Afghanistan - Highway Maintenance Project

RESTRICTED Report No. P-707 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 The report may not be published nor may it be quoted as representing their views.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 DEVELOPMENT CREDIT TO THE KINGDOM OF AFGHANISTAN FOR A HIGHWAY MAINTENANCE PROJECT May 28, 1969  REPORT AND RECOIMEifATION OF THE PRESIDEaT TO TI-EE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THEf KINGDOM OF AFGHAINISTAN FOR A IG-GHUAY MAINTENANCE PROJECT le I submit the following report and recommendation on a proposed Development Credit to the Kingdom of Afghanistan in an amount in various currencies equivalent to $5.0 million. This Credit would be used to help finance highway maintenance equipment, vehicles, tools, spare parts and materials for the purpose of introducing modern maintenance practices for highways in the Borrower's Eastern Region to be selected by the Government and the Association on the basis of recommendations made in the Highway Maintenance Study (1966-1968) dated March 1968 and prepared by consultants, and for selected primary highways in other regions. 2. The project includes associated advisory services which will be financed under a UNDP Special Fund grant. UND?P will provide funds amount- ing to about $1.7 million for consulting services for a period of about 4 years to assist the Government in implementing the improvement of highway maintenance and of the highway administration. The Bank ilEll act as the Executing Agency for this grant. PART I - HISTORICAL 3. The proposed Credit would be the first financing provided by either the Bank or IDA for highways in Afghanistan and is the direct outcome of a Bank technical assistance grant (US$155,000 of October 30, 1966) for consulting services to study road maintenance requirements and recommend measures to improve highway maintenance and the performance of the Road Maintenance Directorate. 4h The proposed Credit wjould be the second IDA Credit in Afghanistan, the first being Credit 68-AF, in the amount of Z3.5 million for an Education Project signed on November 23, 1964. It became effective on March 2, 1966. The Education Pro ject has suffered serious delays. After an initial 14 months delay before the Credit could be declared effective, disagreements betwJeen the consultants and the Government on project design and delays in the acquisition of land resulted in a request for a postponement of the Closing Date from March 1968 to May 1971. .Then the Executive Directors agreed in 1968 to extend the Closing Date it was expected that construction awards would be made by November 1968. Unfortunately, tendering failed as only two bids were received and both exceeded the cost estimate of the consultants by about 100%. After some revision in the contract conditions and an increase in the number of pre- qualified bidders, tenders were again invited on December 15, 1968. Six bids were opened on March 18. Five are within the consultants cost estimate. lie are currently awaiting the Government's recommendation as to the award of contracts. 5. Negotiations toolc place in IWashington on May 12-23, 1969. Represent- ing the Borrower wTere Messrs. H. Nuri (President, Maintenance Department, Ministry of Public Icorks), A. A. Atayee (President, Treasury Department) and A. A. Khurram (President, Department of Planning and Economic Analysis, i4Lnistry of Planning).  PART II - DESCRIPTION OF THIE PROPOSED CREIT 6. Borrower: Kingdom of Afghanistan. Amount: The equivalent in various currencies of US$5.0 million. Purpose: To help finance the foreign exchange cost of a highway maintenance -oroject. Amortization: In 50 years including a 10-year period of grace, through semi-annual install- ments of 1/2 of 15% from June 15, 1979 through December 15, 1988 and of 1-1/2% from June 15, 1989 through December 15, 2015. Service Charge: 3/h of 1lJ per annum on the principal amount of the Credit wqithdrawn and outstanding. Estimated Economic Return on Project: 24-o (see para. 5.17, appraisal report). PART III - THE PROJECT 7. A detailed appraisal of the project (PTR-18a of May 28, 1969) is attached. 8. Afghanistan has no railways. A considerable amount of cargo is carried by animals, but highways provide the principal means of transport- ation for both domestic and international traffic. Air transport plays a complementar, but small role. A primary highway system connects most of the important population, agricultural and industrial centers to the capital. Three branches of the circular route lead to neighboring countries, thus facilitating international trade. 9. Ten years ago there were only 6,200 km of roads, none were paved and less than 4,000 km were usable throughout the year. During the period of the first two ave Year Plans (1957-1967) about 2,000 km of paved high- ways were constructed requiring an investment of about US$350 million. The construction program was financed mainly by grants and loans from the U.S. and U.S.S.R. The donor countries also carried out the required engineering studies and designs. Today, there are approximately 17,300 km of roads of which 2,000 km are paved.  - 3 - 10. It is estimated that there are about 32,000 vehicles, 20,000 trucks and buses and 12,000 ligiht vehicles. Trucks range in capacity from ).8 tons to 12 tons, with 60 percent of about six tons. Estimates suggest that the number of vehicles will grow at about 10 percent per annum over the next few years and that in the composition of the vehicle fleet there will be a shift to heavier trucks. U. The principal problem of the transport sector has been the excessive imbalance between investments for new highwxays and expenditures for mainten- ance of existing highways. Uhile for the foreseeable future the highway network requires only minor additions to serve the needs of the country adequately, there is an urgent and critical need for improving or establishing sound highway maintenance operations to preclude a possible sharp deterior- ation or even partial loss of existing roadways. 12. Responsibility for developing and maintaining public highways rests writh the Road Construction and Maintenance Department of the Ministry of Public lorks. Employment conditions in the Department are poor, even by Afghan standards. IMuch of the existing maintenance equipment is beyond economic repair. Within the Department, responsibilities are not clearly defined, operational procedures are inadequate, budgeting and performance controls are unsatisfactory, and highway and traffic legislation is either non existent or inadequate. The Development Credit Agreement contains provisions designed to remedy these deficiencies (Section 4.03). 13. The donor countries who have financed the construction of the primary road network have also helped by providing maintenance equipment and technical advice. Experience has shomn however that wxhere Afghan staff have been left without direct guidance, maintenance operations have been very primitive and inadequate. Because of this experience the U.S.S.R. has gone further in providing Russian advisers to supervise the maintenance work on the U.S.S.R.-financed roads. Consequently, these roads are in a better condition and are not included in the Project. 14. 'The proposed Project is designed to assist the Ministry of Public W.orks in time to assume responsibility for effectively maintaining the whole of Afghanistan's higlhway network. In view of the considerable difficulties that are likely to be encountered before this ambitious objective can be reached, a pilot area and project has been selected which is expected to have a demonstration effect for maintenance operations in the country as a whole over the four year project period. The UN])P grant, for wihich the Bank is to serve as Executing Agent and which is closely related to the IDA Credit, will finance the stationing of a team of consultants in Afghanistan for four years. The team is expected to provide guidance and advice to the Ministry of Public WJorlcs on the reorganization of the R-oad Maintenance Directorate, and the implementation of modem highway maintenance practices for all types of public roads. At first road maintenance trill be organized for the Eastern Region of the country, as it has the highest road and traffic density, and wiith Kabul at its center it offers the best opportunity for demonstration purposes. The proceeds of the Credit will be used to finance imports of maintenance equipment, tools, spare parts and materials such as steel and bitumen hlich are urgently needed for road maintenance in the Eastern Region and for some primary highwiays in other regions.  15. Ile expect that the starting date for the technical assistance project will be July 1, allowing the consultants, who have been selected, to begin field work by August 1, in time to make significant progress before the start of the wJinter season. There is a constitutional requirement that international agreements be ratified by Parliament. Since the current parliamentary session is about to end, and is not expected to reconvene until October (elections are scheduled for August), we do not expect to be able to declare the Credit effective much before December 31r IJe are presenting the Credit at this time because of the interdependence of the technical assistance operation and the Credit. It should also be noted that the prospective delay in making the Credit effective should not affect the project adversely as several months of consultants' field work are required before Credit funds could be disbursed. The draft Development Credit Agreement would not become effective before the effectiveness of the agree- ments governing the UUDP operation (Section 6.01). A default under or a termination of the agreements governing the UIDP operation shall be deemed a default under the Development Credit Agreement (Section 5.02). 16. The total cost of the project, including contingencies, is estimated at about $10.8 million, of which the Credit would provide $5.0 million, the UNDP grant $1.7 million, and the Government $4.1 million. Credit funds would be disbursed against the cost of imported items on the basis of international corpetitive bidding, with the exception of spare parts for existing equipment. 17. The quantifiable benefits of the project are savings in vehicle operating costs and in costs for reconstructing highways. The rate of return is estimated at 261/. In addition, there are non-quantifiable benefits of a well-maintained highway network and trained personnel. PART IV - LE3AL INSTRU1ABTS AXID AUTHORITY 18. The draft Development Credit Agreement (Highway Maintenance Project) between the Association and the Kingdom of Afghanistan, the Recommendation of the Committee provided for in Article V Section l(d) of the lrticles of Agree- ment and the text of a Resolution approving the proposed Development Credit are being distributed to the Executive Directors separately. The draft Agreement contains provisions usual for this type of project and special covenants providing for the selection of highwJays included in the Project (Section 4.02(a), cf.para.l); the improvement of employment and administration in the Ministry of Public Works and of highway and traffic legislation (Section 4.03, cf.para.12); additional events of default in connection with the UNMD operation (Section 5.02, cf.para.l5) and additional conditions of effectiveness (Section 6.02, cf.para.15). Schedule 3 to the draft Develop- ment Credit Agreement provides for specific procurement procedures.  PART V - TEI-E ECOi1OI4Y 19. An economic mission visited Afghanistan in February 1969. The mission's retort, "Current Economic Position and Prospects of Afghanistan" (SA-6a) d.ll be distributed to the Executive Directors shortly. 20, Afghanistan is a very poor, landlocked country, with few natural resources, remote from world markets, and with a tradition bound population spread over a large and difficult terrain. GNP per head is less than Y`80 and in the last decade has not changed appreciably. However, significant efforts were made to bring about an acceleration of economic development, and substantial amounts of foreign assistance were obtained to establish a modern infrastructure, iwith the result that the principal production and population centers are now linked by modern paved highways3 a large electric power system has been built, extensive irrigation facilities are under construction amd natural gas is being produced and exported. School enroll- ment has more than tripled and medical facilities and services have been significantly improved. 21, However, the impact of these investments on the production of goods and services so far has not been significant. Exports have stagnated in recent years, and government revenues declined as a proportion of GIT. This is largely due to the fact that 3/4 of Afghanistan's development expenditures during the Second Plan was financed by foreign capital wjhich was mainly applied to infrastructure projects writh little developmental impact. The Third Plan (1967-72) proposes to remedy this situation by a drastic shift in emphasis from infrastructure to direct investment in agriculture and industry. Of total public investments of A-f.33 billion, over 52S are to be spent in these sectors compared with 27, during the Second Plan period. 22. To date only slow progress has been made towards this goal, mainly because of a dearth of projects ready for implementation, shortage of adequate public savings, and the absence of suitable institutional credit facilities. To meet the recuired increase in the proportion of domestic finance, the Third Plan proposed several measures to increase Government tax revenues but none of these have so far been implemented for lack of parliamentary action. A priority range of proposals to raise revenues is presently before parlia- ment in connection with the 1969/70 budget. The budget also envisages a someihat more realistic level of expenditures than originally planned. 23. Signs of improvement in Afghanistan's economic prospects have recently appeared in connection with the wheat program. In spite of the decline in wheat prices, the irrigated acreage under improved varieties of wheat is expected this year to go up to 15 percent compared with 5 percent last year. This is expected to make Afghanistan self-sufficient in wheat production, the major food crop. The private sector is also showing initiative for example by expanding raisin cleaning and packing facilities for export. In industry, the response to the 1967 Investment Law has been surprisingly strong; of 132 project applications, some 80 have been approved and 29 projects are already in operation iith an investment of about ;8 million and 10 are w-orking full capacity.  - 6 - 24. LJile modest and cautious optimism is indicated, Afghanistan's balance of payments position is not likely to improve rapidly. Both exports and imports have virtually stagnated in the last 5 years and wihile some growth of exports can now be foreseen mainly through deliveries of natural gas to Russia, the debt service burden, presently 19 percent of exports, will reach 25 percent shortly and remain at least at this level for some time. Hence external capital assistance should be provided to Afghanistan as far as possible on cancessional terms. PART VI - COMPLIANCE WITH ARTICLES OF AGREB&IFNT 25. I am satisfied that the proposed Credit complies with the Articles of Agreement of the Association. PART VII - RECOMfli!!DATIO\ 26. I recommend that the Executive Directors approve the proposed Credit. Attachments Robert S. IVNcNamara President May 28, 1969