Central African Republic - Highway Maintenance Project

RESTRICTED FILE COPY Report No. P-825 This report was prepared for use within the Bank and its affiliated orgonizations. 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 The report may not be published nor may it be quoted as representing their views.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 CENTRAL AFRICAN REPUBLIC FOR A HIGHWAY MAINTENANCE PROJECT May 26, 1970  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE CENTRAL AFRICAN REPUBLIC FOR A HIGHWAY MAINTENANCE PROJECT 1. I submit the following report and recommendation on a proposed credit in an amount in various currencies equivalent to US$4.3 million to the Central African Republic to assist in financing a high-ay maintenance project. PART I - HISTORGICAL 2. In 1968 the Government of the Central African Republic requested IDA assistance for a highway maintenance program. A highway maintenance study and a feasibility study financed by UNDP were carried out by consultants in 1968 and 1969 with the Bank as Executing Agency. An appraisal mission visited the country in October 1969. Negotiations with a delegation from the CAR, led by the Minister of Public Works Auguste M'Bongo, were completed in Washington on May 8, 1970. 3. The proposed credit would be the second operation of the Bank Group in the CAR. The first (Credit 146-CA), of US$4.2 million equivalent to help finance improving the Bangui-M'Baiki road, was signed on April 3, 1969. Almost no disbursements have yet been made on this credit since bidding procedures had to be repeated after the withdrawal of the lowest bidder and the devaluation of the French and CFA francs. The contract for construction wasawarded on February 25, 1970. 4. The Bank is the Executing Agency for a UNDF financed regional survey of the transportation requirements of the southern region of the CAR and Cameroon. Projects in the other sectors (agriculture, education, tele- communications, power) are at preliminary stages of preparation, but none of these projects will be ready for submission to the Executive Directors before FY 1972. PART II - DESCRIPTION OF THE PROPOSED CREDIT 5. Borrower: Central African Republic Amount: $4.3 million equivalent in various currenci Purpose: To assist in financing: (i) highway maintenance equipment and spare parts required for the maintenance of 3,900 km of roads;  -2- (ii) technical assistance; (iii) feasibility study and detailed engineering of the Bangui-Bossembele road. Estimated economic return: 28 percent Amortization: In 50 years, including a 10-year period of grace, through 50 semi-annual installments of 1/2 of 1 percent from December 15, 1980 through June 15, 1990 and 1 1/2 percent from December 15, 1990 through June 15, 2020. Service charge: 3/4 of 1 percent per annum. PART III - THE PROJECT 6. A report (PTR-42a) entitled "Appraisal of a Highway Maintenance Project" is attached. The major objectives of the transport policy of the CAR are: (i) to improve the internal road and river transportation system, particularly in areas potentially promising but presently underdeveloped such as the Lobaye and Haute Sangha provinces; (ii) to improve the existing international transportation system providing access to the sea; (iii) to rehabilitate the road network which has deteriorated since independence. The proposed Highway Maintenance Project relates to the third objective. 7. The proposed project will help ensure that economic development will not be hindered by further deterioration of the road network. The project will improve the condition of the primary and secondary systems and the efficiency of the maintenance organization through a four-year maintenance program; it provides for the purchase of maintenance equipment and spare parts, and technical assistance by consultants for the training of maintenance personnel. The project also lays the groundwork for improving one of the three main highways of the CAR by providing a fea- sibility study and detailed engineering of the Bangui-Bossembel6 road (156 km), which would improve international connections with both Chad and Cameroon. In addition, this road is the main transport artery in the northwest area of the CAR, where more than one-third of the population lives.  - 3 - 8. Highway maintenance expenditures are financed through the Government budget. Before negotiations the Government enacted legislation increasing the fuel taxes (March 12, 1970) and establishing a Road Fund (April 30, 1970). The earmarked funds, in addition to resources provided by the proposed credit, will enable the Government to carry out the four- year maintenance program. In the past two years total revenues from fuel taxes averaged about CFAF 350 million, while expenditures on road maintenance averaged about CFAF 300 million. The difference of CFAF 50 million, which is marginal in relation to the total budget, was used for other government expenditures. After the recent increase of fuel taxes, revenues from these taxes during the program period are estimated to cover increased maintenance expenditures, and a contribution to the general budget may also be possible. Establishment of regulations governing implementation of the Road Fund will be a condition of effectiveness of the credit. 9. The economic rate of return on the investment will be 28 per- cent, based on the reasonable assumption that the traffic growth rate will be 8 percent, and on estimated savings of CFAF 393 million in operating costs by 1971, and CFAF 57b million by 1976. If an alternative traffic growth rate of 5 percent per year is assumed, the return would still be about 15 percent. The estimated economic returns do not take into account non-quantifiable administrative and other benefits, such as the reduction in distribution and inventory costs for government and private business as a result of improved traffic conditions. 10. The total cost of the project is estimated at $5.4 million. IDA would finance the foreign exchange cost, estimated at $4.3 million, i.e. about 80 percent of the total. The Government would make a con- tribution to the capital cost of $1.0 million equivalent for road maintenance, and $125,000 equivalent for the Bangui-Bossemb6le feasibility and engineering studies. The project would be carried out over a four- year period. In addition to its contribution to the capital costs of the maintenance program, the Government would meet the recurrent costs, amount- ing to about $6.4 million equivalent during the period 1971-74, principally through the newly created Road Fund. 11. The Department of Public Works will be responsible for the execution of the project and is competent to do so with the assistance of foreign experts to be provided. Consultants for the required technical assistance and for the feasibility study will be selected through normal Bank Group procedures. Employment of qualified consultants is a condition of effectiveness of the proposed credit. Contracts for the maintenance equipment and materials will be awarded through international competitive bidding. The project is expected to be completed by December 31, 1974.  - 4 - PART IV - LEGAL INSTRUMENTS AND AUTHORITY 12. The draft Development Credit Agreement between the Central African Republic and the Association, the Recommendation of the Committee provided for in Article V, Section 1 (d) of the Articles of Agreement and the text of a Resolution approving the proposed Development Credit are being distributed separately. 13. The provisions of the draft Development Credit Agreement follow the pattern usual in similar highway maintenance projects. The employment of consultants and the establishment and regulation of the Road Fund are conditions of effectiveness (Section 6.01). Any modification of the Road Fund regulation would constitute an event of default (Section 5.02). PART V - THE ECONOMY 14. A report on "The Economy of the Central African Republic: Recent Evolution and Prospects" (AW 16a dated May 26,1970) is being distributed separately. 15. The CAR economy is small, providing employment for about 50,000 wage and salary earners. It has been expanding slowly, barely keeping up with population growth between 1964 and 1967 and probably a little more rapidly than population growth since 1968. However, CARts undeveloped resources are relatively important. Ecological conditions are favorable to the development of agriculture in large parts of the country and to some extent also to the development of livestock. There are also some mineral resources (diamonds, uranium, limestone) and large unexploited forests. Although the market is small, there is some scope for industrial development. 16. The Government has had some success in developing the resources of the country during the last three years. Diamond production has increased considerably and a beginning has been made in local diamond cutting. Timber makes a growing but still modest contribution to exports. The most promising development, however, has been the rapid expansion of cotton production and exports. Income per capita was estimated at US$127 in 1967. 17. In spite of progress in recent years, growth prospects for the next few years remain rather modest. The high cost of transport both within the country and to ocean ports which are about 2,000 km distant, is one impediment. Accelerated growth also depends on improvement in planning and project preparation, and reorganization in some sectors, notably in diamond and coffee production. Since the level of education and skills is still low, improvements in public planning and administration will take time.  18. The most urgent need at present is improved budgetary control. Because of increasing expenditures on administration, education and defense, total budget expenditures in the years 1967 through 1969 have ranged between CFAF 8 and 10 billion with annual deficits around CFAF 1 billion. The 1970 budget showed a deficit of CFAF 0.8 billion because of capital expenditures for which no revenues have been budgeted. Since the revenue forecasts appear over-optimistic, the actual deficit for 1970 may be higher than in 1969. The deficits have so far been financed principally by reducing cash reserves, and, in the last year, also by Central Bank credit and the deferment of payments. 19. Since government revenues already represent more than 25 percent of monetary GDP, it will be hard to increase the tax burden significantly. The principal emphasis must, accordingly, be put on a more careful control of expenditure, particularly on defense, which increased by almost 50 per- cent between 1966 and 1968 and now accounts for almost 15 percent of total expenditure. The increase in the number of government employees will also have to be curbed, especially because increases in government salaries and wages, which had remained virtually unchanged since 1957, have been granted in 1970. 20. The need for better budgetary control and increasing public savings to contribute to development expenditures was discussed during negotiations. The Government welcomes the Bank's assistance to bring about a better allocation of revenues and better management of investment programs. While there will be no lending by the Bank Group during FY 1971, the discussion of the economic report, and the preparation of projects scheduled for FY 1972, will afford the opportunity to provide advice on budgetary control and other economic policies. 21. The rather steady decline in net foreign assets indicates that overall balance of payments deficits were incurred over the entire period 1966-1969. Net foreign assets declined from CFAF 1.94 billion at the end of 1965 to CFAF -0.75 billion in mid-1969. Annual disbursements of foreign aid for public investments and cotton subsidies amounted to about CFAF 1.9 billion equivalent, of which the European Development Fund (FED) and the French Fund for Aid and Cooperation (FAC) contributed about CFAF 1.4 billion. In general, foreign aid disbursements have been declining since 1965. Privately held debt increased from CFAF 521 million to CFAF 850 million during the first six months of 1969. However, the Government intends to contain the increase of suppliers' credits. On the basis of debt outstanding as of June 30, 1969, the debt service ratio will reach 7 percent in 1971. 22. The main constraints on CARts creditworthiness are poverty and the limited capacity to generate savings. Even with substantial improvements in budgetary performance through better control of current expenditures, possibilities for increasing public savings are limited. Although there are prospects for increased revenues from timber, diamond, cotton and  - 6 - coffee exports, the balance of payments is likely to remain weak. For these reasons, CAR will continue to need aid on concessional terms. PART VI - COMPLIANCE WITH ARTICLES OF AGREM4ENT 23. I am satisfied that the proposed Development Credit would comply with the Articles of Agreement of the Association. PART VII - RECOMMENDATION 24. I recommend that the Executive Directors approve the proposed Development Credit. Robert S. McNamara President Attachment Washington, D.C. May 26, 1970