Argentina - Third Highway Project

RESTRICTED FILE COPY Report No. P 901 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 The report may not be published nor may it be quoted as representing their views.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 ARGENTINE REPUBLIC FOR A THIRD ROAD PROJECT March 4, 1971   IN ERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE ARGENTINE REPUBLIC FOR A THIRD ROAD PROJECT 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US$6765 million to the Argentine Republic for a third road project. PART I - HISTORICAL 2. On June 30, 1961, the Bank made a loan of US$48-5 million for the construction and improvement of about 2,600 km of roads and the purchase of road maintenance equipment. At that time the Bank was also the Executing Agency for a UN Special Fund long range study of transport in Argentina. The 1961 road project was not completed until 1968 and not until its scope had been reduced considerably and US$17.5 million of the original loan amount cancelled. 3. In 1968, the Government asked the Bank to review the problems and requirements of the Argentine transport sector and also to consider financing another road project. A mission studied the transport sector in September 1968 and reported that (i) existing institutional arrangements did not promote effective planning or execution of a coordinated transport policy; a central body was needed to collect the necessary data, formulate common criteria for selecting investments, assist in making decisions on the pricing of transport services, and introduce a coordinated approach to the whole transport sector; (ii) despite considerable improvements in the operations of the railways since 1966, a comprehensive rehabilitation and investment effort was required to bring about substantial improvements in the service and to restore financial equilibrium; (iii) while the road system was extensive it needed to be adapted to the changing traffic requirements by selective investments; improvement was also needed in road administration, and in planning and coordinating investments. The mission's findings were discussed with the Government and were generally accepted; on that basis, the Bank prepared to support the development of the transport sector. 4. A second road loan of US$25 million was signed on June 24, 1969, to help finance the construction and improvement of 800 km of roads, consultants' services and purchase of equip- ment. The consulting services were intended not only to assist the government to ensure proper supervision of the project but also to assist in organizing systematic highway planning for the future. The loan did not become effective until January 1970 due to delays in completing the legal formalities.   -2- This caused delays in the execution of the project, but construction is now satisfactorily undenray on all road sections and substantial disbursements are expected in the near future. The project is expected to be completed near the end of 1972. 5. There has been considerable progress in the transport sector since 1968. The national highway organization (Vialidad Nacional) has been reorganized and strengthened. There has been effective use of consultants in planning, engineering and supervision of roads and the competence of local consulting firms is developing. A reconnaissance survey of the primary highway network to identify high priority roads has been completed. The Secretariat of Public Works and Transport has created an agency for coordinated planning of transport invest- ment. As part of the development of the transport system a comprehensive five-year rehabilitation plan has been drawn up for the railways, designed to improve efficiency, reduce costs and eliminate the heavy financial deficit. The Bank has closely followed the formulation of the rehabilitation program and a proposed US$84 million loan to help finance the first two years of this plan is presented to the Executive Directors simultaneo'isly. 6. The proposed third highway loan responds further to the Goverrnment1s progressive transport policies. The project has developed from feasibility and engineering studies on priority roads identified by the reconnaissance survey. 7. The negotiation of the proposed loan took place in Washington initially at the end of November 1970 and was continued in December 1970 and completed early in February 1971. The Argentine government was initially represented by Ing. Robert M. Aguero (Administrator General of the highway organization), and later by Dr. Juan Llamazares (Undersecretary in the Ministry of Public W4orks and Services). S. The proposed loan would be the eighth to Argentina. The following is a summary statement of the previous Bank loans to Argentina, as of January 31, 1971.   -3- (US$ million) Loan Year Bthrrower Purpose Amount Undisbursed Number 288 1961 The Argentine Roads 30.9 - Republic 308 1962 Servicios Power 93.4 - Electricos del Gran Buenos Aires S.A. (SEGBA) 505 1967 The Argentine Livestock 15.3 14.8 Republic 525 1968 Servicios Power 51.0 - Electricrs del Gran Buenos Aires S.A. (SEGBA) 577 1968 Hidroelectrica Power 82.0 57.4 Norpatagonica S.A. (HIDRONOR) 619 1969 The Argentine Roads 25.o 2L.0 Republic 644 1969 Servicios Power 6o.o 50.0 Electricos del Gran Buenos Aires S.A. (SEGBA) Total (less cancellations) 357.6 of which has been repaid to Bank and others 27.8 Total now outstanding 329.8 Amount sold: 5.5 Cf which has been repaid 1.9 3.6 Total now held by Bank 326.2 Total undisbursed 14703 9. No IDA credits have been made tt Argentina. IFC has made commitments to companies in Argentina for a total of US$23.7 million. IFC presently holds US$7.2 million for its own account; this has been totally disbursed. 10. The 1967 livestock loan was designed to help finance a credit program in the Balcarce area. Utilization of the credit by ranchers was slow at first, due to delays in setting up the project organization and to unfavorable relative prices for livestock. However, commitments began to accelerate in the middle of 1970, probably due in large measure to the great improvement in relative cattle prices that occurred in 1970,   r.k'Lviding ranchers with much stronger incentives to invest. The project was reviewed by a reappraisal mission in June 1970 vllich proposed modifications in organization and relending pMcc6durcoo; some of these have already been implemented and cthers ar,3 under discussion with the Government. Larger disbuirsemants are expected in the near future as a result of the iricre6sed rate of commitment since mid-1970. 11; Progress on the El Chocon hydroelectric project, being finaaced by the 1968 loan to Hidronor, is satisfactory and the first two -mits are expected to be commissioned in 1973. The 1968 loan to SE3LA has been fully utilized and no problems have arisen in the exBcution of the project being financed by the 1969 loan. PMRT II - DESCRIPTION OF THE PROPOSED PROJECT 12. Borrower: The Argentine Republic Amount: In various currencies equivalent to US$67,5 million Purpose: To help finance impro'vement of 1,128 km of roads and consulting services Amortization: In 25 years, including a 4-year period of grace, through semi-annual installments beginning May 1975 and ending November 1995. Interest Rate: 7-1/l percent per annum Commitment Charge: 3/4 of one percent per annum PART III - THE PROJECT 13. A report entitled "Appraisal of a Third Highway Project, Argentina" (PTR - 65a) is attached. l4. The Argentine economy's transport needs are being increasingly met by the highways. The national and provincial primary road network consists of 137,000 km and carries about 36 percent of the total freight traffic. Investment in primary roads during the last decade has been substantial but the more systematic planning introduced for the transport sector during the last two years is expected to assist in ensuring a more rational use of resources. Highway users at present amply pay for the cost of the inter-urban highway system. In order to improve transport coordination and planning further, the Argentine authorities propcse to strengthen Vialidad Nacional and the Sectoral Development Office in the Secretariat of Public Works and Transport. They also propose to review the present system of allocating resources among the national and various provincial road organi zations.   15. The prrject is estimated to cost the equivalent of US$150 million, of ishich the proposed loan of US$67.5 million would finance 45 percent. The project entails paving and upgrading 18 sectinns of highway, amounting to 1,128 km in length. Included are important sections of Route 14, which is the major road artery of the Mescpotamia region; after completion of the IDB-financed Fray Bentos bridge over the River Paraguay and the links to it and to the proposed Zarate-Brazo Largo bridge over the River Parana, this road will improve access from Buenos Aires tr, Brazil and Uruguay. The loan would also help finance improvements to Route 9, which serves the densely populated industrial belt between Buenos Aires and Cordoba. The internal economic return on the roads included in the project is computed to be 24 percent. Another part of the project is the retention of consulting services to assist Vialidad in carrying out feasibility studies on 2,000 km of road and engineering studies on about 1,500 km of road for future projects, in ceeordinating the studies and in up-dating the reconnaissance survey of the primary highway network carried out in the second road project. The project is expected to be completed by 197h. 16. The foreign exchange component of the project, computed at 32 percent of construction costs and 30 percent of consulting service costs, is estimated to be about US$48 million. The proposed loan of US$67.5 million would, therefore, cover about US$19.5 million of local expenditures. The analysis in the attached memorandum on the economy concludes that international financial institutions should finance some local expenditures to help Argentina sustain a public investment program of an appropriate size. 17. Contracts for construction will be awarded on the basis of international competitive bidding. A recently passed law governing procurement by public agencies will not affect the award of the contracts in accordance with the Bank's normal requirements for bidding. The government will take all measures necessary to enable the procurement of goods and services under the project according to the procedure set forth in the draft loan agreement. The government intends to do so by passing a law approving the proposed loan documents; this will be a condition of effectiveness. 18. Tle project includes two road sections of the Tucuman provincial system. The government will arrange for construction of these roads by Vialidad Nacional and for their satisfactory maintenance thereafter. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 19. The draft Loan Agreement between the Argentine Republic and the Bank, the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement, and   -6- the text of a Resolution approving the proposed lnan are being distribited to the Executive Directors separately. The Agreeme;it follows closely the form currently used for loans for road projects. PART V - THE ECONOMY 20. A report (No.WH-19la) on the Economy of Argentina was circulated to the Executive Directors on June 3, 1969. A report based on the work of the mission which was in Argentina from April to June 1970 and on discussions early this year with members of the new Government will be circulated to Executive Directors in due course. A summary memorandum attached outlines the principal recent economic developments. It concludes in part that Argentina has good prospects for continuing the satisfactory rate of growth achieved in the past few years, provided policies are followed that enable the country to continue its high rate of investment. Important to the achievement of these objectives will be fiscal policies and state enterprise pricing policies designed to increase public sector savings, and the introduction of price and other incentives that will secure an expanding volume of exports. The Government is committed to accelerating the rate of growth of the economy, and is prepared to pursue appropriate policies. 21. In the context of expanding national income and exports Argentinals large public external debt service payments in prospect (17-21 percent of foreign exchange earnings in the next six years) should prove manageable. Argentina should therefore be creditworthy for the twzo loans proposed today (US$67.5 million for roads and US$84 million for railways). In fact these loans will assist Argentina to improve the average maturity of her external debt. PART VI - COMPLIANCE WITH ARTICIES OF AGREEMENT 22. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECOMMENDATIONS 23. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments Washington, D.C. March 4, 1971.   BASIC DATA Area: 2.85 million km Density per,km2 8.2 Population (1970): 23.3 million Rate of growth per annum (1961-70) 1.5 percent 1967 1968 1969 Gross National Product, Current Prices (millioh new pesos): 51,890 60,893 69,313 Per capita (US$ 1969 prices) 793 823 865 Real growth of GNP (percent) 4.8 5.3 6.6 Percent of GNP at Constant 1969 Prices: Gross investment 19.4 20.5 22.6 Gross domestic savings 21.3 21.2 22.4 Resource gap -1.9 _0.7 0.2 Factor income payments 1.3 1.2 1.1 Net foreign capital inflow o.6 0