Jamaica - Second Highway (Road Improvement and Maintenance) Project

DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTI Not For Public Use Report No. P-1265-JM REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO JAMAICA FOR A ROAD IMPROVEMENT AND MAINTENANCE PROJECT May 16, 1973 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  Currency Eauiv8alents US$1.00 = J$0.91 J$1,00 = US$1o10  INTERNATIONAL BANK FCR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECCM4ENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTCRS ON A PROPOSED LOAN TO JAMAICA FOR A ROAD IMPROVEMENT AND MAINTENANCE PROJECT 1. I submit the following report and recommendation on a proposed loan to Jamaica for the equivalent of $9.3 million to help finance a road improvement and maintenance project. The loan would have a term of 15 years including 5 years of grace, with interest at 7-1/4 percent per annum. PART I - THE ECONIKY 2. A review of the economic position and prospects of Jamaica was contained in an Economic Report (No. Ca-9a), which was distributed to the Executive Directors on June 4, 1971. An updating economic mission visited Jamaica in November-December 1972; the draft report of the mission will be shortly discussed with the Government before being finalized. Recent develop- ments and main conclusions of the mission are contained in the economic memorandum attached as Annex I to this report, prefaced by a country data sheet. A brief summary of the highlights appears below. 3. Jamaica presents a number of features typical of the Caribbean island economies: a narrow resource base, heavy dependence of the economy on the external sector, a social philosophy which, in turning away from traditional plantation agriculture, has over the last decade allowed a sector of major social and economic value to deteriorate, a severe and persistent unemployment problem, and a deficient educational system which has so far failed to correct the imbalance between the availability of jobs and skills. 4. After a record of good management and steady growth over several years, fueled largely by direct foreign investment, the economy slowed down in the last about two years, underscoring some of its basic inadequacies. Exports were affected by a reduced world demand for aluminum and a decline in sugar output, while the rate of increase in imports exceeded that of exports by a significant margin. The import content of both investment and consumption has lately increased, resulting in the current account deficit going up from $62 million in 1967 to some $200 million in 1972. Until 1972 this deficit was more than made up by capital inflow. During last year, however, private capital inflows fell off sharply with the completion of the recent cycle of alumina investment, and the capital account was also affected by speculative outflows. At the same time, in a desire to stimulate economic activity, expansionist monetary policies were introduced in April 1971. Imports expanded rapidly through 1971-72, and foreign exchange reserves by  - 2 - the close of last year had declined to a level that would cover less than two months' imports. The public sector added to the balance of payments pressures by unusually large borrowings from the banking system. 5. After some initial delay, the government has reacted to the crisis with energy and determination on a broad front. Action has been taken to tighten credit and restrain imports. In order to improve the competitiveness of export industry and agriculture and bring Jamaica's trading deficit under control, the exchange rate has been adjusted downward. The imposition of wage and price guide'lines and the eventual formulation of an incomes policy are also under consideration. The recently presented budget proposals for 1973-74 will help restore fiscal discipline, and give evidence of the govern- ment's desire to enlarge domestic resources availability for investment expenditures. In a two-pronged drive towards the maximization of output and employment, the government has restored domestic and export agriculture to the center of its concern, while pushing forward with projects which would help maintain private direct investment, including the launching of joint industries with foreign participation. In agriculture, a comprehensive review of the sector has been undertaken with assistaice from the Bank; the government's plans to revitalize the sector visualize extensive land reorganization on the basis oZ family farms so as to promote employment, and to rehabilitate the important sugar industry and expand the cultivation of domestic food crops. Action is also being taken to improve the administra- tive apparatus, undertake skill training programs so as to make a rapid impact on the unemployment problem, and to extend socially progressive policies. 6. If sound policies are followed in critical areas of the economy outlined above, and discussed at greater length in the economic memorandum, the prospects for Jamaica for the medium-term would appear to be good. In order to realize these prospects, the country will, however, need substantial injections of external technical and financial assistance. Jamaica's debt service ratio presently stands at only 5.2 percent, and although it is rising there remains scope for additional borrowing on conventional terms. The government has also shown its readiness to receive technical assistance to make up the deficiencies in the country's absorptivre capacity.  PART II - BANK GROUP OPERATIONS IN JAMAICA Introduction 7. Since the country's independence in 1962 the Bank has made eight loans to Jamaica totalling $60.0 million. Of this amount about half has been for infrastructural investmant in electric power, water supply and highways; the remainder has gone into education, family planning and an agricultural credit project. The proposed loan would be the second Bank loan for highways. There have so far been only two IFC operations: a loan in 1961 to a concrete company, and an equity/loan investment in 1968 in a hotel project. Annex II contains a summary statement of Bank loans and IFC investments as of March 31, 1973, and comments on the execution of on- going projects. As noted in the Annex, the Bank has experienced serious problems in the execution of projects in Jamaica, although the situation has improved significantly in recent months. Future Direction of Bank Lending 8. The case for continued Bank lending rests on the need to provide some of Jamaica's external financing requirements and to support appropriate policies in critical areas of the economy mentioned in Part I of this report. As in the past, Bank lending will be directed towards achieving improvements in infrastructure, and at contributing to the alleviation of the unemployment problem. 9. After a lull in Bank lending to Jamaica for some two years - due mainly to sector policy issues and slow project preparation - the pace of Bank opera- tions is expected to accelerate over the uext few years. In infrastructure, the project now before you will help finance a high priority program of road improvement and maintenance (where a backlog has developed in recent years) and, through the technical assistance component, will strengthen roads main- tenance administration in the Ministry of Works. Also in the transportation sector, feasibility studies are currently under way for a possible Bank-fi- nanced project for reconstruction of selected stretches of arterial highway. A Bank mission is currently appraising a tourism-oriented airports project. Other infrastructural investments being considered include an addition to the Jamaica Public Service Company's power generating capacity together with associated transmission facilities. The Government is presently reviewing the recommendations of a consultant study for sewering the Kingston area so as to define priority areas for investment. There will also soon be need for a further major investment in water supply for Kingston; however, alternative ground and surface sources of water have to be evaluated before project pre- paration can begin. It is expected that over the next year or so projects suitable for Bank financing will be defined in both these areas. Continued Bank involvement in the power sector, as well as the proposed investments in water and sewerage, would also lend support to appropriate pricing policies for public utilities and help strengthen the institutions concerned.  -a - 10. In the social sectors, the Bank is helping t.e Government prepare a "sites and services" project for the Kingston area involving the provision of basic infrastructure for lower income housing. We also propose to continue our association with the education sector with a third project which will probably be directed largely towards the improvement and expansion of technical and vocational training in an effort to ease the shortage of trained manpower. However, a start will not be made on this project until the conclusions of a survey of the educational sector, recently undertaken jointly with USAID, have been considered and more progress made in implementing the ongoing second project. 11. In the directly productive sectors, the Bank is already involved in agriculture through a loan to the Jamaica Development Bank for on-lending for agricultural credits. We expect that a second loan will soon be justified. At the request of the Governrent the Bank is assisting in the conduct of an agricultural sector study with a view to revitalizing this sector as a means of prormoting exports, stimulating import substitution and helping to check the drift from the rural to the urban areas. It is expected that the agri- cultural sector study will lead '.o the formulation of a nuimber of projects for external financing, including an important program of sugar rehabilitation. PART III - THE TRlNSPORTATION SECTOR IN JAMAICA 12. Jamaica's transport system consists of about 10,000 miles of arterial, secondary ma in and parish roads, a 200-mile government-owned railroad, about 30 miles of private railway, six airports (two of them international), 13 ports and some petroleum product pipelines. Most of the island's internal transport needs are met by roads. The system is generally adequate in ex- tent though not always in its condition or capacity. In preparation for major investments in the system, the Government engaged consultants during 1968/70, financed by the Canadian International Development Agency (CIDA), to carry out a national transport survey to recommend appropriate policies and measures for the most economical development of the country's transporta- tion system through 1979. Feas bility studies have subsequently been under- taken as a basis for further investments in road and air transportation facilities. 13. The railroad, run by the government-owned Jamaica Railways Corporation (JRC), has in recent years lost most of its general traffic to the roads and is now largely a contract carrier for the bauxclte mining companies. The JRC is operating at a small loss largely because i-t provides subsidized service to some of the poorer areas. Jamaica has two international airports at Kingston and lMontego Bay served by some 12 foreign airlines and by the national carrier, Air Jamaica, which is 60 percent owned by the Jamaica Government and 40 percent by Air Canada. Sharp traffic increases have led to congestion in aircraft ground operations and in the handling of traffic at both international airports0 All public airports are presently operated by the Civil Aviation Department of the Ministry of Public Utilities, Com- -.:nications and Works; the Glovernment is now considering a proposal to es-  -5- tablish a new Jamaica Airports Authority to taka over their day-to-day managemento The ports at Kingston and Montego Bay are primarily general cargo ports handlTWgThe bulk of the country's imports. The remaining ports are specialized for handling exports. The Government has plans for a major development at Kingston to establish it as a transhipment port for handling containerized cargo. 14. The road network of Jamaica is relatively extensive for the size of the island, ih over 8,000 miles of it suitable for motor vehicle traffic. The layout of the highway network is generally adequate although steep grad- ients, poor surface quality and low geometric standards contribute to high vehicle operating costs. Most of the asphaltic pavements were constructed between 1950 and 1960, but because of deferment of periodic resurfacing wide- spread aging is evident in the surface of paved roads. Vehicle licence registrations have increased at about 11 percent per annum between 1955 and 1969; vehicle density, one vehicle per 20 persons, is the fifth highest among Latin American and Caribbean countries. Total expenditure on roads (including administrative overheads) rose from $10.3 million in 1965-66 to an estimated $32.1 million in 1972-73. Expenditure on construction tripled during this period and maintenance expenditures also went up substantially, in part due to wage increases and in furtherance of the Government's employment-creating policies, and partly in an effort to catch up with the existing backlog. 15. Permissible vehicle waights are set out in the Road Traffic Regula- tions. These regulations ara, however, deficient in that (i) apart from public passenger vehicles, they specify gross weights but not axle weights, and (ii) they undercharge owners of vehicles which, exceptionally, are licenced to exceed normally permissible limits, for the effect of overload- ing the pavements. During negotiations the Govermnent agreed that, within three years of the date of the Loan Agreement, it would (a) amend its Traffic Regulations to remedy the first mentioned deficiency and (b) review its road user charges to see if they can more adequa1ty reflect the effect on the pavaments of heavier vehicles which operate under special license. 16. Transiort policy formulation is the responsibility of several govern- ment deparQents and i agencies. The most important are the Ministry of Public Utilities, Communications and Transport, responsible for aviation, ports, and railways, and the Ministry-of Works, which is responsible for arterial and secondary main roads. Government policy on taxation of trans- port users has not been defined in terms of specific goals, although in general the users of roads, ports and airports, but not all railroad users, fully meet capital and operating costs (including overheads) of these ser- vices. The data base for proper transport planning and policy formulation however, needs to be improved; during negotiations the Government agreed that in future basic technical and traffic data will be collected on a continu- ing basis for this purpose and that transport studies, as and when necessary, will be carried out.  PART IV - THE PROJECT 1'7.. The project was developedl following the recomnendations of the CIDA- financed Jamaica national transport survey conducted by the consulting firm of Lamarre Valois International Ltd. (Canada) in 1968-70. Subsequently, a road maintenance study, financed by the UNDP and for which the Bank was executing agency, was undertaksn by T.P. O'Sullivan and Partners (UK) during Juna to November 1972. The project is to a large extent based on the recom- nendations of this study and was appraised by a Bank team in December 1972. Negotiations for the proposed loan were held in Washington in April of this ,ear. The Government was represented by Messrs. R. Mullings, Deputy Financial Secretary, Ministry of Finance.9 E. O'Gilvie, Chief Technical Director, Ministry of Works. H. Massey, Director of Maintenance, Ministry of Works, S. Morris, Principal Assistant Secretary, Ministry of Works, and H. Ellis, Acting Assistant Attorney General. 18. A report entitled "Jamaica - Road Improvement and Maintenance Project" (No. 118a-JM dated May 8, 1973) is being distributed separately to the Executive Directors. The main features o: the loan and the project are summarized in Annex III. 19. The objectives of the project are to improve certain major roads in Jamaica, to reduce the backlog of maintenance on others, and generAlly to improve the structure, staffing and procedures of the Ministry of Works, insofar as they relate to the maintenance of the country's road system. The proposed loan of $9.3 million would be made to Jamaica and the project would be executed by t.he Ministry of Works. Project DescriptLon 20. The proposad project pro-ides for resurfacing with asphaltic overlay about 380 miles of arterial roads and some 60 miles of secondary main roads. The roads selected for resurfacing are characterized by pavements which although generally sound are beginning to show signs of surface problems. The project also provides for resealing with a double asphaltic surface treatment a further 250 miles of secondary main roads scattered throughou-t the island. These sections, to be selected by agreement between the Government and Banik on the basis of the consultants' report, have pavements which, while showing no obvious signs of structural decay, are in danger of becoming dry and are losing their waterproof properties. The project additionally provides for limited minor works to be carried out in conjunction with this resurfacing and resealing, with the aim of improving the worst of the geometrical features of the roads (for example, sharp bends and adverse cambers) and the roadside drainage. 21 * Each parish, of which there are 13 in the country, has an allocation of basic road maintenance equipmen1; and vehicles. Most of the equipment is old and about 50 percent of the ve icles are over five years old; hence, equipment repairs are frequent. In order to improve the capability of the parishes for routine maintenance operations, the project includes the provision of essential road maintenance and workshop equipment.  -7- 22. The project also includes provision for about 220 man-months of tech- nical assistance. The technical assistance team would help in the planning and execution of minor works to be carried out in conjunction with the road improvement and maintenance; in procurement procedures; in supervising the civil works under the project; and, as described in the following paragraphs, in training government counterpart personnel and improving the structure, and works and planning procedures of the Ministry of Works insofar as they relate to road maintenance. In order to avoid delay ths government, with the agree- ment of the Bank, has entered into negotiations with the consulting firm of T.P. O'Sullivan & Partners to undertake the technical assistance component of the project and to start preparatory work. Appointment of the consultants on terms and conditions satisfactory to the Bank would be a condition of effectiveness of the loan. 23. The technical work of the Ministry of Works is presently organized under the Chief Technical Director and is shared among five directorates: the Directorate of Technical Services; the Directorate of Construction; the Directorate of Major Projects; the Directorate of Maintenance; and the Directorate of Electrical and Mechanical Services. The Directorate of Maintenance is responsible for maintaining roads, bridges, buildings and drainage channels. It is organized on the basis of parishes, each under the charge of a superintendent or assistant superintendent. Above them are seven senior area superintendents who at present report directly to the Director of Maintenance. The Director, in addition to supervising the senior superintendents, is required to deal with a considerable number of claims and complaints from the public leaving him insufficient time for proper planning and supervision of road maintenance. In order to reduce the wide span of control of the Director and to introduce professionally qualified engineers into line management, the government agreed during ne- gotiations to introduce three "county engineer" posts as a professional level with duties and responsibilities to be determined in agreement with the Bank. 24. The government also agreed during negotiations to strengthen the staff at Headquarters by the recruitment of a qualified engineer to act as technical assistant to the Director, an accountant to help cost all maintenance work, and a senior administrative officer to be responsible for much of the admdnistrative and public relations load currently borne by the Director. Recruitment of the three "county engineers" and the other professional staff would be a condition of loan effectiveness. The new staff will be regarded as counterparts to and will be trained by the tech- nical assistance personnel to be provided under the project.  -8- 25. A number of other improvements in the maintenance procedures of the M,1inistry of Works are required0 The on9 most urgently needed is the intro- duction of costing of road maintvenance operations to enable the true cost of maintenance to be deternmirBd as a basis for effective planning of work and control of labor and equipment. During negotiations the government agreed to the inuroduction of such costing, within a time schedule to be agreed with the Bank. The government also gave an assulrance that within two years of signing the Loan Agreement, the practice of negotiating con- tracts will be phased out and will be replaced by competitive bidding for all but minor morks. This is expected to help reduce maintenanuce costs significantly. 26. At the national level there is need for a comprehensive road maintenance plan; maintenance is presently carried out on a day-to-day basis for the more urgent repairs, leading to fragmentation of work, low efficiency of labor and equipment, and high cost of maintenance. The government agreed during negotiations that, with the help of the technical assistance provided under the project, a five-yearnational road maintenance plan would be pre- pared not later than on year af-ter the signing of the Loan Agreement, and its implementation discussed with the Bank. Meanwhile, the Government has assured the Bank that annual budgetary allocations for road maintenance will be continued at the present level in real terias. Project Costs and Financin:r 27. The total cost of the project is estimated at $17.3 million of which $9.3 million -would be foreign exchange costs to be financed by the Bank loan. The foreign exchange component of the asphaltic overlay has been assessed on the assumption that the work would be undertaken by foreign contractors; how- ever, some of this work may be andertaken by local firns in which case a small amount of local cost financing wiould result, Local costs as necessary would be met from government budgetary allocations. It is proposed that the foreign exchange costs of consultants' services which may be incurred befon the date of the Loan Agreement, but not before April 16, 1973, and not exceeding $120,000 in total, be financed retroactivsly from the loan proceeds. Procurement 28. The asphaltic overlay would be carried out by contracts awarded on the basis of international competitive bidding in accordance with the Bank's "Guidelines for Procurementv". Th.ae work would be bid in two packages of about $3.0 million each, separated by a period of two years to spread the load on budgetary funds and to ensure effective super-vision. Eiach such package would cons-st of a numb;er of lots and bidders would be allowed, consi stent with their capacity, to bid for ay; combination of lots. The asphaltic resealing work would be scattered on secondary main roads throughout Jamaica and would be spread over a five-year pariodc. This work would be undertaken on the basis of competitive bidding, bat snnce it is unlikely in ge-eral to be attractive to firms not already established in Jamaica, it is Droposed that the work should be advertised for competitive bLdding only in Jamaica. Procurement of equipment woula also be in accordance wit-h the "Guidelines"; the Loan Agreement allows for the usual degree of domestic -reference in bid evaluation although equipment of the .dnd required for the project is presently rAot produced in Jamaica. Estimated anrnual disburseniants of the loan are given in Arunex III to this report.  -9- Economic Evaluation and ProJect Justification 29. Althoiu.gh the basic road network in Jamaica is adequate, road surfaces are beginning to show signs of considerable wear; if neglected and allowed to deteriorate further, these will lead to pavement failure and the need for costly reconstruction work. The asphaltic overlay and resealing to be provided by the project will strengthen and help maintain the integrity of existing pavement structures and, additionally, in the case of the overlay, will improve its riding quality. There is also a clear need to strengthen the Maintenance Directorate of the Ministry of Works and to improve its operating procedures both at headquarters and in the field. The several project components, including particularly the introduction of maintenance work costing, the replacement of negotiated contracts with competitive bidding and the preparation of a five-year national road maintenance plan, should lead over time to a significant reduction in road maintenance costs. 30. The project would benefit all parts of the country. The asphaltic overlay would be applied primarily to the most heavily trafficked roads in the country; the resealing work and the improvement of day-to-day maintenance would have their effect mainly on the secondary road network. In the econo- mic evaluation of the project, quantifiable benefits from the asphaltic overlay (representing over 40 percent of project costs), include the reduction in vehicle operating costs due to improved riding surfaces, and the prevention of increased vehicle operating costs that would occur if the roads were allowed to deteriorate further. Economic costs include the estimated cost of putting on the overlay and allowance for the necessary restoration of road profile which would be required prior to this work. The estimated net benefits discounted over a ten-year economic life gives a most likely value for the economic return in excess of 50 percent; even if significant factors in the evaluation are varied to represent more pessimistic values, the economic return is still acceptable. The first year benefits on average are over 30 percent of costs. Investment in resealing will produce benefits in terms of the cost savings to be achieved by deferment of investment in reconstruction which would have to be undertaken if the road were allowed to fail. It is not possible to determine exactly when failure would take place without resealing. Assuming that failure would occur four years hence, necessitating reconstruction, the economic return from resealing now is about 19 percent. This computation is conservative in that it does not take into account the increase in vehicle operating costs in the "without case" as the road pavement progressively breaks up. For the maintenance equipment included in the project, a very modest reduction in vehicle operating costs (of only US$0.3 per vehicle mile) resulting from the use of th.s equipment would be sufficient to provide an economic return of 10 percent on the investment. These savings represent a very small percentage of current operating costs and are clearly attainable.  - 10 - PART V - LEGAL !NSTRUMENTS AND AUTHORITY 31* The draft Loan Agreement butween the Bank and Jamaica, the Report of the Connittee provided for in Article III, Section 4(iii) of the Articles of Agreement, and the text of a resolution approving the proposed loan are being distributed to the Executive Directors separately. The draft agree- ment conforms to the nornal pat-trn of loans for highways projects. 32. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECO~MENDATION 33. I reconmmend that the Executive Directors approve the proposed loan. F.obert S. McNamara President by J. Burke Knapp Attachments May 16, 1973  ANWII( i PREFAGE (i) COUNTRY DATA - JAMAICA AREA POPULATION DENSITY 11,424 km 1.9 million (mid-1970) 163 per kn. Rate of Growth: 1.6 (from 1960 to 1970) per km2 of arable land POPULATION CHARACTERISTICS (1970) HEALTU (1979) Crude Birth Rate (per 1,000) 32.9 Population per physician 2817 Crude Death Rate (per 1,000) 7.1 Population per hospital bed 261 Infant Mortality (per 1,000 live births) 32.3 INCOME DISTRIBUTION DISTRIBUTION OF LAND OWNERSHIP (1961) % of national income, lowest quintile ,. % owned by top 10% of owners 74.6 highest quintile .. % owned by smallest 10% of owners 1.6 ACCESS TO PIPED WATER ACCESS TO ELECTRICITY (1970) % of population - urban 99.0 Z of population - urban and rural 27 - rural 41.0 NUTRITION EDUCATION Calorie intake as % of requirements (1964-66) 93.0 Adult literacy rate % (1960) 86 Per capita protein intake (1964-66) 59 Primary school enrollment % (1970) 85 GNP PER CAPITA in 1971-/ US $690 GROSS NATIONAL PRODUCT IN 1971 ANNUAL RATE OF GROWTH (%. constant prices) US $ Mln. % 1961-65 1965-70 1971 (Estimate) GNP at Market Prices 1,279.2 100.0 4.8 5.3 3.0 Gross Domestic Investment 356.4 27.9 1.8 11.1 4.5 Gross National Saving 167.3 13.1 5.5 6.7 2.9 Current Account Balance -161.4 14.8 . Exports of Goods, NFS 534.0 41.7 4.7 6.4 3.9 Imports of Goods, NFS 631.5 49.4 3.5 8.5 5.9 OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1971 Value Added Labor Force V, A. Per Worker US $ Mln. 7 (000) % US$ % Agriculture 70.9 8.3 246.0 32.4 288 25 Industry 368.3 42.8 163.2 21.5 2257 200 Services 420.1 48.9 305.7 40.2 1374 121 Unallocated _ - 45.1 5.9 _ Total/Average 859.3 100.0 760.0 100.0 1131 100.0 GOVERNMENT FINANCE General Government Central Government (J$ Mln.) Z of GDP (J$ Min.) % of GDP 1970 1970 1968-70 1970 1970 1968-70 Current Receipts 237.4 22.2 24.5 217.9 20.4 22.5 Current Expenditure 194.1 18,2 20.0 178.4 16.7 18.4 Current Surplus 43.3 -4.1 4.5 39.5 3.7 4.1 Capital Expenditures 74.0 6.9 7.6 73.2 6.8 7.6 External Assistance (net) 1/ The Per Capita GNP estimate is at 1970 market prices, calculated by the same conversion technique as the 1972 World Atlas. All other conversions to dollars in this table are at the average exchange rate prevailing during the period covered. 2/ Total labor force; unemployed are allocated to sector of their normal occupation. "Unallocated" consists mainly of unemployed workers seeking their first job. not available not applicable  PREFACE (ii) COUNTRY DATA - JAMAICA June MONEY, CREDIT AND PRICES 1965 1969 1970 1971 1971 1972 (Million J$ oustarding end period) Money and Quasi Money 168.0 324.4 378.8 470.5 413.8 506.5 Bank Credit to Public Sector -4.6 20.0 30.4 50.0 31.0 41.7 Bank Credit to Private Sector 127.0 244.5 285.1 330.4 287.0 394.1 (Percentages or Index Numbers) Money and Quasi Money as % of GDP 25.6 33.5 35,4 41.6 36.6 41.0 General Price Index (1963 = 100)1/ 102.0 122.0 . 133.3 141.4 141.0 147.5 .Annual percentage changes in: General Price Index 2.5 6.8 9.3 6.1 4.6 Bank credit to Public Sector -20.7 -28.1 52.0 64,5 743.1 34.5 Bank credit to Private Sector 21.6 40.7 16.6 15.9 11.8 37.3 BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1969-71) 1970 1971 1972 US$ Mln . (Millions US $) Alumina 114.5 22.7 Exports of Goods, NFS 511.8 531.7 596.8 3auxite 91.4 18.1 Imports of Goods, NFS 598.1 632.5 710.0 Sugar 34.9 6.9 Resource Gap (deficit= -) -86.3 -100.8 -117.2 Bananas 14.4 2.8 All other commodities 250.1 49.5 Interest Payments (net) 5.7 3.1 -0.3 Total 505.3 JOO.0 Workers' Remittances 9.8 11.2 1.3.7 Other Factor Payments(net)-103.9 -105.9 -12.5.9 EXTERNAL DEBT, DECEMBER 31, 1972 Net transfers 21.8 20.7 24.4 Balance on Current USS Mln Account -152.9 -171.7 -201.3 PuLblic Debt, incl. guLaranteed 156.5 Direct Foreign Investment 156.5 158.5 12(0.0 lion-Guaranteed Private Debt Net MLT Borrowing 7.9 27.4 29.0 l'otal outstanding & Disbursed 156.5 Disbursements (15.6) (36.5) (38.0) 2/ Amortization (7.7) (9.1) ( 9.0) DEBT SERVICE RATIO FOR 1972- Subtotal 164.4 185.9 149.0 Capital Grants - - - Other Capital (net) 2.5 14.3 -2'1.1 Public Debt, incl. guaratnteed 5.2 Other items n.e.i. 7.2 14.9 14.2 Non-Guaranteed Private Debt Increase in Reserves(+) 21.2 43.4 -61.2 lotal outstanding & Disbtursed 5.2 Gross Reserves(end year) 160.6 187.8 Net Reserves (end year) 115.1 158.5 97.3 RATE OF EXCHANGE IBRD/IDA LENDING, JANUARY 31, 1973 (Mil'ion US $1: Through - December 8, 1971 June 1972 - Jan. 1973 IBRD IDA US$ 1.00 = J$0.83 Downward float in line J$ 1.00 USS1.20 with Pound Sterling Outstanding & Disbursed 36.8 Undisbursed 21.0 Dec. 1971 - May 1972 Since - Jan. 1973 Outstanding incl. US$ 1.00 = J$0.77 US$ 1.00 = J$0.91 undisbursed 57.8 .T$ 1.00 = US$1.30 J$ 1.00 = US$1.10 1/ Retail Price Index for Kingston. 2/ Ratio of Debt Service to Exports of Goods and Non-Factor Services. not available.  ANNEX I JAMAICA - MEMORANDUM ON RECENT ECONOMIC DEVELOPMNTS AND PROSPECTS A. RECENT ECONOMIC DEVELOPMENTS 1. Betweea the first and second half of the last decade, the GDP growth rate in Jamaica accelerated from an average of about 4.5 percent to 5.5 percent a year. There was however a slowdown in 1971 to around 3 percent, due mainly to a reduction in the growth of mineral production caused by a reduced world demand for aluminum. Construction stagnated as large-scale alumina-related investment came to its close. Manufacturing output also continued to lag and private investment grew only moderately. Agricultural output however rose more rapidly than GNP as a whole for the first time in a number of years. A recovery took place in 1972 when the world demand for alumina improved and the economy once again registered an increase in real output of around 5 to 6 percent. Com- merce performed strongly, and activity in the construction industry picked up after interruptions which followed the general elections and the subsequent change of administration. Some limited gains were also recorded in agriculture and manu- facturing, although sugar output declined somewhat. The rate of increase in domestic prices, which had accelerated rapidly through 1970, slowed down in 1971 and the first half of 1972, to about 6 percent as a result partly of increased output of domestic agriculture and of the revaluation of the Jamaican dollar vis- a-via the US dollar in 1971. More recently, prices have climbed again under the impact of increased wage concessions and the de3preciation of the Jamaican dollar through downward float in 1972 and formal devaluation in 1973. 2. Jamaicats economy has a relatively narrow rssource base, with mining and tourism providing the major propellants of growth; while these sectors earn the bulk of the country's export receipts, however, they have, until recently de- veloped few linkages with the rest of the economy. With its limited resource endowment and domestic market, the country is extremely dependent on external trade and capital inflows. The rate of increase in imports over the last several years has exceeded that of exports by a significant margin. Large-scale investnsnt necessitated substantial capital goods imports, while industrial production has remained dependent on imported raw material and intermediate goods. The import content of both investment and consumption has increased, while recent growth in the value of exports has been limited as larger alumina shipments were partly offset by a weakening in prices, The advantage of improved prices for Jamaica's principal agricultural exports, sugar and bananas, was mainly offset by a decline in production. Other agricultural exports likewise performed poorly, while exports of manufactures which were stagnant since 1965, recently accelerated somewhat under the impact of CARIFTA. As a consequence, the current account deficit in the balance of payments went up from $62 million in 1967 to $168 million in 1971. 3. The current account deficit prior to 1972 was amply covered by capital inflows, and foreign exchange reserves increased. During the last year, however, private inflow fell off sharply with the completion of the recent cycle of alumina investment; the capital account was also affected by speculative outflows. At the  -2- same time, in a desire to stimiuLate economic activity, expansionist credit policies were introduced in April 1971. Imports expanded rapidly through 1971-72, reflectirg a continued rise in the demand for consumer goods and a speculative accumulation of inventories. Foreign exchange reserves declined from their peak of $190 million in March 1972 to about $103 million by the end of that year, at which level they would cover less than two months imports. By the time the Government initiated corrective measures in November last year, Jamaica was in the throes of its first major foreign exchange crisis since in- dependence. T'he Government acted in that month to tighten credit and to restrain _'rports. The exchange rate, which had floated down with the pound sterling in the course of 1972, was devalued by a further 6.7 percent in January 1973. Subsequently, Jamaica followed -the U.S. dollar devaluation, the trade-weighted depreciation of the Jamaican do:Llar thus now amounting to about 10.5 percent in relation to its parity prior to August 15, 1971. The country's foreign ex- change reserves have recovered somewhat in the first half of 1973 mainly as a consequence of an inflow,of pubLic loans. Negotiations have been concluded with the DE for a stand-by of approximately US$32 million (SDR 26.5 million). 4. The public sector added to the balance of payments pressures by un- usually large borrowings from the banking system in the critical period April/ November 1972. The importance of this sector in the economy has increased steadily over the last several years, its share in GNP having gone up from 14 percent in 1965 to 18 percent in 1971. The Govermnent's performance in raising revenues in recent years has been commendable, the ratio of revenues to GNP rising from 16 percent in 1967/68 to just under 20 percent in 1971/72. Weaknesses in public finances, however, became evident last year. Current expenditures of the Central Government in 1972 were permitted to increase by nearly 20 percent, about 2.5 times as much as current revenue growth, the latter being depressed because of a decline in tax payments by the mining companies. Capital outlays over the last three fiscal year's grew by nearly 30 percent. Increases in govern- ment wages and salaries account for the major part of the rise in current expendi- tures; highways, schools and hospital-building programs and other public works, some of them primarily of an employment-creating nature, account for most of the increase in public investment. As a result, substantial domestic borrowing was required for the first time in some years, amounting to over two-thirds of capital expenditure. However, the budget for 1973/74 holds out hopes for a return to fis- cal discipline. Current expenditure growth is planned to be held at around 4-5 percent in constant prices while real growth in current revenue is planned to be almost 15 percent, due to tax measures including property taxes based on long over- due revaluation of urban properties. Assuming the budget targets are met, current revenue in 1973 would reach 22 oercent of GNP in 1973, and the current account surplus expressed as a proportion of capital expenditures, would be restored to a level prevailing before 1S72. Savings of public utilities likewise are expected to rise as a result of increases in electricity and water rates already introduced and those now under consideration.  -3- B. DEVELOPMNT PROBLMS AND POLICY REQUIFEMENTS 5. Jamaica's recent economic experience has underlined its dependence on the external sector, and brought into sharp focus the basic problems and structural deficiencies of the economy. In overcoming these deficiences, it will be necessary in the future to adopt a set of well-coordinated policies. The key problem areas and economic policy requirements in order to meet the country's development objectives,are outlined below. Unemployment and Income Distribution 6. Unemployment and severe income disparities constitute a major pre- occupation of the Government. On the basis of the latest sample survey carried out in April 1972, the unemployment level presently stands at about 16 percent as against 13 percent in 1960, with significant increases recorded in the last three years. If the substantial number of under-employed is taken into account, as much as 30 percent of the labor force might have no or insufficient permanent income. Unemployment is particularly high among the urban populatian, the un- skilled, females and adolescents. Nearly 45 percent of the age group 14-24 years are presently unemployed, accounting for over one-half of total unemployment. 7. Among the factors contributing to the recent upsurge in unemployment are a large increase in the number of new entrants into the labor force, a further rise in the already high participation rate for women, and reduced opportunities to emigrate. Due to the sectoral pattern of economic growth and to technological factors, the substantial investment carried out during the 1960s created relatively few jobs. The highly capital-intensive bauxite-alumina sector accounts for less than 2 percent of the labor force employed; in other sectors wage pressures pro- moted by trade unions have given an impetus to mechanization. Past government policies, by encouraging factor price distortions have worked against larger employment generation and fiscal investment incentives have stimulated capital- intensive production. An overvalued exchange rate has cheapened imports of capital equipment and intermediate goods and inhibited import substitution, and smaller firms have restricted hiring of additional labor to avoid unionization. At the same time, severe shortages of skills at all levels have emerged, aggra- vated by continued emigration of large numbers of skilled personsD and the aca- demically-oriented education system has failed to provide technical and vocational training to achieve a better balance between the availability of jobs and skills. 8. Demographic trends point to three major developments for the decade of the 1970s. First, due to its age pattern the growth rate of the population is likely to increase even if fertility declines and migration continues at a moderate pace. Second, and more important from the employment point of view, the number of young adults would increase by about 66 percent, or 1 times the increase of the 1960s. Third, growth rates in the other age groups are expected to be relatively low and increases among the older adults might be too small to provide a balanced growth of the labor force. Government policies will, therefore, have to be directed to the structural nature of the problem. In addition to policies designed to stimulate employment and the diversification and expansion of the ecanomy, it would be necessary to expand training, education and family planning programs. It would  also be necessary to mitigate the rural-urban drift by revitalization of the agricultural sector which the Government is at present actively planning. 9. Substantial unemployment, low productivity in major economic sectors and the structure of the domestic market, combined with institutional factors, have affected income distribution. Although reliable data are not available, there are indications that income distribution in Jamaica is more skewed than n oth-er CARIFTA countries. Favored economic groups have improved their position a" the expense of those unable to secure for themselves increases in incoms in line with those in output or in domestic prices. Such groups include not only profit recipients, but certain sections of organized labor as well; real wages il mining and construction, for inastance, increased at about 7 percent and 5 percent annually during 1960-70 while agricultural wages other than those in sugar did not increase at all. There are indications that the degree of mono- -olization in manufactur-ing industry is high. The Government has tried to cor- rect the more blatant income disparities by stepping up expenditures for social services and providing relief work for the unemployed. The tax system has lately been made more progressive by the introduction of a separate tax on dis- tributed corporate profits and of a capital-gains tax. However, weaknesses in tax administration have not only affected revenue growth but also curtailed the redistributive potential of the system. Savings and Investment 10. The pattern of incone distribution, low productivity levels in non- rining sectors of the economy, co.mbined with particular aspects of fiscal and Y.onetary policies, influenced adversely the generation of savings and national investment levels. The propensity to consume among recipients of larger incomes is generally high while the savings capacity of the bulk of the population is severely limited. There are few fiscal incentives to save. The low interest paid on deposits inhibited their growth. Concurrently consumer credit was encouraged. Public institutions to promote savings have only recently been established and have so far had little impact. As a proportion of national ,ncome, savings were l9ss than 18 percent in 1971, down from 20 percent in 1967-70. Investment declined frcm 28 percent of GDP in 1968-70 tc, 26 percent in 1972. W.hile government and corporate savings increased significantly, personal savings over most years remained at 6-7 percent of disposable income and probably were below that in 1972. Due to the lack of national capital, there has been an increasing reliance on direct foreign investment and other external capital in- -lows, the latter covering 36 percent of total investment in 1971 as against 16 percent in 1965. Even the share of external capital in non-mi.ning investment L.ore than doubled over this period and accounted for nearly 30 percent in 1971. 1. As already mentioned, the Governmentts performance in raising revenues in recent years has been very satisfactory. The forthc aming fiscal measuros now con- 3emplated should, after the lapses of last year, restore public savings to satisfactory levels. However, it will be essential for the Government in the future to control current expendi.tures and improve the efficiency of its resource application. While maintaining public savings at about 5 percent of GDP, it 'iust be the overall objective of its fiscal, monetary and institutional policies -;o increase national savings over the next five years at, least to the levels already attained during the late 1960s.  -5- Balance of Payments 12. Jamaica's balance of payments has shown a worsening trend since 1967. The negative current account balance in 1966-71 increased five times over that in 1960-65. A particularly disconcerting feature has been the acceleration in the import growth of consumer goods which during the period 1967-71 increased by nearly two-thirds. The current account deficit for 1972 was over $200 mil- lion. Although the most important sources of Jamaica's export earnings - bauxite and tourism - have been dynamic and are likely to remain so, a heavy cammodity concentration of exports and limitation to a few trading channels make the country's export earnings vulnerable. The deterioration of agricultural exports, as well as low manufacturing exports in relation to the industrial potential, have impeded diversification and held exports below the existing overall potential. As a con- sequence, the balance of payments situation has become a crucial constraint on economic development. Incomes and Exchange Rate Policies 13. In order to remedy the adverse situation and keep the current account deficit within manageable proportions, Jamaica will need to diversify its exports, expand its production of traditional export commodities and take steps to make other exports competitive. Two of the major requirements in this connection are the adoption of appropriate incames and exchange rate policies so as to keep cost- price relationships in line. The rate of increase of wages has progressively ac- celerated over the last few years, and has exceeded productivity gains by a wide margin; high wages in the bauxite and alumina sector have induced wage demands in other sectors of the economy where gains in productivity have been far smaller. The Government is now examining the possibility of applying a positive incomes policy. National guidelines are under consideration which would permit annual wage and price increases not exceeding 7 percent and 5 percent respectively, thus allowing for a 2 percent increase per year in average labor productivity. Jamaica has already taken action to adjust its exchange rate so as to correct some of the factor price distortions, to curb imports and make its exports more competitive. For the future, it appears that pragmatic policies in both fields are likely to be maintained; and particularly, consideration of international competitiveness will be given more weight in exchange rate policy. This should be combined with the provisian of subsidies for non-traditional exports and new investment, and with the rationalization of methods to improve efficiency in export agriculture and industries. Steps are also being taken to limit imports and increase domestic food production. Absorptive Capacity 14. The country's capacity to carry out a substantially enlarged invest- ment program and accelerate the pace of development depends upon a rapid improve- ment in the administrative apparatus for project planning and implementation. The performance in this respect in the past has not been very encouraging. Although the capital expenditure of the Central Government has grown appreciably since 1967, and now accounts for more than 9 percent of GDP, this disguises the fact that a number of projects have been inefficiently executed and administered. The sizable migration of qualified personnel has also affected the capacity for project planning and implementation. In an effort to remedy the situation, the  -6- Government has lately reshaped its planning machinery by creating a National Economic Council, a Technical Advisory Group and a National Planning Agency. The Government has instituted a drive to improve the civil service structure and, in order to remedy shortages of competent personnel, to induce capable Jamaicans, who are presently outside the country, to return home. A reform of the civil service structure is planned to impart to it greater flexibility and dynamism; a civil service department is being immediately created to review methods and procedures, with special focus on the Ministries of Agriculture, H^-using and Education. With all that, it is doubtful if deficiencies at middle levels of administration can be quickly overcome without substantial injections of external technical assistance. The Government has shown its readiness to receive such assistance. C. DEVELOPMENT PROSPECTS 15. On the whole Jamaica has a history of good economic management, and the new Government has given evidence of its determination to seek appropriate solu- tions to the problems facing the country. plans for major investment projects and expanded goverment activities as well as favorable prospects for Jamaica's principal exports suggest that the country's economic position from 1974 onwards will again improve. Provided these favorable factors can be sustained, and given sound policies in critical areas of the economy mentioned above, the prospects for the medium term appear good. Our estimates of feasible macro-economic objectives summarized in t+he table below therefore are based on the assumption of an improved performance of the economy:  -7- Current LeVel Projected Actual , Estimated Growth (, 1971 1972 1978 .1973-75 GDP (1967-69 US$ millions) 1I,347 1,4j28 2,090 6.6 (excluding bauxite-alumina sector) (1,174) (1,2h6) (1,774) (6.1) Population (thousands) 1,912 1,948 2,186 1.9 GDP/Capita (1967-69 us$ millitons) 705 733 956 4.6 Consumption/capita (1967-69 US$ millions) 557 589 713 3.3 Gross Domestic Savings (1 967-69 US$ millions) 248 245 465 11 .6 Savings/GDP 18.4% 16.5% 22.2% - Gross Domestic Investment(1967-69 US$ millions) 339 359 465 4.4 (excluding bauite-alumina sector) (45) (300) (402) (5.0) Inve stment/GDP 25.2% 25.1% 22.2% - Public Investmnent/Gross Domestic Investment 32.6 33.5% 40.8% - Public Savings/GDP 5.2% 4.1% 5- Exports of Goods and NFS(1967-69 US$ millions)i 518 566 8148 7,0 (of which bauJdte-alumina sector) (226) (255) (380) (6.9) Imports of Goods and NFS(1967-69 US$ millions) 572 698 857 3.51, (of 'hich bauxite-alumina sector) (58) (48) (69) (6.2) Resource Balance/GDP -4.2 -9.7 -c.5 Net Public Capital Inflow(current US$ imillions) 24 24 36 Ot-her Net Capital Inflow(current US.$ millions) 168 106 114 (of which bauxite-alwxina sector) (129) (61) (83) Zxternal Debt Service2/. 5.1% 5.2% 9.5% 1) Teras-of-trada adjusted. 2/ As percent of goods and non-factor services net of investmnt income abroad. 7/ In relation to 1971 which was much more normal year for im-ports than 1972, the growth rate is 6.0% for total imports and 2.5% for bauxite-alumina related imports of raw materials and capital goods. Imports other than for the bauxite-alumina sector are projected to grow by 6.3% in 1972-78 and by 3.3% in 1973-78 on annual average. 16. With the recovery of industrial production in the major developed countries, led by the United States and Japan, world consumption of>a.lumTihzaz is expected to grow substantially faster in the years 1973 and beyond. An in- crease in the world market aluminum price is iminent, This recovexy would benefit Jamaica by increasing production and exports fro= the existing bauxite and alumina capacity, i-.th further exansion of capacity not unlikeJ.r in two or three years from now. It is the estimate of our economic mission that increasae in the vol-ume and prices of bauxite and alumina exports, which between them coa- prise over two-thirds of Jamaica's total merchandise exports, would cause the total foreign exchange earnings of the country from this source to rise from $225 million to $380 million between 1972 and 1978. These calculations do not tabe into account a substantial petroleum refining-aluminum smelting pro- ject which is presently under active consideration of the Governmen-.  8 - 17. In addition to mining, major contributicns to growth in the future are likely to be made by tourism, manufacturing, agriculture and construction. Annual increases in manufacturing of over 7 percent appear attainable. The sector is expected to benefit from the recent devaluation and also from the transformation of CARIFTA into a Common Market on August 1, 1973, which could provide the basis for promotiorn of manufacturing exports to markets outside the Region. Labor-intensive, aissembly-type industries will continue to play an important part in an effort to increase manufacturing exports. In agri- culture, exports will gain from the prevailing high sugar prices, increased Local profits resulting from devaluation and planned rehabilitation investment. The Goverrment s plans for revi-talizing the sector could lead to substantial import substitution in addition to generating higher export earnings. Con- struction has been the dynamic sector of the econcmy for many years. It is presently going through a phase of depression but, with the large-scale invest- ments projected in the public ELnd the private sectors in the future, is expected to expand rap-idly once again. As a whole, the share of investment in GDP is pro- jected to rise from the present; 26 percent to about 28 percent by 1975, declining gradually thereafter to about 23 percent. The economic mission has estimated an annual growth rate of GDP oI' 6.8 percent in real terms over 1973-78; the recorded rate for 1967-72 was 6.3 percent. 18. public investment is expected to account for over 40 percent of gross domestic investment in 1978, as against 32 percent in 1971. An acceleration of economic growth therefore calls for the foinulation and implementation of a sound public investment progranr. which would balance output and employment-creating objectives. The financing of such a program will call for additional domestic resources as well as increased external borrowing. With total government revenues already at 20 percent of GDP in 1971-72, the scope for additional revenue raising is somewhat lindited. However, improvements in tax administration and increases in property tax rates as well as other revenue measures are soon to be implemented, taking account of these and other factors, the Bank mission has projected government revenues growing to 24 percent of GDP by 1978, or at about 9 percent a year in real terms. The surplus of the rest of the public sector would increase at a stmilar pace, provided the utilities rates are kept in line with costs. Allowing for an increase in current expenditures of around 7 percent, public capital expenditures could thus grow at around 8 percent per annum. On these assumptions, public sector savings would in 1973-78, finance about 55 percent of public investment as against some 70 percent in 1967-71 and just about 25 per- cent in 1972. Gross disbursements from external public borrowing would cover 37 percent of capital outlays as compared with less than 25 percent in the past five years. 19. A draft five-year development plan was prep ared by the previous Govern- ment in 1 Vl1. Maior changes in thi s draft are now being undertaken and the pre- sentation of a new plan to Parliament is scheduled for late 1973. Capital expendi- tures by the Central Government over the fiscal years 1973/74-1977/78 is likely to approximate J$580 million in 1970 prices; such irivestment would represent a sizable increase over the capital outlays of J$300 million (in 1970 prices)  -9- estimated for the five years ending in March 1973. In addition, important in- vestments are planned by three public entities to be financed largely from non- budgetary sources. The overall public investment program is likely to focus on agriculture,, infrastructure, housing and education. It assumes that the development of industry and tourism would be fostered by relatively modest public capital expenditures, combined with incentive and promotional measures. Although the Government has recently embarked on special impact work-employment programs, their achievement has been uneven; it will be necessary to integrate such programs with the overall investment plan towards the implementation of a growth-oriented and well-coordinated employment policy. D. CAPITAI IFLOWS AND EXTERNAL AiD Past Trends 20. Capital inflows have played a decisive role in the past for expanding the productive capacity of the economy and counter-balancing the current account deficit in the balance of payments. Direct private investment has accounted for the bulk of capital inflows. Foreign-financed expansion of baunxte and alumina capacity in 1967-72 accounted for investment in the order of $585 million, well above 70 percent of net private capital inflows during this period; other foreign investment went into manufacturing, telecanmunications and tourism. Disbursements of loans to the public sector, including government-guaranteed loans to privately owned utilities have been rather limited. Net of amortization, they amounted in 1967-72 to $105 million, about 10 percent of net capital inflows over that period. Commitments, however, accelerated sharply towards the close of the period, increasing by $182 million in 1971-72 alone. The composition of external public borrowing has also changed markedly. While prior to 1966, external funds were raised mainly through bond issues on the London and North American capital markets, these sources declined in importance as international capital market conditions worsened; the Government relied increasingly instead on medium-term loans from U.S. commercial banks. However, the largest share was provided through project loans from international and bilateral agencies, whose contribution was negligible prior to 1965. The major part of these funds went to utilities and semi-auto- nomous public agencies, while project loan disbursements to the Central Government lagged due to weaknesses in project implementation. 21. AID and Eximbank combined have been the largest source of external public capital, between them accounting for commitments of $72.6 million, or nearly 27 percent of total public loan commitments in 1967-72. Their lending has been con- centrated in power, agriculture, housing, transport and industrial financing. IBRD has committed a total of $24.2 million over the same period, or about 9 percent of the total. Our past lending has mainly been for economic and social infrastructure, including power, roadv, water supply, education and, to a minor extent, family planning. Canadian aid ($37 million; about 14 percent of the total) has been made available for a large number of projects in telecommunica- tions, education, health, transport and water supply, as well as for preinvest- ment studies. IDB commenced operations in June 1970 and has become increasingly  - 10 - active in the last three years. Its lending ($19.9 million; 7.3 percent of total), mostly from the Fund for Special Operations, has been for agriculture, university education, and small-scale industries and hotels. Finally, U.S. cpmmercial banks have committed sizable funds ($52.4 million) for Eximbank- sponsored projects in power and transportation as well as for large hotels. Financing from suppliers' credits during this period has been relatively low. Future Requirements 22. Jamaica faces an urgent need to improve its trade balance, secure an upturn in capital inflows, and replenish the depleted foreign reserves. Even considering that the trade position will improve, a current account deficit of around $200 million a year is likely to persist through most of 1973-78. The increase in investment required to support faster growth in exports, output and employment will consequently necessitate substantial capital inFlows. Our projections of Jamaica's sources and uses of foreign exchange in 1973-78 are summarized below: US$ millions at current prices Actual Projected 1967-72 1973-78 Sources of Foreign Excha&ge 4 060.2 6 811 4t Exports of Goods and NFS 2,926.2 'O8b Net Direct Foreign Investment 723.3 684.6 Official Loans 1/ 14.76.8 Other 2/ 256.0 481.2 Uses of Foreign Exchange 4,060.2 6,81i.4 Imports of Goods and NFS 3,72M 54.7 Investment Income 6o1. 968.6 Public Debt Service 92.6 353.7 Interest (49 .8 (133.5) Amortization (42.8) (220.2) Accumulation of Reserves 38.1 3.4 1/ Including suppliers' credit;s to public sector. 2/ Private sector borrowing, transfers, allocation of SDRs, and errors and omissions. 23. Direct private investment is likely to remain the largest source of foreign capital during this period. A new round of invesument in alumina due to start in the next couple of years, combined with higher maintenance invest- ment for an enlarged capital stock in mining, could conceivably result in inflows of about $500 million. More loan funds than hitherto are likely to be absorbed by the private sector of the economy, with amortization payments rising rapidly from 1976 onwards. Under these assumptions, net private capital inflows  for the period 1973-78 would be close to $900 million against $780 million in the previous six years. These projections do not take into account the sub- stantial inflows which might result from the petroleum refinery/aluminum smelter project. In order to cover the remaining foreign exchange gap, substantially increased inflows of public capital will be required. As previously mentioned, current surpluses generated by the public sector in the immediate future are likely to be lower than in recent years, and the scope for a further increase in non-inflationary dcmestic borrowing is limited; the needs of the public sector for external capital will therefore rise in line with the public investment growth. Public loan commitments of the order of $600 million would be therefore needed in 1973-78, more than twice as much as during 1967-72. A substantial transfer of external capital to the public sector is assured on the basis of commitments already made. Public loan disbursements net of amortization are estimated to equal about 5 percent of the inflow of foreign funds on both current and capital accounts during the next six years. 24. Although borrowing by the Central Government for budget support will be substantial until around 1975, the share of project loans for the six-year period as a whole is expected to be higher than in 1967-72. In accordance with the emerging public investnent pattern, project loans will also in future be mainly channeled into power, agriculture, and roads and transport, with fewer loan commitments likely for education and tourism. The share taken up by the rest of the public sector, including partly government-owned utilities, will continue to be large. External funds for on-lending to the private sector - particularly to small-scale industry and hotels, as well as housing - will also be forthcoming although as a share of the total, they will remain small. Disbursements can be expected to increase sharply in 1973-75 when borrowing for general budgetary purposes will be largest and substantial investment in utilities and hotels will be carried out. Public loan disbursements are not likely to decline much after- wards, however, and are expected to stay at around $85-90 million annually through 1978. 25. Jamaica is in the process of gaining access to new sources of public capital. The Caribbean Development Bank is extending a small loan for tourism infrastructure; further lending will be limited, however, since CDB is bound to channel its funds primarily towards the smaller CARIFTA countries. Jamaica also has just obtained loans from Japan and Germany. Due to the assumed increase in the share of loans on concessional terms, the average interest rate is likely to decline from 6.5 to about 6 percent in 1972-78. The amortization rate will remain high, however, as repayments of sizable medium-term bank loans obtained in 1970-73 will start during the second half of the decade. The service on external public debt is therefore li5ely to increasF iii497-78,from 5.2 to 9.5 percent, expres'sed as a propor'tion of exports and non-factor services net of investment income abroad. --Provided, however, the authorities implemnt their annotuncd policies of sound econcmic and financial management, Jamaica may be regarded as creditworthy for the estimated external capital requirements.  ANNEX II Page 1 of 4 STATUS OF BANK GROUP OPERATIONS IN JAMAICA A. Statemwnt of Bank Loans (as of March 31, 1973) Loan (US$ million) No. Year Borrower Purpose Amount (less cancellation) Bank Undisbursed 2 Loans fulJly disbursed (408 arid 16411 26.3 468 1967 Jamaica Education 9.5 0.1T 598 1969 The Water Commission Kingston, Jamaica Water Supply 5.0 2.3 690 1970 Jamaica Populaticn 2.0 1.8 719 1970 Jamaica Development Bank Agriculture 3;. 7 2.9 727 1971 Jamaica Education 13.5 13.3 Total (net of cancellation) 60.o 20.4 of which has been repaid 4.o Total now outstanding 56.o Amount sold 1.4 of which has been repaid 1.3 0.1 Total now held by Bank 55.9 Total undisbursed 20.4 B. Statement of IFC Investments (as at March 31, 1973) Year Obligor Type of (US$ million) _ _____ Bu8siness Loan Equit Total 1961 Jamaica Pre-Mix Ltd. Pre-mix concrete 0.2 0.2 1968 Pegasus Hotel of Jamaica Ltd. Tourism 2.2 0.7 2.9 Total gross commitments 2.4 0.7 3.1 Less cancellations, terminations, repayments and sales 1.1 1.1 Total comminents now held by IFC 1.3 0.7 2.0 Total undisbursed 0.2 0.1 0.3 1t The Telecoununications loan (481-JM) was made in 1967 to the Jamaica Telephone Comapay anyd was cancelled by the Borrower during 1 967.  ANNEX II Page 2 of 4 C. Projects in Execution-/ Ln No. 468 First Education Proect; US$9.5 million of September 30, 167 Closing Date: June 30, 1973 All project schools are virtually completed and in use except for two schools that are still under construction. Completion of the project is expected by June 30, 1973, about two years behind the original ,3chedule. De- lays in implementation due to changes in site locations, design variations and poor management, together with devaluations of the Jamaican dollar, have caused substantial cost overruns in construction. Final costs are likely to exceed appraisal estimates by about 50 percent. The loan closing date origi- nally July 31, 1971, has been postponed twice, to December 31, 1972, and then to June 30, 1973. The Bank plans to undertake a special supervision mission shortly after the closing date for a thorough review of the whole execution of this project. Ln No. 727 Second Education Project; US$13.5 million of March 25, 1971 Closing Date: December 31, 1975 There were initial delays due to slowness in recruiting specialist staff for the Project Unit. Implementation was subsequently further delayed because the new Goverrnment on taking up office in early 1972 wished to review the project's scope before proceeding. Also there has been some weakness in the operation of the Prcject Unrit whose staff have been engaged on extraneous duties. Steps are being taken t.o strengthen the Unit and to improve project implemsntation. The Government has recently assured the Bank that construction of project schools will be completed by the present loan closing date, about 18 months later than estimated at the time of appraisal. Because of these delays a 10 percent to 15 percent cost overrun is expected. Ln No. 454 Power Project; US$22 million of June 20, 1966 The physical executi-on of the project has been virtually completed. The loan closed June 30, 1970, Six months after the original closing date of December 31, 1969. Completion of the project was delayed largely due to a tight financial position during 1970 and 1971 when, in spite of repeated ap- proaches by the Bank, the Goverranent was not prepared to allow a much needed tariff increase. However, the Borrower's position improved in May 1972 when a substantial rate increase of a-bout 27 percent was implemented. 1/ These notes ara designed to inform the Executive Directors regarding the progress of projects in execcution, and in particular to report any pro- blems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution.  ANNEX II Page 3 of 4 Ln No. 719 Agricultural Credit Project; US$3.7 million of December 28, 1970 Closing Date: December 31, 197h The project consists of the provision of long-term loans by the Jamaica Development Bank (JDB) to commercial farmers for financing investment for the development and expansion of farms for the production of coconuts, citrus, beef and dairying and the provision of experts. After a slow start the project has picked up momentum during the last few months and about $1.9 million of the Bank loan a,s now been ccmmitted, although disbursements remain rather slow. The JDB is taking steps to streamline and simplify pro- cedures which have mainly accounted for delays in disbursements. The Borrower has recently requested a reallocation of the loan proceeds to increase credit availability for beef and dairy production. Ln No. 690 Population Project; US$2.0 million of June 18,, 1970 Closing Date: March 31, 1975 Initially there were delays in the design/construction programs for the Victoria Jubilee Hospital (VJH) and ten rural maternity centers (RMEs), and weaknesses in the management of the family planning program. However, more recently improved progress has been made in implementing the principal aspects of the program. Construction has started on the VJH expansion; con- struction of three of the ten RMCs has already been completed and the rest are scheduled for comple-4ion by September 1973. In June 1972 the first annual re- view, provided for ill the Loan Agreement, of the progress of the national family planning program took place by experts from outside Jamaica. After discussion with the Bank, the Government is now remedying the deficiencies noted by the external team. Ln No. 598 Kingston Water Suppy 1Project; US$5.0 million of May 14, 1969 Closing Date: December 31, 1973 After initial delays over the acquisition of land rights and in the award of contracts, the physical works of the project are now moving ahead at a satisfactory rate and the most critically needed works will be essentially completed by the end of June 1973. However, the financial situ- ation of the Water Commission remains weak, due to delay in the past in in- creasing water tariffs and to high operating costs. The annual rates of return over the last three fiscal years were substantially below the 8 percent required in the Loan Agreement but after considerable prompting the government is proposing to introduce substantial rate increases with effect from June 1, 1973. This should help restore the Commission's financial viability and enable it to meet the rate of return covenant. Other improvements to reduce costs and improve operating efficiency are also being implemented. The loan closing date originally June 30, 1972, has been extended to December 31, 1973. Final project costs are not expected to exceed appraisal estimates.  ANNE II Page h1 of 4 Ln No. 408 First Highway Projectc US$5.5 million of April 8, 1965 Closing Date: MarchiLj93 By mid-1968, the cost of the project had increased by about 50 per- cent and its execution had been delayed due to underestimation of work volumes, lack of cost experience in Jamaica and increased right-of-way costs and engineer- ing fees. Due to these problems the Bank agreed to postpone the closing date of the loan by two years to March 31, 1972, and reduce the project's scope by omitting the construction of one road section. Further complications arose in March 1972, when due to labor disturbances work was suspended for about six months. The Bank agreed to further postponements in the loan closing date from March 31, 1972, to December 31, 1972, and then to March 31, 1973, to allow cn- tinued loan disbursements to the completion of the project. There was a 60 percent cost overrun on the project. The estimated rate of return of this part of the project at appraisal ranged from 10 to 25 percent. Taking into account the cost increases we estimate that the rate of return would now range from about 10 to 15 percent.  ANNJX III Pago 1 of 2 JAMAICA - HIGHWAY PROJECT loan and Project Sumnary Borrowert Jamaica Amount: US$9.3,million equivalent in various currencies. Termst Payable in 15 years, including a 5-year period of grace at 7-1/ percent interest per annum. Project Description: The project consists of: improving about 440 miles of paved main roads by provision of asphaltic over- lay, maintenance of a further 250 miles by provision of asphaltic resealing, and associated minor works; the provision of road maintenance equipment and a small quantity of workshop equipment and tools; improvement in the staffing and procedures of the Ministry of Works insofar as they relate to road maintenance and a restructuring of the Directorate of Maintenance; a five year program of technical assistance to help implement all aspects of the project. Estimated Cost and Financing Plan: Total projects costs are estimated at $17.3 million of which the foreign exchange component is estimated at $9.3 million (54 percent). The proposed Bank loan would finance the foreign exchange component and local costs would be met from Government budgetary funds. Estimated costs are as follows: (000's of US$) Foreign Exchange local Foreign Total Component I ROAD IMPROVEMENT AND MAINTENANCE (a) Provision of Asphal- tic Overlay 2/ 3,180 3,500 6,680 52 (b) Asphaltic Resealinglj 1,650 1,200 2,850 42 (c) Preparatory WorksZ/ 1,870 - 1,870 -- SUBTOTAL I 6,700 4,700 l1,OhO II PURCHASE OF EQUIPMENT -- 22400 2,400 100 lJ Includes allowance for work to restore road profile prior to asphaltic overlay and resealing. 2/ Mainly improvement of sharp bends and roadside drainage.  ANNEX III Page 2 of 2 (000's of US$) Foreign Exchange Local Foreign Total Component III TECHNICAL ASSISTANCE 220 960 1,180 81 IV CONTINGENCIES 1,040 1,218 2,258 5h TOTAL 7,960 9,278 17,238 54 Estimated Disbursements: US$ million -FY197 FY1975 M976 FT1977 FY1978 2,900 2,700 2,100 1,050 55 Procurement Arrangements: The asphaltic overlay would be carried out by contracts awarded on the basis of international competitive bidding in accordance with the Bank's Guidelines for Procurement. The work would be bid in two packages of about $3.0 million. The asphaltic resealing work would be on the basis of competitive bidding except that advertising for the bidding would be limited to Jamaica. Procurement of equipment would be through international competitive bidding in accordance with the Bank's Guide- lines for Procurement. It is proposed that the foreign exchange costs of consultantsT ser- vices which may be incurred before the date of the Loan Agreement, but not before April 16, 1973, and not exceeding $120,000, should be financed retroactively from the loan proceeds. Consultants: The Goverment has entered into negotiations with T.P. O'Sullivan and Partners to provide the technical assistance to help in all as- pects of the execution of the project. Rate of Return: The rate of return is estimated at more than 50 percent for the asphaltic overlay, about 19 percent for the asphaltic resealing, and at least 10 percent for the equipment.  STATISTICAL APPENDIX Table I a External Public Debt Outstanding as of December 31, 1971 ($ Thousands.) Table I b External Public Debt as of December 31, 1971 ($ Thousands.) Table II Central Government Expenditures and Financing, Fiscal Years 1965/66-1973h74 (ProJected) (J$ millions.) Table III Balance of Payments, 1965-72 ($ millions.)  Economic ?