Nicaragua - Earthquake Reconstruction Project

DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use r Report No. P-1237-NI REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE ,EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF NICARAGUA FOR AN EARTHQUAKE RECONSTRUCTION PROJECT, April 24, 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 It may not be published, .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 EQUIVALENTS US$1 = 7 Cordobas (C$) C$1 = $0.1428 C$1,000 = $142.8 C$1, 000,000 = $142,800 GOVERNMENT OF NICARAGUA FISCAL YEAR January 1 to December 31  REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF NICARAGUA FOR AN EARTHQUAKE RECONSTRUCTION PROJECT 1. I submit the following report and recommendation on a proposed development credit from the Association in an amount in various currencies equivalent to US$20.0 million to the Republic of Nicaragua. PART I - THE ECONOMY 2. A memorandum entitled "The Effects of the December 23, 1972 Earthquake Upon the Economic Position and Prospects of Nicaragua" is being distributed to the Executive Directors simultaneously with this report. The memorandum, the conclusions of which are summarized below, is based upon a mission to Managua in February. The last regular economic report on Nicaragua was distributed to the Executive Directors in April 1971. An economic mission visited Nicaragua in July 1972, but the distribution of its report has been delayed in order to take into account the impact of the earthquake upon the medium-term economic outlook. A country data sheet is attached as Annex I. 3. The earthquake which struck Nicaragua's capital city last Dec- ember killed between 6,000 and 8,000 persons and injured some 20,000 people. It destroyed or rendered unusable practically all of the central zone of the city including most Government offices, the important finan- cial and commercial sections and perhaps 2,500 shops engaged in small- scale manufacturing. About 32,000 housing units, i.e., about 45 percent of the housing in the Managua area, were destroyed. The cost of replacing the physical assets destroyed by the earthquake is estimated at $300 mil- lion. This estimate assumes that the destroyed facilities will be re- built in or near their previous location so that the infrastructure faci- lities relatively undamaged by the earthquake will not have to be re- placed. This estimated replacement cost is equivalent to about one-third of 1972 GNP and about 10 percent of the nation's capital stock. Given the magnitude of the damages relative to the size of the Nicaraguan economy, the task of reconstruction will need to be spread over many years. Major factcrs affecting the pace of reconstruction will be the extent to whic' th- capacity of the construction industry can be expanded and the extent to which activities elsewhere in the country are postponed in favor of re- building the capital city. Of the $300 million which must be spent to replace the destroyed physical assets, about $100 million represent re- placement of equipment, furnishing and inventories,while the other $200 million represent construction costs. The latter figure compares with estimates of $20 million per year for the gross value of construction activity in Managua. Thus, even a five-year rebuilding program would require doubling the 1971 level of construction activity in Managua. 4. The impact of the earthquake upon levels of output and employ- ment is, fortunately, less than might have been expected given the mag- nitude of the destruction of capital assets. Large scale manufacturing activities were located almost entirely on the edges of the city and thus were outside the zone of greatest destruction. In terms of employment and output the major impact is upon the large stores and the small shops  -2- which had been located in the central zone. Reconstruction activities will partially offset the loss in employment in these areas. Govern- ment offices and financial activities continue in temporary quarters outside the seriously damaged area and in some cases in surrounding towns. Thus levels of production that sank drastically immediately after the earthquake are recovering rapidly even though the task of re- placing lost physical assets will spread over several years. For the 12-month period of 19733 it is expected that output in Managua including reconstruction activities, will be about 15 percent below the 1972 level and in 1974 it is expected to recover close to the 1972 level. For the country as a whole, GDP in 1973 may be about 9 percent below 1972 or about 15 percent below the level it probably would have reached in 1973 without the earthquake. 5. Public sector finances have been seriously affected by the earthquake. For 1973 and 1974 together, the loss in receipts is esti- mated at $61 million, or about 18 percent of what otherwise might have been expected. Additional reconstruction expenditure in the two-year period are estimated at $29 million, raising the net budgetary impact to about $90 million. However, emergency tax measures introduced by the Government (taxes on traditional exports and on civil servant salaries) will pro- vide about $46 million and disbursements of earthquake reconstruction loans should provide another $24 million. It should be possible to finance the remaining $20 million from dom6stic borrowing without unduly inflating domestic demand and creating balance of payments problems. 6. Nicaragua has a comfortable balance of payments position as a consequence of a number of favorable factors - international reserves are high, the prices of traditional exports are favorable and substantial amounts of reconstruction assistance are being mobilized. Emergency im- port requirements - foodstuffs, medicines, tents - have been met by grant assistance. Exports will hardly be affected by the earthquake; last year's widespread drought had a more important effect, but even so export earnings in 1973 should be only slightly lower than last year. With prices for coffee and beef remaining firm, cotton product;ion back to normal, and manufacturing industry largely recovering its sales to other CACM coun- tries, export earnings in 197L should be well above the 1972 level. Im- ports are expected to rise even more, however, because of the requirements of reconstruction. For 1973-74 together, a current account deficit of $138 million is anticipated, compared to $44 million for 1971-72. However, in the 1973-74 period Nicaragua's normal public capital account receipts of $78 million will be supplemented by about $75 million in insurance pay- ments and disbursements from reconstruction loans. This should be suffi- cient to finance the projected higher current account deficit. 7. Nicaragua's real per capita income increased considerably in the post World-War II period to a level of $430 in 1970 and prior to the earthquake was somewhat above the level for IDA eligibility. As a result  - 3 - of the earthquake, per capita GNP in 1973 is expected to drop to about $390 (calculated in comparable 1970 dollars, using the World Bank Atlas method). Gross domestic product increased at an average annual rate of about 6.4 percent (real terms) in the period 1946-71 while population grew at 2.9 percent per year, resulting in annual per capita product growth of about 3.4 percent. The main determinant of growth was produc- tion for export, particularly of cotton and coffee. In common with many other developing economies, Nicaragua experiences sharp swings in econo- mic activity because of vagaries of the weather and drastic changes in world prices for primary product exports. However, this characteristic is gradually changing with the recent development of new exports, such as simple manufactured goods and meat. Spurred by the rapid growth of domestic incomes, the establishmentof the Central American Common Market (CACM) and the Government's industrial incentives policy, manufacturing increased its share in GDP from 12 percent in 1950-52 to 21 percent in 1969-71. Preliminary estimates show real GDP growth of about 5 percent in 1972. 8. A reasonable investment effort was another important factor contributing to the high growth rates over the last two decades. Gross domestic investment increased from about 12 percent of GDP in the early fifties to a peak of 21 percent in the mid-sixties and now stands at about 18 percent of GDP, which is roughly comparable to average invest- ment levels elsewhere in Central America. National savings financed a substantial share of investment, but as a proportion of GDP declined over the last two decades; hence external capital, mainly public and publicly-guaranteed medium- and long-term loans, has become important, accounting for about one-third of the financing of investment in recent years. 9. In spite of the rapid growth and the marked shift in the com- position of output, transformation of the structure of the economy is still at an early stage. This is reflected in the low productivity of a large share of the labor force engaged in subsistence agriculture and petty services, and by the continuing vulnerability of the economy to events in the cotton sector. The core of the subsistence sector con- sists of 50,000 farms of up to 7 hectares in size, covering roughly 3.5 percent of the farm area and supporting about one-third of the rural population. A comparatively small number of farmers have benefitted from a special credit program (Cr6dito Rural) operated by Banco Nacional de Nicaragua (BNN), a publicly owned commercial bank. The Government is exploring other ways to broaden the scope of the financial and technical assistance to small and medium farmers. 10. The benefits of Nicaragua's substantial economic growth have been unevenly distributed. Control of the economy remains in the hands of a limited number of people. The largest 1.5 percent of farms - equiva- lent, probably, to an even smaller percentage of farmers - occupies about 14 percent of total farmland. In recent years, the Government started a few programs aimed at improving rural living conditions. Foremost among these are a USAID-financed rural electrification program through coopera- tives,sponsored by the National Power Company (ENALUF), various land  - 4 - titling and settlement schemes of the Agrarian Institute of Nicaragua (IAN) and the construction of rural primary schools and health centers with assistance from USAID. So far, the impact of these projects has been small but they are clearly steps in the right direction. 11. The public sector made a useful contribution to the diversi- fication of the economy. In the early 1950's the Government, with assistance from an IBRD economic mission, devised a comprehensive pro- gram of policies and projects aimed at diversifying and strengthening an economy which had just emerged from about 30 years of near-stagna- tion. An increase in resources and a more active credit role of BNN, the establishment of the National Development Institute (INFONAC), the decision to join the CACM coupled with an aggressive industrial incen- tives policy, and construction of roads, electric power and port facili- ties stimulated private investment and output. The Government's devel- opment effort also led to the creation of various new public institutions, such as ENALUF in 1953, the Corinto Port Authority (CPA) in 1956, and IAN in 1963. W4hile ENALUF and CPA achieved high standards, the BNN, INFONAC and the price support agency (INCEI) have encountered financial problems because of inadequacies in both program planning and administra- tion. A National Planning Office, which was established last year, still has to be adequately staffed for the difficult job of judging sectoral proposals in the context of national priorities and available resources. 12. The creation of new public agencies, especially state enter- prises such as the electric power company, resulted in considerable expansion of the public sector's share in domestic production. The fiscal performance of the Central Government, however, was character- ized by a low level of tax revenues (9 percent of GDP in 1971), compara- tively fast growth of current expenditures, and resulting periodic short- ages of savings. Fiscal difficulties in 1970 were overcome by introduc- tion of a general sales tax, which resulted in a substantial increase in public revenues and savings. External Financing 13. Apart from the Bank, external financing is provided princi- pally by USAID, the InterAmerican Development Bank (IDB) and the Cen- tral American Bank for Economic Integration (CABEI). USAID has made loans for highways, agriculture, industry, rural electrification, hous- ing, education and health. IDB is financing water and sewerage, higher education, agriculture and transport. CABEI is financing projects with a regional impact, principally in transport and industry and power inter- connection. The past lending of these agencies is summarized below. IDB is likely to continue to support the sectors which it financed in the past, although somewhat more emphasis will 'be placed on transport, edu- cation, power and telecommunications. AID expects to focus primarily on project preparation in health, education and agriculture; new commitments for project implementation will depend on the level of AID's funding by the U.S. Government. CABEI's financing will follow closely the pattern of the past, with lending concentrated in the transport and industrial sectors.  -5- (US$ millions) IBRD IDA AID IDB CABEI Lending 1950-1965 35.6 3.0 20.7 h2.h 13.3 Lending 1966-1971 Transport - - 2.8 3.5 22.5 Power and telecommunications 20.3 - 15.0 - 4.6 Education 4.o - 2.0 0.3 0.7 Health - - 6.1 8.h - Housing - - 3.7 6.o 6.5 Agriculture - - 17.6 19.7 - Industry - - 4.5 - 16.9 Other - - 9.h 1.0 - Total 59.9 3.0 81.8 81.3 64.5 of which is repayable in local currency - - - 21.5 8.9 14. Loans from these agencies are usually on softer financial terms than Bank loans. AID loans are for a term of 40 years with interest of 2 to 3 percent. IDB now plans to extend all of its loans to Nicaragua from the Fund for Special Operations, such financing now carries a 2 percent interest rate and terms of up to 40 years with 10 years of grace. The terms of CABEI loans - which often provide 100 percent financing of local expenditures - vary in accordance with CABEI's sources of financing, but generally contain a substantial concessionary element. USAID, which held roughly one-third of the debt repayable in foreign currency at the end of 1971, is Nicaragua's largest external creditor. Liabilities to the Bank Group represented less than one-fifth of debt repayable in for- eign currency. 15. In financing its reconstruction program over the next several years, Nicaragua must keep in mind the requirements of longer term debt management. Nicaragua's publicly-guaranteed debt expanded considerably in recent years. The outstanding balance of debt repayable in foreign currency rose from $68 million at the end of 196L to $225 million at the end of 1971, with a large part of commitments in this period accounted for by foreign private banks and suppliers. Debt service payments in- creased from about $7 million in 1965 to $31 million in 1971, the debt service ratio rising from h.2 percent to 13.7 percent of export earnings. Service payments fell slightly in absolute terms in 1972 and the service ratio fell to 10.3 percent; this was partly due to a policy of lengthen- ing the maturity structure of the debt. The additional borrowing re- quired to finance reconstruction -- about $100 million spread over sev- eral years -- will result in a substantial further increase in the out- standing debt. If Nicaragua had to finance the reconstruction of Managua on conventional terms in addition to its normal foreign financing require- ments, its debt service ratio would climb to well over 20 percent by the end of this decade. A major portion of the additional borrowing over the next few years should therefore be on concessionary terms in order  - 6 - to maintain Nicaragua's creditworthiness for further lending. Other agencies are expected to provide most of the requested assistance on concessionary terms and I recommend that the Bank Group participate in this effort through the proposed IIA credit. PART II - BANK GROUP OPERATIONS IN NICARAGUA 16. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of February 28, 1973, and notes on the execution of on-going projects. Nicaragua has to date received 18 Bank loans and one IDA credit totalling $104.8 million, net of cancellations. As of February 28, 1973, a total of about $44.4 million remained to be disbursed on four loans for education, water supply, power and ports. Consider- able delays were initially encountered in the execution of the Educa- tion Project, but progress is now satisfactory. The water supply project was recently amended (R73-67) to meet the needs arising from the earthquake; the most recent loans, for power and ports, became effective only in March 1973. 17. IFC made one investment in Nicaragua in 1967, in a new cotton and synthetic fiber textile company (FABRITEX), consisting of a $1 mil- lion loan (fully disbursed) and an equity participation of about $1.1 million equivalent. Marketing problems, partly associated with the dif- ficulties in the operation of the Central American Common Market, resulted in low sales, large inventories and a shortage of working capital. The earthquake has further aggravated FABRITEX's financial situation. In December 1972, IFC agreed to reschedule principal payments, and other long-term lenders are considering similar action. lo. In the past, the Bank Group assisted Nicaragua in those areas where it has special expertise and where finance on softer terms from other external development agencies was unavailable. Thus, the Bank lent for economic infrastructure such as power, ports and roads and, to a lesser extent, for agriculture and social sectors such as water supply and education. Bank lending was interrupted in 1969-71 because of fiscal and balance of payments problems but, following a marked im- provement in Central Government finances resulting from new sales taxes, lending was resumed in 1972 as the country's development effort had materially improved. Assuming a continued Nicaraguan effort to mobilize public savings and considering the large reconstruction needs, we are accelerating project preparation work. 19. The Bank is considering several operat:ions in support of the Government's export diversification policy. Two FAO missions which visited Nicaragua in February 1972 identified projects for possible Bank assistance in livestock and crop production. As a result, a Bank mission recently visited Nicaragua in February 1973 to appraise a possible agricultural credit project that I plan to submit to the Board in a few months. A UNDP/UN mission is presently conducting groundwater investigations which may result in Bank financing of tubewell development for irrigation in a second agricultural credit loan in the mid-1970's. With respect to industry, the Bank is considering channelling financing to Nicaragua and the other Central American countries through the Central American Bank for Economic Integration (CABEI). It is also planned to continue assisting the development of physical and social infrastructure in Nicaragua, including possible further reconstruction reauirements.  - 7 - PART III - THE PROJECT 20. The main features of the proposed reconstruction project are summarized below. It was prepared and appraised in the field by various Association missions during January/February 1973, which also assessed the earthquake's effects on ongoing Bank projects in the water, power and education sectors. In view of the complicated technical, economic and political questions of how and where to reconstruct the capital city, the Bank Group responded to the Nicaraguan Government's request and col- laborated with the Inter-American Development Bank and the Organization of American States by sponsoring an international panel of experts to advise on these matters. The International Advisory Panel's report, a copy of which is being distributed separately, was submitted to the Nicaraguan Government on March 23, 1973. 21. The purpose of the Panel was to assist the Government of Nicaragua in reaching decisions as to the type, intensity and form of reconstruction and future development to be permitted or fostered in the Managua region. The Panel was also to review and analyze a draft reconstruction plan which had been prepared by Mexican consultants, financed by the Mexican Government. The report of the Panel concludes that, with respect to the question of siting, no convincing alternative locations had yet been identified where both the probability of future earthquakes was significantly less than in Managua, and where the reduc- tion in damage risks would be less than additional costs resulting from relocation. Further studies might be able to identify such a location and should be pursued. In the meantime, however, it was necessary to move quickly in restoring essential services, and providing housing and employment for displaced persons. Given these conditions, and the fact that the large industrial establishments and most of the infrastructure suffered little damage, the report recommends making continued use of much of the existing site of Managua while reducing the population density in the downtown area, and decentralizing the city by encouraging the development of secondary towns and cities where refugees from Managua have relocated. 22. Specifically, the Panel recommended that: - studies should continue urgently on locating less earthquake prone site-s_sin ce rebo'nstruction would continue over several years and location emphasis could be changed at a later stage. - there should be greater dispersal both within the Managua region and between Managua and other towns to reduce the danger of a large part of the country's economic and administrative structure being severely damaged by a single earthquake event; - as much use as possible should be made of the buildings, industry and infrastructure remaining in the Managua region while pro- moting dispersal to other towns of new buildings, industries and serv- ice activities which can be relocated without high economic cost;  -8- - spatial planning of Managua should concentrate on much lower densities in the central area with no high buildings apart from important public buildings, before further sub-soil studies are available; - better local building materials should be developed and cer- tain structural design improvements introduced; - new building codes and construction standards should be dev- eloped as quickly as possible and emphasis put on their implementation. 23. The report of the Panel and that of the Mexican team are cur- rently being actively considered by the Nicaraguan authorities. Clear- ance of the devastated area will not be completed until the end of 1973 and by that time the Nicaraguan Government will prepare a more compre- hensive basic plan for the reconstruction and redevelopment of the Managua region and its relation to fostering growth in other urban cen- ters. An interim report as well as the final plan will be submitted for review by an international advisory panel. Sub-soil testing in the Managua area will be rapidly instituted to provide a basis for design standards, particularly in the central area; proposals for standard building codes and their implementation will be completed before June 30, 1973. The Government will consult with the Association on the results of all these studies. Further, no new permanent structures of a nature that would foreclose the options to which the plan will be addressed will be licensed in the central area before the basic plan for redevel- opment has been completed. Such structures include administrative build- ings, markets and commercial centers and, more generally, high-rise or high-density developments. This timetable for the planning effort thus appears realistic both in terms of constraints and opportunities. Project Description 24. The proposed credit is part of a more comprehensive under- taking of various national and international agencies to support the Government of Nicaragua in its reconstruction efforts. It particularly complements the activities of the IDB and USAID and takes full account of the recommendation of the International Advisory Panel described above. Speci- fically, the credit would help finance five sub-projects which are high priority items in the Government's earthquake reconstruction program, including: (i) sites and services, to accommodate 6,4OO low to middle-income fami- lies displaced by the earthquake, about half of which will settle in secondary cities and the remainder in the outskirts of Managua; (ii) industrial credit, to help restore the output of the small and medium- size industrial sectors and to generate new employment opportunities in the secondary cities; (iii) education, to provide new facilities in Managua at the secondary level, where almost all school buildings suf- fered irreparable damage , and to establish a post-secondary technical institute; (iv) water supply and (v) power, both to help restore and repair existing installations and to extend the respective distribution  -9- networks to take into account shifts of population and service areas. The latter two sub-projects would at the same time help alleviate the financial burden on the Empresa Nacional de Luz y Fuerza (ENALUF) and on the Empresa Aguadora de Managua (AGUADORA), two Bank borrowers whose revenues have been sharply reduced and who must make heavy expenditures on repairs as a result of the earthquake. Project Financing 25. The total cost of the five sub-projects is estimated to be $30.3 million, including a foreign exchange component of $16.6 million. The cost of the individual sub-projects would be as follows: ($ millions) Proposed Total Cost Local Foreign IDA Credit Sites and Services 13.0 7.0 6.o 8.0 Industry 5.0 1.5 3.5 2.5 Education 2.9 1.2 1.7 2.0 Water Supply 2.7 2.1 o.6 2.5 Power 6.7 1.9 4t.8 5.0 TOTAL 30.3 13.7 16.6 20.0 The counterpart contribution of $10.3 million would be financed 60 percent by the Central Government, 18 percent by the relevant public sector agenc- ies and 12 percent by beneficiaries of the industrial credit sub-project. Retroactive financing of up to $1.85 million is included to cover expenditures incurred since January 1, 1973 for the power and water supply sub-projects and since March 1, 1973 for the education sub-project. Sites and Services 26. $8.0 million of the proposed credit would be used to provide housing for families displaced by the earthquake. The sub-project includes: (i) 2,750 residential sites in the outskirts of Managua; 3,250 sites for families settling in four secondary cities; and 0oo sites the location of which will be determined after a further review of the refugee situation; (ii) community facilities (primary schools, health centers, community centers, recreational space and markets) for all sites; (iii) a building materials fund for self-help housing con- struction; and (iv) technical assistance, engineering design and con- struction supervision. 27. The four secondary cities, which received the bulk of the refugees and in which some 75,000 refugees still remain, are also the cities on which the industrial credit financing would focus, thereby generating 1,200 - 1,500 new industrial jobs for those taking up perma- nent residence. The sub-project would provide housing for about one- third of refugee families who have thus far indicated their intention to stay in the secondary cities. The 2,750 service sites in the out- skirts of Managua would accommodate some 15 percent of the 100,000 refu- gees who have now returned to the city. Most of the remaining 85 per- cent are being given provisional wooden shelters under a US$3.0 million USAID grant.  - 1C - 28. Each serviced lot would be 7.5 x 14 m, clustered into 14 units around a small open space. A fundamental principle adopted in design- ing the layouts was the need to integrate the sites selected into the existing urban areas. Schematic site plans indicating transportation lines, cluster arrangements and community facilities were prepared and sketch designs of infrastructure were drafted and reviewed with repre- sentatives of the National Housing Bank and the water supply and power authorities in Nicaragua. Given the still fluid refugee situation, site plans were prepared so that development could be staged in units of 250 lots each. 29. Careful analysis of the special circumstances in Nicaragua indicated a need to modify the usual sites and services approach. Al- though considerable building has been done in the past in Nicaragua by self-help methods, the particular techniques and building materials employed were largely reponsible for the extensive damage to housing during the recent earthquake, as were the construction techniques and poor quality materials used by the construction industry. Therefore, 5,500 of the lots would include a 20 m2 earthquake resistent shelter and sanitary core unit. Construction of the core unit by contract would permit early occupancy in a safe shelter, which could later be enlarged by carefully supervised self-help methods. On the remaining 500 lots, the sanitary core would be provided, but the shelter would be constructed by the owners themselves with intensive technical assist- ance to assure that structural designs and building materials are earth- quake resistant. This would serve as a pilot project to develop and foster improved self-help construction techniques, which should have widespread application elsewhere in Nicaragua. 30. The total cost of the sub-project is estimated at $13 million, of which the proposed credit would finance 61 percent. Government partici- pation, in the form of land and inputs for infrastructure and community facilities, would amount to $5.0 million. Land itself would constitute nearly one-quarter of the Government's contribution, and land acquisi- tion is already underway. The $5.0 million contribution from the pro- posed credit would be used by the Government to establish a special low income housing fund to be administered by the National Housing Bank (BVN). BVN is an autonomous Government agency established in 1966 to con- struct and finance housing units in both the public and private sectors. This would be the first Bank Group operation with BVN, which is a soundly managed institution with a healthy financial situation. BVN will em- ploy additional staff, including a resident engineer, three foremen, two inspectors and two social workers per 1,000 lots, all of whom will reside on site. BVN would also employ with the approval of the Association a senior architect, an engineer and a sociologist who would be exclusively responsible for the implementation of the sites and services program; their services would be financed under the proposed credit.  31. Families would be offered mortgages at 20 years with 5 percent interest, and ownership would be transferred to the family after the first self-help room is built, inspected and approved by BVN. Monthly payments would amount to about $10.90 for a lot in Managua and $10.10 in the secondary cities. Applicant families would qualify for lots chronologically after satisfying two criteria: (i) that they were dis- placed by the earthquake and (ii) that they have monthly household incomes not exceeding $155. About 30 percent of the lots would be reserved for families with monthly household incomes of less than $71. 32. Mortgage payments from sites and service beneficiaries as well as debt service payments, from ENALUF, AGUADORA and INFONAC, would be channelled into the housing fund in order to enable BVN to carry on a further low-income housing program. This represents a departure from the Association's standard approach of not seeking to specify the use to be made of IDA "counterpart funds" but I consider this justified in view of the Government's desire to carry out a substantially larger and continuing program in the field of sites and services work and other low-cost housing. 33. Disbursements for civil works contracts would be against an agreed percentage of the contractors' periodic statements of work per- formed, substantiated by invoices and certification by the engineer in charge of construction supervision. Bids for civil works would be invited for either individual contracts or one single contract, under the Association's procedures for international competitive bidding. For engineering consulting and technical assistance costs, disbursements would cover 100 percent of foreign exchange expenditures. Industrial Credit 34. This sub-project is designed to complement the sites and services program of the Government by providing an estimated 1,200 - 1,500 permanent new jobs for refugees in the secondary cities. It is proposed that $2.5 million of the proposed credit be onlent by the Government of Nicaragua to the National Development Bank (INFONAC) to help finance sub-loans for (i) industrial sites and services in second- ary cities; and (ii) plant, equipment and buildings for about 30 to 50 medium-sized industries, which have already been identified and which are also located in the secondary cities. 35. INFONAC was established as an autonomous Government agency in 1952, and in 1955 the Bank made two small loans totalling $2.0 million to assist INFONAC in financing projects in the agricultural and power sectors. Although INFONAC has some institutional weaknesses, including weak coordination and poor information records, it nevertheless has the basic capacity to execute the industrial sub-loans satisfactorily, provided separate accounts for the IA credit are maintained and carefully audited and close supervision is provided by the Association. INFONAC is planning to engage consultants to formulate a program to improve its internal organization, operating procedures, research and development program and accounting system, particularly to separate the accounting of its industrial and agricultural portfolios.  - 12 - 36. The Government would onlend to INFONAC at 6-3/4 percent for 12 years including a 3 year grace period, and sub-loans to enterprises would be for up to 10 years at 8-3/h percent interest. The average size sub-loan would be about $7b,000; sub-loans exceeding $100,000 would re- quire prior Association approval. The Association would not finance more than 50 percent of the total cost of any particular industrial project; the minimum equity required would be 25 percent and an appro- priate debt-equity ratio would be required for each project. 37. With regard to procurement, INFONAC would not require formal inter- national competitive bidding from its sub-borrowers, but would satisfy itself that the equipment and machinery to be financed meet the techni- cal requirements of the project and are competitive with goods of simi- lar quality. Education 38. An estimated 85 percent of the secondary school capacity of Managua was destroyed by the earthquake; practically the only public schools left standing are two general secondary schools and the teacher training college, all recently constructed under Loan No. 532-NI. It is proposed that $2.0 million of the proposed credit be used to (i) construct 100 prefabricated classrooms in four temporary schools in the outskirts of Managua to accommodate 8,000 students in two shifts; (ii) construct, furnish, and equip two permanent multilateral secondary schools in Managua to accommodate 5,800 students in two shifts; and (iii) construct and furnish a post-secondary technical institute with a capacity of ,oo student places in technical fields and 100 in business education. Recon- struction needs at the university and primary eclucation levels will be met by the IDB and AID, respectively, except for those primary school facilities which are part of the sites and services component of the proposed credit. 39. Item (i) would permit the Ministry of Education to open schools in and around Managua in June 1973, resulting in only a 3-1/2 month loss of time out of the normal academic year. The prefabricated classrooms would be of the kind which can easily be disassembled and later relocated inrural areas after the more permanent facilities are constructed. Suit- able sites for the four schools have been selected and surveyed, bidding and contract documents reviewed by the Association, and bids for procure- ment and installation of the temporary facilities invited and evaluated under direct supervision of the Association. In addition to permanently restoring much of the secondary school capacity of Managua, the two new multilateral schools under item (ii) would expand further into the edu- cation system the diversified curriculum first introduced under Loan No. 532-NI. -'This curriculum better relates secondary education to the needs of the economy by including practical subjects such as industrial arts and home economics and pre-vocational streams in electricity, mech- anics and business education. The post-secondary technical institute would train workers who would provide an urgently needed bridge between University graduates and skilled workers. Suitable sites for items (ii) and (iii) would be selected in consultation with the Association, taking into account the recommendations of the International Advisory Panel.  - 13 - 40. This part of the project will be executed by the project unit of the Ministry of Education, which is implementing the first Bank- financed education project (NI-532); UNESCO's school building center in Mexico (mONESCAL) will assist the project unit in implementing this pro- ject. To this end, during the first twelve months of the project execu- tion it will second an architect to the Ministry of Education. 41. The total cost of the education sub-project is estimated at $2.9 million, of which the Association would finance 69 percent. Retroactive financing of $150,000 is included to cover expenditures in- curred since March 1, 1973 in connection with the prefabricated class- rooms. To expedite project implementation, while assuring competitive prices, bidding procedures for the prefabricated classrooms, estimated to cost $0.5 million, have been simplified. The Government has already advertised the procurement of the temporary facilities through announce- ments in local newspapers and notices to foreign embassies; bidding and contract documents have been reviewed by IDA and are now being finalized. All contracts for civil works and equipment approved after loan signing will be awarded on the basis of international competitive bidding follow- ing the standard procedures specified in the Bank's guidelines. Water Supply 42. Managua's principal supplier of potable water is AGUADORA, a public enterprise established in 1932, which served some 72 percent of the city's population before the December earthquake. AGUADORA is a well-run institution to which the Bank Group has made one credit and one loan. The earthquake severely damaged pipelines, service connections, reservoirs, pumping stations and AGUADORA's administration and warehouse buildings, and is responsible for a loss of about 50 percent of AGUADORA's former subscribers. $1.0 million of the proposed credit would be allo- cated to cover 80 percent of local and foreign costs of selected civil works and equipment and supplies for repair and rehabilitation. It is further proposed that in order to help alleviate the financial burden on AGUADORA resulting from the drop in revenues and the cost of repair and rehabilitation work, $1.5 million of the proposed credit be allocated to cover 80 percent of the local cost of civil works being performed under Loan No. 808-NI. The Government has already agreed to make AGUADORA a loan to finance the remainder of its cash flow deficit, estimated to total $3.2 million during the period 1973-75. 43. The Association's funds would be onlent by the Government of Nicaragua to AGUADORA at a term of 20 years, including six years of grace. In view of AGUADORA's present financial situation, no interest would be charged during the grace period. However, interest would be payable at 7-1/4 percent from the seventh year onward. 44. Civil works contracts related to service reser- voirs and the unstable embankment at Lake Asososca, and the procurement of selected equipment and supplies, have already been negotiated because of their emergency nature. An amount of $800,000 of retroactive financ- ing is included to finance such expenditures incurred since January 1, 1973. All other works and equipment would be procured by international competitive bidding.  - 14 - 45. In order to help meet the needs of the refugees who fled to neighboring suburban areas and to improve living conditions mainly in low-income residential areas hitherto unserved or underserved with pot- able water, the project being financed under Loan No. 808-NI has al- ready been amended (see Memorandum from the President R73- 67, April 10, 1973). Power 46. Practically all public electric service in Nicaragua is pro- vided by ENALUF, a well-managed autonomous public corporation established in 1954. The Bank has made eight loans for power since 1953, aggregating $66.3 million, which have assisted in financing practically all of the expansion of ENALUF's generation and transmission facilities. The earth- quake caused some damage to ENALUF's thermal plant on the south shore of Lake Managua, to adjoining substations and to Managua's distribution net- work; the repair of these installations is estimated to cost about $1.7 million. Extension of the distribution network and expansion of some substations to accommodate that part of the population and small industry and commercial enterprises which have moved to areas surrounding Managua will cost an additional $1.4 million. The earthquake has also caused a large cash flow deficit, estimated at $7.6 million for 1973/74, resulting from a loss of about 30,000 customers and increasing operating costs due to higher fuel consumption. 47. In addition to the $3.1 million of repair and rehabilitation and extension expenditures described above, ENALUF now requires assist- ance in carrying out some of its ordinary construction activities which were not included in the last Bank Loan (840-NI of June 28, 1972) since at that time it was expected to be able to cover these expenditures out of its own resources. Adding $3.6 million for that purpose, ENALUF's new financing requirements for its construction program come to $6.7 million. It is proposed to cover 75 percent of these costs, or $5 mil- lion, out of the reconstruction credit; the remainder will be financed through local borrowing. h8. The $5.0 million would be relent by the Government to ENALUF for a term of 20 years, including a grace period of 5 years that would be interest free because of ENALUF's difficult financial situation. Interest would be payable at 7-1/h percent interest from the sixth year forward. 49. Existing contracts relating to Lake Managua thermal plant and associated substations have been extended to include emergency re- pair work. These contracts have been reviewed by the Association and $900,000 is included in the proposed credit to finance retroactively repair work undertaken since January 1, 1973. All new equipment con- tracts approved after credit signing would be awarded on the basis of international competitive bidding and contracting of consultants' serv- ices would follow normal Bank Group procedures. Disbursements for civil works contracts would be made against 40 percent of the total works per- formed. Disbursements for equipment and materials would be for 100 per- cent of c.i.f. costs (if imported) or 95 percent of the ex-factory cost (if procured locally).  - 15 - Procurement and Disbursement 50. Procurement and disbursement procedures for each sub-project have been described above. Whenever normal international competitive bidding is employed for the procurement of goods, in accordance with the Central American Agreement on Fiscal Incentives for Industrial Develop- ment, Central American Common Market countries would receive a margin of preference in bid evaluation of 50 percent of the applicable external tariff or 15 percent of the c.i.f. price, whichever is the lower. Annex III summarizes the disbursement schedule for each sub-project. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 51. The draft Development Credit Agreement between the Republic of Nicaragua and the Association, the draft Project Agreements between the Association and Banco de la Vivienda, Empresa Aguadora de Managua, Empresa Nacional de Luz y Fuerza, Instituto de Fomento Nacional, res- pectively, the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement and the text of a Resolution approving the proposed Development Credit, are being distributed to the Executive Directors separately. PART V - RECOMMENDATION 52. I recommend that the Executive Directors approve the pro- posed credit. Robert S. McNamara President Attachments Washington, D.C. April 24, 1973   ANNEX I Page 1 of 2 COUNTRY IATA - NICARAGUA AREA POPULATION DENSITY 118,360 km2 2.08 million (mid-1971) 16r km2 Rate of Growth: 3.1 (from 1960 to 1970) .. per km2 of arable land POPULATION CHARACTERISTICS (1970) HEALTH (1970) Crude Birth Rate (per 1,000) 42.6 Population per physician 1,674 Crude Death Rate (per 1,000) 7.7 Population per hospital bed 433 Infant Mortality (per 1,000 live births) 45.3 INCOME DISTRIBUTION D