Chad - Second Highway Improvement Project

CIRCLULATING Copy FIILEt' COPY ID. BE RETURNED TO REPORTS DESK DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use p 14U-c1 . Report No. P/ Da-CD REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF CHAD FOR A HIGHWAY IMPROVEMENT AND MAINTENANCE PROJECT May 30, 1974 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 It may not be published, quoted or cited without Bank Group authorization.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 Currency Unit : CFA franc (CFAF) US$1000 CFAF 250 CFAF 1.00 = us$o.oo4 CFAF 1,000 = us$4.oo CFAF 1 million = US$h,ooo Fiscal Year : January 1-December 31  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF CRAD FOR A HIGHWAY IMPROVEMENT AND MAINTENANCE PROJECT 1. I submit the following report and recommendation on a proposed de- velopment credit to the Republic of Chad for the equivalent of US$3.5 million on standard IDA terms, to help finance a project for highway improvement and maintenance. PART I - THE ECONOMY 2. The report, "Chad's Economic Development: Constraints and Poten- tial" (75a-CD), of the economic mission which visited Chad in April/May 1972, was distributed to the Executive Directors on July 2, 1973 (R73-191). A spe- cial mission visited Chad in November 1973 to update our information on the Government's financial situation; the findings of the mission are incorporated in this report. A country data sheet is attached as Annex I. 3. With extremely poor natural resources, a harsh climate, a limited infrastructure and a pervasive lack of skills, Chad faces unusually difficult handicaps in its economic development. An additional difficulty is the high cost of transport to the outside world; the main centers of activity of this large land-locked country are located at 1,500 to 2,500 km from sea ports. With a per capita GNP of $80 in 1971, Chad is classified by the United Nations as one of the 25 least developed countries in the world. 4. Most of the population - at least 90 percent - lives in rural areas, deriving its livelihood from agriculture and livestock. About half of the rural population lives in central Chad as semi-nomadic livestock herders who exploit the Sahelian grasslands. The other half lives in the relatively higher rainfall zone in the South, where they grow millet and sorghum as food crops and cotton as a cash crop. Cotton accounts for more than 70 percent of re- corded exports. A recent and relatively successful diversification effort in the South is the introduction of rice growing on the flood plains of the Logone River. 5. In the first decade since independence in 1960, GDP grew by about 5 percent annually in current prices, and 2 percent in constant prices. The most rapid growth took place in the market economy, mainly import substitu- tion industries and services, while the growth of livestock and subsistence crops probably did not exceed the population growth rate of 1.5 percent an- nually. Accordingly, income disparities grew between the north and the south, as well as between the small modern sector in the towns and the mAas of the people in the rural areas.  6. Since the late 1960's two events have affected Chad's grcwth and fiscal performance - the rebellion and the drought. The rebellion which broke out in 1968 made wide areas of the country insecure and cut off tradi- tional cattle trading routes. Wells were neglected and the supply of water for livestock dwindled. Earlier progress in animal disease control was lost. The effects of the rebellion were compounded by droughts which occurred in three of the last five years. Enormous losses of cattle have been reported, cotton output dropped and shortages of basic foodstuffs occurred even in areas which normally produce a surplus of food. Emergency food shipments from abroad have thus far been able to avert widespread starvation. 7. These factors have made the financial situation of the Government precarious. Up to 1968, the Government's current budget had been in balance, and considering the country's development constraints, the overall fiscal performance appeared satisfactory. After 1968, however, expenditures started to grow much more rapidly than receipts. Military outlays alone rose from 18 to 31 percent of the total budget outlays. The droughts further increased the demand for Government services while reducing revenues. The overall budget deficit rose from CFAF 1.6 billion in 1968 to 4.3 billion in 1972; it is expected to have declined to CFAF 4.0 billion during fiscal year 1973. Annual French budgetary subsidies have partly covered these deficits. How- ever, a considerable financial gap remained, causing arrears on Government payments to rise to CFAF 6.1 billion by September 1973. 8. The fiscal situation constitutes a serious obstacle to development, as Chad can finance neither the required capital nor all the recurrent expend- itures of ongoing and new high priority projects. Even essential economic services have had to be curtailed. Chad's authorities agree with our assess- ment of the fiscal problem and with the need to rehabilitate their public fi- nances, re-examine current spending priorities and evenitually make a start on generating public savings. The conclusions and recommendations of the recent fiscal review mission have been transmitted to the Government. The IMF, with whom we are in close contact on the matter, recently sent a mission to Chad for consultations with the Government and is expected to report its findings shortly. The outlook is that even with the best performance it will be years before Chad can hope to overcome the fiscal constraint and generate current budget surpluses. 9. Chad's development potential lies in its rural areas. Opportuni- ties for productive employment in towas will remain small. Progress in the rural economy, however, will be slow. Even assuming political stability and normal rainfall, it will take many years and great efforts to restore the productive capacity destroyed by years of rebellion and droughts. 10. In view of Chad's very limited savings capacity, almost all of the country's investment has been financed by external sources. Foreign aid re- ceived during 1966-70 averaged $13 million a year, almost $4 per capita. Most of the aid - 91 percent - consisted of grants. France and FED provided  - 3 - the bulk of aid (about 40 and 30 percent respectively). Other aid donors including the European Investment Bank and United Nations agencies made smaller contributions. IDA credits during the period accounted for 4 percent of total aid. 11. External public debt outstanding and disbursed on December 31, 1971, amounted to US$34.8 million; IDA credits represented a little over 5 percent of this amount. In 1971 debt service was estimated at 8 percent of the export earnings. After 1971, Chad has continued to receive grant aid from its traditional sources of aid but to the best of our knowledge no major additions to the debt were made. Chad reportedly did receive in 1973 pledges of aid from the People's Republic of China and some Middle Eastern countries, but these pledges, to our knowledge, have not yet been followed by specific Loan agreements. Tentatively, it is estimated that by the end of the decade IDA's share in Chad's external debt could rise to close to one-third. Taking into account the concessionary nature of most of the assistance extended and in prospect for Chad, the debt service ratio is likely to decline to less than 5 percent by that time. 12. In the light of Chad's poverty and low per capita income, its modest prospects for growth of GDP and exports of goods and non-factor serv- ices, external borrowing should be, to the extent possible, on concessionary terms. Furthermore, even with good fiscal performance, Chad will have neither the free budgetary resources through the end of the 1970's to enable it to pay its share of capital outlays, nor will it be able to afford substantial new outlays for recurrent costs associated with new projects. In the next few years, foreign aid agencies should therefore consider financing virtually the total cost of projects, including, in the early years of project opera- tion, a high proportion of current operating cost. PART II - BANK GROUP OPERATIONS 13. Since 1968, when the first credit was made, the Bank Group has extended five credits to Chad totalling US$13.2 million 1/ - one for highway maintenance, two for education, one for livestock development and the fifth credit for drought relief. A sixth credit of US$7.5 million to help finance a rice irrigation project was approved by the Executive Directors at the end of March 1974. The Association is waiting for an external debt letter from the Government required for the signature of the Credit Agreement. 14. With the exception of the highway maintenance credit (the Drought Relief Credit has just become effective), disbursements and project implemen- tation are behind schedule, principally as a result of the Government's in- ability to finance its contribution. In recognition of the Government's 1/ Includes supplementary financing of US$0.9 million approved in August 1973 for the two education projects.  tight budgetary position, which has been aggravated by the drought, and to offset the effects of the devaluation of the US dollar, the Executive Di- rectors approved in August of last year supplementary financing for the two ongoing education projects to provide for 100 percent financing of total project costs net of duties and taxes. Similarly, in December last year the Executive Directors approved 100 percent financing for the livestock project and the creation of a revolving account from the proceeds of the credit for pre-financing project expenditures. Annex II contains a summary statement of IDA credits as of April 30, 1974 and notes on the execution of ongoing projects. 15. Apart from the Government's budgetary constraints, the scarcity of well-prepared projects is one other major factor that has so far militated against a substantial expansion of Bank Group operations in Chad. Conse- quently the Bank has concentrated its efforts on assisting the Government (in many cases in cooperation with other aid agencies) in identifying and preparing new projects in key sectors, while at the same time trying to ensure successful implementation of ongoing projects. These efforts are gradually paying off in the form of a growing pipeline of suitable projects, mainly in transportation and agriculture. 16. In keeping with the Government's development priorities, the Bank Group's lending strategy to Chad continues to focus on agriculture (including livestock), transportation and education - the key sectors of the economy. The Livestock Development Unit, established under the first IDA project with UNDP financing, is expected to be a helpful instrument for the identification and preparation of further projects for possible Bank Group financing in this highly important sub-sector of the economy. Another project, prepared with FAC financing, is the Lake Chad Polders project for smallholder cotton and wheat production; Government has requested IDA financing and other aid agen- cies (FAC, USAID and ADF) have expressed interest in co-financing. 17. In transportation, priority is being given by the Bank Group to the improvement of crop marketing roads. To this end, a two-phase improvement program for cotton roads is planned. The first phase is the object of the present credit. The second phase would cover the improvement of roads used for transporting cotton fiber from ginneries to export outlets and its prepara- tion will be financed under the first phase project. 18. In the field of education, we are reviewing the reDort of a study (financed under an existing IDA credit) on a possible project for the train- ing of young farmers. PART III - TRANSPORT IN CHAD 19. Chad is a vast and land-locked country. N'Djamena, its capital city, though also located in the south is at a considerable distance from the cotton growing areas near Moundou and Sarh. It is also located at about  - 5 - 2,000 km from sea ports, making export-import trade dependent upon long routes outside the country. Thus, transport costs play a critical role in Chad's economy and the lack of adequate transport infrastructure constitutes a major obstacle to its development; high transport costs make exports less competitive and inflate the domestic prices of imports. 20. For its external trade, Chad relies on the transport routes of neighboring countries without exclusive dependence on any one of them. These routes are the transequatorial road/river/rail system to the Congolese ocean port of Pointe Noire; the transcameroon road/rail route to the Cameroonian port of Douala; and the Nigerian route by road to Maiduguri and then by rail to the coast. 21. The internal transport system consists of a simple network dominated by roads; air and water transport have only minor local significance. The road network consists of about 7,200 km of classified roads (only 240 km are paved), and about 25,000 km of earth tracks which provide connections to agri- cultural areas. The network is unevenly distributed and its condition is generally poor. In addition, nine ferry boats, all over 30 years old, located on main roads in the cotton growing area and/or international routes, are in poor condition, thus aggravating the poor transport infrastructure in the area. These ferry boats frequently break down, causing protracted delays in transportation of cotton and goods. 22. A Road Fund established in 1960 and already partly utilized 1mder the first highway project could generate sufficient funds for road maintenance purposes if it were regularly fed with revenues from fuel taxes. However, the allocations made for road maintenance have always been lower than the revenues actually collected from fuel taxes because receipts are deposited in the Central Treasury where they are absorbed into the general budget. These in- adequate budget allocations have only allowed maintenance of primary roads, leaving important feeder roads in the cotton growing areas not even minimally maintained. To ensure improved control over the Road Fund, the Government has agreed (a) to maintain in its Central Bank a separate account for the Road Fund; (b) to allocate to the Road Fund the amounts collected from fuel taxes and ferry boat tolls; and (c) to allocate from the proceeds of the Road Fund the amount budgeted for road maintenance and operating costs of the ferry boats (Sec. 4.03 of the draft Credit Agreement). Budgets for road maintenance and for operating of ferry boats would be established following annual con- sultation with the Association (Sec. 4.04 of the draft Credit Agreement). 23. The Bank Group's contribution to the development of Chad's interna- tional routes has been mainly through improvement of port, railway and road systems in the neighboring countries. Projects have been financed or are under consideration in Cameroon and Congo. For internal transport, priority has been given to road maintenance and in this context the Bank Group's first lending to Chad (Credit 125-CD, US$4.1 million, August 1968) helped finance a five-year road maintenance program.  - 6 - 24. Until 1972, DPW 1/ was only responsible for administration and maintenance of the primary road network (about 4,600 km); the secondary system (about 2,600 km) was under the jurisdiction of local authorities. However, because of staffing difficulties and financial constraints, the local authori- ties were unable to carry out the maintenance required on the road system assigned to them. The Government therefore decided to centralize responsibility for this network under DPW so as to ensure better administration and mainte- nance of the roads. Thus, in 1973 DPW assumed responsibility for about half of the secondary system, and it is expected to take over the remainder during 1974. 25. DPW is adequately staffed, with senior positions held by French engineers under a long-term technical assistance agreement with FAC. Grad- uates of the Ecole Nationale des Travaux Publics (ENTP) at N'Djamena will en- sure the future availability of local civil engineers. However, there is a shortage of adequately trained lower-level specialized personnel (e.g., plant operators, mechanics, equipment overseers and foremen). A training program drawn up under the first highway project to meet this problem was, however, not executed because the cost of its implementation would have exceeded the funds available under the credit. The proposed project includes a new com- prehensive training program for all the above-mentioned categories of specialized personnel. 26. Besides the need to improve the transport infrastructure, a major effort is required for the improvement of the transport industry in general and the trucking sector in particular. The lack of coordination among carriers and customers, together with the imbalance in tonnages carried for export and import traffic, have had the effect of reducing the average vehicle load factor for road transport to about 50 percent, and creating high unit costs for such transport. The present high tariffs are also largely a result of the monopolistic structure of the industry whereby one company carries most of the freight. Since no improvement of the existing situation can be expected as long as the Ministry of Transport (which is responsible for transport policy and coordination) lacks the personnel qualified to study the problems related to road transport, outside assistance is required. The proposed project would provide such assistancethrough the services of a transport economist to be attached to the Ministry of Transport to study the critical aspects of the road transport industry and to make proposals for its reorgani- zation. 1/ Directorate of Public Works, Ministere des Travauz Publics et de 1'Amenagement du Territofro  PART IV - THE PROJECT Background 27. The proposed project has evolved from a Government request that the Association participate, along with FAC and FED, in the financing of a five- year (1973-77) cotton development program in southern Chad. While FAC and FED have proceeded with the financing of the cotton development program, the proposed project would provide improvement of the infrastructure which will contribute to the success of the program. It was identified by our Permanent Mission in West Africa in 1972 and the feasibility study, financed by FAC, was completed in 1973 by French consultants, BCEOM. The project was appraised in October/November 1973 by a Bank mission. Negotiations for the proposed credit were held from April 29 to May 4, 1974 in N'Djamena with a Cliadian delegation led by Mr. Ahmed Ngakoutou, Director of DPW. A report entitled "Chad: ApLraisal of a Second Highway Project" (No. 381a-CD), dated May 28, 1974 is being distributed separately and a Credit and Project Summary is attached to this report as Annex III. 28. The proposed project consists of: (a) a five-year program for improvement and maintenance of about 800 km of feeder roads in cotton growing areas; (b) preinvestment studies for the improvement of about 120 km of secondary roads connecting cotton growing areas with the main export routes; (c) a two-year training program for DPW staff; (d) technical assistance to the Ministry of Transport for reor- ganization of the road transport industry; (e) a two-year traffic count on about 2,000 km of the most impor- tant and heavily trafficked roads in the country; (f) reconditioning of nine ferry boats and their interim maintenance over a three year period; and (g) a feasibility study for replacement of ferry boats and improve- ments of dock facilities. Organization and Execution 29. The improvement and maintenance works for roads would be carried out by force account; in view of the scattered nature of operations and the need for flexibility in carrying them out this method would provide tho least- cost solution. These works would be carried out by four teams, one for reshaping, one for regravelling and two for structural works.  30. DPW would have overall responsibility for the entire operation. However, because its scarce staff is already charged with the maintenance of primary roads and is also becoming increasingly involved in the maintenance of secondary roads, the Government and the cornultants believe that it would be more realistic to assign management of the work teams to COTONTCHAD 1/ which has qualified personniel and adequate equipment maintenance facilities. DPW would own the equipment purchased under the, proposed project, while COTONTCHAD would, under a contract acceptable to the Association to be concluded between DPW and COTONTCHAD, provide the personnel needed for the four work teams and for equipment maintenance. The contract would specify the details for reimbursement of COTONTCHAD's direct costs, such as labor, materials, fuel, lubricants, spare parts, etc. An outside expert would be engaged by DPW and seconded to COTONTCHAD to organize and supervise the works assisted by a local engineer who would, after two years, replace the expert. 31. While the improvement of the feeder roads used for transporting seed cotton to the ginneries is the first priority, it is necessary also to improve the roads used for transporting cotton fiber from ginneries to main export outlets. Consequently, the proposed project includes provision for pre-investment studies for the improvement of two such roads and the construc- tion of a bridge on a third road. 32. The training program for DPW staff whidc was prepared by consultants ORT (Switzerland) under the first highway project, but which was not implemented due to insufficient funds, is now included in this project. It provides for technical assistance and the purchase of tools and workshop equipment for the trainees and for routine equipment maintenance. Training would be done essentially on the job, with teams of trainees maintaining some road sections assigned to them and also the equipment used to carry out the road maintenance. This practical training would be complemented by theoretical courses. An important feature of the program would be the training of local counterpart staff who could replace the experts at the end of the program. Provision of fellowships for study abroad would also be included in the program. 33. The technical assistant to be assigned to the Ministry of Transport for the reorganization of the road transport industry would, over a period of nine months, evaluate the problems of road transport and advance proposals for solving them. 34. Traffic counts would be carried out by DPW and financing would be provided under the project for the necessary operating costs, including hir- ing of vehicles. 35. The project also includes a provision for procurement of major equip- ment items for reconditioning and maintenance of ferry boats, fcr materials for their maintenance over three years as well as funds for a feasibility study 1/ COTONTCHAD is a company with private participation but controlled by the Government. It has a monopoly of processing and marketing cotton in Chad.  -9- to determine the extent of nev investments required. The reconditioning and maintenance would be performed by DPW. The feasibility study would be carried out by a consultant who would, over a period of three months, evaluate the ferry boat problem and submit an economically justified program for replace- ment of ferry boats and improvement of dock facilities. Project Cost 36. The total cost of the project, net of taxes, is estimated at about US$3.5 million equivalent, with a foreign exchange cost of US$2.65 million (76 percent). Details of cost estimates are summarized below. All estimates reflect expected prices at end-1974. ---- CFAF Million -