Bolivia - Second Railway Project

IILE COPY DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use Report No.Pr,j636,Bo REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE NATIONAL RAILWAY ENTERPRISE OF BOLIVIA CENFE) WITH THE GUARANTEE OF THE REPUBLIC OF BOLIVIA FOR A SECOND RAILWAY PROJECT May 21. 1975 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 It may not be published, quoted or cited without Bank Group authorization.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 (As of April 30, 1975) Currency Unit = Bolivian Peso ($b) US$1 = $b2o $bl = US$0.05 $bl,000 = US$50 $bl,000,000 = US$50,000  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE NATIONAL RAILWAY ENTERPRISE OF BOLIVIA WITH THE GUARANTEE OF THE REPUBLIC OF BOLIVIA FOR A SECOND RAILWAY PROJECT 1. I submit the following report and recommendation on a proposed loan to the National Railway Enterprise of Bolivia (ENFE) with the Guarantee of the Republic of Bolivia for the equivalent of US$32 million to help finance a program for the technical and financial rehabilitation of ENFE. The loan would have a term of 25 years, including five years of grace, with interest at 8.5% per annum. PART I - THE ECONOMY Introduction 2. An economic report entitled "Current Economic Position and Prospects of Bolivia" (WH-213a) dated November 9, 1972 was distributed to the Executive Directors in 1972. A new economic report is near completion and will be dis- Lributed to the Executive Directors in the near future. Country data sheets are attached as Annex I. Background 3. Despite the increasing importance of petroleum and natural gas exports, as well as significant mineral deposits, Bolivia remains the poorest country in South America. The majority of the population is engaged in trad- itional agriculture. Only a small part of the labor force participates in salaried activities in the modern sectors. The infrastructure is still very primitive and the road and rail networks cover only a fraction of the country. The combination of strong traditional ties within the Indian communities and geographic, health and educational obstacles to population mobility has per- petuated the demographic concentration on the barren, windswept and dry 10-15 thousand feet plateau lands of Bolivia known as the Altiplano. About half of Bolivia's population lives a physically, culturally and economically isolated subsistence existence in this inhospitable region of limited agricultural potential. 4. The 1952 revolution sought to put an end to the dual economic structure which had characterized Bolivia's economy since colonial times and to deprive the landowning and mining oligarchy of its economic base. This objective was only partially achieved. Progress was made in eradicating  - 2 - feudal relations, distributing the land and eliminating obstacles to social mobility. Tkhe agrarian reform and the nationalization of large mines, how- ever, were followed by declines in agricultural, mining and manufacturing production. GDP declined in the 1950s and did not recover to its pre-1952 level until 1961. During the subsequent decade, output increased steadily at an average annual rate of around 5%, providing for average annual per capita income increases of 2.5%. As a result, GNP per capita which had fallen by 24% in the 1952-60 period had recovered, by 1970, to the 1952 level and was better distributed. 5. In 1971, the momentum of economic growth was again lost because of political instability and deteriorating public finances. Private invest- ment fell and public investment was unable to fill the shortfall due to lack of financial resources. The deterioration of public finances reflected a structural flaw in the economy. Since the expropriations of 1952, Bolivia's public sector became proportionately one of the largest in South America and a source of livelihood for a sizeable segment of the population. With the scarcity of employment opportunities in the private sector, pressures to expand the ranks of public servants proved difficult to resist. Increased expenditures on wages and salaries, combined with a weak tax system, left few resources for investment. Moreover, the inability of the public sector to generate adequate savings limited its capacitv to utilize external assist- ance. 6. On coming to power in 1971, President Banzer faced the need to provide jobs for the unemployed and to set the basis for investment growth. This need was faced in the conitext of a sharp deterioration in Bolivia's terms of trade which declined by about 20% in 1971. In late 1971, the Governa,ent put into effect an "Emergency Program" aimed at creating jobs in public works. To establish a ml.ore favorable climate for private investment, new laws offering guarantees and incentives to private investors were promul- gated. In addition, the Government settled claims arising from earlier nationalizations. At the same time, the Government also improved public admninistration, and the pricing policies of some public undertakings. These policies were successful in increasing private investment and in bolstering the rate of growth. They also resulted, however, in a large budgetary deficit and losses of international reserves. Recent Economic Developments 7. The most important event affecting recent econ6mic performance has been the substantial improvement in the terms of trade in 1974 caused by the increases in petroleum and mineral prices. Although GDP growth slowed down to about 5% in 1974--due to slower agricultural growth, stagnant hydrocarbon output and a fall in mining output--the substantial gain in the terms of trade has allowed a simultaneous an' large expansion of both consumption and invest- ment.  - 3 - 8. There has been a significant improvement in Central Government revenue and in overall public savings. The increase in Central Government current revenue in 1974 was close to 20% in real terms. Over one-half of this increase was due to higher export prices. Current expenditures increased only bv about 5%. Thie Central Government achieved a current surplus--after running current ,eficits during 1971-73--equivalent to nearly 50% of its capital expenditures, which were about 17% above the 1973 level. Savings of the public sector as a whole in 1974 increased to nearly 10% of GDP, exceeding the sector's capital expenditures and producing an overall surplus. In contrast to previous years when borrowing from the domestic banking system financed close to 40% of the public sector deficit, outstanding net credit to the public sector has been reduced by one-half between the end of 1973 and August 1974, and public sector deposits with the banking system increased by about $b2.4 billion for the whole of 1974. 9. The strong balance of payments performance in 1974 was the result of sharp price increases for Bolivia's principal export commodities. On average, export prices nearly doubled in 1974, following an increase of 25% during the previous year. The average price of Bolivia's light crude low sulphur petroleum was about US$15 per barrel in 1974 compared to US$4.13 in 1973. Prices of minerals and sugar also nearly doubled in 1974. Natural gas prices increased less. However, a new long-term contract has been negctiated with Argentina, still Bolivia's sole natural gas customer, which will provide substantially ihigher prices from 1975 onwards. On the other hand, import price rises approached 30-35% with much higher increases for mining and petroleum drilling equipment, items which are becoming an increasingly important component of Bolivia's imports. Nevertheless, the terms of trade gain in 1974 was equivalent'to about 9% of GDP and the trade surplus reached about US$180 million. In spite of the deficit on service account because of higher transport costs and larger factor service payments abroad, there was a current account surplus of nearly US$80 million. It is estimated that net capital inflows approached US$65 million, nearly four times their 1973 level, primarily as a result of substantially higher disbursements of loans to the public sector. The gain in net foreign reserves in 1974 was US$145 million. This brought total reserves to US$176 million, representing over four months of imports. 10. The growth of the Bolivian economy was accompanied by continuing wage-price pressures during 1973-74. As a result, in part, of the openness of the economy, Bolivia in the 1960s enjoyed relatively low rates of inflation. The substantial devaluation at the end of 1972, however, unleashed inflationary pressures. These pressures were accentuated by sharply rising international prices during 1973/74, the spillover of excessive credit expansion of past years, and the acceleration of wage increases following the 1972 devaluation. The retail price index for La Paz (the only price index available in Bolivia) rose 31.5% in 1973 and nearly 30% during the first two months of 1974 as prices of basic commodities were sharply increased by the Government in an effort to bring them into line with international prices. In addition, some public service tariffs, such as those for railways and electricity, were increased by the Government. Since then price rises have slowed to a monthly average of 1-1.5%. The increase in retail prices for 1974 was about 45%.  - 4- Debt Service and Creditworthiness 11. Bolivia's external public debt outstanding and disbursed at end- 1974 amounted to US$723 million, equivalent to over 41% of that year's GNP. Service on external public debt amounted to 12.9% of exports of goods and non-factor services net of investment income abroad. This represents a considerable reduction from Lhe debt burden of previous years which frequently absorbed 15-20% of net export receipts. Akverage terms of the external debt outstanding have remained soft, reflecting the high proportion of concessionary aid channelled to Bolivia. Average interest in 1973 was 4.4% and average maturity about 26 years. 12. This position is bound to change, however, as it can be expected that lending terms will become harder and the share of loans on conventional terms will increase. Of new loans attracted during 1974, nearly one-half were from commercial banking sources. With substantial disbursements envi- saged during the next six years, external public debt outstanding by 1980 might be as high as US$1.9 billion (in current prices) the service of which would absorb some 19% of net export receipts. In view of these heavy commit- ments, prudence in choosing external capital sources and insistence on utiliz- ing external capital for high priority purposes will have to become an essen- tial element of Bolivia's external debt management. 13. Bolivia enjoys a substantial resource base in agriculture, minerals and hydrocarbons which has to be developed to sustain rapid economic growth and, in particular, rapid expansion of export earnings in the foreseeable future. If production in the export sectors can be increased as planned and prices for the country's major export products (oil, gas, minerals) stay relatively firm, Bolivia can be considered creditworthy for substantially increased amounts of external lending on conventional terms. Even under the best circumstances, the country will require substantial external financing of investment to supplement the domestic savings effort at least until the early 1980s. Although substantially increased supplier and financial credits will probably become available, they will at the most meet 45% of the public capital inflow required during 1975-80 for meeting projected growth targets. To finance the remaining gap of almost US$650 million, Bolivia will also require international development financing, including an expanded Bank lending program.  -5- PART II - THE BANK GROUP OPERATIONS IN BOLIVIA 14. Bolivia is an original member of the Bank but did not receive Bank Group resources until 1964. Bank Group assistance to Bolivia has been limited by the country's tight budgetary situation and its limited capacity to service external debt. Except for a Bank loan to help finance an "enclave" project, lending to Bolivia has been in the form of IDA credits. Moreover, with the exception of the previous credit to the Railways and the Mining Credit, Bank Group financing has been to projects requiring no contribution from the Government. Because of the narrow scope for private investment, the first IFC investment, amounting to US$400,000 in a cable and plastic products enter- prise, was not made until 1973. 15. Annex II contains a summary statement of the Bank loan, IDA credits and IFC investments as of March 31,-1975, and notes on the execution of ongoing projects. IDA has made a previous credit to the Railway for US$8 million, four credits for power generation and distribution (US$28.4 million), three for livestock development (US$10.2 million) and one for mining (US$6.2 million). The Bank made a loan (US$23.5 million) to help finance an "enclave" project for the construction of a pipeline to transport natural gas to Argentina. 16. The proposed loan would be the Bank's second and the twelfth Bank Group operation in Bolivia. Net of undisbursed balances, Bolivia's debt to the Bank and IDA now represents 8.3% of its external public indebtedness. This ratio might increase to 9.3% by 1980. The share of the Bank Group in total debt service is now about 4% and is expected to increase marginally to about 4.3% in 1980. Although the Bank Group has ranked below the US Government and the IDB as a source of financial assistance to Bolivia, its role has been expanding. In the period 1964-68, the first five years of Bank/IDA lending to Bolivia, IDA credits of US$17 million were made. Addi- tional Bank/IDA loans and credits of US$59.1 million, or more than three times the credits made during the first five years, have been made to Bolivia since then. 17. Bolivia's substantial resource base in hydrocarbons, minerals and agriculture gives promise for expanded export earnings in the foreseeable future and provide a sufficient basis for creditworthiness to justify a shift from IDA to Bank financing (see para. 13). We expect, however, to recommend one more IDA credit to Bolivia for an agricultural credit project which should be presented for your consideration in the near future. 18. Future Bank Group activities will give emphasis to supporting Govern- ment efforts to remedy imbalances in the distribution of the benefits of economic growth. About half of future Bank lending is planned for agriculture, where priority will be given to the needs of poor farmers. The Bank Group's assistance to infrastructure projects will be concentrated in transportation, where we have selected specific areas in which we believe serious constraints to development exist and Bank assistance could be most effectively utilized.  - 6 - Thus, in addition to the proposed project, we are contemplating an eventual third project to complete the planned rehabilitation of the railway. We are also contemplating an airport and air navigation aids equipment project which will permit access to isolated areas of economic activity, where transportation needs are not now adequately served. In the power sector, we contemplate participating in the financing of a national interconnection project, once the difficult issue of tariffs has been resolved. 19. A common element of constraint in most development activities in Bolivia is institutional capacity. We plan to finance projects in rural development, small scale agro-industries, forestry, fisheries, water supply and rural education which will contain significant elements for technical assistance and focus on developing institutional capacity. We also hope to be able to continue lending in the mining sector, where the existing IDA credit provides for technical assistance. Our future financing to the sector will furnish credit assistance to small and medium producers. 20. In addition to the agricultural credit project, project preparation is well advanced for two other projects. One is an integrated rural develop- ment project with poor farmers in the Altiplano. The project is expected to assist 4,000 families. The second is a project designed to meet the pressing credit needs of medium size mining enterprises. It is also possible that this project might contain a component for industrial credit, if the industrial credit needs of the development bank handling mining credit are not adequately met by other external lenders, such as the IDB. PART III - THE TRANSPORT SECTOR General 21. The topography and geographic location of Bolivia, with three distinct and separate regions, its rugged mountainous terrain and its distance from the sea, makes the provision of transport facilities a difficult and costly task. The problem is aggravated by the sparse population and large size of the country, wqhich requires land transport to cover long distances to serve small volumes of traffic. Highways 22. The present road system, consists of 28,000 km of roadway, of which 1,104 km are asphalted. Highway development was prompted and financed by AID in the 1960s and is now a major segment of Inter-American Development Bank financing in Bolivia. Most of the highway system is located in the southwestern portion of the country and serves domestic transport needs. The trucking industry has gr:own rapidly in the last decade and now carries over 60% of domestic freight. It does so, however, at high cost. The lack of direct access to the ports and the relative advantage of the railways on heavy and long hauls, has meant that the role of road transport in external trade has been negligible.  -7- Waterways 23. The potential of inland water transport has not yet been exploited in Bolivia. The two major rivers, the Beni and Mamore, are isolated and lightly travelled. Traffic on the Paraguay River is also relatively insig- nificant. The most important waterborne traffic is by steamer across Lake Titicaca. Air 24. In view of Bolivia's difficult terrain, air transport has special importance. There is scheduled air service between 30 of the approximately 300 airports within the country. Many of these airports serve cities and towns with no land connections. Only three of the airports in the country have paved runways. Despite this limitation, passenger traffic has grown 12% a year for national traffic and 10% a year for international traffic since 1968. The tonnage of international air freight has increased sharply from approximately 2,200 tons in 1971 to 11,500 in 1973, an indication of the lack of capacity and delays in alternate transport modes. Pipelines 25. Bolivia has over 2,600 km of oil pipelines and 640 km of gas pipe- lines operated by state-owned companies. The petroleum pipelines allow access from the major production fields to the Pacific seaport of Arica and the Argentine border. The Bank-financed natural gas pipeline conveys gas to Argentina. Depending on the' success of intensive exploration efforts now underway and the proving of known reserves, significant new pipeline construc- tion may be undertaken. Railways 26. The 13olivian economy relies primarily on the railway system to carry its external trade, and a significant part of its domestic freight and passenger traffic. The system consists of about 3,500 km of railway line. The only line not operated by ENFE is operated by the Government mining company, COMIBOL, over 105 km of track. The railways form two separate systems: the Western and Eastern systems, linked only by a long detour through Argentina. 27. The Western system was built in the period between 1870 and 1920, largely in response to the need of the mining industry to transport its products to the Pacific ports. These lines were built with private capital, albeit often backed by Government guarantees. This system consists of 2,300 km of meter- gauge railway, linking the main towns in the southwestern part of the country and providing access to the port of Matarani in Peru, to those of Arica and Antofagasta in Chile, and (via Villazon) to the Argentine ports. About 71% of the freight traffic in the Western system consists of export/import traffic.  -8- 28. The Eastern system consists of two major lines operating over 1,200 km and was built after 1937. One connects Corumba on the Brazilian border to Santa Cruz, and the other connects Santa Cruz with Yacuiba on the Argentine border. A third line, extending northeastwards from Santa Cruz, is presently under construction. Its construction is financed by Argentina and the line will provide access to the unexploited Beni region. The rail- ways are the only significant mode of transport in Eastern Bolivia, the region where most of the new exports (cotton, timber and fruits) originate. About 80% of the traffic on the Eastern system consists of export/import traffic. 29. Comparisons of railway marginal costs with those estimated for roads in the West (excluding road infrastructure) indicate that road costs are considerably higher. Analysis of ENFE's freight traffic shows that a large proportion consists of bulky, relatively low value products with long hauls, for which transportation cost is a prime factor. Planning and Coordination 30. Transport planning and coordination in Bolivia have historically been weak. A unit for formulating, directing and executing transport policy now exists in the Ministry of Transportation. In a country where substantial new investments in transport are required and where many new projects are being considered and where there are growing intermodal relationships and conflicts, the lack of an adequate planning unit could be a serious short- coming which might result in costly errors. A UNDP technical assistance program to strengthen the planning unit in the Ministry of Transportation is now underway. PART IV - THE PROJECT 31. The Government of Bolivia has requested a Bank loan to help finance the second phase of a program to rehabilitate the national railway. The project was appraised by a Bank mission which visited Bolivia in November 1974. A report, entitled "Appraisal of a Second Railway Project," No. 741-BO dated May 9, 1975 is being circulated separately to the Executive Directors. A loan and project summary is presented in Annex III. Negotiations took place in Washington from April 21 to April 25. The Government of Bolivia was represented by Messrs. Mario Antezana and Jorge Balcazer and ENFE was repre- sented by Messrs. Armando Murillo, Moises Ramos, and Jose Aramayo. The First Project 32. In the years foilowing its creation in 1964, ENFE suffered from many of the managerial, financial and technical problems that have frequently been experienced by railroads in developing countries. The operating and financial difficulties of ENFE were caused by badly maintained and overaged equipment, lack of experienced management, inadequate staff training, excess  staff and an inad-equate rate structure. To help solve these problems the UNDP began financing a program of technical assistance to the railways administered by the Bank in 1969. Under this program a team of French con- sultants prepared a five-year (1973-77) investment and rehabilitation program to modernize the railway. The Bank Group undertook to finance the foreign exchange component of the program through an US$8 million credit made in 1972, which covered the purchase of rolling stock, diesel shunting locomotives, spare parts, machine tools and materials for track rehabilitation. In addi- tion to the physical works and purchases, the program for the rehabilitation of the railways includes restoring the railways to financial health and in- troducing modern engineering, commercial and managerial methods. Due to sharp increases in costs, about half the items planned for purchase under the IDA credit had to be eliminated and deferred for financing until the proposed loan could be made. Although all of the funds under the first project have heon committed, matcrials, te^-