Ecuador - Guayas Province Highway Construction Project

P - 61 RESTRIC TED FILE COPY This report is restricted to use within the Bank. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPME.NT REPORT AND RECOMMENDATIONS of the PRESIDENT to the EXECUTWVE DIRECTORS on the PROPOSED LOAN to the COMITE DE VIALIDAD DE LA PROVINCIA DEL GUAYAS FOR THE DEVELOPMENT OF HIGHWAYS IN THE COASTAL REGION OF THE REPUBLIC OF ECUADOR February 3, 1954  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOIA%I-TDATIONS OF THE PRESIDENT TO THE EKECUTIVE DIRECTORS ON A FROPOSED LOAN TO THE COMITE EJECUTIVO DE VIALIDAD DE LA PROVINCIA DEL GUAYAS FOR. THIE DEVEIOPMETT OF HIGHWUAYS IlI THE COASTAL REGION OF THE REPUBLIC OF ECUADOR 1. I submit herewith a report and recommendations on a proposed loan of $8.5 million to the Comite Ejecutivo de Vialidad de la Provincia del Guayas to finance the foreign exchange costs of a program of higlhway con- atruction in the Province of Guayas and neighboring provinces of the coastal region in Bcuador. PART I - HISTORICAL 2. This is the first loan proposed for Ecuador. Since 1948 several Bank missions have visited Ecuador, but the defaulted eocternal debt has until recently been an obstacle to lending operations. 3. In Mday 1953 the Government negotiated with the British Council of Foreign Bondholders a settlement of bonds issued in the United Kingdom having a face value of about $11 million. The settlement was ratified by the Ecuadorian Congress in October 1953. Certain I. claims, the amount of which is disputed, resulting from French franc obligations guaranteed by or issued on behalf of the Ecuadorian Government about 1909 and 1913 are still unsettled. I have been assured that the Ecuadorian Government intends to reach an equitable settlement vrith holders of these obligations as soon as possible. 4. During September and October 1953, a Bank mission was in Ecuador examining the econoraic and financial situation and investigating certain specific projects presented to the Bank by the Ecuadorian Government. One of these projects was the highway program to be financed by the pro- posed loan. PART II - DESCRIPTIONi OF THE PROPOSED LOAN Borrower 5. The Borrower would be the Comite Ejecutivo de Vialidad de la Provincia del Guayas (hereinafter called "the Comitel), an autonomnous local authority consisting of regional officials and prominent private citizens. It was established by law in 1945 for the purpose of improving transportation facilities in the Province of Guayas. Under special laws the proceeds of the tax collected in CGuayas Province on the sale of petroleum products accrues to the Comite and this is its primuary source of income for financing its highway program. Since its establishment, the Comite has been satisfactorily building and maintaining roads in the Province of Guayas. Guarantor 6. The Guarantor would be the Republic of Ecuador, a member of the Bank.  - 2- Amount 7. The amount of the loan would be 08.5 million, or its equiva- lent in other currencies. 8. The proceeds of the loan would be used to cover the foreign exchange costs of 'a project, described in Schedule II of the Loan Agreement, to develop the highway system of the Province of Guayas. The project includes the construction of suitable shops for the repair and servicing of highway equipment and the acquisition of ferryboats to- operate on the Guayas River between Guayaquil and Duran. Interest Commission and Commitment Charges 9. The loan would bear interest at the rate of 4 5/8a per annum including the statutory comnission of 1%. The commitment charge would be 3/h of 1% per annum and would accrue from the effective date of the Loan Agreement or a date 60 days after signature, whichever is earlier. Amortization 10. The loan would be for a period of ten years. It would be amortized by semi-annual payments of principal beginning March 1, 1958, and ending March 1, 1964, as set out in Schedule 1 of the proposed Loan Agreement. Legal Instruments and Legal Authority 11. Drafts of Loan and Guarantee Agreements are attached as Appendix 1 and Appendix 2, respectively. The following provisions of such agreements are of special interest: a) To ensure that the Comite has sufficient technical and administrative help in carrying out the project, the Comite is required to employ a general superintendent, a technical consultant, and a firm of construction engineers (Loan Agreement Sections 5.01 (a), 5.01 (b) and 7.01 (a)) b) Except as the Bank shall agree the Comite is not permitted to incur debt aggregating more than 8,000,000 sucres bthcr than debts outstanding December 31, 1953 and the amount of the Bankts loan. An exception to the Comite's negative -pledce enables the Comite to give security for local currency indebtedness contracted after December 31, 1953 in an amount not exceeding 8,000,000 8ucres (Loan Agreement, Sections 5.03 (a) and 5.03 (b)(iii)). c) The Comite is to keep separate boolks and accounts for its highway activities, and revenues and receipts allocated to its highway  - 3 - activities are not to be used to defray the costs of its other activi- ties (Loan Agreement, Section 5.01 (e)). Furtherriiore, the Comite may not undertake any project the cost of which is estimated to exceed 10 million sucres unless it first satisfies the Bank that it has on hand or has made satisfactory arrangements to secure the funds necessary to carry out such project (Loan Agreements Section 5,04), d) Before withdrawals are permitted for the acquisition of ferry- boats, the Comite must have obtained firm prices for their reconditioning if they were previously used and must have obtained assurances satis- factory to the Bank that the ferryboats are suitable for operation between Guayaquil and Duran (Loan Agreement, Section 2-02), e) Since the Comite is an autonomous entity not subject to direct control by the Guarantor, the guarantee of the Republic of Ecuador has been limited to a guarantee of payment of principal, interest and other charges on the loan. However, the Guarantor covenants not to take, and within the limitations of its constitutional powers, not to permit any of its political subdivisions to take, any action which would prevent or interfere with performance by the Comite of its obligations, and it agrees to take or cause to be taken all reasonable action which may be necessary to enable the Comite to perform such obligations (Guarantee Agreement, Sections 2.01 and 2.02). f) The negative pledge contained in the Guarantee Agreement has been modified to avoid prQblems arising from the autonomy granted by the Ecuadorian Constitution to certain governmental agencies and to political subdivisions of the. Republic of Ecuador. The Guarantor under- takes, writhin the limitations of its constitutional powers, to make the negative pledge provisions effective with respect to such agencies and political subdivisions, and to the extent that it is unable to do so, the Guarantor agrees to grant to the Bank an equivalent lien satisfactory to the Bank. The full negative pledge, however, does cover the Central Bank, which will give its independent authorization to the Guarantor to undertakce the negative pledge covenant on its behalf. Evidence that the negative pledge covenant is binding upon the Central Bank must be fur- nished to the Bank as a condition-of the effective date. Liens given by political subdivisions and their agencies on local currency revenues and receipts under arrangements which contain no provisions which would result in priority in the allocation or realization of foreign exchange are excepted from operation of the negative pledge. (Guarantee Agreement, Section 3.01, Loan Agreement, Section 7.01 and 7.02). 12. The report of the Comaittee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Bank is attached as Appendix III.  - 4 - PART III - APPRAISAL OF THE PROPOSED LOAN 13. A detailed appraisal of the Project (TO [ja) is attached as Appendix IV. A report on the Economy of Ecuador (WH 15a) is attached as Appendix V. Justification of the Project 14. The proposed highway program will open up the rich lands of the Province of Guayas and the neighboring regions in the Provinces of Manabi, Los Rios and El Oro, permitting lands now cultivated to be used more effec- tively and new areas to be brought under cultivation. These provinces are located in the coastal plain where Ecuador's chief export crops (bananas, cacao and. coffee) and the buIW of such other important crops as c9tton, sugar and rice are produced. 15. Lack of roads and high transportation costs have severely restricted development of the coastal plain. Of the 6.8 million hectares in this region, only about 500,000 hectares are now under cultivation, although most of the uncultivated area is extremely fertile and suitable for agricultural develop- ment. However, past experience in the Guayas Province has shown that the construction of highways immediatlJy leads to the cultivation of land in the vicinity of the roads and a sharp increase in agriculturel production. 16.. While the prospective increase in. agricultural production likely to result from the project cannot be forecast with accuracy, it is estimated in the technical report that by 1958, when the project is completed, production of ZEcuador's chief annual crops (sugar, corn, rice and bananas) will have increased by about 50% of 1952 output, or at present prices, by about 012 million per annum. After 1958J increases in harvests of coffee and cacao will also be realized from trees planted during the construction period. 17. In addition to its favorable impact on agricultural production in the coastal region, the project will benefit the country by expanding the national road system and contribiAte toward making year-round highway trans- portation possible between Guayaquil and Quito, the two chief cities of the country. 18. The inauguration of ferry service will for the first time make possible the transportation of trucks, automobiles and possibly railroad cars, across the Guayas Riiver between GQiayaquil and Duran, which is the terminus of important roads and of the railroad to Quito. Method of Procurement 19. The Comite intends to procure the equipment and supplies on the basis of international bidding. Before retaining a construction firm the Comite will investigate the quaifications of a number of firms in the field and negotiate a pontract with the firm which they regard as most suitable after ascertaining that such finm is satisfactory to the Bank.  The Economic Situation 20. In recent years Ecuador's economy has strengthened substantially. Exports have been diversified by the development of important new export crops (bananas and coffee) to supplement cacao, upon which Ecuador has long been dependtnt, and these three crops now account for 75% of the value of total exports. Output of other important crops such as sugar and cotton has also increased markedly. While high prices for Ecuadorian products in world markets have contributed to these results, sound fiscal and monetary policies have also been important factors. Since 1948 the Central Bank has followed a cautious credit policy and prices have been comparatively stable. Between 1950 and 1952 public investments rose from 4.2% to 6.8% of total output. 21. During 1953, however, there have been signs of financial pressures. The budget of the Central Government for 1953 closed with a deficit, part of which will have to be financed by the Central Bank. Part of the Government expenditures can be attributed to the situation created by the floods of early April, but mu&o of the increase cannot be accounted for by the emergency. Should the government continue to indulge in deficit spending to finance the sizeable investment program upon which it is embarking, Ecuador's economic position would be adversely affected. 22. Prospects for export earnings are good and the development qf the coastal region, to which this project will contribute, will improve them. Import requirements will continue to grow but there are good possibilities of replacing some imports, particularly cereals, by increased local production. On the whole, Ecuador's international financial position is sound, with prospective dollar earmings sufficient fully to cover prospective dollar needs. The chief apparent danger to her proepective balance of payments position would stem from the indirect effects of the govermnent's financial policies were it to resort to inflationary methods of financing its develop- ment program. 23. Service for Ecuador's present extemal debt will average US $k4. million in the period 1955-59 with a peak of US $4.4 million in 1956. Average annual service represents 3.5% of expected annual foreign exchange earnings. The loan for roads in the Province of Guayas, together-with another now under active consideration (for the expansion of eLectric power in Quito) would raise annual average service during the period 1956-59 to US1$5.3 million and shift the peak of annual service payments to US $6.0 milLion in 1959. The annual payments would still be less than 5% of the expected annual average value of exports. Thus, there would still be room for further borrow- ing, particularly for projects of an export generating or import saving type. The size of this additional margin will depend upon the domestic policies followed by the government.  - 6 - The Political Situation 24. Ecuador's political past has been turbulent, and for about 30 years prior to the Galo Plaza regime (1948-1952) no president had served out his constitutional term of office. There are, however, some indications of greater stability in Ecuadorian political life. During the first two sessions of the present Congress the President has drawn support from diverse political elements in it, which have cooperated in the carrying out of the program he initiated. Prospect of Fulfillment of Obligations 25. The Comite is a competent organization which has shown its ability to construct good highways at reasonable costs and to plan an effective construc- tion program. Since the project will greatly increase the scope of its high- way operations, the Comite has agreed to strengthen its organization by the employment of a full-time general manager, a technical consultant, and an engineering firm (see paragraph lla). 26. The sources of revenue allocated to the Comite and available during the period of construction are estimated to be sufficient to cover the local currency costs of the project and to meet the Comite's other local currency obligations. However, should the funds available to the Cornite be inadequate, the G-uarantor undertakes to provide to the Cornite the amounts needed for the project. 27. The estimated income of the Comite during the life of the loan should be adequate to meet its obligations and to provide the local currency needed, at present exchange rates, to purchase the foreign exchange to service the loan. The increased earnings in foreign exchange which Ecuador should realize as a result of the project should substantially exceed the amounts needed to service the loan, and these amounts should be within Ecuador's capacity to provide. PART IV - COMPLIANCE VIITH ARTICLES OF AGREEZIENT 28. I am satisfied that the proposed loan will comply vrith the require- ments of the Articles of Agreement of the Bank. PART V - RBOONWIMDATIOY1S 29. I recommend that the Bank make a loan of $8.5 million to the Comite Ejecutivo de Vialidad de la Provincia del Guayas, for the term of 10 years at such rates and on such other terms as are specified in the attached Loan and Guarantee Agreements. Eugene R. Black Wrashington D. C. February 3, 195