Peru - Highway Maintenance Project

R E S T R I C T E D Report No. P-94 FIE COPY This document was prepared for internal use in the Bank. In making It available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS of the PRESIDENT to the EXECUTIVE DIRECTORS on a PROPOSED LOAN to the REPUBLIC OF PERU for a HIGHWAY MAINTENANCE PROGRAM in PERU July Z8, 1955  INTFRNJATIONAL BANK FOR REC ONSTRUCTION AND DEVELOPMWTT REPORT ANT RECO ANDATIOV1S OF THE PRESIDmBTT TO THE EXECUTIVE. DIRECTORS ON A PROPOSED LOANI TO THE REPUBLIC OF PERU FOR A HICHWAY MAINTRTANCE PROGRA1I. 1. I submit herewith the following,report and recommendations on a proposed loan of US $5 million to the Republic of Peru to finance the foreign exchange cost of a program of highway maintenance to be carried out by the Department of Highways of the Peruvian Ministry of Develop- ment and Public Works. PART I - HISTOFICAL 2. The Peruvian Government has been spending very substantial sums in recent years on highwray construction and improvement, but only recently has it come to a full appreciation of the need for a modernized and well- equipped highway maintenance service. A Bank I"Iission which visited Peru in January and February 1954 was informed that the Government would give a high priority to a highway maintenance program but that it could not afford the required local currency appropriations until the financial stabilization program which had been instituted early in 195) had been successfully completed. Early this year the Banlc was informed that the Government was nrepared to make adequate provision for local currency expenditures on a highway maintenance program, and that a loan was desired to cover the necessary imported equipment, supplies, and services. 3. The Bank Mission which visited Peru in April and May of this year had preliminary discussions on this subject and negotiations for the proposed loan began in Washington on July 1Lh, 1955. The Peruvian Government was represented by Mr. Eduardo Salgado, Director of the Department of Highways; MIr. Raul Paraud, Chief Engineer; and Mr. Carlos Gibson of the Peruvian Embassy. 4. If the nronosed loan is made, it would increase the total amount of Banc loans to Peru to US A36 million. The Bank has already made the following six loans to Peru, four to the Government, one to a Government agency, and one to a private company:  -2- Serial Amount Disbursed Year No. Borrower Purpose Amount by July 25, 1955 1952 57 PE Government ImDrovement to $ 2,500,000 $2,018,880 Port of Callao 1952 67 PE Government Agricultural 1,300,000 Fully disbursed machinery to be Feb. 10, 1954 operated by SCIPA 1954 98 PE Government l"70o0.tOOO 1,326,663 1954 105 PE Banco de To expand credit 5,000,000 150,000 Fomento facilities Agropecuario 1955 114 PE Government To irrigate waste 18,000,000 3,314,144 lands between Quiroz and Piura rivers 1955 116 PE Cia Nacional Erection of Cement 2,500,000 None de Cemento plant at Pacasmayo (not yet Portland del effective) Norte, S.A. Total $31,000,000 PART II - DESCRIPTION OF THEl PROPOSID LOAN Borrower 5. The Borrower would be the Renublic of Peru, a member of the Bank. Amount 6. The Loan would be in the amount of US r5 million or its equivalent in other currencies. Purpose 7. The Loan would enable the Peruvian Government to initiate a sub- stantial highway maintenance Program and to train personnel in modern maintenance methods. It would finance the importation of maintenance equipment, spare parts, machinery for repair shops and heavy maintenance materials, and would provide for the fees of engineering consultants who would assist the Highway Department during a three year period in organizing and carrying out the program. The local currency requirements would be met from budgetary anDrooriations; under present conditions it is estimated that some 80 million soles (Mh million) would be required annually.  - 3 - Interest, Commission and Coomitment Charges 8. The Loan would bear interest at the rate of 441% per annum, including the statutory commission of 1%. The commitment charge would be 3/1 of I% per annumi and would accrue from the effective date of the Loan Agreement or 60 days after the date of tlhe Loan Agreement, whichever is earlier. Amortization 9. The Loan would be for a period of 9 years. It would be amortized by semi-annual payments beginning August 15, 1958 and ending August 15, 1964 as sat out in Schedule I of the proposed Loan Agreement. Legal Instruments and Legal Authority 10. A draft Loan Agreement is attached (PJo. 1). It contains no features not customary in this type of loan. Attention is called, however, to the attached 1atter (No. 2), expressing the general understanding of the Government regarding the magnitude of the local currency sums which would be made available pursuant to its obligation in Section 5.01(b) of the Agreement. 11. The Peruvian Government is authorized under Law 11696 of January 16, 1952 to enter into this Loan Agreement. 12. The report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank is attached (No. 3). PART ITT - APPRAISAL OF THu. PROPOSE) LOAN 13. A detailed apDraisal of the Project (T.O.90.a)is attached (No. 4). Justification of the Project 14.' Better transportation facilities are essential for Peru's further economic develonment. Possessing no integrated railroad system, Peru is largely dependent on roads as a means of transport and the highiry system provides the only liri between some of the main regions of the country. Although there is some freight movement by coastal ship and much of the mineral output is moved by rail, most freight movement in Peru is by road. Food sunplies, building materials, clothing and machinery are moved to consumer centers by road and most of the cotton crop, Peru's chief export, is transported by truck. 15. A sign of the increasing importance of road transnortation is a steady increase in the vehicle mileage covered and in the number of vehicles registered. Registrations almost doubled in the five years from 1949 to 1954. 16. Due to the lack of adequate maintenance, the Government has been forced in recent years to make large investments in the reconstruction of existing highways and, in narticular, it has had to rebuild almost in  its entirety the principal north-soutli highway. As the construction program continues, so grows the need for maintenance to preserve the heavy investment now being made. M4uch of the remainder of tlhe road system is in poor condition but the immediate institution of a maintenance program would serve to improve some of these roads to the point wJhere the Government would be saved the costly alternative of reconstruction. 17. Improvement of roads through proper maintenance would decrease trucking costs anad increase the economic life of the vehicles. In vehicles and tires alone the wear and tear caused by poor roads is esti- mated to cost the country around the equivalent of ,10 million annually. Faster transportation would also give economies resulting from a reduction in the time goods are in transit. 18. Dependence on road traffic will increase as the Government pursues its program of building penetration roads into the undeveloped areas of the upper Amazon basin. The Government has requested the Bank's assistance in this program through a loan for the improvement and paving of the easternmost section of the highwJay from Lima to Pucalpa, a river port on the headwzaters of the Amazon. As a preparatory step, a small part of the $300,000 reserved in the present loan for the nayment of consulting engineerst fees would be used to make a preliminary engineering survey of this project. Method of Procurement 19. Competitive bids will be requested for all substantial orders of equipment and materials. In the case of equipment, account will be taken not only of price but also of its suitability, the nossibilities of servicing by the manufacturers, and the necessity of limiting the makes and types to standardize stocks of spare parts. Economic Situation 20. A report entitled "The Current Economic Position and Prospects of Peru"'(WH 42-a) was distributed to the Executive Directors on July 13, 155 (Secretary's Memorandum 1-278). This report points out that the economic difficulties which beset Peru in 1953 did not affect the internal growth of the country, advances having been made by most sectors of the economy, and that 1954 proved to be a year of progress with stability. 21, Short-term fluctuations are to be exrnected in Peru, which is relying on indirect financit) policies to make the necessary adjustments. This possibility should cause no serious concern provided the Peruvian authorities continue as they have done in the past to aDply sound financial policies with reasonable promptness. 22. The basic structural strength of the economy justifies an optimistic view of long-term prospects. Over the next five years export earnings are expected to increase. There will be greater nroduction of cotton and an expansion in the refining capacity of the mining industry. Petroleum  production is expected to increase and partly offset growing import needs. Five years hence exports will receive a great boost from the copper production of the Toquepala project, which is estimated to return more than US 120 million annually in net exchange earnings. 23. The service on the proposed loan, added to Peru's Dresent commit- ments, would bring total annual service to something less than 7% of the net export earnings which are expected during the next few years. Peru's use of short-term suppliers credits has been quite limited. Prospects of Fulfillment of Obligations 24. The Department of Highways shotld have no difficulty in organizing and carrying out the project, with the assistance of consulting engineers experienced in maintenance work, and the Government should be able to appropriate sufficient sums each year to cover the local currency costs of the project, as well as the local currency equivalent of service on the Bank loan. It should also be within the capacity of Peru to provide the foreign exchange required to service this loan in addition to its other obligations. PART IV - COMPLIANCE WnITH ARTICLES OF AGREMIENT 25. I am satisfied that the proposed Loan will comply with the require- ments of the Articles of Agreement of the Bank. PART V - RECOMMDATIONS 26. I recommend that the Banlc make a loan of US q5 million, or the equivalent in other currencies, to the Republic of Peru on such terms and at such rates as are specified in the attached draft Loan Agreement, and that the Executive Directors adopt a resolution to that effect in the form attached (No. 5). Eugene R. Black Washington, D. C. July 28, 1955