Rwanda - Fourth Highway Project

Document of FILE COPY The World Bank FOR OFFICIAL USE ONLY Report No. P-2220-RW REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF RWANDA FOR A FOURTH HIGHWAY PROJECT February 8, 1978 This doewnt has a restriced distribution sad my be sd by recipients only in the performance of their ocdal duties. Its contents may not otherwise be disclosed without World Bank authorisation. CURRENCY EQUIVALENTS Calendar 1976 November 1977 Unit = Rwanda Franc (RWF) Rwanda Franc (RWF) US$1 RWF 92.8 RWF 92.8 RW 100 = US$1.1079 US$1.1079 FISCAL YEAR January 1 - December 31 DEFINITIONS MD - Maintenance Division RB - Road Branch WFP - World Food Program UNDP - United Nations Development Program FRG - Federal Republic of Germany UNITS Metric System FOR OFFICIAL USE ONLY RWANDA - FOURTH HIGHWAY PROJECT CREDIT AND PROJECT SUMMARY Borrower: Republic of Rwanda Amount: US$15.0 million equivalent Terms: Standard Project Description: (a) Objectives: To improve the main road network by assisting Government in carrying out a road betterment program and in expanding and strengthening road maintenance operations and the capacity of the Road Branch of the Ministry of Public Works and Infrastructure of Rwanda. (b) Major Comporentz: (i) A four-year betterment program to improve 500 km of gravel roads, to rehabilitate or upgrade another 1,000 km of roads to gravel standards, and to seal about 100 km of heavily trafficked paved roads (which receive no maintenance at present); (ii) a four-year maintenance program to strengthen operations, on about 3,500 km of earth & gravel roads and to initiate routine maintenance on about 350 km of paved roads; (iii) strengthening and expansion of the Road Branch through a training program for maintenance per- sonnel at all levela. and equipment, vehicles, workshop facilities. msterials, and technical assistance recessar7 for project implementation. (c) Benefits: The main quan.ified benefits from the better- ment program will be the savings in vehicle operating costs which will acc-ue primarily to road users. Domes- tic freight rates can be expected to stabilize as a re- sult of road betterment and maintenance. The reduced transport costs are expected to stimulate agricultural production and thus increase foreign exchange earnings. This document has a restricted disirfbutin and may be used by racoients only in the performance of their official duties. Its contents may not otherwise be discosed without World Bank authorization. -2- Cost of Project: Total project costs, net of taxes, are estimated at US$23.7 million. The foreign exchange component is US$17.6 million (74 percent). (US$ '000) Items Local Foreign Total Betterment Program 3,729 11,536 15,265 Routine Maintenance Program 293 1,677 1,970 Training Program 706 792 1,498 Contingencies 1,361 3,573 4,934 Total Project Cost 6,089 17,578 23,667 Financing: (US$ million) (Percentage) IDA 15.0 63.0 Federal Republic of Germany 2.3 10.0 UNDP 1.3 5.5 Belgium 0.5 2.0 WFP 2.0 8.5 Government 2.6 11.0 Total 23.7 100.0 Procurement Arrangement: Except for small amounts of equipment which should be stan- dardized with existing equipment, highway maintenance equipment, as well as machine and hand tools, will be procured through ICB in accordance with Bank Group "Guidelines for Procurement." Spare parts, fuel and bitumen will be procured on the basis of price quotations from established suppliers. Materials such as cement, steel and timber will be procured on the basis of local bidding procedures in accordance with Government procurement procedures. Individual items not suitable for bulk purchase, costing under US$25,000, may be procured by negotiated purchase after solicitation of quotations from suppliers or contractors. The total amount of these pur- chases will not exceed US$200,000. -3- Estimated Disbursements: IDA Fiscal Year (June 30) (US$'000 (Closing date 1979 1980 1981 1982 July 1982) Annual 7.700 11.100 13.900 Cumulative 7.700 13.900 15.000 15.000 Rate of Return: Overall rate of return is in excess of 100%. Appraisal Report: Report No. 1673b-RW dated February 6, 1978. Map: Attached is a map of the roads proposed for the betterment program.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF RWANDA FOR THE FOURTH HIGHWAY PROJECT 1. I submit the following report and recommendation on a proposed Development Credit to the Republic of Rwanda for the equivalent of US$15.0 million on standard IDA terms to help finance a Fourth Highway Project. The project will be co-financed on grant terms by the UNDP ($1.3 million), the Federal Republic of Germany ($2.3 million), Belgium ($460,000) and the World Food Program ($2.0 million). PART I - THE ECONOMY 2. A report entitled "Memorandum on the Economy of Rwanda" (No. 1108- RW) was distributed to the Executive Directors on July 27, 1976. The next economic mission is scheduled for April 1978. 3. Rwanda became independent in 1962. The present Government was established in 1973 and faces many challenges. Achievement of lasting structural improvements in Rwanda's economy is hampered by the country's acute poverty and by many physical and manpower constraints. With an average per capita income of about US$110 in 1976, Rwanda is one of the 25 poorest countries designated as "least developed" by the United Nations The problem of an already high population density of 165 inhabitants per km is exacer- bated by the pressure of a rapidly rising population on the limited arable, and indeed total land available. Although agriculture provides more than half of Rwanda's exports (coffee, tea and pyrethrum the remainder consisting of minerals), the expansion of export crops is constrained by the priority accorded to the production of foodcrops for domestic consumption. Rwanda's manufacturing base is extremely narrow and its expansion is hampered by the limited size of the market, the lack of raw materials, insufficient knowledge of the mineral endowment, shortage of trained labor, and inadequate ancillary services such as banking and marketing. 4. Despite these handicaps, the present Government has made percep- tible progress in developing a strategy to lift the economy from its present low level. Some aspects of the country's characteristics are favorable and it is around these that the Government has designed its strategy. The popu- lation has a certain unity, deriving from similarities in customs, ways of life and standard of living throughout the country. Income and wealth dis- tribution are remarkably even. There are neither the remnants of a strong traditional hierarchy nor signs of significant emerging urban-rural polari- zation. Moreover, the small size of the country reduces the administrative - 2 - difficulties and at the same time limits serious regionalism. The country also has a natural asset in its relatively fertile soil which, provided that the problem of erosion in Rwanda's hilly terrain can be overcome, can give good yields for a variety of foodcrops. To take advantage of and preserve these admittedly modest assets, the Government has recognized that its devel- opment policies must be built around a carefully integrated and balanced strategy reaching the entire population. 5. Following an increase of about 1.8 percent per annum between 1971 and 1974, GDP at constant prices expanded by 9.4 percent in 1975 and 7.1 per- cent in 1976 when increases in agricultural production triggered expansion of the industrial (including construction) and service sectors as well. Significantly, more than 85 percent of the increase in agricultural produc- tion came from subsistence crops. Merchandise exports, in value, neverthe- less, roughly doubled during these two years owing largely to above average coffee crops and extremely favorable world coffee prices. 6. Among the encouraging developments of recent years are also: (a) the significant deceleration of the rate of inflation in 1976; (b) substan- tial improvements in the Government's financial position, the balance of pay- ments and in the banking system's reserves; (c) increased attention by the Government to key sectors such as agriculture; and (d) intensified efforts in development planning which have culminated in the preparation of a plan for the 1977-81 period. 7. After rising at a rate of 6.2 percent in 1971-73, prices recorded an increase of about 30 percent per year in both 1974 and 1975; but the rate of inflation contracted sharply to 7 percent, in 1976, helped by the return of supplies to more normal levels, and the arrest of the increase in import prices. 8. The Government's current revenues exceeded current expenditures by 4 percent in 1975 and 32 percent in 1976. The improvement was brought about by higher imports (import duties are a significant source of revenue), high coffee prices, and improved collection of income and profit taxes. Unlike the 1970-73 period when current expenditures expanded much faster than GDP, in 1974-76 they expanded by 22 percent compared to a growth of 26 percent in GDP. 9. Imports increased dramatically in 1975, producing a substantial deficit in the balance of trade; but exports rebounded strongly in 1976 turning the deficit into a small surplus. The chronic deficit in the ser- vices account rose by more than 50 percent in 1975 and contracted somewhat in 1976. As a result of these changes, the current account deficit, which had increased to about $69 million in 1975, declined to $40 million in 1976. The deficits in both years were more than offset by net inflows of official transfers and capital with the result that net foreign exchange reserves jumped from about $7.5 million at the end of 1974 to about $48 million at the end of 1976, equivalent to about 6 months of merchandise imports. - 3 - 10. Agriculture is the principal focus of Government policy, with higher foodcrop productivity a major objective. A review of the agricul- tural sector completed by the Bank in 1977 (Report No. 1377-RW) concluded that a 3% growth rate in yields is necessary in order to meet food produc- tion needs without endangering soil fertility. To this end, in the last few years, the Government has been working on a rural development plan with major efforts directed at foodcrop intensification. These efforts would be linked with soil conservation and livestock development (two large mixed farming projects are being undertaken with financial assistance from IDA) and supported by extension services and appropriate infrastructure, includ- ing local roads and storage facilities, which will assist Government efforts to implement a suitable price policy. Inevitably, achieving the desired results will take time. 11. In the mining sector (cassiterite, wolframite, etc...), which con- tributes relatively little to GDP but constitutes a major source of foreign exchange earnings, the merger of several companies in 1973 into the Societe Miniere du Rwanda (SOKIRWA) has arrested the decline in the sector's output, lowered administration costs, and improved technical efficiency. Although some positive steps have been taken in the manufacturing sector as well, such as the preparation of a new investment code, progress in this sector is bound to be slow because of the priority which has to be accorded to food production. 12. Rwanda's landlocked position at 1,700 km from the nearest port, Mombasa, has been particularly disadvantageous in recent years when trans- portation costs have risen sharply. Attempts are being made to improve the route through Tanzania via Rusumo for alternative access to the ocean while a new road northward to Uganda was recently completed. The road southward to Burundi is also being improved. Although these are positive steps, more efforts to improve the transportation network, both internal and external, are necessary in order to expand the production base and ameliorate distribu- tion. 13. Development planning in Rwanda is indicative in nature. While the country did have a formal plan covering the period 1966 through 1970, planning since then has been based on several ad hoc studies. The draft summary plan for 1977-81 may be seen as an attempt to address the overall and sectoral problems of the economy in a more structured fashion. Even though the docu- ment may still be revised before being adopted officially, it throws some light on the Government's priorities, particularly as it is accompanied by a list of projects. A major objective of the plan is the improvement of in- frastructure in order to improve communication and transportation and thus provide incentives to more intensive cultivation and diversification. The document projects an annual average growth rate of GDP of about 6 percent. Of the projected investment of about $580 million over 1977-81, nearly 30 percent would be allocated to physical and administrative infrastructure. Of an estimated $220 million intended for agriculture, nearly 40 percent would be devoted to rural development as such. Functionally, almost one third of the proposed expenditures would go into feasibility studies and other selected administrative assistance. As a means of promoting small industries, the plan calls for the setting up of a fund to guarantee loans to small-scale business. According to the draft plan, 72 percent of the pro- jected investment would be provided by external sources, 5 percent by the Government and 23 percent by the private sector. 14. Although the performance of Rwanda's economy in the last two years has been encouraging, substantial infusion of financial and technical assis- tance well suited to the country's needs will be crucially needed in the years ahead. Assistance in the past has been provided largely by Belgium, Canada, France, the Federal Republic of Germany, Switzerland, the European Development Fund, UNDP and IDA. In February 1977, the Government organized a "Table Ronde" meeting of aid agencies in Kigali to set forth its planning objectives, to ensure that future projects are more closely related to national priorities. The meeting provided a useful exchange of views on the future of Rwanda's economy and a basis for improved coordination among the agencies. 15. Rwanda's external debt is low. External debt outstanding and dis- bursed was estimated at the end of 1976 at about $66 million of which IDA credits represented $21.1 million (32%). The service payments on debt are estimated at about $1.0 million per year, or 1-2 percent of exports. Because of Rwanda's level of poverty, assistance should continue to be on the most concessional terms possible,including the financing of a substantial part of the local currency cost of projects. PART II - BANK GROUP OPERATIONS IN RWANDA 16. Bank Group assistance started in 1970 and initially focused on the improvement of the road network, which is vital for the movement of the country's domestic and foreign trade. Rwanda has received nine IDA credits totalling US$59.7 million, of which four (including one supplemental IDA credit) were for roads, three for agriculture, one for education and one for a DFC project. There have been no Bank loans. An IFC loan of US$535,000 for a tea factory was signed in 1976. Annex II contains a summary statement of.IDA credits, IFC investments and notes on the execution of ongoing proj- ects. 17. The First Highway Project (Credit 196-RW) was affected by cost overruns and, in 1975, a supplemental IDA credit was approved in the amount of US$9.5 million. About US$0.8 million of this credit is being used to help finance cost increases under the Highway Maintenance Project (Credit 299-RW) of 1972. The Saudi Fund for Development agreed to co-finance part of the cost overrun on the First Highway Project with a loan of US$5.0 million signed in Oc'ober 1976. The implementation of the Agricultural Development (Mutara) Project (Credit 430-RW of Nov. 29, 1973) began in September 1974, about a year behind schedule. The project has experienced several difficulties and project cost has increased substantially. Following a recent in-depth review, it is now being revised and certain elements eliminated in order to allow attain- ment of all of its principal objectives. Credit agreements for a DFC and a -5- Cinchona Project were signed in August 1976. The Bugesera Est and Gisaka/ Migongo Mixed Farming and Rural Development Project was signed in March 1977. All three of these projects are in very early stages of execution. 18. Because of the lack of skilled manpower and expertise in Rwanda execution of projects will require substantial assistance from Bank Group staff and expatriate experts. With respect to new operations, we plan to put primary emphasis on agriculture while continuing our support to the highway and education sectors. In the case of agriculture, the government is prepar- ing an extension of the Mutara project (livestock and mixed farming) and a forestry project is under discussion. In education we are awaiting the outcome of a UNESCO sector survey which should determine the needs for future investment. In highways we have indicated our willingness to consider finane- ing the Kigali-Ruhengeri road if found to be economically feasible. Two other projects were identified: one in local construction industry where the Government has expressed its belief that there is a need to develop the domestic construction industry and to increase the competition among contrac- tors; the other one in the water supply sector, where a WHO team is currently in the field conducting a survey under the cooperative program. 9. We have taken an interest in regional cooperation involving Rwanda. Last year Zaire, Rwanda and Burundi created a regional economic organization named the Economic Community of the Great Lakes with its headquarters at Gisenyi in Rwanda. As this organization evolves we intend to support its activities through appropriate regional projects. PART III - THE TRANSPORT SECTOR 20. The topography of Rwanda, which changes from rugged mountainous terrain in the west to a rolling plateau scattered with swampy valleys, in the east, makes road construction costly and transportation difficult. Transport in Rwanda relies on a very dense network of poorly maintained roads. There are no railroads, and the only water transport, on Lake Kivu, is of no.real significance. The international airport of Kigali is the only one capable of handling long-range jets. The road network, totaling abo t 6,300 km, is one of the densest in Africa, with an average of 250 m per km . It is divided into two classes: (i) the national network (2,400 km), maintained by Road Branch (RB) and comprising about 350 km of bituminous-surfaced roads, 280 km of recently regravelled roads, 770 km of very old gravel roads, and 1,000 km of earth roads; and (ii) the district network, consisting of 3,900 km of earth roads, maintained by local authorities. This classification, how- ever, is only functional since all roads that are not bituminous-surfaced or recently regravelled are low standard earth roads characterized by corrugated surfaces, large ruts and potholes, and, in wet weather, by deep mud. 21. Since 1971, overall traffic in Rwanda has grown at an average annual rate of about 10%. The national vehicle fleet grew at an average annual rate of 18% until 1976 when the rate declined to 13% because of rising fuel costs. The registered fleet totalled 13,000 vehicles mostly consisting of passenger cars and light trucks and vans. Annual contributions of road - 6 - users to Government revenues averaged US$2.5 million equivalent between 1971 and 1976, increasing at an average annual rate of 22% during that same neriod, 22. Total expenditures for roads, including foreign assistance, in- creased in the period 1971-76 from an annual amount of US$1.1 million to US$16.9 million. Capital expenditures increased from US$650,000 to US$15.2 million and recurrent expenditures increased from US$400,000 to US$1.7 mil- lion in the same period. Total foreign aid to the road sector increased from $245,000 to $13.9 million. Government contributions to capital and recurrent costs increased at an average annual rate of 30% from about $800,000 in 1971 to $3.0 million in 1976 and expenditures for road maintenance increased at an average annual rate of 20% from about $400,000 to $1.0 million over the same period. 23. The Ministry of Public Works and Infrastructure, through the Road Branch, is responsible for the design and maintenance of the national net- work. The Road Branch includes three technical departments: the Workshop and Warehouse Department, the Planning and Engineering Department and the Works Department. The technical assistance for the Workshop and Warehouse Department is financed by the Federal Republic of Germany (FRG), however its independence of the RB's Works Department has undercut interdepartmental coordination and efficiency. 24. The Road Branch is responsible for planning, supervising and ex- ecuting routine and periodic road maintenance on the national network (at present 2,400 km plus an additional 1,100 km of roads included in the proj- ect). The RB's planned road investment program, up to 1983, is adequate for Rwanda's needs and is being financed principally by the European Development Fund and the FRG. Thus, contrary to the past, the Government should have funds available for maintenance. 25. The Road Branch still depends largely on foreign technical assis- tance. The twelve local managerial level staff members are young and inexperienced. At least some of the local engineers would profit from further training. The training required by local staff will be provided by a training program which includes on-the-job training, courses in Kigali and scholarships abroad. RB staff includes sixteen expatriates - nine provided by the Federal Republic of Germany, five by IDA and two by Belgium. Five of them are assigned to the Planning and Engineering Department, six to the Works Department and five to the Workshop and Warehouse Department. 26. The Bank's first and third highway projects in Rwanda were for road construction. The first project financed by a US$9.3 million IDA credit (196- RW) approved in 1970 and increased through a supplemental credit in 1975 to US$18.8 million, provided for the construction of the Kigali-Gatuna road, the final link in an all weather road joining Kigali via Kampala and Nairobi to the port of Mombasa. The project was substantially completed in late 1977, having encountered many delays due to slow mobilization of the contractor, shortages of materials, poor consultant supervision, and slow bureaucratic procedures. Cost overruns resulted from the severe international inflation of 1973-74 and from currency realignments. The third project, financed by Credit 475-RW, in 1974, involved improvement to paved standards of the Ruhengeri- - 7 - Gisenyi road (60 km). It encountered problems similar to those which plagued the first highway project and was completed in June 1977. 27. The Bank's second highway project, approved in 1972, consisted of a program to reorganize and strengthen highway maintenance operations. The US$3.0 million credit (299-RW) helped finance a total project cost of US$7.2 million, increased from an appraisal estimate of US$5.1 million. Additional funds ($1.2 million) were provided for this project out of the supplemental credit for the first project (Credit 196-RW). The UNDP and the Federal Republic of Germany participated in the financing of that proj- ect. Project completion was delayed from 1976 to the end of 1977 due to slow and difficult mobilization of expatriate experts, slow delivery of equipment and vehicles, periodic fuel shortages due to frequent border closures be- tween Uganda and Kenya; and shortages of Government funds. In spite of these problems the project has been relatively successful and the experience should help facilitate the implementation of the fourth project. PART IV - THE PROJECT Background 28. A report entitled "Rwanda - Appraisal of a Fourth Highway Project" No. 1673b-RW) dated February 6, 1978, is being circulated separately. The project is in part the continuation of the second highway project (road maintenance), Credit 299-RW of April 19, 1972. Negotiations were held from December 12 to 15, 1977, and the Rwanda delegation was led by Mr. Ntirugirimbabazi, The Minister of Finance. The Project 29. The proposed project, the second phase of a maintenance program prepared by consultants (Rhein-Ruhr Ingenieur-Gesellschaft. RRI) and the Government. The first phase of this program is completed and was financed under the second highway project. The project consists of; (i) a four-year betterment program to (a) improve about 500 km of gravel roads; (b) rehabilitate about 270 km of very old and deteriorated roads; (c) upgrade about 730 km of earth roads to gravel standards; and (d) seal about 100 km of paved roads with a coat of bitumen and stone chippings; (ii) a four-year maintenance program to strengthen opera- tions on about 3,500 km per year of earth and gravel roads and to initiate routine maintenance on about 350 km of paved roads; (iii) the strengthening and expansion of the Road Branch's (RB) capacity to implement both programs through: (a) procurement of additional equipment and vehicles; -8- (b) technical assistance; (c) construction and expan- sion of workshops; (d) procurement of machine and hand tools; and (e) procurement of spare parts, fut-0d materials for the betterment program; (iv) a training program for maintenance personnel at all levels, including courses and scholarships abroad. Betterment Program 30. To prevent the further deterioration of the road network, two mechanized units will do betterment work, which involves improvement of about 500 kms of national roads on which the original grave base has completely worn off because of the lack of maintenance. Rehabilitation and upgrading of gravel roads will be carried out by two mechanized units which will construct a base course, 10-15 cm thick and 4-5 m wide. The proposed project will undertake the sealing of 100 km of paved roads, using one mechanized unit to apply a coat of bitumen and stone chippings. The betterment program will be carried out by force account. The Government originally considered engaging contractors for this work, but subsequently decided to implement the program by force account, so that the experience gained from the work can benefit RB's organization. The two improvement units will each do 50 km of improvement per year for the first two years, 65 km in the third year and 85 km in the fourth year. The two rehabilitation and upgrading units will each do 100 km in the first year, 105 km in the second, 140 km in the third, and 155 km in the fourth year. Routine Maintenance 31. The proposed Credit will provide RB with the resources to expand its routine maintenance operations from the present 2,400 km to 3,500 km. Routine maintenance of the entire earth and gravel road network will be car- ried out by one mechanized unit staffed by 250 road gangs, and equipped with 8 trucks and 3 graders. Each gang, staffed with one foreman and twelve roadmen, will be responsible for approximately 12-15 km of road, its work mainly involving patching, cleaning culverts, and clearing shoulders, slopes and ditches. The unit will reshape about 1,100 km of gravel and earth roads three times a year. Routine maintenance of 350 km of now unmaintained paved roads will be carried out by one unit of six gangs, the unit being staffed with a chief, two assistants, twelve foremen, sixty skilled workers and ninety laborers. The work will be done by labor-intensive methods and will consist of the same operations as for routine maintenance of earth and gravel roads. Routine and periodic maintenance of structures and road signs will be carried out by one unit of two gangs over the entire network. The unit, staffed with a chief, an assistant, 4 foremen, 40 skilled workers, and 60 laborers, will repair stone bedding, replace timber flooring and paint metal structures and signs. Strengthening of RB 32. To strengthen the RB and expand its capacity to implement the proposed program, the project will provide it with additional equipment and vehicles and 607 man/months of technical assistance for the betterment and - 9 - maintenance unit and workshops. Also, for the betterment program the heavy equipment section in the Kigali Central Workshop will be expanded and two small workshops in Butare and Cyangugu in the south and southwest of Rwanda will be constructed. In addition, machine and hand tools for the workshops and spare parts, fuel, materials, and staff for five mechanized units will also be provided. Technical Assistance and Training 33. The RB still needs a considerable amount of external technical assistance to carry out its functions efficiently and to train staff at all levels. The project includes an extensive training program. Theoreti- cal courses will be provided as well as on-the-job training and 72 man- months of scholarships for study abroad. The whole training program will require 84 man-months of consultant services, the construction of classrooms, and procurement of teaching aids. 34. The Government would extend ongoing contracts for technical assis- tance presently financed by IDA and UNDP under the Second Highway Project. The 607 man-months to be furnished under the project over the four years of execution is a high level of technical assistance, but the government feels that it is necessary to make a concerted effort at this time to take advantage of experience gained in the earlier project. About 75% of the total technical assistance will, however, be devoted to the betterment program, which will be carried out by force account. Of the total, IDA will finance about 227 man-months, UNDP 121, the Federal Republic of Germany 216, and Belgium 43. The cost of such assistance is expected to average about US$8,000 per man- month, including salaries, overheads, fees, housing and transport. This is comparable with costs in other African countries. This technical assistance absorbs a sizeable portion of the proposed project costs, but it will advance the Government's main objective of gradually staffing the RB and its Mainte- nance Division with sufficiently qualified local personnel. Project Execution 35. The Ministry of Public Works and Infrastructure through RB will be responsible for the execution of the project which is scheduled to begin in 1978 and to end in late 1981. The Government would be required to report on project progress on a periodic (quarterly) basis (Sect. 3.04 (a and b iii) of the Draft Development Credit Agreement) as well as provide a project completion report at the end of execution (Sect. 3.04(c) of the Draft Devel- opment Credit Agreement). RB, with the amount of technical assistance pro- posed, will be able to execute the project successfully, provided that Government follows up on measures already taken, including: (i) full implementation within RB of a cost accounting system satis- factory to the Association (Sect. 4.02(c) of the Draft Development Credit Agreement) and to ensure that separate accounts are kept to reflect the operations, resources and expenditures of RB; (Sect. 4.02(d) of the Draft Development Credit Agreement); - 10 - (ii) to give RB authority to hire, supervise and dismiss vehicle drivers and equipment operators (Sect. 4.02(b i) of the Draft Development Credit Agreement); and (iii) to simplify RB's purchase orders and payment procedures; (Sect. 4.02(b ii) of the Draft Credit Development Agreement). 36. Use of Labor-Intensive Methods: The Government considers that routine maintenance of all roads should be carried out wi%h labor-intensive methods, as is now done with about 2,500 laborers, and periodic maintenance and betterment work should be carried out with equipment-intensive methods. It also considers that investment in equipment for the proposed betterment program and in trucks to provide mobility for the routine maintenance program (labor gangs) is necessary. It is prepared to strengthen as needed its present organization in order to improve the labor-intensive techniques on operations which it now carries out. To assist the government, the Associa- tion is planning to send an expert who would, during a short mission to Rwanda, review the situation with respect to the use of labor-intensive methods and make recommendations to the Government on appropriate work methods. Following this, the Association and the Government will review the expert's recommendations and discuss what action should be taken in the light of these recommendations. In the meantime, the Government, although calling for tenders for the entire list of equipment, plans to defer purchase of equipment valued at about US$500,000 (two angle-dozers, two loaders, 2 pneumatic tired tractors and six tipper trucks) until the review has taken place. Project Cost and Financing Plan 37. The project has a total cost of US$23.7 million equivalent net of taxes and duties with a foreign exchange component of US$17.6 million equivalent. Project items include road maintenance equipment, materials, machine and hand tools, teaching materials, construction of workshops and classrooms, consultant services, and spare parts and fuel. External assist- ance would provide about 90% of the estimated total cost of the project, including 100% of the foreign cost and 57% of local cost. In addition, the Government will provide US$6.7 million for recurrent,maintenance costs. In the first year, it will provide $1.8 million (Sect. 6.01(c) of the Draft Development Credit Agreement) and, thereafter, an amount not less than $1.6 million would be provided annually. Consultations between Government and the Association will, be held periodically on th& adequacy on these amounts (Section 4.03 d, e) of the draft Credit Agreement). See also para. 22 above). - 11 - (US$ '000) Local Foreign Total % IDA 687 14,313 15,000 63.0 UNDP 260 1,040 1,300 5.5 FRG 463 1,856 2,319 10.0 Belgium 93 369 462 2.0 WFP 2,000 - 2,000 8.5 Government 2586 - 2,586 11.0 Total 61089 17,578 232667 100.0 38. The program of road betterment and maintenance has started in January 1978 and retroactive financing of up to $250,000 would be provided for expenditures made after January 1, 1978 to meet fees of consultants now on the job and to purchase spare parts and fuel needed early in the project. Procurement and Disbursement 39. Small amounts of other equipment which should be standardized with existing equipment, except for highway maintenance equipment (US$3 million) and machine and hand tools (US$160,000) will be procured through international competitive bidding, in accordance with Bank Group Guidelines. Spare parts, fuel and bitumen will be procured on the basis of prices negotiated with established suppliers. Materials for the betterment program and construction of the workshops and classrooms will be procured locally on the basis of the Government's competitive bidding procedures which are acceptable to IDA. Items costing under US$25,000 may be procured by negotiated purchase after solicitation of quotations from suppliers or contractors. The total amount of these purchases is not to exceed US$200,000. The project completion date is July 1, 1982. The proceeds of the Credit will be disbursed against: (a) 100% of the c.i.f. cost of road maintenance equipment, materials, machine and hand tools, spare parts, and fuel; (b) 70% of the cost of civil works for expansion and construction of the workshops; (c) 80% of the cost of construction of classrooms. (d) 98% of the cost of teaching aids; (e) 100% of the cost of scholarships; and (f) 100% of the cost of consultants. - 12 - Benefits and Risks 40. The main quantified benefits of the betterment program will be the savings in vehicle operating costs, which will accrue to road users. Unquan- tified benefits also include time savings and increased comfort to road users, reduced accidents, and better and more rapid access to medical facilities. Domestic freight rates can be expected to stabilize as a result of road betterment and maintenance. Since competition in the road transport sector is keen, it should be expected that producers and consumers will share the benefits accruing to those engaged in road transport. 41. In Rwanda vehicle operating costs are substantially higher than those in several neighboring countries because of the very poor road con- ditions. Steep grades and tortuous terrain result in low average speeds and high fuel consumption. Very rough running surfaces on most roads cause rapid deterioration of vehicles resulting in high maintenance and repair costs and high depreciation costs due to shortened vehicle life. Thus the proposed betterment program will help reduce substantially those components of vehicle operating costs which are very sensitive to road conditions. Most of these expected savings are likely to result in appreciable foreign exchange saving as well.. The improvement component of the project yields an economic return in excess of 150% while the return on rehabilitation and upgrading is 35%. The overall rate of return to the betterment program is in excess of 100%. 42. While the project as conceived is economically sound, there are two possible risks which have been identified. The first one involves a reduction in the benefits as a result of lack of proper maintenance follow- ing the betterment work. The other possible risk identified is that project costs could escalate as a result of a serious drop in productivity during execution. Sensitivity tests were therefore conducted assuming reductions in vehicle operating costs (v.o.c.) savings and an increase in project costs. For the improvement program, tests reveal that the large increases in its cost or decreases in benefits do not result in unfavorable rates of return. For the rehabilitation and upgrading program, tests reveal that, should the costs of this component rise by 15%, the rate of return would still be 24%. If, on the other hand, v.o.c. savings were reduced by 25%, the rate of return would still yield 14%. A 12% rate of return would be maintained even if costs of the rehabilitation and upgrading increased by 37%, while for the improve- ment component costs would have to increase by more than 250% for the rate of return to fall below 12%. Similarly benefits could be reduced by 72% to maintain a 12% rate of return for the improvement component. For the reha- bilitation and upgrading component benefits could be reduced by 27% and still maintain the 12% rate of return. - 13 - PART V - LEGAL INSTRUMENTS AND AUTHORITY 43. The draft Development Credit Agreement between the Republic of Rwanda and the Association, and the recommendation of the Committee provided under Article V, Section 1(d) of the Articles of Agreement, are being distri- buted to the Executive Directors separately. 44. Special conditions of the project are listed in Section III of Annex III of this report. 45. Additional conditions of effectiveness of the credit are: (a) The Government has secured external financing and other resources in addition to the Credit, on terms and conditions satisfactory to the Association, as shall be required for the carrying out of the project (Sect. 6.01(a) of the Draft Devel- opment Credit Agreement); (b) The Government has taken the action required to place the .workshop and Warehouse Department under the Works Depart- ment (Sect. 6.01(b) of the Draft Development Credit Agreement); and (c) The Government will provide not less than US$1.8 million equivalent for routine maintenance operations during 1978 (Sect. 6.01(c) of the Draft Development Credit Agreement). 46. I am satisfied that the proposed Development Credit would comply with the Articles of Agreement of the Association. PART VI - RECOMMENDATION 47. I recommend that the Executive Directors approve the proposed Credit. Robert S. McNamara President Attachments February 8, 1978  ANNEX I Page 1 of 2 pages COUNTRY MTA - rIm GROSS NATIONAL PRODUCT IN 1976- ANNUAL RATE OF GROWTH %Z 1972 - prices) US m 1n. 7 1972476 1976 GNP at Market Pr-I.es 595.6 100.0 6.0 7.0 Gross Domestic Investment 95.9 16.1 20.0 9.6 Gross National Saving 55.4 9.3 Current Account Balance -37.2 -6.2 Exports of Goods, NFS 120.0 20.2 12.5 3U.9 Imports of Goods, NFS 157.2 26.4 10.0 21.5 OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1976 Value Added Labor Forcel2 V. A. Per Worker US M1n. 7 M1n. % US$ Agriculture 303.7 51.6 1910 91.0 159 56.6 Industry 129.3 21.9 53 2.5 2440 868.3 Services 156.2 26.5 53 2.5 2947 1048.8 Unallocated . . 84 4.0 .__ Total/Average 589.2 100.0 2100 100.0 281 100.0 GOVERNMENT FINANCE Central Government 2 (RvF M1n.) % of GDP 1976 176 l97!629 Current Receipts 6597 11.9 7.4 Current Expenditure 12.3 . . L.2L L.1 Current Surplus 1474 2.7 0.3 Capital Expenditures 775 1.4 0.7 External Assistance (net) MONEY, CREDIT and PRICES 1972 1973 1974 1975 1976 (Million RwF outstanding end period) Money Supply 2679 3705 5155 5698 3540 Bank Credit to Public Sector 2071 2221 3017 2469 1564 Bank Credit to Private Sectors'/ 568 1041 2042 2070 2494 (Percentages or Index Numbers) Money as % of GDP 11.8 15.2 18.0 12.1 13.6 General Price Index (1970 - 100)4/ 103.6 113.3 148.5 193.1 206.5 Annual percentage changes in: General Price Index 3.1 9.4 31.1 30.0 6.9 Bank Credit to Public Sector 46.0 7.2 35.8 -18.2 1-36.7 Bank Credit to Private Sector -22.2 83.3 96.2 1.4 20.5 1/ Unallocated consists of unemployed people without occupation for health reasons, old age, etc. Statistics available refer to occupational distribution of population above 15 years, i.e., not exactly to labor force. 2/ Excluding external assistance -3/ Includes credit to official entities. 4/ Consumer price index for Kigali. Not available Not applicable ANNEX I Page 2 of 2 pages TRADE.PAYMENTS AND CAPITAL FLOWS BALANCE OF P#,MZETS MBCHAUDISE EPORTS (AVERAGE 1974-76) 1974 1975 1976 US$M1 n %. (Killions US $) Coffee 41.7 58.8 Tea 4.1 5.8 Exports of Goods, NFS 37.6 63.5 120.0 Pyrethrum 1.5 2.1 Imports of Goods, NFS 65.9 129.0 157.2 Cassiterits 8.8 12.4 Resource Gap (deficit Z -) -Wo7 l653 -77 Wolfran 4.1 5.8 Interest Payments (net) 0.4 All other comnodities 10.7 15.1 Workers' Remittances - - 2.8 - 3.3 ( Total 70.9 100.0 Other Factor Payments (net) - Net Transfers 8.5 57.9 54.1 EXTERNAL DEBT, DECEMBER 31, 1975 Balance on Current Account 19T' -TiT? -13.6 US $ M1n Direct Foreign Investmeat 3.2 3.5 5.1 Iet MLT Borrowing Public Debt, incl. guaranteed 62.4 Disbursements 4.o Non-Guaranteed Private Debt Amortization 0.b Total outstanding & Disbursed Subtotal 3.9 13.2 17.6 nEBT SERVICE I/ Caoital Grants 11,6 Other Capital (net) -0.8 13.4 -7.3 Other Itens n.e.i - - - Error anem s 7.8 - -4.0 Public Debt, incl. guaranteed 0.8 Errors and Omissions -7. 40Non-Guaranteed Private Debt Increase in Reserves (-) -6.3 -15.6 -25.0 urandind P Debtrse Gross Reserves (end year) 14.3 27.9 59.3 Total outstanding & Disbursed Net Reserves (end year) 8,9 20.5 47.8 RATE OF EXCHANGE IBRD/IDA LENDING, Zhq*j3l. 1977 (Million US $): 1972 1973 IBRD_ IDA US $ 1.00 = RwF 92.1 IBD D 1.00 = US $0.0109 0.0119 Outstanding & Disbursed 30.3 Undisbursed 29.4 Since Jan. 1974 Outstanding incl. Undisbursed US $ 1.00 2 Rwr 92.8 59.7 1.00 = US $O.O[08 1/ Ratio of Debt Service to Exports of Goods and Non-Factor Services. not available not applicable EAN February 1978 Annex 2 Page 1 The Status of Bank Group Operations in Rwanda A. Statement of IDA Credits (As of December 31, 1977) Amount US$ million Credit No. Fiscal Year Borrower Purpose IDA Undisbursed 196-RW 1970 Rwanda Kigali-Gatuna Road construction 18.8 0.7 299-RW 1972 " Road maintenance 3.0 0.1 439-RW 1974 Agro-pastoral Development 3.8 1.9 475-RW 1974 Ruhengeri-Gisenyi Road construction 6.3 0.0 567-RW 1975 Education 8.0 7.6 655-RW 1977 DFC 4.0 3.7 656-RW 1977 Agriculture CInchona 1.8 1.7 668-RW 1977 Bugesera-Est Gisaka/Migongo Mixed Farming and Rural Development 14.0 13.7 Total 59.7 29.4 B. Statement of IFC Investments In 1976, IFC made a Loan of US$535.000 for a tea factory. No other investments have been made so far. Annex 2 Page 2 (PROJECTS IN EXECUTION) Credit No. 196-RW Kigali-Gatuna Project; US$9.3 million credit of June 17, 1970; Date of Effectiveness: September 15, 1970; Closing Date: December 31, 1977; US$9.5 million supplementary credit of December 19, 1975; Date of Effectiveness: February 18, 1976 Closing Date: August 31, 1978 The project consisted of building a paved road to link Kigali with the Uganda Road system, thus reducing by 73 km the road distance to Kampala through which most Rwandese imports and exports pass on their way to the port of Mombassa. Construction works were interrupted in April 1975 because of a cost overrun amounting to about US$16.0 million, including a foreign exchange component of US$13.7 million. A supplementary IDA credit of US$9.5 million was made in 1976 of which US$8.7 million was earmarked for the completion of the Kigali-Gatuna road and the remainder to finance additional costs under the Highway Maintenance Project (see below). The cost overrun is cofinanced with a US$5.0 million loan from the Saudi Fund for Development. Due to a revision of the contracts between the Government and the contractor and the supervision consultants, savings of about US$1.0 million were made in the total cost financing of the project. These savings were used to finance fur- ther cost increases under the Highway Maintenance Project (about US$600,000) and a cost increase in the Third Highway Project amounting to about US$400,000. The road was completed in mid-November 1977, but work is still being carried out near Gatuna at the Uganda border where the road crosses a marshland. Uganda has agreed to reimburse Rwanda US$100,000 to pay for the contractor's activities on Ugandan territory but has thus far not paid. We are using our good offices with the Ugandan administration to speed up the transfer. Credit No. 299-RW Highway Maintenance Project; US$3.0 million credit of April 19, 1972; Date of Effectiveness: January 15, 1973; Closing Date: June 30, 1978 The project aimed at improving road maintenance capabilities of Rwanda in order to develop an efficient internal and external road communi- cations system. Project completion was delayed from 1976 to the end of 1977 by: slow mobilization of expatriate exports; slow delivery of equipment and vehicles and periodic fuel shortages due to frequent border closures between Uganda and Kenya; and shortages of Government funds. Reduced operations and costs overruns resulted. The government therefore maintained the road network mostly manually, and started mechanized operations only in mid-1976. The estimated total cost has increased from US$5.1 to US$7.2 million necessitating additional IDA financing of US$1.4 million (see above Kigali-Gatuna Project). The project was completed at the end of December 1977 and is to be followed by the second phase of the highway maintenance program which will be carried out under the Fourth Highway Project. Annex 2 Page 3 Credit No. 439-RW Mutara Agricultural Development Project; US$3.8 million Credit of November 29, 1973; Date of Effectiveness: September 5, 1974 Closing Date: December 31, 1979 The project which aims at the agro-pastoral development of some 48,000 ha of land in Mutara, situated west of the Kagera National Park in the north of Rwanda consists essentially in establishing a cropping settlement, group ranches, and a breeding ranch. Project implementation began about a year behind schedule because of delays in selecting a suitable consulting firm to assist in project execution. Various difficulties have since been encountered, particularly in recruiting staff and in defining the project area. In a large area, spontaneous settlement has occurred before project implementation was underway, thus making it more difficult to organize settlement as envisaged in the project. Most plots have now been allocated and the final number of farmers settled will exceed appraisal targets; how- ever, the number of group ranches established will be about half the appraisal targets as the actual average area per ranch is much above appraisal estimates for technical reasons. Following a substantial increase in project costs, from US$4.3 million to US$7.0 million, mainly as a result of world-wide price increases, an in-depth project review was carried out by RMEA to revise the project, and the project scope reduced to take into account the funds available. A follow-up project is being prepared. Credit No. 567-RW Education Project; US$8.0 million credit of June 30, 1975; Date of Effectiveness; December 1. 1975; Closing Date: June 30, 1982 The project includes the construction, furnishing and equipment of 150 workshops for about 6,000 students and of a print shop, and the provision of paper for production and distribution of text books written in Kinyarwanda. The project also provides technical assistance to the School Financing and Construction Unit (SFCS) which was established under the project and is operating satisfactorily. The SFCS will undertake all design work for the project institutions. The architect of SFCS has recently left Rwanda and an urgent replacement is being sought under the UNDP/UNESCO Technical Assistance. Construction work is progressing well for the printshop and the offices for the SFCS. One work shop has been completed, nine are nearly completed and 30 others are under construction. All the nine Rwandese print- ing technicians have returned from a training course in Tunisia including two who have attended a supplementary two-months course in France. Teaching equipment has been purchased for the first ten workshops. Annex 2 Page 4 Credit No. 655-RW Rwandese Development Bank Project; US$4.0 million; Credit of August 20, 1976; Date of Effectiveness: March 2, 1977; Closing Date: June 30, 1981 This line of credit to the Banque Rwandaise de Developpement (BRD) is intended to fill a gap in the foreign resources requirements of the only long-term financing institution in the main productive sectors in Rwanda. This project is proceeding satisfactorily; the Credit became effective on March 2, 1977. IDA has already approved projects totalling about US$2.0 million. Also, BRD has obtained additional technical assistance from Germany. Recently, the Government and BRD have inquired about the possi- bility of reallocating about US$200,000 from this Credit to finance a feasibility study for the establishment of an auditing firm in Rwanda. This proposal will be favorably considered since it had been proposed by the appraisal mission. Credit No. 656-RW Cinchona Project: US$1.8 million credit of August 20, 1976; Date of Effectiveness: March 2, 1977; Closing Date: June 30, 1982 The project which is to be carried out over a period of five years provides agricultural inputs, extension, marketing and other services to smallholders to assist in the expansion of cinchona production for export by extending the present plantations by about 900 ha. Project staff has been appointed and an expatriate cinchona expert is being hired to visit Rwanda from time to time to give advice on cinchona production. Progress is satisfactory and there are no major problems so far. Credit No. 668-RW Bugesera Est and Gisaka/Migongo Mixed Farming and Rural Development Project: US$14.0 million credit of March 31, 1977; Date of Effectiveness: November 23, 1977; Closing Date: September 30, 1982 The project consists of the promotion of mixed farming and rural development in two regions and the strengthening of the central services responsible for rural development. The project includes tsetse control, field extension and infrastructure, provision of farm inputs on credit, construction and improvement of feeder roads and water facilities, schools, and health centers, establishment of two cattle ranches and a study for an irrigation project. The project is cofinanced by BADEA (US$5.0 million equivalent for livestock development) and Belgium (US$0.9 million equivalent for water facilities). The French Government has agreed to provide seven of the nine experts required by the project. Of these, three are already in post (the Project Director and the two Regional Directors), and the first work plans have been prepared. Annex 3 Page 2 (e) Government will place and maintain RB's existing Workshop and Warehouse Department under the authority of RB's Works Department as a Division at the same level as the Maintenance Division; and (f) the Borrower has secured financing and other resources, in addition to the Credit, on terms and conditions satisfactory to the Association, as shall be required for the carrying out of the Project. (g) Government will provide not less than US$1.8 million equivalent for routine maintenance operations during 1978. Annex 3 Page 1 RWANDA Fourth Highway Project (Supplementary Project Data Sheet) I. Timetable of Key events (a)oi rto Mission February 1976 Cb) ? aonMio n: June 1976 (c) app :::1 Mission February/March 1977 (C) :December 1977 (e) flanned date oi effectiveness June 1978 IT. Agei Asoiation: -,wpleyentation Action None Ill. SpRecial Conditions (a) follow up on steps taken to give RB the authority required for the carrying out of its responsibilities, particularly (1) to gi7e RB authority to hire, supervise and dismiss vehicle dtiveis and equipment operators; and (ii) to simplify RB's procurement and payment procedures. (b) fully iaplemenL within RB a sound cost accounting system satisfactory to the Association and to ensure that separate accounts are kept according to sound accounting practices to reflect the operations, resources and expenditures of RB; (c) follow an implementation schedule and quarterly progress reporting requirements, and to prepare an evaluation report promptly after project completion; and (d) provide a minimum of US$1.6 million equivalent every calendar year during the execution of the project, starting with the year 1979. Government also undertook to exchange views with the Association on the adequacy of these amounts by October 31 of each year, starting in 1978. 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