Honduras - Highway Construction Project

R E S T R I C TE D (ALE COPY R e p o r t N o. P-t6 This report was prepared for use within 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 the PROPOSED LOAN to THE REPUBLIC OF HONDURAS for a HIGHWAY CONSTRUCTION PROJECT May 1, 1958  INTMRNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECONMINDATIONS OF THE PRESIDENT TO THE EXECTUIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF HONDURAS FOR A HIGHWAY CONSTRUCTION PROJECT 1. I submit herewith the following Report and Recommendati.ons on a proposed loan in an amount in v&rious currencies equivalent to $5.5 million to the Re- public of Honduras to finance the foreign exchange costs of a highway construc- tion project. PART I - HISTOFICAL 2. In 19.5h, at the request of the Honduran Government, the Bank assisted in the creation of a National Economic Council and since 1955, it has staticned a Resident Representative in Honduras to cooperate with the Council and assl.<+t it in its wrok,. 3. In December 1955 the Bank made a ti4.2 million loan to financo a program of hlighway maintenance. The loan also financed the cost of preliminary engineering plans for highways included in the project to be financed by the proposed loan. 4. A preliminary 5-year program of economic development (1958-I962) was prepared by the Council and presented to the Bank for study and comment in September 1957. Within this program, highway construction has highest priority. At the end of March 1958, a Bank mission visited Honduras, reviewed the high- way plans and worked out the present project as the principal next step in the Honduran highway p.rogram. 5. The United States Development Loan Fund has indicated its interest in making a supplementary loan to cover the local currency costs of the oroject. This loan would have the same length as the Bank loan and interest is expected to be 3-1/2% per annum. 6. If the proposed loan is made it would increase the total amount of Bank loans in Honduras to $9.7 million net of cancellations and refundings. The Bank has to date made only one loan to Honduras. Its status as of March 31, 1958 was as follows:  - 2 - Borrower Purpose Amount Government Highway Maintenance $ 4,200,000 Amount Sold (of which $239,OCO has been repaid) 872,000 Held by Bank Includes $2,108,000 not yet disbursed $ 3,328,000 7. Another project which may come up for active consideration in the Bank in the near future is a small power project for Tegucigalpa, the capital city of Honduras. 8. Negotiations took place in April rith a Honduran mission consisting of Messrs. Fernando Villar, Minister of Finance; Roberto Martinez, Hin ster of Communications and Public Works; Roberto Ramirez, President of the Gentral Bank; Jorge Bueso, Secretary of the National Economic Council; Rafael Callejas, Vice President of the National Development Bank; and Dr. Geleo Davila, Honduran Ambassador to the United States. PART II - DESCRIPTION OF THE PROPOSED LOAN 9. The proposed loan would finance the foreign exchange cost of ccnstruct- ing two highways; of constructing access roads, bridges and culverts on a third to bring it to all-weather standards; and of preparing final engineering designs for extending the latter road to the El Salvador border. 10. The loan would have the following characteristics: Borrower: The Republic of Honduras. Amount: The equivalent, in v?.rious currencies, of $5,500,000. Term: The Loan would be for a period of 20 years, amortized by semi-annual installments from March 1, 1961 to March 1, 1978.  3-3 Interest Rate: 5-3/8% per annum, including 1 per cent commission. Commitment Charge: -3/4 of one percent per annum. PART III - LEGAL INSTRUMNENTS AND LEGAL AUTHORITY 11. Attached is a draft Loan Agreement between the Bank and the Republic of Honduras (No. 1). The draft Loan Agreement conforms generally to the normal pattern of the Bank's loan agreements. Attention is specifically drawn to the following provisions: (a) The effectiveness of the Bank Loan is made conditional upon the effectiveness of an agreement between the borrower and the Development Loan Fund or some alternative source satisfactory to the Bank, providing for funds in the amount of $5,000,000 to cover the local currency costs of the project (Section 8.01(a)). Should funds from the loans of the Bank and the Development Loan Fund, or alternative source prove inadequate to cover the full cost of the project, the Borrower will make arrangements to provide the balance (Section 5.01(f)). (b) The Loan amends the Highway HIaintenance Loan Agreement (135 HO), as follows: The highway maintenance program is extended for an additional year and one-half. Defaults under the new loan would be ground for suspension, cancellation or prematuring of the Highway iMaintenance Loan (135 HO)(Article VI). Default under the Highway Maintenance Loan is ground for suspending, cancelling or prematuring the new Loan (Article VII). (c) To ensure that resources will be concentrated upon the efficient execution of the project and of the program provided for under the Highway Maintenance Loan Agreement, the Borrower covenants to exercise reasonable restraint in the undertaking of additional highway work (Section 5.09). This limitation is more specifically defined in a letter from the Government of Honduras (No. 2). 12. Before the Loan Agreement becomes effective, it is to be ratified by the National Congress of Honduras. PART IV - APPRAISAL OF THE PROPOSED LOAN 13. A detailed appraisal of the project, T.O. 170a is attached (No. 3).  14. A principal factor in the slow development of the Honduran economy has been the lack of an adequate transportation system. The Highway Main- tenance Loan of December 1955, which provided for a program of highway repair and maintenance, was a first step toward remedying this situation. Besides providing for the acquisition of maintenance equipment, materials, shops and training facilities, the Loan provided for reorganization and strengthening of the Highway Department in the Ministry of Public Works. 15. The present project is a second step in the creation of a satisfactory national highway system for Honduras. It is part of a larger program of highway development currently being undertaken by the Honduran Government. 16. The roads included in the project are all essential links in the creation of a national highway network and are indispensable to development of the country's economy. (a) The proposed highway from Bufalo to Puerto Cortes will provide an all-weather road connection between Hondurast principal port on the north coast and the country's d_velop- ing road network. Puerto Cortest only connection withi the interior is by means of a single-track railroad extend:.ng for only 95 kme. and a rough road connection usable on.y in good weather. The new road will also connect the por+ wTith the San Pedro Sula area, the most important industrial and agricultural region of Honduras; with the rich Western agricultural region to be opened up by the Western Highway; with Tegucigalpa, the capital; and via the Southern Highway, with the Inter-American Highway on the Pacific coastal plain and the Salvadorean road network. (b) The existing part of the Western Highway serves one of the most densely populated areas of Honduras and a potentially productive agricultural region. Development of this region is being held back by the lack of a reliable all-year connection with the country's principal market and port of export. When the necessary bridges and culverts have been installed, traffic along this road can be expected to in- crease. (c) The Southern Highway is currently one of the most important traffic arteries in Honduras, being the only means of communi- cation from the Pacific coast to Tegucigalpa and the interior. The paving of this road is essential to cope wzith the large and steadily increasing volume of heavy truck traffic in this part of the country.  (d) Preliminary engineering s tudies of the Western Highway extension were carried out under the earlier Highway Maintenance loan. These studies, together with recent economic information, indicate the feasibility and de- sirability of proceeding with detailed engineering plans at this time. Procurement 17. The construction work in the project will be carried out by con- tracts awarded on the basis of international competitive bidding. Economic Situation 18. The report on the Current Economic Position and Prospects of Honduras (te