Argentina - Highway Construction and Maintenance Project

FILE C R E STR IC TE D CUP @Y RRepo r t No. P-255 This report was prepared for use within the Bank. It may not be published nor may it be quoted as reprosenting the-Bank's views. The Bank accepts no responsibility for the accuracy or completeness of the contents of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE ARGENTINE REPUBLIC FOR. A HIGHWAY PROJECT June 21, 1961  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECONMENDATIONS OF THiE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE ARGENTINE REPUBLIC 1. I submit the following report and recommendations on a proposed Loan in various currencies, equivalent to '$48.5 million, to the Argentine Republic to help finance the foreign exchange cost of a highway construction and maintenance project. PART I - HISTORICAL 2. While this would be the first loan that the Bank has made to Argentina, it has had an active program of technical assistance there, having served as Executing Agency in carrying out a U.N. Special Fund survey of Argentina's power facilities and now acting as Execu- ting Agency of a similar survey of the transportation system. These surveys are providing the basis for programs of investment in the fields of power and transportation. 3. The final report of the power survey mission was delivered to the Government in July 1960. Its principal conclusions were: that the most urgent task in the field of power was to provide adequate energy for the Buenos Aires area, in which most industry and commerce and one-fourth of Argentina's population is concentrated and which has long suffered from a serious power shortage; and that this could best be accomplished by the prompt completion of the Dock Sud thermal power plant. The Bank is reviewing a proposal of the Government for financing the completion of the Dock Sud plant and for consolidating and rationalizing the power facilities in the area. 4. The Transportation Planning Group is now engaged in formula- ting long-range recommendations for the coordinated development of rail, road and water transport and its report is expected to be completed by the end of 1961. An interim report containing recommenda- tions on the Government's emergency program for rehabilitating the railroad and highway systems was delivered to the Government last January, and the Government's programs for investment in these fields have been revised to follow the consultants' recorLmendations. 5. The Bank has been asked to finance part of the investments for railway rehabilitation recommended by the Transportation Group. However, the rehabilitation of the railroad system will require not only investments, but more importantly improvements in organization, administration and financial practises and the closing of a substan- tial number of lines. Prompt action is important since the railroad situaticnis a grave threat to the transportation requirements of the economy and is the most important single factor responsible for Argentina's difficult fiscal problem. The Government is now beginning  - 2 - to grapple seriously with this situation. I have informed the Govern- ment that I would be prepared to recommend that the Bank consider a first loan for railway rehabilitation when the Government has adopted an effective program for remedying the railways' principal shortcomings and has taken substantial steps towards carrying it out. 6. Yeanwhile, in February 1961 the Argentine Government reques- ted that the Bank finance a portion of the 10-year highway program part of which is also being financed by the U.S. Export-Import Bank and Development Loan Fund. A Bank mission visited Argentina in March to explore the bases for a highway loan, In Nay missions visited Argentina to review economic conditions and prospects and to appraise a specific project for highway constraction and maintenance. That project is the subject of the proposed Loan. 7. Negotiations of the proposed Loan began in Washington on June 12, 1961 with Mr. Carlos de la Barra, Director General, Direccion Nacional de Vialidad Nacional, representing the Borrower. PART II - DESCRIPTION OF TiE PROPOSED LOAN 8. Borrower: The Argentine Republic. Amount: The equivalent in various currencies of $48.5 million. Purpose: To finance the foreign exchange cost of the reconstruction and improvement of a number of road sections, totalling about 2,600 km., and of maintenance equipment and spare parts. Term and Amortization: 16 years; 25 semi-annual installments from July 15, 1965 to July 15, 1977. Interest Rate: To be determined. Commitment Charge: 3/4 of 1% per annum. Payment Dates: January 15 and July 15. PART III - LEGAL INSTRUMENTS AND LEGAL AUTHORITY 9. Attached is a draft of the Loan Agreement between The Argentine Republic and the Bank (No. 1 ) providing for the proposed Loan. The draft Loan Agreement generally follows the form of the Bank's loan agreements for road projects except as indicated below. Also attached is the report of the Committee provided for in Article III, Section h (iii) of the Articles of Agreement of the Bank (No. 2).  - 3 - 10. The standard withdrawal provisions in the Loan Regulations have been modified to permit disbursenents from the Loan Account to be made on the basis of a percentage to be agreed from time to time between the Borrower and the Bank representing the astimated foreign excharige component of the cost of construcbion and reconstruction of the roads included in the Project. The agreement on the percentage is set forth in a letter which is attached (No. 3). 11. The Goverrnent of Argentina is authorized to incur the proposed loan under Law No. 15275 of February 22, 1960. PART IV - APPRAISAL OF TME PROPOSED LOAiN Justification of the Project 12. A detailed appraisal of the Project (TO-286a) is attached (No. 4 ). The Project, which is part of the country's 10-year highway program, is designed to improve about 2,600 km. of some of the country's most important highways. The roads included in tiie Project are located in different parts of tne country, from Patagonia to the northernmost part of Argentina. T:ie maintenance equipment to be financed under the Loan would be used to improve n,aintenance facilities throughout the country. 130 Inadequate means of transportation are presently hampering Argentina's economic growth. Because the Argentine railways have not been able to provide adequate service, an increasingly heavy burden has fallen on the country's highway system, which was not designed for heavy trudk traffic, and on the road maintenance organization, which is inadequately equipped to meet the heavy demands now thrust upon it. The Project will make an important contribution to Argentina's road system bothi through rcconditioning and upgrading of existing roads and tharough improved maintenance. The investment required to carry it out is fully justified by the economic benefits. The savings resulting from longer life and faster turn-around time of all types of road vehicles and the savings in operating costs resulting from lower fuel consumption and reduced wear and tear of vehicles and tires have been analyzed by experts of the Transport Survey and by independent consul- ting engineers retained by the Argentine Government, and will be substantial. The benefit-cost ratio is estimated by 1970 to exceed 2 to 1 in most cases and to be well over 10 to 1 for a number of roads. Execution 114. The Project will be carried out by the Direccion Nacional de Vialidad, an autonomous government agency. The work will be executed by contractors under unit-price contracts resulting from international competitive bidding. Only a few foreign contractors are working on the program at present, but more have shown interest in recent biddings and are likely to be attracted because of the larger size of contracts to be awarded.  -4 - Economic Situation 15. A "Miemorandum on Argentina's Economic Position and Prospects" (R 61-60), distributed on June 20, confirms thc. appraisal of the last economic report-(R 60-78). 16. The immediate objectives of the stabilization program, which was initiated in December 1958, have been achieved. The balance of payments is in equilibrium and the price level has been relatively stable for more than a year. In contrast to 1959, when national produc- tion fell by almost 57e0 as a result of the difficult adjustments accom- panying the early phase of stabilization, 1960 was a year of expansion: total ouitput increased by over 4% and industrial output by over 9<O. Prospects for continued expansion are good. The outloo! for an increase in exports also remains favorable. 17. The budgetary situation and the foreign debt remain as two major problems. The Central Governmient's cash budget continues to show a substantial deficit, which this year is expected to approximate one- fourth of total revenue. It is, however, being financed increasingly from non-inflationary internal sources. Practically the entire deficit results from the operations of the state enterprises, especially the national railways and the Buenos Aires Transport system. The Government has announced its determination to reduce these deficits as quickly as possible and has already begun to carry out a broad program to strengthen the financial position of the railroads. 18. Annual service payments on Argentina's present public external debt are high. Even after tihe recent stretch-out of some short-term credits, annual debt service ranges between p220 million and .280 million through 1964 and will absorb 20$ or more of gross annual foreign excnange earnings at least through 1963. Tnis burden, however, reflects the terms rather than the level of indebtedness. Some ;$900 million of the present debt of roughly n1,300 million equivalent is scheduled to be repaid within the next five yrears. The relatively large amounts of new borrowing now under active consideration by Argentina would have the effect of extending the average maturities rather than increasing the over-all level of debt. With good phasing of new debt commitments, and with the continued good economic and financial management which would enable the country to realize its substantial growth potential, Argentina should be able to manage the substantial borrowing now contemplated. Prospects of Fulfillment of Obligations 19. The highway agency should have no difficulty in organizing and carrying out the Project with the assistance of consulting engineers whom the Government has undertaken to employ. The Government would agree, and should be able, to make available sufficient amounts each year to cover the local currency costs of tne Project. I consider that the Government can provide tne local currency equivalent of service on  - 5 - the Bank Loan and that Argentina should be able to provide the foreign exchange required to service this Loan in addition to its other obligations. PART V - COM1PLIANCE WITH ARTICLES OF AGREEMENT 20. I am satisfied that the proposed Loan would comply with the Articles of Agreement of the Bank. PART VI - RTECOn:ENDATIONS 21. I reconmend that the Bank make a Loan to the Republic of Argentina in an amount in various currencies equivalent to :.18.5 million for a term of 16 years including a grace period of four years, with interest (including commission) at per annum and on such other terms as are specified in the attached Loan Agreement and that the Executive Directors adopt a Resolution to that effect in the form attached (No. 5). Eugene R. Black President Washington, D.C. June 21, 1961