Chile - Highway Maintenance Project

i !1!> vR E S T R I C T E D Report No. P (IDA) 4 This report'was prepared for use within the Association. It rmay not be pub- lished nor may it be quoted as representing the Association's views. The Association accepts no responsibility for the accuracy or completeness of the contents of the report. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF CHILE FOR A HIGHWAY PROJECT June 19, 1961  INTERMNATIONAL DEVELOPIMENT ASSOCIATION REPORT END RECOIIMENDATIONS OF TEE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPIiENT CREDIT TO THE REPUBLIC OF CHILE FOR A HIGHWAY PROJECT 1e I submit the following Report an.d Recommendations on a proposed Development Credit, for an amount in various currencies equivalent to '19 million, to the Republic of Chile, to finance the foreign exchange cost of a highway projectO. PART I - INTRODUCTION 2. The Government of Chile has asked for financial assistance Lor its highway program. I recommend that this assistance be in the form of a Development Credit for the construction and betterment of a road network which would open to year-round traffic the main secondary roads in the ten provinces of southern Chile, and in the form of a loan to develop the high- way maintenance program of Chile. I am therefore concurrently submitting to the Executive Directors of the Bank a recommendation for a loan of $6 million for a highway maintenance project. 3. The Bank has made eight loans to Chile totalling US$ 106.6 million equivalent, of which $ 60.7 million were disbursed as of May 31, 1961. The net amount held by the Bank was i) 92.9 million. The proposed Develop- ment Credit wTould be the first to Chile. PART II - ECONOMIC JUSTIFICATION FOR AN IDA CREDIT TO CHILE 4. A report (WH-105a) on the "Current Economic Position and Pros- pects of Chile" was distributed on June 12. That report notes Chilets effective stabilization efforts, its sound management of external debt and its relatively favorable long-tenn prospects. However, it also stresses the fact that Chile is still faced with a grave fiscal problem, that domestic savings must be further increased, that the burden of ex- ternal debt service in the next several years is very heavy and that the volume of external capital required to meet the investment goals of the Government's new 10-year development program is very large. 5. That program places particular stress on increasing the level of domestic savings, and on investment in agriculture and transport, the two sectors crucial to economic growith and thus far relatively neglected.,  2 Achievement of the goals of the program would result in substantial in- creases in national income and the standard of living. A Bank mission is now in Chile, on the invitation of the Government, to review and assess the program. However, it is clear that whatever the result of that as- sessment, Chile must obtain substantial external capital in order to achieve an adequate rate of' income growth. 6. As of May 1, 1961, Chilets external debt totalled $632 million equivalent; Chile also owed $42 million repayable in Escudos and an ad- ditional lt66 million to the TIF. The external debt has increased by $150 million in the past 18 months; however, these additions have been on long- term while the debt amortized in the same period has been largely short- and medium-term. This change in the conposition of debt reflects the con- tinuing policy of the Government to shift its borrowing to a long-term basis and to keep short- and medium-term borrowing to a minimum. Never- theless, debt service remains very high. In 1961 it will require about 25% of estimated net foreign exchange earnings, and just a little less in 1962. These heavy service payments should be manageable largely be- cause of the grants and loans on non-conventional terms which various govermnents are making to Chile following the earthquakes of 1960. 7. In the next several years Chile will be able to service its debt and still undertake the investments needed to reconstruct the earth- quakes damaged sections of Chile and to maintain an adequate rate of growth only if foreign capital imports permit the importation of goods in excess of the amount which export earnings would make possible. If the capital required merely to offset amortization payments were to be obtained on conventional terms, Chile's debt service wiould, even after 10 years, require around 17% of foreign exchange earnings. Given a continued policy of stabilization, the vigorous pursuit of policies to i.ncrease public savings, and a sound pulDlic investment progr3m, Chile should be able to support a fairly high level of' debt service, and hence incur new con- ventional debt. However, a substantial part of the new external capital w.hich Chile needs must be obtained on non-conventional terms if external debt payments are to be reduced to, and kept at a less burdensome level. I conclude that the economic situation and prospects of Chile justify a blend of IDA and Bank financing. PART III - BACKGROUND AND DESCRIPTION OF THE PROPOSED CREDIT Background 8. The Project now under consideration was prepared jointly by the Ministry of Public Works, the Ministry of Agriculture and the Development Corporation (CORFO) as part of the 10-year development program of the Government and as an essential part of its program of agricultural develop- ment. It was completed after the May 1960 earthquakes, which caused  -3 extensive damage to southern Chile. In December 1960, a mission visited Chile to appraise the Project. Additional data was subsequently submitted by the Government in support of the Project, in April and May. 9. Negotiations began on June 9, 1961, with a Chilean Mission con- sisting of Mr. Ernesto Pinto, Minister of Public Works, Mr. Ruperto Casa- nueva, Director of Planning, Ministry of Public Works and Mr. Jose Zabala, CORFO representative in Nqew York. Description of the Proposed Credit l0o Purpose: To assist in financing the cost of: (a) new construction or relocation of about 950 km. of roads, the betterment of about 2,500 km. of existing roads, the paving (mostly asphalt) of about 400 klm. and the reconstruction of a large bridge all in the 10 provinces of southern Chile. (b) engineering services for the preparation and execution of the work under (a) and for the reorganization of the higlhway maintenance system. Borrower: The Republic of Chile. Amount: The equivalent in various currencies of $19 million. Term and Amortization: 50 years; 80 semi-annual repayments of prin- cipal: from December 1, 1971, one-half of 1% of the principal semi-annually for 10 years and 1-1/2% semi-annually thereafter to June 1, 2011. Service Charge: 3/4 of 1% per annum on the principal amount disbursed and outstanding. Payment Dates: June 1 and December 1. PART IV - LEGAL INSTRUM ENTS AND LEGAL AUTHORITY llo Attached is a draft Development Credit Agreement between the Republic of Chile and the Association (No. 1). Development Credit Regu- lations No. 1 dated June 1, 1961 would apply.  120 The following provisions of the draft Agreement are of' special interest: (a) Section 2.03 (i) of the Agreement entitles the Borrower to withdraw from the Credit Account a percentage of the amounts expended by the Borrower for goods required for carrying out Part A of the Project. The agreement on the percentage is set forth in a letter which is attached (No. 2), (b) The provisions of Article IV (Particular Covenants) of the draft Agreement follow in substance the normal pattern of covenants between the Bank and its members for projects of this kind except that no provision is made for a negative pledge on the Borrower's assets. 13. The recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement of the Association is attached (No. 3). 14. It is expected that the Development Credit Agreement will be submitted to the Chilear. Congress for approval. PART V - APPRAISAL OF THE PROPOSED CREDIT The Project 15. A detailed appraisal of the Project /TO-283a/TO(IDA)3a7 is attached (No. 4). It shows that the Project is well conceived and that the invest- ment required to carry it out is fully justified by the expected economic benefits. 16. The lack of an adequate road network in the southern provinces of Chile was singled out in the joint Bank-FAO mission report of 1952 as one of the major factors retarding the progress of agriculture in the southern provinces of Chile -- the main agricultural area of the country. Development of the region constitutes an essential requirement for Chilets growth and stability. Chile is heavily and increasingly dependent on the importation of foodstuffs. The low productivity of agriculture and high cost of distribution of farm products have brought constant pressure on internal food prices. Low incomes in agriculture have in turn limited the market for industrial products. 17. The Project is designed to provide an all-weather road system in the ten provinces of the southern zone. The roads, which were selected in accordance with their economic importance, will provide connections between the main producing areas and consumption and processing centers. They will permit the marketing of production all year around, eliminating undue carry-over and consequent losses, and will effect large economies  -.5 in the costs of shipment; they will also encourage production, which will be given additional incentives through the general agricultural development program of the Government. The ten provinces suffered most of uhe damage caused by the earthquakes of May 1960. IWhile only part of the construction work included in the Project represents earthquakes reconstruction, the economic activity which the execution of the Project will stimulate and the benefits it will provide in a region whose over-all economy has been harshly affected by the disaster, are particularly importante. Cost Estimates and Sources of Funds 18. The estimated cost of the Project is about US4 56.5 million equivalent. This estimate is based upon preliminary studies of the roads in the Project. Detailed estimates of quantities and costs are available for some but not all of the roads. This estimate includes a 20% contin- gency for possible increases in quantities and 10% for possible increases in local currency cost; these are considered adequate. 19. Of the total cost, the foreign exchange component, equivalent to US! 19 million, would be financed by the Credit. The remainder, equiv- alent to about US$ 37.5 million, would be provided by the Chilean Govern- ment. The Government would, under the Credit Agreement, commit itself to provide these funds. Legislation passed in 1959 eliminated the rigid earmarking of funds and allows the Government to make the necessary al- locations with flexibility. Execution 20. The construction w,,Tork in the Project would be carried out under contracts awarded on the basis of international competitive bidding. The technical staff of the Highway Department is generally capable. Because of the shortage of staff and lack of experience in certain techniques of road construction, the Government agrees to engage engineering consultants to assist in the execution of the Project. PART VI - CO1PLIAN\CE ITITH ARTICLES OF AGREIIENT 21. I am satisfied that the proposed Development Credit would comply with the Articles of Agreement of the Association. PART VII - RECOTIENDATIONS 22. I recommnend that the Association make available a Development Credit to the Republic of Chile, in an amount in various currencies equiv- alent to $19 million, for a total term of 50 years, with service charges  at 3/4 of 1% per annum, and on such other terms as are specified in the attached draft Development Credit 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 19, 1961