Malawi - Infrastructure Project

Document of The World Bank FOR OFFICLAL USE ONLY Report No. P-4958-MAI MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 22.3 MILLION TO MALAWI FOR AN INFRASTRUCTURE PROJECT October 17, 1989 This document has a resicted distribution and may be used by recipienb only in the performance of t|er official duties Its cootents may not otherwise be disclosed without World Bank authorization.  Currency Equivalents Currency Unit - Malawi Kvacha (MK) US$1.00 - MK 2.60 (October 1988) US$1.00 - MK 2.73 (1989) MK 1.00 m 100 Tambala SDR 1.00 - MK 3.86 - Fiscal Year (PY) April 1 to March 31 Abbreviations and Acronyms AfDB = African Development Bank AfDF - African Development Fund DANIDA - Danish International Development Agency DRMP - District Roads Improvement and Maintenance Program DOW - Department of Water DWSF - District Water Supply Fund EDF = European Development Fund ERR - Economic Rate of Return FRG - Federal Republic of Germany GTZ - Gesellschaft fur Technische Zusammenarbeit ERR - Economic Rate of Return ICB = International Competitive Bidding JICA - Japan International Cooperation Agency KfW - Kreditanstalt fur Viederaufbau LCB - Local Competitive Bidding HOW - Ministry of Works ODA Overseas Development Administration UK - United Kingdom UNCDF = United Nations Capital Development Fund UNDP - United Nations Development Programme UNHCR - United Nations High Commissioner for Refugees USAID - United States Agency for International Development  FOR OFm CIAL USE ONLY MALAWI INFRASTRUCTURE PROJECT CREDIT AND PRC'fCT SUMMARY Borrower: Malawi Credit Amount: SDR 22.3 million (US$28.8 million) Terms: Standard, with 40 years maturity Onlending Terms: Not applicable Financing Plan: U`S$ million Government 12.7 IDA 28.8 AfDF 38.8 DANIDA 1.5 EDP 21.9 JICA 8.1 KfW 15.9 GTZ 2.9 ODA 15.4 UNCDF 5.0 UNDP 3.4 USAID 3.3 TOTAL 157.7 Economic Rates of Return: Component 2 Roads 17 Bridges >50 DRIMP >12 Water Supply 6 Borehole Rehab. 20 Public Buildings 29 Staff Appraisal Report: Report No. 7551-MAI Map: IBRD No. 21225 This document has a restricted distribution and niay be * sed by recipients only in the performance of their official duties. Its contents may not other *' i-3 disclosed without World Bank authorization.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO MALAWI FOR AN INFRASTRUCTURE PROJECT 1. I submit the following memorandum and recommendation on a proposed development credit to Malawi in the amount of SDR 22.3 million (US$28.8 million equivalent) for approval. The proposed credit would be on standard IDA terms with 40 years maturity and help finance an infrastructure project. TLe project would be cofinanced by AfDF, DANIDA, EDF, JICA, KfW, GTZ, ODA, UNCDF, UNDP, and USAID, with amounts as indicated on the preceding page. 2. Background. Throughout the 19809, Malawi has experienced significant economic difficulties caused by external shocks and internal factors, among these the closure of traditional transport routes and influx of large numbers of refugees. The difficult economic situation has placed considerable pressure on the public sector, with resultant growth in the public deficit. These developments have been accompanied by a serious deterioration of infrastructure, an outcome of management weaknesses and underfunding of infrastructure maintenance. This decline has forced productive enterprises to absorb higher costs, in turn lowering productivity and export potential. Government's Development Policies explicitly recognize the problem of providing the infrastructure necessary for economic development, while at the same time restoring fiscal discipline in line with its continuing program of structural adjustment. Accordingly, the sector policy fncuses on improving efficiency and sustainability, the latter through sound fiscal policies, increasing allocations to maintenance and recurrent expenditures and minimizing new investment. 3. The Bank Group has assisted with implementation of the sector policy through its ongoing association with the Roads Department of the Ministry of Works (MOW). Previous projects in the road sector financed improvements in the road network, in particular the main north-south road that contributed to the integration of the country. More recent projects shifted the Bank's focus to rehabilitation and maintenance through introduction of a maintenance management system and technical assitance to the Roads Department. Although progress haf been made, ongoing problems with maintenance and scarce resources mandate further improvement in the efficiency and decision-making of that depariment. In the water subsector, the Bank Group has worked successfully with the Lilongwe and Blantyre Water Boards to establish sound fiscal management and cost recovery. The project would extend these improvements to the District Water Supply Fund (DWSF) and thereby to the management of water systems in seven smaller urban areas that presently operate at a deficit. In the rural areas a large proportion of ' ireholes are not operating efficiently, and Government's policy is to rehaoilitate these boreholes and introduce a self-help scheme for  -2- maintenance. The Bank Group has not previously assisted in the maintenance of public buildings, but t7ae deteriorated state of these buildings shows a pressing need for improved maintenance and management. As management problems pervade all subsectors, the project would implement the recommendations of a recent IDA-financed comprehensive management study for further improvements in MOW's direction and management control, organizational structure, development of human resources, and provision of adequate financial and material resources to carry through planned programs. Other issues requiring resolution are the slow pace of localization of key MOW positions and the need to stimulate development of the local construction industry. Further, to reinforce the emphasis on maintenance, the project would require annual review of MOW budgets prior to their adoption. With major investments planned for DWSF, a set of financial covenants also would be needed to ensure sound fiscal management of DWSF. 4. Several cofinanciers for this project, AfDF, EDF, KfW, and ODA, have been regular supporters of the road sector since the late 1960s - early 1970s. During the 1970s, USAID also financed some major road works. In addition to IDA, contributors to the water supply sector over the last about 10 years have been AfDB, DANIDA, USAID, KfW, Canada, EECIEDF, Japan, and UNICEF. Finance for public buildings, particularly for education, agriculture and health, has been provided by USAID, EEC/EDF, AfDF, and ODA, as well as IDA. Many other agencies have contributed on a more moderate scale to the development of the three sectors over the last several years, financing not only civil works, but also technical assistance and training. 5. Rationale for IDA Involvement. The project forms an integral part of IDA's country and sector assistance strategy. IDA's participation in the project would help to ensure that public works programs and related policy changes recommended by the Association in the recent past are implemented and that further improvements in strategy, policy formulation and institution-building are pursued. 6. Project Obiectives. The main objectives of the project are to (i) strengthen the capability of MOW to carry out effective maintenance of public facilities; (ii) restore the physical condition of selected main and secondary roads, to facilitate the movement of traffic and lower transport costs; (iii) expand the existing system of district roads, to provide improved access for many additional rural people; (iv) expand the potable water supply for selected urbat centers and rural areas; and (v) rehabilitate high-priority hospitals, schools and other important public buildings so that they contribute more efficiently and effectively to the provision of public services. 7. Project Description. The project under consideration would cover MOW's activities for management improvement and training as well as maintenance, rehabilitation, and construction works over a four-year period  -3- from fiscal year 1989/90 through 1992/93. The project would thus consist of four main components: (i) MOW management improvement program (US$9.4 million); (ii) roads component (US$99.5 million); (iii) water supply component (US$39.8 million); and (iv) public buildings (US$9.0 million). The above costs include an advance from the Project Preparation Facility of US$1.5 million, which will also be financed under the project. A breakdown of costs and the financing plan are shown in Sch:Aule A. Amounts and methods of procurement and the categories of disbursement are shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations in N4Iawi are given in Schedules C and D. respectively. A map, IBRD No. 21225, is also attached. 8. Riparian Matters. The project includes construction of two new dams and raising of an existing dam by about 4.5 m. Two of the rivers to be dammed drain into Lake Malawi, an international body of water, bordered by Malawi, Mozambique, and Tanzania, and the third into Lake Chilwa, bordered by Malawi and Mozambique. Both Mozambique and Tanzania have advised Malawi that they have no objection to the proposed damming of the rivers in question. 9. Agreed Actions. During negotiations, the following main agreements were reached with the Government: (i) MOW will implement the agreed upon MOW localization plan; (ii) the Government shall consult with the Association on any new investment to be made in the infrastructure sector in each year of project implementation; (iii) the Association will review annually the adequacy of MOW's maintenance programs and budget allocations prior to the adoption of the annual budgets; (iv) MOW will by June 1990 prepare an action program for development of the local construction industry; (v) MOW will by December 1990 establish separate accounting arrangements for the water supply schemes of Zomba, Mzuzu, and Kasungu; and (vi) the Government will ensure that, in each year of project implementation, DWSF generates total revenues at a level sufficient to: (a) not later than the end of FY 1991192 cover DWSF's expenses for operation and maintenance, and depreciation or debt service requirements, whichever is higher; (b) not later than the end of FY 1993/94 generate positive net income after allowing for DWSF's expenses for operation and maintenance, depreciation, interest, and other charges on debt; and (c) maintain a current ratio of not less than 1.4. The Government agreed that the following would be conditions of effectiveness of the credit: (i) all donor agreements for subprojects to begin implementation during FY 1989/90 have been signed; and (ii) the Government has received firm commitments from donors to finance subprojects to begin implementation during FY 1990/91. 10. Benefits. Extensive benefits are expected from the strengthened management capabilities of MOW. The road rehabilitation, upgrading and resealing components will improve road conditions, and thereby reduce transport costs, enhance the reliability of transport and prevent progressive road deterioration. The extension and improvement of DRDIMP roads will afford rural populations better access to markets, supplies and  -4- public services. The improved rural transport scheme will help to stimulate economic development in the rural areas. The urban water supply component will expand the capacity of seven town systems to meet the rapidly growing demand, as well as strengthen the institutional capacity of DWSF and facilitate cost recovery for the larger systems. The rehabilitation of boreholes and construction of gravity-fed schemes w.11 increase the water supply in rural areas and will also assist in meeting the needs of the refugees. The rehabilitation of public buildings will improve their utility, reduce maintenance costs and avoid the high cost of premature reconstruction. The road maintenance and improvement component is expected to have an Economic Rate of Return (ERR) of 172, bridge reconstruction an ERR of at least 502, DRIMP road expansion and improvements an ERR of not less than 122, urban water supply an ERR of 62, borehole rehabilitation an ERR of 20?, and public buildings an ERR of 292. 11. Risks. A principal risk is the possibility that the Government's financial allocations for maintenarie of infrastructure facilities may be inadequate. The Government's commitment to this project, which helps to implement key development policies, should minimize this risk. For urban water supply, a possible risk is that DWSF will not be able to generate sufficient revenues due to the Government's inability to authorize necessary tariff increases. However, the Government has recently (April 1, 1989) taken steps to improve the financial standing of DWSF through its tariff increase of 20Z, an increase in line with financial targets specified in the financial plan. 12. Recommendation. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recommend that the Executive Directors approve the proposed credit. Barber Conable President Attachments Washington, D.C. October 17, 1989  Schedule A HALAWI INFRASTRUCTURE PROJECT Estimated Cost and Financing Plan Estimated Costs Local Foreign Total