Peru - Second Road Construction Project

RESTRICTED F!! F ('(WE y R@C Report No. P-446 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF PERU FOR LA OROYA-AGUAYTIA ROAD PROJECT August 20, 1965  INTERNATIOiAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT ATD RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF PERU FOR IA OROYA-AGUAYTIA ROAD PROJECT 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to $33 million to the Peruvian Government for the construction of La Oroya-Aguaytia road and consulting services. PART I - INTRODUCTION 2. The Government of Peru has asked the Bank to finance part of the cost of the construction of La Oroya-Aguaytia road and of various consulting services. Bank missions went to Peru to appraise the pro- ject in August 1964 and in February and May 1965. The background of the request and the history of the three previous Bank road loans are described briefly in paragraphs 8 and 9 below. 3. Negotiations for the loan took place in TWashington from June 21 through July 1, 1965. The Government was represented by Mr. Felipe Vera La Rosa, Director of Highways at the Ministry of Public Works, and Mr. Jorge Pflucker, Financial Coordinator of the Ministry of Public Works. Mr. Pflucker was designated to represent the Peruvian Ministry of Finance. Further discussions were held throughout July with the Highway Department and their consultants to finalize the project cost estimates. 4. The proposed loan would increase the total of Bank lending to Peru from $149.3 million to $182.3 million. The status of the previous Bank loans as of July 31, 1965 is sumarized below: $ million Total loans, net of cancellations 149.3 of which repaid 28.3 Balance outstanding 121.0 Amount sold 13.3 of which repaid 8.0 _ _3 Net amount held by the Bank 115.7  _2- A discussion of the loans for which there have been delays in disbursements is contained in paragraph 5 of the "Report and Recom- mendation of the President to the Executive Directors on a Proposed Loan to the Republic of Peru for the San Lorenzo Irrigation Project", which was sent to the Executive Directors on April 12, 1965 (P-h25). The only change worth recording which has occurred since then is that last June the Peruvian Corporation submitted to the Bank and Eximbank a plan of financial reorganization. The document was accom- panied by proposals for several specific measures to be taken by tlle Peruvian Government to strengthen the financial position of the Cor- poration. Discussions are now under way with the Peruvian Government and the Corporation. PART II - DESCRIPTION OF THE PROPOSED LOAN 6. Borrower: Republic of Peru Amount: $33 million equivalent Purpose: To help finance: a) the construction and reconstruc- tion of the 486 Km. La Oroya- Aguaytia road; b) the employment of consultants to continue to render advisory ser- vices in the administration of the Highway Department; c) the preparation of further road studies. Term and amortization: 25 years (including six years grace); 39 maturities beginning August 15, 1971 and ending August 15, 1990. Interest rate: 5 1/2% per annum Commitment charge: 3/8 of 1 per annum PART III - THE PROJECT 7. A detailed appraisal of the project is attached (TO-481a).  - 3 - 8. The major portion of the proposed loan would be used for construction and reconstruction work on the 486 Km. portion of the Carretera Central which goes from La Oroya to Aguaytia. The northern- most section of the Carretera Central, from Aguaytia to Pucallpa is being built with part of the proceeds of the $5.5 million Bank Loan of 1960 (271 PE). 9. Besides the 1960 loan, the Bank made road loans to Peru in 1955 (127 PE) and 1961 (300 PE) for $5 million and $10 million res- pectively. Both loans, which were intended primarily for the pur- chase of equipment to strengthen the road maintenance system, have been utilized effective'y by the Highway Department. The second of these loans was also used to finance an important group of road studies, including the studies and final engineering for the present project, and a general highway study which was carried out by consultants and which has indicated the main lines of the present National Higlway Plan. In addition, in October 1964, the Bank agreed to provide Peru with $300,000 as technical assistance to make feasibility studies for four high priority roads in various parts of the country. 10. The proposed highway La Oroya-Aguaytia will provide the missing section in the all-weather road link between the Lima-Callao area and Pucailpa on the Amazon river system. The principal highway in Peru is the 2,750 Km. north-south Panamerican Highway along the arid coastal plains. Of the three planned major east-west penetration roads, the Central Highway, to which the proposed road section La Oroya-Aguaytia belongs, is by far the most important. From Lima, the capital and the major industrial and commercial center of the country, the Central Highway cli:bs the western slopes of the ^ndes and reaches its highest point at 4,800 meters above sea level shortly before La Oroya, one of the largest Peruvian copper mining centers. Then through high mountain valleys, the road descends until it reaches Pucallpa on the Imazon river. 11. The project will sharply reduce transport costs on one of the mosttravelled roads in Peru and will permit substantial increases of traffic the year round. It would also open up new lands to farming settlement, stock raising and lumber exploitation, thereby helping to relieve some of the population pressure existing in the Andes. 12. The proposed loan makes provision for the continuation of the advisory services which have been given to the Highway Department under the 1961 loan 300-PE. The consultants have oeen successful in organizing the maintenance and equipment divisions as well as in assist- ing in traffic engineering and planning. The terms of reference of the consultants would now be broadened to include assistance to the Highway Department in the execution of the large National Highway Plan for which Peru is expected to seek substantial external financing.  13. In addition, the proposed loan makes provision for feasibility studies on and final engineering of various roads which will be selected by mutual agreement. The final engineering program will include the roads for which feasibility studies are being made with the proceeds of Loan 300 PE and with the recent $300,000 Bank technical assistance operation, as well as high priority roads to be selected according to the recommendations of the National Highway Plan. 14. Finally, the proposed loan would provide funds for a study and evaluation of the Peruvian system of road users' charges with a view to developing new sources of finance for Peru's highway investment program and, by increasing the portion of road costs borne by the users, aci-ieving a better balance in the competitive position of the various modes of transportation and types of vehicles. The Peruvian Government will complete this study within the next six months and establish a timetable for implementation of the resulting recommienda- tions. Arrangements for financing 15. The total cost of the project is $55.6 million equivalent of which $51.5 million for road construction including contingencies and engineering, and $4.1 million for advisory services to the Highway Department and for road studies. The proposed Bank loan would provide about 60% of the total cost a-nd Peru would supply the remaining 4W%. The foreign exchange component is estimated at 45-50% of construction costs and at about 60% of the cost of road studies. In the light of Peru's internal effort to finance its public investment program, the proposed cost sharing arrangement appears reasonable. Procurement 16. Construction would be carried out by contractors under unit- price contracts awarded on the basis of international comoetitive bidding. It is envisaged that the project will be let in seven con- tracts. Bidding documents will be prepared by consultants with the assistance of the Ministry of Public Works. Construction work will be supervised by consultants, who will engage a number of Peruvian engineers for training purposes. PART IV - LEGAL IINSTRUM$ENTS AND AUTHORITY 17. The Loan Agreement is being circulated separately. In addition to covenants normally included for road projects, the Loan Agreement obliges Peru to continue the maintenance program initiated under pre- vious loans (see Section 5.03) and to limit the dimensions and axle-  loads of vehicles using the highway system (see Section 5.10 and letter re Implementation o.' Traffic Laws). The agreement concerning the review of the system of road users' charges is contained in the letter covering Local Funds and Road Users' Charges. This letter and the letter on the Implementation of Traffic Laws are being circulated sep- arately. 18. The report of the Committee provided for in Article III, Sec- tion 4(iii) of the Articles of Agreement is being circulated separately. PART V - ECONOMIC SITUATION 19. A report on the economic position and prospects of Peru was dis- tributed to the Executive Directors on Harch 3, 1965 (WH-143a). When thOp loan to the Banco de Fomento Agropecuario was presented to the Executive Directors on May 18, 1965, the statement was made that the Peruvian authorities had taken measures to reduce bank liquidity in order to counteract increasing inflationary pressures. There has been no major change in the situation since then. The Bank mission wbi-ch visited Peru in spring this year to review the Peruvian Public Invest- ment Program is still preparing its report. PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT OF THE BANK 20. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECOMMENDATION 21. I recommend that the Executive Directors adopt the following resolutioln: RESOLVED: That the Bank shall grant a loan to the Republic of Peru,in an amount in various currencies equivalent to thirty three aillion United States dollars (US$33,000,000), to mature on and prior to August 15, 1990, to bear interest at the rate of five and one-half per cent (5M0) per annum, and to be upon such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in the form of Loan Agreement (La Oroya_Aguaytia Road Project) between the Republic of Peru and the Bank, which has been presented to this meeting. George D. Woods President By J. Burke Knapp Washington, D.C. August 20, 196v