Jamaica - Highway Project

RESTRICTED Report No. P-424 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 The report may not be published nor may it be quoted as representing their views.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 RBCONSTRUCION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO JAMAICA FOR A ROAD PROJECT March 22, 1965 REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO JAMAICA 1. I submit the following report and recommendation on a pro- posed loan to Jamaica for an amount in various currencies equivalent to US$5.5 millionto help finance a road project. PART I - INTRODUCTION 2. The Bank's relations with Jamaica began in 1952 when a general survey mission, organized by the Bank, prepared a report on "The Economic Development of Jamaica" for the Government. After the completion of this report there were a number of informal contacts but no projects were presented to the Bank for financing. Jamaica became an independent member of the British Commonwealth in 1962 and joined the Bank in February 1963. The Government then requested the Bank to provide financial assistance for its five- year development plan (1963-68). In March 1964 a mission visited Jamaica to appraise the road project now proposed for Bank financ- ing. Negotiations for the proposed loan were held in January, 1965. It would be the Bank's first loan in Jamaica. PART II - DESCRIPTION OF PROPOSED LOAN 3. The main characteristics of the proposed loan would be as follows: Borrower: Jamaica. Amount: The equivalent in various currencies of $5.5 million. Purpose: To help finance a highway construc- tion project. Amortization: In 41 semi-annual installements, be- ginning July 15, 1970 and ending July 15, 1990. Each payment of principal and interest taken together would be approximately equal. Interest Rate: 5-1/2%. Commitment Charge: 3/8 of 1%. - 2 - PART III - THE PROJECT 4. An appraisal report on the project is attached (No. 1). 5. Highway transport is the most important form of transport in Jamaica. The railway, which is Government-owned, is important only for the carrying of bauxite products, and the domestic air service is still on an experimental basis. The highway system of Jamaica comprises some 2,690 miles of main roads. The roads are generally well maintained and the extent of the highway network is ample. However, the standards to which the roads were originally constructed are inadequate for today's type and volume of traffic, particularly in regard to alignment and width. The highway trans- port industry has expanded rapidly in the last ten years with the motor vehicle fleet increasing at an annual rate of 15 percent and further substantial growth in highway transport can be expected. 6. Jamaica's five-year development plan for 1963-68 allocated $33 million for transport investments, or about 13 percent of the $256 million total expenditures proposed. About $25 million, or some three quarters of the allocation for transportation, is for highways; an additional $16 million is allocated for roads in connection with agricultural and housing projects. The development plan provides only for public capital expenditure and does not include expenditure on vehicles, which are likely to be at least three times as great as the investments in highways. The proposed project was not originally included in the development plan because the economic study was not yet completed. The Government decided to proceed with it when the traffic studies indicated that the road sections in the proposed project had a high priority. 7. The project consists of the improvement of three road sec- tions on the main route from Kingston to the north coast. The first section, from Kingston to Spanish Town, which accounts for about 70 percent of the expenditure included in the project, is the most travelled and heavily congested highway in the country and serves an area composed of commercial and industrial enterprises. The opening of the new four-lane road will resultin a substantial re- duction in vehicle operating costs., The improvement of the second section north from Spanish Town to Bog Walk serving an area which is agricultural in nature, will also reduce vehicle operating costs by permitting greater speeds, a reduction in distance, and the elimina- tion of a lengthy detour which has to be made whenever the present road is closed to traffic because of recurrent floods. The improve- ment of the third section, from Moneague to Crescent Park, which is in poor condition, will permit traffic to use this road instead of a detour via Ocho Rios which is unsuitable for heavy traffic. Agriculture is the main activity in the area served by this road. - 3 - 8. The Ministry of Communications and Works, responsible for the execution of the project, is well organized and efficient. However, as the project would involve almost doubling construction by the Ministry during the next few years, a firm of outside con- sultants will be employed to review the existing designs, prepare specifications and final documents and supervise the construction of the sections Kingston-Spanish Town and Spanish Town-Bog Walk. Construction of these sections will be carried out under unit price contracts let on the basis of international competitive bid- ding, and the work will probably be contracted to foreign firms as there is no large local road construction industry in Jamaica. On the small Moneague-Crescent Park section, design and improvement work will be carried out by force account, which will provide use- ful training for the Ministry's engineers and technicians, as well as employing the Ministry's available labor and construction equip- ment. The consultants will also provide advisory services for this section. 9. Total expenditures on the project are expected to be US$11 million equivalent, half of which would be covered by disbursements from the Bank loan. The foreign exchange component is estimated to be about 48 percent for the contracted works, about 38 percent for the force account work, and about 60 percent for engineering services. The total period for the completion of the project is estimated at about 5 years. The Government has agreed that it will give priority to the construction of the roads, and will provide adequate local currency funds from its investment budget to carry out the project on schedule. 10. The project, which is well planned and technically sound, will greatly improve road transport conditions and sharply reduce transport costs on some of the most heavily travelled roads in Jamaica. The Ministry's road maintenance organization functions efficiently and the quality of maintenance is generally good. The rates of return on the investments in the three road sections range from 10 to 25 percent, which are clearly satisfactory. PART IV - LEGAL INSTRUMENTS 11. Copies of the draft Loan Agreement between Jamaica and the Bank and the Report of the Committee provided for in Article III, Section (iii) of the Articles of Agreement of the Bank relating to the project are being circulated separately to the Executive Directors. The draft Loan Agreement conforms substantially to the pattern of agreements for similar projects where disbursements of the proceeds of the loan are to be in amounts equal to a percentage of total eexpenditures for the project. PART V - ECONOMIC SITUATION 12. A report (No. EA-144a) on the "Current Economic Position and Prospects of Jamaica" was circulated to the Executive Directors for information on October 10, 1963 (IBRD/R63-120). 13. Until the last decade the economy of Jamaica was heavily dependent on the production and export of sugar and bananas. The discovery of large resources of bauxite after the war added another major export product to an economy almost wholly dependent on agriculture. During the 1950's the expansion of bauxite and alumina production proceeded rapidly and, at the present time, the value of exports of these two products is more than double that of sugar. However, in an economy characterized by population pressure the sugar industry remains very important as a source of employment. 14. The development of the bauxite resources, the rapid growth in the tourist industry and the growth of manufacturing industry enabled Jamaica to achieve a rate of growth which averaged 7 per- cent during the period of 1953-1960. Nevertheless, the problem of unemployment remained serious despite substantial emigration to the United Kingdom. Since 1960 the rate of growth has slowed d9wn considerably. 15. Recent Economic Developments. In the last quarter of 1963 there was an upturn in economic activity and this general improvement continued in 1964. During 1963 sugar production and export earnings increased to record levels, reflecting the buoy- ancy in the world market, and by the end of the year there was also a revival in the construction and tourist industries. Alumina output increased, but there was a decline in bauxite pro- duction, and a slight decrease in export earnings from these pro- ducts. Reflecting the considerable improvement in exports, mainly from sugar sales, the deficit in the current account of the balance of payments was only £0.7 million in 1963, the smallest since 1954. 16. The general economic improvement continued in 1964. Although sugar production declined slightly as compared with the previous year, bauxite and alumina production increased. Exports increased moderately but the higher level of economic activity led to a considerable rise in imports and larger deficit on the balance of payments. The rising economic activity was also reflected in an increase in commercial bank loans and advances. 17. The general pattern of government finance has been one of surpluses on current account being used to finance capital expenditure, with the balance of capital expenditure being financed by external borrowing. In recent years, tax revenues have increased steadily but, since 1960/1961, the more rapid growth of current expenditure has re- sulted in smaller surpluses with which to finance the expanding capital expenditure. Increasing resort has been had to borrowing, both domestic and foreign. The estimates for 1964/1965 project an 11 percent in- crease in total revenue, resulting partly from the recovery of the economy but mostly from increased taxation. With a continuing increase in current expenditure, and a record 32 percent increase scheduled in capital expenditure, some 25 percent of capital expenditure is expected to be financed from the current surplus, as compared with the peak of 55 percent in 1960/1961. 18. The local capital market has shown a significant develop- ment under the guidance of the Bank of Jamaica, and has become an in- creasingly important source of finance to the Government. In September 1964, government local registered stock and treasury bills amounted to L20 million and 10 million respectively, as compared with L15 million and L8 million a year before. In foreign markets also, some of the u.- certainties associated with Jamaica's independence and political events in the Caribbean have been overcome, and in June 1964 Jamaica made successful issues of 3.2 million in the United Kingdom and Can.$4.5 million in Canada without any difficulty. An issue in the New York market is now under preparation. 19. Current Prospects and Creditworthiness. Population growth (which in recent years has exceeded the rate of economic growth), a high level of unemployment, and rural poverty remain Jamaica's basic problems. In 1963 emigration to the United Kingdom was reduced to less than one-fifth of the peak reached in 1961, as a result of the re- strictions on the entry of Commonwealth citizens. The Government's plans for increasing the contribution of the agricultural sector are now being worked out and, if successful, could produce significant results. The prospects for bauxite export earnings are basically good. Tourism has been expanding but there is still considerable excess capacity in hotels and further measures, particularly those which would attract middle-income tourists, will be necessary if this industry is to make its full contribution to economic development. There are, therefore, - 6 - reasonably good prospects for economic growth in Jamaica based mainly on the export of bauxite and alumina, and processed foodstuffs, import substitution and tourism. However, it is unlikely that the rapid rate of growth characteristic of the 1950's will be repeated in the period immediately ahead. 20. Total public external debt in December 1964 was $74.8 million and debt charges were $5.8 million or less than three percent of estimated merchandise exports in 1964. Charges on this debt will average annually about $7.0 million during 1965-1978 with the peak of $10.3 million in 1973 being about five percent of 1964 export earnings. In these circumstances a prudent borrowing program is justified and Jamaica can be regarded as creditworthy for the loan now proposed. PART VI - COMPLIANCE WITH ARTICLES OF AGREEMIENT 21. I am satisfied that the proposed loan complies with the Articles of Agreement of the Bank. PART VII - RECOMMENDATIO11 22. I recommend that the Executive Directors adopt the following resolution: RESOLVED: THAT the Bank shall grant a loan to Jamaica in an amount in various currencies equivalent to five million five hundred thousand dollars ($5,500,000), to mature on or prior to July 15, 1990, to bear interest at the rate of five and one-half percent (5A) per annum, and to be upon other terms and conditions substantially in accordance with the terms and conditions set forth in the form of Loan Agreement (Highway Project) between Jamaica and the Bank which has been presented to this meeting. George D. Woods President Washington, D.C.. March 22, 1965