Zambia - Highway Reconstruction Project

LtJ- q k RESTRICTED Report No. P-507 FILE COPY 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 The report may not be published nor may it be quoted as representing their views.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 LOAN TO THE REPUBLIC OF ZAMBIA FOR A HIGHWAY RECONSTRUCTION PROJECT September 7, 1966  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE FRESIDENT TO THE EXECUTIVE DIRECTORS CONCERNING A LOAN TO THE REFUBLIC OF ZAMBIA FOR A HIGHWAY RECONSTRUCTION FROJECT 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US $17.5 million to the Republic of Zambia. PART I - HISTORICAL 2. In 1964 the Bank financed a survey of transportation in Zambia by the Netherlands Engineering Consultants (NEDECO) which recommended a transport development plan for the period 1966-1970. After stucdring this plan, the Government of Zambia approached the Bank in early 1965 with a proposal to reconstruct a number of main roads scattered throughout the country. In reply, the Bank indicated that, for its first road loan in Zambia, it would prefer a more consolidated project. The Governrrent was also informed that the Bank required detailed engineering to be carried out before the Bank would appraise a road construction project. 3. The Government submitted in July 1965 a revised application for help in financing the reconstruction of 728 miles of road. A Bank appraisal mission visited Zambia in November/December 1965 and found that the re- construction of 373 miles of road, on which the detailed engineering had been carried out in response to the Bank's stated requirement, and the detailed engineering of an additional 147 miles would be suitable for financing at this time. 4. Formal negotiations took place in Washington in May 1966. The borrowfer was represented by His Excellency Arthur N.L. Wina, Minister of Finance, and His Excellency Hosea Josias Soko, the former Arnbassador of Zambia to the United States. Representatives of the Ministry of Finance, the Ministry of Transport and Works, and the Attorney-General's office were also present. Presentation of the proposed loan to the Executive Directors has been delayed until the Zambian Parliament had passed the necessary enabling legislation. 5. The proposed loan would be the first lending operation by -the Bank or IDA in independent Zambia. Previously the Bank made two loans for railways in Northern Rhodesia (now Zambia) and Southern Rhodesia and two loans for power to the Central African Power Corporation, jointly owned by Zambia and Rhodesia. Zambia has since assumed responsibility for its share of these lendings. Each of these loans is guaranteed by the United Kingdom. There have been no IDA operations in Zambia. The following is a summary statement of Bank loans in Zambia as of July 31, 1966:  -2- Amount (US $ Millions) Year Borrower Purpose Bank Undisbursed 1953 Zambia Railways 14.0_ 1956 Central African Power Corporation 1/ Electric Power 40.0 2/ _ 1958 Zambia 1/ Railways 9.5 - 1964 Central African Power Corporation Electric Power 3.85 2/ 0.5 Total (less cancellations) 67.3 of which has been repaid ih.8 Total now outstanding Amount sold 37.2 of which has been repaid 13.6 23.6 Total now held by Bank 2T.9 Total undisbursed 0.5 0.5 6. The Central African Power Corporation has been unable to obtain the foreign exchange from the governments of Rhodesia and Zambia for recent payments due under the 1956 and 1964 loans. Zambia and the United Kingdom have each made one-half of these payments as guarantor. 7. No further loans to Zambia are expected to be submitted to the Executive Directors in the near future. Work is progressing on the prepara- tion of a secondary general and technical education project following a recent UNESCO project identification study. A Bank/FAO project identifica- tion mission visited Zambia last year and, as a result of its recommendations, an application is expected for assistance in a forestry project. PART II - DESCRIPTION OF THE PROPOSED LOAN 8. The main characteristics of the proposed loan are as follows: Borrower: Republic of Zambia. Amount: Various currencies equivalent to $17.5 million. 1/ As a result of Loan Assumption Agreements entered into in connection with the dissolution of the Federation of Rhodesia and Nyasaland at the end of 1963. 2/ Amount guaranteed by Zambia, i.e., one-half of loan.  -3- Purpose: To finance part of the cost of the reconstruction of sections of the Great Morth and Great East Roads, totalling 373 miles, and the detailed engineering of an additional 147-mile section of the Great Niorth Road. Amortization: In 33 semi-annual installments begin- ning July 15, 1970, and ending July 15, 1986. Interest Rate: 6% per annum. Commitment Charge: 3/8 of 1% per annum. PART III - THE FROJECT 9. A report on the proposed project entitled "Appraisal of a Highway Reconstruction Project - Zambia" (TO-525b, dated Septenber 7, 1966) is attached. 10. Zambia's transport system consists of 665 miles of railway line, 20,800 miles of public road, water transport in some limited areas and a network of light aircraft services. The railway, the portion of the Rhodesia Railways situated in Zambia, is used primarily to transport minerals to the sea and to bring in imported goods including coal from Rhodesia. It contributes little to the internal exchange among the various regions of the country, and its extension to meet these requirements is not practical. Water and air transport, while important in certain areas or for limited purposes, are not suited to the major task of integrating the economy. The road net- work, however, is basically appropriate for meeting these needs. 11. The project consists of the reconstruction and bituninous paving of sections of the Great East and Great North Roads and the detailed engineering of an additional section of the Great North Road. Both of these roads are main arteries and provide international connections to the sea. The Great North Road is part of the main highway frcm Cape Town, South Africa to Dar-es-Salaam, Tanzania and to Nairobi, Kenya, and the Great East Road links the center of Zambia with the highway and railway systems of Nlalawi and Mozambique. In the present unsettled conditions in Central Africa arising from the Unilateral Declaration of Independence by Rhodesia, these roads are carrying exceptional import and export traffic diverted from the Rhodesia Railways. However, reconstruction of the project sections to the proposed standards would be economically justified on the basis of normal traffic patterns. The project sections will have ample capacity to accommodate expected normal traffic volumes and would also be able to handle extra- ordinary traffic for considerable periods if the need should arise. 12. The cost of the project is estimated at about $29.0 million equi- valent, including engineering and contingencies. The proposed loan would  cover the estimated foreign exchange cost component of $17.5 million equi- valent, approximately 60% of the total cost. The Government will cover the local currency requirements. The project is expected to be completed by the end of 1969. 13. Design of the road sections to be reconstructed has been carried out by engineering consultants in close consultation with the Bank, and provision is made in the draft Loan Agreement to reimburse the Government for its foreign exchange expenditures on this work since June 1, 1965, amounting to about $720,000. 14. Contracts for the reconstruction of the project roads have already been awarded on the basis of bidding procedures acceptable to the Bank. Similarly, the engineering consultants for the 1h7-mile section of the Great North Road have been retained. Execution of the project will be the res- ponsibility of the Roads Department of the Ministry of Works. Supervision of construction will be performed by consultants. 15. The project, which is based on recommendations of the Bank- financed survey of transport in Zambia, has high priority in the Government's development plans. Reconstruction of the road sections will reduce transport costs substantially and prevent a rapid rise in transport costs in the near future. Based on projections of normal traffic, that is, making no allowance for traffic at present diverted from the Rhodesia Railway, the rate of economic return on the investment from savings in transport and road mainte- nance costs is about 12-13 percent, which is satisfactory. Other, less quantifiable benefits, such as the project's contribution to the economic integration of outlying areas with the fast-growing center of the country, can also be expected. PART IV - LEGAL INSTRU1ENTS AND AUTHORITY 16. The draft Loan Agreement between the Bank and the Republic of Zambia and the Report of the Committee provided for in Article III, Section (iii) of the Articles of Agreement are being distributed to the Executive Directors separately. 17. The draft Loan Agreement is similar to other agreements entered into by the Bank for highway projects. Attention is directed to Section 5.09 which provides that the Borrower is to reconstruct to satisfactory standards the section of the Great East Road connecting the two sections being reconstructed under the project. Work has begun on this section and is progressing satisfactorily. PART V - THE ECONOMY 18. An Economic Report, entitled "The Current Economic Position and Prospects of Zambia" (No. AF-43a), dated MIay 18, 1966, was distributed to the Executive Directors on May 25, 1966.  19. This report concluded that abstracting from the possible future effects of Rhodesia's Unilateral Declaration of Independence (UDI) on November 11, 1965, Zambia has a good growth potential. Clearly copper will continue to be the mainspring of this growth in the foreseeable future. Copper is in many ways an enclave industry, highly dependent on foreign skills, but the revenue which it provides to the Government, if productively employed, should have increasing effect upon growth in the other sectors of the economy. There is a fairly good agricultural potential to be tapped, although the shortage of trained manpower, particularly for the extension service, will for many years limit the pace of general agricultural develop- ment. Nevertheless, African farmers in Zambia are beginning to turn to the production of cash crops - mainly tobacco and cotton. Industrial develop- ment is limited by the low internal purchasing power and lack of skilled manpower. However, there are further possibilities for import substitution and for the processing of agricultural, fish and forest products. 20. Zambia has sizeable current account budget and balance of pay- ments surpluses. These are likely to continue for a few years, but, short- term fluctuations apart, copper prices are likely to fall in due course to a much lower level. From about 1970 onvards current account balance- of-payments deficits are likely to emerge as development of indigenous economy accelerates. The current account budget surplus will probably con- tinue to be considerable up to about 1970, but will not be sufficient to finance all public investment requirements. In any case, it is desirable for 7ambia to start a small phased program of external borrowing now, both in order to maintain an adequate level of reserves and to acquire much needed experience in the preparation and implementation of projects. Zambia's gold and foreign exchange reserves, including those held by the copper companies, were over