Burundi - Bujumbura Water Supply Project

RESTRICTED Report No. P-471 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 The report may not be published nor may it be quoted as representing their views.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 DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE KINGDOM OF BURUNDI FOR A WATER SUPPLY PROJECT March 21, 1966  INTERNATIONAL DEVIOPMENT ASSOCIATION REPORT AND RECO-MMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS CONCERNING A DEVELOPIENT CREDIT FOR A WATER SUPPLY PROJECT TO THE KINGDOM OF BURUNDI 1. I submit the following report and recornendation on a proposed credit, in an amount in various currencies equivalent to $1.1 million, to the Kingdom of Burundi, to assist in financing a water supply project. PART I - HISTORICAL 2. The proposed credit would be the first IDA operation in Burundi. Burundi became independent in 1962 and joined the Bank and IDA in 1963, after having been administered, together with neighboring Rwanda, as part of the Belgian Trust Territory of Ruanda-Urundi. In 1957, the Bank, made a loan of $4.8 million to Ruanda-Urundi, with the guarantee of Belgium, for a road and lake port project located in Burundi. Although no arrangements have yet been made by Belgium, Rwanda and Burundi regard- ing the succession to the loan debt, Burundi has in fact been servicing all amounts due under the loan out of its annual resources from Belgian economic assistance. The status as of February 28, 1966 of the Bank loan to Ruanda-Urundi is as follows: Year Borrower Purpose Amount (US $ million) 1957 Ruanda-Urundi Road and lake port 4.8 (wholly disbursed) of which has been repaid 1.1 Total now outstanding 3.7 Amount sold 3.00 of which has been repaid 1.1 1.9 Total now held by Bank 1.8 3. In June 1964, the Government of Burundi asked the Association to consider financing a water supply project to be carried out by Regideso, the water and power authority of Burundi. A mission appraised the pro- ject in October/November 1964. Political difficulties following the  - 2 - assassination of the Prime Minister in October 1965 delayed the start of negotiations and a second appraisal mission went to Burundi in November 1965 to update information about the project and the operations of Regideso. Formal negotiations for the proposed credit were completed in Washington on February 1, 1966. The government was represented by a delegation headed by the Director General of the Ministry of Finance and Regideso by its General Manager. PART II - DESCRIPTION OF THE PROPOSED CREDIT Borrower: The Kingdom of Burundi. Beneficiary: Regideso, the power and water supply authority in Burundi. Amount: Equivalent in various currencies to $1.1 millioc, Purpose: To finarce part of the cost of the construction and expansion of the water supply system serving Bujumbura, the capital city, and adjacent communities. Amortization: The development credit would be for a period of 50 years with no amortization for 10 years. One half of one per cent of the principal amount would be payable semi-annually frcm August 1, 1976 to February 1, 1986, and one and one-half per cent semi-annually from August 1, 1986 to February 1, 2016. Service Charge: 3/A of 1% per annum on the principal amount of the credit disoursed and outstanding. Relending Terms and Project Agreement.: The Kingdom of Burundi would relend the proceeds of the IDA credit to Regideso for 1L-1/2 years including 5 years of grace at an interest rate of 5-1/2% per annum.  - 3 - PART III - THE PROJECT b. A report on the project "Appraisal of the Bujumbura Water Supply Project" (TO-076c) is attached. The existing water system in Bujumbura has been operating above capacity for a number of years. Service is deteriorating and the duration of periods of no service is rapidly in- creasing. Moreover, present water sources are inadequate and are sub- ject to damage from flooding. The project would provide an adequate and reliable supply of pure water from a practically unlimited source, Lake Tanganyika. The additional capacity proposed would meet the demand up to 1978 and could easily be expanded. 5. The project would be operated by Regideso, the power and water supply authority in Burundi. In the past Regideso operated under a highly competent administration. During the last few years Regideso made considerable efforts to follow conservative management practices but its operations were seriously affected by the deterioration of the general economic situation in Burundi, government instability and disorganized public administration. Although earlier levels of performance have yet to be regained, the improvement that began in 1963 was confirmed by the results obtained in 1964 and 1965. With support to increase its foreign staff and to train local personnel, Regideso can again become a well run organization. Regideso has agreed to hire an additional engineer witn extensive training and experience and will engage an additional administra- tor if administrative, billing and collection practices do not improve subs` antially in the course of this year. The government has already been sending and will continue to send qualified high school graduates to foreign universities for advanced training in the fields of engineering and businesr, administration. Some of these may be considered for key staff positions within Regideso on their return. 6. The total cost of the project is estimated at $1.7 million, of which about $1.1 million, 65%, would be in foreign exchange. The proposed credit would cover the foreign cost of the project. Regideso has accumulated substantial cash reserves, is not expected to encounter any difficulty in financing the remaining 35% and would be able to maintain adequate working capital throughout the construction period. 7. The present rate of return on net fixed assets of Regideso is low. This derives to a large extent from the past policies of the government and the agency. The government and Regideso have agreed to put the future operations of the agency on a sound financial basis and to maintair or increase rates so as to produce a rate of return of at least 6% on net fixed assets at the earliest possible date, and in any event not later than 1972. In the case of the water department, major rate increases are necessary, the first of which is expected to take place at the end of 1969 when the new facilities will come into operation and enable Regideso to improve the service.  8. The project would be carried out over a period of 3-1/2 years, 1966-69. Construction would be supervised by a consultant. Contracts for civil work, as well as for the purchase of machinery, equipment and materials, would be submitted to international competitive bidding. PART IV - LEGAL INSTRUIENTS AND AUTE_RITY 9. The draft Development Credit Agreement between the Kingdom of Burundi, the draft Project Agreement between the Association and REGIDESO and the Report of the Committee provided for in Article V, Sect`on l(d) of the Articles of Agreement are being distributed to the Executive Directors separately. 10. The draft Development Credit Agreement provides, in addition to the usual provisions, that the Borrower shall relend the proceeds of the Credit to REGIDESO on the basis of an agreement between the Borrower and REGIDESO satisfactory to the Association (Section 3.01), and that with- drawals from the Credit Account would be made directly by REGIDESO (Sec- tion 7.03(b)). 11. The draft Project Agreement is substantially in the form used by the Association for projects of this kind. Section 2.09 provides that, without the agreement of the Association, REGIDESO would not incur any long-term debt if as a result thereof, the ratio between its total long- term debt and its total equity would be higher than bo:60. PART V - THE ECONC1IY 12. A report on the economy of Burundi was distributed to the Execu- tive Directors in April 1965. 13. While about half of Burundi's economy was still based on tradi- tional subsistence agriculture, at the time of its independence in 1962, it had achieved a modest degree of modern development, particularly in the production of high quality coffee (its main export), a few other cash crops, an embryonic industrial sector and a basic transport infrastructure. lb. The three years after independence were difficult ones, as the result of natural calamities (flooding), the breakup in 196b of the customs and monetary union with Rwanda, and a number of domestic political and administrative problems. These difficulties contributed to the creation of a serious budgetary and foreign exchange crisis wihich became acute by the end of 196b. 15. However, in February 1965, the government worked out with the assistance of the IMF a stabilization program including a 75% devaluation of the currency which took place in February 1965 and a significant increase in the overall rate of taxation. The implementation of this program has proved to be an important step toward the achievement of a  - 5 - more balanced economic growth. The price increases which resulted have been moderate, foreign trade and transfers have to a large extent been freed frcm restrictions, and multiple currency practices have virtually disappeared. 16. There were also some setbacks during 1965. The output of coffee. providing 80% of Burundi's export earnings, was substantially lower than expected, due to climatic conditions, and foreign exchange reserves declined somewhat. Since October 1965, unforeseen government expenditures caused by the political events in that month and their aftermath have had an adverse effect on budget expenditures. Consequently, there has been larger recourse to credit by government than foreseen, although overall credit expansion remained within the limits of the stabilization program. 17. The government is undertaking immediate action to increase its control over current expenditure and to take measures directed toward keeping further growth of expenditure and recourse to credits within the limiis of the program for the current year agreed upon with the IMF. Renewed DIF standby agreements, which will enable Burundi to overcome continuing seasonal discrepancies in its foreign exchange situation, are likely to be forthcoming. 18. Prospects are good for a more substantial coffee crop in 1966, and this should permit the current budget to reach equilibrium. However, a further removal of transfer restrictions in January 1966 may result in a further use of reserves in 1966 equal to or slightly higher than that of 1965. 19. Balance of payments deficits are expected to continue for some years to come. However, there are fair prospects that increased foreign exchange earnings frcm both existing and newly introduced crops, together with a continued inflow of foreign aid in moderate amounts, will enable Burundi to achieve equilibrium in its external accounts within a reason- able time and without undue difficulty. PART VI - CCMPLIANCE 1JITH ARTICLES OF AGREMIENT 20. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VII - RECOIND0$ATION 21. I recommend that the Executive Directors adopt the followving resolution: RESOLUTION NO. Approval of a Development Credit to the Kingdom of Burundi (Bujumbura Water Supply Project) in an Amount Equivalent to US$ 1,100,000  -6- RESOLVED: THAT the Association shall grant a development credit to the Kingdom of Burundi in an amount in various currencies equiva- lent to one million and one hundred thousand dollars ($1,100,000), to mature on and prior to February 1, 2016, to bear a service charge at the rate of three-fourths of one per cent (3/b of 1%) per annum, and to be upon other terms and conditions set forth in the form of Development Credit Agreement (Bujumbura Water Supply Project) between the Kingdcm of Burundi and the Association and the form of Project Agreement (Bujumbura lWater Supply Project) between the Association and the Regie de Distribution d'Eau et d'Electricit6, which have been presented to this meeting. Attachments W4ashington, D. C. George D. Woods March 21, 1966 President