Uganda - Highway Project

RESTRICTED FILE - COPY Report No. P-556 This report was preparecl 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 The report may not be published nor may it be quoted as representing their views.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 TC) THE STATE OF UGANDA FOR A ROAD PROJECT July 5, 1967  INTERNATIONTAL DEVELOPMNT ASS OCII a.ON REPORT AND RECOIMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS CN A PROPOSED DEVELOPMENT CREDIT TO THE STATE OF UGANDA FOR A ROAD FROJECT 1. I submit the following report and recommendation on a pron0osed credit in an amount in various currencies equivalent to U.S. $5.0 million to the State of Uganda. PART I - HISTORICAL 2. The Association received a preliminary application from the Uganda Government for financial assistance for a road project in August 196L, followed by a more detailed application in early 1965. An appraisal mission visited Uganda in March L965 and reached general agreement with the Govern- ment on the roads to be included in the project. Due to delays in completing the de-tailed engineering of these roads, the Association and the Government agreed in mid-1966 to reduce the scope of the project to its present size. The detailed engineering of the roads to be constructed under the project was satisfactorily completed in March 1967. 3. Formal negotiations took place in Washington in May 1967. The Uganda delegation was led by the Honorable William Kalema, Minister of Com- merce and Industry, and included representatives of the Ministry of Works, Communications and Housing, the Treasury and the Attorney General's Office. 4. This is the first road project proposed for IDA financing in Uganda and would be the second IDA credit to Uganda, increasing IDA financing to $i5.0 million. While still a British protectorate, Uganda received one lcan from the Bank amounting to $8.4 million, guaranteed by the United Kingdom. The following is a sunmmary statement of the Bank loan and the IDA credit to Uganda as of Hay 31, 1967: Loan or Amount (U.S. $ nilli,nj Credit No. Year Borrower Purpose Bank IDA Undisbursed 279-UG 1961 Uganda Electric Power 8.4 h 101-UG 1967 Uganda Education 10.0 10.0 Total (less cancellations) 8.4 10.0 of which has been repaid 0.9 Total now outstanding 7 Amount sold 8.3 of which has been repaid 0.9 7.h Total now held by Bank and IDA 0.1 1OX Total undisbursed - 100 1.00  - 2 - 5. In addition to the above loan and credit, the Bank has made three loans to the East African Common Services Authority (EACSA); two of the loans were for railways and harbors and the third for telecommunications. Each one is guaranteed jointly and severally by Kenya, Tanzania and Ugpllda, with the United Kingdom also being a guarantor for the first loan. The status of these loans as of May 31, 2Q67 was as follows: (U.S. $ million Loan No. Year Borrower Purpose Bank UJndisbursed ll0-EA 1955 EACSA Railways and Harbours 2h.0 - 428-EA 1965 EACSA Railways and Harbours 38.0 2h.6 h83-EA 1967 EACSA Telecommunications 13.0 13.0 Total (less cancellations) 75.0 of which has been repaid 11.0 Total now outstanding T77 Amount sold 23.8 of which has been repaid 10.9 12.9 Total now held by Bank 3 .1l Total undisbursed 37.6 6. Practically all of the 1965 loan for railways and harbors (No. 428-EA) has been committed against orders for wagons and other equip- ment. Though some disbursements are made against progress on these orders, the bulk is made on delivery, soDme 12 to 18 months after the orders are placed. These deliveries will begin shortly and will be reflected in an increased disbursement rate. The entire loan is expected to be disbursed by mid-1968 as originally anticipated. 7. IFO has made one investment in Uganda, il. Mulco Textiles, Ltd. The investment totalled. $3.51 million equivalent, of which $2.80 million was a loan, $6h0,000 was equity and $70,000 was a standby commitment. As of May 31, 1967 all but $400,000 has been disbursed. 8. The Association negotiated a $3.4 million credit for smallholder tea development in October 1965. The delay in presenting this pioposed credit to the Executive Directors has been caused mainly by delay in appointing the Uganda Tea Growers Corporation's Board of Directors and senior staff. Most of these appointments have now been made and the project is expected to be presented to the Executive Directors in the near future. 9. A ranching project has recently been appraised and an application for assistance for an agricultural credit project is under study. The Government expects to submit a second road project, based on the engineering work included in the presently proposed project, later this year. PART II - DESCRIPTION OF THE PROPCSED CREDIT 10. Borrower: State of Uganda Amount: Various currencies equivalent to $5.0 million.  -3- Purpose: To helo finan.ce: (a) the detailed engineering and construction. of approxi- mately 100 miles of main, feeder and tea roads, and (b) the detailed engineer- ing of approximately h60 miles of additional main, feeder and tea roads. Amortization: 50 years includin.g a ten-year period of grace in semi-annual installments begin- ing October 1, 1977 and ending April 1, 2017. Service Charge: 3/4 of 1% per annum. PART III - THE PROJECT 11. An appraisal report entitled "lUganda - Appraisal of a:Highway Project"(TO--590a dated July 5, 1967) is attached (No. 1). 12. The project co-asists of: (1) the reconstruction. to a paved surface of the main. road from Yibarara to Katunguru, totalling about 70 miles; (2) the reconstruction. to a gravel surface of three short feeder roads totalling about 7 miles; (3) the construction. of two tea roads totalling about 24 miles; (4) the detailed engineering and supervision of construction of the above roads; and (5) the detailed engineering of 6 main and 10 feeder roads totalling approximately 460 miles. All of these roads form an integral part of the road program contained in the Government's Five Year Developmen.t Plan and were found by the recent Bank economic mission to be of high priority. 13. The project's estimated total cost, including a 15% allowance for contingencies, is $7.2 million. equivalent. The proposed credit of $5.0 million wiould cover the foreign. exchange costs which are estimated at 70% of total costs. The estimated construction. cost of the main, three feeder and two tea roads accounts for almost 85% of the total; these cost estimates are based on. completed detailed engineering and are considered reliable. Construction. will be carried out by contractors selected on, the basis of standard Bank Group procedures. 14. The Nbarara-Katunguru road forms part of the trunk road system between Kampala, Mvasaka, Iibarara and Fort Portal and is the only part of that systein which remains unsurfaced. This road will also improve the link with Congo (K) and would. provide improved access to the railhead at Kasese. The economic return on. the investment in this road is conservatively esti- mated at about 10%. The three feeder roads, located near the Katunguru end of the trunk road, will provide improved access to fishing facilities at V Lake George and Lake Edward. The return on the investment in these three roads is estimated at about 13%. The two tea roads will serve a tea growing / area near Fort Portal, one of four such areas to be established under a smallholder tea project which the Government is carrying out. A proposal for assistance for this project will be presented to the Executive Directors in the near future. The detailed engineering of additional main. and feeder roads, including the other tea roads required for the smallholder tea projer;t,. could form the basis for a future road project.  - 4 - 15. The Roads Branch of the Ministry of Wlorks, Communications and Housing will have overaLl responsibility for the execution of the project. The detailed engineering and the supervision of construction will be carried out by consultants. As already indicated, much of the detailed engineering has already been completed and the proposed credit would cover expenditures made for such services s:ince January 1, 1966. The consulting engineers were appointed after consultation. with the Association, and the cost of their services from January 1, 1966 to date is estimated to total approxi- mately $360,000, of which 70% or about $250,000 would be eligible for reimbursement from the proposed credit. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 16. The draft Developmen.t Credit Agreement between the State of Uganda and the Association and the Recommendation of the Committee provided for in Article V, Section. l(d) of the Articles of Agreement are being distributed to the Executive Directors separately. The draft Development Credit Agree- ment conforms generally to other agreements entered into by the Association for road projects. PART V - THE ECONOMY 17. A report entitled "Current Economic Position and Prospects of Kenya, Tanzania and Uganda" (No. AF-35, dated September 13, 1965), was distributed to the Executive Directors in, connection with a loan for East African. Railways and Harbours (No. 428-EA). A memorandum updating the economic information, on Uganda (No. AF-53) was distributed to the Executive Directors on October 27, 1966 (R66-141): significant developments up to April 1967 were reviewied in the President's Report and Recommendation. to the Executive Directors in connection with a credit to Uganda for an. Education.Project (101-UG). Discussions have just been. concluded with the Uganda Government on. the draft report of an economic mission. which visited the country during October-December 1966. The main conclusions of this report, which will shortly be distributed to the Executive Directors, are summarized below; basic data on the economy are attached (No. 2). 18. In recent years, the growth of Ugarda's economy has been fairly rapid. During the period 1960-65, real per capita income in the monetary sector rose by an annual average of about 3.5%. The main factors which contributed to the rise in incomes were an export boom in the period 1963-65, and a marked expansion, in public and private spending. Although private domestic savings were high, their availability for domestic invest- ment was significantly affected by transfers abroad, hoarding and property speculation. Public savings, on the other hand, proved inadequate to finance an accelerated capital expenditure program, and consequently a fairly substantial financial imbalance developed. Externally, although the current account balance was favorable, the heavy private capital out- flow caused a substantial loss of reserves, which touched a dangerously low level in the early part of 1966.  - 5 - 19. The situation necessarily called for fairly drastic measures. In the 1966/67 budget, the Government provided for a sizeable surplus through increased taxation and economies in expenditure. It also took the politically difficult step of reducing the producer price for cotton to bring it in line with the world market price, thereby closing a fiscal gap which had been widening. Present indications are that both these steps have had a salutary effect on the country's public finances, improving the mobilization of resources for development. 20. Economic growth in the next few years will have to be based more on production for the domestic market, in contrast to previous growth which was largely dependent on the export market. In real terms, the rate of growth is likely to be higher than in the period 1960-65. There is, however, the prospect that an increase in the physical growth rate will be largely offset by the uncertainty regarding coffee prices and the probable fall in export prices of cotton and copper. Hence the rate of growth of real per capita incomes is expected to fall from the 1960-65 average of 3.5% to about 1.2%. 21. In the coming years, projected investment is expected to be greater than available domestic savings. Hence, Uganda's development is much dependent on sustained capital inflows from abroad. Since many of the projects likely to be suitable for external financing have a relatively low foreign exchange component, some external assistance may also be needed to cover a proportion of local investment costs. 22. Uganda's total external debt (including undisbursed amounts and its notional one-third share - $79.0 million - of EACSA debt) stood at $200.8 million on December 31, 1966. The ratio of debt service payments to estimated receipts on current account in 1966 was about a.6%. Though Uganda's potent-ial for long-term growth and diversification suggests that there may be a margin for incurring additional debt on conventional terms, the unfavor- able outlook for coffee,cotton and copper export earnings, the low per capita income (about $1l6), the probability of further substantial borrowing on conventional terms for EACSO services, and the need to raise large amounts of external capital to implement the national development program lead to the conclusion that a proportion of Uganda's external debt should continue to be on non-conventional terms. PART VI - COMPLIANCE WITH THE ARTICLES CF AGREEMENT 23. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association. PART VII - RECOMMENDATION 2b. I recommend that the Executive Directors adopt the following resolution:  - 6 - RESOLUTION No. Approval of Development Credit to the State of Uganda in an aiount equivalent to U.S. $5,000,000. RESOLVED: THAT the Association shall grant a development credit to the State of Uganda in an amount in various currencies equivalent to five million United States dollars (U.S. $5,000,000) to mature on and prior to April 1, 2017, to bear a service charge at the rate of three-fourths of one percent (3/4 of 1%) 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 Development Credit Agreement (Road Project) between the State of Uganda and the Association, which has been presented to this meeting. George D. Woods President Attachments Washrington, D.C. July 5, 1967