Paraguay - Second Highway Maintenance Project

RESTRICTED EeTI s djfl00]pY Report No. P-764 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 The report may not be published nor may it be quoted as representing their views.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 PARAGUAY FOR THE. SECOND HIGHWAY MAINTENANCE PROJECT December 17, 1969  INTERNATIONAL BANK FOR RECONSTRUCTICN AND DEVEVOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EKECUTTIVE DIRECTORS OC A PROPOSED LOAN TO THE REPUBLIG OF PARAGUAY FOR THE SECOND HIGHWAY MAINTENA-NCE PROJECT 1. I submit the following report and recommendation on a proposed Loan in an amount in various currencies equivalent to US$6.0 million -to the Republic of Paraguay, to assist in the financing of a second highway maintenance project. PART I - HISTORICAL 2. The proposed Loan would be the second for highway maintenance in Paraguay. In 1961, IDA extended a credit of US$6.0 million (12-PA) for the reconstruction and paving of the Asuncion-Encarnacion road, for the purchase of urgently needed road maintenance equipment, and for the preparation of a master road maintenance plan with the help of consult- ants. This credit was supplemented in 1964 by a loan of US$2,2 million (396-PA) to cover increased construction costs of the project road. The masber road maintenance plan, prepared in 1966 under the above credit/loan and updated subsequently by the Govermnent, is the basis for the four-year maintenance program which constitutes the proposed project. 3. The second highway maintenance project was ap1raised in Feb- ruary 1969, and negotiations took place in Washington from July 22 to July 25, 1969. The Government of Paraguay was represented at these negotiations by Hr. Nicolas Pistilli, Director General of Vialidad (the Hiohway Authori-ty), Mr. Antonio Arias, Director of Vialidad's road maintenance depa;tment, Yr. Carlos Santacruz, Administrative Director of Vialidad, and lMr. Juan Delgadillo, Economic Advisor to the Mfinistry of Public Works and Communications. Presentation of the proposed Loan to the Executive Directors had to be delayed until satisfactory assur- ances were received regarding the Government's program for financing -its investment outlays in the coming years (see paragraph 18 below). 4. The proposed Loan would increase the Bank's total lending to Paraguay to US421.9 million. In addition the Association has provided US$21.4 million to Paraguay. The following is a summary statement of Bank loans and IDA credits to Paraguay as of November 30, 1969:  -2- Loan or Amount (US$ million) Credit Year Borrower Purpose Undis- Number Bank IDA bursed 55 1951 Republic of Paraguay Agriculture and Transport 4.5 - - 12 1961 Republic of Paraguay Roads - 6.0 - 47 1963 Republic of Paraguay Cattle ._ 3.,6 396 1964 Republic of Paraguay Roads 2.2 - 0.6 437 1965 Administracion Nacional de Nave- gacion y Puertos Port 2.8 - 1.2 86 1966 Republic of Paraguay Livestock - 7.5 0.6 443 1966 Re;public of Paraguay Roads 2.1 - 0.5 156 1969 Republic of Paraguay Livestock * - 4.3 4.3 620 1969 Republic of Paraguay Livestock * 4.3 - 4.3 Total (less cancellations) 15.9 21.4 of' which has been repaid to Bank and others 4.5 Total now outstanding 11.4 Amount sold 0.3 of which has been rapaid 0.1 0.2 Total now held by BanIc and IDA 11.2 21.4 Total undisbursed 6.6 4,9 11.5 *t Not yet effective. 5. Disbursements on the existing loans and credits on the whole are proceeding on schedule. Although some of the projec.s had a slow start, particularly the second road project, and some difficulties were encountered in the execution of the port expansion project early this year, at present none of them poses unusual problems in execution. The Bank is keeping close watch on the progress of the port expansion project and is working with the Government to accelerate its pace of execution. 6. The Government and IDA/Banl are discussing additional projects in agriculture, education and tourism. The Government has also requested the Bank to be the executing agency for a proposed transport survey to be financed by UNDP, w-hich is expected to lead to further lending in the transport sector.  PART II - DESCRIPTION OF THE PROPOSED LOAN 7. Bor=o-rer: Republic of Paraguay. Purpose: To assist in fin%ancing the capital expenditures of a four-year highway maintenance program, plus consulting services and a staff training prograra. Amount: The equivalent in various currencies of US$6.0 million. Amortization: In 20 years including a four-year period of grace, in semi-annual installments beginning February 1, 1974 and ending February 1, 1990. IntereSt Rate: 7 percent per annum. Commi-tment Charge: 3/4 of 1 percent per annum. PART III - THE PROJECT 8. A detailed description of the nroject is given in the attached Appraisal Report entitled "Appraisal of a Second Highway IXintenaxice Project" (PTR-230). 9. The proposed project would consist of a four-year program ('970-73), for tae continuation, improvement and expansion of maintenance operations on national roads. The program would be implemented with the assistance of consultants and would include the purchase of maintenance, shop and other equipment, the expansion and improvement of workshops and training of local personnel. 10. The project would be executed by the Department of Highways (VIALIDAD), under the Ministry of Public Works and Communications (14OPC'-, v_cdh is responsible for planning national roads and for maintaining four of Paraguay's five maintenance districus (maintenance in the Chaco region is carried out by the Army Corps of Ehgineers). To correct some of Vialidad's organizational and operational deficiencies, a law was passed in July 1969 providing for reorganization of the entity. Vialidad's personnel is, in general, competent, but the organization has been under- staffed, largely because of the generally lower salaries paid in the public administration as compared to the private sector. The Government intends to offer more attractive salaries and to initiate an active re- cruitment program to overcome this problem. In addi-tion, the inclusion in -the proposed loan of an item for the training of personnel would con- tribute to further improvemen-t in the operational efficiency of Vialidad.  - 4 - 11. The total estimated cost of the four-year maintenance program would amount to US$13.1 million, of which US$6.3 million represents -che estimated capital expenditures, and US$6.8 million equivalent the recur- rent local currency cost. The proposed Bank loan would finance the foreign exchange component of the capital cost of the highway main- tenance program, in the amount of US$5.5 million equivalent. The Govern- ment would finance the balance of capital expenditures and all recurrnt costs. The remaining US$0.5 million equivalent of the proposed Bank loan would cover the foreign exchange costs of the staff training program and of consulting services for supervision of the highway maintenance program and for improvement of the administration and operations of Vialidad. The Government has agreed to earmark specific revenues to finance the local ex?enditures and to review with the Bank annually tl-he proposed budgetary allocations for the four-year maintenance program, in order to ensure adequate financing of the proposed project. The Government's draft 1970 budget for highway maintenance has been re- viewed and found acceptable. 12. The highwvay maintenance, workshop, and control equipment for the proposed project would be procured on the basis of international com-petitive bidding, in accordance with the Bank's procurement policies. The Government has invited a number of consultant firms to submit pro- posals for the provision of services required for the project. The terms of reference covering the services and the list of firms have been approved by the Bank. The Government is expected shortly to negotiate a contract with one of the firms (selected on the basis of proposals received), and the conclusion of a satisfactory contract is a condition of effectiveness of the proposed Loan. 13. Although on the basis of the economic life of the mainten- ance equipment to be procured under the program, a shorter term for the loan would be wa^ranted, I consider the proposed term of 20 years, in- cluding a four-year grace period, justified and suitable in view of Paraguay's uncertain ba'Lance of payments prospects and difficult exter:Lal debt situation. 14. The economic rate of return of the highway main-tenance program is betwieen 18 and 51 percent, depending on the assumptions made re- garding estimated traffic growth and the extent of unit vehicle operating cost savings, and the project is therefore well jusLified economically. PART IV - LBGAL INSTRUMENTS AND AUTHORITY 15. The draft Loan Agreement between the Republic of Paraguay and the Bank, the Report of the Committee provided for in Article III, Section 4(i;i) of the Articles of Agreement and the draft resolution approving the proposed Loan are being distributed to the Ekecutive Directors separately.  16. The draft Loan Agreement contains provisions genrnally used in highway maintenance projects. Furthermore, it provides that the right of the Borrower to make withdrawals from the Loan Accot'.nt may be suspended by the Bank if the revenue earmarkiLg --range7nwnts Q'See paragraph 11 aebzoe) are altercd without the prior agrcersent of the Bank (Section 6.02). PART V - THE ECONOIE 17. An economic report entitled "Current Economic Position and Prospects of Paragr_ayll (WIH-19Oc) was distributed to the Executive Direc- tors on June 2, 1P6Q. Iy report of June 3, 1969 (P-71C' to the Execu- tive Directors on the proposed credit/loan for the third livestock project contained a sizurary of the ii,ain conclusions of the economic report. It specifically referred to recent actions taken and addit- ional measures to be implemented during the remainder of 1969 to raise fiscal revenues. 18. Silce the reoort was written, the Paraguayan authorities have continued to manage the public finances reasonably well. The Govern- ment has decreed certain refonrs of the property tax and has submitted to Congress a law modifying the income tax, which should provide the necessary domestic resources to carry out the public investment program in 1970. The Govemnment plans to go forward with an ambitious public investment prograi in subsequent years and is contemplating the adop- tion of additional tax measures during 1970 in order to raise the nec- essary domestic resources. 19. '-nlance of payments trends during 1969 have continued to be adverse with exports stagnating, and imports rising, resulting in a further drop in foreign exchange reserves. ihe Government is studying a series of measures to help deal with this situation. We intend to follow these developments closely. PART VI - COMPLIANCE WITH THE ARTICLES OF AGREEaMIET 20. I am satisfied that the proposed Luan would comply with the Articles of Agreement of the Bank. PART VTU - RECOMMENDATION 21. I recommend that the Executive Directors approve the proposed Loan. Robert S. McNamara President Attachments Washington, D. C. December 17, 1969