Malagasy Republic - Port of Tamative Project

RESTRICTED Report No. P-840 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 The report may not be published nor may it be quoted as representing their views.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 MALAGASY REPUBLIC FOR A PORT PROJECT June 3, 1970  INTERNATIOINAL DEVELOPNEIqT ASSOCIATIOIN REPORT AND RECaO1.EDATIWJ OF TIIE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOP1iET CREDIT TO THE 11AIAGASY REPUELIC FOR A PORT PROJECT 1. I submit the following report and recommendation on a proposed credit in an amount in various currencies equivalent to US $9.6 million to the lialagasy Republic to assist in financing a port project. PART I - HISTORICAL 2. In hay 1968, the Bank made a technical assistance grant of $196,800 to the Malagasy Government to finance hydrological, economic and preliminary engineering studies, and the preparation of a master plan for the development of the port of Tamatave. These studies formed the basis for the proposed project, wihich wias appraised by a mission that visited Madagascar in October 1969. 3. Negotiations wiere held in W!ashington from Nay 11 to 14, 1970. The Malagasy delegation was led by the Honorable Eugene Lechat, Mfinister of Equipment and Communications, and included H. E. Jules A. Razafimbahiny, Ambassador of the i'alagasy Republic in Washington, and representatives of the Linistries of Finance, Planning and Communications. 4. Since 1967, the Bank Group has made five loans and credits to the Mialagasy Republic for four projects, the 1968 highway project wa finaneed by a conbined loan amd credit. The follo!fing is a aummry statement of those loans and credits as of April 30, 1970: Loan or Credit Year Borrower Purpose Amount (US$ million) Number Bank IDA Undisbursed 90-MAG 1966 Malagasy Republic Highways 10.0 3.9 510-NAG 1967 Malagasy Republic Education 4.8 4.0 570-MhG 1968 Mialagasy Republic Highways 3.5 3.5 134-YAG 1968 Nialagasy Republic Highways 4.5 4.2 585-NIAG T969 ilalagasy Republic Livestock 2.8 2.8 Total now held by Bank and IDA 11.1 14.5 - Total undisbursed 10.3 8.1 16.4  - 2 - 5. Physical progress under the above-mentioned loans and credits is generally satisfactory. In two cases, the 1967 education loan and the 1968 loan and credit for highwxays, there have been administrative delays in the preparation of withdrawal requests which have now been largely overcome. At the Government's request, the Association has agreed that the part of the undisbursed balance of the Highway Credit No. 90-MAG that will not be required for the original project should be applied to certain additional construction works and further road studies. To enable the undisbursed balance to be so applied, the clos- ing date of this Credit has been postponed from December 31, 1970 to December 31, 1972 (IDA/R69-76). 6. Negotiations for a credit of about US $5.0 million for an irrigation project in the Lake Alaotra region are expected to begin shortly. Other possible projects at various stages of preparation in- clude livestock, irrigation and highways. Preliminary consideration is also being given to the creation of a development finance company suitable for Bank Group assistance. PART II - DESCRIPTION OF THE PROPOSED CREDIT 7. Borrower: The Malagasy Republic Amount: Various currencies equivalent to $9.6 million. Purpose: To finance the foreign exchange cost of the modernization and extension of the Port of Tamatave, consultant services and technical assistance. Amortization: In 50 years, including a 10-year period of grace, through semi-annual install- ments of 1/2 of 1% from December 15, 1980 through June 15, 1990 and of 1-1/2% from December 15, 1990 through June 15, 2020. Service Charge: 3/h of 1% per annum. Relending Terms: The proceeds of the credit would be re- lent by the Government to the Port Autonome de Tamatave, an autonomous port authority which is being estab- lished. Relending would be for a period of 24 years, including a 4-year grace period, with interest at 3/4 of 1% per annum during the grace period and 7% per annum thereafter. Estimated Economic Return: 19% in 1974/75.  - 3 - PART III - THE PROJECT 8. A report entitled "Appraisal of the Port of Tamatave Project - N1alagasy Republic" (PTR-48a), dated May 25, 1970 is attached. 9. The economy of Madagascar is highly dependent on foreign trade; in recent years, the combined value of exports and imports has averaged about one-third of GDP. Land communications within the island are difficult and coastal shipping is also of unusual importance. About 75 percent of imports and 35 percent of exports pass through the port of Tamatave, which serves the most populous and developed regions, including the capital Tananarive. In 1968, Tamatave handled about 460,0O0 tons of general dry cargo and 670,000 tons of petroleum products. Projections indicate that, by 1979, dry cargo traffic will more than double and petroleum products will increase by about one-third, far beyond the capacity of the present port, which is, moreover, poorly protected from the open sea and ineffi- ciently laid out. Quay aprons are narrow, the transit sheds and ware- houses are small, badly designed and poorly located. The loading and un- loading of petroleum products in the main area of shipping movement is a major hazard. The proposed project is designed both to remedy these defi- ciencies and to provide the capacity needed to handle traffic projected until 1979. 10. The project is based on the master plan for the Port of Tamatave and consists of the extension of the existing breakwater by about 225 meters; the construction of two new berths, transit sheds and warehouses; the provision of cargo-handling equipment, and of a new deepwater tanker mooring for petroleum tankers; and consultants' services for final engineering design and supervision, and technical assistance in management and accounting. 11. To execute the project and operate the port, the Government has agreed to establish a new port authority, Port Autonome de Tamatave. The draft legislation required to establish the authority has been drafted and is satisfactory to the Association. Passage of the legislation, expected in July, would be a condition of effectiveness of the proposed credit. The existing port assets would be transferred to the authority and the Government would receive in exchange the initial equity of the autho- rity, which would take over full responsibility for the port and the project by April 1, 1971. In the meantime responsibility would remain with the Ministry of Equipment and Communications which operates the present port through two separate agencies, a Port Directorate and a Port Operations Section of the National Railways. Division of responsibility between those agencies, neither of which has financial or administrative autononm, contributes to the present inefficiency of port operations. The Government has agreed that expatriate personnel would be appointed initially to fill the top management posts of the new Port Autonome de Tamatave, including those of Director, Chief Accountant, Chief Traffic Manager and Chief Training Officer, and the proposed credit provides for the payment of their salaries for three years. The port authority would provide suitable local counterparts, who would be expected in due course to take over.  12. Total project costs are estimated at $1 7.7 milflion, including local taxes amounting to $0.7 million. The proposed credit would finance the foreign exchange requirements, estimated at $9.6 million. The pro- ceeds of the credit would be on-lent by the Government to Port Autonome de Tamatave, as a 24-year loan, including 4 years of grace, with interest at 3/4 o7f1 percent per annum during the grace period and 7 percent per annum thereafter. Local costs will be covered by a Government equity contribution of $5.4 million equivalent, and $1.8 million from the cash flow of the port authority. A dividend on the Government's equity would be distributed only after the port authority had met its debt service requirements and set aside one quarter of its net operating revenues on a port development reserve account. Additional debt may not be incurred unless total debt service requirements are covered at least 1 .5 times by cash generation from operations. The project includes the construction of an oil pipeline from the coast to the Tamatave oil refinery, at a cost of $0.9 million equivalent, to be financed by the petroleum compa- nies which own the refinery. 13. The project would be completed by June 1974. Procurement of equipment and contracts for execution of civil engineering and other works to be financed under the credit would be let in accordance with the Association's guidelines for international competitive bidding. 14. If port capacity is not increased, ship delays will rise sharp- ly. Economic benefits will result mainly from reduced ship turn around time and lower shipping costs for petroleum products. On this basis, the project is expected to yield a first year economic return of 19% for 197V/75, the opening year of the new facilities. The return would be expected to increase thereafter. 15. The Government has agreed to an increase in port charges of 12 1/2% as a condition of effectiveness of the proposed credit. Thereafter the tariff structure will be progressively revised with the assistance of consultants to achieve a rate of return on net fixed assets rising from about 4 percent in 1974 to 7 percent in 1978. PART IV - IBDAL INSTRUMENTS AND AUTHORITY 16. The draft Development Credit Agreement between the Malagasy Re- public and the Association, the recommendation of the Committee provided for in Article V, Section 1(d) of the Articles of Agreement of the Associa- tion, and the text of a draft Resolution approving the proposed Development Credit, are being distributed to the Executive Directors separately. 17. The draft Development Credit Agreement follows the general pattern for projects of this kind. Section 3.02(a) provides that the Borrower shall cause, not later than April 1, 1971, Port Autonome de Tamatave to be respon- sible for the operation, maintenance and development of facilities at the port of Tamatave. The Borrower also undertakes to appoint promptly to the management of Port Autonome de Tamatave competent and experienced persons  - 5 - management of Port Autonome de Tamatave competent and experienced persons acceptable to the Association, and to submit to the Association, not later than September 30, 1971, a training program in all phases of cargo-handling (Section 3.08). PART V - THE ECONOYff 18. A report on "The Economy of the Malagasy Republic" dated October 8, 1968 (No. AF-83a) was distributed to the Executive Directors on October 16, 1968 (R 68-193). An economic mission visited 14adagascar in November 1969, and is completing its report. 19. Madagascar is the third largest island in the world. There is a great vrariety of climate and physical conditions which make possible a wide range of crops. There is great scope for the development of livestock. On the other hand, the population of about 6.8 million is distributed very unevenly, internal communications are severely hampered by distance and rugged terrain, and Madagascar is by-passed by the major shipping routes. 20. Economic growth in recent years has little more than kept pace with the growth in population, estimated at about 2.2 percent a year. The country has succeeded in achieving self-sufficiency in rice and cotton, but important export crops, notably bananas, vanilla and sisal have suffered from poor market conditions. 21. In 1964, Madagascar formulated its first official Five-Year Development Plan. By 1967, it became obvious that investment levels and production figures remained well below the Plan targets. The Government decided to take remedial action, particularly to increase the output of rice and of export crops. An interim program called "The Program of Major Operations", consisting of a number of investment projects mainly in the agricultural field, was drawn up. As a result, public sector investment rose from an average of FKG 11 billion in the 3-year period 1964-66 to FMG 13 billion in 1 967 and FMG 1 7 billion in 1968. 22. Total current revenues of the Central Government increased at an annual rate of 8.5 percent in current prices between 1964 and 1969, thanks in part to important tax revisions in 1966 and 1969. Central Government current expenditures increased 7.5 percent annually in current prices between 1964 and 1969, that is, 1 percent less than current revenues, thus permitting the generation of increased Central Government savings, which amounted to about 2.5 percent of GDP at market prices in 1969. Until 1967, the country's public finance policy had been relatively conservative but when dissatisfaction with the development effort arose and the Govern- ment decided to pursue a more active investment policy through the Program of Major Operations, Treasury liquid balances declined and Madagascar's international reserves were drawn down. 23. Preparations for a second five-year plan, intended to cover  - 6 - the years 1970-74, are still incomplete. The recent Bank economic mission has made a provisional estimate that public investment in the next five years could reach about FM1 85 billion, compared with a total during the first plan period, of FTIG 63 billion, and that such a volume of invest- ment could be sustained if foreign aid continued at about its present gross level of FMI 14-15 billion ($50-55 million) a year and if public savings continue to finance 35-40 percent of public investment. The projected figure for external assistance assumes an increase in Bank Group lending, offsetting an expected reduction in aid from other sources. The mission estimates that with an overall investment level in the 1970-74 period of about FMG 130 billion, the economy would be likely to grow at the same rate as since 1965, namely,approximately 4.5 percent a year. Given a continued population growth of 2.2 percent annually, this would mean that per capita GDP might increase by more than 2 percent annually. 24. Madagascar has traditionally received a major proportion of external aid by way of grant, but over the last five years, the share of grants has fallen from 92 to 81 percent, and it will probably fall fur- ther. Hence a higher proportion of resources for investment will have to come from foreign borrowing and from larger public savings. Present external public debt is small, amounting to $103 million as of December 1969, with service payments of $6 million, or slightly over 5 percent of export earnings, in that year. There is thus some room for additional borrowing on conventional terms. However, owing to the country's poverty, which means that an inflow of aid will be required for a considerable time, and the modest prospects for exports over the next five years or so, most external borrowing should be on concessionary terms. I consider that the Malagasy Republic is eligible for assistance from the Association. 25. A basic data sheet is attached as an Annex. PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT 26. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association. PART VII - RECOMMENDATION 27. I recommend that the Executive Directors approve the proposed development credit. Attachment Robert S. McNamara President June 3, 1970  ANINE NiALAGASY REPUBLIC BASIC DATA Area: 590,000 square kilometers Population: (1970) 6.8 million Rate of growth: 2.2% per annum Political Status: Independent since June 1964 GDP (market prices) 1969: FMG 217 billion growth 1965-196): about 4.5 percent per capita, 1 96,: US $120 Central Government (actuals, 1968, FIG billions) Current revenues 31.9 Current expenditures 28.5 Current surplus 3.4 Investment expenditures 9.1 Deficit -5.7 Balance of Payments 1969 (FMG billions) Exports (f.o.b.) 29.1 Imports (f.o.b.) -4o.3 Net services -7.1 Factor payments -7.0 Current transfers 10.7 Current balance -14.6 Aid Disbursements 1969 (US$ million) Grants 41.6 Loans 8.9 External Public Debt September 1969 (US$ million) Total (including undisbursed) 110.9 Debt service, 19069 5.7 Debt service ratio, 1969 3.2 percent Exchange rate FPIG 1,000 = US $3.6 June 3, 1970