DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

Not For Public Use Public Disclosure Authorized

FILE COPY Report No. P-1210a-

REPORT AND RECOMMENDATION

OF THE Public Disclosure Authorized PRESIDENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

TO THE

Public Disclosure Authorized REPUBLIC OF

FOR A

SIXTH HIGHWAY PROJECT

Žlay 11, 1973 Public Disclosure Authorized

This report was prepared for official use only by the Bank Group. It may not be published, quoted | or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. Currency Unit Honduras Lempiras (L) US$ 1.00 = L 2.00

L 1 = US$ 0.50 L 1,000 = US$ 500.00

L 1,000,000 = US$ 500,000

Fiscal Year - January 1 to December 31 INTERNATIONAL BANrK FOR RECONSTRUCTION ANlD DEVELOPMENT

REPORT AND RRCO•1V4ENDATTON OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF HONDURAS FOR A SIXTH HIGHWiAY PROJECT

1. I submit the following report and recommendation on a proposed loan to the Republic of Honduras for the equivalent of US$18.8 million to help finance a project for highways. The loan would have a term of 30 years, including 5 years of grace, with interest at 7-1/4 percent per annum.

PART I - THE ECONOMY

Recent Developments and Prospects

2. A report entitled "Basic Report on the Economy of Honduras" twas distributed to the Executive Directors in June 1972. The main recommenda- tions of this report stress the importance of policies to diversify the econonmy, especially through goverrment action to encourage forestry, the necessity of negotiating a reasonable basis for renewed full participation of Honduras in the Central American Common Market (CACM), and the desirability of increasing tax revenues. A country data sheet is attached as Annex I.

3. Honduras has a small open economy, heavily dependent on the export of , although a modest degree of diversification has taken place in the last decade through the development of new export products such as meat, simple manufactures, and . Its limited resources consist mainly of the fertile coastal plain in the north, a few fertile valleys in the east, and extensive but largely unexploited natural pine forests. Known mineral deposits are not extensive; they include , lead and zinc, which have been exploited on a small scale for decades, and low-grade iron ore. Although the average population-to-land ratio is favorable, population has traditionally concentrated in the mountainous west, the poorest area of the country, and on the north coastal plain. In the future, as population pressure increases in these areas, heavy investment in physical infrastructure will be necessary to facilitate the movement of population of less heavily settled areas further to the east. This process has already started as the road network was improved and expanded in recent years.

4. gith a per capita income of about $290 in 1971,2/ Honduras is the poorest country in . Real GDP rose at an average annual rate of 5.6 percent in the 1960's, but much of this expansion took place in 196h-68, as a consequence of substantial investment and subsequent large increases in output and export of bananas. Since then, the economy has been in , per capita income increased slowly, and the balance of payments weakened considerably. Several factors contributed to the recession, including severe hurricane damage to and other in 1969, coinciding with the amred

1/ Calculated according toiorld Bank Atlas methodology. conflict between Honduras and and the consequent reduction in private investment; the withdrawal by Honduras from the free trade arrange- ments of the Central American Corrnon Market (CACM), a move which has adversely affected a nimber of export industries; and finally, a severe drought, in 1972 which resulted in a large loss in agricultural production.

5. The CA(M was an important element in the growrth of the Honduran economy during the 1960's. Tne CACM5 absorbed Honduran exports of ortaples which have no ready market elsewhere, and it provided the additional markets necessary for the establishment of factories making textiles, clotlhing, chem- icals and metal products. The Honduran authorities felt, however, that the benefits of integration, especially in terms of industrial investment, were unequally distributed among the member countries. The other GACM members recognize the basis for the Honduran complaints, and during the past two years have sought solutions to the problem. However, no agreeraent has been reached largely because of the border dispute with El Salvador. As an interim solution to basic Ccmmon Market problems, Honduras has negotiated bilateral trade agreements with all its CACM partners except El Salvador, A new Government took office in December 1972, and has adopted a positive attitude towards the CACM and the El Salvador border issue. In addition, the Common Market Secretariat (SIECA) has prepared a st-ady which proposes solutions to existing problems, and makes recommendations geared to the foriation of a Central American Economic Community. The report has been well received by the CACH member governments, including Honduras. Discussions of the propo3als among the five member countries, expected to lead to agreement on issues such as ccmplete free trade and rationalization of the comon tariff, will be carried out throughout this year.

6. During most of the 196 0's the Goverrment followed an aggressive developnent policy. Among the major achievements in this period were the establishment of a basic transport network connecting the main poDulation centers, the expansion of electric power and telecommunications services, and the doubling of primary school enrollment. UntLl 1968, there were no financial difficulties in carrying forward these schemes, mainly because of the fast growth of gover2nert revenues based on the introduction of a general sales tax and higher income tax rates in 1964, and larger tax paynents by- the banana companies. Since 1969, however, the public sector has experienced a sharp deterioration in its finances, initially because of defense and other emergency expenditures connected wxith the 1969 border incident with El Salva- dor, and later because the normal growth of goverrnent current exDenditures outstripped that of current revenuaes. Public sector savings declined frm an average cf 2.7 percent of GDP in 1966-68 to 1.6 percent of GDP in 1969-71. In spite of this, the public sector maintained an impressive investment effort with the average investment ratio rising from 3.6 to 6.2 percent of GDP over the same period. A large increase in net foreign financing did not cover the overall p-ublic sector deficit, and the Central Bank was required to finance the gap, ecuivalent tc about 1.3 percent of GDP in 1969-71. In the twelve months ending in November 197?, however, public sector borrowing was reduced to less than 0.5 percent of GDP. - 3 -

7. In December 19729 a military Governnent took power, and announced its intention to pursue progressive development policies, and to tackle the country's fundamental econcnic and social problems. Since then,the new Govern- ment has been working closely with international agencies in an effort to revise and accelerate the execution of a tentative investment program prepared last year. The progrEa provides for continued investments in physical infra- structure, especially power and transport, and a substantial increase of invest- ment in the social sectors, particularly education and water supply, and in directly productive sectors, giving special emphasis to agricultural diver- sification. The forestry sector offers the best opportunity for the medium- term diversification of production with good export potential. Various institutional difficulties inhibit the prcnpt establishment of a pulp and paper industry, but an imaginative approach, perhaps drawing together capital frcm other Central American countries, could help overcoe scme of these problems.

External Assistance

8. The external lending agencies have strongly supported public invest- rment in Honduras. Apart from the Bank Group, external financing is provided principally by USAID, the Inter-American Development Bank (IDB) and the Central American Bank for Economic Integration (CABEI). USAID has been active in education, health, feeder road construction, water supply and ; it was also instrumental in the formation of a private industrial finance company. IDB has been involved in housing, education, water and sewerage, and highways. It also supports agricultural and industrial projects by means of general credit lines to the government-owned development bank. CABEI is financing projects with a regional impact, primarily in transport, industry and tele- communications. Past lending of these agencies is sumnmarized below.

COIqITMENTS BY MAJOR OFFICIAL LENDING AGENCIES (Net of cancellations, as at December 31, 1972) (US$ millions)

IBRD IDA AID IDB CABEI

Lending 1950-65 25.9 11.9 26.7 27.2 8.1

Lending 1966-72 41.5 12.1 26.6 62.5 73.8

Transport 19.2 - - 11.6 35.2 Power 25.3 9.5 - - 4.3 Telecommunications - - - - 2.7 Education - - 9.0 7.6 Health - - 2.6 - Housing - - - 12.5 6.1 Agriculture - 2.6 13.0 28.6 0.5 Industry - - 1.5 2.2 22.4 Other - - 0.5 - 2.6 Total 70.4 24.0 53.3 89.7 31.9 IDB and CABEI are expected to continue financing projects in the sectors which they have financed in the past, although CABEI *ill focus increasingly on tourism. USAID, on the other hand, may concentrate ito future lending in agri- culture, depending on the results of an ongoing sector s-urvey which it is financing.

9. Since its poverty, meagre resource endowment and uncertain balance of payments prospects make it difficult for Honduras - one of the laast developed coantries in Latin Amierica - to borrow substantial. mounts on con- ventional terms, external agencies have extended financial assi.stance on fairly soft teras so that debt service, while it has risen significantly in the last few years, is still low. It would be desirable to maintain reason- ably soft average terms of assistance in the futuzre in order to keep the debt service ratio within moderate limits, and further IDA credits are accordingly being planned. However, Honduras does have some margirn for borrowing on corventional terms; assimting that the average terms of external borrowing were to remain more or less the sane as in the past, the debt service ratio would rise to about 6.5 percent by the end of the decade, which is manageable for an economy such as Honduras. Therefore, Honduras can be regarded as creditworthy for the proposed loan.

PART II - BANK GRO-LP O?PEEATIONS TN HONDTUAS

10. Honduras has to date received eleven Bank loans totalling US$YCXL million and five IDA credits totalling US$21j.0 million, both net of cancel- lations, making a total of US$94.4 million. At the end of March 1973, the Bank and IDA held about US$31.6 million, including about USb24.4 million not yet disbursed. The most recent loan, for power, was signed in Jane 1972. The proposed loan is the only operation in Honduras to be presented for your consideration during the current .

11. Execution of Bank Group financed projects has, on the whole, been satisfactory. Annex II contains a summiary statement of Bank loans, IDA credits and IFC investments as of March 31, 1973, and notes on the execution of on-going projecvs.

12. In the past, Bank and IDA lending has been heavily concentrated on transport and power, where inadequate facilities hampered the development of the country. The first livestock development credit approved in -1970, however, marked the beginning of a major diversification in lending. The Bank's lending program for FY73-77 would support the priorities of the Government's investment plan by giving increased emphasis to investment in the social and directly productive sectors while continuing to lend for physical infra- structure,where there are still substantial deficiencies to be made good.

13. Over the past two years the Bank has been working closely with the Government in developing programs in education and agriculture. A first education project, wnich I hope to present for your consideration in the next few months, includes non-fonral technical training, agricultural education, and teacher training programs, which are long neglected areas that deserve the highest priority. The objectives of lending for agriculture are to assist in diversifying the economy, developing competitive exports in high- value products, and supporting the Government's efforts in agrarian reforn. A second livestock project, which will be geared to help the smaller pro- ducer, will also be presented for your consideration in the next few months. The project will be broader in scope than the first, including financing for dairying, pig production and slaughterhouses, and a large component of tech- nical assistance to train local technicians in livestock production and help small farners. Other agricultural projects aimed at supporting the Govern- ment's land colonization programs,and to increasing production of high value crops are under consideration. 14. We plan to assist industry in Honduras as well as in the other Central anerican countries by lending to the Central American Bank for Eco- nomic Integration (CABEI). Lending for industry through a multinational institution such as CABEI would serve a number of purposes: it would support the Central American integration effort; foster rational industrialization in the area (national markets are too small to penmit efficient industrial development); and assist in diversifying the region's economy. I hope to present for your consideration a first loan to CABEI during the next fiscal year.

15. In transport, we will continue to assist the Government to ccmplete the highway links between the main regions of the country, but will in the future increase our assistance, in consultation with IDB, in the construction of a network of feeder and access roads to support the Government's agri- cultural program. The project which I am presenting for your consideration today includes financing for the first part of this feeder road program. 16. IFC has participated in two projects in Honduras. A total of US$378,000 was invested in a leather tanning project in 1964 and 1966. The more important operation is a pilot project for pulp and paper industry to utilize the resources of the Olancho Reserve. A pilot company, Compania Pino Celulosa de Centro Am6rica S.A. (COPINO), was established in June 1968, under the leadership of International Paper Company (IPC), to investigate and possibly carry out a project. IFC invested US$75,ooo in COPINO in 1969 and 1970. In March 1971, IPC discontinued its participation in COPINO, and efforts to find other technical partners have so far not been successful. The new Government has indicated that it desires to find some means of exploiting the Olancho forest, but no specific plans in this regard have yet been formulated.

PART III - THE TRhASPORT SECTOR

Background 2 17. Honduras, with an area of L15 thousand kn ,is the second largest of the Central American countries and the most mountainous. Population density is low, about 23 per lan2, but population is heavily concentrated in the western part of the country and along the north coast The terrain is - 6-

r-ugged and traversed by many rivers, and these features, together with the tropical climate, have traditionally made road and railroad construction and maintenance difficult and expensive. Unlike other Central American countries where urban population has concentrated in one center, there are three major and relatively distant urban centers in Honduras: , the capital, in the central zone, and industrial and , both of which developed around the banana industry on the north coast. An inadequate transport system has hampered communications between the major centers within Honduras, and between Honduras and the other Central American cou7ntries, and has been a major stumbling block in the country's developnent.

18. sJith four loans and two credits totalling US$36.2 million for highways, and two loans totalling US$100 6 million for ports, the BarIC Groupi has been closely associated wTith the develo,mient of the transport svstem in Honduras. The Bank has contributed to financing the basic highw-y network of the country. In addition, it hlas been instrumental in establishing and strengthening the port authority, and has provided the bulk of financing required to implement the Govermnent's expansion plans in ports.

19. Development of the transport sector began only- in the mid-fifties with the construction of the Inter-American Highwa,- in the southern part of the country. Transport facilities are mainly concentrated in the western half of the country and along the densely populated north coast. Folr pa77ed roads, San Lorenzo-Tegucigalpa-Puerto Cort6s (the north*-south road), San Pedro Sula-Ocotepeque (from the north coast to the El Salvador border), San Pedro Sula-La Ceiba (along the north coast) and the Inter-American Highway (in the extreme south), constitute tihe main highway network0 The railway, principally used to transport banatnas, runs along -the Atlantic coast between Puerto Cort6s ard Sonaguera. Until recently, air services pla-yed a vital role in the developnent of the country providing transport for many remot.e areas. As a result of the recent improvement of the highway system, however, domestic air service has been discontinued in many areas; nevertheless, total air traffic, especially for passengers, has been steadily increasing. In 1971, more than 86 percent of all freight t:raffic (i-n' tons) was carried by road, 11 percent by rail and less than 3 percent by air.

20. About 90 percent of the country's international trade is handled by the ports, and the Government attaches high priority to their develop- ment. Puerto Cort6s, on the north coast, is the principal port with a total traffic exceeding 2 million tons per annura. It handles about half of the total banana ex-orts while the two other specialized ports east of Cort6s, and La Ceiba (also on the north coast), export the remainder. Amapala, on the island of El Tigre, and El Muerto are the only accessible anchorages on the Pacific coast for ocean-going ships; they are lighterage ports, and cargoes are hauled by tugs to and from San Lorenzo on the mainland9 About 120,000 tons of lumber - re-presenting about two-thirds of total traffic through the Dort - are exported annually through Amapala-San Lorenzo-El Muerto. The Bank's loan for the Second Port Project is assisting the Government in financing a deep water port at Henecan in the Pacific - 7-

Transport Policy and Coordination

21. Transport planning and the preparation of transport investment programs are the responsibility of the Technical Secretariat of Planning (STP), in coordination with the Planning Unit of the Secretariat of Camuunications, Public Works and Transport (SCOPT), and the Port Authority. The Planning Unit of SCOPT was created following agreements reached in connection with the loans for the fourth (North Road) and fifth (Western Highway Paving) highway projects.

22. A Six-Year Transport Investment Program (1972-77) prepared last year follows the recommendations of a Bank-financed transport survey prepared by the Stanford Research Institute. The program amounts to about US$Th5 million, which would represent around 26 percent of the total public invest- ment program over the five-year period. A major portion of the proposed investment will be devoted to road improvement and feeder road construction to support the agricultural development program of the Government.

23. The Six-Year Transport Investment Program contains much valuable information, but additional work is required to establish priorities within the sector. Staff in both the Transport Department of the STP and the Plan- ning Unit of the SCOPT lacks transport planning experience and the basi^. data with which to work. To remedy these shortcomings, the proposed project includes financing of technical assistance to strengthen transport planring.

2h. Coordination of the transport sector is not a serious problem in Honduras because there is little competition between different modes of transport. The railway serves only a small part of the country and ne-ther coastal shipping nor inland water transportation is of any significance. Internal air services still currently serve cities and towns which are also served by roads (e.g. Tegucigalpa and San Pedro Sula), but each mode caters to a different segment of the market and there is no uneconomic compotitioln.

The Highway Sub-Sector

25. Honduras has a total road network of about 5,590 km, of which about 1,170 Im are paved; there has been a ten-fold increase in the paved length since 1960. The increase in road transport has been in line with the expansion of the network. The vehicle fleet grew at a rate of about 11 per- cent per year over the past ten years, and the fleet of about 31,000 vehicles in 1971 is adequate to satisfy demand.

26. The General Directorate of Highways (DGC) within SCOPT is responsible for constructing all roads in the country. It also undertakes design work for minor improvements and for some feeder roads. The new Government has created a General Directorate of Maintenance (DGM) with a view to increasing efficiency in maintenance operations. Routine maintenance is carried out by force account, and has recently been taken over by the DGMo Under the loan agreements for the fourth and fifth highway projects, the Government agreed to carry out a number - a- of important refoms ini highway administration, mainly aimed at improving highway maintenance. The technical expertise and equipaent of the highway construction and maintenance organization have 'oeen materially strengthened, although there is still room for improvement. The preposed project there- fore provides for training of highway engineers, supervisors and technicans of SCOTP.

27. Honduras has about six local firms capable of executing small to medimu scale c onstruction works. For larger works, most of these firms have been associated with foreign contractors. In addition, there are about 20 small firms apecializing in drainage structures and minor earthworks which are periodically engaged by DOC. The growth of a strong dcrtestic contracting industry has been inhibited by uneven budgetary allocations, and by the uneven flow of foreign financing for highway construction which have led to uncertainties and idle periods for the contracting firms.

28. About 75 percent of highway investment has been financed from external sources, and the highway investment program contemplates a corresponding share of external financing in the f-ture. Highway revenues from road user charges currently total US$7.5 million, which appreciably exceed expenditures on administration and maintenance alorne. Th:Ls level of road user charges is considered acceptable frcm the point cf view of promoting efficient use of transport facilities, but further consideration needs to be given to increas- ing these charges, taking irto account the coimntry7ls fiscal problems.

PART IV - THE PROJECT

29. A report entitled "Honduras - Appraisal of a Sixtbh Highway Project"t (No. 101-HOa) dated Pay 1h,1973, is being distributed separately. The main features of the loan and project are summarized in Annex III. Feasibility studies for the construction components of the project were prepared by Howard Humphreys Keeble and Partners, of the United Kingdom, and Brown and Root Engineering of the . The project was appraised in the field in November 1972, Negotiations for the proposed loan were held in Washington in April 1973. The Government was represented by Messrs. herman Aparicio, Vice Minister of Communications, 1ublic Works and Transport, Roberto Galvez, Ambassador of Honduras to the United States,and Gulliermo Bueso, Economic Advisor to the Embassy of Honduras in the United States, Project Description

30. The project forus an important portion of the Governmentrs 1972-77 highway investment program and consists of:

(a) construction of a 55 kn primary road from TegucigaLpa to Talanga, t>he first leg of the main route between Tegucigalpa and Juticalpa, 3erving the rich eastern zone of Honduras, wfhere lumber erploitation is intensive, and agricultural and further forestry development pracxising; construction -9-

and supervision of the Tegucigalpa-Talanga road is the most important component of the project, constituting 60 percent of total project costs;

(b) improvement of a 45 hm secondary road frcm Canayagua to La Libertad that would connect the fertile Comayagua Valley in central Honduras to the Tegucigalpa-San Pedro Sula road;

(c) improvement of 80 km of feeder roads, and construction of a 200 m bridge over the Ulua River, along the La Ceibita- San Nicolas feeder road. The feeder roads would support the agricultural development program of the Government;

(d) consulting services to supervise the construction program listed in (a), (b), and (c) above;

(e) consulting services to carry out the engineering design for the Ccmayagua-La Libertad road, the Ulua bridge, and part of the feeder road program;

(f) studies of additional feeder roads for possible future Bank financing;

(g) a training programn for highway engineers, supervisors and technicians of the Secretariat of Communications, Public Works and Transport;

(h) assistance in transport planning to the Technical Secretariat of Planning and to the Secretariat of Communications, Public Works and Transport.

31. The Secretariat of Communications, Public Works and Transport would be responsible for the execution of all construction, supervision, and train- ing. Consulting engineers would supervise all the construction canponents of the project. The project is expected to be carried out during 1973-76.

Cost Estimates and Financing

32. The total cost of the project is estimated at US$25.8 million including contingency allowances; a detailed breakdown of costs is given in Annex III. The proposed loan of US$18.8 million equivalent would finance the estimated foreign exchange ccmponent of the project. However, a small amount of local currency (up to US$o.4 million) may be financed depending on which consulting firms are engaged to carry out the supervision of construc- tion, and the feasibility and engineering studies. The remaining local currency component would be financed by the Government.

33. No contracts have recently been awarded for major highway works, and it is therefore difficult to judge the response to the forthcaning bidding for the Tegucigalpa-Talanga road. Since bids higher than the - 10 - estimate would place a heavy bulrden on the Government, a special contin- gency of 15 percent of the construction cost of the Tegucigalpa-Talanga road has been izcLuded in the uroposed loan amount; this contingency would be cancelled, after consultat,ion with the Borrower, if the results of the bidding indicate it is not needed.

Procurement and Disbursement

34. Contracts for the construction of the Tegucigalpa-Talanga road would be let on the basis of interrnational competitive bidding in accordance with Bank guidelines. Contracts for the secondary and feeder roads, however, would be relatively small (about seven contracts totalling US$2.0 million), and construction sites are so clispersed that they are unlikely to attract foreign companies not presently operating or represented in the country. Since there would be little, if any, advantage derived frcm :international advertising, these contracts would be advertised locally only. This would not exclude participation by interested foreign bidders.

35. The loan would be used to cover 74 percent of total expenditures for civil works contracts; 60 percent of total expenditures for consult.ing senrices, and 100 percent of foreign expenditures for the technicaL assi&stance for trans- port planning and for the training program. It is propc,sed t.lat -ip to U-$50,000 be reimbursed to the Goverment from the proposed loan for expenditures in re- spect of engineering services necessary for p:roject preparation incurred between April 1, 1973, and, the date of signmig. Annex III includes the dis- bursement schedale for the proposed loan.

Economic Justification

36. The economic rate of return of the Tegucigalpa-Talanga road, the major component of the project, is estimated at 13 percent. The rate of return of the secondary and feeder road program is about 1? percent. In calculating the economic rate of return, only the readily qnuantifiable bene- fits of reduced vehicle operating costs and lower maintenance costs have been considered.

37. The project can be expected to play an important role in the devel- opment of forestry and agriculture. The Tegucigalpa-Talarnga road would lead to more efficient lumber'ng and thereby further promote the area's lumber industry, which accounts for about 35 percent of Honduras total Ilwmber pro- duction. At present, high transport costs and difficult access to markets are severe disincentives to producers.

38. The proposed Tegucigalpa-Talanga road is the first step towards opening the rich and practically unexploited agricultural regiorn of Olancho that is about 100 km eastuo' Talanga. The difficult road section between Tegucigalpa and Talanga has been a major obstacle for developing the Olancho region. The reduced tranisport costs between Tegucigalpa and Talanga will stimulate production in the Olancho region of basic agricultural products for the Tegucigal-a area, and of livestock and cotton for export. By opening the largely unexploited and potentially rich eastern frontier of Honduras, - 11 -

where the Government plans to concentrate its colonization programs, the project will contribute to improving productivity and the pattern of land tenure in the agricultural sector.

39. The feeder road improvements contemplated in the project are designed to support the Government's agricultural program. The roads will provide farms in the affected regions with better access to the national market, which coupled with the extension services to be provided by the Government, is expected to increase production.

PART V - LEGAL INSTRUMENTS AND AUTHORITY

4O. As mentioned above, a military Government took power in December 1972 under General Oswaldo L6pez Arellano, who was frcm 1963 to 1971. The new Government is in control, and has been recognized by most Bank member countries. In the past, there have been "de facto" govern- ments in Honduras and successor governments have recognized the obligations incurred by them; the present Government has stated that it will honor obligations incurred by its predecessors. The constitution of June 2, 1965, remains in force, and is being applied to the extent that it is not incon- sistent with the decisions of the Government. Our loans to, or guarantees by, Honduras require congressional approval under the 1965 constitution. Due to the dissolution of Congress, such approval would now be obtained through a Law-Decree issued by the Head of State in Council of Ministers. This procedure is acceptable to the Bank.

41. The draft Loan Agreement between the Republic of Honduras and the Bank, the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement, and the text of a draft resolution ap- proving the proposed loan are being distributed to the Executive Directors separately. The draft Loan Agreement conforms to the usual pattern for highway projects.

42. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank.

PART VI - RECOMMENDATION

43. I reconmend that the Executive Directors approve the proposed loan.

Robert S. McNamara President by J. Burke Knapp Attachments. May 11, 1973

A1414EX I Page 1 of 2 pages

COUNTRY DATA - HONDURAS

AREA POPULATION 2 DENSITY 115,200 km 2.61million (mid-1971) 22.7 per km2 Rate of Growth: 3.14 (from 1960to 1970)

POPUTLATION CHARACTERISTICS (1965-70) HEALTH (1970) Crude Birth Rate (per 1,000) 49.0 Population per physician 3,6oo C--ude Death Rate (per 1,000). 17.1 Population per hospital bed 592 Infant Mortality (per 1,000 live births) 34.0

INCOME DISTRIBUTION DISTRIBUTION OF tAND OWNERSHIP % of national income, lowest quintile 7. owned by top 10 of owners highest quintile .. % owned by smallest 10% of owners ACCESS TO PIPED WATER ACCESS TO ELECTRICITY (lQ71) - 7 of population 35 X of population 16

NUTRITION (1960-63) EDUCATION (1970) Calorie intake as Z of requirements 90.1 Adult literacy rate % 50 Per capita protein intake 53.6 Primary school enrollment % 83

1/ GNP PER CAPITA in 1971 US $ 290

GROSS NATIONAL PRODUCT IN 1971 ANNUAL RATE OF GROWTH (7M, constant prices)

US $ Mln. Z 1960-65 1965-70 1971

GNP at Market Prices 719 100.0 3.7 5.8 3.8 Gross Domestic Investment 125 17.4 9.1 7.3 -20.2 Gross National Saving 95 13.2 0.8 8.1 4.0 Current Account Balance -30 1.2 Exports of Goods, NFS 207 28.8 7.0 10.6 3.6 Imports of Goods, NIFS 219 30.4 12.9 8.2 -12.1

OUTPUT, LABOR FORCE AND PRODUCTIVITY IN 1970 2/ Value Added Labor Force7 V. A. Per Worker US$Mln, 7 Mi. % U % Agriculture 210 37.1 0.467 65.3 511 56.8 Industry 130 20.1 0.081 11.3 1,605 177.3 Services 277 42.8 0.167 23.4 1,659 183.3 Unallocated Total/Average 647 100.0 0.715 100.0 905 100.-O

GOVERNMENT FINANCE General Government Central Government (Lernp-Mln.) % of GD? (Lemp. Mln.) 7% of GDP 1971 1971 1968-70 1971 L97 1 1968-70

Current Receipts 202 13.6 13.7 173 11.6 11.6 Current Expenditure 188 12.6 12.4 152 10.2 9.7 Current Surplus ; 1.0 1.3 21 1.4 1.9 Capital Expenditures 63 1.2 4.2 51 3.6 3.5 External Assistance (net) 27 1.8 1.5 25 1.7 1.5

i/ The Per Capita GNP estimate is at 1970 market prices, calculated by the same conversion technique as the 1972 World Atlas. All other conversions to dollars in this table are at the average exchange rate prevailing during the period covered. 2/ Total labor force; unemployed are allocated to sector of their normal occupation. "Unallocated" consists mainly of unemployed workers seeking their first job.

not available not applicable ANNFEX I Page 2 of 2 pages

COUNTRY DATA - HOITDURAS Prel. 1970 1971 1972 MONEY, CREDIT and PRICES 1965 1969 (Million Lemp.outstanding end period)

378 431 and Quasi Money 167 294 335 Money 73 82 Bank Credit to Public Sector is 23 54 347 369 116 Bank Credit to Private Sector 135 299 (Percentages or Index Numbers)

21.8 22..4 Money and Quasi Money as % of GDP 1i.5 -19.6 ill.6 General Price Index (1963 = 100) 106.7 Ll0.6 111. Annual percentage changes in: 1.2 - 0.3 General Price Index . 0.9 1314.5 35.2 - 12.3 Bank credit to Public Sector . 6.3 16.0 6.3 12.7 Bank credit to Private Sector . 21.0

MEBRCHANDISE FXPORTS (AVEPAGE 1969-71) BALANCE OF PAYMENT-S US$ ln 5 1969 1970 1971 (Millions US $) 82 L5.6 Goods, NFS 187 196 207 Bananas Exports of 22 12.2 Imports of Goods, NTS 206 244 220 L=Ler 17 9.4 Resource Gap (deficit = -) _ 9 *7 9 5.0 commaodities 50 27.8 Payments (net) - 1 - 2) All other Interest Total Qoq,o Workers' Remittances . .) - 23 Other Factor Payments (net) - 13 - 20) EXTERNAL DEBT, DECEMBER 31, 1971 Net Transfers 7 7 6 Account - 31 6 --30 Balance on Current US S Mln Direct Foreign Investment 9 8 6 Debt, incl. guaranteed 150 MLT Borrowing 19 214 17 Public Net Private Debt Disbursemer.ts 20 25 20 Non-Guaranteed 1 l -1 Total outstanding & Disbursed Amortization 1/ Subtotal 28 32 23 , - - DEBT SERVICE RATIO for 1971 Capital Grants - % Other Capital (net) 2/ 3 5 1 Other 4tems n.e.i 3 13 12 6 Public Debt. incl. guaranteed 3.3 Increase in Reserves (+) - 3 -14 Non-Guaranteed Private Debt outstanding & Disbursed Gross Reserves (end year) 28 24 24 Total Net Reserves (end year) 23 9 15

LENDING, Dec. 31. 1972 (Million US S): RATE OF EXCHANGE IBRD/1DA IBRD IDA Through - 1971 US $ 1.00 = Lempiras 2.00 & Disbursed 36.6 22.2 Lemp. 1.00 US $ 0.50 Outstanding Undisbursed 24.2 2.6 inml. Undisbursed 60.8 2 .8 Since - 1971 Outstanding US $ 1.00 Lempiras 2.00 Lemp.1.OO = US $ 0.50

1/ Ratio of Debt Service to Exports of Goods and Non-Factor Services. and to the banking system. 2/ Net medil'm and long-tern capital to private non-monetary Sector

not available

not applicable ANNEX II Page 1 of 4

THE STATUS OF BANK GROUP OPERATIONS IN HONDURAS

A. STATEMENT OF BANK LOANS AND IDA CREDITS (as at March 31, 1973)

Loan or US$ million Credit Amount (less cancellation) Nimnber Year Borrower Purpose Bank IDA Undisbursed

Ten loans and credits fully disbursed 38.0 15.9 - i)Y-65 1967 Honduras Roads 8.6 - 0.3

179 1970 Honduras Livestock development - 2.6 1.3

692 1970 Honduras Generation and transmission 5.5 - 5.5

201 1970 Honduras Generation and transmission - 5.5 0.7

767 1971 Empresa Nacional Portuaria Ports 6.o - 5.8

OLl 1972 Empresa Nacional de Energia Generation and Electrica transmission 12.3 _ 10.8

Total 70.4 24.o 24.4 of which has been repaid 12.6 0.2 Total now outstanding 57.8 23.8 Amount sold 2.5 of which has been repaid 2.5 -o- Total now held by Bank and IDA 57.8 23.8

Total undisbursed 22.4 2.0 2h.h ANNEX II Page 2 of h

B. STATEMENT OF IFC INVESTMENTS (as at March 31, 1973)

Type of Amount in US$ million Year Obligor Business Loan Equity Total

1964/66 Empresa de Curtidos Tannery 0.30 0.08 0.38 Centroamericana S.A. (ECCASA)

1969/70 Compafiia Pino Celulosa Pulp and de Centroamerica (COPINO) Paper o.080 0.08

Total gross commitments 0.30 0.16 o.46 less cancellations, terminations, repayments and sales 0.26 0.09 0.35

Total coamitments now held by IFC 0.04 0.07 0.11 Total undisbursed ANNEX II Page 3 of 4

C. PROJECTS IN EXECUTION

Ln No. 1495 'Western Highway Paving Project: US$8.6 million Loan of May 26, 1967; Closing Date: September 28. 1973.

Paving work has been completed, although some slide removal and minor drainage works are under way. Loan is expected to be fully disbursed by the Closing Date.

Cr Nio. 179 Livestock Development Project: US$2.6 million Credit of March 2, 1970; Closing Date: December 31, 1975.

The credit has been fully committed, and disbursements are nolw pro- ceeding on schedule.

Ln Hlo. 692 Fourth Power Project: Ut$5.5 million Loan and US$5.5 million Credit Cr No. 201 both of June 24, 1970; Closing Date: June 30, 1974.

Engineering studies carried out after the signing of the Loan/Credit suggested, partly because of the proposed interconnection with , a number of changes in the design of the project which made necessary amending the original project description. These changes delayed bid preparation for and construction of the project's transmission and sub-transmission components by about six months. Disbursements are still expected to be completed on scheduale by June 30, 19714.

Ln No. 767 Second Port Project: US$6.0 million Loan of June 25, 1971; Closing Date: June 30, 1975.

The project provides for the expansion of Puerto Cort&s in the north of Honduras, and the construction of the new port of Henecan in the south. After loan signing, thp Honduran Congress, partly for political reasons associated wqith the border issue with El Salvador, expressed reservations about the construction of a port at Henecan. The Government, the Port Authority and the Bank agreed to postpone the construction of Henecan until additional studies were carried out. However, the Government that took office in December 1972, and the Port Authority have now decided to proceed with the construction of Henecan. As a result of the delays, execution of the project is about 18 months behind schedule.

1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution. ANNEX II Page 4 of 4

Ln No. 841 Fifth Power Pro,ject: US$12.3 million Loan of June 28, 1972; Closing Date: June 30, 1976 Construction of the La Ceiba diesel units, the generation component of the project, is expected to proceed on schedule. Delays in negotiations with major customers and with the Nicaraguan utility may delay completion of the transmission components of the project; completion of construction and disburse- ments is still expected by June 30, 1976. ANNEX III Page 1 of 3

HONDURAS - SIXTH HIGH1IAY PROJECT

LOAN A4D PROJECT StMWiARY

Borrower: Republic of Honduras

Amount: US$ 18.8 miLlion equivalent

Tenns: Payable in 30 years with 5 years of grace at 7-1/h percent interest per annum.

Project Description: (1) Construction of a new paved primary road between Tegucigalpa and Talanga (about 55 1km).

(2) Reconstruction of a secondary road between Coma- yagua and La Libertad (about 45 km).

(3) Construction of a bridge over the Ulua River (200 m).

(4) Improvement of about 80 laa of feeder roads.

(5) Consulting services for:

(a) supervision of items 1 through 4 above;

(b) engineering studies for items (2), (3) and 45 kn of (4) above;

(c) feasibility studies and, if feasible, detailed engineering of about 330 hn of feeder roads; and

(d) technical assistance in transport planning.

(6) A training program abroad for highway engineers, supervisors and technicians. ANNEX III Page 2 of 3

US$ Million Equivalent Local Foreign Total Estimated A. Civil Works Cost: (1) Construction of the Tegucigalpa-Talanga Road 3.40 10.30 13.70

(2) Reconstruction of the Comayagua-La.Libertad.Road 0.40 1.30 1.70

(3) Construction of a 200 m bridge over the Ulua River 0.20 0.60 0.80

(4) Improvement of about 80 km; of Feeder Roads 0.50 0.50 1.00

Sub-Total 4.50 12.70 17.20

B. Consulting Services for:

(1) Supervision of construction, of works under A above 0.6k o.96 1.60

(2) Engineering studies for items A (2), (3) and 45 kam of (4) above 0.08 0.12 0.20

(3) Feasibility studies and if feasible detailed engineering of about 330 kn of feeder roads 0.20 0o40 o.60 (4) Technical assistance. in. transport planning _ 0.10 0.10

Sub-Tot.al 0.,92 1.58. 2.50

C. Training Progrmn Abroad for Engineers, Supervisors and Technicians 0.15 0.15

E. Contingencies

(1) Physical (about 10% of A) 0.h5 1.27 1.72

(2) Escalation (about 11% of A and B) o.60 1.57 2.17

(3) Special (about 15% of A(1)) i.53La 2.06

Sub-Total 1.58 4.37 5.95

GRAND TOTAL 7.00 18.80 25.80 ANMEX III Page 3 of 3

Financing Plan: US$ Million Foreign Local Total IBRD 18.8 Government 7.0 25.8 Estimated Disbursements: US$ Millions by fiscal year 1974 1975 1976 1977 3.6 5.4 7.5 2.3 ?rocurement Arrangements: - International competitive bidding for the Tegucigalpa- Talanga Road.

_ Competitive bidding with local advertising only for the construction of the Ulua River bridge, reconstruction of the secondary road Ccmayagua-La Libertad, and improvement of secondary and feeder roads; this procedure would not exclude participation by foreign firms in bidding. Consultants: 1) The Government intends to engage:

a) Howard Humphreys Keeble and Partners (UK) for the supervision of the Tegucigalpa-Talanga Road. b) Suitably qualified consultants for:

i. supervision of reconstruction of the secondary road Comayagua-La Libertad, improvement of feeder roads, and construction of the Ulua River bridge;

ii. engineering for 45 kn of feeder roads to be constructed under present project;

iii. feasibility studies and engineering studies for additional 330 km of feeder roads.

iv. technical assistance in transport planning. Rate of Return: The economic return for the construction of the Tegucigalpa- Talanga road is 13 percent; for the secondary and feeder road program 19 percent; for the bridge 12 percent. Appraisal Report: No. 101-HOa, dated May 4, 1973.

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