R E S T R I C T E D FILE COPY Report No. P-27 Public Disclosure Authorized This report was prepared for use within the Bank. It may not be published nor may it be quoted as representing the-Bank's views. The Bank occepts no responsibility for the accuracy or completeness of the contents of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMEN1 Public Disclosure Authorized REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS Public Disclosure Authorized ON A PROPOSED LOAN TO NIHON DORO KODAN (JAPAN HIGHWAY PUBLIC CORPORATION) FOR THE KOBE-NAGOYA EXPRESSWAY SECOND PROJECT Public Disclosure Authorized November 21, 1961 INTFRNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPINT REPORT AND RECO iEN!DATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO NIHON DORO KODAN (JAPAN HIGB!,TAY PUBLIC CORPORATIOII) FOR THE KOBE-NAGOYA EXPRESSTWlAY SECOND PROJECT 1. I submit the following report and recommendations on a proposal for a loan in various currencies in an amount equivalent to h40 million to Nihon Doro Kodan (Kodan), a government corporation established for the con- struction, operation and maintenance of toll roads and related facilities in Japan0 The proceeds of the loan would be used to help finance the com- pletion of the construction of the Xobe-Nagoya expressway in Japan. PART I - HIISTORICAL 2. The Japanese Government and the Bank agreed in 1957 that transportation had a high priority in Japan's economic development and the Government pro- posed the Kobe-Nagcya expressway as a project for the Bank's consideration. Preliminary studies made by a Bank mission which visited Japan in February 1958 confirmed that a Kobe-Nagoya expressway was econonically justified. The Bank accordingly lent ;640 million to the Kodan in Narclh 1960 to assist in financing the construction of a 72 kilometer section of the KIobe-Nagoya expressway from Amagasaki to Ritto linking the Osaka-Kobe metropolitan area with that of Kyoto. Work on thlis section, about 405 complete, is proceeding on sched-ule and it is likely to be completed by March 1963 as originally planned. 3. Early this year, the Japanese Government requested the Bank to con- sider m,-iaking a second loan of i40 raillion to the Kodan to help finance the completion of the Kobe-Nagoya expressway. Taking into account the efforts being made by the Governrment to tap the resources of the private market (the latest example is the $20 million placed by the Japanese Development Bank in the New York market in October), I agreed to consider the proposed loan to the Kodan. I informed the Executive Directors of this on March 15, 1961, and at that time I iinentioned that this would probably be the last loan to Japan except snall loans for joint operations which would facilitate access of private companies to the market. 4. Negotiations began in WJashington on October 25, 1961 with the repre- sentatives of the Government and the Kodan and were concluded on November 15, 1961. 5. The proposed loan would be the Bank's twenty-fourth loan in Japan and would increase the total amount lent by the Banlc for projects in Japan to about p8482 million, net of cancellations. Loan previously made are: -2- A,ount of Loan Year Borrowjer Purpose Net of Cancellat ioS (in million of US>o 1953 JDB Power Development (Kansai) 20.6 1953 Power Development (Kyuslhu) 10.4 1953 PowTer Development (Chubu) 6.5 1955 Steel Project (Yawata) 5.1 1956 Industrial Projects 7.6 1956 Steel Project (Kawasaki) 20.0 1956 Land Dev. Corp. Land Reclamation 4.1 1957 Aichi Corp. Irrigation 4.9 1958 JDB Steel Project (Kawasaki II) 8.0 1958 PowJer Development (Kansai II) 37.0 1958 it Powier Development (HoIaLriku) 25.0 1958 " Steel Project (Sumitomo) 33.0 1958 Steel Project (Kobe) 10.0 1958 Power Project (Chubu II) 29.0 1958 t, Steel Project (Nippon Kokan) 22.0 1959 PowTer Development (1iiboro) 10.0 1959 Steel Project (Fuji) 24.0 1959 Steel Project (Yawata II) 20.0 1960 l4ihon Doro Kodan Highway Project (Amagasaki-Ritto) 40.0 1960 JDB Steel Project (Kawasaki III) 6.o 1960 i Steel Project (Sumitormo II) 7.0 1961 It Power Development (It-ushu II) 12.0 1961 JsDanese National Railw.Tays Railw.ay Improvement 80.0 Total, net of cancellations 442.2 Of w,hich has been repaid 18.2 Total now outstanding 424.0 Amiount sold 5)4.2 Of which has been repaid 15.1 39.1 Net apio-unt now held by Bank 384.9 A! 1/ Includes W96.3 million not yet disbursed as of October 31, 1961. All loans are effective. PART II - DESCRIPTION OF THE LOAN 6. Borrower: Nihon Doro Kodan (Japan Highway Public Corporation). Guarantor: Japan. -3 - Amount: The ecuivalent in various currencies of .4O rilion. A,mortization: 41 semi-amnual instalments from January 15, 1965 to January 15, 1985. Interest Pate: 5-3/4%fl per annum, including 1% conunission. Comaitment Charge: 3/4 of 1% per annum. Payement Dates: January 15 and July 15. 7. The amount of the loan would represent about 20% of the cost of the Project. PART III - LEGAL IFSTRUTi04TS AND L7GAL AUTHORITY 8. Attacned are drafts of the followTing docuents: (a) Loan Agreement between the Bank and Nihon Doro Kodan (No. 1), (b) Guarantee Agreement between Japan and the Bank (No. 2). (c) Letter regarding Expenditure, List of Goods and Currencies (N'Io.3). 9. The Loan and Guarantee Agreements conform to the customary pattern and are sutbstantially similar to the agreements signed in connection with the previous loan to the Kodan (R60-33). 10. As in the previous loan the Guarantee Agreement contains, in addition to the guarantees of payment and performance and other normal provisions, an undertaking to ensure the construction of an adequate number of proper access roads (Section 3.02). 11. Also attached is the Report of the Committee provided for in Article III, Section 4 (iii), of the Articles of Agreement of the Bank (No. 4). PART IV - APPRAISAL OF THE PROPOSED LOANi 12. The report, "Appraisal of the Kobe-Nagoya expresswjay Second Project," No. TO-300a, dated November 17, 1961, is attached (No. 5). 13. The Project is a four-lane, divided, limited access toll expressway, consisting of one 7 km section from N4ishinomiya (Kobe area) to Amagasakd (Osaka area) and another 104 lkm section from Ritto (Kyoto-Otsu area) to Ichinomiya (Nagoya area), These sections would complete the Kobe-NMagoya expressway. 14. The Kodan is a public corporation under the supervision of the IJinistry of Construction. The construction Work will be done by contractors under the supervision of the Kodan, assisted by qualified foreign consultants. The design standards, plans and specifications are satisfactory. Acquisition of right of way and some bridge construction started in late 1960; about 5% of the work on the project has been completed. 15. The Kodan plans to invest a total of US$844 million equivalent in the Kobe-Nagoya expressway and other toll facilities in the next five years. Of this amount the Kobe-lNagoya expressway, whlich has priority over the other works, will require about "301 million equivalent. The funds for the present Project, US$212 million, would be provided from the following sources, all of which involve governmient contributions or guarantees: USC' million equivalent IBRD loan 40.0 Borrowings from the Trust Funds held by the M4inistry of Finance: 2.3 Sale of Road Bonds to banks and insurance companies: 138.5 Government grants 31.1 Total 211.9 The Japanese Government and local authorities are spending about US$lo8 million equivalent for improvement of the access roads to the Kobe-:ITagoya expressway, Financial and Fiscal Aspects of the Project 16. Estimated revenues from expressway tolls would be sufficient to cover operating costs and interest charges at 6/% and to repay the investrnent cost of the expressway in 20-25 years. Larger tax revenues induced by the express- way - principally real estate taxes - would repay the government and the local authorities in a few years for their expenditures on access roads (US$108 million) and grants for the expressway (US$31.1 million). The total toll revenues of the Kodan are increasing rapidly and the Kodants operating ratio is improving steadily. The Kodants present earnings from toll revenues net of operating costs are sufficient to cover 90% of interest charges and would amortize Kodants fixed assets now in service at about 61-d over a period of 30 years. Justification of the Project 17. The Kobe-Magoya expressway will relieve increasingly severe traffic congestion on the existing roads in the area, stimulate the dispersal of industry and population out of overcrowded cities, widen the effective area of food supply for the urban cormunities and reduce truck, bus and car operating costs substantially. The road user savings alone would represent an economic return of some 10 to 151 annually from the start of operation. Method of Procurement 18. Foreign contractors with experience in expressway construction will be given the opportunity to bid for all major works of the Project. This follows and improves upon the precedent of the Amagasaki-Ritto loan, wlhen international competitive bidding w.ras employed for the first time in Japanese highwray construction but limited to selected important works. In fact, however, little interest has been shovn by foreign contractors even in the submission of prequalification details, and no foreign firms have actually submitted bids. Economic Situation 19. A memorandum on Recent Economic Developments is attached (No. 6). Japan is currently in the midst of one of the periodic balance of payments crises which have been characteristic of the last decade.