FILE COPY Report No

RESTRICTED

FILE COPY Report No. P-636

This report was prepared for use within the Bank and its affiliated organizations. Public Disclosure Authorized 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 The report may not be published nor may it be quoted as representing their views.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

Public Disclosure Authorized REPORT AND RECOMMENDATION

OF THE

PRESIDENT

TO THE

EXECUTIVE DIRECTORS

ON A Public Disclosure Authorized PROPOSED LOAN TO

THE REPUBLIC OF ZAMBIA

FOR A

HIGHWAY PROJECT

Public Disclosure Authorized September 12, 1968 REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS CONCERNING A PROPOSED LOAI TO THE REPUBLIC OF ZAMBIA FOR A HIGHWTAY PROJECT

1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US$10.7 million to the Republic of Zambia.

PART I - HISTORICAL

2. The Government of Zambia requested in May 1966, at the time of the negotiations for the first highway loan (469-ZA), that the Bank also finance the design and construction of the Serenje-Tunduma section of the Great North Road and of the Rufunsa-Nyimba section of the Great East Road. At that time it was very difficult to judge the economic justification for the reconstruction of these road sectionswhich was proposed mainly to accommodate the diverted traffic resulting from Rhodesia's unilateral declaration of independence. Moreover, justification would also have required parallel action by neighboring countries, particularly Tanzania, to improve their sections of the trunk routes from the Zambian border to the sea. Due to these uncertainties, the Bank decided that it would be im- practical to appraise these roads at that time. However, in view of the transport crisis facing Zambia, it was clear that the Government could not delay the project until these uncertainties could be clarified. Therefore, it was agreed that if a subsequent appraisal should demonstrate the reconstruction of these road sections to be justified, and if in its expenditures on these road sections the Government followed procedures acceptable to the Bank, it would be recommended to the Executive Directors that the Bank finance expenditure on the project retroactively.

3. The Government again requested Bank consideration of these road sections in January 1968. A Bank appraisal mission visited Zambia in March/April 1968. As a result of this visit and information subsequently provided by the Government, the members of this mission found the reconstruction of the 235 mile Mpika-Tunduma section of the Great North Road and the detailed engineering of the 63 mile Luangwa River-Nyimba section of the Great East Road to be suitable for Bank financing. The remaining sections of the Great North Road and of the Great East Road in the originally proposed project were found not to be suitable for financing due to the award of contracts on a negotiated basis.

4. Formal negotiations took place in Washington in August 1968. The borrower was represented by a delegation led by Mr. E. G. Kasonde, Permanent Secretary of the Ministry of Finance and including Mr. D. Hutchinson from the Roads Department, Mr. V.A. McInnes from the Ministry of Finance, Mr. D. Crapper from the Office of National Development and Planning, and Mr. D. Gray from the Department of Legal Affairs.

5. The first lending by the Bank in independent Zambia was a road loan (h69-ZA) made in 1966. Previously, the Bank made two loans for railways in Morthern Rhodesia (now Zambia) and Southern Rhodesia, and two loans for power to the Central African Power Corporation, jointly oimed by Zambia and Southern Rhodesia. Zambia has since assumed responsibility for its share of these loans. Each of the pre-independence loans is guaranteed by the United Kingdom. There have been no IDA operations in Zambia. The following is a summary statement of Bank loans in Zambia as of August 31, 1968.

Loan No. Year Borrower Purpose Amount(US$ Million) Bank Undisbursed 74-DR 1953 Zambia Railways 71 -

lk5-RN 1956 Central African 1/ 2/ Power Corporation Electric power 40.0 -

197-RN 1958 Zambia 1/ Railways 9.5 -

392-RNS 196Ll Central African 2/ Power Corporation Electric power 3.85 -

469-ZA 1966 Zambia Roads 17.5 10.4

Total (less cancellations) 84.8 of which has been repaid to Bank and others 21.6

Total now outstanding 63.2

Amount sold- 37.6 of which has been repaid 18.2 19.4

Total now held by Bank 43.8

Total undisbursed 10.h 10.4

6. Since June 1, 1966, the Central African Power Corporation has been unable to obtain the foreign exchange from the governments of Southern Rhodesia and Zambia for payments under the 1956 and 1964 loans. Zambia and the United IKingdom have each made one-half of these payments as guarantor.

7. I am submitting simultaneously a proposed loan of US$ 5.3 million for an industrial forestry project. It is expected that an education

As a result of Loan Assumption Agreements entered into in connection with the dissolution of the Federation of Rhodesia and Nyasaland at the end of 1963.

/ Amount guaranteed by Zambia, i.e., one-half of loan. loan of about US' 17 million will be ready for negotiations within the next few months, and a livestock developmerit project may be ready for presentation by the end of this fiscal year. I may also submit proposals for the financing of an extension to the powxer installati:ons at Kariba which were financed by Loan 145-RN of 1956.

PART II - DESCRIPTION OF THE PROPOSED LOAN

8. The main characteristics of the proposed loan are as follows:

Borrower: Republic of Zambia

Purpose: To help finance the detailed engineering and reconstruction of the Mpika-Tunduma section (235 miles) of the Great North Road, and the detailed engineering of the Luangwa River-1,yimba section (63 miles) of the Great East Road. Amount: Various currencies equivalent to USfl0.7 million.

Amortization: In 20 years, including a two-year period of grace, through semi-annual installments beginning July 15, 1970 and ending July 15, 1938.

Interest rate: 6 1/2%.

Commitment charge: 3/L of 1%.

PART III - THE PROJECT

9. A report on the proposed project entitled "Appraisal of the Second Highway Project - Zambia" (TO-676a, dated September 10, 1968) is attached. 10. As a landlocked country heavily dependent upon imports and exports, Zambia must concern itself with ensuring reliable access to the sea as well as building an internal transportation network to facilitate economic development. Prior to Southern Rhodesia's unilateral declaration of independence (U.D.I.) in iNovember 1965, practically all of Zambia's imports and exports were carried via the Rhodesia Railways through Southern Rhodesia and the Mozambique Ports of Beira and Lourenco Marques. This pattern was to a large extent the result of pre-independence policies aiming at linking the economies of what were then Northern and Southern Rhodesia. Since attaining its independence, the Zambian Government has had as a long term goal the development of alternative outlets to the sea. U.D.I. has, however, forced Zambia to take urgent action to free itself from dependence on transport routes through Rhodesia, not only as a result of Zambia's owfn political preferences but also as a result of economic sanctions imposed by the UN Security Council which restrict the movement of products to or through Rhodesia. To meet this emergency, varicus measures have been undertaken ranging from the construction of an oil pipeline from Dar-es-Salaam to a temporary military-type airlift by the Canadian, U.K., and U.S. Air Forces.

11. One of the measures undertaken to meet this crisis has been the upgrading and resurfacing of the Great North Road so that it can withstand the greatly increased volume of traffic it is now bearing. The reconstruction of the Hpika-Tunduma section of this road for which finance is proposed under this project, represents a part of this effort. The Great North Road is the main highway to Tanzania and to the sea via Dar-es-Salaam, and in 1967 carried an average of 30,000 tons per month of imports and exports. A previous Bank loan (469-ZA) helped to finance the reconstruction and surfacing of a 122-mile section of this road and the final design of another 1l7-mile section. A project to improve the Tanzanian portion of the Great North Road is expected to be ready for presentation to the Executive Directors in a few months. The proposed financing of the final design of a 63-mile section of the Great East Road also represents continued Bank involvement in a road for which financing had previously been provided under Loan L69-ZA. This road connects the capital with the agriculturally rich Eastern Province of Zambia and ultimately to the sea via the road/railway networks of 1Ialawi and Mozambique.

12. Calculation of the expected economic rate of return on the road section being built under this project is complicated by various uncertainties, such as the duration of U.N. sanctions, the rate of growJth of capacity of the Dar-es-Salaam harbor, and the possibility that a railroad to Tanzania may be put into operations some time after 197h. These and other uncertainties were taken into account by means of a method that weighs the various possible events by a probability estimate of the event's occurrence. This analysis demonstrated that the expected rate of return on the project is over 15%, and that the probability is only 10% that the rate of return on the project would be less than 8%. Even if it is assumed that the railroad to Tanzania would be built at the earliest feasible date (1974) and that all export/import traffic would be diverted from the road to the railwaay thereafter, the expected rate of return on the project w^jould still be nearly 11%. The above calculations only take into account the savings in transport costs on the traffic over the road and the savings in maintenance cost on the road. Additional savings to the Zambian economy may occur since the reduced cost of road transport may induce price cuts on the existing rail routes to the sea, in order to meet competition.

13. The cost of the project is estimated at about $17.5 million, including engineering and contingencies. The UIK has provided a grant of US.$2.2 million toward the project, which covers total expenditures incurred until early this year. The proposed Bank loan wou'ld finance the estimated foreign exchange component (70%) of the project cost in excess of the amounts already covered by the 11K grant. Retroactive financing, which is recommended for the reasons stated in paragraph 2 above, would amount to about 'j3million by October 1968. The project is expected to be completed by the end of 1969. - 5 -

14. Contracts for the reconstruction of the project road have been awarded on the basis of international competitive bidding procedures acceptable to the Bakc. Similarly, the engineering consultants have been retained in accordance with acceptable procedures. Execution of the project is the responsibility of the Roads Department of the Ministry of Works. Supervision of construction is being performed by consultants acceptable to the Bank.

PART IV - LEGAL INSTRME17T S UTD AUTHORITY

15. The draft loan agreement between the Bank and the Republic of Zambia and the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement are being distributed to the Executive Directors separately.

16. The draft loan agreement is similar to other agreements entered into by the Ban1 for highway projects. Attention is drawn to the provisions of section 2.03(b) (i) and (ii) regarding retroactive financing for expenditure incurred since February 1, 1968. Note should also be taken of section 5.07(d) which provides that the Borrower keep under observation the road constructed under this project and strengthen the pavement when and if necessary3 the pavement is designed to allowJ strengthening in stages by overlays as required by traffic growth.

PART V - THIE ECONOMY

17. An economic report entitled "Economic Position and Prospects of Zambiall, dated August 8, 1968, was distributed to the Executive Directors on August 27, 1968. Brief comments on the economy are included in my report of this date, on a proposed loan for an industrial forestry project.

PART VI - COiIPLIANCE WITH ARTICLES OF AGREEMENT

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

PART VII - RECOI1UENDATION1-

19. I recommend that the Executive Directors adopt the following resolution:

Resolution Nlo.

Approval of a Loan to the Republic of Zambia in an amount equivalent to US$10,700,000.00. -6-

Resolved:

T1AT the Bank shall grant a loan to the Republic of Zambia in an amount in various currencies equivalent to ten million seven hundred thousand United States dollars (US$310,700,000.00), to mature on and prior to July 15, 1988, to bear interest at the rate of six and a half percent (6 1/2%) 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 Loan Agreement (Second Highway Project) between the Republic of Zambia and the Bank, which has been presented to this meeting.

Robert S. McNamara President

Attachment

Washington, D.C. September 12, 1968