Fil E COPY Report No

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fIl E COPY Report No. p-497

Public Disclosure Authorized 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 The report may not be published nor may it be quoted as representing their views.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 Public Disclosure Authorized

REPORT AND RECOMMENDATION

OF THE

PRESIDENT

TO THE

EXECUTIVE DIRECTORS

Public Disclosure Authorized ON A

PROPOSED LOAN

TO THE

NIHON DORO KODAN

JAPAN

July 19, 1966 Public Disclosure Authorized REPORT AND RECOMMENDATION OF THE PRESIDENJT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE NIHON DORO KODAN

1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to $100 million to the Nihon Doro Kodan, a government corporation established for the construction, operation and maintenance of toll roads and related facilities in Japan. The loan would provide additional financing for the construction of the Tokyo-Shizuoka section of the Tokyo-ICobe expressway.

PART I - HISTORICAL

2. The Bank has made five previous loans totalling $280 million to the Nihon Doro Kodan for various sections of the Tokyo-Kobe expressway, including a loan of $75 million in 1963 for the Tokyo-Shizuoka section. The section between Kobe and Nagoya is complete and open to traffic, and the sections between Nagoya and Tokyo are scheduled for completion in April 1969. Early this year the Government asked the Bank to consider lending an additional $100 million to the Kodan. As the percentage of the Bankgs 1963 participation in the Tokyo.-Shizuoka section amounts to 12% of the total cost of this section as against higher percentages for the other uncompleted sections, it was proposed that this $100 million supplemental loan be applied to the Tokyo-Shizuoka section. The proposed supplemental loan will increase the Bank's share in the total cost of the project to about 27Z, which is roughly equal to the Bank's share in the other sections.

3. The appraisal of the project was based on the previous appraisal report of the Tokyo-Shizuoka section of the expressway and on additional information presented to the Bank by the Nihon Doro Kodan. Negotiations were held between July 5 and 12. The Nihon Doro Kodan was represented by its Financial Director and the Government by officials from Ministries of Construction and Finance.

4. The proposed loan, if approved, would be the sixth Bank loan to the Nihon Doro Kodan and the thirty-first loan to Japan. It would increase the total of Bank loans to Japan from $757 million to $857 million, net of cancellations. Japan has received no IDA credits. The status of previous Bank loans, as of June 30, 1966, is as follows: -2-

Amount (US$ Million) Year Borrower Purpose Bank Undisbursed

1953-62 Fully disbursed loans 482 - 1963 Nihon Doro Kodan Roads 75 30.1 1964 Nihon Doro Kodan Roads 50 34.8 1964 Tokyo Expressway Public Corporation Roads 25 21.2 1965 Electric Power Development Company Power 25 21.8 1965 Nihon Doro Kodan Roads 75 70.7 1965 Hanshin Expressway Public Corporation Roads 25 19.6

Total (less cancellations) 757.0

Of which has been repaid 104.1

Total now outstanding 652.9

Amount sold 83.0 Of which has been repaid 80.9 2.1

Total now held by Bank 65o.8

Total undisbursed 198.2

5. In every case, disbursements have proceeded normally according to schedule.

6. The Bank does not contemplate making any further loans to Japan and the Government has been so informed.

PART II - DESCRIPTION OF THE PROPOSED LOAN

7. The main features of the proposed loan are given below.

Borrower: Nihon Doro Kodan (Japan Highway Public Corporation).

Guarantor: Japan.

Amount: Various currencies equivalent to $100 million. -3-

Purpose: To assist in financing the Tokyo- Shizuoka section of the Tokyo-Kobe expressway.

Amortization: In 25 semi-annual installments beginning August 1, 1969 and ending August 1, 1981.

Interest Rate: 6-5/8% per annum.

Commitment Charge: 3/8 of lY$ per annum.

PART III - THE PROJECT

8. A report entitled "Supplementary Appraisal of the Third Express- way Project, Tokyo-Shizuoka" is attached. Japants domestic transportation system consists mainly of railways, coastal shipping and highways. Air transport is relatively limited because of the short distances between major industrial areas. The total road network in Japan exceeds 150,000 kms. in length, of which less than 20% is paved. Motor vehicles, which now number almost eight million, operate under congested and often danger- ous conditions. The Government, conscious of the need for improved highways, has approved a Five-Year Road Improvement Program under which an amount equivalent to US11.4 billion is to be spent for the construction, improvement and maintenance of roads during the period 1964 to 1969.

9. Toll roads are financed, built and operated by semi-autonomous agencies which are responsible to the Ministry of Construction. The Nihon Doro Kodan, which was established in 1956, is charged with the construction and operation of interurban toll roads. Although the Kodan is autonomous in form, it is in fact subject to a large degree of ministerial control. The management of the Kodan is good and its staff is competent. It has amply demonstrated its ability to design and supervise the construction of highways. The sections of the Tokyo-Kobe Expressway now cpen to traffic havo-been efficiently operated.

10. The Project consists of a section of expressway extending approximately 161 km. from the western suburbs of Tokyo to the city of Shizuoka, constituting part of the 536 km. Tokyo-Kobe Expressway. The works include the construction of earthworks, structures, paving, interchanges, service areas, bus stops, toll stations, traffic control facilities and connection links with the existing road network.

11. The latest estimate of total cost, including interest during construction, of the project indicates an overall increase of only 21½ percent over the 1963 cost estimate, and now stands at US$640 million. The remaining cost of the project will be financed through Government grants and loans and the sale of road bonds. Despite the slight increase in costs and lower revenue estimates, the project is financially sound. Toll revenues are now expected to recover the total investment cost, including interest, in 22 to 2h years, *hich is considerably less than the economic life of the project.

12. The completion of the Tokyo-Kobe expressway in 1969, of which this Project is an integral part, will be a crucial step in alleviating the serious shortage of transportation capacity which now prevails in the Tokaido region of Japan. Reduced transportation costs, time savings to passengers and freight, and reduced accidents are expected to bring a return of 15% on the investment.

13. Foreign contractors are being given the opportunity to bid for the major roadway and pavement contracts. The interest of foreign contractors has increased and a $3 million contract was awarded last year to a U.S. contractor for the construction of a section of the expressway near Shizuoka.

14. The Kodan's potential earning capacity is high. However, until the entire Tokyo-Kobe expressway is open to traffic in 1969 and earning at full capacity, the Kodan's financial position will be affected by an increasing burden of interest payments. However, the Japanese Government will provide the Kodan with all funds necessary for the completion of its construction program.

PART IV - LEGAL INSTRUMENTS AND AUTHORITY

15. The draft Loan Agreement between the Bank and the Nihon Doro Kodan, the draft Guarantee Agreement between Japan and the Bank and the Report of the Committee provided for in Article IV, Section 4(iii) of its Articles of Agreement are being distributed to the Executive Directors separately.

16. Since the proposed loan is to provide additional funds for the completion of a project for which the Bank has made a previous loan, the draft Loan and Guarantee Agreements supplement the earlier documents. Certain provisions of the 1963 Loan and Guarantee Agreements are incor- porated by reference in the draft Loan and Guarantee Agreements.

17. The draft Loan Agreement contains certain provisions designed to facilitate sales of portions of the proposed loan and of the 1963 loan by the Bank. (See Sections 2.07 and h.03)

18. The 1963 Loan Agreement has been modified to make a default in the performance of any covenant or agreement on the part of the Borrower or the Guarantor under the draft Loan Agreement and Guarantee Agreement as an event of default under the 1963 loan. (See Section 7.01) PART V - T1E ECONOMY

19. An economic report "The Current Economic Situation and Prospects of Japan" (FE-47c), which was distributed to the Executive Directors on December 2, 1965, covered economic developments through the middle of 1965. At that time, the Japanese economy was in a recession following a boom in 1963 and most of 196h which led to balance of payments difficulties and the imposition of monetary restrictions. The report noted the remarkable improvement in the balance of payments as exports increased considerably with these restrictions and the slowing doinm of domestic economic activity in the fall of 1964. It also noted that, contrary to previous Japanese experience, the economy had failed to revive quickly after monetary restrictions were lifted early in 1965 because of structural changes, such as the growing labor shortage, rapidly rising wages, excess productive capacity and reduced profits in many indus- tries.

20. The recession continued throughout the year 1965. In the fiscal year ending March 31, 1966, gross national product at constant prices increased by less than 3%, the lowest growth rate since 1954. Gross private domestic capital formation was approximately 7% lower than in FY1965; inventory investment decreased by more than a third of the volume of the preceding year. Despite the recession, consumer prices in urban areas vc.nt up by 7.4% in FY 1965, principally due to a sharp rise in agricultural prices and service charges. Also prices of industrial goods manufactured by small- and medium-sized enterprises increased while the products of large scale enterprises remained in general unaffected by the price upswing, as only the less productive enterprises passed wage increases on to the consumer in the form of higher prices.

21. The balance of payments continued to be the bright spot in the picture. With exports rising 22% while imports increase only 9%, Japan registered a record $1,469 million surplus in its trade account for FY 1965. Lowier domestic demand and the excellent performance of Japanese corpetitors in the world market accounted for the improved exports. Imports were affected by the economic slowdourn at home. Because of the large trade surplus, the current account showed a surplus of $811 million for FY 1965, even though there wlas a large deficit on invisibles. The deficit on invisibles and donations rose to $653 million despite U.S. military procure- ment in Japan increasing to s354 million. In previous years, deficits on the current account were counterbalanced by capital imports. In 1965, however, a net outflow of capital, both long and short-term, amounting to $681 million, was offset by the large current account surplus. The reversal in long-term capital flows tems largely from lower U.S. investment in Japan following U.S. Government measures to improve the U.S. balance of payments and greater repayments on existing loans. The deficit in the short-term capital balance was caused partly by the improvement of the trade balance, as export usance credits grewJ much faster than import usance credits. Moreover, the tightening of the world's money market, - 6 - as well as the diminished demand for short-term foreign funds by the Japanese economy due to the recession, contributed to the net outflow. Gross official reserves (gold, reserve position in the IMT and foreign exchange reserves) increased by 'P"80 million to P2,154 million during FY 1965.

22. The prospects for 1966 have improved recently. After having hit the bottom in the fall of 1965, the economy is now beginning to pick up slowly with fiscal policy this time playing a major role in promoting business recuperation. The Government, modifying its previous stand, initiated a large deficit spending program in the second half of 1965, after monetary measures failed to produce an upswing. This program will be intensified in fiscal year 1966. Providing for expenditures in the amount of X 6,341 billion (approximately 4;18 billion) the 1966 budget is 20% higher than the original 1965 budget. The stimulative impact of Government expenditures is to be supplemented by speeding up public works projects and by substantial tax cuts. Government expenditures will con- centrate on housing and road construction which are public investment priorities and also considered to be most effective in stimulating demand.

23. With Government budgetary expenditures rising and exports conti- nuing to expand satisfactorily, the overall indices for shipments and production have improved in the last few months and the commodity markets have been showing signs of recovery. Nevertheless, the situation still varies considerably among different industrial sectors and among individual enterprises. Several sectors and firms have not yet made the turn upward and the eccnomy is not expected to recover rapidly. So far, the favorable underlying trend of the trade balance has not changed. However, economic recovery is bound to affect the current account adversely. Increased domestic activity will reduce the pressure to eyport and will stimulate imports. As deficits in the current accoun-t are not likely to be offset, as they were in the recent past, by the import of capital, the Government will have to watch the pace of expansion carefully in order to avoid the recurrence of balance of payments difficulties. As in the past, the Government authorities can be expected to take the necessary measures to keep the situation under control.

PART VI - COMPLIANCE WITH THE ARTICLES OF AGREENENT

24. I am satisfied that the proposed loan complies with the require- ments of the Articles of Agreement of the Bank.

PART VII - RECOMETEIATION

25. I recommend that the Executive Directors adopt the following Resolution: - -7-7 -

RESOLUTION No.

Approval of Loan to Nihon Doro Kodan in an amount equivalent to U.S.$100,000,000 to be guaranteed by Japan.

RESOLVED:

That the Bank shall grant a loan to the Nihon Doro Kodan to be guaranteed by Japan, in an amount in various currencies equivalent to one hundred million United States dollars (U.S.4100,000,000), to mature on and prior to August 1, 1981, to bear interest at the rate of six and five-eighths per cent (6-5/8%) 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 (Third Expressway Project - Supplementary) between the Bank and the lNihon Doro Kodan, and the form of Guarantee Agreement (Third Expressway Project - Supplementary) between Japan and the Bank, which have been presented to this meeting.

George D. WIoods President

Attachment

Washin7ton, D.C. July 19, L966