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FItLE COPD Report No. p-508

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 The report may not be published nor may it be quoted as representing their views.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 DEVELOPMENT ASSOCIATION

REPORT AND RECOMMENDATION

OF THE Public Disclosure Authorized

PRESIDENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED DEVELOPMENT CREDIT

Public Disclosure Authorized TO THE REPUBLIC OF MALAWI

FOR A HIGHWAY ENGINEERING PROJECT

September 14, 1966 Public Disclosure Authorized INTERNATIONAL DEVELOPMENT ASSOCIATION

REPORT AND RECONMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF MALAWI FOR A HIGHWAY ENGINEERING PROJECT

1. I submit the following report and recommendation on a proposed development credit in an amount in various currencies equivalent to $490,000 to the Republic of Malawi to finance a highway engineering project.

PART I - HISTORICAL

2. In February 1965 the Government of Malawi applied for an IDA credit to help finance the reconstruction and paving of the main north- south road between Zomba and Lilongwe and the main road between Lilongwe and the Zambian border. Preliminary assessments of the engineering and economic aspects of the project by two missions which visited Malawi in the first half of 1965 gave rise to questions concerning possible alternative routes for some stretches of the Zomba-Lilongwe road. The Govern- ment therefore, upon the recommendation of the Association, retained consultants to prepare a study of the alternative routes. The economic and engineering investigations confirming the alignment of the road were completed in December 1965. Since detailed engineering for this road and the review of the engineering and cost estimates for improving the Lilongwe-Zambian border road are needed before a construction project can be appraised, it was agreed with the Government to consider first an engineering credit for the two roads in question.

3. Negotiations were held in Washington from June 28 to July 6. The Malawi delegation was led by Mr. K. J. Barnes, Deputy Secretary to the Treasury, and included representatives of the Ministry of Works and Supplies and of the firm of consultants who will carry out the detailed engineering work. Mr. E. D. Mwasi, Counsellor of the Malawi Embassy, participated in the negotiations.

4. The proposed credit would be the first lending operation by the Bank or IDA in Malawi. Malawi, formerly Nyasaland and a territory of the Federation of Rhodesia and Nyasaland (1953-1963), was not a beneficiary of any of the Bank loans to the Federation.

PART II - DESCRIPTION OF THE PROPOSED CREDIT

5. The main characteristics of the proposed credit are as follows:

Borrower: The Republic of Malawi.

Amount: $490,000 in various currencies

Purpose: To finance the foreign exchange cost of the route selection study, the detailed -2-

engineering of the Zomba-Lilongwe road (168 miles) and the review of the detailed engineering of the Lilongwe- Zambian border road (90 miles).

Amortization: Ten years including a grace period of 2 years. Repayment in equal semi- annual installments beginning October 1, 1968, and ending April 1, 1976; however, the credit would be subsequent- ly refunded from the proceeds of any future credit which DA may make for the construction of these roads.

Service Charge: 3/4 of 1% per annum.

PART III - PURPOSE

6. An Appraisal Report entitled "Appraisal of a Highway Engineer- ing Project - Malawi" (TO-533a, dated September 6, 1966) is attached.

7. The project consists of three separate parts: (a) the serv- ices of engineering consultants for the detailed engineering, including design and preparation of tender documents, of the Zomba-Lilongwe road; (b) the review, and revision as necessary, by the same engineering consultants, of the detailed engineering and cost estimates already prepared by the Ministry of Works for the Lilongwe-Zambian border road; and (c) reimbursement to the Malawi Government of the cost of the route selection study carried out last year at the request of the Association.

8. The road linking the two important commercial centers, Blantyre-Limbe and Lilongwe, via Zomba, the capital, is the most important trunk connection in Malawi. The section between Blantyre-Limbe and Zomba is already being improved and thus is not part of the present project. A small section of the Zomba-Lilongwe road has at present one lane of bituminous paving and is poorly aligned. The remaining part of this road is either gravel surfaced or unpaved. In view of the heavy traffic on this road, its improvement is of high priority.

9. The road running west from Lilongwe to the Zambian border, an extension of the Zambian Great East Road, normally carries rather less traffic than the Zomba-Lilongwe road. Since it is of good gravel construction, to improve it may not be justified at this time. However, in the last few months a large volume of heavy traffic has developed on this road between Zambia and the Malawi rail system to Beira. The future permanent traffic volumes on this road are uncertain. In any event, a decision whether, or when, to improve it cannot be reached until firm cost estimates are available. The review by the consultants of the engineering work already done on this road is considered necessary in order to obtain such estimates, and to ensure that they are - 3 - based on design criteria which are consistent with the Zomba-Lilongwe road. It is estimated that this part of the project involves less than 3% of the total project cost.

10. The Government has already engaged the consultants who carried out the route selection study, Brian Colquhoun and Partners (U.K.), to carry out the detailed engineering, and they began work in August 1966. Though all the detailed engineering and the preparation of tender documents for the entire Zomba-Lilongwe road will take about 12 months, the consultants will concentrate initially on developing accurate cost estimates for this road in order to enable the Association to appraise it early in 1967 for a possible construction credit. Construction could begin on a first section of the road shortly thereafter, with the other sections following as the remaining detailed engineering is completed.

11. The total cost of the engineering project is estimated at US$ 575,000 equivalent including an allowance for contingencies. The foreign exchange component is estimated at about 85% of the total, or US$ 490,000, which the proposed engineering credit would cover. The local currency component would be provided by the Government of Malawi.

PART IV - LEGAL INSTRUMENTS AND AUTHORITY

12. The draft Development Credit Agreement between the Republic of Malawi and the Association and the Recommendation of the Committee provided for in Article V, Section l(d) of the Articles of Agreement of the Association are being distributed to the Executive Directors separately.

13. The draft Development Credit Agreement is in the usual form except that the term of the credit would be 10 years including a 2-year period of grace, as reflected in Schedule 1 to the Agreement. Attention is drawn to the preamble of the draft Development Credit Agreement where it is stated that the Association would be prepared to refund this credit out of the proceeds of any credit which may later be made for the construction of the project roads.

PART V - THE ECONOMY

14. An Economic Report, entitled "The Economy of Malawi" (No. AF-51a) dated September 14, is being distributed to the Executive Directors today under separate cover.

15. In terms of per capita income, Malawi is one of the poorest countries in Africa. Its four million people are still heavily dependent on subsistence agriculture. One-third of the Government's current expenditures and nearly all of its capital expenditures are financed by external grants and loans, mainly from the United Kingdom. - 4 -

16. However, during recent years, the economy has made impressive progress in a number of respects. The most notable is the sustained record of increase achieved in the cash crops of Malawi's peasant farmers, result- ing in part from the soundly conceived programs of the Government in mar- keting and agricultural extension, as well as the enterprising nature of the farmers themselves. Progress has also been made in public finance. Since 1962/63, the last year before independence, revenues have expanded faster than current expenditures so that the proportion of expenditures covered by foreign budgetary support has declined significantly. More- over in 1965 and 1966, both public and private investments have been increased substantially, offering the prospect that the economic growth rate will accelerate in the years ahead. Even with such an acceleration, however, it is evident that Malawi will remain heavily dependent on external capital support for some time, and the provision of this support on soft terms would appear to be well justified by the country's great poverty and by the record of its recent performance.

PART VI - COMPLIANCE WITH ARTICLES OF AGREEMENT

17. I am satisfied that the proposed development credit would comply with the Articles of Agreement of the Association.

PART VII - RECOMMENDATION

18. I recommend that the ERcecutive Directors adopt the following resolution:

RESOLUTION NO.

Approval of Credit to Republic of Malawi (Highway Engineering Project) in an amount equivalent to US$ 490,000.

RESOLVED:

THAT the Association shall grant a development credit to the Republic of Malawi in an amount in various currencies equivalent to four hundred and ninety thousand United States dollars (U.S. $490,000), to mature on and prior to April 1, 1976, to bear a service charge at the rate of three-fourths of one per cent (3/4 of 1%) 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 Development Credit Agreement (Highway Engineer- ing Project) between the Republic of Malawi and the Associa- tion, which has been presented to this meeting.

George D. Woods Attachment President Washington, D.C. September 14, 1966