Document of The World Bank FILECOPY FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No P-2 576-PA REPORT AND RECO(4ENDATION OF THE PRESIDENT OF THE INTERNATIONALBANK FOR RECONSTRUCrION AND DEVELOPNENT Public Disclosure Authorized TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF PARAGUAY FOR A Public Disclosure Authorized SIXTH HIGHWAYPROJECT June 4, 1979 Public Disclosure Authorized This document has a restricted distributionand may be usedby recipients only in the performance of their official duties. Its contentsmay not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS US$1.00 0 126 a 1.00 US$0.008 # 1,000 US$7.94 $ 1,000,000 US$7,937 GLOSSARY OF PRINCIPAL ABBREVIATIONS USED IN THIS REPORT DGV - Directorate General of Highways IDB - Inter-American Development Bank OCIPT - Office of Coordination and Integral Planning of Transport GOVERNMENT OF PARAGUAY FISCAL YEAR January 1 - December 31 FOR OFFICIALUSE ONLY PARAGUAY SIXTH HIGHWAY PROJECT Loan and Project Summary BORROWER: Republic of Paraguay AMOUNT: US$39.0 million equivalent. TERMS: Repayable in 17 years, including 4 years of grace, at 7.9% interest per annum. PROJECT DESCRIPTION: The proposed project would assist the Government in (a) providing road infrastructureto support the rapid agricultural development of the southern Alto Parana and Itapua regions, in the hinterland of the Parana river; (b) improving the Government'scapacity to meet increasing requirementsfor feeder and rural roads and develop better methods for the design, constructionand maintenanceof such roads; and (c) pursuing the objectives of the Fifth Highway Project for improving transport sector management. The primary highway and the complementaryfeeder roads to be constructedunder the project would support future rural developmentefforts and would acceleratethe rate of expansionof the agriculturalfrontier along the Parana river. Readily quantifiablebenefits would be a substan- tial reduction in transport costs, and an increase in agriculturalproduction in the area. The project would contribute to institution-buildingwithin the Ministry of Public Works and Communications: the feeder roads compo- nent would provide overall support to agriculturalprograms, while thieOCIPT componentwould help improve transport planning within the Ministry; DGV's staffing capabilities would be improved to enhance the Ministry's effectiveness. The constructionworks do not present special risks in view of the relatively standard nature of the roads and the fact that the bulk of engineeringwork is now complete. The assumptionsunderlying the economic analysis are sufficientlyconservative so that future increasesin agriculturalproduction (includingincreases resulting from the project) are not in question. A higher element of risk is attached to the institution-buildingobjectives: the stretngtheningof DGV's management capabilitiesand of OCIPT's transportplanning functionsare long-termprocesses depending largelyupon the availabilityof qualified professionalstaff; special attentionhas been placed under the project to measures addressed to bringing a permanent solution to the Ministry's staffing problems. This documewnthas a restricteddistribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. - ii - ESTIMATED COST: Investment Category Local Foreign Total ------(US$ million)------ Construction of the Pirapo- Ciudad Pte. Stroessner Road (Route No. 6) about 180 km 11.23 27.10 38.33 Construction of about 500 km of Feeder Roads 2.26 4.47 6.73 Technical Assistance (i) Feeder Roads Unit 1/ 0.38 1.62 2.00 (ii) DGV 0.12 0.46 0.58 (iii) OCIPT 0.06 0.24 0.30 (iv) Survey of road materials 0.30 0.30 0.60 Sub-total 0.86 2.62 3.48 Contingencies Physical 1.11 2.90 4.01 Price 7.54 5.41 12.95 Sub-total 8.65 8.31 16.96 TOTAL 2/ 23.00 42.50 65.50 FINANCING PLAN: Local Foreign Total -----(US$ Million)------- Government 19.5 - 19.5 Private Bank 3.5 3.5 7.0 Bank _ 39.0 39.0 TOTAL 23.0 42.5 65.5 ESTIMATED DISBURSEMENTS: FY 1980 1981 1982 1983 1984 1985 -------- …(US$ Million)…------------- Annual - 1.5 12.0 13.0 9.5 3.0 Cumulative - 1.5 13.5 26.5 36.0 39.0 ECONOMIC RATE OF RETURN: 18%. APPRAISAL REPORT: Report No. 2455b-PA, dated June 4, 1979 1/ Including office equipment and vehicles. 2/ In line with Government regulations, most project-related expenditures are exempt from taxes and duties. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO TH'EEXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF PARAGUAY FOR A SIXTH HIGHWAY PROJECT 1. I submit the following report and recommendation on the proposed loan to the Republic of Paraguay for the equivalent of US$39.0 million to assist in financing the Sixth Highway Project. The loan would have a term of 17 years including 4 years of grace, with interest at 7.9% per annum. PART I - THE ECONOMY I/ 2. An economic mission visited Paraguay in October 1978 and the up- dating ecoriomicreport, covering short- and medium-term developments, has been distributed to the Executive Directors ("Economic Memorandum on Paraguay" (2461-PA), M4ay 1979). Economic Performance 3. Paraguay is endowed with vast areas of unutilized lands well-suited for agriculture or livestock, and has substantial hydroelectric potential. Despite these natural resources, progress has been held back by weak public institutions in the development area, remoteness from foreign markets, scattered population, and a weak transport network. The private sector still consists mainly of small traditional firms, and the role of the public sector in the economy is limited. For many decades, per capita income and employment .grew slowly and emigration served as an outlet for unemployed and under- employed manpower. More recently, however, the economy has been growing rapidly and many Paraguayans who had emigrated to neighboring countries have returned, responding to the expanded employment opportunities associated with the construction of the Itaipu dam. Furthermore, the expansion of the agri- cultural frontier has encouraged the immigration of farmers from abroad. Nevertheless, the country's population density remains very low in relation to agricultural land. 4. Ihe economic potential of the country began to be more fully realized during the 1970's with the rapid expansion of land under cultivation and the beginning of the exploitation of the enormous hydroelectric potential I/ Paragraphs 3-13 are identical to the ones contained in the President's Report: for the Livestock and Agricultural Development Project (Report P-2482-PA of March 7, 1979). -2 - of the stretch of the Parana River along the country'sborder with Brazil and Argentina. A rise in external demand and favorableprices were instru- mental in acceleratingagricultural growth. The effectivesupply response of Paraguayan agriculturehas been assisted by improvementsin transport and implementationof a comprehensiveset of programs designed to increase and diversify agriculturalexports. The agriculturalgrowth of recent years has brought about an improvementin the real incomes of the rural population, which comprisesabout three-fifthsof the total. A significantshare of production of tobacco, cotton, and soybeans,which account for most of the recent expansion, is grown by small farmers who have received land under the Governmentand privately sponsoredcolonization programs. Roughly 25% of agriculturalworkers have benefitted from these land settlementefforts. Moreover, recently,rural wages have increasedsharply in some areas where demand for agricultural labor has exceeded supply. Thus, the benefits of agriculturalprogress have been fairly widely shared. This has reduced rural-urbanmigration. Per capita income grew at 5.2% per annum during 1972-78 compared to the 1.2% averaged during the previous 30 years. Growth in per capita incomes has been accompaniedby other improvementsin the standard of living as life expectancy and literacyhave increased,and infant mortality has declined. Nutritional levels are comparable to those found in countrieswith higher per capita incomes. Furthermore,in recent years, the Government has started to carry out a series of programs aimed at extending social and other back-up services, financial support, and technical assistance to existing and new land settlements. These programs should help in spreading the benefits of growth even more effectivelyamong the poorer segments of the population. 5. Exploitationof the country's hydropower potential has been facil- itated by treaties signed with Brazil and Argentina to form two binational authorities for the constructionand operation of two or more hydroelectric plants aggregatingat least 17,000 MW. Constructionof the Itaipu dam with Brazil, the largest ever built, has begun and is on schedule. Paraguay's economy is now in the midst of a rapid transformationspurred mainly by agriculturalexpansion and constructionactivity on the Itaipu dam. The rapid growth of agriculturehas continuedunabated in 1977-78, and, together with the reactivationof agroindustrialactivity in the wood and beef sectors, has resulted in accelerationof the GDP growth rate to over 9% in 1977-78 (as compared to 6% in 1975-76). These developmentshave been accompaniedby increased foreign capital inflows, a notable expansion of investment levels, and an accelerationof economic growth. 6. Growth has been accompaniedby relative price stability. The rate