Document of The World Bank FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No. P-327 7-PA REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Public Disclosure Authorized TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF PARAGUAY FOR A Public Disclosure Authorized SEVENTH HIGHWAY PROJECT April 19, 1982 Public Disclosure Authorized i This documenthas a restricteddistribution and may be used by recipientsonly in the performanceof 1 their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS US$1.00 d 126 a 1.00 US$0.008 a 1,000 Us$7.94 a 1,000,000 US$7,937 GLOSSARY OF PRINCIPAL ABBREVIATIONS USED IN THIS REPORT DGV - General Directorate for Highways MOPC - Ministry of Public Works and Communications OCPIT - Office of Coordination and Integral Planning of Transport UNDP - United Nations Development Programme WEIGHTS AND MEASURES 2 1 hectare (ha) = 10,000 m = 2.47 acres 1 kilometer (km) = 0.62 miles 2 l-square kilometer (km ) = 0.39 square miles = 100 ha 1 kilogram (kg) = 2.20 pounds 1 liter (1) = 0.26 gallons 1,000 kg = 1 metric ton = 0.98 long ton GOVERNMENT OF PARAGUAY FISCAL YEAR January 1 - December 31 FOR OFFICIAL USE ONLY PARAGUAY SEVENTH HIGHWAY PROJECT Loan and Project Summary BORROWER: Republic of Paraguay AMOUNT: US$46.0 million equivalent (including US$0.7 million front-end fee). TERMS: Repayable in 17 years, including 4 years of grace, at 11.6% interest per annum. PROJECT DESCRIPTION: The project would consists of: (I) Civil works and related supervision services for: (i) widening of a 64-km section of Route 2 between San Lorenzo and Eusebio Ayala, including the construction of two additional lanes along 30 km; (ii) upgrading, including paving of a 98-km section of Route 3, between Tacuara and Santa Rosa; and (iii) upgrading, including paving of a 28-km section of Route 8, between Villarrica and Numi. (II) Upgrading the Ministry of Public Works and Comunications' planning, technical and managerial capabilities through: (i) initiation of an annual planning and programing system for the transport sector; (ii) strengthening the Ministry's Planning Department; and (iii) implementation of a staffing and training program for the Ministry's Roads Directorate. (III) Improvement in the efficiency of the Directorate's maintenance operations, through programming and monitoring. PROJECT RISKS: The arrangements proposed for the finalization of the financing plan would give the Government and the Bank the necessary discretion to adjust the project scope in the event that co-financing does not materialize, an unlikely possibility given the country's creditworthiness. The annual review of the highway program would also provide an opportunity to assess overall funding requirements (in particular those related to the on-going projects) and compare them with the level of resources available to MOPC. The relatively good performance of Paraguay in the implementation of similar components of previous projects suggests that the risks attached to the civil works components are low. The key problem of adding more engineers to DGV has been directly addressed with specific timing applied to the undertakings from the Government. The implementation of the new planning process, including the development and consolidation of the system, would take several years and presents a high element of uncertainty since the process entails a new approach by agencies involved. Inadequate coordination between agencies and lack of follow-up are the main potential source of difficulties and delays which will have to be dealt with during supervision. This document has 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 COSTS: Local Foreign Total Items ---- (US$ Millions)--- Part A I. Construction and Upgrading of Primary Roads Civil works for: (i) San Lorenzo-Eusebio Ayala 10.6 24.7 35.3 (ii) Villarrica-Numi 2.3 5.5 7.8 (iv) Supervision of Construction 1.3 3.0 4.3 Subtotal 14.2 33.2 47.4 II. Technical Assistance to DGV and OCPIT (i) Management of the Equipment Fleet and Workshops 0.1 0.4 0.5 (ii) Purchase of Vehicles, Office Equipment and Pavement Evaluation Equipment - 0.1 0.1 (iii) Training of Engineers 0.1 0.3 0.4 (iv) Assistance to OCPIT - 0.3 0.3 Subtotal 0.2 1.1 1.3 Base Cost (At February 1982 Prices) 14.4 34.3 48.7 Contingencies: physical 1.4 3.3 4.7 price 5.2 5.7 10.9 Total Part A 21.0 43.3 64.3 Part B Construction and Upgrading of Tacuara- Santa Rosa 11.2 26.0 37.2 Supervision of construction 1.1 2.6 3.7 Base Cost 12.3 28.6 40.9 Contingencies: physical 1.2 2.9 4.1 price 6.5 7.5 14.0 Total Part B 20.0 39.0 59.0 Total Project Costs 41.0 82.3 123.3 1/ Front-end Fee of Bank Loan - 0.7 0.7 Total Financing Required 41.0 83.0 124.0 1/ Directly imported items are exempt from taxes and duties. Taxes for other items are not significant. - iii - FINANCING PLAN: Local Foreign Total ---(US$ Millions)---- Bank 46 46 Government 41 41 Co-financing 37 37 Total 41 83 124 ESTIMATED DISBURSEMENTS: 2/ Bank FY: 1983 1984 1985 1986 1987 1988 ----------(US$ Millions)---------- Annual 1.5 0.5 0.2 25.5 16.7 1.6 Cumulative 1.5 2.0 2.2 27.7 44.4 46.0 RATE OF RETURN: 21% STAFF APPRAISAL REPORT: Staff Appraisal Report - Seventh Highway Project, Report No. 3791b-PA, dated April 19, 1982 2/ Assumes that the US$37 million in co-financing would become available by October-December 1983. a INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF PARAGUAY FOR THE SEVENTH HIGHWAY PROJECT 1. I submit the following report and recommendation on a proposed Loan to the Republic of Paraguay for the equivalent of US$46.0 million, which includes a capitalized front end fee of 1.5% on the Bank Loan, to assist in financing the Seventh Highway Project. The Loan would have a term of 17 years including 4 years of grace, with an interest rate of 11.6%. PART I - THE ECONOMY 2. An economic mission visited Paraguay in November 1980 and its report "Economic Memorandum on Paraguay" (3569-PA, September 1981), covering short- and medium-term developments, has been distributed to the Executive Directors. The following discussion is based on the findings of this mission. Country data sheets are presented in Annex 1. Economic Performance 3. Agriculture, including livestock, forestry and fishing, is the mainstay of Paraguay's economy. Over the last two decades these activities directly contributed about 30% of GDP, 40% of employment and 80% of merchandise exports earnings. Indirectly, their contribution is even larger, since most of Paraguay's manufacturing industry consists in the processing of agricultural materials, both for home consumption and for export. Although no significant mineral resources have been found in Paraguay, the country is endowed with ample land suitable for farming and livestock raising, as well as significant forest stands. These land resources are located east of the Paraguay river. The area west of that river--the Chaco, particularly its northern half--is generally unsuitable for agriculture owing to insufficient or uneven rainfall. Of the 8 million hectares in the eastern half of the country suitable for farming, only some 1.4 million--less than 20%--are at present under crops. 4. During the 1960's, agriculture's and overall economic growth was slow: 1.8% and 4.3% annually, respectively, in constant prices. The introduction of soy beans in 1970 accelerated growth, and both crop production and forestry exploitation expanded substantially. Livestock production also increased, though somewhat less. The construction of the Itaipu hydroelectric dam on the Parana river jointly with Brazil, started in the mid-1970's, gave a new and strong impulse to the economy, the more so as it coincided with favorable conditions in world markets for cotton and soy beans, Paraguay's main export crops. The combined effect of both factors made it possible for Paraguay to achieve during 1974-80 an average growth rate of just under 10%. This has been accompanied by other improvements in the standard of living, as reflected in the increased life expectancy and literacy rates, while child mortality has declined. Nutritional levels are comparable to those found in countries with higher per capita incomes. The agricultural growth of recent years has brought about an improvement in the real incomes of the rural population, which comprises about three-fifths of the total. A significant share of production of cotton and soybeans, which account for most of the recent expansion, is grown by small farmers, many of whom have received land under government and privately sponsored colonization programs. Rural wages have, though with some lags, generally been rising in real terms. Thus, the benefits of agricultural growth have been fairly widely shared. Despite the significant progress made in recent years, however, Paraguay's per capita income is still low and large segments of the population still live in poverty. On the other hand, rising incomes, the new dynamism of the economy and the greater social mobility, are creating new and more diverse needs, both at the individual and national levels, as well as stronger expectations that they be satisfied.