No. P - 17 RESTRICTED This report is restricted to use within the Bank. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON THE PROPOSED LOAN TO THE REPUBLIC OF COLOMBIA April 5, 1951 REPORT AND RECOMMENDATIONS OF THE PRESIDENr TO THE EXECUTIVE' DIRECTORS ON THE PROPOSED LOAN TO THE REPUBLIC OF COLOMBIA 1. I submit the following report and recommendations on the proposed loan of $16,500,000 to the Republic of Colombia for a highway project. PART I - HISTORICAL 2. A General Survey Mission, headed by Dr. Lauchlin Currie and spon- sored jointly by the International Bank and the Colombian Government visited Colombia from July to November, 1949. The report of the Mlission, entitled "The Basis of a Development Program for Colombia," was submitted to the Bank and to the Colombian Government in mid-1950. The report was distributed to the Executive Directors of the Bank on October 24, 1950. 3. In September 1950, an Economic Development Committee was appointed by the President of Colombia to study the Report of the General Survey Mission, to formulate a development program, and to recommend to the Government the means of carrying out such a program. The Committee, consisting of six members appointed on a non-partisan basis, has been working since September and has made substantial progress toward the completion of its task. The Bank has been favorably impressed with the Committee as an instrument for formulating a sound and practicable development program for Colombia. 4. The Bank had intended to await the Committee's final recommendations on an over-all development program before discussing with the Government the financing of particular segments of the program. In December 1950, however, the Economic Development Committee recommended that the Government proceed at once with a three,year emergency project for the rehabilitation of Colombia's principal highways, as the first step in an eventual five-year highway program. 5. The Minister of Public "orks, while accepting the Committee's recommendation in principle, felt that the emergency project should be sub- stantially larger than that recommended by the Committee. He came to Washington early in February 1951 and asked the Bank to assist in financing the Ministry's own larger program. NOTES: (1) Rates of exchange used in this report are official parity rates, namely: $61 = 1.95 pesos, 1 peso = $0.51 1 million pesos - $513000 (2) The $ sign is used exclusively for U.S. dollars: pesos are designated as such. (3) On March 20, 1951, exchange rates applying to many transactions were revised (see paragraph 31). This revision does not, how- ever, affect the conclusions of this report. 2- 6. In view of the urgent need for the immediate improvement of Colom- bia's principal roads, and of the fact that such a project must necessarily form an important part of any development program for Colombia, the Bank de- cided that it should make an exception to its general principle of awaiting completion of the Committee's work before considering any projects in Colombia. 7. The Bank concluded, however, that the larger program favored by the Mlinistry of Public Works might commit a disproportionate amount of Colombian resources to highways before the total requirements of the over-all develop- ment program being formulated by the Committee were known. It accordingly informed the Colombian Government that it was prepared to consider financing the foreign exchange costs of the three-year emergency highway project as recommended by the Economic Development Committee without, however, commit- ting itself on the remaining two years of tbe five-year program. 8. On February 10, 1951, the Bank sent a group to Colombia, headed by Mr. Burland of the Loan Department, to discuss a loan for the three-year emergency project. 9. The Republic of Colombia, through the M,4inister of Public Works, made formal application for a loan on February 8, 1951. A revised applica- tion was handed to Mr. Burland in Bogota on March 7, 1951. The Colombian Ambassador to the United States has been authorized to execute the Loan Agreement on behalf of the Colombian Government. PART II - DESCRIPTION OF THE PROPOSED LOAN Borrower 10. The Borrower would be the Republic of Colombia, a member of the RAG. Amount 11. The amount of the loan would be $16.5 million, or the equivalent in other currencies. Purpose 12. The proceeds of the loan would be used to provide the Borrower with the foreign exchange required for the carrying out of the project described in Schedule 2 to the draft Loan Agreement. 13. In substance the project consists of: (a) the construction of approximately 155 kilometers of new highways to provide connecting links in the trunk highway system; - 3 - (b) the reconstruction and retebilitation of about 2,906 kilometers of existing trunk highways; and (e) the establishmnent alnd maintenance of repair shops for the servicing of the equipment to be purchased with the proceeds of the proposed loan and for the training of Colombian personnel in the repair and use of the equip- ment and in the function of highway maintenance. 14. The total cost of the project is estimated at 90.1 million pesos (equivalent to V46,2 million), 57.9 million pesos of which would be in local currency. The amounts to be appropriated specifically for the project have been set at 15% in excess of estimated total costs so that a reserve for contingencies will, in effect, be provided. 15. Work on two portions of the projeot has been contracted for and is already under way.r The foreign exchange costs of such work incurred prior to the effecti:re date of the loan, presently estimated at about tl.l million, are to be eligible for payment from the proceeds of the loan. Terms 16. The loan would bear interest at the rate of 3-7/8% per annum, including the statutory comission of 1%. 17, The coommitment charge would be 3/4 of 1% rer an8 = End would accrue from the effective date of the loan or from Kay 15, 1951, whichever is the earlier, 18. The loan would be arnortized by equal semi-annual payments of prin- cipal and interest of about $1,357,000, comencing Nlovember 15, 1954, and calculated to retire the loan by maturity on MaaY 15, 1961. 19. I consider that the proposed schedule for the repayment of prin- cipal and the rate of intetest and other charges in connection with the pro- posed loan are reasonable and appropriate. Legal Instru__ent and LeZal athority 20. Appendix I contains drafts of the following documents; (a) A Loan Agreement between the Bank and the Republic of Colombia . (b) A letter from the Minister of Public Works of Colombia to the Bank explaining the limits of highway work to be carried on in addition to, and during the period of, the Bank-financed project. (see paragraph 35 below) 2.1. The proposed Loan Agreement would be entered into on behalf of the Republic of Colozbia pursuant to Law No. 90 of December 16, 1948. A decree of the President and Council of Ministers would approve the Loan Agreement, -4- and would modify the schedule of investment priorities set forth in Law No. 90 so as to authorize the use of the proceeds of the loan for the highway project described in the draft Loan Agreement. PART III - APPRAISAL OF THE PROPOSED LOAN Technical Justification for the Loan 22. A technical appraisal of the project to be financed by the Bank loan is attached as Appendix II.. (No. Loan 124). 23. Colombia is particularly dependent upon her highways. Many hundreds of communities are not accessible by other means and major traffic flows, even between the capital and the more important interior cities, are dependent on highway transport for some part of the journey. Highways are generally the most suitable means of providing surface transport over Colombian terrain. 24. At present there are about 20,300 kilometers (12,586 miles) of roads in Colombia of which 12,000 kilometers are national highways and 8,300 depart- mental roads. The usefulness of the system today is severely curtailed because of: (a) important gaps in the system; (b) excessive grades, improper alignment and inadequate bridges; and (c) excessive deterioration resulting from improper main- tenance and accentuated by excessive rains during the past two years. 25. The construction of the proposed connecting links and the recon- struction of deteriorated sections of the major trunk roads of the country woiuld remedy the more important deficiencies of the present system and would substantially reduce transport costs. 26.- The establishment of strategically located repair shops, and the training of local Colombian personnel in highway maintenance and the use and repair of equipment, should assist the Mir-istry of Public Works in carrying out its stated intention of introducing an effective system of highway main- tenance. The reorganization of the Highway Department, completed this year, and the sending of Colombian engineers for training in the U.S. under the Bureau of Public Roads, should also contribute toward the likelihood of effective maintenance after completion of the project. 27. In the opinion of the Bank's engineering staff, the Colombian high- way project is technically spund and justified.' Completion of this project would relieve to a large extent transportation bottlenecks in Colombia, which are a major handicap to the country'f continued economic development. THE ECONOMIC SITUATION IN COLOIMBIA 28. A short report on the economic position of Colombia with special reference to the proposed loan has been prepared by the Eco!,ovlic Department and is attached. ( Appendix III). 29. Oin the whole, the main sectors of the Colombian economy have been developing satisfactorily, and, despite some adverse conditions, both agri- cultural and industrial production are now at relatively high levels. Re- ceipts from coffee exports, the chief sourpe of Colombia's foreign exchange inoome, were higher in 1950 than in 1949, and are likely to be higher still in 1951, while earnings from other traditional exports are steady. Coffee prospects are good, at least for the next five to six years. Execution of an integrated development program such as that now being considered by the Economic Development Committee should give rise to new exports, thus lessen- ing Colombia's dependence upon coffee, and increase domestic output of com- modities now being imported. 30. Since October 1950, inflation has been brought under control and the cost-of-living index has steadied. The fiscal position of the Govern- ment has improved; a budget surplus was achieved in 1950 and one is expected in 1951. 31. In Mlarch 1951, restrictions on imports were reduced and the system of exchange rates was simplified. A new rate of Ps.$ 2.50 to the U.S. dollar was eetablished for all foreign payments and all foreign exchange proceeds other than those from coffee exports, which will be converted at Ps.$ 2.1 per U.S. dollar. 32. Service on Colombia's present external debt will be $23.1 million in the peak year of 1952, an amount equal to just over 5% of foreign exchange receipts on current account. in 1950. The service on this debt will fall to $6.5 million by 1960. Colombia should not experience difficulty in meeting considerably larger service payments than those required for the existing debt and the proposed loan. Political Situation 33. After a period of political tension which culninated in the decla- ration of a State of Siege and dissolution of Congress, Laureano Gomez, the Conservative Party leader, was elected President of Colombia on November 27, 1949. The Liberal Party did not present a candidate for the presidency and Liberals refrained from voting. President Gomez was inaugurated on August 7, 1950. 34. While the internal situation has been somewhat unsettled ever since the disturbances of April 1948, and the State of Siege has not yet been lifted, I do not believe that this should prevent the Bank from making the proposed loan. The project has been recommended by a non-partisan Committee of out- standing Colombians and there is general agreemient that it is one of the most important steps to be taken in any program of development. -6- Prospects of Fulfillment of Obligations 35. In the past, Colombian efforts in the field of highway development have not been entirely effective because, instead of concentrating on a few operations at a time and successfully completing them, the responsible authorities have undertaken work simultaneously on a great many different sectors on an inadequate scale. As a step in remedying this situation: (a) the M4inister of Public tPorks has cancelled all but a few of the contracts for highway work not within the project; and (b) the Government has agreed (in a letter attached as Appen- dix I) not to embark upon any major highway works, other than those Included in the project, until after comple- tion of the project. 36. The execution of the project would be carried out by a number of competent engineering firms under contract with the Borrower. The mainten- ance shops established and equipment purchased with the proceeds of the loan are to be under the control of the contractors during the term of the contract and are to be turned over to the Colombian authorities in sound operating condition when the work is completed. 37. Section 2.03 of the draft Loan Agreement provides that contracts for the carrying out of the project and for the purchase of the goods are to be satisfactory to the Bank. 38. The obligation of the Borrower to provide the funds needed to cover the local currency costs, including a reserve for contingencies, is specifi- cally provided in Section 4.08 of the draft Loan &greement. Funds for the first year of the project are already tovered by the 1951 budget of the Ministry of Public Works. The appropriations required for the remaining years of the project will not present a difficult problem for future budgets. 39. As pointed out in the economic section, the prospects for Colombia's balance of payments position are favorable. They indicate that provision of the amounts of foreign exchange required for the interest on and amortization of the proposed loan should be well within Colombia's capacity.- 40. In the light of the above considerations, it is my opinion that the Borrower would be in a position to meet its obligations under the proposed loan, and that in making this loan, the Bank would be acting prudently in the interest of the Republic of Colombia and of the members of the Bank as a whole. 41. Appendix IV contains a recommendation of the proposed loan by the Statutory Loarn Committee provided for in Article III, Section 4, Paragraph (iii; of the Articles of Agreement. PART IV - COMPLIANCE WITH THE ARTICLES OF AGREEMENr 42. I am satisfied that the proposed loan would comply with the require- ments of the Articles of Agreement of the Bank. 43. I am also satisfied that, in the prevailing market circumstances, Colombia would be unable to obtain elsewhere a loan of the amount required on reasonable terms. PART V - RECOMMENDATIONS 44. I recommend that the Bank make to the Republic of Colombia a loan of l16,500,0O0 for a term of ten years with interest (including ceamission) and commitment charge at such rates and on such other terms as are specified in the draft Loan Agreement attached as hppendix I. Eugene R. Blaek President April 5, 195)