FILE COPY DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use Report No. P-1529-PA REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF PARAGUAY FOR THE FOURTH HIGHWAY PROJECT November 25, 1974 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. CURRENCY EQUIVALENTS US$1.00 = 126 01.00 = uS$o.0o8 1 ,000 = US$7 .94 01 ,000 ,000 = US$7,937 WEIGHTS AND MEASURES Metric System ABBREVIATIONS CIAP - Comit6 Interamericano para la Alianza para el Progreso (now CEPCIES) IDPC - Ministry of Public Works and Communications OCIPT - Office of Coordination and Integral Planning of Transport GCPO - Government's Central Planning Office DGV - Direcci6n General de Vialidad GOVERNMENT OF PARAGUAY FISCAL YEAR January 1 - December 31 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 FOURTH HIGHWAY PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of Paraguay for the equivalent of US$14h5 million to help finance the Fourth Highway Project. The loan would have a term of 25 years, including five years of grace, with interest at 8% per annum. PART I - THE ECONOMY 2. An economic mission visited Paraguay in September 1973 and again in February 1974. The resulting updating economic report (299a-PA) was distributed on May 10, 1974. A summary of Country Basic Data is attached as Annex I. 3. Paraguay is a predominantly agricultural country of about 2,4 million inhabitants, located in the flat tropical heartland of the South American continent. After a long period of political and economic turmoil following the Chaco War (1931-35), the country's economy recovered in the 1960s and achieved an average annual growth of 4.6% per annum during 1962-72. Output growth proved insufficient to provide adequate employment opportunities, but continued emigration to neighboring Argentina helped to contain the growth of population, eased the unemployment problem and permitted an improvement of almost one-fifth in per capita income during the decade. In 1971 per capita income was estimated at US$280, which was less than one- half of the South American average. Its distribution, however, was about the same as that of the continent. Literacy rates appear to be higher than for countries at a similar stage of development, although educational facilities are below average. 4. Paraguay is a landlocked country and conducts most of its world trade through Argentina and Brazil. The high cost of shipping its products to the nearest seaports has delayed the country from taking full advantage of its agricultural and labor resources and determined the nature of its export trade. Paraguay specializes in the production of agricultural and livestock goods with high unit values. In addition to world market fluctu- ations, a significant part of the country's exports is dependent on supply and demand fluctuations in neighboring countries. Paraguayan economic prospects appear to be favorable, however, over the longer term. Extensive areas of unused land suitable for agropastoral and forestry production provide opportunities for large scale colonization and expanded production. Technological improvements, now under way, are expected to increase substantially the productivity of land already under cultivation. The country's vast water power resources are expected to provide a plentiful -2- source of cheap energy and foreign exchange earnings. Additional transportation facilities are expected to enhance further the compe- titive position of Paraguayts products in world markets. Finally, the deepening of agricultural and forestry products-processing industries is expected to continue raising the value-added content of Paraguayan exports. 5. Economic growth accelerated in the 1970s. Between 1969 and 1973, overall output increased at an average rate of 5.5% per annum.and, despite a setback in 1971 resulting from adverse weather conditions, the aggregate production target set by the 1971-75 Development Plan was met in 1973. The Paraguayan economy responded quickly to the stimulus provided by rising world demand for its export products during the period. The sup- ply response was facilitated by earlier investments in transportation, official assistance to mechanize agriculture, and the reinforcement of fiscal and credit export incentives. Export earnings boomed between 1969 and 1973, easing the foreign exchange constraint to growth and boosting domestic savings and investments. 6. Government investment spending in the last three years lagged behind the targets set by the Development Plan. Tne country's investment rate increased, however, as a result of greater investment outlays by the rest of the public sector and by the private sector. The decline in Government investment expenditures was caused by the completion of some lumpy infrastructural projects as well as by budgetary stringencies during most of the period. 7. The fiscal situation deteriorated in the early 1970s. Despite the expansion of output and trade, Government revenues remained almost stagnant in the face of growing current expenditures. To deal with this situation, the Government made key personnel changes in the tax and custoras administra- tion and introduced a number of revenues measures. At the CIAP Country Review held in January 1972 the authorities established targets for fiscal improvement in 1972 and 1973 aiming to restore Government savings to the peak levels achieved in the past. The fiscal situation deteriorated further in 1972, but improved markedly in 1973, when the revenue targets established two years earlier were met and Government recourse to Central Bank financing ceased. This was made possible by Government's actions to increase taxes and to improve the performance of the Income Tax and Customs Administrations, as well as by an upsurge in imports which helped to increase revenues from import duties. 8. While the strengthening of external demand for Paraguayan products gave considerable impetus to output growth in the 1970s, increased export prices and world inflationary conditions broke Paraguay's impressive record of price stability. The consumer price index,which in the second half of the 1960s increased at an average annual rate of 1.3%, rose by 5% in 1971, 10% in 1972 and 13% in 1973. Wholesale prices, however, increased faster last year (33%) largely reflecting price hikes in internationally tradeable commodities. -3- 9. Government efforts to curb inflation followed a three-pronged approach: measures to control domestic prices of exportable foodstuffs (particularly beef), strict control over real wages, and increased fiscal effort to mop up purchasing power. At the same time, disincentives to imports of consumer goods were maintained while applying a liberal policy of duty exemptions towards imports of capital goods and transport equipment. Although they helped to contain price rises, these policies failed to break the inflationary impulse. Beef price and marketing controls, removed since February 1974, proved to be largely ineffective as the system of export quotas associated with them created speculative expectations on the part of ranchers and led to scarcities in the domestic market. Government incomes policy depressed real wages in urban areas (particularly those of public servants), but real wages in the countryside increased rapidly under the influence of rising export prices and labor shortages at harvesting time. The improvement in the Central Government financial situation in 1973 and the elimination of the overall fiscal deficit contributed, however, to cooling off the economy. 10. Given the Paraguayan economy's relatively small size and large degree of openness, anti-inflationary policy is likely to be only partially effective so long as worldwide inflation persists. The Governmentts strategy to contain inflation has been by and large correct, and as long as fiscal, monetary and incornes policies continue in their present form, domestic infla- tion should subside. Inflationary prospects, however, have become somewhat more threatening as a result of the increase in world petroleum prices. In recent months the price of oil landed in Asuncion trebled, which caused retail prices of petroleum products to double. It is expected that the price hike will trigger a first round increase of some 3% in the consumer price index, but its impact over the year is likely to be considerably greater. 11. As of December 31, 1973, Paraguay's outstanding and disbursed external public debt repayable in foreign currency was US$123 million, compared with a total of US$114 million a year earlier. The Bank Group share in the former total was US$38 million as compared with a level of US$33 mil- lion the year before. In 1973, net public medium and long-term external debt is estimated to have increased at a somewhat higher pace as a consequence of the upturn in investment experienced during the year. 12. Paraguay contracted new external obligations amounting to US$115 mil- lion in 1969-73,over 70% of which was contracted with bilateral credit agencies. Of the remaining 30% the Bank provided the largest share (12.5%), with roughly a blend of 40% IDA funds and 60% of IBRD funds. In addition, new loans disbursable in foreign currency but repayable in local currency were contracted with the 1DB for a total of US$84 million. The rhythm of new external commit- ments is expected to accelerate in 1474 as a result of bunching in the prepara- tion of projects amenable to external financing as well as greater availability of local funds following recent improvements in domestic resource mobilization. -4 - 13. Despite Paraguay's impressive export perfornance in 1972-73 and the promising prospects for 1974-76, the country will continue to need substantial inflows of external assistance in order to attain its growth and employment objectives. Additional capital inflows will also be required to finance the increase in Paraguay's import bill resulting from the recent increases in international oil prices. The oil import bill, which in 1972 was about US$8 million or 11% of imports of goods, is expected to climb to some US$30 million in 1974, which would be about 20% of total imports. However, since Paraguay has obtained the bulk of its foreign capital needs on concessionary tems and since its exports are expected to continue increasing at high growth rates, the country's creditworthiness is not expected to be impaired by the recent changes in oil prices. 14. The debt-service ratio remained within the range of 1Ov to 161 in 1968-72 and declined in 1973 to 8.6% of exports of goods and nonfactor services. While the country's external borrowing is ex-pected to increase in the coming years, the debt service ratio is unlikely to exceed 13% in the remainder of the decade provided that the addltional capital is con- tracted on terms comparable with those of the recent past. The Bank Group's share in the debt service amounts to about 11.4% of the total and in 1973 rep- resented 1% of exports of goods and nonfactor services. Under these circun- stances, Paraguay is creditworthy for increasing amounts of Banlk lending. Given Paraguay's improved economic prospects, we are planning to gradually phase out IDA operations. PART II - BANK GROUP OPERATIONS IN PARAGUAY 15. Paraguay has received US$69.4 million (net of cancellations) in Bank loans and IDA credits. Of this amount, US$31.9 million has been in the fonn of seven IBRD loans, while six credits totalling US$37.5 million have been from IDA resources. As of September 30, 197L, the Bank held US$26.1 million, including US$11.9 million undisbursed, and IDA US$37.3 million, including US$16.1 million undisbursed. On a sectoral basis, Bank Group assistance to Paraguay has been 66% for agriculture, 26% for transportation, and 8% for education. Execution of Bank Group-financed projects has, on the whole, been satisfactory. There has been a delay, however, in disbursing the loan for the Second Highway Maintenance Project (Loan 652-PA), as the fiscal situation led the Government to reduce the highway maintenance budget. This has now been corrected, as the Governument has appropriated sufficient funds for this purpose in the 1974 Budget. 16. Thus far, IFC has made no loans or investments in Paraguay. It is processing an integrated forestry project which could have a significant impact on Paraguay's foreign exchange earnings. Annex II contains a summary of Bank loans and IDA credits as of October 31, 1974, and notes on the execution of ongoing projects. 17. In FY74 the Bank Group did not make any new loans or credits to Paraguay. Bank Group lending to Paraguay in FY75, however, will be substantial: in addition to the proposed Fourth Highway Project now under consideration, a loan to help expand beef production and exports (1037-PA/US$l million) and a development credit for a small farmer credit and rural development project (509-PA/US$ll million) were approved on August 6, 1974. Other projects in preparation are in the fields of highway maintenance, preinvestment, agroindustry and power. These may be ready for consideration by the Executive Directors during the next two years. l8. In lending to Paraguay, the Bank Group tries to assist the Govertm- ment in achieving four major objectives. These objectives are interdependent and complementary; hence, it is not possible to rarLk them in order of priority or importance. One objective is to spread the benefits of growth more widely than before and, more part iularly, to attack directly the problem of rural poverty. A second objective is to help Paraguay expand output, including e.,pots, by supporting projects that direc'ly or indirectly make large con!- tributionis tc Irodacl;,aon and employment. A third obJective is to bring about institutional improvements in the management of the economy and in the developmenr. of pub,lic financial intexnediaries. A fourth objective is to ' ransfer sufficient external resources t-o complement Paragua7 s domestic savings and prov-de the necessary funds for maintaining an ade- quate level of economic aLd social investments in a framework of sound domestic finances and a viable balance of payments. 19. While the last objective primarily influences the magnitude of the Bank Group's program in Paraguay, the other three jointly determine its structure. The livestock projects are designed to help expand the production of beef, thus strengthening the balance of payments, by increasing beef exports. Projects for rural development are designed to help ease the rural poverty problem; basically, the Bank Group would work in consolidating existing colo- nization settlements, a strategy which is consistent with promoting better resource utilization and which conplements the role of other international lenders, notably IDB and AID, in the small farmer field. Loans for highway construction and maintenance are designed to transfer resources to Paraguay, to help expand the country's paved road network, which is considered crucial for expanding agricultural output, and to consolidate the ongoing efforts to strengthen transport planning and coordination as well as the road maintenance organization. Bank Group assistance for agroindustry is to help increase the processing of agricultural products destined for export, raise employment and expand marketing outlets, particularly for small farmers. Lastly, Bank Group financing of power development is designed to transfer re- sources to Paraguay on suitable terms and to help increase the country's exports. -6- PART III - TRANSPORT SECTOR 20. Given Paraguay's mediterranean position, the most important transport link to the sea is the Paraguay River, which flows north-south across the country to join the Parana River at the border with Argentina. River transport, therefore, carries some 85% of all foreign trade, but the importance of this mode has been declining in recent years following con- struction in the early 1960s of a bridge across the Parana' River between Paraguay and Brazil, and the recent completion of a paved road from the Paraguayan border through Brazil to the Atlantic port of Paranagua; this bridge and road, together, provide an alternative link to the sea. 21. About 80% of the country's population of 2.4 million and most of the economic activity are located east of the Paraguay River in the "Triangulo" area, roughly defined by the corners at Asuncion, the capital; Encarnacion; and Puerto Presidente Stroessner. The country's economy is based mainly on primary and processed agricultural products and, in order to further develop Paraguay's agricultural potential, the Government is pursuing a policy of intensive land colonization. Roads have been built to support these efforts and also to integrate scattered centers of agricultural and indus- trial production into the national economy. The transport sector has been receiving a large share of public investments, and the basic transport system--essentially roads--now exists. However, continued emDhasis on extending and improving the road system to meet the growing demands of agri- cultural development is needed, road transport being the main mode used for domestic freight and passengers, particularly since the steady decline in the efficiency of the railway system over the past 20 years, A wide domestic air service network complements surface transport. River transport is unimpor- tant domestically except for timber rafting and some internal river shipping on the Paraguay and Parana Rivers. 22. Since 1950, the length of the country's highway system has increased eightfold from 830 km to 6,500 km. Highway construction has been one of the most dynamic subsectors in the economy, and also one critical to the development of the agricultural sector by providing access to new agricultural land. Road development over the past 20 years has been concentrated on paving primary roads and on extending the system. The network as a whole provides acceptable transport to most populated areas of the country. However, some of the existing paved and gravel roads need to be improved to meet growing traffic volumes and facilitate the development of new agricultural areas. 23. The Planning Office of the Ministry of Public Works and Communications (MOPC), and the Government's Central Planning Office, have responsibilities for coordinating the activities of the various agencies in the transport sector; however, their work has been generally poor due mainly to insufficient expertise and inadequate support within the Government. As a result, decision-making has been carried out independently by each of the transport agencies. Despite this, investments in the sector have for the most part met the development requirements of the economy. To help provide the Government with a sound basis for effective transport coordination and planning, the UNDP financed a -7- transport survey for which the Bank was executing agency. The first phase of the study, completed in 1973, consisted of an integrated approach to the various transport modes, development of investment priorities and the recom- mendation for the establishment of an agency for transport planning and coor- dination as well as for the training of persomnel. The major recommendation of -the study was to create, as a first step, the Office of Coordination and Integral Planning of Transport (OCIPT). A further recommendation was the creation of a National Transport Council, and the eventual estahlishment of a Ministry of Transport0 In late 1972, the Government created OCIPT to carry out the responsibilities envisaged by the UTDP study but it did not allocate sufficient funds for its operation. The Government has now decided to make OCIPT fully operational and, starting in 1976, to adequately fund its opera- tions. Assurances to this effect were given by the Government to the Bank (Section h.04 of Loan Agreement). 24. ExternaIL lenders have been very active in assisting Paraguay's transport sector. Over the 1965-73 period, about 4C% of highway expenditures have been financed by external borrowing, while most of the remainder, com- prising local funds, have been provided from eanmarked taxes from fuels and a 5% surcharge on imports. (Total revenues from road users have, in recent years, substantially exceeded total expenditures on roads. Since the recent oil crisis, fuel costs have risen from US$0.21 equivalent per litre in November 1973 to US$0o40 per litre in February 1974, representing an increase of about 90e.) Between 1961 and 1970, the World Bank Group provided four loans and one credit totalling US$16.3 million for construction, maintenance and studies of highways, and one loan amounting to US$2.8 million for improve- ment of port facilities in Asuncion. In 1956 the Export-Import Bank made a US$1.2 million loan to finance the construction of the runway at the interna- tional airport of Asuncion. Thereafter, in 1968, USAID provided US$4.7 million for financing a new and larger runway. Also between 1960 and 1967, USAID made three loans totalling abou-t US$15 million for the reconstruction and paving of the Asuncion-Puerto Presidente Stroessner road (330 Ia) and for the rehabilitation of a sec-tion of the same road. Between 1964 and 1972, UNDP also provided financial assistance totalling US$1 million for highway studies, training programs and the aforementioned transport survey. Finally, in 1971 the IDB made a US$26.4 million loan to finance the engineering and construction of the Trans-Chaco highway, which is the largest single road project ever undertaken in Paraguay. 25. The Bank's approach in the transport sector is to support the Government's primary objectives in expanding the country's transport system: (a) to foster output in produc-tive areas through better transport facilities; (b) to integrate scattered centers of production into the national economy; and (c) to improve international links with neighboring countries to facili- tate foreign trade. Also Bank assistance for transportation has a strong orlentation towards institution building, with the objective of improving overall sector planning and coordination, optimizing the benefits of invest- ment resources in -transportation and strengthening the administrative capacity of the existing transport services. PART IV - THE PROJECT Background 26. The proposed project evolved from the UNDP preinvestment study carried out during 1964-67 which evaluated the agricultural potential and road requirements of southeastern Paraguay (Triangulo area). Feasibility studies and detailed engineering for some of these roads were later per- formed under the Bank's Second Highway Project (Loan 443-PA) and the project roads were shown by these studies to have a high economic return. A Bank mission appraised the project in November 1971 and, following the recent improvement in fiscal performance which was necessary to assure the avail- ability of local funds to finance the project, a second Bank mission updated the appraisal in March 197h. On October 10, 197f, a Bank Mission visited Paraguay and agreed with the Government on all the conditions contained in the Draft Loan Agreement; as a result, it was not necessary to hold formal negotiations in Washington. A report entitled "Paraguay: Appraisal of a Fourth Highway Project" (No. 532a-PA) dated November 25, 1974, is being distributed separately. A Loan and Project Summary is attached to this report as Annex III. General Description 27. The roads that would be improved with the proposed project serve two important agricultural regions. The Itapua region, where the Encarnacion- Hohenau-Pirapo Road lies, is a fertile area with about two-thirds of its soils suitable for crop production, of which more than half are considered among the best soils in Paraguay. Through Encarnacion, the region has access to Argen- tina by ferry. The Guaira region, where the Mbocayaty-Colonia Indepen- dencia Road is located, is also a good agricultural area. The Mbocayaty- Colonia Independencia Road comnects with the Villarica-Coronel Oviedo Road, which is an affluent of the main highway between Puerto Presidente Strossner (export outlet to Brazil) and Asuncion, the capital. Over the years, several colonization settlements have been established in the two regions, some of which are of different ethnic groups (mainly German and Japanese). Land d s- tribution in the regions is quite even; the farmers are very progressive and many are grouped in well-run cooperatives. Their main produce is soybeans, cassava, sugar, silk, wine and poultry, and, except for some products which go to the local markets, the bulk of the produce is for export. 28. The proposed project consists of the following elements: (a) Road construction and reconstruction as follows: (i) Fncarnacion-Hohenau-Pirapo Road--Reconstruction and paving of an existing gravel road between Encarnacion and Hohenau (37 km.), including the construction of a bypass around the city of Encarnacion (about 1.5 km.) and a connecting road to the river port of Pacu-Cua (about 4.5 km.); and the construction, including paving, of a new 33 km. section between Hohenau and Pirapo. - 9 - (ii) Mbocayaty-Colonia Independencia Road--Reconstruction and paving of 24 km. of road and of a 2 kn. access road to Melgarejo. (b) Procurement of spare parts, tires and batteries for maintenance equipment financed under Loan 652-PA (First Highway Maintenance Project). (c) Consulting services for: (i) Supervision of the roads under (a) above; (ii) Extension of the assistance currently being provided for maintenance under Loan 652-PA; (iii) A study to determine further highway maintenance requirements; and (iv) Technical assistance for transport planning, including the training of nationals abroad, and for aid to the local construction industry. 29. The vertical and horizontal alignments of the existing Encarnacion- Hohenau-Pirapo and Mbocayaty-Colonia Independencia roads are not satisfactory and the roads lack an appropriate drainage system; during heavy rains the highway authority sets barriers preventing vehicle transit to avoid major maintenance expenditures. The project would provide paved, all-weather roads needed to cope with the growing traffic demand and a permanent connection to the outside markets. It would also finance the procurement of spare parts, tires and batteries for maintenance equipment to strengthen and complement the ongoing road maintenance program being financed by the Bank (Loan 652-PA). The stepped-up maintenance activity requires an increase in the normal inventory of spare parts to permit making efficient use of the road maintenance equipment. Project Cost 30. The total cost of the project is estimated at about US$20.0 million equivalent with a foreign exchange cost of US$1h.5 million (72%). Details of cost estimates are summarized below. All estimates reflect expected prices at end of 197h. - 10 - Local Foreign Total Foreign as -(115 Million) --- % of Total 1. Construction and Reconstruction of Roads (a) Encarnaci6n-Pirapo 2.70 6.30 9.00 70 (b) Mbocayaty-Col.Independencia 0.90 2.10 3.00 70 Sub-Total 3.T6 .40 12.00 2. Right-of-Way 0.30 - 0.30 3. Purchase of Spare Parts, Tires and Batteries for Mtnce. Equip. - 1.15 1.15 100 4. Consulting Services 0.36 1.74 2.10 83 5. Contingencies (a) Physical (lO0 of Item 1) 0.36 o.84 1.20 (b) Escalation: (i) 25% of Item 1 0.86 2.14 3.00 (ii) 13% of Item 4 0.02 0.23 0.25 Sub-Total T:71 7T¶ f7l TOTAL 5.50 14.50 20.00 72 - ~~= Financing 31. The proposed Bank loan would cover the total foreign exchange cost of the project (US$l.5 million); local project costs will be met by the Government in the amount of US$5-5 million equivalent. The Government has allocated suFficient funds in the 1975 Budget to carry out the project and has given assurances that it will continue to do so in the following years until successful completion of the project (Section 4.03(a) of Loan Agreement). Organization and Execution 32. The Directorate of Highways (DGV) within the Ministry of Public Works and Communications (MOPC) will be responsible for all the operations related to the project, While DGV's role in highway administration has been steadily growing, shortage of staff has prevented it from undertaking major highway design and engineering studies for the network. For this reason the engineering for the two roads under the proposed project was prepared by consultants Louis Berger, Inc., (U.S.) in association with SAE (Argentina). Since investments for the period 1975-78 are projected to be three times the average expenditure in the previous five-year period, assurances have been obtained from the Government that it will strengthen DGV's technical and administrative staff to cope with the increased workload. (Section 4.05 of the Loan Agrpeement). 33. The possibility of breaking down project works into units attractive to local contractors was taken into account. However, the limited capacity of the few local firms would make it necessary to subdivide the works into many units, leading to inefficient administration of project works. Local contractors are expected to participate through subcontracting to larger for- eign firms as has been the case in previous Bank highway projects. To assist the local contracting industry in improving its capability, the project pro- vides for the financing of consultants who would work with the contractors' association to identify problems and recommend measures for improvement. 34. Road maintenance has lagged behind other aspects of road development mainly because most of the earth and gravel roads were originally only tracks with poor alignment, inadequate drainage and shortage of staff and equipment. A master plan for maintenance was prepared in 1966 under the Second Road Project (Lh3-PA) and in 1970 the Bank made a loan (652-PA) to implement this plan; highway maintenance is now substantially improving. Under the proposed project the highway maintenance department's operations will be strengthened further in order to enable its staff to fully take over from consultants the day-to-day operations, over a period of two years. Consultants will be retained to provide the necessary technical support and training of local highway personnel during the transition period. 35. To assist the Government in improving transport sector planning and coordination and in implementing the recommendations of the previously mentioned IJNDP transport survey, assurances were obtained from the Government that it will provide the necessary financing for the operation and staffing of the Office of Coordination and Integral Planning of Transport (OCIPT). During negotiations the Government agreed to (a) select consultants acceptable to the Bank to undertake the required technical assistance and (b) set up and staff OCIPT by June 30, 1976. (Sections 3.02 and h.04 of the Loan Agreement). Procurement and Disbursement 36. Construction contracts will be awarded on the basis of international competitive bidding in accordance with Bank guidelines. Since the procurement of spare parts is for existing equipment, packages of contracts of up to us$50,ooo will be awarded directly to the local dealers for the equipment. In the case of tires and batteries, however, procurement will be made on the basis of international competitive bidding in accordance with Bank guidelines. 37. For civil works, disbursements will be made on the basis of 100% of expenditures denominated in foreign currencies and 33% of expenditures denom- inated in guaranies. The latter is equal to the estimated indirect foreign exchange component of civil works. On this basis, it is estimated that the Bank will finance 70% of the project's total civil work cost. In the case of spare parts, tires and batteries, and consulting services, disbursements will be made for the actual foreign exchange cost. Any funds remaining after com- pletion of the project will either be used for additional consulting services, studies or items for highway maintenance, or will be cancelled. - 12 - Benefits and Justification 38. The benefits of the project would primarily consist of a reduction in unit vehicle operating and road maintenance costs for normal and generated traffic. The project is also expected to stimulate colonization and develop- ment of some areas adjacent to the roads by reducing passenger and freight costs. Additional, but unquantified, benefits are time savings for passengers, increased cargo load of commercial vehicles, and reduced spoilage of agricul- tural products. The economic rate of return from construction of the Encarnacion- Pirapo Road is estimated at 24%, and that of the Mbocayaty-Colonia Independencia Road at 13%; the weighted average economic return for the project's civil works is estimated at 21%. With respect to the Mbocayaty-Colonia Independencia Road, it is relevant to note that because of flooding during heavy rains the road has remained closed to traffic over 70 days per annum, with duration of closures of up to three days. Although quantifiable costs for these closures with regard to vehicle costs and operators' time were taken into account when calculating the rate of return, it is not possible to quantify their adverse developmental effects on the people in the region served nor the loss of production caused by them. The benefits of the other components of the project were also not quantified; however, it is expected that they will be considerable, particu- larly the increase in the normal inventory of spare parts which is essential for the improvement and maintenance of the highway network. PART V - LEGAL INSTRUMENTS AND AUTHORITY 39. The draft Loan Agreement between the Republic of Paraguay and the Bank, the Report of the Comnittee provided for in Article III, Section 4(iii) of the Articles of Agreement, and the text of a Resolution approving the proposed loan, are being distributed to the Executive Directors separately. The draft Loan Agreement contains provisions to reflect the various arrange- ments described in Part IV above, including the usual covenants for highway projects. 40. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 41. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments November 25, 1974 ANNEX 1 Page 1 of 3 WD1NThY DATA PA31UAOI ARLA POPULATION MLISIT! 106.76~2 k,,7 2.4 dmplio (mid-1i972) .. Per tlof ar.bI land SOCIALj1AIrCASORS Refereoros countries Oo-d--a Ei SalvadOr Cot Mtc ____A MO7 1970 1970 GNP? FER CAPITA 08$ (ATLAS BASIS) 4 230 /a 329 /b 330 /5 7.0 /a 630 /i t7-rade irth rate (rot thousa nd) 42-7 6 /n d 3td .6' Crude death rate (per thousa.nd) 12-it, ii 1? 0 7 infant socIality r.ae (pe.r thousand live birth,) . .I' _ 5 62 LIfe epe'ttanY at birth (year) 5. 6 2 36 Gross rep-ducticm rate .. 393.3 3.6 . Populatino, groth rate yr 2. / 3.7 /n 3.7 3.7 I Population groWth rate - urban 1 ! 37 57 Age eitulut.. (hernet) 15-hi 51 51 7? 619 D-odnvpr-y -ti 1.A 2.0 Jk 1.6 / 1,W7 0 .6 /k Urban. Popuilation as Percent af total ./7, 9, 'If 32 /ng 39 /- 3~ Or E91YTENT oalbur ome (th-oeoje 00' 030 poll 1,303 /L 5)J P-rcetge e-ployed ..a.icltr 56 .. ? 0 75 POrc-tage --epinyad ID..1 1/ 1,: - - incoan ~~~~ronel-d by higheot 6% .. 30 13 P 29 / 23 / Porvoet nOnaioa 00 renni-od y9 highent 20% .. y.c5 52 7. 54L Peren nO na Ioa to-s roe Yo Iy ...ant 20% 2. p407? Pre a t ofvtiou. inonoroctd by 10aa,,. Los.. ..6 -,1 PISTUIBITION OP LANd il&IO705H0P I owned by tap 10% af owners I nOmd byooiet10% of anr 31A0T79 AND MUcTRITION PPnm-.itinn .-er-ph7ysician .90/. 2,3(2/0 1-710 Jr 0.033 0/0" PPopult-no Per narstog Paersan - a 7lOt Y,130 900, 1,6~913 PPcIpialc par haspita1 bad' 620 - 0' 523 1 Por capita colria nopply as % of -eqirsearte /5 9.A In 71 907i Per capita Praotr .1 opply , lota3- (grano per dpj~/6 6, 77 30 ~ Ofnhlch, nobol eic pulne Lo 7, 61 2'1 0Dbt ratr i-li years /7 . Adjusted /5 primay enhool enrull-tn relic 1:),,/ 33/ 91 Jr. 20 Ad,ustod s"onconarj schul enoi iratio Lo i. 77 10 - fer,atsacctg provided, first and ee-nd true1 1? 1ˇ- 122 ~ -nntoca 1emclteot as % nOf nec.ochnal enrotlsect 16 I? 31 Adult .literacy rate . 19 bod 2/Dcuo '7 __ Ave.rag No- cf P-r-s e rn (uPrban)2 - Pre t c o pied wills ithout piped Wacter. Acce-Ss to rientricity (as % or total popla.tion) i13 7~t J Percent af ural Wpora.tIno aunneo.t.d -a e1-onrLiciy CONSUMPTION Ralo..-,par 100 population 83 /ob 71 7 I Pa,ceanger care Pe, iG'O opuetr 6 2 lii Sla-trbo poar conercptia (lois p.-.) 56 92 2 1 92 51 NoanPrint c-rooptlo, P.c. lkg per year 0,o 1.7 0.5 37 6.? Natno, Pigarro refer either to the blaest periads or to annoot CT eirnnta .artperatare, body aitre, ca theats pas Lotesa yoricde refer 1 pIlcuiple ta dletrib.tilan by age cod Iea of nattonl1 PoPulatco" the ynorn11956-ho cr 1P6-70; the acet- ye.re to pria- /6 Pr't.iae atedarde (recoireet,t) for Dall C n..tri- as ae'taa- cipteo 1960 rad 1970. lloead by U1101 Euenamic R.earnh Sarine pro-ode for a nioe.a 4 The Per lapito CoP eeoeat iat anabt pri-afralu.n of 60 aae cf tntal protaua per day, aur 20 gr-ar. of yOr thor tlion t960,calcuieteo byf tba came cooverelsi. an-Ia and pulee orotelo. of -chb tO gras shoUld he anMim troaiiqp- -n tin 1992 World neRo noton prutinic These standards are sasa.hat leer ihauc th-ae of 75 42 Average vu-bho of daaghter e oa coanf reprnd-tiva rend of IteLl protein and 13 va- of er-al prntiaacca age. -serage for the world, prnpca..d by Fi0 in the 7hi.rd World Food 4 PipuILitoa grooth raten ore for Lbe denodes en,ding io S-one. 3960 and 19710. /2 Scene etadee hare euggeastd that oride death rater, of child-e 4L Satin f and'r 19 and h5 cd over age braketn t. ape 1 throgh u ba Ile -ced ae a first appra.taa I.. idaa of thos3e In laborr force brachen of ngeo 15 throug 60.eolltior 4 FAO refereone ntandaad represent phyrilclgloal ,., /8 Pe-netay erairo r-rropr.diog pop,laUoa af an.ho1 age qoAr-ente for aarena avteilty and health, tkrog as donnced Leo' eanh ooitry. Jo aeicta byappydo tothp157 fiurethe growth rate af the GN? per eapila (Jo real taers fros 196! c1770 l? 7'! stlete; /d l65~0~ o 150..2; If' ittee, tlnarr, antd ad-IrttOstrattsg casters of deparrunte an d1stots tonal itles of i00 or eofe inli itts haclr--e.g.esretioly wham laate-ele /h0 ACentat eniatere of oomi nipolltte; /1 eMbropcioae ereorof Sanloa et0 Cty (eNecldlng rals arof dtflPrict of Lao pavao), Caflagr oily, cod adminotratTveaenters f all natons eanepe San Pablo, Aaaodayrar, aid Buenos Aires; 4~ 3362; Au hacl of xpop- 1atio on~dor 15 and 65 and Over to total labor forae; /I1l9yli be 1969; fri Emaladee forestry; Jo. 196;. /P hoaehoido; /q 1967-62; Ir dumber ona register, nsCifll aeaicbng-Ta cooatry;- /n Coverage of data unci; /I do- coa~lng eIowcven, aSsistant nuraesa and midWIfery and nuoslng aLxililaries; Jo InOfldiig reotoal neta; I lrtl-t,; Ia -nclding primary eve- g sohoulo; . Nont ~.oladi,,g tle..h- t-rointg; Hom ..ing umbta; Jo Urban and roal;I TSa iota refro' to d,,ellcag ; Jab 1961; be 15 Yaa.e a nd o-e; bad Defincitiono kordaaee. C-sta ila han breen selected as a- bljenolce comtry nia,ce it ha. alela..sarehan and population ..o.a Pa,a&-io.y nod boo ta-laned each higher atandarde of eagi.1 d-eInprerj. oAd ecoonruic growth. ':h10,86 25 ic-eritr 19, 1976 AiC:EXY I Page 2 of 3 ECONCMIC INDICATORS GROSS NATIOINAL PRODUCT IN 1972 ANNUAL RATE OF CRO'i? (Z, constant pricos) US3 Ml-n. % 1962 -65 1965 -70 1973 GNP at Market Prices 757.9 100.0 4.2 4 .I 5.9 Gross Domestic Investment 127.3 16.8 9.9 5.2 23.-4 Gross National Saving 122.7 16.2 Current Account Balance -2.0 -0.3 Exports of Goods, FFS 106.2 14.0 12.3 4.3 6.4 Inports of Goods, NFS 99.1 13.1 3.6 5.5 39.9 OUT`PUT, LABOR FORCE AND PRODUCCIVITY IN 1970 Value Added Labor Force /1 V. A. Per Worker US$ I-n. _ us $ _ Agriculturs 192.2 32.1 0.385 56.7 1,86.6 56.6 ±ndustry 16,9 24.5 0.148b 21.2 992.6 115.6 tn;rvices 259.6 43.4 0.154 22.1 1,605.7 196.2 * a,llocated Total/Average 596.7 100.0 0.697 100.0 59.0 100.0 fiO-OERN}iOET FNIANCE nm PtlroliS Ftcr MlCentral 2Gvernisnt __ ~~~~~fil P f,%of GD? 1973 1972 1973 1973 197 973 Current Receipts 19,053 16.8 15.1 11,423 9.8 9.1 Currant Expenditure 15,501 14.6 12.3 9,218 8.9 7.3 C'urrent Surplus 3,52 22. 2 8. Capital Expenditures 6,258 5.7 5 0 1, 22 1.3 E;xternal Assistance (net) 2,280 3.4 1.9 -42 0.7 * i59N^!EY CTSDiT and PRICES 1968 1969 1970 1971 1972 1973 (Mllion 0 outstanding end period) 11oney and Quasi Money 9,026 10,981 12,826 1 4,632 18,090 21,629 /a Bank credit to Public Sector 4,094 4,611 1L,531, lt612 5,718 5,635 7 Bank Credit to Private Sector 10,193 12,673 14,L65 16,033 17,822 19,726 /a (Percentages or Index Nimbers) Money and Quasi H1oney as % of GDP General Price Index (1963 = 100)/1b 109.0 111.5 110.5 116.0 126.7 143.0 Arnnual percentage changes in: tv:lr;,1 Prize Index 0.6 2.3 -0.9 5.0 9.2 12.9 1;:m.i: craedit to Public Sector .. 12.6 -2.1 2.2 214.0 Bank credit to Private Sector * 24.3 141.1 10.9 11 .1 NOTL± All conversions to dollars in this table are at the average exchange rate prevailing durinrg the period covered. LI Total labor force; unemployed are allocated to sector of their normal occupation. 'llUnallocated" consists mainly of unemployed workers seeking their first job. not available not applicable * negligible /I n a 19°73 T Year average ANN EX I TRADE PA{ElNTS AND CA.PITAL FLO014S 7age 3 of 3 BALANCE OF PAYENTS MERCILHADISZ EYPFORTS (1973) 1°57-9 1972 1973 US $ Mln . (MLillions US $) Exports of Goods, N-FS 66.2 10. 2 151.7 IJ,jrtS of Co_-;, FrS 9,.5 99.l 151.8 Resource Gao (deficit = -) -_277J 73 _J.1 Beef b.L 31.3 Industrial seeds 12.2 9.6 Interest Pc,%ments (net) -b.5 -9.6 -11.1 Luuiber 11.8 9.3 R'or',;ers' Remittances - - - Cotton 11.6 9.1 Other Factor Payrents (net) -1 .1 -1.5 -1.4 Cakes and expellers 7.6 6.0 Net T;ansfers 2.5 2.3 2.5 All other co.anoditics L3.3 :.2 Balance on Currenit Account -T2.1 -2.0 -10.1 Total 12b.9 lo0, Direct Foreign Investment 3.5 2.9 5.4 EXTERNAL DEBT, DECEMER 31, 1973 Nct. 1MLT Borrowing Disbursem,ents 26.7 2L.8 30.9 US $ Mln Armortization (-) -h.6 -7.1 -10.8 Subtotal 22.1 17.7 20.1 Pnblic Debt, incl. guaranteed 126.6 Capital Gralits 2.6 2.7 3.0 Non-Guaranteed Private D)ebt (Dther Capital (not) 3.6 -10.9 L.0 Total outstanding & Disbursed 01t1r items n.e.i lncrease in Reserves (+) -3.6 10.4 22.4 DEBT SERVICE RATIO for 1973 /1 Gross Reserves (c-d year) Not Reserves (end year) 20.2 30.6 53.0 Public Debt, incl. guaranitced 1; Non-Guaranteed Private Debt Interrimdiate Proc>ucts Total outstanding & Disbursed ITports 21.0 20.3 28.6 of which: 7eLrol.mmn 6.4 8.1 9.0 ExIport.s of which: Petroleum IBRD/IDA LENDING, ('Msrch 31,1971| (Millinn US $) IBRD IDA PATE 0(L' .C4G Outstandinig & Disbursed 13.- ,.5 Tluounh1l - 1071 Since - 1971 hidisbursed 3.2 .1 u $ l.0) = V I26 u1S $TT = - i126 Outstanding incl. Undisbursed 30 o a 1.0o = uS $O.O08 f 1.00 = us $o.008 /1 Rstio of Debt Service to Exports of Goods and Non-Factor Services. not available not applicable ANNEX II Page 1 of 2 STATUS OF BANK GROUP OPERATIONS IN PARAGUAY A. Statement of Bank Loans and Credits (as of October 31, 197h) (US$ M4illion) Loan Amount (less cancellations) No. Year Borrower Purpose Bank IDA Undisbursed Eight loans and credits fully disbursed. 11.6 21.4 - 620 1969 Paraguay Livestock 4.3 - 0.7 652 1970 Paraguay Highway Maintenance 6.o - 1.2 347 1972 Paraguay Secondary Education - 5.1 5.1 i037 197h Paraguay Livestock IVt 10.0 10.0 509 197h Paraguay Small Farmer Credit & Rural DevelopmentV 11.0 11.0 Total Net of Cancellations 31.9 37.5 28.0 of which has been repaid 5.8 0.2 Total now outstanding 26.1 37.3 Amount sold 0.3 of which has been repaid 0.3 - Total now held by IBRD/IDA 26.1 37.3 Total undisbursed 28.0 B3. Projects in Executio 1/ Loan 396 First Road Project, US$6.0 million and US$2.2 million, Credit 12 October 1961 and December 196L. Work financed by the Bank Group for improving a road between Asuncion and Encarnacion was completed satisfactorily in March 1970. The German contractor, Hochtief, claims that it is entitled to US$11.1 million more than the .US$9.6 million it has received for its work under the contract. Supported by I/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution. Not yet effective. ANNEX II Page 2 of 2 the project consultants, MOPC rejected the claim. For some time Hochtief tried to resolve its claim through direct negotiations with the Paraguayan Government. In June 1972, Hochtief altered its approach and attempted to settle its claim by invoking the arbitration clause of the contract. The. Government, however, has refused to appoint its representative on the arbi- tration panel as called for in the arbitration clause, and Hochtief has asked for Bank assistance in bringing the Paraguayans to arbitration. We have advised the Government of the Bank's interest in having the parties to Bank-financed contracts adhere to the disputes provisions of such contracts and have advised Hochtief that, under the circumstances, its most appropriate course of action would be to pursue and exhaust the judicial remedies which are still open to it under Paraguayan law. Loan 620 Third Livestock Project, US$h.3 million, IBRD, Credit 156 and US$4.3 million, IDA, June 25, 1969 The US$4.3 million from Credit 156-PA was fully disbursed by January of 1973. The funds provided by Loan 620-PA were fully committed by January 31, 1971L. The project is about one year behind schedule due to slow disburse- ments during the 1970-72 period. Loan 652 Second Road Maintenance Project, US$6.0 million, January 9, 1970. The project comprises provision of maintenance and shop equipment, improvement of the maintenance organization and its operations, and training of personnel. Important progress has been made, with the assistance of con- sultants, in strengthening the road organization and in improving the physical maintenance of roads, as a result of the project; approximately 90% of the provision for equipment has been disbursed. In 1971 and 1972 procure- ment was delayed pending the provision of adequate local funds to operate the extra equipment. These funds are now available and will enable the remainder of the equipment to be procured in 1974 and 1975. In this event, the project should be completed by mid-1975, with disbursements extending to the end of the year, approximately two years behind schedule. Credit 347 Secondary Education Project, Us$5.1 million, December 22, 1972. After a seven-month delay due to a recess in both houses and an ensuing backlog of pending legislation, the Credit Agreement was ratified by the Congress on September 1i, 1973, and the Association declared it effective on October 30, 1973. Key staff of the project implementation unit have been appointed and, at this stage, no special problems are envisaged for the proper carrying out of the project. Since the Government met CIAP's 1973 fiscal targets, the second tranche of the Credit, which was conditioned on the Government's meeting these targets, has been released. ANNEX III Page 1 of 2 PARAGUAY LOAN AND PROJECT SURITARY Borrower: Republic of Paraguay Amount: $14.5 million Terms: Repayable in 25 years, including 5 years of grace, at 8% interest per annum. Project (a) Construction and improvement of two high Description: priority roads (Encarnacion-Pirapo, including a short spur and bypass, about 76 km; and Mbocayaty-Colonia Independencia, including a 2 k-m. access road to Melgarejo, about 26 km,); (b) spare parts, tires and batteries for equipment procured under the highway maintenance loan (652-PA); and (c) consulting services for supervision of construction, for highway maintenance, and for technical assistance for transport planning and aid to the local construction industry. Estimated Cost: Local Foreign Total Foreign as -(US$ Million--- % of Total 1. Construction and Reconstruction of Roads (a) Encarnaci6n-Pirapo 2,70 6.30 9.00 70 (b) Mbocayaty-Col.Independencia 0.90 2.10 3.00 70 Sub-Total 3.60 8.40 12.00 2. Right-of-Way 0.30 - 0.30 3. Purchase of Spare Parts, Tires and Batteries for Mtnce. Equip. - 1.15 1.15 100 4. Consulting Services 0.36 1.7h 2.10 83 5. Contingencies (a) Physical (l0% of Item 1) 0.36 o.84 1.20 (b) Escalation: (i) 25% of Item 1 0.86 2.14 3.00 (ii) 13% of Item h 0.02 0.23 0.25 Sub-Total 1.24 3.21 4.T4 TOTAL 5.50 14.50 20.00 72 - _ _- ANNEX III Page 2 of 2 Financing Plan: The proposed Bank loan would cover the total foreign exchange cost of the project (72$) net o.' duties and taxes, and the Government the remaining 28% representing local costs. Estimated In US$ Thousand Disbursements: FY75 FY76 FY77 FY78 FY79 Annual TT1T 777 4T:5 T7T T.U Cumulative 0.1 3.0 7.5 11.5 14.5 Procurement: Construction contracts and the procurement of tires and batteries for maintenance equipment will be awarded on the basis of international competitive bidding in accordance *ith Bank guidelines. Since the procurement of other spare parts is for exist- ing equipment, it will be awarded directly to the dealers for such equipment in packages of contracts of up to US$50,0O. Consultants: Consultants will be retained by the Ministry of Public Works and Communications for the supervision of construction, assistance in highway maintenance, a study of highway maintenance requirements, tech- nical assistance for transport planning, and aid to the local construction industry. Rate of Return: 21% for the two road construction components combined. * -2558- Fntiorralbt 5/7 To MbutuY 'SonJoaquin BRAZIL ~~~~~VILLA HAYES /~psoc~'-ID.CcloBe -V B R5A ZL tg -,,_ ) n < X ; > 1 0 9 a t 8 C g s5'Ne aC l b BOLIVIA) a rn Ia NuenoCclombia \ I1 de Marzo -scAN;UAN BASUNCIST 0 < '>}YuX nBernr\ \- AiV l E/ so. s1 . CAACUP t E C L Z~~~~~~~~ ~San Antonio tugna DVIEDOrco ir Villeto ira u CaCgrape Pto\\FozytemY 7 R. Snn Iqnocioo Sat R GrolArtfias S UHR REGtON Gral.E.I Iaiazh 0 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Bitumninous surfaced roods (Dstrict manortOenace05sho°ps,under con I ie 'Grovel/earth surfaced roodu in the Northern Region: PasoBarreto, /~~~~~~~~~~~~~~ 0 l 20 00 40 50 Tol uuu*-cUarof A9ur-G)z C _r_pegu_Yb _ I i-II Railroads zo ~~~~ ~ ~ ~~~~~~~~~~~MILES ~--u-, Rivers FOURTH HIGHvWAY 'ROJECT> , 0 nlb ,,. I rl,l', 1,,,, ,,, "I,: .,,p ,. '.' $ 0 4 0 A Main ports -Proposed roads-consrruction c- 7 e^y tisJr/elB PP'f "t OPa Clhr'P by KILOMETERS Main airports v W C Internaional houndaresO 1. u d I _ _