RESTRICTED FILE COPY Report No. P-884 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 The report may not be published nor rnay it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF KENYA FOR A HIGHWAY MAINTENANCE PROJECT December 9, 1970 INTERNATIONAL DEVELOP WENT ASSOCIATION REPORT AND RECOHMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPIENT CREDIT TO THE REPUBLIC OF KENYA FOR A HIGHWAY MAINTENANCE PROJECT 1. I submit the following report and recommendation on a proposed development credit in an amount in various currencies equivalent to $12.6 million to the Republic of Kenya for a highway maintenance project. PART I - HISTORICAL 2. During the past ten years the Bank Group has made six loans and credits for highways and agricultural roads in Kenya. Because of concern that new construction was in danger of outstripping Kenya's capacity to maintain the road system in the face of rapidly increasing traffic, funds were provided under the last highwiays project (Loan No. 639 KE) for a consultant`.z study of the whole maintenance problem. The study was completed in December 1969, and in January 1970 the Government requested Bank Group assistance in financing a highway maintenance program based on the con- sultant's recommendations. The project was appraised in the field in March 1970. 3. Negotiations for the proposed credit were held in Washington in October 1970. The Kenya delegation consisted of: Messrs. P. Shiyukah, Permanent Secretary, IMTinistry of Works; N. Nganga, Chief Finance Officer, Ministry of Finance; S. 1,ibugua, Engineer-in-Chief, Ministry of lorks; N. P. Radier, Chief Engineer (Roads), Ministry of Works; and G. P. Manners. Chief Engineer (Roads Supernumerary), Ministry of WVorks. 4. The proposed credit would be the eleventh credit to Kenya, which has also received four Bank loans. A loan of $8.3 million to the City Council of Nairobi for the Nairobi WTater Supply Project, which was approved by the Executive Directors on November 17, 1970, is expected to be si&ned shortly. The position of the other loans and credits as of November 30, 1970, is surmarized below: -2- Amount (US $ million) No. Year Purpose B IDA Undisbursed 256 KE 1960 Agriculture and Roads 5. /I 303 KE 1961 Land Settlement 3.- - _ 64 KE 1964 Tea Development - 2.8 .6 70 KE 1964 Highways I - 4.5 - 77 KE 1965 Tea Roads - 3.0 93 KE 1966 Education - 7.0 - 104 KE 1967 Agricultural Roads - 5.3 .7 105 KE 1967 Agricultural Credit - 3.6 2.3 119 KE 1968 Tea Development - 2.1 2.1 120 KE 1968 Highways II - 10.7 1.6 129 KE 1968 Livestock Development - 3.6 3.5 639 KE 1969 Highways III 23.5 - 21.9 641 KE 1969 Forest Plantations 2.6 - 2.6 185 KE 1970 Second Education - 6.1 6.1 Total (less cancellations) 34.7 48.7 of which has been repaid to Bank and others 6.1 Total now outstanding 28.6 Amount sold: 4.3 of which has been repaid 4 - _ Total now held by Bank and IDA 28.6 48.7 Total undisbursed: 24.5 16.9 41.4 /1 Guaranteed by the United Kingdom 5. The situation with respect to the rate of disbursement of past Bank loans and IDA credits in Kenya was described in detail in the Report and Recommendation of the President to the E,cecutive Directors in connection with a loan to the City Council of Nairobi for a water supply project (Report No. P-872, dated November 4, 1970). No major changes have taken place during the intervening four weeks. 6. Other lending under active consideration for Bank Group financing during the current fiscal year includes a $29 million loan for the Kamburu hydroelectric scheme. -3- 7. In addition to the lending set out in paragraph 4 above, the Bank has made six loans for common services in East Africa. All these loans are guaranteed jointly and severally by Kenya, Tanzania and Ugar,da; the United Kingdom is also guarantor of the first loan for railways. The following is a summary statement of Bank loans for common services as of November 30, 1970: Amount (US $ million) No. Year Borrower Bank Undisbursed 110 EA 1955 East African Railways Corporation /1 24.0 - 428 EA 1966 East African Railways Corporation /2 32.4 .4 1966 East African Harbours Corporation /2 5.6 .4 483 EA 1967 East African Posts and Telecomm.unications Corporation /2 13.0 3.8 638 EA 1969 East African Harbours Corporation 35.0 32.8 674 EA 1970 East African Railways Corporation 42.4 42.4 675 EA 1970 East African Posts and Telecommunications Corporation 10.4 10.4 Total 162.8 of which has been repaid to the Bank and others 16.5 Total now outstanding 146.3 Amount sold: 23.8 of which has been repaid: 16.4 7.4 Total now held by Bank 138.9 Total undisbursed 90.2 /1 Loan made originally to East African High Commission 7r Loan made originally to East African Common Services Authority - 4 - PART II - DESCRIPTION OF THE PROPOSED CPRDIT 8. BORPBWER: Republic of Kenya AM"OUNT: US$12.6 million equivalent in various currencies PURPOSE: To help finance the Government's highway maintenance program, including the purchase of equipment, construction and improvement of regional workshops, offices and road camps, construction of additional training center facil- ities and provision of related con- sultant and specialized staff services AMORTIZATION: In 50 years, including a ten-year period of grace, through semi-annual installments of one-half of one percent from April 1, 1981 through October 1, 1990 and of one and one- half percent from April 1, 1991 through October 1, 2020 SERVICE CHARGE: 3/4 of 1/ per annum ESTEIA'TD ECONOIIC RATE OF RETURN: 33% PART III - THE PROJECT 9. A report entitled 'Ulppraisal of a Highwaay lMaintenance Project" (No. PTR-61a) is attached. The project is desIgned to give the i'inistry of TWJorks (NisOW) the capacity to maintain adequately the entire 25,000 mile road network in Kenya, for which it will in future be responsible, and to eliminate the backlog' of maintenance on about 12,000 miles of the most important roads. The project comprises: (a) acquisition of road maintenance and workshop equipment, including spare parts; (b) construction and improvement of 6 regional workshops and of all necessary offices and road maintenance camps; (c) construction of additional training center facilities and acquisition of training equiprment; (d) provision of consultants services to introduce cost accounting and management procedures in the Roads Department and to assist with equipment procurement; (e) provision of services of consultants or other qualified staff to train maintenance personnel at all levels in the Roads Department; (f) provision of qualified personnel to fill key positions in the Roads Department of the Ministry of W4orks and to train Kenyans to take over these positions in due course. 10. The total estimated cost of the project is US$18.1 million equivalent and the foreign exchange component $13 million. The United Kingdom is making a grant of $0.4 million equivalent towards the foreign exchange costs, the balance of which would be financed bar the proposed $12.6 million IDA credit. The local costs, amounting to $5.1 million equivalent, would be met by the C-overnment of Kenya. Eapenditures amounting to $150,000 incurred since January 1, 1970, for consultant services for preparation of contract documents and for operation of the training center would be eligible for reimbursement from the proposed credit. 11. Inadequate maintenance of the road system at a time when the volume of traffic is rising rapidly is not only jeopardizing the past heavy investment in roads but is also increasing transport costs to the Kenya economy, particularly in the crucial sectors of agriculture and tourism. The object of the present project is to bring poorly maintained roads up to stzandard and to assure satisfactory standards of maintenance for the system as a whole. In terms of the resulting savings in vehicle operating costs, the project is estimated to have an economic rate of return of 33%, assuming a future growth in traffic of 7' a year, which is equal to the average annual rate of increase realized during the last ten years. At a rate of increase in traffic of only 5% a year, the rate of return would still be 28%. 12. The proposed project is closely related to the reorganization of the Roads Branch of the illinistry of W*torks recommended in the consultants study financed under the Bank's 1969 highways loan. In the past, res- ponsibility for maintaining the Kenyan roads system was divided among the 1inistry of Works and twenty-eight local authorities, whose administrative and executive capacity could not keep pace with the expansion of the roads system and the wear and tear resulting from a rapidly increasing volume of traffic. Complete responsibility for the maintenance of the entire network of roads is in the process of beinE, transferred to a reorganized and strengthened Roads Department of the MOiJ, which would be directly responsible for the execution of the proposed project. - 6 - 13. To implement the proposed project successfully it is essential that twenty-seven key positions at the headquarters and regional offices of the Roads Department be filled with fully qualified staff. Since most of these positions cannot be filled by Kenyans at this time, the Governrent is actively seeking to recruit overseas. To the extent possible the Government is anxious to retain staff on a grant basis under bilateral assistance and has therefore approached a number of possible donor countries. The Government has already obtained the agreement of the Norwegian Govern- ment to fill three of the headquarters posts and of the U.K. Overseas Development Administration (ODA) to recruit staff for the remaining headquarters posts, five of which the ODA has already filled. In the event that efforts to recruit some or all of the regional staff through bilateral assistance are not successful, the Government has made standby arrangements to recruit them through the U.K. Crown Agents for Overseas Governments and Administration on a contract basis, and the proposed Credit provides funds to finance such appointments. To the extent that staff are obtained under bilateral assistance an appropriate part of the credit would be reallocated or cancelled. The draft credit agreement provides that appointment of the 27 key staff must be made within 9 months of the date of signature. 14. An important objective of the proposed project would be to ensure that in the future sufficient numbers of suitably qualified Kenyans are available to fill professional and other tecinical positions within the Roads Department. The Government has undertaken to prepare as a condition of effectiveness a plan which is acceptable to the Association for the appointment of as many understudies as can realistically be made available for the twenty-seven positions described in paragraph 13 above. Recognizing that alternative employment opportunities have often been more attractive to qualified Kenyans than civil service positions, the Government has under- taken to prepare within six months of credit signature a comprehensive plan to attract and train professional staff for the Roads Department. Finally, finance would be provided under the proposed credit for the services of consultants to administer and operate a training center for maintenance personnel at lower supervisory levels for the Roads Department. 15. Procurement of all equipment and spare parts, except training center equipment which would be financed under the U.K. grant by competitive bidding within the U.K., would be on the basis of international competitive bidding. Improvement and construction of the regional facilities would be carried out by Government forces or by local contractors selected on the basis of competitive bidding within Kenya. These buildings are mostly of low standard construction, scattered throughout the country, and would be unlikely to attract international bidding. PART IV - LEGAL INSTRU1YETS AND AUTHORITY 16. The draft Development Credit Agreement between the Association and the Republic of Kenya, the Recommendation of the Committee provided under Article V, Section I(d) of the Articles of Agreement, and the text of a Resolution approving the proposed Development Credit are being distributed to the Executive Directors separately. The draft Development Credit Agreement conforms substantially to the pattern of Agreements for projects of this kind. PART V - THE ECOI\OI 17. An economic report entitled "Economic Development Prospects in Kenya" (Report No. AE-6a, in two parts, dated October 22, 1969) was distributed to the Executive Directors on October 31, 1969 (R69-209). Since then the Government of Kenya has published its 1970-74 Development Plan which is essentially the same as the draft plan examined in the economic report. The report found the Plan to be realistic, and concluded that, on the basis of the past economic performance of the country and the sound financial and economic policies of the Government, Kenya would continue to warrant substantial external assistance. These views were supported by representatives of other donors at the meeting of the Consultative Group for East Africa on Kenya in February7 1970. An economic and preinvestment studies mission has recently returned from East Africa and a report, reviewying recent economic developments and progress made during; the first year of the 1970-74 Plan, will be distributed to the Executive Directors in early 1971. 18. Because of the probable increased inflow of private capital and the end of post-independence grants, the average terms on which Kenya can obtain external resources in the future are likely to be harder than in the past. IWTithin moderate liriits, the econony can sustain a somewhat harder blend of aid than in the past. However, given the likelihood of its being able to absorb increasing amounts of external assistance, Kenya needs to secure as much concessional aid as possible to keep its debt service burden within reasonable limits. 19. A basic data sheet is annexed. PART VI - CO1T,?LIACE WITH APTICLES OF AGREE'i=T 20. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. PART VII - RECOM'MNDATION 21. I recommend that the Executive Directors approve the proposed Development Credit. Robert S. IMcNamara President Attachment WJashington, D. C. December 9, 1970 A N N E X BASIC DATA Area: Total - 225,00o sq. miles = 582,750 square kilometres Land area - 219,800 sq. miles = 569,282 square kilometres Population: 1969: 10.89 million Rate of growth: 3.3 percent Population density: Total land area - 19 sq. kilometres per capita Political Status: Republic since Independence on December 12, 1963 Member of the British Commonwealth Gross Domestic Product at Factor Cost (1969):* Kb 477 million - ($1,334 million) GCTP per capita (1969):* K; 47 ($131) GDP (at factor cost) Growth Rate: 196469* 1968-69* Constant 1964 prices 6.3% 5.6% Current prices 7.6% 7.8% Investment & Savings: Kb million 1969* Gross Fixed Capital Formation 95.5 Change in Stocks -3.0 Gross Capital Formation 92 Gross Capital Formation as percentage of GDP at factor cost 19.4% Gross National Saving percentage of GNP at market prices 16.3% Central Government Budget: Kb million 1968/69 Current Revenue 84.9 Current Expenditure 75.2 Current Surplus 9.7 Capital Revenue O.6 Balance 10.3 Capital Expenditure 24.5 Overall Deficit -14.2 Financed by: Internal Loans 8.1 External Grants & Loans 8.1 Increase in Cash Balance 770 * provisional AqN1,EX Page 2 Balance of Payments: US$ million 1964 1969* Exports 216.4 249.5 Imports -242.7 -338.2 Net trade balance -26.3 -88.8 Net travel 7.3 25.5 Other net current items 68.0 41.7 Balance on current account 49.0 -1. Net long-term capital movements: private -42.0 44.8 public -1.7 24.1 Net short-term and monetary movements 8.7 -65.0 Balancing item -1 17.7 External Debt (31 December 1969): US'$ million Including Disbursed Undisbursed Total Debt Outstanding Kenya: 265.8 368.8 Notional 1/3 Share of East African Community Debt:* 54.4 67.9 TOTAIJ* 320.2 436.7 Total Debt Service - 1969 Kenya: 19.0 Notional 1/3 Share of East African Community Debt: 6.9 TOTAL DEBT SERVICE 26.0 Debt Service Ratio (1968):* 7.0% * estimated A_i'EX Page 3 Foreign Exchange Position: Kenya is a member of the Sterling Area Foreign exchanige reserves at June 30, 1970: Total KE 72.4 million ($203 million) Equivalent to over 7 rrionths' imports at the 1969 rate Exchange rate: KE 1 = Sh. 20 = US$2.8 I7iF Position: US$ million 196h Oct. 1970 Quota 25.0 32.0 Drawings S.D.R.s 5.8 December 9, 1970