Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized REST R I.CTE D FILE COPY Report No. P-29 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 The report may not be published nor may it be quoted as representing their views. INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF NICARAGUA FOR THE MANAGUA WATER SUPPLY PROJECT August 29, 1962
INTERNATIONAL DEVELOPivENT ASSOCIATION REPORT AND RECO TENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPIMENT CREDIT TO THE REPUBLIC OF NICARAGUA FOR THE MANAGUA W-1ATER SUPPLY PROJECT 1. I submit the following Report and Recommendations on a proposed Development Credit to the Republic of Nicaragua for an amount in various currencies equivalent to $3 million to assist in financing a water supply project for the City of Managua. PART I - BACKGROUND 2. In the summer of 1961, the Government of Nicaragua requested assistance from the Association in the financing of a water supply project for the City of Managua. An appraisal mission visited Managua in January 1962 and found the project wxorthy of consideration. 3. Negotiations for the credit were held in Washington during the end of July and the first days of August 1962. The Borrower was represented by the Minister of Development and Public Works, Mr. Enrique F. Sanchez, the General Zanager of the Empresa Aguadora de Managua, M4r. J. Santos Zelaya, Mr. Adan Cajina Rios of the Empresa Aguadora de Managua and Mr. Fernando J. Montiel of the Ministry of Development and Public Works, 4. The proposed IDA credit, if made, would be the first credit to Nicaragua. There have been 11 Bank loans to Nicaragua, totalling $3505 million equivalent. PART II - DESCRIPTION OF THE PROFOSED CREDIT 5. Purpose: Borrower: To assist in financing the expansion and improvement of the water supply system of the City of Managua. The Republic of Nicaragua. Amount: The equivalent in various currencies of $3 million. Term and amortization: Fifty years iwith ten years grace. Eighty semiannual repayments of the principal from September 1, 1972 to March 1, 2012.
Service charge: Three-quarters of one percent per annum on the principal amount of the credit withdrairn and outstanding. Payment dates: M,1arch 1 and September 1. Subsidiary borrower: Empresa Aguadora de Managua. PART III - LEGAL DOCCUIELTS AND LEGAL AUTHORITY 6. Attached is a draft Development Credit Agreement betwleen the Republic of Nicaragua and the Association (No. 1). The draft Credit Agreement conforms generally with the pattern of the Association t s credit agreements. Afttention is drawn to the following provisions. 7. Section 4.01(a) provides that the Borrower shall relend the proceeds of the credit to the Empresa Aguadora de Managua on terms and conditions satisfactory to the Association. Agreement has been reached with the Borrower on the substance of the terms of a Subsicdiary Loan Agreement to be entered into between the Borrower and the Empresa Aguadora de Managua. The execution of this Subsidiarv Loan Agreement will be a condition of effectiveness of the Credit Agreement (Section 6 eol(a) and 6.02). 8. Under the terms of the Subsidiary Loan Agreement the Government will relend the proceeds of the credit to the Empresa Aguadora de ianagua for 24 years at an interest rate of 6% per annum. The Empresa will repay the principal in local currency after a grace period of 4 years, 9. An exchange of letters between the Borrower and the Association provides that as a condition for withdrawal from the credit account, except for amounts to be spent on engineering services, water rates shall have been raised,and that this rate increase should occur no later than March 1, 1963 (No. 2). 10 The report of the Committee provided for in Article 5, Section l(d) of the Articles of Agreement of the Association is attached (No.3). PART IV - APPRAISAL OF THE PROPCSED PROJECT 11D A detailed appraisal of the Project (TO-333A) is attached (No. 4). The present water supply system of Managua is in need of major improvements; it serves only about 40% of the built up area of the city and about 53% of the 221,000 inhabitants. The other residents, who are
- 3 - generally in the lower income groups, depend mainly upon door-to-door water vendors and to a lesser extent upon private wells and small independent water systems. W!ater received from these sources is often contaminated, and such health statistics as are available indicate a high incidence of typical water born diseases in Managua. 12. The proposed project is the first stage of a soundly conceived 20-year expansion program. It is based upon reasonable estimates of population growth and future water use. The percentage of the population served would increase from 53% to 68% by 1980, but the estimated number of people served would more than triple during this period. Because of the dispersion of the population and the limitations of the present supply sources, it does not appear prudent to plan to serve a larger proportion of the population at this time. M'Ioderate increases in industrial and commercial use are expected. 13. The proposed project includes new pumping facilities for increased supply, chlorination facilities, substantial improvements and extensions of the transmission and distribution systems, new service connections and meters, and improved chlorination and meter repair facilities. A study, of the existing and possible supplementary water supply sources is also included. Major contracts for equipment and construction would be awarded on the basis of international competition. 14. The total cost of the project is estimated at $6 million of which the proposed credit would provide 50o. This would cover all foreign exchange costs and a portion of local currency costs eqaal to '$3009000. Contributions from operations of the waterworks during the construction period are expected to cover about 21% of project costs, and the Government would undertake to provide the balance of the funds required. 150 The project would be undertaken by the Empresa Aguadora de IIanagua which, although handicapped by inadequate revenues, has been well managed and appears capable of carrying out the project with relatively minor additions to its staff and with the aid of outside corsultants. The draft credit documents provide that the Empresa should be given a greater degree of autonomy and that any change in its management should occur only after consultation with the Association. In order to insure that the water supply system is operated on a sound financial basis, the Borrower has agreed to establish water rates which will provide sufficient funds to cover operating costs, debt service, normal extension expenditures and a reasonable part of the cost of future major expansion. It is estimated that present rates would have to be raised by about 56). Although this increase is large, the cost of water to those not served by the existing system is at present much higher than the rates proposed. Moreover, present water rates have been in effect since 1945, during which time other elements of the cost of living have nearly doubled, and water revenues in recent years have been barely sufficient to cover operating costs and a very modest program of replacement and extensions.
- 4" - PART V - ECONOMIC POSITION 16, A report "The Current Economic Position and Prospects of Nicaragua" (R 62-72) was distributed on August 16, 1962. 17. During the first half of the 1950's, with the rise of coffee prices and a great expansion in cotton production, Nicaragua's economy grew extraordinarily rapidly. The value of exports almost quadrupled and the real Gross Domestic Product rose by 9.5% per year. The period of rapid growth ended in 1955. With declines in prices of coffee and cotton in subsequent years, the value of exports fell, the growth of output slowed, and per capita income declined. 18. In response to the worsening prospects for the country t s major exports, the Nicaraguan authorities took steps to diversify the economy and promote new exports. The Government continued to invest in basic economic services of high priority, notably power and transportation. The Mational Development Institute provided increased financial and technical assistance for cattle raising, agricultural diversification and manufacturing industries. Substantial private investments were made, especially in new production for export. 19. These efforts began to bear fruit in 1961 with increasing shipments of sugar, meat, copper concentrates and soluble coffee, In response to the recovery in cotton prices since 1959, cotton production increased to reach a new record in 1962, and, despite the expected continued decline in coffee prices, further increases in export earnings are in prospect. 20, The continued growth of output and exports will be assisted by fhrther investment in the public sector. Nicaragua is building a major hydroelectric project and has obtained loans from abroad to expand its highways, housing and school construction programs. NTew loans are being sought to help finance irrigation, sewerage and airport projects as well as the water supply project now under consideration. 21, Nicaragua?s external debt outstanding at December 31, 1961 was $42 million. The service on the existing debt reaches a peak of $5.59 million in 1963, equivalent to 5.2 percent of the foreign exclhange earnings estimated for that year. Service payments decline rather slowly until 1967. In view of this relatively modest level of service on the existing debt, Nicaragua's plans to incur substantial amounts of additional foreign debt on conventional terms for projects of high priority do not seem unreasonable 0 22. Nonetheless, there are inherent weaknesses in the Nicaraguan situation which make it doubtful whether Nicaragua could prudently borrow on conventional terms all the capital from abroad which will be required in the coming years. The low educational and health standards of the people, the low level of income per capita (about $220) and of
savings, the smallness of the entrepreneurial class, the limited experience and resources of the administ-ration, and political uncertainties which tend to inhibit private investment, are factors lilely to harper the rapid growth of output and foreign exchange earnings, and thereby to limit Nicaragua's capacity to service additional debt on conventional terms. It is therefore appropriate for some part of new external borrowings to be supplied on special terms. PART VI - COMPLIANCE WITH ARTICIES OF AGREEMENT 23. I am satisfied that the proposed Development Credit would comply with the Articles of Agreement of the Association. PART VII - RECOMMENDATIONS 24. I recomnend that the Association make available a Development Credit to the Republic of Nicaragua in an amount in various currencies equivalent to $3 million for a total term of fifty years with a service charge of 3/4 of 1% per annum and on such other terms as are specified in the draft Development Credit Agreement and that the Executive Directors adopt a resolution to that effect in the form attached (No. 5). Eugene R. Black President Washington, D. C. August 29, 1962