Honduras - Seventh Highway Project

Document of The World Bank FL FOR OFFCIAL USE ONLYFI E C P Report No. 125 3b-HO STAFF PROJECT REPORT SEVENTH HIGHWAY PROJECT HONDURAS November 10, 1976 Latin America and the Caribbean Proj ects Department This document has a restricted distribution and may he used byr recipients only In the performance of their officia duties. Its contents may not otherwise be disclosed without World Bank authorization.  Currency Fquivalents Currency Unit = Lempira (L) IJS$1.00 = L 2.00 L = US$0.50 L l,000,000 = US$500,000 Fiscal Year January 1 - December 31 System of' Weights and Measures: Metric Metric British/US Equivalent 1 meter (m) = 3.28 feet 1 kilometer (km) = 0.62 mile 1 square kilometer (km2) = 0.336 square mile 1 hectare (ha) = 2.47 acres 1 metric ton (m ton) = 2.205 pounds Acronyms and Abbreviations ADT - Average Daily Traffic BR - Brown and Root (Consultant) CAB-I - Central American Bank for Economic Integration COHDFFOR - Gorporacion Hondurena de Desarrollo Forestal CONSUPLAN - Consetjo Superior de Planificacion Economica DGH - Directorate General for Highways DGIT-N - Directorate General for Highway Maintenance DGT - Directorate General for Transport ENP - Impresa Nacional Portuaria FAO - Food and Agricultural Organization FNIT - Ferrocarril Nacional de Honduras HTH' - Howard IIunphreys, Keeble and Partners (Consultant) IDB - Tnter-American Development Bank MCOPT - Ministerio de Comunicaciones, Obras Pblicas y Transporte SIECA - Secretaria Permanentlt del Tratado de Integracion Fcon6mica Centro Americana USA ID - US Agency for international Development vpd - Vehicles per day  FOR OFFICIAL USE ONLY STAFF PROJECT REPORT SEVENTH HIGHWAY PROJECT HONDURAS TABLE OF CONTENTS Page No. INTRODUCTION AND SUMMARY ...... .............. i -xiv I. THE TRANSPORT SECTOR ...... .........................1 A. The Distribution of Economic Activity ......... B. The Transport System .......................... 2 C. Transport Planning and Coordination .... ....... 5 Table 1.1 - Areas of Major Valleys .... ............. 8 Table 1.2 - Urban Population Centers - 1974 ........ 9 Table 1.3 - Honduras Natonal Railway - Traffic and Finance 1970-1975 .... ............ 10 Table 1.4 - Dry Cargo Traffic at Principal Ports - 1970-1975 ............................ 11 Table 1.5 - Passenger and Cargo Traffic and Major Airports 1965-1973 .... ......... 12 Table 1.6 - Public Investments in Transport 1973-1975.13 II. THE ROAD TRANSPORT INDUSTRY ........................ 14 A. The Road System .............................. 14 B. The Transport Industry ........................ 15 C. Regulations and Policies ..... ................. 22 D. Future Trends ................................. 24 III. THE HIGHWAY SUBSECTOR .............................. 27 A. The Highway Network ........................... 27 B. Bank Assistance in the Highway Subsector ...... 27 C. Traffic Growth and the Road Transport Industry .................................... 28 D. Highway Administration ........................ 30 E. Highway Planning and Financing .... ............ 31 F. Highway Engineering ........................... 32 G. Highway Construction .......................... 32 H. Highway Maintenance ........................... 33 This report has been prepared by Messrs. Robert Burns (Economist), Carlos F. de Castro (Transport Specialist), Raul Paraud (Engineer), and Luis Enrique Pinilla (Engineer) and has been edited by Miss Virginia R. Foster. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without Would Bank authorization.  Table of Contents (Continued) Page No. Table 3.1 - Development of the Highway Network 1964-1974 ....................... 36 Table 3.2 - Vehicle Registration 1964-1974 ....... 37 Table 3.3 - Highway Expenditures 1970-1975 ....... 38 Table 3.4 - Road User Charges and Highway Expenditures 1970-]974 ........................... 39 IV. THE PROJECT ......................,.,.... 40 A. General Description ........................... 40 B. Cost Estimates ................................ 45 C. Financing ..................................... 47 D. Implementation ................................ 48 E. Disbursements ................................. 50 Table 4.1 - Design Standards for Project Highways .. 51 Table 4.2 - Tentative List of Maintenance Equipment Included in the Project .... .......... 52 Table 4.3 - Summary of Construction Costs .... ...... 53 Table 4.4 - Estimated Schedule of Disbursements .... 54 Annex to Chapter IV -- Project Implementation Schedule 55 V. ECONOMIC ANALYSIS ................................... 56 A. Civil Works ................................... 56 B. Road Maintenance Equipment .................... 61 Table 5.1 - Actual and Proposed Cropping Patterns for Irrigated Areas of the Guayape Valley 62 Table 5.2 - Current Levels and Mix of Road Traffic 1976 ................................. 63 fable 5.3 - Traffic Projections ..... ............... 64 Table 5.4 - Cost and Benefit Streams Talanga- Juticalpa ............................ 65 Table 5.5 - Cost and "Benefit Streams Juticalpa- Catacamas ............................ 66 Table 5.6 - Road and Vehicle Operating Characteristics ...................... 67 Table 5.7 - Vehicle Operating Cost ................. 68 Table 5.8 - Farm Size Distribution in the Municipios of Talarnga and Juticalpa in 1965-1966 69 Table 5.9 - Current and Future Backlog of Road Maintenance with Current Expenditure 70 Table 5.10 - Reconstruction Costs of Roads not MIaintained 71 VI. AGREEMENTS REACHED AND RECOMMENDATION .... .......... 72  Table of Contents (Continued) ANNEX Related Documents and Data Available in the Project File CHARTS IBRD-15878 - Organization Chart of the Ministry of Communications, Public Works and Transport IBRD-15879 - Organization Chart of the Directorate General for Highways IBRD-15880 - Organization Chart of the Directorate General for Maintenance of Highways and Airports MAP IBRD-10395-RI - Honduras - Main Highway Network This report is based on information provided by the Government, by the UK consultant Howard Humphreys, Keeble and Partners; by the US consultant Brown and Root and local individual consultants; and on the findings of an appraisal mission to Honduras in February 1976 consisting of Messrs. Robert Burns (Economist), Carlos F. de Castro (Transport Specialist), Raul Paraud (Engineer) and Luis Enrique Pinilla (Engineer). Additional reports and data related to the project available in the Bank are listed in the Annex.   STAFF PROJECT REPORT SEVENTH HIGHWAY PROJECT HONDURAS INTRODUCTION AND SUMMARY A. The Transport Sector Background 1. The Honduran transport system is dominated by roads and road trans- port. Because distances are short and the terrain rugged, railways are non- competitive, except in the northern coastal strip where specialized banana railways operate. Road transport carries 86% of the freight tonnage and 96% of the passenger traffic in the country. The primary road network connects the two principal cities, San Pedro Sula in the north, and the capital, Tegucigalpa, in the south, and is designed to service, what were historically and still are, the most important agricultural areas, the Sula and Choluteca Valleys and the Atlantic coastal strip. 2. Aside from infrastructure to serve the banana industry, major devel- opment of the transport sector began only in the mid-fifties with construction of the Inter-American highway in the southern part of the country; a modern all-weather road between Tegucigalpa and San Pedro Sula was not completed until 1970. Modernization of the principal port, Puerto Cortes on the Atlantic, did not begin until the creation of a National Port Authority in 1965; and, with Bank assistance, a deepwater Pacific Coast facility is only now being con- structed at San Lorenzo. Investment in transport infrastructure increased significantly in the 1970's, and highway projects are now planned, or under construction, to complete most of the country's primary highway network; when completed in the early 1980's, these projects will provide modern all-weather access to the increasingly important agricultural and timber areas of eastern Honduras, including the rich Aguan Valley in the north, the Guayape Valley and the Olancho forest reserve in central Honduras, and the Danli area in the south. The improvement and expansion of the feeder and access road system, to which the Government will be giving increasing emphasis over the next five years, will mean that the country will, for the first time, have an internal transport network adequate to serve its most important productive areas. Highways 3. Because of the topography of Honduras, road construction, in general, has been difficult and expensive; nevertheless, the road network grew from about 3,200 km (110 km paved) in 1960 to about 6,100 km (1,240 km paved) in 1975. In addition to the principal roads mentioned in the preceding paragraph,  - ii - the primary system includes a road southwest from San Pedro Sula to the El Salvador border and a road along the north coast to La Ceiba. The country's secondary and tertiary road system is not yet well developed. 4. The road transport industry, operating in an environment of virtually no regulation, expanded rapidly in the decade from 1964 to 1974. During that period, the vehicle fleet grew from 16,000 to 43,900, an increase of 174%. The most notable growth occurred in the number of trucks, which increased by 230%. The road transport industry is generally adequate in the sense that it does not constitute a serious bottleneck to the development of other sectors of the economy. However, the poor organization of the local trucking market and the large discrepancy in managerial and financial resources between small domestic operators and the large international operators has led to a partitioning of the industry in which Honduran truckers have not had access to lucrative international traffic. This situation, together with the serious problem of overloading of trucks, led to enactment of a revised Land Transport Law (February 1975) which permits the detailed regulation of road passenger and freight traffic. At present, the Government is restricting its regulatory activity to passenger transport and a gradual program of control of truck loading, but it is now considering what is feasible and desirable in other areas; so far it has refrained from imposing regulations that might harm what to date has been a reasonably adequate truck and bus industry. 5. The Ministry of Communications, Public Works and Transport (MCOPT) is in charge of planning, designing, constructing, and maintaining all roads in the country, except for a few being built by the Honduran Forestry Devel- opment Corporation (Corporacion Hondurena de Desarrollo Forestal, COHDEFOR) for forestry development. MCOPT's highway activities are carried out through two Directorates: the Directorate General for Highways (DGH), which plans, designs, and supervises construction of roads; and the Directorate General for Highways and Airports Maintenance (DGHM), which maintains the road network. All major construction works are implemented by contracts awarded after competitive bidding. Some minor improvement works and construction of a few feeder roads, totaling an average yearly investment of about US$1.5 million equivalent, are performed by force account. A research program is currently being carried out with Bank assistance to determine the appropriate labor- capital mix for constructing such roads. Government-financed works are normally supervised directly by DGH staff, while externally financed construc- tion works are supervised by consultants. Despite considerable technical assistance over recent years, DGH is still heavily dependent upon consultants for implementation of major projects and still requires additional technical assistance, particularly to improve the quality of its professional staff. High staff turnover which results from low civil service salary levels has been the major factor in limiting the effectiveness of past training programs. Recently, civil service salaries have been increased somewhat, and there has been greater staff stability. Additional measures will be taken to provide MCOPT with qualified, experienced staff. 6. Highway maintenance continues to be the most serious problem in the transport sector, accentuated by the overloading of trucks, particularly in the timber industry. DGHM carries out routine maintenance by force account  - iii - through its seven maintenance districts. Each district has its own technical staff, equipment and repair facilities, and two main workshops are located in Tegucigalpa and San Pedro Sula, but the facilities in these, as well as in the other district workshops, are inadequate. MCOPT has received assistance from several international sources for improving and strengthening its maintenance operations and for the purchase of maintenance equipment. In spite of this assistance, routine maintenance is deficient, and more equipment is needed to replace wornout units, many of which are 15 years old or older. The inadequacy of road maintenance has been due to insufficient annual budgetary allocations, the use of maintenance equipment for works other than maintenance and lack of trained staff over the past two years. However, there have been substantial increases in the maintenance expenditures for maintenance and equipment renewal. Also, the installation of 12 weighing stations has recently been completed, and regulations for controlling truck weight and dimensions have been enacted. Thus, the Government will shortly be in a position to enforce load limits which should, over time, reduce deterioration of the country's major highways. 7. Although the development of a local construction industry was encouraged by the impetus provided by the road construction program of the early 1970's, the industry still faces a number of problems, caused mainly by its deficiency of technical and managerial skills and the uneven level of highway works; improvements in these and other related areas are therefore needed. Honduras has no restrictions on foreign contractors, who normally submit bids and obtain contracts for major construction works. 8. During the 1970-1975 period, about 70% of highway investments were externally financed. All local funds are provided through the normal budgetary process, and there is no road fund or earmarking of user charges. Road users are currently paying taxes and user charges at about L 18 million annually, of which fuel taxes account for more than L 12 million with annual road maintenance expenditures of about L 12.0 million. This is considered generally adequate. However, with increased maintenance expenditures expected in the future, appropriate adjustments will be required. The precise nature and level of these charges will be one of the issues to be considered in a Highway Master Plan Study to be prepared under the project. Transport Subsector other than Highways 9. The railway system comprises three narrow-gauge lines, all located in the north and designed originally to serve the banana plantations in the Sula Valley, the northern coastal strips, and the upper Aguan Valley. The Government-owned railway, Ferrocarril Nacional de Honduras (FNH), with a total length of 114 km of main line, runs from the Atlantic port of Puerto Cortes to San Pedro Sula and into the upper Sula Valley; it hauls sawn timber and banana exports and agricultural imports, mainly rice. The Tela Railway, recently acquired by the Government, operates over 179 km of main line, serving the banana plantation areas of the eastern side of the Sula Valley and part of the coastal strip. The Standard Fruit Company Railroad still operates over 157 km of main line and serves the banana plantations of the  - iv - north coastal strip as well as the upper Aguan Valley. Its gauge is different from that of the other two, thus precluding interconnection. Consideration is now being given by the Government to reconstruction of an abandoned Aguan Valley rail line to haul bananas produced by the Isleta agrarian reform settlement and other producers to the proposed port at Puerto Castilla. 10. The port system includes Puerto Cortes, Tela, La Ceiba and Puerto Castilla on the Atlantic coast and a shallow draft port, San Lorenzo, on the Pacific; the latter is currently served by lighterage but is being developed into a deepwater port under the Bank-financed Second Port Project (Loan 767-HO). All ports are operated by the Empresa Nacional Portuaria (ENP), an autonomous Government organization which was highly successful in developing the port of Puerto Cortes and which was subsequently given control of all ports in the country. Puerto Cortes remains the principal port and accounts for about two-thirds of all dry cargo movements of the country. It has adequate capacity and a good operating record. Puerto Castilla is the least developed and as yet carries no significant traffic. It is, however, the natural outlet for the Aguan Valley and is a crucial infrastructure element for the valley development plan. The Bank has recently appraised a project to improve facilities at Puerto Castilla to serve prospective exports of agricultural products, timber, and, eventually, paper from a proposed paper mill in the lower Aguan Valley at Corocito. 11. Honduras has two major airlines; between them they provide adequate domestic and international service. The Villeda Morales airport at San Pedro Sula has a good runway of 2,800 meters; the Toncontin airport at Tegucigalpa is less satisfactory, with only 1,980 meters of runway; it is barely adequate for modern jets. However, traffic levels are so low that a major expansion of the Toncontin Airport will not be economically feasible for many years to come. With the completion of the road between San Pedro Sula and the El Salvador border and that between Tegucigalpa and San Pedro Sula, private automobiles and a good intercity bus and truck service have captured a large portion of the earlier air traffic, and domestic air traffic generally has declined steadily since the peak year of 1970. Transport Planning and Coordination 12. Responsibility for highway planning lies with MCOPT. The main bases of the highway investment plan are: (a) a long-term highway master plan, which was prepared almost ten years ago; and (b) a long list of proposed projects which reflect a variety of local interests as well as national development priorities. Some of these projects have well prepared engineering and economic feasibility studies associated with them; some others are integral parts of larger agricultural and forestry development plans and have received attention only in terms of preliminary engineering analyses and cost estimates. Still others are merely lines on a map. The main deficiency of the present "plan" is that it is not feasible in terms of finances or implementation capacity. Perhaps the most critical need is to attach a realistic cost estimate to each project in the current plan and to phase these projects, subject to realistic forecast of fund availabilities. The immediate result of such an effort would be the realization that very difficult decisions are required concerning  priorities. Such an exercise is within the capacity of the MCOPT staff and would allow them to focus their limited planning resources on a core of projects instead of dispersing them over a large number, many of which are of low priority. The economic analysis of projects is reasonably well understood within MCOPT, and, with some help, the road investment program could be put on a sound economic basis. The data and analytical requirements of such an exercise are modest, and past Bank assistance has been helpful in improving the data base and the techniques of project analysis. The benefits of such assistance are potentially large, and the effort should be continued, bearing in mind the severe personnel constraint in MCOPT and the consequent need to keep the effort modest and feasible. 13. Port planning is the responsibility of ENP, a semiautonomous organi- zation that operates and plans all of the ports of the country. Its manage- ment has been good and is not subject to frequent change, thus allowing the development of a rolling five-year plan that includes economic, engineering, and financial analyses, most of which are done by the port staff itself. The inclusion of a cash flow analysis in the five-year plan avoids the most serious deficiency of the highway plan and effectively integrates the annual budget exercise for the ports into a longer term plan. 14. Both railway and airport planning are of minor importance due to stagnant or declining traffic, and major investments in these modes are not anticipated. The possibility of a short, specialized banana railway to serve the Aguan Valley and the possible improvement of the airport in Tegucigalpa (largely because of safety considerations) would require specialized planning expertise, but this can be obtained through consultants. 15. The formal transport coordination mechanism involves both MCOPT and the Consejo Superior de Planificacion Economica (CONSUPLAN), attached to the President of the Republic, which works with the Ministry of Finance in harmonizing the transport investment proposals of the various modes. For this purpose, CONSUPLAN prepares both five-year national investment plans and an annual operational plan for the public sector. However, because of CONSUPLAN's shortage of staff and the relative independence of the Ministries, the basic coordination effort now takes place between MCOPT and the Ministry of Finance. B. The Project Project Objectives 16. The main objectives of the project are: (a) To provide an economic and safe road connection between the northeastern part of thie country, the consumption centers and the export outlets; (b) To determine the complementary investments needed for the development of the Guayape Valley;  - vi - (c) To assist in the preparation of an updated highway investment program to serve as a basis for annual budget decisions; (d) To assist in the improvement of highway maintenance opera- tions; (e) To achieve institutional improvements for a smoother operation of the Highway Department; and (f) To improve the management and operational capacity of the local construction industry. Project Description 17. To support the above-mentioned objectives, the proposed project contains the following basic elements: (a) Reconstruction, including supervision, of the Talanga- Juticalpa-Catacamas road; (b) A study for an integrated development program for the Guayape Valley; (c) Preparation of a Highway Master Plan; (d) Purchase of maintenance equipment, including spare parts, workshop, and laboratory equipment; (e) Technical assistance for training the staff of the Directorates of Highways and of Highway Maintenance, including fellowships; and (f) Technical assistance to the local construction industry. 18. The Talanga-Juticalpa-Catacamas road is part of the main link between Tegucigalpa and the northeastern section, usually referred to as the "Olancho Region". The present gravel road serves as an outlet for forest exploitation in the mountainous area to the north and connects the third largest valley of the country (the Guayape) to the main population centers; it was constructed almost 20 years ago and, because projected traffic volumes at that time were low, it was constructed to minimal standards with steep grades and sharp curves in order to keep the investment costs reasonable for what was essen- tially a penetration road. Current traffic volumes (about 400 vpd, 50% being heavy trucks, on the most trafficked section) make it impossible to maintain the gravel surface to appropriate standards, and vehicle operating costs are high. Reduced grades and a paved surface will greatly reduce vehicle operating costs and stimulate production in the area of influence of the road. Recon- struction of the Tegucigalpa-Talanga section is currently nearing completion, partly financed by Loan 896-HO. Reconstruction of the Talanga-Juticalpa- Catacamas section to extend the Tegucigalpa-Talanga works to Olancho will be the major component (85% of total cost including contingencies) of the proposed project.  - vii - 19. The Talanga-Juticalpa section of the proposed project crosses rugged terrain, while the topography along the Juticalpa-Catacamas section is generally flat; the latter section passes through the Guayape Valley, the area with the most potential for increased agricultural production in the zone of influence of the proposed road works. A joint IBRD/IDB/USAID Agricultural Rural Sector Study indicates that, to achieve this potential, a development program should be undertaken which should include irrigation and feeder road infrastructure; agricultural credit, extension, and marketing facilities; and a progressive land reform and settlement policy. Although some information is available regarding the valley, there is a need to update and supplement it in order to develop a project in the area. The Government has advised the Bank that it wishes to give priority to preparing and undertaking a rural development project for the Guayape Valley. An IBRD/FAO Cooperative Program mission, which visited Honduras in September 1976, has concluded that there is potential for a rural development project to benefit small farmers and agrarian reform settlements. The IBRD/FAO Cooperative Program will assist the Government in preparing terms of reference acceptable to the Bank for project preparation studies to be financed under the proposed loan. 20. Unless the scarce planning, financial, and implementation resources of the country are focused on a feasible, time-staged road investment plan, the annual budget exercise will continue to be unrelated to longer term con- siderations. The collection of basic data for a Highway Master Plan is being carried out under the ongoing Sixth Highway Project (Loan 896-HO). The pro- posed project provides for preparation of a Highway Master Plan based on these data, and the focus under the proposed project will be on a realistic effort within the personnel constraint of MCOPT so that the planning process can be continued with MCOPT staff alone at the end of the period of technical assistance. It is proposed that the consultants who prepared the preliminary work for the Highway M4aster Plan be retained to assist in the actual prepara- tion of the plan. To achieve this continuity, a small amount of retroactive financing will be required. 21. A number of organizations have attempted to support the development of road maintenance in Honduras, and some progress has been made, particularly in changing the structural organization of DGHM, so that it is generally appro- priate. Much remains to be done, however, and the proposed project includes financing for urgently needed maintenance equipment as well as further tech- nical assistance. The technical assistance will take the form of the devel- opment of a pilot maintenance district with the help of consultants. Personnel from the other maintenance districts will then have access to training experi- ence within an actual functioning operation in Honduras. The consultants will, in addition, assist MCOPT in specifying the equipment to be purchased under the proposed project. It has been agreed that the two main maintenance equipment repair shops in Tegucigalpa and San Pedro Sula will be improved in a manner satisfactory to the Bank prior to the disbursement of funds for equipping them. The level of expenditures for highway maintenance and for equipment renewal during the 1977-1980 period has also been agreed. Further, in order to reduce road damage caused by overloaded vehicles, it has been agreed that weight and dimensions regulations for all vehicles which are satisfactory will be enforced beginning not later than June 30, 1977.  - viii - 22. The local road construction industry faces a number of problems gen rated in part by the industry itself and in part by the Government's treatment of it. These problems (mainly a deficiency in the firms' technical and managerial expertise and a lack of regulations for dealing with the industry by Government agencies such as eventual delays in payments to the contractors) have been identified by the Bank, and the project includes a technical assistance component to finance a study to make recommendatiuns designed to remedy the present shortcomings of the industry. It has been agreed that the Government will enter into a cooperation agreement, acceptable to the Bank, with the Camara Hondurena de la Industria de la Construccion, the local construction industry association, to provide for the participation in these studies. Project Cost and Financing 23. The total estimated cost of the project is US$51.2 million equivalent, as detailed on the following page:  - ix - US$ Million FEC Local Foreign Total % (a) Road Reconstruction, including Right- of-Way 10.1 21.0 31.1 68 (b) Supervision of Construction (522 man-months) 1.2 1.3 2.5 50 (c) Study of an Integrated Development Program for the Guayape Valley (33 man-months) 0.1 0.5 0.6 80 (d) Preparation of a Highway Master Plan (56 man-months) 0.1 0.3 0.4 80 (e) Procurement of: - Maintenance, Workshop and Laboratory Equipment 0.3 2.2 2.5 90 - Spare Parts - 0.3 0.3 100 (f) Technical Assistance to MCOPT (65 man-months) 0.1 0.3 0.4 80 (g) Technical Assistance to the Local Construction Industry (20 man-months) - 0.1 0.1 80 /1 Total Base Costs 11.9 26.0 37.9 68 (h) Contingencies: Physical (about 10% of Item a) 1.0 2.1 3.1 Price Adjustments (about 27% of base costs) - For Civil Works 3.0 6.3 9.3 - For Equipment Purchases - 0.3 0.3 - For consulting services 0.3 0.3 0.6 TOTAL 16.2 35.0 51.2 68 /1 Local costs amounting to about US$20,000 not shown because of rounding of figures. The cost estimate is based on the assumption that reconstruction works will be carried out by foreign contractors with some local participation; that equipment will be procured abroad; that the Highway Master Plan, technical assistance and study of the valley will be carried out by foreign consultants with some local participation; and that supervision of construction will be carried out by local consultants with some foreign participation. Physical  - x - contingencies have been estimated at 10% of the construction costs, and price adjustment contingencies have been estimated at 12% p.a. for 1977-1979 and 10% p.a. for 1980/81 for the reconstruction works, 8% p.a. for the equipment and 6% p.a. for the consulting services. The unit costs for road construction vary between US$134,000 and US$223,700 per km (excluding contingencies), depending on terrain conditions. Consultant services and technical assistance are estimated at an average of US$5,000 per man-month. 24. The foreign exchange component of the project, estimated at US$35.0 million (about 68% of project cost), will be financed by the proposed loans with disbursements scheduled to take place from March 1977 through December 1981. All local costs, estimated at US$16.2 million equivalent, will be met from Government budgetary allocations. The current assessment of the Honduran economy indicates that sufficient local revenues will be available to finance the present project. Project Implementation 25. Project implementation will be the responsibility of MCOPT, except for the Guayape Valley study which will be the responsibility of the Ministry of Natural Resources. Implementation will commence in 1976 and is scheduled for completion by mid 1981. Civil works are expected to be implemented over a period of about four and a half years, beginning in early 1977 and ending in mid 1981. Acquisition of right-of-way will be handled by MCOPT before construc- tion contracts are let; existing legislation is adequate for the acquisition. 26. The preparation of a Highway Master Plan, the technical assistance to MCOPT and to the local construction industry, and the study of an inte- grated development program of the Guayape Valley are scheduled to commence in mid 1977, after the selection of suitable consultants, and to be completed by mid 1979. Agreement has been reached on a detailed implementation schedule of the project. In order to strengthen the MCOPT staff, it has been agreed that, as a condition of effectiveness, MCOPT will establish a project unit consist- ing of three engineers and two administrators, acceptable to the Bank, which will be responsible for carrying out the project. Also, MCOPT will prepare by June 30, 1977, a plan acceptable to the Bank for providing incentives designed to assist in recruiting and retaining qualified personnel. Included in this plan will be provisions for fellowships to be granted to MCOPT person- nel who will be attached to highway authorities abroad or to specialized consultants; in either case, attachments will be for short periods in order to avoid disrupting the operations of the Highway Directorates. Procurement 27. The civil works will be carried out by contracts awarded through international competitive bidding in accordance with the Bank's "Guidelines for Procurement"; prospective bidders will be prequalified. MCOPT proposes that, for bidding purposes, the works be divided into four lots and bids be invited on a "package" basis, whereby the contractors may bid separately for  - xi - each of the four lots or for any combinations thereof; contracts will be awarded on the basis of the lower of (a) the lowest evaluated bid for the four lots and (b) the lowest combination of evaluated bids for each lot. The estimated cost of each lot varies between US$5.5 and US$9.5 million, and it is likely that the contracts will be won by foreign firms in joint venture with local firms or subcontracting part of the works to local firms. 28. Road maintenance and workshop equipment will be procured through international competitive bidding in accordance with the Bank's "Guidelines for Procurement". In bid evaluation, consideration will be given to the need for standardization of equipment, which is especially important in a country such as Honduras, with a modest economy, limited facilities for repairs and a scarcity of qualified mechanics and operators. Items (e.g., tools, workshop equipment) that cannot be grouped in packages of at least US$30,000 and will not: in the aggregate exceed the equivalent of US$300,000 will be advertised locally and procured in accordance with local procedures which are acceptable to the Bank. Local procedures will also be applied for the purchase of urgently needed spare parts and laboratory equipment which only a few special- ized firms supply up to an aggregate of US$300,000. 29. The consulting services will be carried out by qualified consul- tants acceptable to the Bank and engaged by the Government under terms and conditions satisfactory to the Bank. Disbursements 30. Disbursements will be made at 68% of construction costs representing the foreign exchange costs of construction and for the actual foreign exchange costs of equipment; for consulting services, the disbursement percentages will reflect the foreign exchange costs of the different types of services required (para. 23). Any funds remaining in the loan account after project completion will be used for the purchase of additional maintenance equipment. Retroactive financing for about US$40,000 is contemplated for payment of consulting ser- vices (para. 20). Economic Evaluation 31. The economic evaluation considers, in quantitative terms, the pro- posed investments in (a) civil works and (b) maintenance equipment. The other components are dealt with in qualitative terms. Civil Works 32. For the economic evaluation of the investment in the proposed civil works, the benefits have been assumed to be savings in vehicle operating costs from (a) improved surface condition and (b) length reduction of the road sections. Benefits accruing to normal and generated traffic have been esti- mated as separate benefit streams and include time savings only for professional drivers and helpers on buses and trucks (the savings account for no more than 3% of the total benefits).  - xii - 33. Traffic projections for normal traffic were based on recent traffic counts, past trends, and consideration of the future of the lumber industry in the area. The most recent traffic counts (1976) indicate that traffic on the Talanga-Juticalpa section averages 400 vpd, of which 50% are heavy trucks. For the Juticalpa-Catacamas section, the figures are 380 vpd, with 32% heavy trucks. For the past ten years, traffic on these two sections has been growing at about 5% per year, and the evaluation assumes that traffic will continue to grow at this rate until 1986, when the most accessible timber areas will have largely been exhausted. There is little information on the sustainable yield of timber from the area, and it may well be that timber traffic after 1986 will remain constant or even decline. It is expected, however, that the growth of normal traffic will, on a conservative basis, proceed at 4% after 1986 even without very substantial increases in the rate of growth for agri- cultural traffic from the Guayape Valley. However, if integrated development of the Guayape Valley materializes (para. 19), it should raise the economic return on the project. 34. Generated traffic has been estimated on the basis of reasonable estimates of demand elasticities, and unit benefits for generated traffic have been assumed at half those for normal traffic. Reconstruction of the road is expected to yield a 28% increase in bus traffic and a 17% increase in truck traffic in the year after its completion, with subsequent growth rates the same as those for normal traffic. 35. The economic evaluation shows that the reconstruction of the road will be well justified and appropriately timed. Based on an economic life of 20 years, a construction period of four years for the first section and three years for the second section, the economic return for the road reconstruc- tion element of the project has been estimated at 15%, with a first year return of 13%. Separate analysis of the Talanga-Juticalpa section indicates an economic return of 16%, with a first year return of 14%. For the Juticalpa- Catacamas section, the economic return is estimated at 11%, with a first year return of 9%. The greatest element of risk for this project is the traffic projection. The conservative estimate of growth after 1986, based on the declining importance of lumber traffic and the slow development of the Guayape Valley, reflects this risk. A sensitivity analysis indicates that, with variations of the major cost (+15%) and benefit (-15%) streams, the recon- struction will still yield an economic return of at least 13%. Distribution of Benefits 36. An analysis of the organization of bus and trucking operations in the area, together with information on land tenure patterns, provides a general indication of the distribution of the savings in vehicle operating costs. 37. The common carrier bus operations in the area, which account for 7% of vehicular traffic on the Talanga--Juticalpa section and 16% on the Juticalpa- Catacamas section, are generally organized on a cooperative basis, both for scheduling purposes and for protection of the operators' interests; buses are privately owned, and entry into the market is free. The operators may try to  - xiii - maintain tariffs at current levels after the road is completed, but this wil be difficult because other operators, perceiving profits, will enter tile market, thus increasing the frequency of service. Even if current tariff levels are maintained, the effects of inflation will mean a reduction in effect, and most of the savings will eventually be passed on to bus riders who come from the lower income groups. Of total project benefits, it is estimated that those accruing to bus riders will be about 5%. 38. Cost reductions for owners of automobiles and pickup trucks which account for approximately half of vehicular traffic will, in general, go directly to the owners, who are usually the most affluent elements of the population. These benefits are estimated at 13% of the total. 39. Truck operating costs will be influenced by the improved surface and gradients, and reduction in these costs will be responsible for 82% of the total benefits of the investment even though trucks represent only 50% of vehicular traffic on the Talanga-Juticalpa section and 32% on the Juticalpa- Catacamas section. About 35% of the trucks haul timber, and savings attribut- able to this traffic will account for 29% of total benefits of the investment. These benefits will initially be passed on to sawmill owners who serve as middlemen in the lumbering operation, contracting for trucking at the lowest possible rate in a competitive market. The recent takeover of the lumber marketing operation by the Government will, however, allow eventual capture of the benefits by COHDEFOR through truck tariff agreements and price adjust- mentEs for the sawmill outputs. A truck tariff agreement, which is currently being negotiated, will make it possible for the Government to implement weight restrictions without major tariff increases on the project roads and will allow the state to benefit in the form of longer life for the roads and reduced maintenance costs. 40. Truckers carrying agricultural commodities in the area are competi- tive, and operating cost savings should be passed on to shippers in the form of lower tariffs. Larger farmers, who hold over 40% of the land in the Guayape Valley, will benefit the most initially since they are geared to commercial production. However, there are many small holders in the valley (under 50 ha), and recent (1976) figures indicate that progress on land reform is being made there. Sixty-six agrarian reform settlements with about 1,400 families have been established. Depending on how far the policy is carried out, more peasants are likely to gain control of valley land, and the implementation of a rural development project will enable them, and exist- ing small holders, to increase their share in the benefits of the road. Since agricultural trucking benefits are estimated at 53% of the total benefits of the civil works investment, progress on land reform and the development of a project for the valley will be important determinants of the distribu- tion of benefits from the project. Maintenance Investment 41. Based on an analysis of the entire road network, it has been deter- mined that the level of maintenance expenditure in Honduras is not sufficient  - xiv - to keep the current road network at a reasonable standard, and premature re- construction and high vehicle operating costs have been the result. Con- sideration of the present backlog and the future net additions to the main- tenance load indicates that the current expenditures of approximately L 11.0 million per year should be stepped up to about L 19.0 million by 1979. The economic analysis carried out was designed to determine whether the expendi- ture of an extra L 8.0 million per year for maintenance will be well justi- fied, since the Bank contribution will be a part of this increase. This stream of extra expenditures was compared only with the estimated annual savings in avoided reconstruction costs and yielded a benefit-cost ratio of 1.7 over a 15-year period. As is the case with most investments in an ade- quate maintenance program, the expenditure is well justified, and the Bank contribution to the overall program will yield a satisfactory return. Studies and Technical Assistance 42. Benefits from the studies to be carried out under the project and from the technical assistance have not been quantified. These elements, however, are clearly justified since they will assist the Government in determining investment priorities in the subsector, in preparing a program of complementary investments in the area of influence of the road and in improving operations in the transport sector as a whole. C. Conclusions 43. The proposed road reconstruction is one of the links of the primary road network that has been developed, for the most part, during the last ten years. It will provide efficient access to one of the largest valleys in the country and to the southern part of the Olancho forestry reserve. Access from the north coast is unlikely to be completed in less than ten years, making the project road the sole outlet for products from this area. While COHDEFOR has a program under way for managing the forest reserve, the develop- ment of the Guayape Valley is less certain, and the proposed study of the valley will ensure that the Government will have the necessary information regarding the practicable potential of the valley and the investments and institutions required to realize that potential. 44. The investment in maintenance equipment is a part of a larger pro- gram that is well justified economically and should be of very high priority. The specified loan conditions are designed to ensure that all actions necesary to the effective execution of this program will be taken . The technical assistance associated with the maintenance component of the loan is designed to improve the implementation capability of the road maintenance organization, while the covenants and agreements are designed to ensure that the maintenance program receives the priority it deserves. 45. The other technical assistance elements are designed to help streng- then the planning and implementation capability of MCOPT, an organization that must be improved if it is to deal effectively with the more demanding and sophisticated planning requirements of the future and to improve operations of the local construction industry.  I. THE TRANSPORT SECTOR A. The Distribution of Economic Activity 1.01 Although Honduras is the second largest country in Central America, it is estimated that only 17% of the land area is suited for agricultural use. The rest of this mountainous country, with thin soils and steep slopes, is best suited for forestry and other extensive uses. The good agricultural land is concentrated in four widely separated major river valleys, ten smaller valleys, and the northern coastal strip. The four major valleys are the Aguan, Sula, Guayape, and Choluteca (Table 1.1). Coffee is produced in the hilly areas between 700 and 1,200 meters above sea level. Cattle breeding occupies many rich valley areas where big holdings dominate. Banana plantations are located in the two most important Atlantic valleys, the Sula and the Aguan. Hardwood and softwood forest production is grouped around the proposed project's zone of influence, spreading to the north and southeast. 1.02 The capital and largest city, Tegucigalpa, had a 1974 population of 280,000, while the second largest city, San Pedro Sula, had a population of 200,000. Additionally, there are five departments in the country with urban populations of less than 50,000 but more than 20,000 (Table 1.2). San Pedro Sula has emerged as the industrial center of the country, with an estimated 55% of the 1970 manufacturing activity. Together, the two largest cities were estimated to account for 80% of the manufacturing output of the country in 1970. 1.03 The Sula Valley and the nearby northern coastal strip have dominated the agricultural and industrial development of the country. Located in the extreme northwest, the valley attained a distinct, almost self-sufficient, regional economy centered on the city of San Pedro Sula, itself about 60 km from the Atlantic coast and from the main port of Puerto Cortes. To the south, facing the Pacific coast, is the Choluteca Valley, of considerable historical importance but having less rainfall and, therefore, less potential than the Sula Valley. The largest of the valleys, the Aguan, like the Sula, faces the Atlantic coast in the northeast, but is isolated from the rest of the country; it has excellent soils and good rainfall and is destined to play an important role in the future shape of the transport system (para. 1.10). The Guayape Valley is located in the center of the country to the west of Tegucigalpa. Its future development and efficient connection with the capital are among the basic objectives of the proposed project. 1.04 An understanding of the valley-centered regional economies of Honduras is essential to an understanding of past and future transport devel- opment strategies. A complicating factor is the transport network required for exploitation and management of the largest natural resource in the country, namely the softwood forests in the north central mountainous areas, where road building is extremely costly and intensive agriculture not possible or even desirable. According to forestry experts, most of these areas should be left as reserve, and managed to provide a sustained growth of timber for export and domestic purposes, rather than be cut and tilled. In the western mountains of Honduras where the timber has been removed, the peasants farm the  - 2 - steep slopes and thin soils and manage to provide a subsistence type of agriculture with no real hope of increased living standards unless they gain access to the rich valley lands, which have generally been controlled by a few families. For this reason, agrarian reform has become a leading political issue of the country, and a comprehensive agrarian reform law has been enacted. B. The Transport System (i) Highways 1.05 Honduras is essentially a unimodal country dominated by roads and road transport; the distances are short and the terrain rugged, making rail- ways non-competitive, except in the northern coastal strip where specialized banana railways continue to operate. The Superior Planning Council (Consejo Superior de Planificacion Economica, CONSULPLAN, para. 1.19) estimated that road transport carries 86% of the freight tonnage and 96% of the passenger traffic in the country. The primary road network is centered around the cities of San Pedro Sula in the north and Tegucigalpa in the south. Important agricultural areas, with the exception of the Aguan and Guayape Valleys, have access to the major urban areas over all-weather roads. 1.06 While notable progress has been made in development of a primary road network in Honduras, attention is now shifting to development of secondary and tertiary roads. Local roads to serve the traffic within the main valleys have been constructed, but they have not received the mainte- nance attention that such lower standard roads require. Feeder roads into the mountainous farming areas, where the poorest peasants live, are costly to construct and maintain, and the prDspect of large increments in agricultural production in these areas is small. The low standard road network required for management and exploitation of the forestry reserves will provide for the limited agricultural activities in the forested areas, but the western areas of the country, where the forest has been stripped, will continue to have serious problems of access. (The Road Transport Industry and the Highway Subsector are discussed in full in Chapters II and III.) (ii) Railways 1.07 There are three small, narrow gauge rail operations in the country, all located in the north and designed originally to serve the banana plan- tations in the Sula Valley and the northern coastal strips. They total 450 km of main and branch line and 750 km of sidings and spurs. The Govern- ment-owned railway, Ferrocarril Nacional de Honduras (FNH), runs from the Atlantic port of Puerto Cortes to San Pedro Sula and along the upper Sula Valley, with a total length of 114 km of mainline. It hauls sawn timber as well as agricultural imports ancl exports. Until recently, FNH showed a profit. Large investments to repair the damage of Hurricane Fifi in 1972, however, and the reduction of banarLa shipments from damaged plantations led to a deficit operation of about US$0.5 million per year for the last two years (Table 1.3). The Tela Railway operates over 179 km of mainline and serves the  - 3 - pl^rLtation areas of the eastern side of the Sula Valley and part of the coastal strip. It has access to both Puerto Cortes and the specialized banana pier at the port of Tela. It was owned and operated by the United Brands Company in Tela, but has recently been acquired by the Government. Since both these lines are of the same gauge (1.07 m), their rolling stock is compatible. The Standard Fruit Railroad operates over 157 km of main- line and serves the banana plantations on the coastal strip between Tela on the west and Balfate on the east. The specialized pier at the port of La Ceiba is the outlet for banana exports. Since the line is a 0.91 m gauge, there is no connection to the other railroads. A branch line from the coastal strip through rugged terrain and into the upper Aguan Valley is the only access, apart from the sea, that it has with the rest of Honduras. Negotia- tions have been initiated to make the Standard Fruit Railroad a Government operation also. FNH will then control all the rail operations in the country. With captive banana traffic and a simple operation, there should be no trouble in keeping costs down and tariffs at appropriate levels so that Honduras does not develop a rail deficit problem. (iii) Ports 1.08 On the Atlantic coast, from west to east, are the four ports of Puerto Cortes, Tela, La Ceiba and Puerto Castilla. On the Pacific coast, there is a deepwater anchorage at Amapala on the island of El Tigre with lighter service to the shallow draft mainland port of San Lorenzo. The ports are operated by the Empresa Nacional Portuaria (ENP), a semiautonomous Government organization that was highly successful in developing the port of Puerto Cortes and was subsequently directed to take over the operation of all the ports in the country. 1.09 If liquid cargoes are excluded, the ocean-borne foreign trade of the country has fluctuated between 1.5 and 2.0 million tons per year for the last five years, with tonnage reductions in 1974 and 1975 due to Hurricane Fifi (Table 1.4). There is a large imbalance in tonnage entering and leaving the country, with export tonnages almost three times import tonnages. Bananas and timber dominate dry cargo export flows. In 1975, bananas were 38% of export cargo by weight, while timber was 30%. Import tonnages are more evenly distributed among machinery, foodstuffs, fertilizer and grain. 1.10 Puerto Cortes is the principal port of the country, accounting for 1.0 million tons, or 68%, of dry cargo flows in 1975. La Ceiba followed with 16%, most of which consisted of bananas. San Lorenzo carried 9%, most of which was timber, while Tela accounted for 7%, again mostly bananas. Puerto Castilla as yet carries no traffic of any significance. Puerto Cortes will continue to be the main port of the country since it faces Europe and North America, serves the better developed Sula Valley, is well sheltered, has good facilities, and is well connected by road to the rest of Honduras and other Central American countries. La Ceiba is likely to decline in importance when the banana plantations are better linked by road, and perhaps rail,  - 4 - with the future port at Puerto Castilla. According to a recent consultants' report, the timber pier at La Ceiba is deteriorating, and a decision to replace it will have to be made in a few years; La Ceiba is not well sheltered and does not provide adequate depth for modern ships. A new port will soon be required at Puerto Castilla to handle the Aguan Valley imports and exports as well as the output from the timber and chip mill planned at Corocito. The Bank has recently appraised a project to improve facilities at Puerto Castilla. This is only one of the infrastructure requirements associated with the development of the Aguan Valley. A new port at San Lorenzo on the Pacific, financed by Bank loan 767-HO (1971), is under construction and is scheduled for completion in late 1977; it will eliminate the need for the present lighterage services. San Lorenzo will continue to serve as a major timber outlet and will handle the expected sugar and molasses exports from the Choluteca Valley. (iv) Air Services 1.11 Honduras has two major airlines offering both domestic and inter- national service. The larger is SAHSA, a private airline with headquarters in Tegucigalpa. It has a fleet of 14 planes for domestic services (DC-3, DC-6, Convairs, etc.,), and a Boeing 737, its major revenue earner, for international service to New Orleans, Managua, San Jose and Panama. The 737 calls at both Tegucigalpa and San Pedro Sula, offering service between these two points. The second airline, TAN, operates a 737 out of San Pedro Sula and offers service to Miami and Mexico City, calling at Tegucigalpa and La Ceiba en route. TAN also operates three smaller aircraft for domestic service. It is privately owned and recently acquired a majority share in SAHSA, effecting a merger of sorts; so far, the operations of the two have not been consolidated. In addition to the two above-mentioned main airlines, there is at least one local airline (Aerovias Nacionales de Honduras) operating DC-3 aircraft, which provides regular domestic service to 20 cities, including the bay islands in the Caribbean Sea. There are also a number of "bush pilot" services that provide access to a large number of airstrips in isolated sections of the country. 1.12 The Villeda Morales airport at San Pedro Sula has a good runway of 2,800 meters. The Toncontin airport at Tegucigalpa is less satisfactory, with only 1,980 meters of runway, barely adequate for modern jets, and is considered a hazardous facility. A new airport at Tegucigalpa is a perennial issue, the rationale being that the capital should have a safe international airport facility. The low level of traffic would not, however, lead to financial viability. 1.13 With the completion of the Western Highway and the road between Tegucigalpa and San Pedro Sula, domestic air traffic has declined steadily since the peak year of 1969 (Table 1.5). Private automobiles and a good intercity bus and truck service have diverted a large portion of air traffic, especially on the Tegucigalpa-San Pedro Sula segment.  C. Transport Planning and Coordination 1.14 Responsibility for highway planning lies with MCOPT, and this Ministry is subject to the usual pressures of a public works department that presides over a relatively large investment and maintenance budget affecting all parts of the country. The main bases for highway investment planning are: (a) a long-term highway network master plan, which was prepared almost ten years ago; and (b) a long list of proposed projects which reflect a variety of local interests as well as national development priorities. Some of these projects have well prepared engineering and economic feasibility studies asso- ciated with them; others are integral parts of larger agricultural and forestry development plans and have received attention only in terms of preliminary engineering analyses and cost estimates. Still others are merely lines on a map. The biggest deficiency regarding the present CONSUPLAN plan (para. 1.19) is that it is clearly not feasible in terms of finances or implementation capacity, and there is an urgent need to develop a program that is realistic enough to be of use in the annual budget exercise when the Ministry of Finance and MCOPT make the difficult decisions about project funding. Perhaps the most critical need is to attach a realistic cost estimate to each project in the current plan and to phase these projects, subject to realistic budget constraints. The immediate result of such an effort would be the realization that very difficult decisions are required concerning priorities. Such an exercise is within the capacity of the MCOPT staff and would allow them to focus their limited planning resources on a core of projects instead of dispersing them over a large number, many of which are of low priority. The economic analysis of projects is reasonably well understood within MCOPT, and, with some help, the road investment program could be put on a sound economic footing. The data and analytical requirements of such an exercise are modest, and past Bank assistance has been helpful in improving the data base and the techniques of project analysis. The benefits of such assistance are poten- tially large, and it should be continued, bearing in mind the severe personnel constraint in MCOPT and the consequent need to keep the effort modest and feasible. The proposed project will make an important contribution to the continuation of the transport planning effort by providing for the financing of a new Highway Master Plan. 1.15 Port planning is the responsibility of the National Port Authority (ENP), a semiautonomous organization that operates and plans all ports in the country. Unlike MCOPT, it is not subject to pressures from diverse local interests and generates many of its financial requirements through a system of port charges. Because of the limited number of ports in the country, it also avoids the problem of attempting to implement too many projects. Its management has been good and is not subject to frequent change, allowing the development of a rolling five-year plan that includes economic, engineering, and financial analysis, most of which is done by the port staffs themselves. The inclusion of a cash flow analysis in the five-year plan avoids the worst deficiency of the highway plan and effectively integrates the annual budget exercise for the ports into a longer term plan. The orderly environment of the port planning operation, together with fringe benefits such as subsidized housing and a training program, allows ENP to attract and retain competent staff and to upgrade younger staff.  1.16 The Honduran National Railway (FNH) is also a semiautonomous organi- zation that will eventually be in charge of operating all three narrow gauge railways. It is a stable operation with little traffic growth, specializing in moving bananas to the Atlantic ports. As such, its planning operation is essentially financial and involves projection of revenues and operating expenses. The capital budget is small and has not required sophisticated engineering or economic analyses. The proposal to reconstruct the old rail line from the upper Aguan Valley to the proposed new port of Puerto Castilla is the only serious new project on the horizon, and consultants will be hired to do the studies. The current planning staff is small but has been adequate to date. 1.17 Airport planning is the responsibility of MCOPT, but receives little attention from that Ministry. With distances so short and incomes so low, road transport cut deeply into domestic air traffic as the road network expanded in the 1970's, obviating the need for planning new investments in domestic airports. 1.18 The two modes that receive most of the transport investment in Honduras are roads and ports, and they are the subjects of continuous planning activity. Highways, which control by far the largest budget, accounted for 72% of the 1975 budget expenditure for transport. In the same year, ports accounted for 20%, rail 6% and airports 2% (Table 1.6). To speak of a trans- port plan for Honduras is to speak, therefore, of an independently produced port plan and a highway investment plan. 1.19 The formal transport coordination mechanism involves both MCOPT and CONSUPLAN. CONSUPLAN, which is a quasi-ministry, was originally intended to work with the Ministry of Finance in harmonizing the transport investment proposals of the various modes and to ensure that such proposals support the national development effort. CONSUPLAN is supposed to deal with intersectoral considerations as well as intrasectoral ones, such as those within the transport sector. It has published both a national development plan and an annual operation plan for the transport sector. In the last year, the division within CONSUPLAN that dealt with transport matters became ineffective with the departure of key personnel and advisors, some of whom went to the MCOPT planning unit, and the basic coordination effort now takes place between MCOPT and the Ministry of Finance. This is a realistic move which recognizes that there are simply not enough qualified personnel to staff both the MCOPT planning unit and the transport division within CONSUPLAN. 1.20 Since intermodal considerations are not generally of major concern and highways dominate the transport picture, the budget decision for highways is the major transport investment decision. The coordination required among roads, airports, and the semiautonomous railroads and ports is handled through ad hoc meetings and the personal relationships of the heads of agencies, all of whom know and see one another frequently.  -7- 1.21 With an adequate, independently produced port plan and no serious problem of intermodal coordination, the major task remaining is to formulate a highway investment program that reflects both national priorities and con- straints; this has never been achieved through past efforts of CONSUPLAN or MCOPT. Technical assistance under the ongoing Sixth Highway Project (Loan 896-HO) has been aimed at developing a suitable data base and technical skill that would allow such an exercise to be carried out. The proposed project includes a component for financing the preparation of a Highway Master Plan and is the logical extension of the current technical assistance effort.  TABLE 1.1 HONDURAS SEVENTH HIGHWAY PROJECT Areas of Major Valleys (Background Information) Valley Area Km2 % Total Aguan 2,288 22.6 Sula 1,841 18.2 Guayape l,155 11.4 Choluteca 973 9.6 Agalteca 605 6.o Paulaya 582 5.7 Comayagua 534 5.3 La Masica, Este 388 3.8 Siria 364 3.6 Talanga 329 3.2 Nacaome 322 3.2 Yoro 271 2.7 Jamastr,|rn 261 2.6 Danli-El Paraiso 214 2.1 Total 10,127 100.0 Source: Agricultural/Rural Sector Survey: Honduras IBRD/IDB/AID December 1975, Table 1 of Annex 1 April 1976  -9- TABLE 1.2 HONDURAS SEVENTH HIGHWAY PROJECT Urban Population Centers - 1974 (Background information) 1974 Urban Department Population (000's) Main city or town Francisco Morazan 286.4 Tegucigalpa Cortes 219.0 San Pedro Sula Atlantida 57.9 La Ceiba Yoro 45.3 El Progreso Comayagua 35.6 Comayagua Choluteca 34.4 Choluteca Olancho 23.7 Juticalpa Other 122.7 Total Urban 825.0 Total Rural 1,828.9 Total National 2,653.9 Source: Current Economic Position and Prospects of Honduras, IBRD Draft Report May 3, 1976 August 1976  - 10 - TABLE 1.3 HONDURAS SEVENTH HIGHWAY PROJECT Honduras National Railway: Traffic and Finance 1970-1975 Net Total 1/ Operating Cargo Total Operating Surplus (Metric Revenues Expenses Deficit (-) Year Tons) Passengers (1000 Lempiras) (1000 Lempiras) (1000 Lempiras) 1970 510,359 106,769 4,130 2,753 1,377 1971 591,010 102,948 4,146 3,661 485 1972 546,724 76,051 3,410 3,624 - 214 1973 619,378 78,452 4,069 3,659 410 1974 446,348 92,991 3,264 4,277 - 1,013 1975 339,745 98,561 2,380 3,631 - 1,251 1/ Includes depreciation and debt service 2/ Estimate based on eleven months figures Source: Ferrocarril Nacional de Honduras August 1976  - 11 - TABLE 1 .14 HONDURAS SEVENTH HIGHWAY PROJECT Dry Cargo Traffic at Principal Ports 1970-1975 (Thousands of Metric Tons) 1970 1971 1972 1973 1974 l975 Puerto Cortes 880 1080 1069 1169 1013 1015 Tela 210 315 250 206 215 102 la Ceiba 366 369 374 381 313 236 San Lorenzo 128 82 206 209 168 134 Total 1584 1846 1899 1965 1709 1h87 1/ Excludes petroleum and molasses Squrce: Trafico de Carga y Estados Financieros por los Anos 1976 al 1980. Empresa Nacional Forturaria, Febrero 1976 April 1976  - 1z - TABLE 1.5 HONDURAS SEVENTH HIGHWAY PROJECT Passenger and Cargo Traffic at Major Airports 1965-1973 Tegucigulpa San Pedro Sula Total Year Passengers Cergo Passengers Cargo Passengers Cargo (l,oo) (l,000 lbs) (1i,00) (1,C0O lbs) (1,OOC) (1,OOC lbE) 1965 113 11,151 78 8,795 191 20,21[6 1966 125 12,955 109 11,339 23L 24,29L 1967 1 33 1)4,927 112 10,397 245 25,32)4 1968 168 15,15L4 137 11,601 305 26,755 1969 181, 18,121j 167 17,578 351 35,702 1970 213 18,381 200 16,65)4 k13 35,035 1971 17L4 15,855 150 15,306 32L 31,161 1972 152 11,336 109 11,602 261 22,938 1973 1kc3 10,199 10,3 1,8) 2L6 20,CILO Source: Estadisticas de Transporte Aerpo 1973-7hi Direccion General de Aeronautica Civil, MCOPT, MIay 1975 April 1976  - 13 - TABLE 1.6 HONDURAS SEVENTH HIGHWAY PROJECT Public Investments in Transport 1973-1974-1975 Mode Amount (1,000 Lempiras) 1973 1974 1975 Roads .1/ 19,800 23,400 34,700 Ports 5,293 15,649 9,433 Railroads 304 297 3,057 Airports 1,769 1,168 872 Total 27,193 40,514 48,062 6ources: j MCOPT 2/ Plan Operativo del Sector Transporte 1976 CONSUPLAN April 1976  - 14 - II. THE ROAD TRANSPORT INDUSTRY A. The Road System 2.01 From the point of view of transport, Honduras has four basic road corridors: (a) The National Central corridor, which extends from Choluteca on the Pacific to Puerto Cortes on the Atlantic, running through Tegucigalpa (the capital) and San Pedro Sula (the major industrial center). (b) The Inter-American corridor, which runs along the Pacific Coast from the border of El Salvador to that of Nicaragua. (c) The Northwest corridor, which runs from San Pedro Sula through Santa Rosa de Copan and Nueva Ocotopeque and continues to the Guatemalan and El Salvador borders at Agua Caliente and El Poy respectively. (d) The Central American corridor, which runs eastward through Tegucigalpa and Danli, linking the National Central corridor with the border of Nicaragua at Las Manos. This corridor was proposed by the Honduran Government as part of the Pan-American Highway and is due for completion by November 1976. The above-mentioned four corridors cross Honduras south to north and west to east with the main purpose of carrying and distributing national and inter- national traffic, thereby servicing the various economic regions through a mediocre secondary road system in the west and an incipient secondary system in the east. 2.02 Additionally, four major road projects, designed to open the un- populated eastern regions, are in various stages of study, project prepara- tion, or implementation: (a) Santa Rosa de Copan-La Esperanza-Masaguara-Siguatepeque, which links the National Northwest corridor with the National Central corridor from west to east, proposed by the Honduran Government as part of the Inter-American Highway. (b) San Pedro Sula-La Ceiba-Puerto Castilla, which runs eastward and links the two most important valleys in the country, the Sula and the Aguan, situated along the Atlantic Coast. (c) Tegucigalpa-Talanga-Juticalpa-Catacamas (the Sixth and proposed Seventh Bank projects).  - 15- (d) Talanga-Porvenir-Yoro-Olanchito-La Ceiba, which runs northward through the vast softwood forests of the mideastern region to La Ceiba on the Atlantic, and parallel to the National Central corridor. 2.03 The above existing and programmed road investments will still not cover the potentially rich eastern region, which accounts for one-third of the Honduras territory, and, if benefits of the main network are to filter to the rural areas, secondary and feeder road programs in the eastern half of the country are essential as a complementary effort to the main road programs. B. The Transport Industry General (i) Freight Transport 2.04 There are three types of operators in freight transport: (a) Individual Operators: This group dominates the transport of domestic freight (70% to 80% one-truck owners). These operators, engaged in the seasonal transport of lumber, grain, and general cargo, operate to and from main urban centers and agricultural regions and use the worst road sections; conse- quently, they have the highest vehicle operating costs. They compete most actively for cargo and return loads, often operating at cost level, and occasionally at below-cost level; they over- load their vehicles from 30% to 60%, are at a disadvantage when seeking financing (with interest rates of 18% to 25% p.a.) and, finally, are under pressure from sawmills and commodity purchasers to reduce rates. To improve the profit margin, they often become middlemen by buying the commodities they transport from farmers and lumbermen and distributing (general merchandise and bulk) through depots. (b) Regional Operators: This is a small group (about 13 companies with three to 40 trucks each) which works in the Central American transport market, faces price and commodity control from foreign owners, and is being pushed from below by the competition of individual operators searching for expansion. Regional operators have more sophisticated equipment (over 15-ton truck units or over 24-ton truck and trailer units), benefit from the better road network of main corridors, and, consequently, have lower vehicle operating costs.  - 16 - (c) Roll-on/Roll-off Operators: This group dominates the international freight transport. Two USA (Miami) based companies--Coordinated Caribbean Transport (CCT) and Chester, Blackburn & Roder (Pan- American Mail Lines)--utilize vessels of their own or operated under legal waivers by FLOMERCA (Flota Mercante Centro-Americana). Through agreements on pricing, market distribution and route utilization, these companies keep control of the USA originated and destined, general commodity cargo. With an average of 80 trailers per week through Puerto Cortes (2,000 tons/week - 108,000 tons/year), the operation appears profitable; it has no connection with the Honduran economy, except for the US$.57/vehicle mile subcontracting rates paid to individual truckers for the traction of their trailers, when such owners are not US-controlled agents. This situation of freight transport adversely affects distribution of benefits from a national viewpoint insofar as benefits largely accrue to interests outside the country. (ii) Passenger Transport 2.05 Passenger transport firms are better organized, spreading competi- tion among themselves and accounting for service and maintenance of vehicles. Rates usually take depreciation costs into account. Less-than-economical "bus-taxi" type service is now directly confronted by these better organized firms. Some of the first draft regulations under the new Transport Law (para. 24) will restructure rates and tariffs on suburban and urban passenger trans- port. The Government will also implement a review of passenger transport licenses and will give attention to the quality of service rendered. Rural passenger transport, in areas where feeder roads are in poor condition, is operated by cooperatives using converted pickup vehicles; nevertheless, the standards of this service seem to be adequate for rural needs. Security of all passenger services is poor, and the implementation of adequate regulations to increase security is of top priority within the Bank-financed technical assistance program being conducted by the consultant TAMS-Cerna y Maier (Sixth Highway Project, Loan 896-HO). The flat fare, regardless of distance, for urban transport services in Tegucigalpa and San Pedro Sula presently leaves peripheral urban zones with marginal services and is also due for review. The Government is taking a firm stand on passenger transport tariff regulation as a result of the new law. Marketing (i) Freight Transport 2.06 An evaluation of the industry's ability to organize the sale of services must focus on the two most important groups of transported products and on the directions in which such products flow in order to reach the main markets.  - 17 - (a) Agricultural produce and lumber from peripheral zones to main urban centers, and/or storage areas, and/or export points 2.07 Agricultural production is scattered throughout the country, with emphasis on the main productive valleys; coffee is produced in the hilly areas between 700 and 1,200 meters above sea level. Cattle breeding occupies many rich valley areas where big holdings dominate. Banana plantations are located in the two most important Atlantic valleys, the Sula and the Aguan. Hardwood and softwood forest production is grouped around the proposed project's zone of influence, spreading to the north and southeast. 2.08 Services are dominated by individual transport, with the exception of banana plantations served by rail. Simple marketing methods, based on the dual character of the transporter acting as middleman, typify the marketing of services except in the transport of packed meat from the proposed project area, where one of the few well-organized, medium-sized refrigerated transport companies operates profitably and competes successfully in the inter-American market. To market agricultural production better and to protect their own geographical areas or commodities, transport men group themselves into coop- eratives which do not accomplish any marketing or tariff regulating functions; however, through agreements between cooperatives, they offer their members return load possibilities, carrXing general cargo from mnain centers to rural areas. 2.09 Pricing and transport tariffs follow supply and demand, and carriage is therefore seasonal according to demand. Insufficient silo storage capacity in the country has greatly influenced the instability of grain prices, and the consequent price of transport in 1975, by lowering the price of corn from a forecast (Banco de Fomento) L 15 (US$7.50) per 100 kg to a low of L 9 (US$4.50). The same seasonal supply and demand oscillations affect the transport of lumber from production areas to sawmills, and of sawn wood from sawmills to Corporacion Hondurena de Desarrollo Forestal (COHDEFOR) depots or ports for export. Here again, the usual practice is for the transporters to buy lumber from forest owners or contractors and to sell it to sawmills; in turn, saw- mills sell the sawn product to COHDEFOR. This marketing process causes sawmills to be the focal point for price policy with the result that the price of transporting a cubic meter of timber from Tegucigalpa to San Lorenzo dropped from L 101.46 (US$50.88) in 1973 to L 84.80 (US$42.40) in 1975, in spite of the fuel increase. 2.10 These primitive marketing practices and organization, the absence of break-bulk terminals and the tight control of the purchasing monopolies over both producers and transport middlemen, are reflected in the poor standard practices of the industry, in the lack of preventive maintenance, in frequent bankruptcies and change of ownership of vehicles and in one-way overloading practices; eventually they have a negative impact on the filtering of benefits to lower levels of population and on the condition of roads in all areas. Recommendations for improvement of this situation are being made in the analysis of the Road Transport Industry in Central America, which is now being prepared.  - 18 - (b) Manufactured and processed goods from Central American processing centers and from the USA's main cargo center in Miami, to the main urban centers 2.11 The main processing industries in Central America are located in Guatemala, El Salvador and Costa Rica, and marketing and tariffs of transport services for the end products are dictated by the transport companies in the countries where the product originates. Competition is therefore strong for the small nucleus of Honduran firms working the national and regional trans- port market, and return loads are scarce because of the absence of efficient cooperatives at the regional level and the unequal export-import flow of goods. The establishment of sales offices at the regional level through a Central American common market return load system would be a definite improvement in this middle sector of the transport industry marketing. Appropriate recom- mendations for coping with the problem are proposed in the analysis of the Road Transport Industry in Central America. 2.12 The main flow of manufactured products from the USA enters Central America through the roll-on/roll-off system operated by Miami-based companies. Puerto Cortes is the natural port of entry for Honduras, Nicaragua and, in normal conditions, El Salvador. A good return load system, created through an efficient office network in Honduras and within the region, ensures that meat, wood and other agricultural products are returned to Miami for distri- bution. The marketing ability and practices of the two companies involved in the Central American runs, their important financial investment in equipment and terminals, the efficient sales coordination throughout the USA, the agree- ments in force with US operators, and the underdevelopment of the Honduran transport industry, as well as its difficult financial resources and primitive marketing organization, make competition in this field very unlikely. Rates and tariffs are the same as those set by the Federal Maritime Commission in the USA. (ii) Passenger Transport 2.13 The transport of persons, often combined with the transport of freight in rural areas, has a more fluid and natural marketing pattern based on the quality of service. Competition is keen among the one-owner minibus licensees in urban areas, although services seem to be adequately priced and the number of operators seems to match the service demand. Cooperatives tend to regulate rural transport and protect geographical areas from new entries, but their full impact is to be noted more in the internal organization of the cooperatives and the consequent improvement of services. Within inter-urban transport, certain lines and regions have particularly attractive price escalations; for example, one of the two licensed companies performing services to and from Tegucigalpa and the project area is able, through accurate service, cost and personnel control, coupled with an aggressive sales policy and excel- lent tariffs, to depreciate vehicles every two to four years, keep preventive maintenance, and still have 40% profit before taxes.  - 19 - Organization of the Transport Industry (i) Legal Types of Association and Administrative Structures 2.14 Types of association change according to different segments of the industry. There is no type of association found at the individual operator level other than the cooperative type. Cooperatives protect groups of truckers in certain territories and commodities against outsiders in their zones of influence. Limited companies or corporations are common among truckers oper- ating the national or inter-American markets, and limited companies are also the most usual type for commodity operators engaged in the carriage of fuel and bulk products. Administration at the cooperative level is simple, all matters being handled by the association itself. A rudimentary paternaliqtic type of management, with more up-to-date personnel organization, can be found at the limited company level. Methodology and managerial transport practices, accurate accounting, truck coordination, preventive maintenance practices, etc., gain ground gradually among private companies and are being used by some limited companies. (ii) Service Organization 2.15 Two particular service areas not described in the general classifi- cation of industry are subcontracting and commodity contracts. Subcontracting is widely used among brokers and roll-on/roll-off operators; in some cases, it is a simple way to mask foreign ownership. It is done on a mileage basis and has an impact on the number of bankruptcies since it leaves the individual truck owners unprotected in case of breakdown or deterioration of equipment. The commodity contract is also peculiar inasmuch as it too influences entries and bankruptcies; commodity producers and/or purchasers (cement factories, oil distributors, sawmills) agree on a contractual basis for periods up to one year to furnish loads of a specific type and over a specific route. Owners find financing (two years at rates of about 18% to 25% p.a.), on the face value of their contracts, to purchase equipment from importers. If contracts are dis- continued, as the case is presently with oil and cement, truckers are left with an unpaid vehicle and no load to carry. (iii) The Vehicle Fleet 2.16 Seventy to ninety percent of the fleet is composed of 5-10 ton flat bed, two-axle vehicles. A gradual change is now under way to replace this type of transport with equipment more suited to the new roads under con- struction. Since registration of freight vehicles has not yet been imple- mented, it is hard to give an accurate account of the situation. All equip- ment engaged in inter-American transport and all the roll-on/roll-off equip- ment is of higher tonnage capacity, and most of it is of the truck and trailer type units. (iv) Operating Practices 2.17 Preventive maintenance is unknown at the individual operator level. The usual life span of vehicles is up to five or six years, depending on  - 20 - routes and care. Bus passenger companies and companies operating at national and inter-American levels have occasionally organized preventive maintenance and replacement of depreciated equipment. In one case at least, vehicle replacements (engine units) were imported regularly to be assembled locally. Depreciation takes three to five years. Import taxes on spares are 25%, while import duties on trucks are higher. 2.18 Overloading is a general practice, and current rates and tariffs take overloading for granted (see chart at the end of this Annex). Lumber carriers interviewed within the project area had an overload factor from 30% to 60%. Grain truckers assume an overloading of 20% to 40%. General cargo compa- nies operating truck and trailer units had an overload factor of 20% to 30%. On commodities such as grain and lumber, and due to the nonexistent return load organization, overloading occurs one-way only, from product areas to main centers, as may be the case in the area of the proposed project. This influen- ces road conditions, taking a heavy toll on one side of the road. The Govern- ment can influence overloading by assisting the main commodity purchasers in negotiating tariffs (lumber, grain) with sawmills and grain distributors in such a manner that benefits, which are excellent at the level of the commodity distributors or purchasers, filter down to the lower levels of the transport industry. The poor condition of road surfaces also encourages overloading, making travel time uneconomical for the normal vehicles used (5 to 10 ton units). The proposed project will cut traveling time from Tegucigalpa to Juticalpa in half, allowing truckers to increase the number of trips at a much lower cost. (v) Institutional Organization 2.19 Transport documentation at the national and international levels is unified in accordance with the Central American Common Market Agreement. However, a wide gap exists in the implementation of procedures at the national level. Customs stations are slow and ill-informed, interpretation of regula- tions is subjective, and there are no commonly established customs procedures. Usual documents include the Poliza de Transito (International Bill of Lading), the proforma invoice, and the inventory. Usual procedures include custom seals and an accompanying customs man while the vehicle is in transit (custodio). Distribution of Benefits 2.20 Benefits from road construction and improvement affect mainly the road transport industry in the area, the population living in the road's zone of influence, the marketing of produce from the road's zone of influence, and the development of the road's zone of influence. If benefits are to be passed down to the lower levels to affect the marginal population and to complement social and agricultural development, programs must be carried out, at the farm level, for feeder roads, transport recovery and improved marketing. Benefit distribution in the various strata of the Honduras transport and farming economy has the following pattern.  - 21 - (i) Individual Owner Transport 2.21 Due to the control of the marketing of lumber and grain by sawmills and grain banks 1/, benefits of road projects in rural areas are gradually absorbed by those monopolies unless a strong pricing policy on the Government side is implemented as a complement to road improvement. Considering the prevailing conditions in the project area, benefits will directly affect both farming communities and trucking cooperatives, but they will not affect the marginal population in the area without complementary investment. (ii) National and Inter-American Transport 2.22 Distribution of benefits in this segment of the industry follows a rather more traditional pattern. Better tariff structures and a healthier competition allow benefits to filter down with better fluidity. It is impor- tant to note, however, that the high percentage of heavy vehicle traffic of foreign ownership in certain corridors (e.g., 80% foreign owned between Puerto Cortes and San Pedro Sula, 90% foreign-owned between the El Salvador and Nicaragua borders along the Pacific, and 67% foreign-owned between Puerto Cortes and the Nicaraguan border through Tegucigalpa) means that a high per- centage of benefits accrue to interests outside the country. (iii) Roll-on/Roll-off 2.23 No net benefits are left in the local industry by this operation which accounts for 100% of the manufactured commodities entering Honduras via truck trailer units through Puerto Cortes. Unless the local industry organizes itself to compete by means of better-organized sales at the international level, a matching trucking organization inland, better terminals and/or a free zone distribution area, it will have very little chance of participating directly in this business. Problem Areas (i) Underdevelopment of one-half of the country eastward, where a high percentage of production originates, and the lack of processing industries in situ causes low volume of input traveling eastward, high volume of cargo traveling westward, return load difficulties, and low load factors. (ii) Insufficient and/or poor feeder and penetration road systems east- ward cause overcrowding of main areas open to commodities, depopu- lation of other rural areas, poor land utilization in zones of influence parallel to main roads, and excessive vehicle operating costs for lumber and grain transport. 1/ Banco de Fomento and Fanalco (Association of Agricultural Cooperatives) are the main grain purchasers in Honduras.  - 22 - (iii) Poor return-load organization causes low load factors and rentability. (iv) Ill-distributed benefits from the marketing and distribution of lumber, sawn wood and grain cause subsistence level operations for 75% to 85% of the industry and encourage overloading. (v) Inter-American tariff and marketing control from Guatemala causes low profitability for the Honduran trucker, return load difficul- ties from Central American countries, difficult growth of the transport industry and consequent transition of ownership from one-owner/one-truck to several-trucks/one-owner level. (vi) USA operators' control of the most profitable area of business causes underdevelopment of the transport industry, sales and marketing inability at the international level and a very high percentage of heavy vehicle use of road infrastructure in favor of foreign operators. (vii) Expensive financing causes bankruptcies and industry instability. C. Regulations and Policies The Transport Law 2.24 The final revised version of the draft, prepared in 1973, received important modifications between January 27, 1976 and the day of its approval on February 23, 1976 in several cabinet meetings subsequent to the examination of the draft by the Chief of State. The following parts of the law merit comment: (i) Article (1) qualifies the transport of persons or freight as a specific service controlled by the State; it will, therefore, leave an opening for future implementation, making this law a tool for control or a channel for persuasion, according to Government policy; (ii) Articles (8) and (9.c) are new additions and give wide freedom to the State to regulate freight transport; (iii) Article (4.a.b.) makes provision for duty exceptions on imports of vehicles and spares when in the interest of public service. The same provisions apply to materials and equipment to operate transport terminals; (iv) Articles (5), (6) and (2:3) deal with international transport under the principle of reciprocity and acknowledge the Central American Agreement on Traffic Regulations (approved December 29, 1958);  - 23 - (v) Articles (18) and (23) regulate the minimum national capital required for newly established companies (51%) with foreign participation and the formalities required; (vi) Delineation of freight and passenger services is now adequate; (vii) The law points to several areas where draft regulations will follow: (a) International transport of persons or freight (b) Urban and road traffic (c) Passenger and freight terminals (d) Organization of the Consejo Nacional de Transporte (National Advisory Council for Transport) (e) Entries and permits, national and international, and charges to be levied on new permits (f) Special permits for transport of passengers (g) Transport of explosives, fuel, and otherwise dangerous articles (viii) The Directorate General for Transport (DGT) of MCOPT is working with consultants TAMS-Cerna y Maier on implementation of the preceding regulations, as well as others. The Policy 2.25 The present policy of MCOPT is to regulate passenger transport fully and to regulate freight to a limited extent. Communications between industry and the Government will be channeled through the proposed Consejo Nacional de Transportes (Chapter III, Articles 12 and 15). However, behind the various modifications of the present law lies the project of thoroughly modifying the transport structure by the creation of a Government-controlled Empresa Nacional de Transporte. This, if done in accordance with the project pre- sented by the Empresa Nacional Portuaria (ENP), would not favor the present problem areas of the Honduras transport industry, but would create a monopoly for the service of few. 1/ Enforcement of Regulations on Weight and Dimensions of Vehicles 2.26 DGT, with financial help from CABEI, has built and equipped 12 permanent vehicle weight control stations which are operational and are 1/ The first draft for the National Road Transport Company was published by ENP in July 1975.  - 24 - located along the National Central corridor (para. 1) with the exception of two scales located at the border with Guatemala in the Northwest corridor and at La Ceiba on the northern coastal road. DGT has undertaken an education campaign for road users as a first step before full enforcement, and allowing time after the issue of the new transport law, for the negotiations now under way between COHDEFOR and the sawmills to materialize into a new tariff structure under which the ultimate beneficiaries would be the mass of individual truckers now performing services for the lumber industry. Since anything affecting transport is a very sensitive economic and political issue, the situation is being carefully reviewed, and it is difficult to set a date for its final enforcement since the Government has made no commitments so far. In any case, the Government is moving in the right direction for compliance with section 4.03 (b) of Loan Agreement 896-HO regarding action to be taken for enforcement of regulations on weights and dimensions of vehicles. D. Future Trends Rates and Tariffs 2.27 On a first appraisal of the rate structure, it seems logical that the three sectors of the industry in which the main differences of profitability are to be found should start reducing their gap as soon as the small trucker is able to compete for loads at the customer level, terminals or ports, by means of better access roads. These advantages and, in addition, better equip- ment and facilities and his own better organization will give the small trucker an incentive to perform preventive maintenance and also to improve his quality of service; thus, he will transfer a better share of profits from the commodity groups and international firms to himself. Geographical distribution of the present road investments, plans for development of access roads in rural area, and the Puerto Cortes development should have an impact on the above process. Inter-American and International Coordination 2.28 ENP, supported by the Government, has laid out plans for the formula- tion of a national transport company conceived with the purpose of gaining ground in the Central American market. Such a project would be welcomed by the Honduras transport economy if the project could be integrated within the present industry and could encourage vertical movement across the various stratas and improvement of marketing. On a wide scale, the main complaints by the transport industry are: - No participation in the productive and important international trailer transport market. - Minor participation in the potentially productive Central American market. - Absence of an organized network of road terminals.  - 25 - - Absence of a nationwide sales and management organizaiton to coordinate efforts at a private level. - Absence of sound financial policies in transport industry investment. Sales Promotion, Management and Transport Coordination Organization at the National Level 2.29 The need to cope with the above problem areas and the need to integrate the industry in an effort to improve transport would point, with slight variation, to a compromise between the public sector's idea and the needs of the country to the formation of a national company with mixed public and private sector participation dedicated to the organization, management and promotion of transport and transport sales, with control over free zone and terminals, ability to establish sales offices both at international (Miami) and inter-American levels, to contract cargo and subcontract transport, obtain and promote finance of equipment among associate members, bill out and collect revenues, and, an general terms, administer for the benefit of many the poten- tiality of the present market. Tentative conversations along this line have already started with the Government and public sectors in order to assess the organizational structure of the projected company and the terms of integration of the industry needs with the institutional proposals.  - 26 - pi*= to Chabter II REPU8LtCA DE HONDURAS ~MSITEO DE , ,WU iCiO , C ,MAS tUMLCAS Y TRANSPORE DIRECCION GENERAL DE TRANSPORTE PESOS Y DIMENSIONES MAXIMAS DE LOS VEHICULOS DE CARGA CONFORME AL ACUERDO CENTROAMERICANO SOBRE CIRCULACION VIAL. PESO TiPO DE VEHICULO PESO TIPO DE VEHICULO TOTAL TOTAL 1 l e-2 1 P ~~~~~T3-S2 12.0-T 33.0-T In.I3 n mInOm nlOm. 4000 8000 4000 7250 7250 7250 7250Kg C-3 :rC21tR 18.5-T |=34.5-T ; \. 3.Sm lil.