Dominican Republic - Road Maintenance and Reconstruction Project

%D O - PY PW\iP Document of 11I bUrY *The World Bank FOR OFFICIAL USE ONLY Report No. P-1884-D REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE DOMINICAN REPUBLIC FOR A ROAD MAINTENANCE AND RECONSTRUCTION PROJECT June 24, 1976 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 World Bank authorization.  Currency Equivalents Currency Unit = Dominican Peso (RD$) US$1.00 = RD$1.00 Fiscal Year January 1 - December 31 Weights and Measures Metric British/US Eouivalent 1 meter (m) = 3.28 feet (ft) 1 kilometer (km) = 0.62 mile (ni) 1 square kilometer (sq. Ian) 0.386 square mile (sq. mi) 1 metric ton (ton) = 0.98 long ton (lg ton) 1.1 US short ton (sh ton) 1 kilogram (kg) = 2.2 pounds (lb) Abbreviations and Acronyms GDP = Gross Domestic Product GNP = Gross National Product IDB = Inter-American Development Bank ILO = International Labor Organization LVI = Lamarre Valois International SEOPC = Secretaria de Estado de Obras Publicas y Comunicaciones UNDP = United Nations Development Program  FOR OFFICIAL USE ONLY INTERNATIONAI. BANK FOR RECONSTRUCTICN AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTrIE DIRECTORS ON A PROPOSED LOAN TO THE DOMINICAN REPUBLIC FCR A ROAD MAINTENANCE AND RECCNSTRUCTION PROJECT 1. I submit the following report and recommendation on a proposed loan to the Dominican Republic for the equivalent of US$5.0 million to help finance a Road Maintenance and Reconstruction Project. The loan would be made on standard Third Window terms of 25 years, including 7 years of grace, with interest at 4.85 percent per annum. PART I - THE ECONOMY 2. An economic mission visited the Dominican Republic in August/September 1974. Its report, "Updating Report on the Economy of the Dominican Republic" (611-DO), was distributed to the Executive Directors on April 18, 1975. Relevant social and economic data are presented in Annex I. 3. In 1970-74, the Dominican economy expanded rapidly, stimulated by large inflows of private capital into key sectors such as mining, agriculture, and menufacturing, by rapid export growth Pnd by a dynamic public investment program. The rate of real GDP growth averaged almost 11 percent. 4. Mining, industry (including sugar refining), construction, and services accounted for the bulk of output growth. Industrial incentive laws, although offering a high degree of protection and encouraging capital intensive activities, did stimulate private investment in manufPcturing, mostly in import substitution industries. Construction activity was stimulated by the high level of public investment outlays for infrastructure and by private residential construction. M9uch of the increase in mining output came from the Falconbridge ferronickel plant (partly financed by Lonn 6l6-DO) which started production in 1X72. IJrban services and tourism also expanded rapidly. The total volume of agricultural production increased at a slower rate, as increases in export crops were partly offset by slow growth in food crops. 5. Responding to political stability and a favorable business climate, gross investment increased from 19 percent to 25 percent of GDP between 1970 and 1974, an annual increase of nearly 20 percent in real terms. Much of the invest- ment was financed out of internal savings. Domestic savings increased from just under 12 percent of GDP in 1970 to about 18 percent of GDP in 1974. Prudent fiscal policies contributed to the growth of savings. Consolidsted public sector savings financed over three fourths of public capital expenditures and contributed over one-half of total gross domestic savings in 1970-74. However, the restraint on current expenditure involved some cost in the neglect of needed services. The ratio of taxes to GNP is in excess of 16 percent, reflecting a substantial public resource mobilization effort. 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 World Bank authorization.  6. Exports have been the most dynamic element in the economy. Merchandise exports increased from US$213 million in 1970 to an estimated US$634 million in 1974. The Dominican Republic was one of the few countries able to increase its volume of sugar exports in a period of rising world prices. Raw sugar exports amounted to 7614,000 tons in 1970 and 1,016,000 tons in 1974. Other exports have also been buoyant. The combined export value of cocoa, coffee, and tobacco reached US$134 million in 1974 as compared to US$63 million in 1970. Ferronickel exports, which began in 1972, reached US$93 million in 1974. Although tourism has only recently become a significant source of foreign exchange, gross tourism earnings came close to US$50 million in 1974, up from about US$20 million in 197C. 7. The economic expansion of 1970-74 was accompanied by liberal credit policies. In this period, the stock of bank credit to the private sector increased at an average annual rate of over 33 percent and bank credit to the public sector increased at an average annual rate of 14 percent. The inflationary potential of the fast credit expansion was partly compensated by an increased willingness on the part of the private sector to hold time and savings deposits, even though low yields are paid to savers. Nevertheless, the Santo Domingo Consumer Price Index, which rose at an average annual rate of 4 percent in 1970-71, accelerated to 14 per- cent in 1973-74. Part of this increase was the result of the sharp increase that import prices experienced in 1974. It is probable, moreover, that the cost of living in Santo Domingo understates inflationary pressures because prices of staples and rents, which weigh heavily in the index, are controlled. In any event, the liberal credit policy of 1970-74 would have led to even greater price rises, had not imports been allowed to rise from US$278 million in 1970 to US$673 mil- lion in 1974, an annual nominal rate of nearly 25 percent and a real rate of 14 percent. 8. In 1974, world sugar prices rose to reccrd levels. The world price, which had averaged 8.5 cents/lb in 1972/73, peaked at over 60 cents/lb in Novem- ber and averaged 30 cents/lb for the year. The Dominican Republic, because it had followed the practice of selling forward most of its crop, did not fully benefit from these high prices in 1974, as the average price obtained was 14.7 cents/lb. In early 1975, it was expected on the basis of future sales already contracted at that time that Dominican sugar exports in 1975 would sell at an average 33 cents/lb. The actual average export price received in 1975 was 25.4 cents/lb. While still a very high price, it did not allow for the reserve build-up that had been envisaged (see Economic Report 611-DO). 9. The potential for a reserve build-up in 1975 was further affected by a severe drought, causing lower sugar exports and higher food imports than in 1974. The volume of bauxite and ferronickel exports also dropped in 1974, owing to weak foreign demand. On the other hand, the Rosario gold and silver mine started operations in 1975, with exports of US$28.6 million. On balance, the authorities were able to sterilize in 1975 about US$60 million of tax revenues and US$20 mil- lion of sugar exporters' revenues in special reserve accounts. These measures helped prevent excessive expansion of domestic credit and imports, making it possible for banking system external reserves to increase by US$60 million in 1975. As a consequence of the poor weather and world recession, GDP growth in constant prices was only 4.7 percent in 1975.  10. Prospects for 1976 are mixed. Good weather in late 1975 and early 1976 is expected to lead to a recovery in agricultural output. Recent expansions in installed electric power capacity should facilitate some expansion in industrial production. The ongoing economic recovery in OECD countries could result in larger volumes of bauxite and ferronickel exports, as well as in higher earnings from tourism. Further expansions in gold mining capacity are under way. On the other hand, with world sugar prices running at about one-half the prices obtained by the country in 1975, total 1976 export earnings may be some US$200 million below the 1975 levels and a substantial balance-of-payments deficit is expected to re-emerge. Because the Government feels that the Dominican Republic failed to benefit fully from the high sugar prices prevailing in 1974 and 1975, it has been reassessing its marketing strategy. This reassessment has led to a marked slowdown in marketing the current sugar crop. As a result, in early 1976 domestic liquidity continued to be tight and the authorities were again pursuing cautious fiscal and incomes policies; overall growth is likely to be quite modest. t1. Because much of the recent economic growth was concentrated in the main urban centers, it did not materially improve the living standards of the rural majority. Although the official accounts show GNP per capita of between US$h6c and US$480, most non-financial indicators of the level of economic development show the Dominican Republic at par with other Latin American countries in the US$320 to US$360 GMP per capita range (see Annex I, p. 5), and suggest that poverty is fer more widespread than suggested by GNP per capita figures. A recent health sector assessment found that the food int2ke of almost 70 percent of the population is below the minimum nutritional standards established for Central Ame- rica and Panama and that over three-fourths of pre-school children suffer from protein-calorie malnutrition. Malnutrition in the Dominican Republic is probably more severe than in any Central American country. 12. The Government is acting to correct the disparity between rural and urban incomes. It has taken action to redistribute land, to redirect public credit to small scale farmers, and to extend the benefits of public education to rural areas. Since 1972, the land reform institute has acquired over 225,000 hectares (almost 10 percent of the country's arable land). Much of this land has been distributed to individuals -- in farms of under 7 hectares -- or to "asentamientos", state farms in which the members work the land together and share the proceeds. To ensure that subsidized credit reaches small-scale farmers, the lending ceiling of the State Agricultural Bank was lowered from US$250,GGC to US$50,000. The average size of new loans made in 1975 was about US$1,50C in the case of the Agricultural Bank and even smeller in the case of the two other official agricul- tural credit agencies. The Government also intends to broaden the opportunity for children to have at least four years of primary schooling, especially in rural areas. With Bank Group assistance, the Government is beginning to emphasize nonformal vocational training for agricultural activities and industrial trades. 130 The Government is also continuing its efforts to provide new employ- ment opportunities by pursuing growth-oriented policies and carrying out a large public investment program. Nonetheless, despite recent increases in output, the overall urban unemployment rate has not been significnntly reduced, m.ainly because the urban labor force has increased by more than 6 percent per annum, reflecting migration to the cities and an increase in the economic participation of women. A recent ILO study suggests that in early 1973, 20 percent of the  - L - Santo Domingo labor force was unemployed and 60 percent of the remainder were partially unemployed. In spite of extensive rural migration, underemployment in agriculture is still widespread. Nationwide, unemployment and underemploy- ment are equivalent to about 4O percent of the labor force. Because of the fast growth of population (over 3.3 percent), the economy would need to expand by 6.5 percent per year merely to maintain unemployment at its present high rate. 1a. The Agency for International Development (AID), IDB, and IDA have pro- vided the bulk of external assistance since 1960. Because of its income level, the country is no longer eligible for IDA credits. AID's budget has been signi- ficantly reduced in recent years and U. S. government assistance to the Domini- cen Republic has gone down from over US$100 million per year in the mid-1960's to about US$17 million per year. IDB lending has averaged US$30 million per year. The Dominican Government has also been able to borrow modest amounts from foreign commercial banks. 15. The Government's prudent financial management is reflected in a relatively small and well-structured external public debt. As of year-end 1975, the disbursed total external public debt of US$L37 million was equivalent to 11.5 percent of GDP. The Government has taken the position that the economy cannot afford to service more than a quite limited amount of debt on conventional terms, because of its lasting structural weakness. Therefore, only one-third of the debt had been contracted at commercial terms (commercial banks and suppliers' credits), and the debt service ratio is relatively low. The Government, in its assessment of terms that the country can afford, is mindful of the fact that until only a few years ago official external lenders like the Bank considered that the economy's creditworthiness was so fragile as to warrant lending only on highly concessionpry terms such as those provided by IDA. 16. Despite progress achieved in recent years towards diversifying exports, sugar still represents more than half of export earnings. Sugar prices, trEdition- plly highly volatile, are expected to remain depressed for several years, while other traditional exports (ferronickel, coffee, cocoa, tobacco, bauxite) are expected to grow slowly in the medium term. While gold and silver exports are expected to expand, as well as tourism earnings, and the country could develop new exports, such as agroindustrial products, the balance of payments outlook is not likely to change significantly until the mid-1980's. Cn balpnce, export earnings over the next decade are likely to fluctuate considerably and can be expected to lag behind import growth if an effort to improve social conditions is to be sustained. 17. Because the authorities have pursued prudent debt management policies, they h.ve some untapped borrowring capacity from private sources. But they could draw from these sources only in moderate amounts, if overall debt terms are to remain sufficiently soft in the face of poor prospects in the world sugar market. To the extent that new commerciel borrowing is kept at moderate levels and a suitable balance is maint ined between conventional and concessionnry loans, the Dominic2n Republic can be considered creditworthy for some Bank lending. B'lig,ibility f'or Third Window Lending iF. The foregoing raragraphs (11 through 17) present material which is relevant to the consideration of Third Window financing for the Dominican Republic. In sum- mary, the country is considered eligible for this type of financing on the basis of she following criteria:  (1) Poverty: Although the GNP per capita is shown at about US$460 in 1972 (Bank Atlas figure), most non-financial indicators of the level of economic and social development show the Dominican Republic at par with other Latin American countries in the-US$320 to US$360 per capita income level (see Annex I, p. 5) (2) Performance: The Dominican Republic is making a substantial development effort in relation to its resource base and economic potential. The Government is pursuing growth-oriented policies designed to provide new employment opportu- nities, attempting to correct the imbalances between the urban and rural popule- tion and promoting the diversification of the country's foreign exchange earnings. (3) Creditworthiness: The Dominican Republic is creditworthy for limited amounts of Bank lending. Its external debt and debt service are at moderate levels, although its overall borrowing should continue to be on relatively soft terms gi- ven the critical dependence of the balance-of-pAyments on sugar exports and the depressed outlook for world sugar prices. (4) Alternative sources of fin?nce: In the past, the bulk of the Dominican Repubiicrs borrowings has come from IDA, AID, and IDB. The country is no longer eligible for IDA financing, AID has sharply reduced its lending program, while IDB lending is expected to remain at recent levels. As indicated in paragraph 15, the Government is prudently limiting its recourse to borrowing on commercial terms. PART II - BAIK GROUP OPERATIONS IN THE DOMINICAN REPUBLIC 19. Since the Bank Group began operations in the Dominican Republic in 1969, the country has received three IDA credits totalling US$22 million and three Bank loans totalling US$ 54 million, making a total for the Bank Group of US$76 million. At the end of April 1976, the Bank and IDA held about US$70.6 mil- lion, including US$40.2 million not yet disbursed. One loan, for the Falcon- bridge ferronickel project, has been fully disbursed. 20. Two IDA credits were made in FY71: US$4 million for an Education Project and US$5 million for a Livestock Development Project. A third IDA credit for US$13 million was approved in FY73 for an irrigetion project (Yaque del Norte) which is being jointly financed with IDB. Two Bank loans were made in FY75: one for US$21 million to finance a tourism project and another one for US$8 million to finance a Second Education Project. IFC m-de one investment in the Domiricar. Republic: a loan end an equity comdmtment fcr US$7.L million in FY74 for a cement project, which has been fully disbursed. Execution of Bank Group projects has been, on the whole, satisfactory. Annex II cortains a summary statement of Bank loans, IDA credits, and IFC investments as of April 30, 1976,2nd notes on the execution of ongoing Bank and IDA financed projects. 21. When the Bank Group began to lend to the Dominican Republic in the late sixties, the country's precarious economic and financial situation required that all external assistance be on highly concessionary terms. Therefore, with the exception of the Falconbridge ferronickel project, an enclave export project, all lending up to fiscal year 1973 was on IDA terms, In view of the considerable economic progress achieved by the country in recent years, the Dominican Republic is no longer eligible for lending on IDA terms. However, for the reasons explained in Part I, the Dominican Republic will continue to require some external finnn- cing on concessionary terms.  22. Bank Group lending to the Dominican Republic has been primarily direc- ted at redressing the three major obstacles to economic and social development: the vulnerability of the balance of payments, high rates of rural underemploy- ment and urban unemployment, and weakness of the institutions responsible for sectoral policies, project preparation, and project execution. The ferronickel, livestock, and tourism projects are aimed at strengthening the Dominican Republic's balance of payments. The livestock and tourism projects have at the same time strengthened sectoral institutions. The education projects are directed at upgrading the capabilities of the labor force, thus helping to resolve the underemployment and unemployment problems. The Yaque del Norte Irrigation Pro- ject will assist both to improve the standards of living of the rural population es well as to increase production in a potentially rich agricultural area. 23. Although the Government has been carrying out substantial investment in road construction, allocations for maintenance have not kept up with the needs of the expanded network, both because of resource constraints and because of institutional weaknesses. As a result, there is an urgent need to rehabilitate and reconstruct some important roads which have been allowed to deteriorate, and to strengthen maintenance services. The main purpose of the proposed Project is to support the Government's efforts at strengthening highway mainten- ance organization and procedures. 24. The Dominican Republic's population density ranks among the highest in the hemisphere, and the net population growth rate would also be among the highest were it not for substantial emigration to the United States and Puerto Rico. The Goverrment has begun an active, though limited, family planning program with the support of the United Nations Fund for Population Activities and AID, 2nd has requested Bank assistance to complement the activities of these agencies. Preparations to bring a Family Welfare Project to the Executive Directors are well advanced. 250. Sugar exports are likely to remain the Dominican Republic's principal source of foreign exchange earnings in the foreseeable future. The State Sugar Enterprise, which is responsible for some 60 percent of the country's sugar output, is considering, with the assistance of Bank staff, a project designed to increase field and factory productivity. Implementation of this project would assist the Dominican Republic to maintain its competitive position in the world sugar market and to make more effective use of its limited lend resources. The Government and the Bank are also discussing the possibility of a second livestock project. 26. The U. S. Government has in the past been the Dominican Republic's major source of external finnncing, mainly for budget support and for projects in agriculture, education, health, and for industrial credit. However, as noted above, this support has been declining sharply. The IDB has been active in power, irrigstion, water and sewerage, industrial and agricultural credit, and higher education and has made one loan for ports development. iuture lending by AID is expected to be concentrated in health. agriculture and rural develop- ment, while IDB expects to continue lending in the sectors in which it has been active in the past.  Table 1: External Assistance to the Dominican Republic 1953 - 1975 (US$ million; commitments, net of cancellations) U. S. IBRD/IDA IDB Government a Lending 1953-5- 12.0 47.7 Lending 1966-75 76.0 174.0 245.8 Lending by sector Power - 67.0 16.6 Education, Health, and Housing 12.0 3.4 9.3 Agriculture, Livestock, and Fishing 18.0 45.2 26.5 Industry and Tourism 46.O 7.0 27.9 Water and Sewerage 27.5 Transportation 35.5 _ Other - 0.h 213.2 b/ T 0 T A L ................. 76.0 186.o 293.5 J US-AID and PL480; excludes PL480 grant funds. i Mainly budget support. 27. The Bank Group's share in the Dominican Republic's publicly-guaranteed external debt outstanding and disbursed, amounted to 11 percent at the end of 1975. The Bank Group's share of public external debt service was 11 percent. Its share in the Dominican Republicls external debt and debt service is likely to remain below 15 percent by the end of the 1970's. The service of public exter- nal debt in 1975 was equivalent to about 3.6 percent of foreign exchange earnings, i.e., exports of goods and non-factor services plus transfer receipts. Though some increase in this ratio can be expected, it should not exceed 10 percent in the early 1980's, provided the Government's present policy of restricting its borrowing on cammercial terms is continued. PART III - THE TRANSPORT SECTOR Main Characteristics 28. The Dominican Republic occupies the eastern two-thirds of the island of Hispaniola, which it shares with Haiti. Its territorry is crossed by low mountain ranges with fertile valleys in between. 29. Over half the population is employed in agricultui;i.. The bulk of the population is located in three areas: in the capital, Santo lhomingo, in the south; in the agriculturally rich Cibao Valley which runs parallel to the north coast, and in the eastern region, where most of the sugar cane is grown.  - 8 - 30. Because of the relatively small size of Uhe country and its economic structure, internal transport distances are short. The main exports -- sugar and ferronickel -- are produced near ports and normally require hauls of less than 100 km. Domestic trade is mainly in agricultural products from the Cibao Valley, and in industrial products and imports from Santo Domingo; their average haul distance is about 125 km. There is little or no commercial traffic with neighboring Haiti. Because hauls are over relatively short distances, road trans- port, is the most widely used mode, accountirng for about 95 percent of tot"1. internal transport of passengers and goods. 31. Railway transport accounts for 4 percent of domestic freight traffic and an insignificant proportion of passenger movement. The Government owns and operates a 112 km railway in the northeast which transports mostly agricultural products; the remainder of the small rail network is owned by the sugar companies and is generallly in poor condition. Airlines transport 4 percent of all domestic passengers and 1 percent of total freight. There are 16 local airports in service, in addition to an international airport. Coastal shipping is negligible. 32. International air traffic is through the modern Las Americas airport near Santo Domingo, which is now equipped to handle jumbo jets and to service aircraft. In order to handle an expected increase in tourist traffic to the north coast, a second international airport is being built under the Bank-financed Puerto Plata Tourism Project (1051-DO). About 90 percent of the volume of mer- chandise imports and 20 percent of merchandise exports pass through Santo Domingo, which has three harbors. Another 45 percent of merchandise exports pass through Pedernales, in the southwest near the frontier with Haiti, a port special- izing in mineral exports; and the rest is mainly exported through Puerto Plata on the north coast. 33. The major producing areas of the country have access by road, and the transport system does not constitute a serious bottleneck to the economic development of the Republic, provided it is not allowed to deteriorate. However, the productivity of ports in the area of Santo Domingo could be improved; some major roads are in poor condition, and the coimunications network in the northwestern region is inadequate. Public expenditures in transport, which reached 19.2 percent of Central Government expenditures in 1971, have declined in importance and are eBtimated to have accounted for 8 percent of expenditures in 1974. Amounts spent on highway maintenance have been inadequate and additional attention will have to be given to it. Transport Administration and Policies 34. Several Government agencies have responsibilities over various facets of transport. Their functions are not clearly defined, there are overlapping responsibilities and there is little coordination among them. Most agencies with responsibilities in transport have inadequate budgets and insufficient technical staff. In addition, traPsport priorities and policies are not clearly defined. Investment projects, which are normally financed with funds controlled by the Presidency, are selected without reference to a national transport scheme and their economic priority is not always clearly established.  - 9 - 35. To improve planning and rationalize investment decisions in the transport sector and to impiove coordination in the administration of the various modes, a transport sector study will be prepared with IDB financing. At the Government's request, the Bank has commented on the consultant's terms of reference. The IDB is in agreement with the Bank's suggestions. The Government has agreed to carry out the transport sector study by December 31, 1977 along the lines agreed with the Bank (draft Loan Agreement, Section 4.03). The Highways Subsector 36. There are approximately 10,700 km of highways in the Dominican Republic, and road communication is adequate throughout most of the country. About half the highway network was originally paved and about one-third are secondary gravel and improved earth roads. The main population and production centers are joined by four highways, which total 540 km., all starting from Santo Domingo. The most important is the Duarte Highway, which crosses the Cibeo Valley and links Santo Domingo in the south to Santiago, the country's second largest city, in the north. The network is satisfactory, except in the northwest region. Thus, the construction of additional highways at present is not of high priority, although the rehabilitation and reconstruction of certain existing highways, which have been allowed to deteriorate, requires urgent attention. 37. Traffic counts over the 1968-1973 period suggest an average traffic increase of 12 percent per annum. This conclusion is supported by data on the growth of fuel consumption and road vehicle purchases. Largely as a result of the structure of customs duties, which favor light vehicles over medium-size trucks and buses, the vehicle fleet, which reached 94,000 units in 1974, includes a large proportion of small pick-ups and vans, comparatively few trucks, and even fewer buses. Cars, taxis, and light vehicles represent 85 percent of the traffic in the main highways, which results in traffic congestion and artificially creates the need to enlarge the main highways. The previously mentioned trans- port sector study (see paragraph 35 above) is expected to recommend means by which the efficiency of highway use could be improved. Highway Acdminiistration 38. The Government agency which is principally responsible for highway construction and administration is the Secretariat of State for Public Works and Communications (Secretaria de Estado de Obras Pu'blicas y Comunicaciones - SEOPC). The SEOPC is divided into two loosely defined Sub-Secretariats. One is responsible for programming, planning, designing, building, and maintaining primary and secondary roads, as well as for maintenance of some ports and air- ports. Another Sub-Secretariat is responsible for highway transit regulation, for postal services and telecommunications and for administration of the small public railways system. The General Directorate of Rural Roads, a subdivision of SEOPC which is funded directly by the Presidency, is responsible for the administration of' local roads. 39. The consultants who assisted in the preparation of the proposed pro- ject reviewed highway administration and made several recommendations on SEOPC's organization. The consultant's recommendations on internal SEOPC practices --  - 10 - such as the reorganization of the Secretariat along functional lines -- have been implemented during the preparation of the proposed Project. However, those recommendations which have implications on the functions of other Govern- ment agencies involved in transport administration will only be taken into account when the conclusions of the IDB financed inter-sectoral transport study become available. Highway Construction 40. SEOPC has been responsible for preparing the final design for all primary and secondary roads and f'or supervising their construction. Up to about five years ago, detailed engineering was inadequate and construction supervision insufficient. Initial construction problems have increased the maintenance requirements, and some roads must be reconstructed or rehabilitated before routine maintenance can be effectively carried out. During the past live years, however, the quality of construction has improved substantially: acceptable detailed engineering is now being prepared and acceptable geometric standards are used. Improved supervision has also resulted in better construction. 41. Most road construction work has been carried out by local firms of which the larger ones are associated with international firms. The total capacity of the contracting industry is about RD$40 million per year, but only three or four firms, all of which have international affili^tions, are capable of undertaking works of up to RD$7.0 million per year. Contracts have normally been awarded by the Office of the Presidency without competitive bidding and at a price determined by SEOPC. Highway Maintenance 42. The m?jority of the Republic's highways suffer from either complete lDck of' maintenance or lack of proper maintenance. Equipment and spare parts and a well defined maintenance program are lacking; accounting of field and workshop maintenence costs are inadequate. Although SEOPC's budget expenditure for routine ma-intenance is below requirements, a redefinition of procedures and the rehabilitation of workshops are needed before maintenance expenditures can be substantiplly increased to good effect. L3. To carry out maintenance work, the Government has been employing a large number of people, part-time and at low wages, rather than fewer people with higher qualifications and pay. While this policy msy be justified in the light o,' high rates of unemployment among unskilled workers in the Dominican Republic, the large labor force (about 7,000 full and part-time workers) working on maintenance has not been effectively employed. Management has been weak and proper work procedures and standards have been lacking. bL0 The heterogeneous maintenance equipment fleet has not itself been adequately maintained, and about three quarters of the fleet is old, out of order and i, need of replpcement. Workshops have been neglected and cannot adequately hnndle normal equipment maintenqnce. The proposed Project aims primarily at addressing the problems associated with highway maintenance described above by financing a technical assistance program (designed to improve maintenance practices and procedures) and the necessary equipment and spare parts.  SECTION IV - THE PRJWECT 45. In 1970, the Government requested that the Bank Group consider financing a highway project and, after a project identification mission visited the Dominican Republic early in 1971, it was agreed with the Government that a highway maintenance, rehabilitation, and administration study should be pre- pared. UNDP granted US$400,000 for the preparation of such a study, for which the Bank was named Executing Agency. The study, which serves as the basis for the proposed Project, was carried out by Lamarre Valois International (LVI) of Canada. L6. Bank missions visited the Dominican lRepublic in June-July 19h7 to appraise a project on the basis of the LVI study, and again in November 1974 to update cost data. The scope of the Project was subsequently substantially modified as a result of the Government's decision to limit its request for Bank financing to the urgent maintenance program and the reconstruction of one key road. A post-appraisal mission visited the Dominican Republic in March 1976 to redefine the civil works component of the Project. A report entitled "Appraisal of a Rood Maintenance and Reconstruction Project" (No. 1216-DO), dated June 21, 1976 is being distributed separately. The matin features of the lonn and Project are summarized in Annex III. Loan negotiations were held in Washington, from May 17 to May 21, 1976. The Dominican negotiating team was led by Mr. Manuel Alsinn Puello, Secretary- of Public Works and Communications. Project Objectives and Description 47. The proposed Project would be the first financed by the Bank in the transport sector in the Dominican Republic. Its main objective is to bring about an improvement in highway maintenance procedures and planning. The Project would consist of the following: (A) Reconstruction (i) Reconstruction of the 19 Im Puente Camu-San Francisco de Macoris Road. The road is heavily travelled and feeds into the main trunk road from Santo Domingo to Santiago. (ii) Rehabilitation, widening or reconstruction of bridges on the Puente Camu-San Francisco de Macoris Road. (B) A road maintenance program, including: (i) purchase of highway maintenance equipment, workshop tools and equipment; (ii) Purchase of spare parts;  - 12 - (iii) Rehabilitation and reconstruction of workshops; (iv) Improvement of maintenance procedures and planning. (C) Provision of consulting services for: (i) Supervision of the reconstruction of the Puente Carru-San Fra.ncisco de Macorl-s Road; (ii) Technical assistance to implement the maintenarncc program. 48. The Project contains consulting services for construction s'1pervision and to provide technical assistance for the maintenance program. It is estina- ted that 100 man-months of consulting services will be required for construction surervision. The estimated total cost of these consultant services is USS2K'CCC oran average cost of US$2,O0C per man-month. In the case ol the technical assistance for maintenance, it is expected that 8C man-months of consulting services will be required. The estimated totol cost of these consultant ser- vices is US16C0,CCOCor an average cost of US$7,500 per man-month. The cost of maintenance consultants is higher than that for supervision becauFe of the snecializeq nature of this work. 4 0. The bridge works included in the Puente Camu-San Frencisco de Macoris Roa2 will be carried out without Bank financin;g. The Government has agreed to send to the Bank the design and specifications of such bridges (which will be consistent with the design standards of the road) before disbursements are made for the works on the road (dreft Loan Agreement, Schedule 1, Paragrnph i~ (b)). The Government also agreed to complete the bridge works by the time the road is completed (dreFt Loan Agreement, Section 3.06). >C. iIew maintenance equipment and equipment spares to rehabilit-te use- ful units now in the fleet will be acquired tc bring the mTintenance fleet to an -cceptable level. A list of maintenaince equipment and workshop tools and equipment has been agreed with the Government. F'urther, the Government has af reed sc provide evidence of satisfactory progress on the construction of the Santiego workshop and to rehabilitete or reconstruct the other workshops included in the Froject before any disbursements are made for mrintenance equip- ment (draft Loan Agreement, Schedule 1, 1-aragraph 1 (c)). The irrrovements in hia,h.Yray m:int,en::rice procedures to be imnlemented under the Prciject are based on the recomrmendaviorn., Ynk: bG,- the conn,c ts (LVTI). Te