Ecuador - Fifth Highway Project

FILE COPY Document of Tr The World Bank 1 L FOR OFFICIAL USE ONLY L. Report No. P-2071-EC REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF ECUADOR FOR A FIFTH HIGHWAYS PROJECT May 6, 1977 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 = Sucre (S/.) US$1 = S/. 25 S/.1 = US$0.04 S/.1,000 = US$40.0 S/.1,000,000 = US$40,000.00 Fiscal Year: January 1 to December 31  FOR OFFICIAL USE ONLY INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF ECUADOR FOR A FIFTH HIGHWAYS PROJECT 1.. I submit the following report and recommendation on a proposed loan to the Republic of Ecuador for the equivalent of US$17.5 million to help finance a fifth highways project. The loan would have a term of 17 years, including three and a half years of grace, with interest at 8.2% per annum. PART I - THE ECONOMY 2. A report entitled "Current Economic Position and Prospects of Ecuador" (No. 1382-EC), based on the findings of an economic mission which visited Ecuador in August/September 1976 and in March 1977, was distributed to the Executive Directors on April 1, 1977. Annex I summarizes the main economic and social indicators. 3. Until the emergence of petroleum as a major source of export earnings Ecuador depended mainly on agriculture. Its major exports were bananas, coffee, cocoa and sugar. Non-traditional exports, even though they increased rapidly during the 1960s, only represented a small fraction of total export earnings. Ecuador's manufacturing sector has been dynamic, growing at an average annual rate of 8.7% during 1965-75. It consists mainly of small private firms in a great variety of industries. Petroleum exports began in 1972, and they now make up half of total exports. Nevertheless, petroleum exports only average about US$75 per person -- about one-tenth the per capita exports of Venezuela. Ecuador is the smallest exporter in OPEC. In spite of petroleum exports, Ecuador is one of the poorest countries in Latin America, with one of the fastest rates of population growth. Only Haiti, Bolivia, Honduras and El Salvador have lower GNP per capita (1976 Bank Atlas figures). Likewise, Ecuador is among the six Latin American and Caribbean countries with the lowest protein consumption per head; the same is true for its consumption of energy per head. 4. The recent petroleum-boom has improved the country's balance-of- payments and fiscal situations and has enabled the Government to expand public investment substantially. Ecuador's longer run development prospects have been greatly strengthened by the petroleum revenues. The main problem of economic management in the years ahead will be to maintain a reasonable balance between the country's petroleum output and exports, on the one hand, and the absorptive capacity of the economy (and, particularly, of the public sector), on the other. Until now this balance has been fairly well main- tained, and the inflationay problems of 1974 and 1975 have come under better control in 1976. The fiscal and balance-of-payments problems attending 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/IFC authorization.  - 2 - the decline in petroleum earnings of late 1974-75 due to changes in petroleum pricing and pipeline disruptions, have also largely been resolved through a combination of prudent fiscal and monetary policies and the resolution of outstanding issues between the Government and private oil companies. 5. Petroleum policies will have a decisive influence on the country's growth prospects. The main problem is that crude reserves are now being extracted by conventional methods faster than they are being replaced, owing to the virtual absence of exploration and development activity. A resumption of such activity on a substantial scale is warranted by the size of the in situ reserves. The main responsibility for carrying out a petroleum develop- ment program is CEPE's (the State Petroleum Corporation), which recently acquired the assets of Gulf Oil and now controls 62.5% of the Texaco/CEPE Consortium which produces all of Ecuador's petroleum exports. The Govern- ment has recently decided to step up investment in petroleum exploration and development, so as to increase production. To this effect, CEPE will receive a larger share of petroleum revenue than in the recent past for investment, and private petroleum enterprises will be encouraged to invest. These policies could lead to an increase in petroleum production from about 66 million ton/year (1973-76 average) to about 86 million ton/year within two years. Prospects for natural gas development in the Gulf of Guayaquil may be good, and further exploration is warranted. 6. Ecuador has enough fertile land to expand agricultural and livestock output at reasonable cost. Over the years agriculture has been the most important source of employment, and improvements in the standard of living of the majority of lower income Ecuadorians will hinge on increased agricultural production and efforts at incorporating farmers more fully into the market economy. Prospects for industrial development are favorable and have been enhanced by better availability of medium-term credit (due partly to the introduction of more realistic interest rates in 1976) and by improvements in physical infrastructure (transport, electricity power, water). 7. While in the past Ecuador suffered from a lack of development projects, project preparation has improved considerably in the public sector, partly as a result of the creation of a National Preinvestment Fund (FONAPRE) supported by petroleum revenues and external financing institutions. The Government's record in the allocation of petroleum revenues is encouraging since they have been largely devoted to economic and social development projects. Out of 1976 petroleum exports of US$565 million (net of barter arrangements with Venezuela), US$480 million accrued to the public sector. The National Development Fund (FONADE) created to channel petroleum revenues into social and economic development projects absorbed US$152 million, and the next largest recipients were the Central Government, the armed forces, the national power authority, and CEPE. The balance went mainly to the National Housing Bank, the Ministries of Labor, Education and Health, as well as the universities. The past allocation of petroleum revenues suggests that the Government will continue to give priority to economic and social projects.  8. Public investment has increased from 5-6% of GDP in the early 1970s to 9% in 1976, while GDP was growing at a rapid rate. If petroleum production rises from its 1976 level of 65.9 million barrels to about 90 million barrels by the early 1980s, Ecuador should be able to command the financial resources required for a further increase in public investment. The growth of public investment, particularly in petroleum, electric energy, agriculture and rural development, transport, industry, health and education, should encourage the further development of the economy, particularly manufacturing, agriculture and construction. Ecuador's public investment effort will require continuing support from external financing institutions. Such assistance is also needed to help finance the substantial balance of payments deficit which would accompany higher levels of public investment. It should include an appro- priate blend of financial assistance from international institutions and of borrowing at commercial terms from other external sources. This would enable Ecuador to receive the external resources required to finance its investment program while limiting the increase in the country's debt service ratio from its 1976 level of near 7% to about 12% by the early 1980s. 9. The prudent fiscal and monetary policies pursued during 1975 and 1976 have been reflected in a significant reduction in inflation and in a substantial increase in foreign reserves (during 1976 these increased by US$189 million to US$515 million, equivalent to nearly five months imports). The 1977 budget confirms that the Government intends to continue to pursue prudent fiscal and monetary policies, thus reinforcing Ecuador's credit- worthiness for further lending on Bank terms. PART II - BANK GROUP OPERATIONS IN ECUADOR 10. Starting with the first loan in 1954, the Bank and IDA have made eighteen loans and six credits to Ecuador totaling US$230.8 million, net of cancellations. On March 31, 1977, the Bank and IDA held about US$184.4 million including about US$114.0 million not yet disbursed. IFC has made six loans and investment commitments in Ecuador, two in a large textile company, three in a development finance company, and one in a sugar mill, amounting to US$9.4 million of which, as of March 31, 1977, US$3.1 million has been repaid, sold, terminated or cancelled. IFC is currently examining other investment prospects. Execution of Bank Group financed projects has, on the whole, been satisfactory, even though it has not been free of difficulties often caused by the insufficiency of the country's managerial and technical resources--a constraint that still is a major obstacle for Ecuador's economic and social development. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments'as of March 31, 1977 and notes on the exe- cution of ongoing projects. 11. Bank and IDA lending were originally concentrated in transportation and power, where there were--and still are--substantial deficiencies to be overcome. At the end of 1976, these two sectors accounted, respectively, for  - 4 - about 42% and 7.3% of total past lending. Most of the lending for trans- portation was to improve the road network of the country, although two loans were made to help finance port facilities in Guayaquil. Lending for power has been concentrated in improving generation and distribution facili- ties in Quito. The first livestock development loan (FY67) marked the begin- ning of a diversification of lending; since then, the Bank and IDA have made seven more loans and credits for agriculture and fisheries, three loans to support industrial development through development finance companies, one loan and one credit for education, one loan for water supply, one loan for improved seeds production and one loan to assist Ecuador in the preparation of rural development projects. Bank/IDA assistance for the directly productive and social sectors has grown to about 50.6% of total lending. 12. External development financing has also been provided by IDB and AID and, to a lesser extent, by other bilateral sources. External financing by sector and by source through December 31, 1976 is summarized below: Other Bilateral IBRD IDA IDB US /1 Sources /1 Lending 1954-64 54.0 8.0 35.3 62.7 0.2 /2 Lending 1964-76 140.5 28.9 349.8 73.0 96.5 /3 Transport 44.0 - 65.1 - 0.8 Power - 6.8 92.7 6.2 67.2 Education 4.0 5.1 4.1 5.3 - Health and Sanitation 23.2 - 49.3 9.5 4.8 Agriculture and Fisheries 15.3 17.0 64.6 29.1 - Industry 54.0 - 53.8 7.8 8.7 Urban Development - - 14.4 - - Other - - 5.8 15.1 15.0 194.5 36.9 385.1 135.7 96.7 /1 Includes official export credits. /2 Statistics on lending during this period were probably incomplete. /3 Through December 31, 1975 only. IDB is the largest single lender, having extended most of its loans to Ecuador from the Fund for Special Operations, which has normally carried a 2% interest rate, a ten-year grace period, and repayment terms of up to 40 years. It is likely that IDB will remain the major development lender in the immediate future, although its terms have become less concessionary than in the past.  Meanwhile, no new AID commitments have been made since FY73. There were in calendar year 1975 over US$205 million of new commitments of external finance, including those from international institutions, suppliers, commercial banks and some bilateral sources. Education, health and other socially oriented activities, as well as agricultural development, have been receiving increas- ing attention from the external lending agencies in recent years. IDB, AID and the Bank Group have coordinated their efforts in these fields to assure the most effective use of all available resources. 13. Bank lending is aimed at supporting the Government priorities out- lined in Part I above. This objective is to be met by emphasizing projects that will help strengthen the institutional framework for development policy-- including project planning, preparation and implementation--in agriculture and rural development, transportation and other high priority activities. The Bank is undertaking institution-building efforts in these fields, which should yield tangible benefits for Ecuador. Considering the extreme poverty in which most of the Ecuadorian population still lives, the current Bank program includes substantial support for integrated rural development projects and important assistance for the development of the country's agricultural potential. All projects programmed for this sector include sizable technical assistance components, as a major part of the overall institution building effort referred to above. Projects in the agricultural sector planned for the next two years include an oil palm project, an irrigation project, an agricul- tural credit project and two rural development projects. 14. The proposed Fifth Highways Project is relevant to the above objec- tives in several respects. The roads to be built--discussed in further detail in Part IV of this Report--would improve the access of agricultural production to Ecuador's major export center and two of the country's major consumption markets. One of the two roads would also open to full production a potentially important agricultural area, in which other projects are being prepared with Bank assistance. Finally, a small technical assistance component will comple- ment a major ongoing effort undertaken by the Bank in the transportation sector under the Fourth Highways Project, approved during FY76. PART III - THE TRANSPORT SECTOR IN ECUADOR Background 15. Ecuador's geographical configuration, comprising three widely dif- fering regions - the Costa, the Sierra and the Oriente (Amazon) - has been a determining factor in the development of its economy and of its transport sys- tem. The principal transport flows follow several corridors: (a) the coun- try's most important corridor links Quito, the capital, to Guayaquil, the main port and industrial center; (b,) two North-South corridors serve the Costa and Sierra regions extending from the Colombian to the Peruvian borders; and finally (c) the recently developed pipelines and road links between the Oriente and the coast channel mainly crude oil for export. The highway network (see  - 6 - map attached) developed largely after the Second World War, increasing con- siderably since the 1960s and reaching a total of 26,500 km in 1976, of which 13,000 kin, including trunk roads and important secondary roads, are under the responsibility of the Ministry of Public Works and Communications (MOP). iiiglhways 16. Ecuador's domestic transport is based essentially on roads for gen- eral cargo and passengers, with petroleum products channeled by pipelines. In 1974, total freight movements amounted to about 10.7 billion ton/km, of which 5.4 billion were carried by pipeline. Road transport accounts for nearly 95% Of total intercity freight transport and about 90% of total intercity public- service passenger traffic. Several indicators related to overall road traffic suggest that road traffic has expanded at about 10% p.a. over the last decade. 17. The importance of the two major urban centers of Quito and Guayaquil is shown by the fact that about 62% of the total vehicle fleet is registered in thie provinces of Pichincha and Guayas. The vehicle fleet more than doubled in the period 1970-76, reaching 125,000 vehicles in 1976. The truck and bus fleet grew rapidly during the last decade and so did its share of the traffic. High demand and thie absence of strong competition from railroads stimulated development of intercity bus operations which, on the whole, seem adequate, in terms of price, quality of services, and volumes supplied. Inter-city freight operations are also generally adequate. The largely unregulated trucking industry competes actively for traffic. 18. Road transport is regulated and administered by a variety of Govern- ment agencies, including MOP, the Ministry of Labor and Social Welfare, and the Interior Ministry. Passenger traffic is generally regulated, including routing and tariffs. Regulations for trucking are less strictly implemented. Overloading of trucks is still a problem in spite of attempts by MOP to improve the situation. In the early 1970s, four weighing stations were installed on trunk roads under an earlier Bank project, but shortage of adequately trained personnel slowed down the establishment of effective control. The Covernment is preparing to take acLlon under the Fourth Highway Project (Loan 1231-EC, 1ay 1976) to establish effective control and enforcement of legal axle road regulations. In view of the importance of this matter for the protection of large road investments carried out over the last ten years, similar provisions concerning the enforcement of axle load limits are incorporated in the pro- posed loan. (Section 4.03 (c) of the draft Loan Agreement.) 19. Since the 1950s, Ecuador has undertaken a major effort to improve and complete its trunk road system. Over the period 1966-75, road construc- tion received by far the largest share of all transport infrastructure invest- ments, accounting for nearly 30% of all public investment. Large areas, however, such as the sparsely populated Oriente lowlands east of the Andes ani' most of the northwestern coastal region, remain isolated. There is a continued need for agricultural feeder and secondary roads. 20. Within MOP, the Directorate General of Public Works (DCOP) is respon- sible for higwhays. DGOP does not have enough qualified personnel at the pro- fessional level. Traffic data are not available for planning and programming  - 7 - purposes; the 1973 Highway Master Plan has not been updated yet; and coordi- nation with other transport agencies is weak. Recent experience has shown that MOP lacks sufficient capability to define adequately the scope of pre- investment studies, and to contract and supervise consultants. The Government undertook, within the framework of the Fourth Highway Project, to improve high- way planning, particularly as regards traffic data collection and evaluation, and to build up MOP's capacity for pre-investment studies. Technical assist- ance and institutional measures under the above project are now being initiated. 21. Highway expenditures are financed through the general Government budget, under DGOP allocations. Recurrent expenditures for highway mainte- nance, periodic improvements, administration and supervision, including the total of MOP's operating budget, absorb about 40% of the overall MOP expendi- tures for highways. Capital expenditures in 1975 amounted to about 60% of total MOP expenditures, reaching about US$30 million equivalent. Estimated contributions from road user charges cover current highway expenditures as well as roughly one-third of capital outlays. Retail prices for gasoline and diesel oil are low in comparison with international levels. On the other hand, high import duties tend to discourage renewal of the fleet. The need to rationalize road user charges will be reviewed by the transport planning unit to be set up within the framework of the ongoing Fourth Highway Project. 22. A large part of the highway construction work in Ecuador, in- cluding projects financed externally, has been awarded to local contractors. To improve their performance, technical assistance is being initiated under the ongoing Fourth Highway Project to review the road construction industry and related Government policies and practices. 23. Highway maintenance is performed through seven regional divisions of the Maintenance Directorate under DGOP. In spite of earlier programs, further improvement is still necessary. The level of MOP's overall mainte- nance expenditures has been increased in recent years, and the current level seems to be adequate for the trunk road network under MOP's jurisdiction. However, management procedures and work techniques have to be improved in order to ensure efficient use of available resources. Workshops and garages also require urgent improvements. An important element of technical assist- ance, now being initiated, has been included in the ongoing Fourth Highway Project for highway maintenance. The covenants of Loan 1231-EC concerning the strengthening of highway maintenance would also be covenants in the proposed Loan Agreement. (Section 4.03 (a) and (b) of the draft Loan Agree- ment.) 24. Planning and construction of feeder roads are closely related to the agricultural sector and require coordination with agricultural development programs for extension services, agricultural credit, improved marketing, etc. Although feeder roads have received increasing attention in recent years as the pressure increased for opening previously uncultivated land of high poten- tial, the preparation of sound feeder road projects and accompanying develop- ment programs has been inadequate because of poor coordination among the  - 8 - various Government agencies involved. Therefore, following the recommendations of the recent Bank economic mission (November 1976), an element of technical assistance to MOP has been included in the proposed project to improve pl7anning and preparation of feeder roads. 25. Beginning with the first loan to Ecuador (FY54), the Bank and IDA have lent US$97 million for transport, out of which US$50.5 million were devoted to highways. The Bank has made four loans for this purpose, in FY54, FY58, FY64 and FY76; the third of these loans was associated, in a consortium project, with an IDA credit and loans from USAID and IDB. The first two loans helped to finance the paving of about 1,100 km of roads, primarily in the Guayas River basin, and others linking Guayaquil with the Sierra, and Quito with the Northern coast. The third loan and its co-financing helped to carry out parts of the Government's 1964-73 transportation investment program. Both the second and third projects included highway maintenance programs which however fell somewhat short of expectations, in particular because of lack of continuity in the middle and high echelons of DGOP. The first three projects contributed to the completion of the main road network in the Coast agricultural area, while important links between this area, the Sierra and the Northwest were also improved. The Bank's experience with these three projects has been generally good, although the magnitude and complexity of the third one required special coordination among the lending agencies and a very long disbursement period. 26. The Fourth Highway Project and the proposed Fifth Highway Project emerged from a comprehensive review of the transport sector carried out in 1974. While originally conceived as a single project, it was later staged into two projects, in order not to delay institutional improvements in the transport sector until engineering for the Duran-Boliche road was completed. The Bank loan for the Fourth Highway Project was approved on March 30, 1976 and became effective last October. The Fourth Highway Project aims to improve planning and management for the transport sector as a whole, as well as for the highway subsector, while providing for the upgrading of a high-priority road. Last March, MOP invited consultant firms to submit proposals for the various technical assistance programs included in the project; bids for highway construction were opened on April 18 and are being evaluated. The improved MOP planning and operating capabilities to be acquired from the technical assistance provided under the project are expected to strengthen MOP's ability to execute successfully both the Fourth and the proposed Fifth Highway Projects. Transport Policy, Planning and Coordination 27. In September 1974, a Bank mission visited Ecuador to study the transport sector in depth. The mission concluded that: (a) although service levels were generally adequate, upgrading of the system would be necessary to increase its efficiency and to accommodate the growing requirements of the economy; and (b) serious institutional deficiencies would have to be remedied in the areas of pricing policies, coordination, planning, and project pre- paration to allow the continued development of the system. Transport sector investments in the next few years should address the following needs:  - 9 - (a) Highway Infrastructure - the need to improve the trunk road network, including integration of the Oriente, improvement of north-south corridors and access to major cities, in particu- lar Quito and Guayaquil, expansion of secondary and feeder road systems, and improvement of road maintenance; and (b) Other Modes - the improvement of seaport capacity and maritime shipping, greater use of inland waterways, in particular in the Oriente; definition of the future role of the railway, and expansion and improvement of air transport services. 28. Because of the fragmentation of sector management and the fact that the agencies involved do not have the adequate capacity to ensure the functions of coordination and planning, the issues of intermodal planning for meeting long-term demand for transport have been neglected. Within the framework of the ongoing Fourth Highway Project, the Government agreed, in a first stage, to establish within MOP an adequately staffed unit for planning and coordination of land transport (road and rail); and, in a second stage, to establish an appropriate agency with enlarged responsibilities for all modes. After an initial delay, MOP has initiated recruitment of necessary technical assistance which is a prerequisite for the above measures. PART IV - THE PROJECT Project Description 29. A Staff Project Report entitled "Fifth Highway Project - Ecuador" (No. 1453b-EC) is being circulated separately to the Executive Directors. Summary statemetnts oTI the proposed project and loan are contained in Annexes III and IV to this Report. The proposedl project is a complement to the ongoing Fourth Highway Project. It would include: (a) civil works and related supervision for the construction of a four-lane paved highway (25 km) between Duran and Boliche; (b) civil works and related supervision for the construction of a development road between Puerto Ila and Doblones (29 km) and for the construction and improvement of about 75 km of lateral feeder roads in the area of influence of the Puerto Ila-Doblones road; and (c) pre-investment and organizational studies for the prepara- tion of a regional secondary and feeder road program, principally in the provinces of Guayas, Los Rios and El Oro. Implementation of the project is expected to take about three and one-half years from mid-1977 to end-1980.  - 10 - Duran-Boliche Road 30. The Duran-Boliche road is one of three major access roads to Guayaquil, the country's largest urban center and main seaport. The present two-lane road with its poor riding surface has inadequate capacity for the relatively high traffic volumes (at 5,800 V.P.D. with about 48% heavy vehicles), carrying passengers, agricultural products for consumption and export, and imported goods between the Costa and Sierra regions and the port city of Guayaquil. It needs constant and costly repairs due to structural deficiencies compounded by periodic flooding. 31. The proposed works would consist of constructing a four-lane divided highway (25 km in length) between the Guayas bridge (slightly north of Duran) and the crossroad of Boliche. The works would also include one grade-separated interchange, one at-grade intersection, and one underpass under the approach span of the existing Guayas bridge at the Duran end of the road. Two critical aspects received particular attention during project preparation: (i) the fact that the road crosses a flood plain and (ii) the approach to the Guayas Bridge. Design standards and engineering and cost estimates have been reviewed during appraisal and after subsequent minor design revisions they are accept- able. 32. MOP has taken two specific measures to remove potential sources of delay in the implementation of civil works: (a) MOP and the "Consejo Municipal de Guayaquil" have confirmed their agreement concerning the design of the approach to the Guayas bridge and the scope of related right-of-way acquisi- tion, including the specific properties to be affected thereby, and arrangements for securing and financing such acquisition. (b) MOP and the "Consejo de la Provincia de Guayas" have con- firmed their agreement concerning the location and design for the new Guayas bridge toll collection facilities which would be relocated under the project. 33. Although some additional urban traffic would be generated by the project, it would have no adverse environmental impact on the area. It is not expected that any significant urban development would take place in the existing low, rural land adjacent to the proposed road, although some develop- ment is expected along the first 1.5 km. The alignment of the proposed road would not incerfere with the planned development of the Guayaquil metropolitan area (including Duran), which is currently under study by a UNDP-financed Urban Development Planning team. Puerto Ila-Doblones and Related Lateral Feeder Roads 34. The proposed 29-km Puerto Ila-Doblones penetration road will give access to a large fertile area hitherto largely isolated and undeveloped, west  of the existing Santo Domingo-Quevedo highway. This road is expected to pro- duce substantial benefits by providing improved all-weather transport services to those areas already under cultivation, thus facilitating their full develop- ment, and by opening for development new agricultural and forested areas. 35. The proposed works would consist of: (a) the Puerto Ila-Doblones road (29 km), with two major bridges, and (b) a network of lateral feeder roads totaling about 75 km. Final design work for the Puerto Ila-Doblones road was incomplete at the time of appraisal, but supplementary engineering carried out by MOP with assistance of a local consultant (ASTEC), following Bank recommendations, has sufficiently refined the cost estimate, for purposes of determining financial requirements. Further soils studies for bridge foundation and possible subsequent design revisions are still necessary for the finalization of engineering and bidding documents. MOP has agreed to carry out such supplementary engineering starting May 1977. The exact scope and implementation schedule of the necessary supplementary soil studies and engineering, which would take about four months, have been reviewed and agreed during negotiations. The possibility of effecting cost reductions in the surface course of the Puerto Ila-Doblones road has also been reviewed and agreed at the time of negotiations. Completion of the above engineering and design revisions would be a condition for disbursement of the proceeds of the proposed loan allocated to finance the Puerto Ila-Doblones project component. (Paragraph 4 (c) of Schedule 1 to the draft Loan Agreement.) 36. The location and approximate length of lateral feeder roads required to serve the area of the Puerto Ila-Doblones road have been defined and esti- mated on the basis of a preliminary survey. Detailed definition of alignment, engineering, quantity takeoffs, contracting documents and cost estimates will be prepared under the Rural Development Study financed under the ongoing Fourth Highway Project (Loan 1231-EC). In order to ensure the proper prepara- tion and timely execution of this project component, the Government will prepare, not later than December 31, 1977, a program of feeder roads taking into account the recommendations of the abovementioned study. Adoption of such a program, acceptable to the Bank, would be a condition for disbursement for feeder road construction under the proposed loan. (Paragraph 4 (b) of Schedule 1 to the draft Loan Agreement.) 37. In order to help realize the potential increase in agricultural production possible after the completion of the project, the Government agreed (Section 3.04 of the draft Loan Agreement), that it would: (a) provide extension services to local farmers starting in 1979, in accordance with a program acceptable to the Bank, to be prepared no later than December 31, 1977, in light of the recommendations of the Rural Development Study financed under Loan 1231-EC; (b) make credit available to local farmers for complementary on-farm investments in accordance with arrangements accept- able to the Bank, to be prepared not later than the end of 1977, in light of the recommendations of the Rural Develop- ment Study financed under Loan 1231-EC; and  - 12 - (c) (i) review land tenure patterns in the area of influence of the project taking into account the conclusions of the Rural Development Study financed under Loan 1231-EC, and (ii) discuss, not later than the end of 1978, appropriate measures designed to ensure a reasonably equitable distribu- tion of the benefits of the project among farmers within the project area. Cost Estimates and Financing 38. The total cost of the project is estimated at about US$38.1 million, of which about US$17.5 million, representing the estimated foreign exchange component, would be financed by the proposed Bank loan. The balance would be financed by the Government. 39. The estimates of construction costs for the Duran-Boliche and Puerto Ila-Doblones roads are based on detailed engineering and current prices for similar works. The additional engineering discussed in paragraph 35 above is not expected to result in substantial increases in these cost estimates. The estimates for the 75 km of lateral feeder roads are based on average per km costs for similar works. Cost estimates for consulting services are based on recent contracts for similar services with Ecuadorian firms as well as joint ventures of Ecuadorian and foreign firms. PROJECT COSTS Cost in US$ (Million Equivalent) Local Foreign Total % Bank Civil Works (a) Duran-Boliche (25 km) 7.7 7.7 15.4 (b) Puerto Ila-Doblones 3.9 2.7 6.6 (c) Lateral Feeder Roads (75 km) 1.5 1.0 2.5 Sub-total 13.1 11.4 24.5 47 Consultant Services (d) Construction supervision 1.2 1.2 2.4 (e) Preparation of Feeder Road Program 0.2 0.4 0.6 Sub-total 1.4 1.6 3.0 53 Base Cost (up to mid-1977) 14.5 13.0 27.5 Contingencies 6.1 4.5 10.6 TOTAL PROJECT 20.6 17.5 38.1 46  - 13 - 40. The foreign exchange component of the civil works has been estimated at 47% on the average. It is expected that construction of the Duran-Boliche four-lane divided highway would be done by a joint venture of local and foreign contractors, and the Puerto Ila-Doblones road and the lateral feeder roads, which are of smaller scope, are expected to be constructed entirely by local contractors. The foreign exchange component of consultant services has been estimated at an average of about 53%, assuming that supervision of construction (about 450 man-months of professional services) would be con- tracted to local firms, whereas the preparation of the regional secondary and feeder roads program (about 120 man-months of professional services) would be carried out by a blend of foreign and local consultants. The cost per man/ month for professionals would average US$5,200 ranging, for different services, from US$2,000 to US$6,000. A contingency allowance of 10% has been included to allow for increases in construction quantities for civil works. 1/ An allowance of about 30% of total project base costs has been allowed for price variation for both civil works and consultant services. Execution 41. Within MOP, the DGOP would be responsible for execution of the project. During negotiations, the Government has agreed to ensure adequate liaison and coordination with other Government agencies, such as the Ministry of Agriculture, the Land Reform and Settlement Institute (IERAC), Water Resources Institute (INERHI), and the Guayas River Basin Development Commission (CEDEGE),to assist MOP in the preparation of the regional secondary and feeder road program. Procurement and Disbursements 42. Civil works for road construction and improvement totaling about 130 km would be carried out on the basis of unit price contracts awarded after international competitive bidding in accordance with the Bank's Guidelines. The works of the lateral feeder roads are not likely to attract international bidders, and would generate adequate competition among local contractors. Consequently, invitations to bid for these works would not be published abroad; publicity within Ecuador (including notice to Bank member countries' embassies) would be sufficient. For bidding purposes, the works would be divided into lots of appropriate size, and firms prequalified in a manner acceptable to the Bank would be allowed to bid for any lot or combi- nation of lots. Specific arrangements for the division of civil works in lots have been discussed and agreed at the time of negotiations. General terms and conditions of civil works procurement including, specifically, prequalification procedures, bid and performance bonds and guarantees, the price variation formula and the specific cost items to be covered by such formula, were also reviewed and agreed during negotiations. 1/ 20% for lateral feeder roads.  - 14 - 43. Disbursements of the loan would be made as follows: (a) for civil works, 47% of total expenditures; and (b) for construction supervision and for the preparation of the regional secondary and feeder road program, 53% of total expenditures or 100% of the direct foreign exchange cost. The Bank would finance retroactively up to US$150,000 equivalent of expenditures on consultants' services for the Duran-Boliche road to be incurred after May 1, 1977. Economic Evaluation (i) The Duran-Boliche Road 44. The economic justification of the proposed Duran-Boliche highway is based on benefits resulting from (a) reduction of vehicle operating costs; (b) passenger time savings; (c) reduction of road maintenance costs; and, (d) reduction of road accicdents. Present traffic volumes on the Duran-Boliche highway vary from 5,800 to 4,330 vehicles per day and are among the highest in the country. Heavy vehicles, which account for about 48% of the total traffic, transport passengers and goods between production centers in the Costa and Sierra and the port city of Guayaquil. A variety of agricultural products, including bananas, rice, sugar and livestock, for local consumption and export, as well as imported goods are carried on this highway. Vehicle operating costs savings accounted for about 55% of total quantifiable benefits for existing and projected traffic volumes. Savings in time is one of the important reasons for improving the existing road, which suffers from con- gestion and on which average speeds are low. Passenger time savings accounted for about 35% of total quantifiable benefits, while reductions of road mainte- nance costs and of accidents accounted for the remaining 10%. Benefits derived from reduction of traffic accidents were based on local observations and the reductions in accident rates when upgrading from two lanes to a four- lane divided highway observed under similar conditions. 45. The proposed road, which accounts for 56% of project costs, is well justified, with an economic return (ER) based on best estimates of 20%, including time benefits. The ER without time benefits is 14%. Sensitivity analyses have been carried out on the main parameters affecting the economic evaluation (cost and benefits), showing that the ER would, even under adverse assumptions, still be acceptable. An economic evaluation on the interchange at the junction with the Babahoyo road was made separately. The results indicate that the marginal investment in the proposed grade-separated inter- change in comparison with a controlled at-grade intersection is well justified, with an ER of 22%. An economic evaluation of the four-lane, divided highway, based on best estimates, indicates that the marginal investment in four lanes as compared with two lanes, is justified, with an ER of 19%, including time savings.  - 15 - (ii) The Puerto Ila-Doblones Development Road and Related Lateral Feeder Roads 46. The Puerto Ila-Doblones road gives access to areas highly suitable for agricultural production in the Pichincha and Manabi provinces. The area of influence of the road extends from the existing Santo Domingo-Quevedo paved road westward to Doblones (29 km), covering an area of approximately 64,000 ha, which is characterized by climatic and soil conditions that are favorable for a wide range of crops as well as for livestock production. The area has been defined taking into consideration the available land with good agricultural potential and the improved access to be provided by the proposed roads. This area is highly suitable for pastures, apt to sustain intensive beef production, and for various cash crops such as oil palm, rubber, abaca, platano, citrus, corn and cassava. At present, the extent and intensity of cultivation and resulting agricultural production in the project area are well below potential, due to a lack of basic transport and of public programs to support agricul- tural development. Existing plantations are poorly kept. Grazing lands are generally underutilized. Legalization of land ownership is almost completed, with properties ranging from small farms to cooperatives and medium as well as large private farms. Farm holdings larger than 100 ha constitute less than 5% of all farms and cover less than 20% of the area. Most holdings in the project area are between 20 and 50 ha. The number of farmer families is estimated at 1,300 with a total population in the area of influence of the project of about 10,000. 47. Quantifiable benefits- from the proposed Puerto Ila-Doblones road were calculated by using a producer surplus approach, which attempts to measure the basic economic changes, particularly the net agricultural value added, gener- ated by the proposed road project and complementary investments. This agri- cultural producer surplus would, in fact, be generated by more intense use of the land, and the opening of new potentially productive areas. 48. The proposed road, including the required lateral feeder roads, which accounts for 33% of project costs, is well justified, with an ER of 18%, based on best estimates. Sensitivity analyses have been carried out on the main parameters affecting the economic evaluation (costs and benefits), showing that the ER would, even under adverse assumptions, still be acceptable. Producer surplus benefits are expected to be reasonably distributed among the rural population. Today, small holdings account for nearly 85% of total farm units in the area of influence of the road, and experience with similar neighboring areas suggests that these patterns are stable and would persist after construction of the proposed road. 49. The implementation of an agricultural development project in the area of influence of the road would significantly increase the estimated benefits of the road project, which were based on conservative assumptions of social and economic development of the area. Furthermore, the bridging of the Daule river would open up, to the west, large tracts of land for coloni- zation. To the extent that the project is a prerequisite for these additional benefits, the above economic return has been conservatively estimated.  - 16 - 50. Benefits were not quantified for the regional secondary and feeder road program. This project component is clearly justified in view of the fact that it will lead to the preparation of sound feeder road programs and to a more efficient use of resources currently used for this purpose. 51. The proposed project is well justified, with a combined economic rate of return of 19%, based on best estimates. It would support the Govern- ment's efforts in two areas of clear priority, i.e., the improvement of transport infrastructure and the development of the country's agricultural potential. In addition, the measures agreed to ensure services to farmers and an adequate distribution of project benefits would provide experience in multi-sectoral policy-making and implementation, which would be essential for the future execution of rural development projects now in preparation. Risks 52. Particular attention was given during project preparation to the major sources of implementation problems encountered in past highway con- struction projects in Ecuador. The use of loan funds to be allocated to the only two civil works components which, as of this time, still require addi- tional engineering--i.e., foundation of bridges for the Puerto Ila-Doblones road, and location and alignment of associated lateral feeder roads--has been safeguarded through conditions of disbursement discussed in paragraphs 35 and 36. The estimated ER of investments in the Puerto Ila-Doblones road and associated lateral feeder roads assumes that complementary investments in agricultural development will be made in the area. Past Bank experience in this region of Ecuador has shown that spontaneous private investments have taken place when adequate transport infrastructure became available. Never- theless, assurances were obtained concerning agricultural credit, extension services, land tenure and distribution of project benefits, which are discussed in paragraph 37. PART V - LEGAL INSTRUMENTS AND AUTHORITY 53. The draft Loan Agreement between the Republic of Ecuador and the Bank, the Report of the Committe provided for in Article III, Section 4(iii) of the Articles of Agreement, and the text of the draft resolution approving the proposed loan, are being distributed to the Executive Directors separately. 54. Special conditions of the loan are listed in Section III of Annex IV. The completion of soil studies for bridge foundations in the Puerto Ila- Doblones road and the required subsequent design revisions necessary for the finalization of engineering and bidding documents, as well as the completion of a lateral feeder road program for the area of influence of the same road, acceptable to the Bank, would be conditions of disbursement of loan funds respectively allocated for such project components.  - 17 - 55. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 56. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments Washington, D.C. May 6, 1977   ~~~~~~ ~ ~ ~ ~ ~~~~~~ .zj~~~~~~~~~~~~~~~~~~~~~~~ej~~~~~i- r ~ 10 VI 0 * -.00. t4. 4- ...4V CC 0. ccc ... a. 000 Ccc9t o a~ .09 . 0 ~~ 4~~~l -1-0 4 It d NtCl II -- I.) t4~ - -. .fr4I VI - 44% 4e O - P4 v04 -$ .. Mn 4 fn 0 ~ ~ ~ ~~- NE- 4?gj -1 -4Th 4 .:~~40 -v M ..i a' C 41~~~~~~~~~~~~~~~~~~~~~~~4 .31 A~~~~~~~~~~~~~~1~tj - i~ ~4.j  Pegs 2 of 4 pagee alasom &tev ae sated, data for 1960 rater to my yaer baeep" 1959 sod 1961, for 1970 haeem16 o 90,edfrMs teestti-tet b.twaeot 1075 sod 1975. 4' Vameaele baa leame esleatd -o OR ebjeolov somtoY bcamma,a of its 4XPOrfLam An 0oasmic 4dewlopet b ..d cpu pStrolsa e-P-t.. Raw& __ LIg gmaldieg aseedis te.diN )"gl popedactoe; /b 1950-62; ICj 1962; La tsao opta aalaOI Jul0 11 Eaiai