Ecuador - Fifth Highway Project

Document of FILE COPY The World Bank FOR OFFICIAL USE ONLY Report No. 1453b-EC STAFF PROJECT REPORT FIFTH HIGHWAY PROJECT ECUADOR May 6, 1977 Latin America and the Catibbean Projects Department This document has a restricted distribution and may be used by recipients only in the perforrnanc. of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Currency Equivaleats Currency Unit = Sucre (S/) US$1 = Sucre/ 25.00 Fiscal Year January 1 - December 31 System of Weights and Measures: Metric 1 meter (m) = 3.28 feet (ft) 1 kilometer (km) = 0.62 mile (mi) 1 square kilometer (km2) = 0.386 square mile (sq mi) 1 metric ton (m ton) = 0.98 long ton (lg ton) = 1.1 US short ton (sh ton) Abbreviations and Acronyms AADT - Annual Average Daily Traffic BNF - Banco Nacional de Fomento CEDEGE - River Guayas Basin Development Commission DGOP - Directorate General of Public Works of MOP ECUATORIANA - Ecuadorian Airlines ER - Economic Return FONADE - Fondo Nacional de Desarrollo FONAPRE - Fondo Nacional de Preinversiones FYR - First Year Benefit ICB - International Competitive Bidding IDB - Inter-American Development Bank IERAC - Instituto Ecuatoriano de Reforma Agraria y Colonizacion INERHI - Instituto Ecuatoriano de Recursos Hidrgulicos JUNAPLA - National Planning Board MAG Ministry of Agriculture MOP - Ministry of Public Works and Communications OED - Operations Evaluation Department of IBRD O & D - Origin - Destination Survey PCR - Project Completion Report SAETA - Sociedad Anonima Ecuatoriana de Transporte Aereo SAN - Servicio Aereo Nacional TAME - Transporte Militar Ecuatoriano TAMS - Tippets, Abbot, McCarthy and Stratton UNDP - United Nations Development Fund USAID - United States Agency for International Development Latin America and the Caribbean Projects Department  FOR OFFICIAL USE ONLY STAFF PROJECT REPORT FIFTH HIGHWAY PROJECT ECUADOR TABLE OF CONTENTS Page No. INTRODUCTION AND SUMMARY ..... ......................... i-xii I. THE TRANSPORT SECTOR .................................. A. General ....... ................................... B. The Transport System ................... ...1....... C. Recent Developments ..... ......................... 3 D. Planning, Coordination and Financing ............. 3 E. Recommended Improvement and Development .......... 4 Table 1.1 - Estimates of Transport Sector Expenditures (1970-1975) .... ............ 6 II. THE HIGHWAY SUBSECTOR ................................. 7 A. The Highway Network .............................. 7 B. Characteristics and Growth of Road Traffic and Regulation ..................................... 7 C. Highway Administration ........................... 8 D. Highway Planning ................................. 9 E. Highway Financing ................................ 9 F. Highway Engineering and Project Preparation ...... 10 G. Highway Construction ............................. 11 H. Highway Mlaintenance .............................. 11 I. Feeder Roads ..................................... 12 Table 2.1 - Highway Network (1963-1976) .... ........... 13 Table 2.2 - Vehicle Fuel Consumption (1965-1975) ...... 14 Table 2.3 - Vehicle Fleet by Categories (1965-1976) ... 15 Table 2.4 - Highway Expenditures and Road Users Contribution (1970-1976) .... ............ 16 Table 2.5 - MOP Highway Design Standards .... .......... 17 Table 2.6 - MOP Feeder Road Design Standards .... ...... 18 This report has been prepared by Messrs. Julius Varallyay (Engineer), Jose M. Veniard (Economist) and Dirk van der Sluijs (Agriculturalist) 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 World Bank authorization.  TABLE OF CONTENTS (Continued) Page No. III. PAST AND ONGOING BANK ASSISTANCE TO THE HIGHWAY SUBSECTOR .................................. 19 A. Past Assistance ................................. 19 B. The Fourth Highway Project ...................... 20 Table 3.1 - Technical Assistance Elements under the Fourth Highway Project .... ......... 24 IV. THE PROPOSED FIFTH HIGHWAY PROJECT .... ............... 25 A. General Description ............................. 25 B. Cost Estimates and Financing .................... 25 C. Execution and Procurement ....................... 27 Table 4.1 - Disbursement Schedule ......... .. ......... 29 V. THE DURAN-BOLICHE ROAD ............... .. .............. 30 A. Description ..................................... 30 B. Preparation and Engineering ..................... 30 C. Other Project Preparation Mleasures .... .......... 31 D. Project Impact .................................. 31 E. Economic Evaluation ............................. 32 Table 5.1 - Duran-Boliche Highway Traffic Flows (1976-1990) ............................ 36 Table 5.2 - Summary of Vehicle Operating Costs; Duran-Boliche Road ..................... 37 Table 5.3 - Results of Economic Evaluation; Duran-Boliche Road ..................... 38 Table 5.4 - Marginal Evaluation of Interchange and Four-Lane Highway; Duran-Boliche Road 39 VI. PUERTO ILA-DOBLONES ROAD .............................. 40 A. Description ...................................... 40 B. Preparation and Engineering ...................... 40 C. The Area of Influence ............................ 41 D. Specific Developmental Measures .... .............. 42 E. Economic Evaluation .............................. 43 Table 6.1 - Estimate of Land Use in 1976 and 1990 after Implementation of the Road Project ...... 46 Table 6.2 - Estimated Present and Future Yields with and without the Project ................. 47 Table 6.3 - Estimate of the Additional Production Resulting from the Road Project .... ..... 48 Table 6.4 - Summary of Agricultural Producers Surplus for Selected Years ...................... 49 Table 6.5 - Results of Economic Evaluation .... ........ 50 Table 6.6 - 1976 Land Holding Pattern in the Area of Influence of the Puerto Ila-Doblones Road 51  TABLE OF CONTENTS (Continued) Page No. VII. PREPARATION OF SECONDARY AND FEEDER ROAD PROGRAM ...... 52 VIII. AGREEMENTS REACHED AND RECOMMENDATION .... ............. 53 CHARTS I - Ministry of Public Works and Communications II - Project Implementation Schedule MAP IBRD 11882R3 - Ecuador Fifth Highway Project - Transport Network This report is based on information provided by the Government, in particular its Ministries of Public Works and Communications and of Agriculture; by the Consultants TAMS (US) and ASTEC, Suelos y Concretos and Cimentaciones, Ltd. (all of Ecuador); and on the findings of an appraisal mission in October- November 1976 consisting of Messrs. Julius Varallyay (Engineer), Jose M. Veniard (Economist) and Dirk van der Sluijs (Agriculturalist). The producer surplus analysis was based on the methodology presented in "'The Economic Analysis of Rural Projects" by Messrs. Carnemark, Biderman and Bovet (TRP). Mr. Gershon Feder (YP) adapted and applied the corresponding computer model as needed. Two post-appraisal missions - Mr. S. Miquel (Engineer) in January 1977 and Messrs. J. Varallyay and L. Slavinsky (Structural Engineer, Consultant) in March 1977 - visited Ecuador to review preparation of engineering.   STAFF PROJECT REPORT FIFTH HIGHWAY PROJECT ECUADOR INTRODUCTION AND SUMMARY A. The Transport Sector Background 1. Ecuador's geographical configuration, comprising three widely differ- ing regions - the Costa, the Sierra and the Oriente (Amazon) - has been a deter- mining factor in the development of its economy and of its transport system. The principal transport flows follow several corridors: (a) the country'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 developed largely after the Second World War, increasing considerably since the 1960's and reaching a total of 26,500 km in 1976, of which 13,000 km, including trunk roads and important secondary roads, are under the respon- sibility of the Ministry of Public Works and Communications (MOP). Highways 2. Ecuador's domestic transport is based essentially on roads for general cargo and passengers, with petroleum products channelled 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 inter- city 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. 3. 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 the provinces of Pichincha and Guayas. The vehicle fleet more than doubled in the period 1970-1976, 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 the 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. Intercity freight operations are also generally adequate. The largely unregulated trucking industry competes actively for traffic.  - ii - 4. 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 1970's, four weighing stations were installed on trunk roads under an earlier Bank project, but a shortage of adequately trained personnel and necessary Government commitment slowed down the establishment of effective control. The Bank has been pressing the Government to enforce legal axle load regulations. The Government is pre- paring to take action under the Fourth Highway Project (Loan 1231-EC, May 1976) to establish effective control and enforcement of legal axle load 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 proposed loan (Section 4.03 (c) of the draft Loan Agreement). 5. Since the 1950's, Ecuador has undertaken a major effort to improve and complete its trunk road system. Over the period 1966-1975, 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, how- ever, such as the sparsely populated Oriente lowlands east of the Andes and most of the northwestern coastal region, remain isolated. There is a contin- ued need for agricultural feeder and secondary roads. 6. Within MOP, the Directorate General of Public Works (DGOP) is respon- sible for highways. DGOP does not have enough qualified personnel at the professional level. Traffic data are not available for planning and program- ming purposes; the 1973 Highway Miaster Plan has not yet been updated; and coordination 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 highway planning, particularly as regards traffic data collection and evaluation, and to build up MOP capacity for pre-investment studies. Techni- cal assistance and institutional measures under the above project are now being initiated. 7. 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.  - iii - 8. A large part of the highway construction work in Ecuador, includ- ing 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. 9. 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 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 assistance, now being initiated, has been included in the ongoing Fourth Highway Project for highway maintenance. The covenants of Loan 1231-EC concerning the streng- thening of highway maintenance would also be covenants of the proposed Loan Agreement (Section 4.03 (a) and (b) of the draft Loan Agreement). 10. 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 various Government agencies involved. Therefore, following the recommendations of the recent Bank economic mission (November 1976), an element of technical assis- tance to MOP has been included in the proposed project to improve planning and preparation of feeder roads. 11. 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 1964-1973 transportation investment program. Both the second and third projects included highway maintenance programs, which, however, fell somewhat short of expectations, in particular because of the 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, altough the magnitude and complexity of the third one required special coordination among the lending agencies and a very long disbursement period.  - iv - 12. 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 is aimed at improving 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 elements 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 both the Fourth and the proposed Fifth Highway Projects successfully. Transport Policy, Planning and Coordination 13. In September 1974, a Bank mission visited Ecuador to study the trans- portation 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 prepara- tion to allow the continued development of the system. Transport sector investments in the next few years should address the following needs: (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 particular 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. 14. Because of the fragmentation of sector management and the fact that the agencies involved do not have 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.  B. The Project Project Description 15. The proposed project comprises elements that earlier were considered as part of the ongoing Fourth Highway Project. Later, due to slow progress in project preparation and limited availability of Bank funds, these elements were eliminated in the post-appraisal stage of loan processing. The proposed project would include: (a) civil works and related supervision for the construction of 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 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, prin- cipally 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. Duran-Boliche Road 16. The Duran-Boliche road is one of three major accesses 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 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. 17. 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 were reviewed during appraisal and, after subsequent minor design revisions, are now accept- able.  - vi - 18. 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, the scope of related right-of-way acquisition, including the specific properties to be affected thereby, and arrangements for securing and financing such acquisition. (b) MOP and the "Concejo de la Provincia de Guayas" have confirmed their agreement concerning the location and design for the new Guayas bridge toll collection facilities, which would be relocated under the project. 19. 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 exist- ing low, rural land adjacent to the proposed road, although some development is expected along the first 1.5 km. The alignment of the proposed road would not interfere with the planned development of the Guayaquil metropolitan area, including Duran, which is currently under study by a UNDP-financed Urban Development Planning team. Under the proposed land use zoning and highway network, prepared by this team in November 1976, the Duran-Boliche road is shown in the proposed project alignment as the only Guayaquil access from the east. Puerto Ila-Doblones and Related Lateral Feeder Roads 20. 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 devel- opment, and by opening for development new agricultural and forested areas. 21. 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 totalling 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 the assistance of a local consultant (ASTEC), follow- ing Bank recommendations, has sufficiently refined the cost estimate for purposes of determining financial requirements. Further soils studies for bridge foundations and possible subsequent design revisions are still necessary for the finalization of engineering and bidding documents. M0P has agreed to carry out such supplementary engineering starting Mtay 1977. The exact scope and implementation schedule of the necessary supplementary soil studies and engineering, which would take about four months, were reviewed and agreed  - vii - during negotiations. The possibility of effecting cost reductions in the surface course of the Puerto Ila-Doblones road was also 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). 22. 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). 23. 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 acceptable to the Bank, to be prepared no later than the end of 1977, in light of the recommendations of the Rural Development Study financed under Loan 1231-EC; and (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, no later than the end of 1978, appropriate measures designed to ensure a reasonably equitable distribution of the benefits of the project among farmers within the project area. Cost Estimates and Financing 24. The total cost of the project is estimated at about US$38.1 million, of which about US$17.5 million, representing the estimated foreign exchange component, would be financed by the proposed Bank loan. The balance would be financed by the Government.  - viii - Cost in US$ (Million Equivalent) Local Foreign Total % Bank Civil Works (a) Duran-Boliche (25 km) 7.7 7.7 15.4 (b) Puerto Ila-Doblones (29 km) 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 SPN 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 25. The estimates of construction cost 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 21 above is not expected to result in substantial increases in this cost estimate. 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. 26. 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 con- struction (about 450 man-months of professional services) would be contracted 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  - ix - allow for increases in construction quantities for civil works. 1/ An allow- ance of about 30% of total project base costs has been allowed for price variation for both civil works and consultant services. Execution 27. Within MOP, the DGOP would be responsible for execution of the project. During negotiations, the Government agreed to ensure adequate liaison and coordination with other Government agencies such as MAG, IERAC, INERHI and CEDEGE to assist MOP in the preparation of the regional secondary and feeder road program. Procurement and Disbursements 28. Civil works for road construction and improvement totalling 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 country embassies) would suffice. 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 combination of lots. Specific arrangements for the division of civil works in lots were 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. 29. 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 direct foreign exchange cost. The Bank would finance retroactively up to US$150,000 equivalent of expendi- tures on consultant services for the Duran-Boliche road to be incurred after May 1, 1977. Economic Evaluation (i) The Duran-Boliche Road 30. The economic justification of the proposed Duran-Boliche highway is based on benefits resulting from (a) reduction of vehicle operating costs; 1/ 20% for lateral feeder roads (para. 22).  x (b) passenger time savings; (c) reduction of road maintenance costs; and (d) reduction of road accidents. 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 conges- tion and on which average speeds are low. Passenger time savings accounted for about 35% of total quantifiable benefits, while reductions in maintenance costs and 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. 31. 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 the 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. (ii) The Puerto Ila-Doblones and Related Lateral Feeder Roads 32. 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 agricul- tural 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 agricultural 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  - xi - 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. 33. 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, generated by the proposed road project, and complementary investments. This agricultural producers surplus would, in fact, be generated by more intense use of the land, and the opening of new potentially productive areas. 34. 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), show- ing that the ER would, even under adverse assumptions, still be acceptable. Producers 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. 35. 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 tracks 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. 36. Benefits were not quantified for the preparation of 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. 37. The proposed project, including the Duran-Boliche road, the Puerto Ila-Doblones and related lateral feeder roads, is well justified with a combined ER of 19%, based on best estimates. It would support the Government'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.  - xii - Risks 38. Particular attention was given during project preparation to the major sources of implementation problems encountered in past highway construc- tion 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 additional 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 21 and 22. 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. Recent Bank experience in this region of Ecuador has shown that spontaneous private investments have taken place when adequate transport infrastructure became available. Nevertheless, assur- ances were obtained concerning agricultural credit, extension services, land tenure and distribution of project benefits, which are discussed in paragraph 23. 39. The conditions for the proposed loan, listed in Chapter VIII of this report, are considered adequate to ensure that the objectives of the project would be achieved.  I. THE TRANSPORT SECTOR A. General 1.01 Ecuador's geographical configuration has been a determining factor in the location of its population and economic activities, as well as in the development of its transport network. Two principal mountain chains, the western and eastern ranges of the Andes, run from north to south and divide the country into three natural and distinct regions: the coastal region (Costa), the mountain region (Sierra) and the Amazon region (Oriente). Trans- port between these three regions is difficult. The principal land transport flows take place along several corridors: (a) the country's most important corridor links Quito, the capital city, with Guayaquil, the main port and industrial center; (b) two north-south corridors extend from the seacoast and the Colombian border to the Peruvian border -- one following the Central valley of the Andean chains and serving Quito, and the other running along the Costa, from the port city of Esmeraldas in the north, through Guayaquil, and further south to Puerto Bolivar; and finally (c) the recently developed corridor between the Oriente region and Esmeraldas, channelling mainly crude oil transported by pipeline. B. The Transport System (i) Highways 1.02 Ecuador's domestic transport is based essentially on roads for general cargo and passengers, with petroleum products channelled by pipelines. In 1974, total freight movements amounted to about 10.7 billion ton-km, of which 5.4 bil- lion 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. The highway subsector and its administration are dis- cussed in full in Chapter II. 1.03 Given the relatively short hauling distances and the rugged terrain, road transport is, in general, the most adequate mode. The country's public truck and bus fleet grew rapidly over the last decade (para. 2.04) and so did its share of the traffic. High demand and the 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. Intercity freight operations are also generally adequate. The largely unregulated trucking industry competes actively for traffic, more intensively so as a result of the existence of many "pirate" truckers (unreg- istered, independent owner/operators, para. 2.05). (ii) Shipping 1.04 Foreign and coastal shipping is handled through eight maritime ports with widely varying natural, technical and operational characteristics -- Guayaquil, Puerto Bolivar, Manta, Esmeraldas, San Lorenzo, Caraques, and the petroleum terminals of La Libertad in Salinas and Balao in Esmeraldas. Guayaquil, which handled about 1.7 million tons in 1976, is the principal port  - 2 - of the country, accounting for nearly 65% of the total non-petroleum traffic. The second port, Puerto Bolivar, handled about 25% (800,000 tons) of that total, and the remaining 10% was handled mainly by Manta and Esmeraldas ports. (iii) Pipelines 1.05 A relatively old pipeline for refined petroleum products extends from Duran, close to Guayaquil, to Quito (358 km), carrying an annual volume of about 180,000 tons of various products, mainly premium gasoline. A crude oil pipeline, built from 1970 to 1972, extends from the Oriente oil fields at Lago Agrio to the Pacific port of Balao, near Esmeraldas (503 km), channel- ling an annual volume of over 10 million tons. Smaller feeder lines connect this pipeline at Lago Agrio with other oil fields, such as Shushufindi (16 km) and Sacha (52 km). Additional pipelines--one from Esmeraldas to Quito (259 km) for refined products and the other from Shushufindi to Quito (300 km) for natural gas--are scheduled to be built under an Inter-American Development Bank (IDB) loan approved in November 1976. (iv) Aviation 1.06 The growth of civil aviation and domestic traffic in the last decade has been rapid, with annual rates of about 15%. The extension of all-weather roads has recently, however, curbed the growth of civil aviation, which is now at an annual level of about 500,000 domestic passengers on all routes. Ecuador has four major airlines offering services: Government-owned ECUATORIANA pro- viding international services, and SAN, SAETA and Military Transports (TAME), serving the domestic traffic. These airlines operate mainly on the Quito- Guayaquil-Cuenca triangle that accounts for about 65% of all passenger move- ments. Quito and Guayaquil are by far the most important airports, and the only ones equipped to handle international traffic, now on the order of 300,000 passengers per year. Both airports have some operational limitations. Until recently, only Guayaquil could handle 24-hour operations. Studies for new airports at different locations both at Quito and Guayaquil are under way. (v) Railways 1.07 The rail network has a total length of 971 km. The main line is between Quito and Guayaquil, with branch lines south to Cuenca and northwest to the port of San Lorenzo. Infrastructure is in poor condition. The system, which incurred an annual deficit of about S/. 100 million over the last decade, is heavily subsidized. Railway traffic has been steadily declining due to competition from highway transport and deterioration of the railway service. Freight traffic decreased from 82 million ton-km in 1966 to the current level of less than 48 million ton-km in 1976; in the same period, passenger traffic decreased from 78 million pass-km per year to 62 million pass-km. The railway accounts for less than 2% of total passengers or freight (not including pipelines).  -3- C. Recent Developments 1.08 Since the 1950's, Ecuador has undertaken a major effort to improve and complete its trunk road system. Large areas, however, such as the Oriente lowlands east of the Andes and most of the northwestern coastal region, remain isolated. There is a continued need for secondary and agricultural feeder roads. 1.09 Over the period 1966-1975, road construction received by far the largest share of all transport infrastructure investments, accounting for nearly 30% of all public investment. A further impetus for highway construc- tion came, to a great extent, after 1971-1972, as a result of petroleum exploration and exports, which enabled public investments to rise considerably. During the same period, the Texaco-Gulf Consortium undertook large investments in pipelines for the construction of the Lago Agrio-Esmeraldas link. Highways and pipelines together accounted for over 90% of all fixed investments in transport since 1966. 1.10 The Government also undertook to develop further the country's port system, to plan a major expansion of the nation's air transport facilities and to study a railway rehabilitation program. Improvements in the ports of Bolivar and Esmeraldas are now under way. A major expansion of the port of Guayaquil is being contracted, with financing provided under IBRD Loan 1255-EC. The Bank has also been asked to participate in the expansion of the fishing port at Manta. D. Planning, Coordination and Financing 1.11 The development of transport planning and administration has not been commensurate with the rapid expansion of the country's system. While principal responsibility rests with the Ministry of Public Works (MOP), particularly in matters pertaining to land transport (highways and railways), important transport responsibilities, including policy and investment planning, are shared in varying degrees by four other ministries 1/, JUNAPLA and various regional and local authorities. This fragmentation of functions and resources has been a hindrance to effective planning and coordination and a serious obstacle in the programming and preparation of projects. 1.12 JUNAPLA had defined general objectives for the sector and formulated a set of policies for the National Economic Plan 1973-1977, but was not success- ful in instituting centralized planning or improving coordination. In fact, JUNAPLA was never in a position to control the various agencies involved with the different transport modes and also lacked the necessary organizational strength and staff. 1/ Ministry of Interior, road transport; Ministry of Defense, aviation, ports, and shipping; Ministry of Natural Resources, pipelines and feeder roads; and Ministry of Agriculture, feeder roads.  - 4 - 1.13 The absence of an agency responsible for transport planning resulted in a number of important deficiencies; there is no homogeneous and consistent body of sectoral statistics and there is no coherent pricing policy for the sector as a whole (see fuel prices, para. 2.13). Project planning decisions have been made without adequate coordination; an example in line is the simultaneous but separate preparation of a Quito-Guayaquil expressway project and the competing railway rehabilitation project. Furthermore, important issues remain unresolved, e.g., the planning of infrastructure requirements to link the Oriente with the Sierra; the establishment of clear priorities for further development of the trunk and feeder road systems; the coordination of development proposed for seaports; the definition of the future role of the railway; and the definition of infrastructure and fleet requirements for the development of air transport. 1.14 Government investment in transport infrastructure is made through the various modal agencies. Because of the lack of uniform procedures for budgetary and financial statements, it is difficult to establish an accurate picture of total capital investment in the sector. An attempt has been made, however, to reconstruct total sectoral expenditures, including invest- ments, in Table 1.1. 1.15 Since 1973, Government expenditures have been stimulated by the increasing revenues from petroleum exports; this affected capital investments as well. The National Development Fund (FONADE) received a substantial portion of revenues from oil exports for financing high priority development projects, whereas the National Preinvestment Fund (FONAPRE) was set up in 1973 to finance preparation of such projects. Improvement in project preparation capacity is an important requisite to sustain the current pace of public investments. E. Recommended Improvement and Development 1.16 In September 1974, a Bank mission visited Ecuador to study the transport sector in depth. The report of that mission, completed in mid-1975, concluded that: (a) expansion and improvement of the system would be necessary to increase its efficiency and to accommodate the growing requirements of the economy; and (b) the management and the development of the system was hindered by serious institutional deficiencies. 1.17 The Bank's Transport Sector Mission, after reviewing future traffic levels, including demand generated by investments in regional development and in specific sectoral projects (notably agricultural, rural development, and irrigation and colonization projects), concluded that the Government's objec- tives in the next few years should address the following needs: (a) Highway Infrastructure - the need to improve the trunk road network, including integration of the Oriente, improve- ment of north-south corridors, and access to major cities, in particular Quito and Guayaquil, expansion of secondary and feeder road systems, and improvement of road maintenance; and  - 5 - (b) Other Modes - the improvement of seaport capacity and maritime shipping, greater use of inland waterways, in particular in the Oriente; the definition of the future role of the railway, and expansion and improvement of air transport services. 1.18 The adoption of adequate policies and the planning of necessary investments would require substantial improvements and streamlining of the institutional framework for the management of the sector. The existing organ- ization of MOP is not suitable for the efficient management even of the two modes under its jurisdiction: highways and railways. The Government, in recognition of this fact, contracted a study for the reorganization of MOP in early 1974, and, after the diagnostic and design phase of the study, is now implementing a reorganization scheduled to be completed in 1977. The reor- ganized structure, calling for the creation of a Sub-Secretary of Transport, is shown in Chart I. 1.19 Within the framework of the Fourth Highway Project (Loan 1231-EC), the Government agreed to take steps: first, to establish within MOP a unit to be responsible for the planning and coordination of land transport (road and rail); and second, to establish an agency with enlarged responsibilities for all modes of transport. This two-stage approach was adopted as a practicable formula, taking into account the difficulties to be overcome to alter the present fragmented decision-making process for the sector. The status of implementation of these measures is reviewed in paragraph 3.09.  - 6 - TABLE 1.1 ECUADOR FIFTH HIGHWAY PROJECT Estimates of Transport Sector Expenditures / (1970-19 75) (Millions of Current Sucres) 1970 1971 1972 1973 1974 1975 Highways/2 336.9 823.6 878.8 1,050.6 1,395.0 1,206.6 Railways 139.1 140.7 144.4 151.4 N. Available 183.3 Ports/3 N. Available 162.9 165.6 183.6 116.2 N. Available 14 Airports DAC-/ N. Available 90.0 N. Available 115.0 47.1 109.2 Pipelines/.5 350.0 1,600.0 1,300.0 254.5 248.5 248.5 /1 Unless othervise specified, including operational expenditures, investments, and debt servicing. /2 Excluding road transport industry. /3 Excluding Esmeraldas, San Lorenzo, Salinas, Bahla de Caraquez, and Balao ports. /4 Excluding airlines, taking into account only airport authorities and DAC. /5 Including only investments excluding operational expenditures. Source: Highways - MOP Other modes - Junta Nacional de Planificacio'n January 1977  - 7 - II. THE HIGHWAY SUBSECTOR A. The Highway Network 2.01 As may be expected in a country with terrain as varied as that in Ecuador, highway development has been greatly influenced by geographical and climatic conditions; these differ widely among the three major regions of the country: the Costa, the Sierra and the Oriente. The highway network increased by 70% between 1963 and 1976 to reach a total of 26,500 km (Table 2.1). Paved roads, now totalling about 4,000 km, increased by 50% over the last six years -- this reflects efforts by the Government to expand the main road network. Of the total, about 13,000 km come under the jurisdiction of MOP, representing the trunk system and important secondary roads. These roads have been clas- sified according to their standards in five different classes. 2.02 In spite of continued expansion and improvement, the main road net- work is still not adequate to assure a satisfactory level of service, espe- cially in view of the rapid growth of the demand for road transport. In 1974, MOP initiated an ambitious program to expand, upgrade and rehabilitate the network. After a slow start, this program began to show results, parti- cularly since early 1976 when a new administration took over MOP. Works are currently in progress on close to 2,500 km of trunk roads, about 1,400 km of feeder roads, and 2,300 meters of related bridge construction. In spite of past efforts, particularly under Bank projects, maintenance of the network remains a problem (para. 2.18). B. Characteristics and Growth of Road Traffic and Regulation 2.03 A national transport survey in 1964, a highway master plan in 1973 and, more recently, the Quito-Guayaquil expressway feasibility study provided useful information on road traffic; otherwise, information is scant and un- reliable. Traffic growth over the network can best be estimated through general indicators. Annual growth of diesel and gasoline consumption, shown in Table 2.2, has been around 10% over the last ten years, which correlates well with scattered available historic data on traffic growth. This impres- sive growth is largely due to the economic expansion prompted by large scale oil exploration starting in 1967 and subsequent exports starting in 1973. 2.04 Vehicle registration, another major indicator, is shown in Table 2.3. The fleet more than doubled in the period 1970-1976, reaching 125,000 vehicles in the latter year. The importance of the two major urban centers in the country, Quito and Guayaquil, is shown by the fact that about 62% of the total vehicle fleet is registered in its respective provinces (Pichincha and Guayas). The undeveloped and sparsely populated Oriente region registers only about 1% of all vehicles.  - 8 - 2.05 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, the latter supervising the National Transportation Council which, in turn, is responsible for road transport regulation. Regu- lations concerning trucking are too detailed, so much that, if rigidly enforced, they would be an impediment to the development of a healthy industry. However, since the Government has never acted with full force to implement them, truck- ing, in effect, is largely unregulated. The existence of many unregistered truckers (independent owner/operators) has contributed toward maintaining strong competition. In contrast, passenger traffic is more effectively regulated; intercity passenger tariffs are controlled, as are entry permits, routings, and frequency of service. The technical assistance under the ongoing Fourth Highway Project will assist in reviewing and updating road transport regulations as necessary. 2.06 Usage of the highways is regulated by the "Ley de Caminos," speci- fying, among other things, the allowable weights and dimensions of vehicles. The maximum single axle load is set at 11 metric tons, which is satisfactory. Some efforts have been made by MOP in the past to enforce the "Ley de Caminos". Weighbridges were installed to control axle loads at four sites along major trunk roads under the Consortium Highway Project (paras. 3.04 and 3.06), the last one becoming operational in 1973. Adequately trained personnel, however, are not available at the stations. Collection of data and sampling techniques are deficient. In fact, several stations are not functioning. Overloading of trucks has continued. To protect the considerable investment in highways, the Bank has been pressing the Government to enforce axle load regulations. The Government is preparing to take action to train weighing station staff, to put stations into continuous operation, and to collect and process traffic data. These measures, which will be supported by technical assistance under Loan 1231-EC, should bring about substantial progress over the next year and should enable the Government to comply with the related covenant of Loan 1231-EC by the end of 1978 at the latest. This covenant has been also included as a covenant of the proposed loan. C. Highway Administration 2.07 DGOP administers all matters related to highways. Several depart- ments and regional districts function under DGOP. This organization has its internal shortcomings, and MOP envisages several changes in DGOP, within the framework of its overall reorganization (para. 1.18). Under the revised structure shown in Chart I, a separate directorate will deal with each of the following: highway planning and programming, design and studies, construction, maintenance, geotechnical laboratory, and cost accounting. 2.08 MOP staff totals close to 4,000 people, of which about 400 work in the Ministry, in Quito. Qualified engineering and technical staff are lacking both in Quito and the districts, which is due, in large part, to the relatively low salary scale of engineers. This has been particularly critical since the  - 9 - early 1970s, when oil exploration and subsequent exports began to create well paving technical jobs in the private sector. Shortage of qualified MOP staff will be alleviated, at least in the short run, through on-the-job training and direct support provided by the technical assistance included in the Fourth Highway Project (paras. 3.09 to 3.11). D. Highway Planning 2.09 Highway planning is not a continuous process in Ecuador. After con- siderable expansion of infrastructure under the impetus of oil exploration that began in 1967, the pressure mounted on MOP to plan action in the highway sub- sector for supplementing overall development strategies. Convinced of the importance of a comprehensive plan, MOP retained consultants TAMS (USA) under the Consortium Highway Project (para. 3.04) to complete a highway master plan by mid-1974. This plan served as a basis, in its early stage, for selection of some eight road projects for detailed engineering and confirmation feasi- bility study. One of the high priority roads is included in the Fourth Highway Project (para. 3.15). Two other projects, a four-lane access road to Guayaquil and a penetration road between Puerto Ila and Doblones, would be included in the proposed project. 2.10 Planning for highways is the responsibility of the Directorate of Planning and Programming under DGOP, but this Directorate operates without experienced personnel. A review of its work during preparation of the previous Bank highway project in 1975 indicated major deficiencies: traffic data are not collected periodically; the highway master plan is not being up- dated; and information concerning future demand for road transport is not made available to MOP. The Directorate of Design and Studies under DGOP is responsible for feasibility studies and engineering. Recent experience has shown that this Directorate 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 highway planning, particularly as regards traffic data collection and evaluation and building up staff for pre-investment studies. Technical assistance and institutional measures under the above project are now being initiated (paras. 3.09 and 3.10). E. Highway Financing 2.11 Highway expenditures are financed through the general Government budget under DGOP allocations. DGOP does not have financial autonomy; its expenditures are part of the overall MOP budget. Expenditures for the period 1970-1976, including MOP's total operating budget, are shown in Table 2.4. The level of total annual expenditures in 1976 is close to US$44 million equivalent, based on figures for the first 10 months of the year. Recurrent expenditures for highway maintenance, periodic improvements, administration and supervision, including the total of MOP's operating budget, absorb about 40% of the overall MOP expenditures for highways. These expenditures, although they have been increased over the years, are not adequate to meet the growing maintenance requirements (para. 2.18).  - 10 - 2.12 Capital expenditures in 1975 amounted to about 60% of total MOP expenditures and reached about US$30 million equivalent. Capital expenditures reached a peak in 1974, both in terms of current value (about US$42 million), and as a percentage of total MOP expenditures for highways (about 76%). Both the amount and percentage declined after 1974 mainly due to inefficient administration in the Ministry and slow and ineffective project preparation. In 1975, the Ministry was unable to spend the total amount of funds budgeted for that year. Capital investments for highways are financed from several Government funds, including the Fondo Vial (using earmarked road user charges), FONADE, FONAPRE (studies), the general budget and external sources. 2.13 Estimated contributions from road user charges are shown in Table 2.4. On the average, they cover current highway expenditures as well as roughly one-third of infrastructure investments. The prices 1/ for locally consumed gasoline and diesel oil are low in comparison with international price levels. This situation may, over time, inflate the demand for road transport and distort intermodal distribution of traffic and investment requirements. A quick and easy solution to the problem is not possible -- any solution would need to be considered carefully since it would affect an impor- tant segment of the population. Equally important is the fact that, at this time, there is no soundly based information on which to make rational recom- mendations. The recent Bank economic report (No. 1382-EC, December 1, 1976, para. 33), however, emphasized the costs of this pattern of domestic consump- tion of petroleum products. 2.14 Import duties on vehicles and spare parts have been high and, until 1974, revenues from such duties constituted a substantial part of road user charges; in 1973, for example, they made up 38% of the total, while fuel taxes, which are directly related to the incidence of the use of the road network, contributed 52%. The high import duties tend to discourage renewal of the vehicle fleet, which does, in fact, comprise a high proportion of obsolete equipment. Road user charges would be reviewed by the transport planning unit to be set up within the framework of the ongoing Fourth Highway Project (para. 3.09). F. Highway Engineering and Project Preparation 2.15 The standards of existing highways vary considerbly in Ecuador, according to regional and terrain conditions. Upon MOP's request, consultants TAMS (para. 2.09) developed a highway manual containing design standards, specifications, and standard conditions of contract. The documents were approved by MOP in 1974 and published in 1976. Design standards are shown in Table 2.5 and feeder road standards are shown in Table 2.6. Applied with judgment, these standards are satisfactory. Their adaptation to specific local conditions would be reviewed with technical assistance to be provided under the Fourth Highway Project. 1/ These prices, at US$0.16 per gallon for regular gasoline, are among the lowest in the world, and a comparison with international prices suggests that they entailed an implicit subsidy of about US$440 million in total during the 1972-1975 period.  - 11 - 2.16 Earlier, foreign consultants prepared the major part of pre-investment studies and engineering of highway projects. More recently, however, foreign consultants have been required by law to associate themselves with local consultants. Although this is a positive measure to maximize the transfer of technical know-how to local consultants, it should have been accompanied by safeguards to maintain adequate quality standards. MOP has not been able to supervise local consultants adequately. The Fourth Highway Project provides technical assistance to strengthen and develop MOP's capability in this field (para. 3.10). In the past, the role of the consultant retained for construc- tion supervision has, on many occasions, been limited to quality control. More recently, however, at the Bank's suggestion, MOP revised its practice so that supervisory consultants would be responsible for overall job management, representing MOP with full authority. G. Highway Construction 2.17 For the past ten years, a large part of the highway construction effort in Ecuador, including that financed externally, has been awarded to local contractors. Their performance, however, under the Highway Consortium Project, for example, revealed shortcomings in technical expertise. The 1974 Bank transport sector mission identified a number of problems facing the industry -- arising in part from the industry itself and in part from the Government's treatment of the industry. The Government has agreed to review thoroughly the status of the industry and its own related policy and practices under the ongoing Fourth Highway Project (para. 3.12). H. Highway Maintenance 2.18 Highway maintenance has been performed through four regional divi- sions of the Maintenance Directorate under DGOP. This structure was created in 1970 on completion of a maintenance program that was financed under the Highway Consortium Project. It has been reorganized recently by setting up seven maintenance divisions, and it is better suited for efficient maintenance operations. Periodic maintenance and emergency works are performed through the four maintenance districts and force account, as well as by contract. Routine maintenance of both paved and unpaved roads is carried out exclusively by force account. A review of highway maintenance during the Bank sector mission and subsequent appraisal of the previous highway project indicated that several major deficiencies persist. First, although MOP's maintenance expenditures had been increased from 1971 through 1976 to cope with require- ments of the principal network, the growing overall maintenance requirements oblige MOP to spread available resources too thinly. Second, and more impor- tant, management procedures and work techniques have to be improved in order to ensure efficient use of maintenance resources. Workshops and garages also require urgent improvements. An important element of technical assistance has been included for highway maintenance in the ongoing Fourth Highway Project (para. 3.11).  - 12 - I. Feeder Roads 2.19 Planning and construction of feeder roads require special treatment. These projects must be properly integrated with agricultural development proj- ects, particularly with such complementary aspects as extension services, agricultural credit, and marketing. The need for feeder roads was emphasized by a recent Bank Economic Mission (November 1976). The preparation of sound feeder road projects requires careful coordination among a number of Government agencies, such as the Ministry of Agriculture, the Instituto Ecuatoriano de Reforma Agraria y Colonizacion (IERAC), the Banco Nacional de Fomento (BNF), the CEDEGE and MOP. 2.20 MOP at present is preparing engineering design for about 1,040 km of feeder roads, of which some 280 km are fairly well advanced. These projects have been prepared with little or no coordination with other Government agencies. Such coordination is necessary to assess the scope and feasibility necessary accompanying development measures. In view of the above, an element of technical assistance has been included in the proposed project to improve planning and preparation of feeder roads and to develop a specific program suitable for possible future Bank financing (Chapter VII).  - 13 - TABLE 2.1 ECUADOR FIFTH HIGHWAY PROJECT Highway Network (1963-1976) (Kilometers) Year Paved Gravel Earth Total 1963 ----- 8,413 --------- 7,211 /1 15,624 1970 2,850 8,150 11,300 22,300 1973 3,419 7,107 12,012 22,538 1976 /3 4,168 10,085 12,234 /2 26,487 1/ Seasonal earth roads. 2/ Of which 1,942 km all weather. 3/ Preliminary. Source: Junta Nacional de Planificaci6n January 1977  - 14 - TABLE 2.2 ECUADOR FIFTH HIGHWAY PROJECT Vehicle Fuel Consumption (1965-1975) (millions of US Gallons) Year Gasoline Diesel Total 1965 89.8 38.8 128.6 1966 93.2 44.2 137.4 67 103.9 50.2 154.1 68 114.3 59.0 173.3 69 122.1 62.9 185.0 70 134.0 73.0 207.0 71 150.2 85.5 235.7 72 155.6 88.8 244.4 73 173.2 105.6 278.8 74 198.5 119.4 317.9 75 218.6 119.5 338.1 Annual Rate of Growth 1965-1975 = 10.2% (Total for gasoline and diesel). Source: Junta Nacional de Planificacion January 1977  ECUADOR FIFTH HIGHWAY PROJECT Vehicle Fleet by Categories (1951-1976) 'Passenger Jeeps and Medium Heavy 6/ Year Cars Pickups Trucks Trucks Others Total 1951 1/ -------7,261 1/ ---- 310 4,479 - 12,050 1962 1/ ------22,566 1/ ---- 1,259 7,656 - 31,481 1965 2/ - 27,147 1/ ---- 1,515 9,210 - 37,896 1966 3/ - - - - - 41,421 1967 14,151 20,016 3,002 10,061 49 47,279 1968 14,719 22,191 3,051 10,631 60 50,652 1969 16,403 25,448 3,330 10,572 75 55,828 1970 17,876 30,520 1,810 12,399 176 62,772 I-n 1971 20,186 37,991 3,479 12,717 94 74,467 1972 22,254 38,543 3,544 12,157 8,032 4/ 84,530 1973 23,950 49,833 3,286 13,724 92 90,885 1974 31,087 61,725 3,140 16,009 28 111,989 1975 - - - - - 123,000 5/ 1976 - 125,000 5/ 1/ Breakdown between passenger cars and other light vehicles not available. 2/ Categories shown were calculated from total assuming same breakdown as in 1962. 3/ Breakdown not available. 4/ Includes motorcycles and bicycles in Guayas Province. 5/ Preliminary figure, breakdown not available. 6/ This category includes buses. Source: Instituto Nacional de Estadistica, Direccion General de Transito, Interior Ministry January 1977  ECUADOR FIFTH HIGHWAY PROJECT Highway Expenditures and Road Users' Contribution (1970-1976) (Million of Current Sucres) A. Highway Expenditures 1970 1971 1972 1973 1974 1975 1976 1/ Operating Budget 24.0 23.0 38.1 49.9 44.4 53.9 57.4 Consultants 11.9 5.1 15.6 94.7 95.3 53.4 114.9 Highway Studies 10.6 3.5 6.3 15.0 33.3 23.9 14.0 Highway Construction 236.2 703.1 679.5 680.8 938.5 657.0 578.6 Highway Maintenance and Improvements 84.2 82.6 121.0 186.3 256.8 387.3 367.8 Highway Administration and Supervision - 6.3 18.3 23.9 26.7 31.1 34.3 366.9 823.6 878.8 1,050.6 1,395.0 1,206.6 1,167.0 0' B. Motor Vehicle Contributions Vehicle Registration and Licenses 15.0 14.2 27.3 41.7 Tolls 42.0 60.4 76.0 90.4 Import Duties on Vehicles 360.0 300.0 911.5 2/ 200.0 2/ Import Duties on Parts 23.0 25.0 90.0 2/ 20.0 2/ Gasoline Taxes 266.0 296.3 339.9 396.7 Diesel Taxes 44.4 52.7 59.7 64.5 Tire Taxes 14.0 15.0 14.6 10.0 1/ 764.4 763.6 1,519.0 823.3 3/ 1/ First ten months. 2/ Preliminary figures. 3/ Licensing of vehicle imports closed since 1975. Source: Expenditures: Budgeting and Accounting Department, MOP Contributions: Junta Nacional de Planificacion January 1977  ECUADOR FIFTH HIGHWAY PROJECT MnP Highway Design Standard-1974 Class I Class II Class III Class IV Class V F U M F U M F U M F U M F U M F Design Speed (km/hr) 100 80 70 100 80 60 90 70 50 80 60 40 50 40 40 Min. Hor. Radius (m) 350 210 160 350 210 115 280 160 80 210 115 50 80 50 50 Sight. Distance (m) 160 110 90 160 110 75 140 90 60 110 75 45 80 50 50 (Slopping) Maximum Grade (%) 3 5 7 4 6 8 4 7 9 6 8 10 6 8 12 Width - travelled way (m) 7.30 6.50 6.00 6.00 4.00 - shoulders (m) 2.5 2.0 1.5 2.5 2.0 1.5 1.5 1.0 0.5 - _ Bridge loading HS 20-44 HS 20-44 HS 20-44 HS 20-44 HS 20-44 or HE 15-44 F - Flat Terrain U - Undulating Terrain M - Mountainous Terrain Source: Highway Design Standards by MOP, 1974. January 1977  - 18 - Table 2.6 ECUADOR FIFTH HIGHWAY PROJECT MOP Feeder Road Design Standards Max. Grade (%) at altitudes of: SWL -1000 m 10 1000m -2000 m 9 2000m -3000 m 8 3000m -3500 m 7 Min. Design Speed (km/hr) 35 Min. Hor. Curve (m) 30 Roadway Width (m) 1st order 7.20 2nd order 5.20 Max. Cross Slope (%) 1st order 8.5 2nd order 8.5 Standard Cross Slope (%) 4.0 Source: Specifications for Feeder Road Design by MOP, March 1975. January 1977  - 19 - III. PAST AND ONGOING BANK ASSISTANCE TO THE HIGHWAY SUBSECTOR A. Past Assistance 3.01 In 1954, the Bank made its first of a series of four highway loans to Ecuador to the Comite de Vialidad (US$8.5 million, Loan 94-EC), for con- struction and improvement of about 500 km of trunk roads serving the coastal Province of Guayas. Although a few sections could not be completed because of a shortfall in project funds, the project as a whole was successful. It played an important role in the development of the province, in particular by supporting the vigorous expansion of banana production. 3.02 In 1957, the Bank made another loan to the Government of Ecuador (US$4.5 million, Loan 176-EC) to assist in construction and improvement of 533 km of trunk roads. Three of the four project roads, totalling 377 km, were substantially completed under this project, whereas the fourth road (Chone-Santo Domingo, 156 km) was only 60% completed when, in 1962, all loan funds were exhausted. Remaining civil works were eventually completed under the first phase of the subsequent project. In addition, this project also included a limited component for improvement of highway maintenance. 3.03 In 1962, the Government and the Bank began to prepare a new highway project to complete construction undertaken under the two previous projects (about 300 km), to continue and expand the nationwide highway maintenance program, and to construct and improve four major trunk road sections totalling about 500 km. Consultants were engaged early in 1962 to help prepare this ambitious project. In view of its large financial requirements, USAID and IDB joined the Bank and IDA in forming a consortium for the proposed project in early 1963. Because of internal political developments, negotiations could only take place in 1964. 3.04 The Consortium Highway Project had a final cost of US$69 million equivalent, of which US$32 million equivalent were financed by external sources. IBRD contributed US$9 million (under Loan 379-EC, signed May 26, 1964), IDA US$4 million, IDB US$7 million and USAID US$12 million. The project provided for construction of 730 km of road, a five-year highway maintenance program, and technical assistance for preparation of future highway projects, including a Highway Master Plan. The completion of all components of the Consortium Project took six years longer than expected at appraisal. OLD is preparing a Performance Audit Report on the project (draft issued January 27, 1977) based, inter alia, on LAC Dept. PCR Report (dated April 26, 1976). 3.05 Both reports point to the fact that, in spite of delays and cost overruns, road construction has been successfully completed; the roads have contributed substantially to the economic expansion of the regions affected. Appraisal estimates of economic returns were surpassed in all cases, due  - 20 - mainly to higher-than-expected growth of traffic. The project produced a Highway Master Plan and provided pre-investment studies for a number of high priority road projects. 3.06 Improvement of highway maintenance fell somewhat short of expecta- tion, in particular because of lack of continuity in middle and high echelons of DGOP. The regulatory framework for control of axle load was established, although with considerable delays, and several weight control stations were built. Enforcement was not effective and will be strengthened under the ongoing Fourth Highway Project (para. 3.11). B. The Fourth Highway Project 3.07 The Fourth Highway Project, financed under Loan 1231-EC, emerged from the findings of the 1974 sector mission. The project was prepared through 1975, signed May 24, 1976, and became effective on October 31, 1976. Total project cost amounted to US$21 million. The Bank Loan of US$10.5 million covers estimated foreign exchange requirements. The main objective of the project is to improve planning and management for the transport sector as a whole as well as for the highway subsector. For this purpose, the project includes a comprehensive technical assistance component. It also provides for the upgrading of a high-priority road. Two other roads initially considered under this project could not be included because their preparation was not sufficiently advanced. These two sections are the main components of the proposed Fifth Highway Project which, to a large extent, is a complement to the Fourth Highway Project. The two projects would constitute a comprehensive program to alleviate institutional weaknesses and to upgrade selected high- priority road sections. 3.08 The Fourth Highway Project has made a relatively slow start. This is partly due to a five-month delay in fulfilling the condition for effective- ness. The more basic reasons are the weakness of MOP and the relative complex- ity of the technical assistance component of the project. MOP invited short- listed consultants to submit proposals in early April, and a detailed schedule (Table 3.1) and timetable for the initiation of various technical assistance programs were discussed during negotiations. The Project Coordinator (para. 3.13) is expected to take up his functions in June 1977. The various technical assistance programs would be mobilized between July and September 1977. With such programs started, MOP would have adequate capacity to imple- ment successfully the Fourth Highway Project as well as the additional road construction and study proposed under the Fifth Highway Project. Specific components of the project, related covenants, and the status of their imple- mentation are briefly reviewed in the following paragraphs. (i) Improvement of Planning at Sector and Subsector Levels 3.09 The project provides for a three-year program of institutional measures and technical assistance to create and develop adequate capacity to ensure the function of transport planning and coordination for all modes of transport, while, in the beginning, emphasizing highways. This component includes the setting up of systematic collection of traffic data and the  - 21 - development and implementation of a program for enforcement of axle load regulations. The accompanying institutional measures are defined in two covenants calling for (a) the establishment, within one year (or another agreed date), of a unit within MOP with responsibility for transport planning and coordination; and (b) the establishment within two years of an agency with enlarged responsibilities in transport, including programming of investments and formulation of policies. The existing Directorate of Planning and Coordi- nation will serve as a nucleus for the proposed unit under (a). In view of the initial delay in project implementation and the need to provide a ten- month period for on-the-job training of staff assigned to the new unit, MOP estimates that it will be in a position to comply with covenant (a) only by May 1978, in lieu of May 1977. This new deadline is acceptable to the Bank since it is linked with the schedule agreed during negotiations for the mobilization of technical assistance. (ii) Highway Engineering 3.10 The project includes a program to strengthen MOP's capacity in the areas of programming and project preparation, including the supervision and administration of pre-investment studies entrusted to consultants. The Loan Agreement calls for establishment within MOP of a specific unit responsible for these activities. The Directorate of Design and Studies under DGOP has been designated as the unit responsible for this part of the project. This is acceptable to the Bank. The technical assistance for this component of the project would be mobilized by August 1977. (iii) Highway Maintenance 3.11 This program will be conducted within the Maintenance Department of DGOP. It includes two phases. Phase I, which is now being initiated by MOP, would lead to recommendations for improvement of all major aspects of mainte- nance operations: planning, budgeting and cost control, method and sequence of maintenance activities, qualification of personnel and related training requirements, equipment management, maintenance and renewal. Phase I would also define a two-year (1978-1979) program for the district of Santo Domingo, one of the country's four maintenance districts. This program would be imple- mented under Phase II, which would lead to recommendations for extending improvement to the other districts. Several covenants to the Loan Agreement ensure that the above technical assistance and pilot program are properly supervised and receive adequate support. They contain specific undertakings: (a) to submit to the Bank for comments and consultation the program proposed for the pilot district; (b) to ensure permanent and consistent enforcement of the regulations concerning limitations on dimensions, axle loads and weight of vehicles; and (c) to ensure adequate maintenance and repairs of roads under MOP jurisdiction, adequate upkeep of equipment and provision of spare parts and establishment of necessary workshops. These covenants are included as covenants in the negotiated Loan Agreement for the proposed Fifth Highway Project. The maintenance situation has been briefly reviewed in paragraph 2.18. The level of expenditure planned by MOP for 1978 was reviewed at the time of negotiations and would be broadly adequate given the present maintenance capacity of MOP.  - 22 - (iv) Improvement of the Local Construction Industry 3.12 This program will address problems of the local road construction industry from two standpoints: (a) the structure and method of the industry itself and (b) the handling of the industry by Government agencies. Tech- nical assistance by individual consultants now being recruited by MOP will initially be provided to DGOP's Construction Department and, in a second phase, also to selected local contractors. In order to ensure the effective- ness of this program, the Loan Agreement stipulates that, as of one year of the date of the Agreement (i.e., starting May 24, 1977), no local contractors would be permitted to take part in bidding invited by MOP for paved road con- tracts unless such contractors have received technical assistance under the above program. In view of the delay in contracting related consultant ser- vices, MOP requested a postponement of this deadline until May 1978. This was reviewed during negotiations on the basis of a detailed plan of action by MOP, and it is acceptable. (v) Project Management 3.13 In view of the relative complexity of the various programs included under the project, an engineer with adequate administrative and management experience will be attached to DGOP as Project Coordinator to expedite project implementation, especially as regards technical assistance. The Project Coordinator is expected to start by June 1977 and will also assist in the implementation of the Proposed Fifth Highway Project. (vi) Pre-Investment Study 3.14 The Fourth Highway Project also provides for a study on the area of influence of the proposed new road between Puerto Ila and Garrapata (about 86 km). The study was planned in two phases. Phase I was to define this area's agricultural potential and the investments required for its realization. It was also conceived as serving to provide the basis for the economic evaluation of a road construction project for the area. If the initial findings justified it, Phase II of the study would prepare a development project for the area, including a plan for additional physical infrastructure and other investments. A team from the Ministry of Agriculture began to collect data on the area in mid-1976 with a view to preparing the economic evaluation of the proposed road construction investment, which was the basis of the Bank appraisal mission's investigation of this segment. The Government has now selected consultants to complete Phase I and to undertake Phase II of the study; contract negotia- tions are under way. Because of the difficulties in obtaining sufficient information about the entire project area, it was not possible to establish its justification adequately. For that reason, the proposed Fifth Highway Project includes provisions for the construction of only the eastern section of the envisaged road (Puerto Ila-Doblones), as indicated in Chapter VI (paras. 6.01-6.22) of this report. The remaining sections will be assessed during the course of the aforementioned study and are expected to comprise the basis of a development project which the Bank will consider financing in the near future. The study is expected also to provide the material needed to  - 23 - define and implement covenants regarding land ownership and project benefits accruing from the proposed Fifth Highway Project (extension services and agricultural credit requirements and a lateral feeder roads program (paras. 6.05 and 6.09-6.12)). (vii) Road Improvement 3.15 The Fourth Highway Project includes civil works and related super- vision for the upgrading of the Babahoya-Balzapampa road (49 km). Bids were received on April 18, 1977 and are now being evaluated by MOP. It is expected that works would start in July 1977. Ecuadorian consultant ASTEC is being retained by MOP for supervision of construction under terms and contract condi- tions reviewed during negotiations.  ECUADOR FIFTH HIGHWAY PROJECT Technical Assistance Elements under Fourth Highway Project Estimated Cost Collaborating Forei2n _Local Items Government Agencies Contracting Man/Months (USS Million) (Sucres Millic 1. Highway Maintenance -*Directorate of Maint. (MOP) Firm Professional 120 1.3 12.5 -District of Santo Domingo (MOP) Technical 126 2. Engineering Design and -*Directorate of Studies (MOP) Firm Professional 210 1.2 12.5 Feasibility Studies - Dept. of Computers (MOP) - Laboratory (MOP) 3. 'Transport Planning -*Directorate of Planning and Firm 1st Stage Pro- 0.9 12.5 and Coordination Coordinating (MOP) fessional 90 - Directorate of Programing (MOP) 2nd Stage Pro- fessional 45 1/ 4. Domestic Road Con- -*Directorate General of Public Individuals 0.1- struction Industry Works (MOP) Professional - Directorate of Construction (MOP) 20-25 - Administrative & Finance Directorate (MOP 3/ 4 5. Rural Development -*Ministry of Agriculture Firm 2/ 0.4 10.0 Study Puerto Ila- - JUNAPLA (already Chone - FONAPRE negotiating) - Directorate of Planning and Coordinating (MOP) 6. Project Coordinator -*Directorate General of Public Individual Professional 36 0.3 10.0 Works (MOP) - Directorate of Planning and Coordinating (MOP) *Denotes agency directly responsible for supervising the consultant's work. 1/ Bank can only disburse after MOP took measures, specified in Section 3.02 of loan agreement (Loan 1231-EC), in respect of bidding for paved contracts. 2/ Terms of Reference are being revised by Ministry of Agriculture with Bank assistance and on basis of outcome of appraisal of proposed Highway V. m 3/ Of this foreign exchange, Bank finances 75%, and remaining 25% financed by FONAPRE. Source: MOP January 1977  - 25 - IV. THE PROPOSED FIFTH HIGHWAY PROJECT A. General Description 4.01 The proposed project 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 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 preparation 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 (mid 1977-end 1980). Detailed description and economic evaluation as well as specific covenants concerning each of the project components are provided in the following chapters. Common matters concerning implementation, procurement, cost estimates, and financing are presented hereafter. B. Cost Estimates and Financing 4.02 The total cost of the project is estimated at about US$38.1 million, of which about US$17.5 million, representing the estimated foreign exchange component, would be financed by the proposed Bank loan. The balance would be financed by the Government. Some of the above-mentioned consulting services could have been eligible for financing by the United Nations Development Program (UNDP), but the Indicative Planning Figure for the relevant period is fully committed and there are no funds available for this purpose in the Special Fund. A summary of the project cost is given on the following page. 4.03 The estimated construction costs for the Duran-Boliche and Puerto Ila-Doblones roads are based on detailed engineering and current unit prices for similar works. The necessary supplementary engineering for the founda- tions of bridges on the Puerto Ila-Doblones road is not expected to affect the cost of this project by more than 3%, which would be well within the margin of precision currently accepted for final estimates for road construction projects. Possible reduction in the cost of the Puerto Ila-Doblones road component was discussed at the time of negotiations (para. 6.03). The estimates for the 75 km of lateral feeder roads are based on average per km cost for similiar works. The location, exact length, design standards and detailed cost esti- mates for these feeder roads would be defined later (para. 6.05). Since these roads concern a relatively small portion of the civil works component of  - 26 - PROJECT COSTS Project Components Cost in Sucres (Millions) Cost in US$ (Million Equiv.) Bank Local Foreign Total Local Foreign Total Civil Works (a) Duran-Boliche (25 km) 192.5 192.5 385.0 7.7 7.7 15.4 48 (b) Puerto Ila-Doblones roadworks (29 km) 77.5 52.5 130.0 3.1 2.1 5.2 48 major bridges (spans 132 & 100 m) 20.0 15.0 35.0 0.8 0.6 1.4 48 (c) Lateral Feeder Roads (75 km) 37.5 25.0 62.5 1.5 1.0 2.5 40 Sub Total 327.5 285.0 612.5 13.1 11.4 24.5 47 Consultant Services (d) Construction SPN of (a) and (b) above 30.0 30.0 60.0 1.2 1.2 2.4 (e) Preparation of Feeder Roads Program 5.0 10.0 15.0 0.2 0.4 0.6 Sub Total 35.0 40.0 75.0 1.4 1.6 3.0 53 Base Cost (up to mid-1977) 362.5 325.0 687.5 14.5 13.0 27.5 Contingencies (f) Physical (10% of (a) and (b) 30.0 25.0 55.0 1.2 1.0 2.2 (g) Physical (20% of (c)) 7.5 5.0 12.5 0.3 0.2 0.5 (h) Price Variation 1/ 115.0 82.5 197.5 4.6 3.3 7.9 Sub-Total 152.5 112.5 265.0 6.1 4.5 10.6 TOTAL PROJECT 515.0 432.5 952.5 20.6 17.5 38.1 46 1/ Price escalation rates are as follows: (a) Foreign Exchange Element Civil Works: 1977-1979' 9% p.a. Civil Works: 1979-1980 8% p.a. Consulting services: 1977-1980 8% p.a. (b) Local Cost Element 1977-1980 12% p.a.  - 27 - the project, the uncertainty concerning their cost does not entail unaccept- able risk. Cost estimates for consulting services are based on recent con- tracts for similar services with Ecuadorian firms as well as joint venture of Ecuadorian and foreign firms. 4.04 The foreign component of the civil works for the Duran-Boliche and Puerto Ila-Doblones roads 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 much simpler tasks, 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 would be contracted to local firms, whereas preparation of the regional secondary and feeder roads program 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. The technical assistance component of the project would require 570 man-months of profes- sional services, of which 450 would be for construction supervision and 120 for the regional secondary and feeder road program. 4.05 A contingency allowance of 10% has been included to allow for increases in construction quantities for civil works. 1/ An allowance of 30% of total project base costs plus physical contingencies has been allowed for price variation for both civil works and consultant services, assuming domestic and international inflation rates as shown in the bottom of the cost table on the preceding page. 4.06 Disbursements of the loan would be made as follows: (a) for civil works, 47% of total expenditures; and (b) for construction supervision and preparation of the regional secondary and feeder road program, 53% of total expenditures or 100% of direct foreign exchange cost. C. Execution and Procurement 4.07 Within MOP, the DGOP would be responsible for execution of the project. During negotiations, the Government agreed to ensure adeqate liaison and coordination with other Government agencies such as MAG, IERAC, INERHI and CEDEGE to assist MOP in the preparation of a regional secondary and feeder road program, with respect to the study itself, as well as the institutional and organizational aspects of the resulting investment program. 1/ This allowance is 20% for lateral feeder roads, which have not been engineered.  - 28 - 4.08 Civil works for road construction and improvement totalling 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 character of feeder road works is not likely to attract international bidders, and there would be adequate competition among local contractors for these works. Consequently, invitations to bid for these works would not be published abroad; publicity within Ecuador (including notice to Bank member embassies) would be sufficient. For bidding purposes, the works would be divided into lots of appropriate size, and firms would be allowed to bid for any lot or combination of lots. Prequalification of firms in a manner acceptable to the Bank would be required for all works under ICB procedures. For procurement of 75 km of project feeder roads, post qualification would be sufficient. Specific arrangements for the division of civil works into lots were discussed and agreed at the time of negotiations. General terms and conditions of civil works procurement, including, specifically, the proced- ures for prequalification, 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. 4.09 The terms of reference for consultant services for construction supervision were reviewed and agreed with the Government during negotiations. The consultants to be selected under the project, as well as their terms and conditions of employment, would be acceptable to the Bank. 4.10 The implementation period of the project would be about three and one-half years. The Duran-Boliche Road would require about 24 months of dry seasons over the period from the end of 1977 through 1980 -- dry seasons in this coastal area normally begin in May and end in December. The Puerto Ila-Doblones road and lateral feeder roads would take two to three years to construct, with completion in 1980. On this assumption, the schedule of disbursements of the loan is included in Table 4.1. The timetable for project implementation is presented in Chart II. Risks 4.11 Particular attention was given during project preparation to the major sources of implementation problems encountered in past highway construc- tion 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 additional 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 6.04 and 6.05. 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. Recent Bank experience in this region of Ecuador has shown that spontaneous private investments have taken place when adequate transport infrastructure became available. Nevertheless, assur- ances were obtained concerning agricultural credit, extension services, land tenure and distribution of project benefits, which are discussed in paragraphs 6.09 through 6.12.  - 29 - TABLE 4.1 ECUADOR FIFTH HIGHWAY PROJECT Disbursement Schedule Cumulative Disbursements IBRD Fiscal Year at end of Quarter and Quarter Ending (US$ Thousands) 1977/1978 September 1977 - December 1977 50 March 1978 750 June 1978 2,450 1978/1979 September 1978 4,000 December 1978 5,200 March 1979 5,400 June 1979 6,400 1979/1980 September 1979 9,400 December 1979 11,400 March 1980 12,000 June 1980 12,800 1980/1981 September 1980 15,500 December 1980 17,500 Assumptions: - Bids for Duran-Boliche road received November 1977, construction starts January 1973; - Bids for Puerto Ila-Doblones road received January 1978, construction starts March 1978; - Feeder road construction starts June 1978. Source: Appraisal Mission January 1977  - 30 - V. THE DURAN-BOLICHE ROAD A. Description 5.01 The Duran-Boliche road is one of three major access roads to Guayaquil, and, for the purpose of this project, it can be considered as terminating at Duran, on the opposite bank of the Guayas River (see Map). Duran and Guayaquil are connected by a modern bridge 4.4-km long with four lanes. Guayaquil is the largest urban center and seaport of Ecuador; it handles some 80% of the country's total import tonnage and 50% of exports. 1/ Boliche, at the other end of the section, is at the junction of three main highways: (a) to the east, the highway connecting Quito and Riobamba with Guayaquil; (b) to the south, the Coastal Highway to Machala and, ultimately, Peru; and (c) to the north, the highway to Milagro, center of an area where a Bank-financed irrigation project is under way. About 4 km from Duran, there is a junction with the main highway to Babahoyo and Santo Domingo and the northern coastal region. A large part of the traffic to and from Guayaquil is therefore channelled through this vital artery, which also carries local traffic from neighboring small towns and villages. 5.02 The present two-lane road with its poor riding surface has inade- quate capacity for the relatively high traffic volumes that, growing at historic rates of over 10% per year, reached, in 1976, levels between 4,330 and 5,800 veh/day and is expected to carry over 10,000 veh/day in 1982 with about 48% heavy vehicles. The existing road is clearly obsolete. It needs constant and costly repairs due to structural deficiencies compounded by periodic flooding. B. Preparation and Engineering 5.03 The road was identified as one of the highest priority improvement projects in the Highway Master Plan. The 1974 Bank sector mission confirmed the urgency of the project. Detailed engineering was contracted to local consultants (Suelos y Concretos/Ecuador) in 1974, and, concurrently, a study was undertaken by US consultants TAMS to confirm feasibility of the invest- ments on the basis of preliminary engineering; feasibility was confirmed in early 1975. 5.04 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. The interchange, 4 km from Duran, would connect the project road with the existing road to Babahoyo. The at-grade intersection would be at the Boliche road junction. 1I/ Excluding petroleum products.  - 31 - 5.05 A new improved alignment is proposed throughout the 25 km in order to put the road on a higher, better-draining ground and to minimize the un- desirable effects of expansive clays. The new alignment would bypass the towns of Duran and Boliche. Design standards are shown in Table 2.5. Two critical aspects which received particular attention during project prepara- tion are: (a) the fact that the road crosses a flood plain and (b) the approach to the Guayas bridge. Embankment elevation was designed to avoid flooding. Rock fill would be provided as necessary on selected stretches to ensure free drainage and stability under high water conditions. Special communicating culverts would be provided to discharge flood waters. As regards the approach to the Guayas bridge, the design provides an adequate connection between the rural subdivision of Duran and the project road. 5.06 Final cost estimates, plans, specifications and bid documents were reviewed during appraisal and, after subsequent minor design revisions, they are now acceptable. Current cost estimates based on detailed engineering result in an average cost equivalent of about US$615,000 per km, including all structures and interchanges. C. Other Project Preparation Measures 5.07 MOP and the Bank have reviewed with particular attention two specific steps toward project implementation which will require coordination between MOP, which is responsible for the project, and the municipal and provincial authorities responsible, respectively, for the rural subdivision of Duran and the operation of the toll collection facility at the entrance of the Guayas bridge. These two agreements were reviewed by a post appraisal mission and revised during negotiations, as follows: (a) MOP and the "Consejo Municipal de Guayaquil" have confirmed their agreement concerning the design of the approach to the Guayas bridge, the scope of related right-of-way acquisition, including the specific properties to be affected thereby, and arrangements for securing and financing such acquisition. Construction of the new approach would also come under the project. (b) MOP and the "Concejo de la Provincia de Guayas" have confirmed their agreement concerning the location and design for the Guayas bridge toll collection facilities which would be relocated under the project. The above agreements are acceptable to the Bank. D. Project Impact 5.08 The Guayaquil metropolitan area will benefit from a less congested and less costly transport access, which will contribute to the development of its industry and enhance its role as Ecuador's leading port. Although some additional urban traffic may be generated by the project (para. 5.11), it  - 32 - would not have an adverse environmental impact on the area. Because the road terminates on the east bank of the wide Guayas river estuary, which is rela- tively distant from Guayaquil's Central Business District, and because of the natural barrier provided by the Guayas estuary, it is not expected that any significant urban development would take place in the existing low, rural land adjacent to the proposed road. Some development is expected to take place along the first 1.5 km through the "Parroquia Rural de Duran". The planned development of the metropolitan area of Guayaquil, including this section, is currently under study by a UNDP-financed Urban Development Plan- ning team. This team produced a preliminary land use zoning and road access plan for the entire area under study in November 1976. It confirms that significant urban development would not take place in the immediate vicinity of the proposed road alignment. E. Economic Evaluation (i) General 5.09 The economic justification of the proposed highway is based on the quantification of the following benefits: (a) reduction of operating costs to road users; (b) reduction of road maintenance costs; and (c) reduction of road accidents. (ii) Traffic 5.10 Existing traffic volumes on the Duran-Boliche highway and its con- necting roads were established through traffic surveys conducted in 1974 by the consultants TAMS-ASTEC and confirmation counts conducted by MOP in 1976. Current traffic varies from 5,800 vehicles per day (48% heavy) between Duran and the Babahoyo Junction to 4,330 vehicles per day (48% heavy) in the Babahoyo Junction-Boliche section. Indicators of traffic growth trends, such as gaso- line consumption, vehicle registration, population, and income were used as a base for traffic projections. These indicators were compared with projections made by consultants 1/ using a numerical model based on regional economic parameters. 5.11 Estimates of total traffic used in the evaluation of the proposed project vary - for 1982 - from 11,690 vehicles per day (AADT) on the Duran to Babahoyo Junction section to 8,400 on the Babahoyo Junction-Boliche section. The proposed project, through reduction in vehicle operating costs, would, 1/ Hydroservice-ASTEC, Quito-Guayaquil Expressway Study, 1976.  - 33 - depending on the type of vehicle, generate a traffic increase of 7% to 13.5% of normal traffic over the first three years after opening of the road. These increases have been estimated assuming a price elasticity of demand between generated traffic and reduction in vehicle operating costs of about -0.50 for light vehicles and buses and -0.40 for trucks. Traffic was forecast for 20 years using, for different road sections, overall growth rates between 10.0% and 9.0% p.a. through 1985, and 8.0% and 7.0% p.a. thereafter (Table 5.1). Since this traffic, for the most part, originates at points scattered outside Guayaquil's area of influence, it is considered long-distance traffic. On the basis of the O&D Survey of 1975, and projections of existing traffic, the consultants estimated that, by 1982, of the total traffic entering Guayaquil coming from the project highway, only about 900 light vehicles per day could be considered short-distance traffic from inside that area. (iii) Benefits from the Project 5.12 Quantifiable benefits from the proposed highway construction include the direct benefits derived by highway users--vehicle operating cost savings, time savings and accident savings. 5.13 The new highway, with four paved lanes, adequate shoulders, shorter length, reduced number of curves and intersections allowing higher average speeds, would reduce vehicle operating costs significantly (estimated at about 20% for heavy vehicles, 15% for light). Estimates of vehicle operating costs were prepared by the consultants based on de Weille, 1/ modified according to their experience in Ecuador and using Ecuadorian prices as input. A summary of the vehicle operating costs used for the project is shown in Table 5.2. Vehicle operating cost savings accounted for about 55% of total quantifiable benefits. 5.14 Benefits derived from reductions in travel time have been included in the evaluation. They constitute one of the important reasons for improving the existing road, which suffers from congestion and on which average speeds are low. Passenger time savings accounted for about 35% of total quantifiable benefits. The ER without time benefits is 14%. Time benefits were computed on the basis of the average labor wage when travelling for business purposes. Based on the consultants' 0&D surveys, about 40% of all passengers in buses, and nearly 70% of all passengers in light vehicles (including pickup trucks), would be travelling for business purposes. 5.15 Benefits derived from reductions of traffic accidents have also been included in the evaluation. Although no reliable records of accident rates in Ecuador are available, the observation of traffic flow and road conditions and the analysis of reported accidents in the area indicate a relatively high level 1/ Quantification of Road User Savings, World Bank Occasional Paper No. 2, 1968.  - 34 - of accidents per vehicle-km. Based on local observations and the reductions in accident rates when upgrading from two-lane to a four-lane divided highway observed in other countries, the consultants estimated an order-of-magnitude rate of accident savings for the project, as well as average costs per acci- dent. Reduction of accidents account for 3% of total quantifiable benefits. 5.16 In addition to road user savings, savings in road maintenance costs were included in the evaluation, accounting for about 7% of total quantifiable benefits. Actual MOP maintenance expenditures over the last five years on this highway 1/ were used as a base for determining maintenance costs without the proposed project. It was also assumed that the existing road would only serve local traffic, and its maintenance requirements would be minimal. Future maintenance requirements for the proposed project were determined for normal conditions of a four-lane highway with traffic growing at 7% p.a. In addition, an overlay has been assumed after 11 years of service. (iv) Benefits Distribution 5.17 The benefits resulting from savings in vehicle operating costs and reduced accidents are expected ultimately to be transferred, in large part, to the users through a reduction in rates charged by truck and bus operators of the highly competitive transport industry in Ecuador. This would have a direct impact on economic production, since most of the traffic on this highway 2/ is related to productive activities and trade. Additionally, the users would benefit from improved quality of service (comfort, safety, punc- tuality) and shorter travel time. (v) Overall Economic Return 5.18 The proposed road is well justified, with an economic return (ER) based on best estimates of 20%, including time benefits. Sensitivity analyses have been carried out on the main parameters affecting the economic evalua- tion (cost and benefits), showing that the ER would, even under adverse assump- tions, still be acceptable (Table 5.3). Also, a sensitivity analysis was carried out of the impact on the ER of diverting local traffic passengers from light vehicles to buses. The results showed that full diversion would have little effect--total benefits would be reduced by less than 5%. (vi) Marginal Evaluation of Ancillary Facilities 5.19 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 interchange, in comparison with a 1/ Amounting to an average of S/ 180,000 per km per year. 2/ Including 70% of all occupants in light vehicles, according to the consultants' O&D survey (para. 5.11).  - 35 - controlled at-grade intersection, is well justified, with an ER of 30%. Marginal benefits derived by highway users were calculated on the basis of an analysis of velocity profiles for each vehicle type on all approaches to the intersection. The analysis adapted the velocity profiles to adequate traffic light cycles for the at-grade alternative. Quantifiable benefits included marginal vehicle operating cost savings. An analysis of the First Year Benefit (FYR), which is estimated at about 20, shows that the proposed inter- change is well justified for immediate construction (Table 5.4). 5.20 An economic evaluation of the four-lane divided highway, based on the 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. Marginal benefits derived by highway users were calculated based on the estimated vehicle operating costs resulting from various traffic density conditions (levels of service). 1/ As the levels of service decrease with increased traffic, marginal vehicle operating costs increase. Estimates of these costs were made at peak and off-peak hours. An analysis of the FYR is estimated at about 10% (Table 5.4), which indicates that the four-lane highway is justified for immediate construction. If only a two-lane facility were built first, the addition of two more lanes within only five years after completion of the first two would unnecessarily increase construction costs and interfere with traffic and, hence, with the major road access to Guayaquil. It is recommended, therefore, that construction of the full four- lane divided highway be carried out immediately. 1/ These levels of service are a function of traffic volume and road capa- city.  ECUADOR FIFTH HIGHWAY PROJECT Duran - Boliche Highway Traffic Flows (AADT) Length Actual Estimated 1982 Average Annual Growth Section Trafic (Km) 1976 Light 1976-79 1980-85 1986-99 Total Vehicles Buses Trucks Duran - Babahoyo Junction Normal 4 5,800 10,400 5,600 1,700 3,100 Generated 1,290 760 220 310 Total 5,800 11,690 6,360 1,920 3,410 10.2 10.0 8.0 Babahoyo Junction-Boliche Normal 21 4,330 7,470 3,980 1,160 2,330 Generated 930 540 150 240 Total 4,330 8,400 4,520 1,310 2,570 9.5 9.0 7.0 Source: MOP Traffic Surveys, TAMS-ASTEC feasibility study, Hidroservice Quito-Guayaquil Study and mission estimates. January 1977 I-.  - 37 TABLE 5.2 ECUADOR FIFTH HIGHWAY PROJECT Duran-Boliche Road Summary of Vehicle Operating Costs/l (Sucres/Km) Type of Vehicle Existing Road Proposed Road Savings Light Vehicle 1.18 1.03 0.15 Bus 3.50 2.97 0.53 Truck 5.05 4.02 1.03 /1 Economic costs, including driver's salaries for buses and trucks. Source: ASTEC cost schedules, adjusted by the appraisal mission January 1977  ECUADOR FIFTH HIGHWAY PROJECT Results of Economic Evaluation: Duran-Boliche Road Economic Eval.based on Highway Length Financial Economic Best Estimates 3/ Sensitivity Analysis (ER) (km) Cost 1/ Cost 2/ ER 4/ FYR 5/ Cost +15% Benefits -25% (S/million) (S/million) Duran-Boliche 25 437.3 354.3 20 14 18 16 1/ Based on November,1976 cost estimates, including 10% physical contingencies and project supervision and right of way 2/ Financial cost net of taxes. 3/ Basis for best estimates: (i) annual traffic and growth rates per Table 4.1; (ii) Cost and benefits in November 1976 prices; (iii) project open to service in 1980; (iv) economic life of project, 20 years; (v) benefits include savings in vehicle operating costs, including professional driver's salaries and road maintenance costs and passenger time savings. Passenger time benefits accounted for about 35% of total quantifiable benefits. The ER without time benefits is 14%. Time benefits were computed on basis of the average labor wage when travelling for business purposes. Based on the consultants' 0 & D surveys, about 40% of all passengers on buses, and nearly 70% of all passengers on light vehicles (including pick-up trucks) would be travelling for business purposes. 4/ ER = Economic Return. 5/ FYR = First Year Return. Source: Mission estimates January 1977  ECUADOR FIFTH HIGHWAY PROJECT DURAN-BOLICHE ROAD Marginal Economic Evaluation of Interchange and Four-Lane Highway Marginal 1/ Marginal 2/ Economic Evaluation Sensitivity Project Component Financial Cost Economic Cost Based on Best Estimates 3/ Analysis (ER) (SI million) (S/ million) ER 4/ FYR 51 Cost +15% Benefits -25,' Babahoyo Junction Interchange 17.8 14.4 30 20 27 25 Four-Lane, Divided Highway 115.5 93.5 25 10 23 21 1/ Difference between full project and minimum project; costs based on Nlovember, 1976 estimates, including physical contingencies and project supervision. 2/ FincLrcial cost net of taxes. 3/ Benefits include savings in vehicle operating costs, including professional driver's salaries and passenger time savings, and for the four-lane highway analysis, road maintenance and accident costs. 4/ Economic Return H 5/ First Year Return Source: Mission Estimates January 1977  - 40 - VI. PUERTO ILA-DOBLONES ROAD A. Description 6.01 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 produce substantial benefits by providing improved all-weather transport service to those areas already under cultivation, thus facilitating their full development, and by opening for development new agricultural and forested areas. 6.02 The project area west of the Daule river (20 km from Puerto Ila) is presently not accessible from Puerto Ila. There are some dirt tracks in that part of the project's area east of the Daule river, but they are quite inadequate to provide even basic transport services. They have not been engineered and lack any provision for drainage. Their condition is from fair to poor in the summer, and they become impassable during the long rainy season. There is some private initiative to maintain them, but these are at best emergency repairs to maintain precarious access. Inadequate transport facilities are the main obstacle to the development of the good agricultural potential of the area. The proposed project would eliminate this bottleneck. 6.03 The proposed works would consist of two elements, namely: (a) the Puerto Ila-Doblones penetration road (29 km), with two major bridges with spans of 100 m and 132 m respectively over the Peripa river (9 km from Puerto Ila) and over the Daule river (20 km from Puerto Ila); and (b) a network of lateral feeder roads totalling about 75 km. The penetration road would be designed to class III standards (Table 2.5) and would be surfaced with gravel. The proposed standards are appropriate to ensure adequate year-round all- weather services and allow for future stages of improvement, including eventual paving. The average cost based on detailed engineering is about US$180,000 per km (excluding the cost of two major bridges), which reflects the rolling terrain and the resulting relatively high quantities of earthworks and the need to haul the gravel surface materials from the only available quarry near the Puerto Ila end of the road. Possibilities of affecting cost reduction by reducing the thickness of the surface course were discussed during negotiations, and would be evaluated under engineering studies to be completed by MOP's consultant within four months (para. 6.04). The lateral feeder roads would conform to first and second order feeder road standards (Table 2.6), including surfacing with select borrow material. The average cost of construction of lateral feeder roads would be about US$33,000 per km based on rough per km estimates for similar ongoing projects. B. Preparation and Engineering 6.04 The Puerto Ila-Doblones penetration road is one of ten high-priority development roads identified in the Highway Master Plan. Preliminary engineer- ing for the penetration road and bridges was subsequently undertaken by local  - 41 - consultant Cimentaciones Limitadas, retained by MOP. Feasibility of the investments was confirmed in a separate but simultaneous study by US consul- tant TAMS in early 1975. Cimentaciones was retained by MOP in 1975 to complete detailed engineering. 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 totalling about 75 km. Final design work for the Puerto Ila- Doblones road with two major bridges was incomplete at the time of appraisal, but supplementary engineering carried out by MOP with the 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 foundations and possible subsequent design revisions are necessary for the finalization of engineering and bidding docu- ments. MOP has agreed to carry out such supplementary engineering starting May 1977. The exact scope and implementation schedule of the necessary supple- mentary soil studies and engineering, expected to take four months, were reviewed and agreed during negotiations, together with the possible above- mentioned revisions to reduce the thickness of the surface course. Their completion and revision of engineering based on such studies, which are acceptable to the Bank, would be a condition of disbursement for civil works of the Puerto Ila-Doblones road. 6.05 The lateral feeder roads together with other agricultural develop- ment measures (para. 6.09) are a necessary complement to the proposed develop- ment road. The location and approximate length of feeder roads required to serve the project area have been estimated on the basis of a preliminary survey. Another preparation, including detailed definition of alignment, engineering, quantity takeoffs, contracting documents and cost estimates, will be prepared under the Rural Development Study included in the Fourth Highway Project (para. 3.14). In order to ensure a satisfactory prepara- tion and timely execution of this project component, the Government under- took to prepare, no later than December 31, 1977, a program of feeder roads to be constructed in the project area, showing detailed location, length, design standards, cost estimates, implementation schedules, etc. Adoption of such a program, acceptable to the Bank, would be a condition for disbursement for feeder road construction under the proposed loan. C. The Area of Influence 6.06 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. The northern limit runs parallel to the project road, approximately 13 km to the north. The area further north is benefitting from an IDB-financed colonization project at La Bramadora. The southern limit runs about 9.5 km to the south of the proposed road. This rectangular area, approximately 64,000 ha, is characterized by climatic and soil conditions which are favorable for a wide range of crops as well as for livestock produc- tion. 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 road and complementary lateral feeder roads.  - 42 - 6.07 At present, the extent and intensity of cultivation and resulting agricultural production in the project area are well below potential. Esti- mates of present land use within the project area indicate that about 25% are at present covered by forest and by land without agricultural potential. Of the remainder, some 48% are dedicated to perennial tree crops (including oil palm, platanos, bananas, coffee, and cacao), 8% to annual crops, including subsistence crops, and the remaining 18% to pastures (Table 6.1). Lack of basic transport and of public programs to support agricultural development account for the present low levels of productivity. Existing plantations are poorly kept. Grazing lands are generally underutilized. 6.08 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. The average holding size for the whole project area is 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. D. Specific Developmental Measures 6.09 In order to ensure that the anticipated increase in agricultural production and the resulting producer surplus would, in fact, materialize after the completion of the project, the Government would undertake specific programs to provide extension services and to make agricultural credit avail- able to local farmers in the area of influence of the road. The definition of detailed plans for the implementation of the above programs and measures would be based on the recommendations of the Rural Development Study (para. 3.14). It is expected, in fact, that this study will set the stage for an agricultural project for which Bank financing would be considered. However, the Government obligations under the covenants of the proposed loan would be independent of future Bank participation in agricultural programs for the project areas, as follows: 6.10 As regards extension services, the Government gave assurances to the Bank during negotiations that it would provide extension services to farmers in the area of influence of the road 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. 6.11 As regards agricultural credit, the Government gave assurances to the Bank during negotiations that it would make credit available to local farmers for complementary on-farm investments in accordance with arrange- ments acceptable to the Bank, to be prepared not later than the end of 1977, in light of the recommendations of the Rural Development Study financed under Loan 1231-EC. 6.12 As regards the distribution of project benefits, the Government gave assurances to the Bank that it would (a) review land tenure patterns in the area of influence of the project in light of the conclusions of the Rural Development Study financed under Loan 1231-EC, and (b) discuss with the Bank,  - 43 - not later than the end of 1978, appropriate measures designed to ensure a reasonably equitable distribution of the benefits of the project among farmers within the project area. E. Economic Evaluation (i) Project Benefits 6.13 Quantifiable benefits from the proposed highway construction were calculated by using a producer surplus approach, which attempts to measure the basic economic changes, particularly the net agricultural value added, gen- erated by the proposed road project, and complementary investments. 1/ This agricultural producers surplus (net value added) would, in fact, be generated by more intense use of the land, and the opening of new potentially productive areas. The area traversed by the highway project is highly suitable for agri- cultural production. Rainfall and soil characteristics are particularly suit- able for pastures, apt to sustain intensive beef production, and for various cash crops such as oil palm, rubber, abaca, platano, citrus, corn and cassava. 6.14 The present evaluation is based on information and analysis prepared by a team of researchers of the Ministry of Agriculture, assisted by individual consultants (para. 3.14). The continuation of the Rural Development Study would provide further information and recommendations for future land use. It is anticipated that double cropping, and the introduction of highly productive crops such as soya, will be recommended. Nevertheless, these eventual land use patterns have not been considered, so as to establish a conservative estimate of the economic project return. Assumptions concerning future land use (Table 6.1) and crop yields (Table 6.2) reflect the best conservative estimate of the area's potential. It was also assumed that productivity and intensity of land use in the area would expand over the present levels in the future, although at considerably lower rates, if the project is not implemented. This assumption reflects past experience in areas adjacent to the project area and is particularly significant for oil palm and livestock production. 6.15 It is estimated that a total of about 54,000 ha would be brought under efficient cultivation by 1990 as a result of combined efforts in highway and complementary agriculture investments. It is estimated that the result- ing growth of total production value would range from 7% to 10% p.a. through a 20-year period after opening of the proposed road. These increases would take place as some of the forest areas and fallow lands are brought under cultivation, and unsuitable or unproductive crops are replaced by more appro- priate ones. 6.16 Producer surplus benefits from crop land and pasture land would be generated by various annual and perennial crops and beef production. They were estimated by assuming that present land use trend patterns would persist. 1/ Following the methodology discussed in "The Economic Analysis of Rural Roads Projects," World Bank Staff Working Paper No. 241.  - 44 - The various crops under cultivation and their annual production for selected years are shown in Table 6.3. These increasing quantities are expected to supply regional and national markets, mainly in the urban centers of the coastal region and around Quito. Producers surplus benefits for this produc- tion have been measured in terms of farm gate prices and include the value of increased local consumption. 6.17 The incremental surplus obtained from 11 crops and livestock is estimated to be S/ 80 million in 1990, reaching S/ 200 million in 2000, of which about 8% is generated by annual crops, 80% by perennial plantations, and 12% by beef production. A summary of these benefits for selected years is shown in Table 6.4. (ii) Project Costs 6.18 Estimated future production, and hence project benefits, depend on the availability of adequate extension services in the area. Somewhat antic- ipating the detailed recommendations of the Rural Development Study, the scope and cost of extension services have been estimated on the basis of available information and experience with similar projects. It is expected that, during the first ten-year period, technical assistance would be more intensive than thereafter, and it would include an agronomist, a veterinarian and a socio- logist, associated with a number of technical staff. The full cost of this assistance has been included in the economic evaluation of the project. 6.19 Total investments required to bring about this production are spread over a 16-year period and are estimated to be on the order of SI 520 million. Of this total, 35% is the investment required for the proposed penetration road, 11% for feeder roads, 7% for technical assistance, and 47% for comple- mentary investments in agriculture. Incremental agricultural investments, including land clearing, preparation and leveling, fencing, housing, initial investments in crops and animals, and development of plantations up to year of production, amount to an annual average estimated at about S/ 20.0 million, starting in 1980. (iii) Economic Return and Benefits Distribution 6.20 The proposed project,including the lateral feeder roads, 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. 1/ An economic evaluation of the Daule river bridge and 1/ Sensitivity analyses were carried out for the following variables: (i) increase in road construction costs of +15%; (ii) reduction of over- all project benefits of -25%; (iii) reduction of agricultural yields of -25%; (iv) increases of agricultural production costs of +30%; (v) reduc- tion in the farm gate prices by -30%; (vi) reduction in the areas dedi- cated to the most important crops - African palm, coffee and cacao - of -20%; and (viii) increases in technical assistance costs of +40%.  - 45 - road section west of it was made separately. The results indicate that the marginal investment in these works is justified, with an ER of 14% based on best estimates. Marginal benefits generated by such were calculated from the producers' surplus that would be obtained by farmers west of the Daule river; this area comprises about 15% of the total area of influence of the project. A sensitivity analysis of these marginal calculations has also been carried out and the results are satisfactory (Table 6.5). 6.21 Producers' surplus benefits are expected to be reasonably distributed among the rural population. Today, small holdings account for near 95% of total farm units in the area of influence of the road, as shown in Table 6.6. Experience with similar neighboring areas suggests that these patterns are stable and would persist after construction of the proposed road. Land tenure situation and related Government regulation concerning size of holdings would be reviewed and adopted, as mentioned in paragraph 6.12. 6.22 The implementation of an agricultural development project in the area of influence of the road (para. 3.14) 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 tracks of land for colonization. To the extent that the project is a prerequisite to these additional benefits, the economic return has been conservatively estimated.  - 46 - TABLE 6.1 ECUADOR FIFTH HIGHWAY PROJECT Puerto Ila-Doblones Road Estimate of Land Use in 1976 and in 1990 after Implementation of the Road Project (Hectares) Types of Activities 1976 2/ 1990 3/ Annual Crops Rice 1,000 Corn 3,000 4,000 Cassava 200 1,500 Others 1/ 1,200 1,500 Sub-Total 5,400 7,000 Perennial Crops Cacao 15,000 7,100 Coffee 5,700 5,700 Oil palm 2,500 7,000 Rubber 400 900 Abaca 200 800 Platano 4,000 7,500 Banana 2,800 500 Citrus 200 600 Sub-Total 30,800 30,100 Pastures 11,500 16,500 Total 47,700 53,600 1/ Subsistence crops (on-farm consumption). 2/ Present situation ("before"). 31 Year in which all land has been incorporated and planted to crops as shown. In the "Twith project" situation -- shown here -- this is assumed to take place over a period of 10 years after road construction has been completed. Source: Ministry of Agriculture and Mission Estimates April 1977  - 47 - TABLE 6.2 ECUADOR FIFTH HIGHWAY PROJECT Puerto Ila-Doblones Road Estimated Present and Future Yields with and without the Project (tons/ha) Crop Present 1990 2000 1976 w/o with w/o with Cacao (dry beans) 0.18 0.18 0.38 0.18 0.60 Coffee ("pergamino") 0.20 0.20 0.60 0.20 1.00 Oilpalm (oil) 2.00 2.20 2.80 2.50 3.10 Rubber 0.455 0.60 0.90 0.90 1.30 Abaca 1.00 2.00 2.30 2.50 3.00 Platano 6.00 9.00 12.00 13.00 18.00 Banana 9.0 10.00 18.00 11.00 24.00 Citrus 10.0 12.00 16.00 13.00 20.00 Rice 0.40 0.60 1.00 - - Maize 0.80 1.20 2.00 1.60 3.00 Cassava 4.00 7.00 8.00 9.00 15.00 Meat (kg live weight) 0.050 0.060 0.120 0.70 0.200 Source: Ministry of Agriculture and mission estimates. April 1977  - 48 - TABLE 6.3 ECUADOR FIFTH HIGHWAY PROJECT Puerto Ila-Doblones Road Estimate of the Additional Production Resulting from the Road Project (tons) Types of Activities 1985 1/ 1990 1/ 2000 1/ Annual Crops Rice 100 - - Corn 700 2,000 4,800 Cassava 1,900 6,600 8,900 Sub-total 2,700 8,600 13,700 Perennial Crops Cacao 200 300 2,300 Coffee 500 1,300 4,300 Citrus - 2,000 6,800 Platano 7,700 21,200 26,100 Oilpalm - 300 3,600 Rubber - 200 500 Abaca - 300 300 Banana _ - 6,900 Sub-total 8,400 25,600 50,800 Meat 300 800 2,000 Total 11,400 35,000 66,500 1/ The selected years 1985, 1990.and 2000 represent year 5, the project year in which feeder roads have been constructed and credit and extension services have been organized, 1990 an intermediate year, and year 20, the year of maximum development, respectively. Source: Ministry of Agriculture and mission estimates. April 1977  - 49 - TABLE 6.4 ECUADOR FIFTH HIGHWAY PROJECT Puerto Ila - Doblones Road Summary of Agricultural Producers Surplus 1/ for Selected Years (S/ Millions) Types of Activities 1985 1990 2000 2/ Crops Annual 2.8 6.2 14.4 Perennial 31.6 63.0 179.8 Sub-Total 34.4 69.2 194.2 Livestock Beef 3.9 10.0 24.9 TOTAL 38.3 79.2 219.1 1/ Incremental net value added attributable to the highway project. 2/ The main products contributing were: coffee 31%, cacao 20%, oilpalm 19%, meat 12%, platano 7%, and the remaining products 11%. Source: Ministry of Agriculture and Mission estimates. April 1977  - 50 - TABLE 6.5 ECUADOR FIFTH HIGHWAY PROJECT Puerto Ila-Doblones Road Results of Economic Evaluation Daule River- Puerto Ila-Doblones Doblones Length (Km) 29 4 Financial Cost 1/ (S/ m) 242.0 58.4 Economic Cost 2/ (SI m) 196.0 47.3 Economic Evaluation Based 3/ on Best Estimates (ER) 4/ 14 Sensitivity Analysis (ER) 4/ (i) Road Cost +15% 16 12 (ii) Overall Benefits -25% 13 9 (iii) Agricultural Inputs - Yields -25% 13 9 - Variable Production Costs +30% 16 12 - Farm Gate Prices -30% 10 6 - Crop Areas Reductions 5/ - African Palm 17 13 - Coffee 17 13 - Cacao 16 12 - TAS Costs 6/ + 40% 17 13 1/ Based on November, 1976 cost estimates, including 10% physical contingencies and project supervision and right-of-way and about 75 km of lateral feeder roads. 2/ Financial cost net of taxes. 3/ Basis for best estimates: (i) Agricultural producers surplus per paras. 6.13 to 6.17 and Table 6.3; (ii) costs and benefits in November, 1976 prices; (iii) project open to service in 1981. 4/ ER = Economic Return 5/ Reductions in the areas dedicated to the most important crops: african palm, coffee, and cacao, by 20%. 6/ Technical Assistance Extension Services Source: Mission estimates April 1977  - 51 - TABLE 6.6 ECUADOR FIFTH HIGHWAY PROJECT Puerto Ila-Doblones Road 1976 Land Holding Pattern in the Area of Influence of the Road and Estimated Distribution of Producer Surplus Benefits According to Farm Size Description Small Holdings Large Holdings Average Size 32 Ha 140 Ha General Average 38 Ha Number of Farms 1,200 70 Percentage of Farms 95% 5% Producer's Surplus Distribution 80% 20% Source: Ministry of Agriculture and Mission estimates. April 1977  - 52 - VII. PREPARATION OF A REGIONAL SECONDARY AND FEEDER ROAD PROGRAM 7.01 The project would also include technical assistance for the prepara- tion of a regional secondary and feeder road program mainly in the provinces of Guayas, Los Rios, and El Oro, and for study of required institutional and organizational arrangements. This project element would address important improvements required in the transport and, to some extent, in the agricultural sectors (paras. 2.19 and 2.20). As such, it would help prepare future projects and add to the comprehensive program of institutional improvements already in progress under the Fourth Highway Project. The necessary consulting services would require 120 man-months of professional staff, about half of which should normally be by foreigners. 7.02 The consultants should, more specifically: (a) review existing arrangements for preparation and implementation of feeder road projects and make recommendations for improve- ments, particularly as regards coordination among the principal Government institutions involved; (b) review existing criteria and standards for selection and design of feeder roads, and recommended changes, particularly as regards a comprehensive manual for project selection; (c) formulate and recommend a regional program for secondary and feeder road construction and improvement in the provinces of Guayas, Los Rios, and El Oro, which would be suitable for Bank financing; and, as necessary, (d) consider the application of labor-intensive construction technologies and review their economic and technical feasibility; (e) carry out additional engineering design work to complete preparation of the program recommended under (c) above. 7.03 Benefits were not quantified for this program. This project compo- nent is, however, considered justified in view of the fact that it would lead to the preparation of sound feeder road programs and to a more efficient use of resources currently allocated to this purpose, in particular through expected institutional improvements in project identification and preparation.  - 53 - VIII. AGREEMENTS REACHED AND RECOMMENDATION 8.01 During negotiations, agreement was reached with the Government on the following: (a) assistance to be provided to MOP by MAG, IERAC, INERHI, and CEDEGE in the preparation of a regional secondary and feeder road program (para. 4.07); (b) the division into lots and the terms and conditions for civil works procurement, including prequalification procedures and inclusion of price variation formula in civil works contracts (para. 4.08); (c) the terms and conditions of the required consultant services for construction supervision (para. 4.09); and (d) preparation and presentation to the Bank of plans, design specifications and cost estimates for required lateral feeder roads in the Puerto Ila-Doblones area (para. 6.05). 8.02 During negotiations, assurances were obtained from the Government on the following: (a) provision by the Government of extension services to farmers in the Puerto Ila-Doblones area, starting in 1979, in accor- dance with a program acceptable to the Bank (para. 6.10); (b) provision by the Government of credit to farmers in the Puerto Ila-Doblones area of influence, on terms acceptable to the Bank, (para. 6.11); and (c) review by the Government of land tenure patterns in the Puerto Ila-Doblones area of influence, and discussion with the Bank of specific measures to correct undesirable distribution of benefits (para. 6.12). 8.03 During negotiations, agreement was reached with the Government that completion of additional geotechnical studies and readjustment in the engineer- ing design of the bridges and the granular surface course of the Puerto Ila- Doblones road based on such studies, and acceptable to the Bank, would be a condition of disbursement for civil works of the Puerto Ila-Doblones road. The scope and implementation arrangements for such supplementary engineering were also discussed and agreed during negotiations (para. 6.04). 8.04 During negotiations, agreement was reached with the Government that adoption of a package of lateral feeder roads (para. 8.01 (d), satisfactory to the Bank, would be a condition of disbursement for civil works of such feeder roads (para. 6.05).  - 54 - 8.05 The covenants of Loan 1231-EC concerning the enforcement of axle- load regulations (para. 2.06) and the strengthening of highway maintenance (para. 3.11) would also be covenants to the proposed loan. 8.06 Subject to obtaining satisfactory assurances and reaching agreement on the above matters, the project provides a suitable basis for a loan of US$17.5 million equivalent to the Republic of Ecuador. The loan would be for a term of 17 years, including a three-and-one-half year grace period. May 6, 1977  ECUADOR FIFTH HIGHWAY PROJECT MINISTRY OF PUBLIC WORKS AND COMMUNICATIONS - ORGANIZATION CHART Minister | Sub-Secretary | t Sub-Secretary | Public Works l I Transports --- --- -- ---LegalDept. - - RodDrco General Director dmiisrectior n Publicl Council Public Works Planning & Coordination Administration Relations Phsia Planning & OanzationAdiitaon Prnel SpieFnne Planning Economic TransnorttrMetiod nnn Evaluations . . I I -------90--0"- Iunits receiving * EI] l .___. _ | |technical assistance I undrloa 123-EC Director Director Director Director Executunder loan 1231 Design & Studies Construction Road Maintenance Programming I Unit & Consultants I ' - * to be set up - * supervisory I_L - - -__ - - -_ under covenant function -Highways - Highway - OPerations -Programming & of Loan 1231-EC -Public Works Supervision -Routine Evaluation ....... temporary for execution -Soils & Materials - Public Works Maintenance & -Training & of I DB financed project Supervision Rehabilitation Publications - Equipment World Bank-16900   ECUADOR FIFrH HIGIHWAY PROJECT Projet Ioplee-ttio- Schedule Project R-ep-oslbi Compone- Ace-r 1 2 3 4 5 6 7 8 9 00 01 12 13 14 15 16 17 OR 19 20 21 22 23 24 25 26 27 SR 29 30 31 32 33 34 35 36 37 38 39 40 41 Duro-B.Iioha road 1. -cal for p-eq-1ifi-atio 8lop K 2. -prequalfi-ati-o MOP K 3. -cal foe bids HOP i 4. -cod of cotrat MOP 0 5. --oet-oti-n Contrator x o 1 0 0 0 t 0 C 2 0 0 0 1 0 0 0 C 0 0 0 0 I K K K 0 0 0 0 t It C 0 0 Puerto Ila-Dlbl.... rood 6. -co1 Roe pr-qoalfi-ati- MOP 0 7. -peeqoalico-tion MOP it 0. -coi Roe bids MOP 0 9.-cood of cotract MOP 10. -cent-atieo Contrator 2 0 0 0 C C 0 0 0 0 0 0 0 '8 0 0 0 0 0 K t K I K K K K 0 K it 0 K K Lateral Poed- roads 11. -cal Poe p-eqa ifloatla- HOP 0 12. -pMallcie OP 0 L3. -cal Rae bide MOP 0 14. -ae-d of cotrat MOP It 15. --oct-otiau Cootra-toe 0 K K K I I I I K K K K K K I K K Techoical Assistanc Roe Feader Road Proar- 16. -pesp-r dc-steot for call for proposals MOP, NAG K 0 0 17. -ecolcte proposals and aelst toMoto OP o 18. -i-ptIon report Co....ltaot K K K K 0 0 19. -p-spas -acoa Oo-alt-t K 21 0 0 0 0 0 0 20. -coplotion ef feeder-uutc rod p-ag-e MOP,MAG,IERAC 0 C 0 0 0 21. -copletoe-qoci-d 0 C 0 0 0 0 0 0 eogleeeriogCoc-at-nt Jo-oay 1977 Appraisal Rep-er   1BRD-11882R3 77 00 75100 73 00 MAY 1977 8611. ~~~~~~~~~~~~~~~~~ECUADOR | ;-X 9 o FIFTH HIGHWAY PROJECT IESMEP DAS ElESCAsp L 4A TRANSPORT NETWORK ~~~~~~~0 _i7 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~/ PROJ~,ECT SCARS 000 NATIONAL CAPITAL 0*00*~~~~I NC 1 Q Q X e)voSc X u yoEhChu~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Fmt < POOVINCIAL CAPITALS N A p 0 TORSOS OnRoRriSi ~ OTOI C [IM E