Turkey - Second Highway Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No- 4978-TU REPUBLIC CF TURKEY STAFF APPRAISAL REPORT OF A SECOND HIGHWAY PROJECT May 18, 1984 Projects Department Europe, Middle East and North Africa Regional Office This document has a restricted distribution and may be used by recipients only in the perfornnance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (as of end March 1984) Currency Unit = Turkish Lira (TL) US$1.00 = TL 320 US$0.31 = TL 100 FISCAL YEAR January 1 to December 31 WEIGHTS AND MEASURES 1 meter (m) = 3.281 feet (ft) 1 kilometer (km) = 0.621 miles (mi) 1 metric ton (m ton) = 0.984 long ton (Ig ton) 1 liter (1) = 0.264 US gallons (gal) PRINCIPAL ABBREVIATIONS AND ACRONYMS USED ERR = Economic Rate of Return FY = Financial Year FYR = First Year Return GDP Gross Domestic Product HDM = Highway Design Model ICB = International Competitive Bidding KFAED Kuwait Fund for Arab Economic Development KGM = General Directorate of Highways LCB = Local Competitive Bidding NTMP = National Transport Master Plan p.a. = per annum pass/km = passenger kilometers PCR = Project Completion Report pcu - passenger car units PT = Project Team RAM = Road Analysis Model RTIM = Road Transport Investment Model SPO = State Planning Organization ton/km = ton kilometers TSM = Transport Sector Memorandum YSE = Roads, Water and Electricity Directorate of Ministry of Agriculture  FOR OFFICIAL USE ONLY REPUBLIC OF TURKEY STAFF APPRAISAL REPORT OF A SECOND HIGHWAY PROJECT Table of Contents Page No. I. THE TRANSPORT SECTOR ........... ............................. 1 A. The Role of Transport ........ .......................... 1 B. Current Situation and Issues ...... ..................... 2 C. The National Transport Master Plan ..... ................ 3 D. Previous Bank Experience in the Transport Sector ....... 4 II. THE HIGHWAY SUB-SECTOR ............ ........ .... 5 A. The Network. 5 B. Road Transport Industry. 6 C. Highway Administration. 7 D. Engineering, Construction and Maintenance of Highways 8 E. Highway Planning .9 F. KGM Highway Investment Program. 9 G. Highway Financing .11 H. Performance of First Highway Project .14 III. THE PROJECT .15 A. Objectives ..15 B. Description of the Project ..16 C. Cost Estimates ..18 D. Financing ..20 E. Implementation ..21 F. Procurement. 24 G. Disbursement ..24 H. Environmental Impact ..26 IV. ECONOMIC ANALYSIS ......... . .................................. 26 A. Introduction and Economic Context ......... .. .......... 26 B. Investment Program .......... o ...... ................... 26 C. Equipment and Spare Parts .....o ........................2 ,9 D. Training and Consultancy Services ......... ..... o ....... 30 E. Project Risk ............. o ............................. 31 V. RECOMMENDATIONS ................... 31 This report is based on the findings of an appraisal mission in December 1983, composed of Messrs. R. Bonney (Economist) and W. Sikorski (Engineer, Consultant) and is prepared by Messrs. D. Powrie (Engineer), R. Bonney, W. Sikorski and A. Mackie (Mechanical Engineer, Consultant). 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 (Contd.). ANNEXES Page No. 1 - Analysis of KGM Equipment Requirements ............. 33 2 - Indicative List of Equipment to be Purchased by KGM under the Proposed Project (1985-88) ........... 50 3 - Technical and Economic Criteria for Evaluating KCM Highway Investment Projects .................e... 52 4 - Details of Highway Sections in the First Year's (1985) Civil Works Program ....... .................se 61 5 - Terms of reference for Programs of Pavement Research . ................................. *........ 62 6 - Estimates of Annual and Total Costs for the KGH Investment and Maintenance Program and Bank Participation ..................................... .........0...... 66 7 - Project Implementation Schedule for a Highway Rehabilitation Program (sample) ............. ....... 67 8 - Overall Implementation Schedule of World Bank Loan Components .... .. .. ..... .. ...... .. ...... ..... .... 68 9 - Auditing Requirements ....... ................ ....... 72 10 - Terms of Reference for the Functions of the Project Control and Coordinating Team (PT) ......... 74 11 - Procurement Procedures ................ .. ............ 76 12 - Schedule of Estimated Cumulative Loan Disbursements 79 13 - Selected Documents and Data Available in the Project File ..................................................... 80 MAPS 1. IBRD 17912 - Turkey: State Highway Network 2. IBRD 17913 - Turkey: Regional Administrations of General Directorate of Highways  1. THE TRANSPORT SECTOR A. The Role of Transport 1.01 Transport is vital for the economic, political and economic devel- opment and integration of a country as large as Turkey, with populations and economic activities spread over a wide area and where people and goods often have to trav-' long distances over difficult terrain under severe climatic conditions. Its economic role extends beyond its direct contribution to GDP and employment through its indirect impact on such related activities as construction, manufacturing, retail trade, insurance, police and taxation. It has been one of the more dynamic sectors of the economy prior to 1978, when traffic growth rates were about 1-1/2 times the growth rate of GDP. Since that time, the growth of domestic traffic was practically halted under the impact of the increases in oil prices and the 1980 economic stabiliza- tion policies. The transport system of Turkey provides also a vital bridge between Europe and the Middle East. 1.02 The system consists of about 60,000 km of state and provincial highways which comprise the heavily trafficked interurban and interregional network; about 220,000 km of rural roads and tracks; about 8,000 route-km of railways- about 100 port and landing facilities, including 15 major ports, ana 16 airports of which 2 handle scheduled international traffic. 1.03 Road transport, which is in the hands of the private sector domi- nates the industry (see Table 1.1); in 1982 it accounted for 702 and 90% of total freight and passenger traffic respectively. The corresponding share of railway freight was about 10%, down from 20% in 1976 (the peak of railway freight) and also about 10_ for railway passenger traffic. Data on coastal traffic are not very reliable but coastal shipping's share in total freight transport is estimated at about 20%, primarily oil products. Table 1.1; Traffic by Mode ---------- (million ton/km or pass/km) --- 1978 1980 1982 Pass. Cargo Pass. Cargo Pass. Cargo Road; Domestic+Import/Export 36,400/1 43,200/2 30,100/1 45,600/2 33,000/1 44,400/2 Of which Transit - NA - NA - 5,200 Rail: /3 Domestic+Import/Export 2,969 5,634 3,549 4,971 3,250 6,005 Of which Transit - 900 - 555 - 893 Coastal Shipping /4 - 3,385 - 14,000 - 17,000 /1 Bus traffic intercity only. /2 Excluding transit but including estimated tertiary road traffic. /3 Including transit freight but excluding suburban passenger. /4 Including after 1978 oil products which account for about 80% of traffic. Source: Government agencies and mission estimates.  - 2 - 1.04 A Transport Sector Memorandum (TSM) which is presently being discussed with the Government provides an overview of the current situation, issues and prospects of the sector. Following is a summary of its principal findings. B. Current Situation and Issues 1.05 The Bank's knowledge of Turkey's transport sector has been progres- sively improved since the Public Sector Investment Review of 1980. It is particularly derived through preparation and implementation of the ongoing Highway Rehabilitation and Ports Rehabilitation projects and from an active sector dialogue with the Government. However, although up-to-date knowledge of the Highway Sector is particularly detailed and can be coordinated with the National Transport Master Plan (NTMP), experience of other modes is less detailed and recent work has concentrated on identifying priority institu- tional and policy issues. Although the proposed project is designated as a Second Highway Project, it focusses on the size, composition and quality of the General Directorate of Highway's (KGM) investment and maintenance programs for 1985-1988 and the arrangements for their implementation. Expansion of Bank activity to encompass the entire transport sector will be a step by step process, including; (i) a dialogue on the TSM, which has already started; (ii) a loan for the proposed Second Highway Project; (iii) the preparation of projects for the railways and ports to address policy and institutional issues in these modes; and (iv) a review of public investment in the transport sector. 1.06 The transport system will have to be developed to keep pace with the expected growth of traffic as overall economic growth resumes. Further- more the system will have to adapt to major structural changes, in particu- lar: .i) to support a shift in Turkey's foreign trade pattern, resulting from liberalization of imports and policies to improve export incentives, especially the increased emphasis on exports to the Middle-East; (ii) to accommodate a major expansion in transit traffic between Europe and the Middle-East; (iii) to meet the transport requirements of proposed new industrial and mining developments in coal, iron ore and other basic commodities which may lead to changes in traffic patterns and the demand for bulk transport; (iv) to support the increasing emphasis on developing the less advanced areas of the country and the rapid growth of urban centers; and (v) to incorporate new technological and operational developments, especially the rapid containerization of sea-borne general cargo.  - 3 - 1.07 Turkey's transport system has generally been able to meet transport demand, although short-term bottlenecks do occur and transport costs are often higher than they would be if modern equipment and the appropriate infrabtructure were in place. Railway bottlenecks have caused cutbacks in production in industries such as cement, textiles and paper, and have caused diversion to road system of bulk traffic which could be carrie more econom- ically by road. At present, road transport is highly competitive and is able to handle expeditiously the trade offered apart from occasional unusual peak demands. Even if policy to shift large amounts of freight to railways and coastal shipping, described in the NTMP, is successfully implemented, highway transport would still be the major carrier. The principal problem in this area is that the road infrastructure is below standard for current traffic and is deteriorating seriously, especially on the principal transit and export routes, despite an important maintenance program. The ports have little modern container handling equipment with the result that loading and unloading operations are sometimes very slow and costly. The most serious problem, however, rests with the railways where traffic is being diverted to other modes because of the poor quality of their services and their opera- tional capacity is so low that they cannot accept all traffic that is being offered. 1.08 The Government will also have to address some basic issues in pricing, investment and in operational efficiency (para. 1.11). Prices do not always cover costs; road user charges on trucks may not appropriately reflect costs, the railways operate at a loss, and port tariffs are unrelated to the cost of specific activities. In the area of investments, the process from project preparation through project implementation is weak in several key sub-sectors. Operational efficiency is frequently wanting, especially in the railways leading to low quality and uncompetitive services. To a large extent, these issues reflect institutional deficien- cies in management, organization, staffing, etc., which will require persis- tent and long-term efforts to remedy. C. The National Transport Master Plan 1.09 The Government's plans for the development of the sector are embodied principally in the stabilization programs pursued since 1980 and, espec'ally, in the National Transport Master Plan (NTMP) for 1983-1993, which was approved by Government in 1982. The principal features of the NTMP are as follows: (i) total freight transport in ton-km is expected to grow at an average rate of 4% per year and total passenger-km at 4.6% per year, assuming an average annual growth rate of GDP of 5.5%; (ii) total investment in the transport sector is expected to increase from 1.66% of GDP in 1983 to 3.35% in 1993; (iii) an objective will be a major shift of traffic from road to rail and coastal shipping and this has led to a corresponding policy objective of a shift in the modal allocation of investment mainly from roads to the railways and shipping although roads retain the largest share;  - 4 - (iv) an identification of transport corridors where bottlenecks exist or are expected to arise; and (v) major investment projects selected on the basis of a multi- criteria analysis. 1.10 The NTMP is a valuable component in the planning process for the sector in that it provides a first comprehensive long-term forecast of transport demand, as well as a general framework and general directions for the development of the sector. It also draws attention at an early stage to several corridors where bottlenecks are likely to arise. Furthermore, the NTMP is to be supported by detailed five-year plans, now being prepared for 1985-89 for each mode by each agency; these plans are to be rolled over each year. The proposed project focusses on the 1985-88 investment and mainte- nance plan for state and provincial highways. The Bank is also discussing the plans for railways and ports as part of the preparation of possible projects for these modes. Rural roads and tracks are closely associated with rural development and need to be looked at in that context. The authorities also intend to update the NTMP every three years, the first time in 1985, to take into account the experience with its implementation during the preceding years and changing economic forecasts. 1.11 The TSM was initially discussed with the previous Government in July 1983 and these discussions are continuing. At that time, a broad consensus was reached on the principal issues in the sector and the basic goals and policy principles to be pursued. In particular, the authorities agreed that tariffs should be based on costs, although specific programs to reach this goal gradually would have to be prepared for each mode. In fact, studies are already being carried out under the ongoing ports and highway projects as a basis for establishing appropriate port tariffs and road user charges. The authorities also accepted the need for improving project preparation, including the preparation of feasibility studies for major investments, and to strengthen existing institutions with a view to raise their performance. As explained in the following chapters, the Directorate for Highways (KGM) in the Ministry of Public Works and Resettlement has already made an impressive start during the past two years in introducing a system of comprehensive detailed planning. A master plan for the develop- ment of the ports has been prepared by Louis Berger International (USA) while discussions are underway with the railways for the introduction of comprehensive corporate planning. D. Previous Bank Experience in the Transport Sector 1.12 The Bank has participated in four projects in the transport sector, two ports projects of which one (Loan 1741-TU) is ongoing, one railway project (Loan 893-TU - completed) and one highway project (Loan 2137-TU) which is also ongoing and scheduled for completion in June 30, 1987. Details of these projects and their status are included in the Project File (see item B.19 in Annex 13). Project implementation, although experiencing delays, has generally been satisfactory in achieving physical targets. Most problems have occurred in implementing policy decisions. However, during and after preparation of the NTMP, Government has adopted a more coordinated  -5- and realistic approach towards transport sector policy. This has been reflected in the quality of preparation of the proposed project and in Government's willingness to discuss the important sectorial issues raised in the Transport Sector Memorandum. 1.13 Onl, the Railway Project (Loan 893-TU of US$47 million) which covered the first three-year tranche of the Railways 1972-1977 Investment Plan and closed June 30, 1981 has been the subject of a Project Completion Report (PCR). This PCR is currently under review by Operation Evaluation Department which is preparing a report on the project. The main conclusions of the PCR were that the project was largely successful in meeting its physical objectives, especially track renewal. However, it was less than successful in achieving institutional and policy objectives, particularly relating to improved productivity and financial viability. These issues are being addressed in the transport sector discussions between the Bank and the Turkish Government. II. THE HIGHWAY SUB-SECTOR A. The Network 2.01 Responsibility for public roads is divided between KGM of the Ministry of Public Works and Resettlement and the Road, Water and Electricity Directorate (YSE) of the Ministry of Agriculture.l/ The KGH is responsible for construction and maintenance of state and provincial roads totalling about 61,000 km, of which about two-thirds are paved. Rural roads are part of the agricultural system and this is reflected in their being attached to the Ministry of Agriculture for administrative purposes. There are some 220,000 km of rural roads and tracks, of which approximately 6,000 km were paved in 1983. During 1984 about 1,100 km of low volume roads will be transferred from KGM to YSE, or deleted from the network, because they are no longer considered to be of regional importance or critical to socio-economic needs. 2.02 The state and provincial highway system is vital for the transpor- tation system since they carry about 70% of total land freight traffic and about 90% of land passenger traffic. A major part of the system was built in the 1950's and 1960's and is therefore nearing the end of its normal service life, especially since actual traffic volumes have been higher than had been anticipated when the roads were built. Traffic counts and surveys of existing road conditions, carried out by KGM as part of the preparation of its five-year plan, indicate that many roads are deteriorating rapidly, despite heavy maintenance, and carry traffic volumes in excess of economic capacity. Road conditions are worst, mainly, on the roads that have experienced the rapid increase in transit and export traffic in recent 1/ Prior to 1984, the Ministry of Village Affairs was responsible for rural roads.  years. To cope with current traffic, their pavements must be strengthened and some roads have deteriorated to such an extent that they require complete reconstruction. The road rehabilitation program initiated under the ongoing Highway Project and to be extended under the proposed project with Bank financing are designed to remedy this situation (para. 2.15). Table 2.1; The Highway Network Paved Unpaved Bituminous Surface Category Concrete Dressed Improved 1/ Unimproved 2/ Total _-_______--____---- km --------- State 3,780 21,673 6,400 100 31,953 Provincial - 12,996 9,769 6,235 29,000 Rural - 6,000 128,000 86,000 220,000 Total 3,780 40,669 144,169 92,335 280,953 1/ Selected material 2/ Natural soil with or without drainage structures Source; State Highway Authority and YSE Directorate B. Road Transport Industry 2.03 The road transport industry is mainly privately owned and includes companies in a wide range of sizes, some of which are grouped into associa- tions or cooperatives. In 1983, 682 Turkish trucking firms were engaged in international trade with a total capacity cf 124,000 tons. Competition between operators keeps tariff levels low, but they at least cover operating costs. The rate of company failure does not present unusual problems. 2.04 Vehicle overloading is an issue, but which is being effectively addressed by the' authorities. New legislation 1/ has been introduced concerning penalties. This legislation contains a graduated scale of finan- cial penalties and, although these still appear to be relatively low, the authority to compel vehicles to unload in order to come within the legal limits before proceeding is a very severe deterrent. Fixed point weigh- stations and mobile weigh-bridges procured under the ongoing Loan 2137-TU provide adequate facilities for checking loads. 2.05 Vehicle fleet statistics in Turkey are not up-to-date. The most recent figures available are for 1980 and show the composition of the fleet to be as follows: 1/ Traffic Law; Law Number 2918 of October 13, 1983  - 7 - Table 2.2: 1980 Highway Vehicle Fleet 1977-1980 Vehicle Type Number X increase p.a. Medium and heavy trucks 170,273 r.8 Light trucks and pick-ups 156,908 7.2 Buses 96,707 7.0 Cars 710,915 9.8 Total 1,134,803 8.6 Recent estimates indicate that during the period 1980/83 the numbers of light trucks, pick-ups, buses and cars have remained relatively static, whilst medium and heavy trucks have shoyn an increase of about 3%. This trend is supported by the following data in Table 2.3 on fuel consumption, which show that gasoline consumption declined by about 16% between 1.979 and 1983, whereas diesel fuel consumption increased by about 20%. Table 2.3: Fuel Consumption* (million tons) 1979 1980 1981 1982 1983 (Est.) Gasoline 1.79 1.67 1.65 1.53 1.50 Diesel 3.65 4.05 4.03 3.93 4.40 A These figures exclude the unrecorded quantities of cheap diesel oil imported in specially fitted out-size fuel tanks on trucks serving the export and transit trade with Iran and Iraq. The decline in gasoline consumption reflects a major shift from the more powerful car type to smaller fuel efficient cars, and showe that Govern- ment's fuel pricing policies have been effective. The rise in diesel fuel consumption is at least partly attributable to the sharp rise in transit and export traffic. Recent traffic counts indicate that traffic volumes on the roads have started to increase again. C. Highway Administration 2.06 The organization of KGM is effective and it is competent and well run. The labor force of KG!4, while still large, has been reduced from 34,200 in 1981 to 31,600 in 1983. In general, KGM higher level staff is competent, although in many cases refresher courses and courses designed to expose them to up-to-date techniques of planning, supervision, and works and equipment control are needed.  -8- 2.07 Under the ongoing highway project and in preparation of the pro- posed project, KGM has made important steps to improve its organization: the planning staff has been strengthened and the planning approach broadened to cover the entire network in a systematic way; a project monitoring unit has been established which is beginning to function efficiently; the number of field supervisory staff has been increased significantly and is being trained to check the work of contractors, and initial steps have been taken to improve highway safety. The proposed project aims to consolidate and extend the progress made in these fields (para. 3.08). D. Engineering, Construction and Maintenance of Highways 2.08 Engineering, construction and maintenance functions are performed to a generally satisfactory standard by or under the supervision of KCM. Road design standards are appropriate to traffic flows and physical charac- teristics. Insufficient compaction of the road bed has been a fault in the past. However, KGM is well aware of this problem and is now rigorously addressing this issue through close supervision of new works (see item B8 of Annex 13). 2.09 KGM used to implement 75% of its consLruction work by force account. This percentage is being reduced under the ongoing and proposed projects to approximately 40%. In fact, KGM plans to increase the works to be carried out by contract to about 75% by 1993. The Turkish contracting industry is large and efficient and, in 1t83, had contracted ongoing works overseas of about US$12 billion. The industry has adequate equipment to take on the increasing contract works of KGM. Routine maintenance is carried out by force account. While the proportion of work carried out by contract is scheduled to increase this is within an expanding overall program and the work carried out by force account on the investment and maintenance programs together would remain at about present levels. 2.10 To carry out its force account maintenance and investment opera- tions, KGM has a fleet of about 9,000 major items of equipment spread through 17 regional divisions. This equipment has a replacement value of about US$550 million. Equipment is well maintained and efficiently used. However, due to economic and financial constraints, the equipment park is older than economically acceptable: over 40% of the park in 1983 was older than 11 years and this proportion would increase rapidly during the next 5 years to well over 75% of the fleet. Moreover, the composition of the fleet has become unbalanced, mainly due to the fact that some items of equipment wear out faster than others and also because of the declining kilometrage of unpaved roads and the increasing kilometrage of surface dressed and bitumi- nous concrete roads. Consequently, an equipment renewal program associated with selective scrapping is needed urgently. The proposed program is based on a careful analysis of needs in relation to work. About 802 of the equip- ment to be bought is primarily for road maintenance. An exposition of this analysis and the four-year renewal program in relation to the proposed works program is given in Annex 1. The proposed project would finance part of the equipment renewal program.  - 9 - E. Highway Planning 2.11 Planning and design for state and provincial highways is the responsibility of the KGM, with most work being carried out "in house" and consultants only being used for specialized works. In the past, planning tended to be ^'n an ad hoc basis, and frequently national and local political pressures led to over-ambitious programs. However, despite these pressures, the KGM investment programs generally sought to address important needs and were cost conscious: the road network has not been overbuilt and serves the country well. On advice from the Bank and in line with the framework provided by the NTMP, KGM has improved planning discipline and has shown greater acceptance of economic criteria in project preparation and planning and of project monitoring. 2.12 Tnis improvement in discipline has led to the preparation of the KGM 1984/85-88 detailed investment plan. The planning approach consists of: (a) comprehensive detailed studies for major projects such as the proposed second Bosphorus crossing; (b) feasibility studies by KGM for medium sized works; *'c) analysis according to the Bank's RAM model using Turkish cost and benefit data for smaller size highway projects; and (d) a special study of equipment including equipment to be scrapped and to be bought, for KGM's own forces to implement specified items of the proposed road maintenance and investment programs. This approach represents a major advance and places KGM in the forefront of Turkish organizations with a country-wide approach to investment and maintenance planning based on sound economic criteria. However, further development and refinements of the planning process are required as explained in more detail in Chapter IV, and these will be pursued under the proposed project (para. 4.04). The rural road system carries only about 10% of total freight ton/km, but the size of investment resources scheduled for this sub-seckor are such that, as a first step, appropriate socio-economic planning systems should be used based on agricul- tural needs. F. KGM Highway Investment Program 2.13 The total cost of KGM's 1985-88 investment program is estimated at US$1,488 million equivalent, at April 1984 prices. The size of the program was decided taking into account not only the needs of the network, but also the availability of budgetary and other financing resources as well as certain KGM staff constraints. The program comprises: Ci) rehabilitations, (49% of total); (ii) paving of gravel roads to black-top standards (2X); (iii) town bypasses (6%); (iv) gravel roads (28%); (v) bridges (3%); and (vi) motorways (12%). 2.14 Table 2.4 also shows that the increase in total expenditure is entirely attributable to an increase in investments and that expenditures on routine maintenance remain the same throughout the period, despite the expected growth of traffic. The reasons are that routine maintenance requirements will decline as more roads are rehabilitated and that KGM expects to raise the efficiency of its routine maintenance operations with the arrival of new replacement equipment.  - 10 - Table 2.4: Summary of KGM Investment and Maintenance Program TL (bill.: US$ mill.; 1984 Prices: US$1 = TL 320) 1984 1985 1986 1987 1988 1985-88 T__ U_ TL iUS TL -UsT TL_ u TL USt TL U-Sii Rehabilitation 1/ 41.7 130.3 50.1 156.6 55.5 173.4 60.8 190.0 62.6 195.6 229.0 715.6 New surface dressing - - - - - - - - 5.4 16.9 5.4 16.9 Bypasses, etc. 2.0 6.2 3.6 11.2 5.4 16.9 7.2 22.5 8.9 27.8 25.1 78.4 Gravel roads 43.6 136.2 39.5 123.4 38.3 119.7 37.0 115.6 34.0 106.2 148.8 464.9 Bridges 3.6 11.2 3.6 11.2 3.6 11.2 3.6 11.2 3.6 11.2 14.4 44.8 Matorways 8.9 27.8 10.7 33.4 12.5 39.1 14.3 44.7 16.1 50.3 53.6 167.5 TOTAL 99.8 311.7 107.5 335.8 115.2 360.0 122.9 384.0 130.6 408.0 476.3 1,487.8 Routine and emergency maintenance NA KA 52.0 162.5 52.0 162.5 52.0 162.5 52.0 162.5 208.0 650.0 Grand Total 99.8 311.7 159.5 498.3 167.2 522.5 174.9 546.5 182.6 570.5 684.4 2137.8 1/ includes resealing program. Source: KGN documets 2.15 The rehabilitation works include asphaltic paving of about 3,000 km of primary roads which carry over 500 heavy vehicles a day on average, and double surface dressing of about 4,000 km of state and provincial roads as part of the NTMP objective of upgrading to black-top standard 70% of such roads by 1993. Other works include road widening, short deviations, con- struction of base and pavement, and include resealing or asphaltic overlays, drainage works, road marking signs, short deviations and sections through villages and towns. New surface dressing comprise the upgrading to black- top standards of a selection of priority state and provincial roads in conformity with the NTMP objective of paving all state roads and 70% of provincial roads by 1993. Bypasses comprise the realignment and upgrading oc main state roads through or around the larger towns selected on a priority basis because of traffic congestion and urban needs. Gravel roads comprise realignment, earthworks, drainage and gravel surfacing on sub- standard earth and gravel roads selected on a priority basis from the state and provincial road network. Bridge works comprise the new construction and rehabilitation of medium sized bridges selected on the basis of struct'ral need aid traffic safety. Motorway works mainly cover the completion of ongoing works as well as an allocation for studies, design and the first stages of construction of a second Bosphorus bridge and its approach roads. A final decision on this bridge is dependent on the results of ongoing consultancy studies. 2.16 The investment program will be updated by KGM every year and reviewed by the Bank as a basis for selecting projects for financing in the coming year. Each project, in particular those submitted for Bank finan- cing, will be prepared according to engineering and economic criteria agreed during negotiations (Annex 3).  - 11 - 2.17 The proposed project includes support for the KGM's highway mainte- nance program, since the proposed loan would finance new equipment zo imple- ment the program. Maintenance is defined as regravelling, patching and repairs to pavement, bridges, shoulders, side slopes and drainage and emergency maintenance such as snow clearance and flood repairs. The resources needed for this maintenance have been calculated vy KGM on the basis of the kilometrage of roads of each type, for each year, and classi- fied according to their maintenance requirements, which then have been converted into resource requirements. This evaluation has been carried out under the First Highway Project and includes the analysis of equipment required for all KGM construction, maintenance and general services (Annex 1 and para. 3.05). 2.18 The KGM intends to further improve its maintenance and pavement management system. The first steps in this process are: (i) on the basis of technical and economic evaluation, to reschedule the amount of resealing and replacing it with longer lasting repair or rehabilitation works; and (ii) to provide an adequate number of suitable equipment for road mainte- nance. To begin with, KGM is selecting obvious priority sections regionally and deriving cost estimates of alternative solutions. This process will be continued and the result will be reviewed annually. In conclusion, as the maintenance program evolves, it will be subjected to additional benefit-cost analyses and further operational planning reviews to ensure that it is appropriately scaled and balanced. 2.19 The proposed expenditure program is in line with the proposals of the NTM4P. It is based on the assumption that GDP would grow at an average rate of 5.5% per year and road passenger and freight traffic at 4% and 4.6% respectively. On these assumptions the proposed increase in the expenditure program over the years is reasonable. In fact, the assumed traffic growth may be too low, since experience during previous years indicates that road traffic growth clearly exceeded the growth of GDP. In other words, the proposed increase in expenditure is in line, or below the growth in traffic that can be expected, even if actual growth of GDP were somewhat lower than assumed. KGM has estimated that road traffic increased in 1984, at a rate of about 4%. 2.20 Government tax revenues should normally increase at about the same rate as GDP and should therefore be able to cover the increase of KGM expenditures. However, GDP growth could be lower than assumed in view of the slow pace of world wide economic recovery and Government's continuing efforts to stabilize the economy. In this event, modest downward adjustment of the investment program may become necessary by postponing the start of some new activities. Table 2.7 shows proposed program financing. G. Highway Financing 2.21 The following table shows expenditure on road maintenance and investment for state, provincial and rural roads 1979-1983.  - 12 - Table 2.5: Highway Expenditures 1979-83 (TL Billion - 1980 prices in parenthesis) KCG YSE TOTAL Grand Investment Maintenance Investment Maintenance Investment Maintenance Total -- - -TL million 1979 16.76 (33.5) 8.10 (16.2) 9.0 (18.0) 3.9 (7.8) 25.76 (51.5) 12.0 (24.0) 37.76 (75.5) 1980 31.11 (31.1) 17.10 (17.1) 14.6 (14.6) 8.3 (8.3) 45.7 (45.7) 25.4 (25.4) 71.10 (71.1) 1981 25.44/1 (18.8) 32.02 (23.7) 22.6 (16.7) 9.0 (6.7) 40.04 (35.5) 41.02 (30.4) 89.06 (65.9) 1982 46.55 (27.5) 34.37 (20.3) 19.6 (11.8) 12.9 (7.E) 66.15 (39.3) 47.27 (28.1) 113.42 (67.4) 1983/2 74.32 (33.8) 45.60 (20.7) 1/ Allocations was investment IL 46.5 billion but releases vere zonstrained. 2/ Estimates. Source: CGM, YSE and SPO 2.22 KGM and YSE highway expenditures are primarily financed through the budget. The NTMP states that road users will have to pay the cost of the roads by means of road user charges and tolls (para. 1.11). The revenues from road user charges are estimated as follows in Table 2.6: Table 2.6: Revenue from Road User Charges and Highway Expenditures (1979-83) (TL billion - in 1980 prices between parenthesis) Road User Revenues Highvay Stabiliza- Highvay Exp. as : tion Levv 6 Vehicle Taxes on Expen- of Total Fuel Taxes Licences Veh. & Parts Tolls/Other Total diture Revenues 1979 7.5 (15.0) 9.8 (19.6) 67.2 (134.4) 0.8 (1.6) 83.3 (170.6) 37.8 45 1980 19.8 (19.8) 10.4 (10.4) 80.1 (80.1) 1.1 (1.1) 111.4 (111.4) 71.1 64 1981 67.1 (49.7) 11.1 (8.2) 91.0 (67.4) 1.1 (0.8) 170.3 (126.1) 89.1 52 1982 83.9 (49.6) 11.2 (6.6) 110.4 (65.3) 1.6 (1.0) 207.1 (122.5) 113.4 55 1983 92.6 (42.2) 11.1 (5.1) 157.5 (71.7) 2.5 (1.0) 263.7 (120.0) (Est.) Source: Ministry of Finance. 2.23 The above table shows that total revenues from road user charges continue to exceed total highway expenditure by a significant amount despite the fact that, in real terms, the revenues from licence fees have declined and also that the revenues from taxes on vehicles and spare parts have been depressed after 1979 as purchases of new vehicles have fallen.  - 13 - 2.24 In November 1983, the pump prices of gasoline and diesel fuel were US$0.48 and USt0.32 per liter, respectively. These prices have kept pace with inflation since 1980 and exceed border prices by a substantial margin, even in the case of diesel fuel. The price of diesel fuel is low by Western European standards, but similar to US prices; the price of gasoline is at the low end of Western European prices, but much higher than in the US. Nonetheless, while trucks pay substantial user charges through a tax incor- porated in the fuel prices, it remains to be demonstrated that they pay their fair share of the cost of road-use, especially since the scale of licence fees for different vehicles may not fully reflect differences in road damage by each type of vehicle. Under the ongoing highway project, KGM undertook a study on axle load control, which included an analysis of heavy vehicle user charges. The study was scheduled to have been completed in December 1983. By that time, KGM had completed most of the study and had started to implement axle load control and to require off-loading of over- loads as penalty for overloading (para. 2.04). However, the study component on assessing annual licence fees on heavy vehicles, to reflect the cost of the damage they cause to the roads, had not been completed by the end of 1983. KGM has agreed to a new work plan and timetable for the completion of the study by December 1985. 2.25 The planned overall financing of the KGM 1985-88 Highway Investment and Maintenance Program is summarized in Table 2.7 and it can be seen that estimated road user revenues should be adequate to cover total costs in 1984 prices.  - 14 - Table 2.7: Financing Plan for KCM Investment and Maintenance Programs (1985-88) TL billion 1/ Proposed World Bank KFAED KFAED Government Total Description Bank Loan Loan 2137-TU lst Loan 2nd Loan of Turkey 2/ Financing A. Highwas Investment Program T85-858 (a) Rehabilitation 23.4 17.5 3.8 5.5 158.1 205.5 (b) New Surface Dressing - - - - 4.9 4.9 (c) By-passes - - - - 22.7 22.7 (d) gravel Roads - - - - 132.1 132.1 (e) Bridges - - - - 12.9 12.9 (f) Kotoruays - - - - 48.2 48.2 (g) Equipment 39.5 1.1 - - 22.4 49.1 (h) Miscellaneous 0.8 0.1 - - - 0.9 Sub-total 63.0 18.7 3.8 5.5 385.3 476.3 B. Highnay Maintenance Program (85-88) (a) Routine and Emergency - - - - 208.0 208.0 Maintenance ______ Sub-total - - - - 208.0 208.0 Total TL billion 63.0 18.7 3.8 5.5 593.3 684.3 ___ . t. _._ _- .__.... Z Financing 9.0 2.7 0.6 0.8 87.0 100 (Foreign Loan Amounts) (192.3) (70.0) 3| (5.5) 4/ (5.0) in millions of (Currency Units) (uSt) (USt) (KD) (KD) 1/ Loan amounts expressed at TL 320 - US$l for World Bank loans and at TL 1090 - XD 1 for Kuwait Fund for Arab Economic Development loans. 2/ Government of Turkey financing expressed in April 1984 costs. 3/ USS11.5 million expended before 85-88 program period. 41 RD 2.0 million expended before 85-88 program period. H. Performance of First Highway Project 2.26 The First Highway Rehabilitation Project (Loan 2137-TU) became effective in August 1982. It concentrated on: (i) rehabilitation of highways critical to the export trade and the valuable transit traffic; (ii) improved highway planning and control; (iii) traffic safety and vehicle load controls; and (iv) training. Although it is a first highway project, careful preparation and close supervision together with a basically simple design have resulted in satisfactory progress in achieving both its physical and institutional objectives within KGM. In particular, we would highlight: (a a major advance in project evaluation and the preparation of soundly based investments; (b) establishment of an effective project monitoring unit; (c) the acceptance of ICB for civil works; (d) strengthening the field supervision of civil works under contract; and (e) significant advances in technical aspects of civil works, design and construction.  - 15 - 2.27 Despite initial problems with the adopt-ion of new construction techniques, the works are of good quality and have proceeded quite well as is reflected in the rate of disbursements. Delays 1iave, however, occurred in meeting loan covenants requiring Government: (i) 7o study and prepare a highway safety program; and (ii) to study the incremencal damaging effect of heavy vehicles in relation to vehicle taxation. The study of -ighway safety has proved much more difficult to carry out than was envisaged at the time of appraisal. However, progress is now being made in implementing certain fundamental safety measures, including crash barriers, road signs and markings and traffic police seminars, without waiting for the results of the study. KGM has agreed to a new study schedule with a provisional Phase I target completion date of December 1985 and the Phase II by December 1986. This phase would include identification of "black-spots" on the network and a program of remedial work. To assist in carrying out this work on a continuous basis KGM proposes to recruit one or two English speaking traffic and highway safety specialists to its permanent staff as a matter of urgency. KGM has already complied with the greater part of the covenant relating to heavy vehicle control, but the complementary study of the incremental damaging effect of heavy vehicles and possible modifications to taxation levels is also a more complex task than originally envisaged. Based on a review of the situation, especially relating to data availabil- ity, a new work program has been prepared by KGM and is scheduled for completion in December 1985. It should be emphasized, moreover, that overloading is not a major problem on Turkish roads and that overall road user revenues are adequate to cover highway costs. 2.28 Staff training under the ongoing project has been carried out through short overseas courses for senior and middle management. This training has proved useful and will be continued and expanded under the proposed project (para. 3.08). At the same time regular seminars are being held by KGM in Turkey to train and upgrade its supervisory personnel; this program will also continue. III. THE PROJECT A. Objectives 3.01 The proposed project would continue and expand upon the objectives of the First Highway Project, whose primary objective was to support KGM in the preparation and implementation of a sound investment program. In particular, the proposed project focusses on the identification, prepara- tion, planning and implementation processes adopted by KGM. To this end, the proposed project would address key aspects and components of KGM's 1985-88 investment, maintenance and equipment programs, with the Bank financing selected components of these programs. At the same time, the proposed project would help improve pavement research and management, computerization, and equipment management.  - 16 - 3.02 The objectives of the proposed project, which correspond closely to NTMP objectives, are: first, to promote comprehensive highway planning and control systems for both capital investments and maintenance works; second, to improve, through rehabilitation and strengthening, priority and quick benefit yielding sections of the highway network, in particular those sections which contribute towards foreign exchange earnings; third, to develop the management system of a well balanced equipment fleet in KGM; fourth, to develop road pavement research and management; fifth, to ensure appropriate road user taxation for heavy vehicles; sixth, to provide training for highway staff; and seventh, to continue a highway safety program currently being implemented under the ongoing Highway Rehabilitation Project. B. Description of the Project 3.03 The components of the proposed project are: (a) selected sub-projects from KGM's civil works investment program covering road sections to be started during 1985-88; (b) procurement of equipment and spare parts needed by KGM to modernize its highway investment and maintenance equipment fleet; (c) fellowships for training KGM staff; and (d) consultant services for KGM to promote pavement research and planning, and for other services related to the KGM investment program. Civil Works 3.04 The first-year program of road rehabilitation to be financed under the proposed loan has been identified from the KGM 1985-88 investment program. It includes six road sections of which one, Akyarma-Gerede of 37 km is situated on the Ankara-Istanbul highway and five sections cover the first 242 km, from Gerede to Osmancik of the Northern branch of Trans-Turkey Highway which leads to the Iranian border crossing point at Gorbulak. The details of these highway sections are shown in Annex 4. The work would comprise rehabilitation and upgrading of the existing road including earth- works, drainage, bridges and pavement. On the section Akyarma-Gerede a second carriageway will be constructed in continuation of the program to transform the Ankara-Istanbul highway into a dual carriageway road, which is fully justified by the traffic level (para. 4.09). Sections located on the Northern Trans-Turkey Highway will have their pavement widened to 7.2 or 7.0 m and strengthened to bear heavy international transit traffic. Detailed engineering of roads included in the first-year program is being completed and implementation schedules in the form of critical path diagrams have been prepared (Annex 7). The engineering design was carried out satis- factorily by KGM in-house, to the design standards included in the Detail Master Plan 1983-93 (Annex 13, Bll).  - 17 - Equipment and Spare Parts for Mechanical Services 3.05 K-Uli nas carried cut a study of the new equipment and spare parts needs which represent 27% of the total revised fleet over the period 1985-88. The study also covered the control and costing system to be used. The equipment renewal program invjilves both international and local procure- ment (Annex 2,. The proposed loan would finance, in the 1985-88 four-year program, equipment and spare parts procured under ICB estimated at US$92 million equivalent, and equipment and spare parts procured under LCB procedures acceptable to the Bank and open to foreign bidders estimated at US$31.7 million equivalent. The remaining equipment to be procured under reserved procedures is estimated at US$32 million equivalent and will be financed entirely by the Government. The equipment to be procured under LCB consists of items for which Turkish suppliers are in a strong competitive position (para. 3.23). 3.06 Spare parts inventory and use management are the primary areas needing improvement in KGM's mechanical services. These improvements are being undertaken by KGM. Details of the status and requirements for control over the fleet and spares, are at Annex 1 and in Bank's report "Overall Equipment Services Study for the Turkish Public Sector" dated September 12, 1983, which is in the Project File. 3.07 Initially a short training course abroad for 3 middle management staff has been arranged for mid-1984 under the First Highway Project to assist in the development of a computerized management information system for the mechanical services. Following this introductory course, KGM will draw up a program and schedule for implementing the control and management system for equipment. Fellowships 3.08 To assist KGM in improving its planning, control over the equipment fleet and spare parts inventory, design and construction, and for pavement research and management, a program of fellowships abroad (about 250 man- months depending upon cost) are proposed for its technical staff. These fellowships are a continuation of the 60 man-months provided under the First Highway Project. The fellowships will be provided in Western Europe, by agencies such as contractors, consultants, State Highway Departments and Universities. In particular, a training program (10 man-months) has already been drawn up to assist senior mechanical and computer staff of KGM to set up and implement their equipment control program under the First Highway Project. This program and the remaining fellowships will be arranged by the KGM Training Department directly with the agencies concerned. Particular attention will be paid to the need to have planning and executive staff trained in modern pavement management techniques and methods as a stage in introducing modern pavement management systems. Detailed program of fellow- ships will be reviewed by the Bank annually during the overall annual program reviews (para. 3.25).  - 18 - Consultancy Services 3.09 The project would include approximately 200 man-months of consul- tancy services to KGM in such fields as: (i) engineering design and supervi- sion of large and complex projects; (ii) pavement research and management; (iii) improvements of highway safety; and (iv) continuation of research of pavement deterioration under heavy vehicles, all as may be agreed with the Government. 3.10 A design and supervision contract for the second Bosphorus bridge was signed on December 2, 1983, between KGM and Freeman Fox and Partners associated with a Turkish firm, BOTEK. The cost of the contract is US$5.5 million equivalent, for a duration of 18 months for studies and 42 months for supervision of works. The Bank is financing 85% of the cost for updating the feasibility study (about US$30,000 equivalent), under the First Highway Project, but its subsequent participation in the cost for the design, documentation and supervision components of this consultancy contract, under either the First Highway Project or the proposed loan, is conditional upon the completion of a feasibility study acceptable to the Bank and the proposed investment showing an acceptable rate of return. 3.11 The objectives and terms of reference for pavement research (Annex 5), and the need for the services of highly specialized experts were confirmed between the Government and the Bank at negotiations. The project's objectives to improve highway safety and to ensure economically based heavy vehicles taxation may also require specialized consultancy services. The progress of highway safety program and the status of road user charges will be reviewed at the annual project reviews (para. 3.25). C. Cost Estimates 3.12 The estimated total base cost of the total 1985-1988 investment and maintenance program (including about US$200 million of taxes and duties) is US$2,137 million equivalent, of which US$1,235 million are estimated to be foreign costs. Government's policy is to adjust the financing requirements to reflect inflation annually through the investment and current budgets process; this procedure has worked satisfactorily. A summary of the cost estimates is shown in Table 3.1. The estimated cost of the Project, i.e. Part A of the program to be financed under the proposed loan, is US$232 million equivalent, including a foreign exchange component equivalent to US$185.9 million.  - 19 - Table 3.1: Su anary of Costs of KSM 1985-1988 Investment an! Mainter.jn, rrogram Foreigr are Local Costs Total Local Foreign Tot-i Local Foreign Total Foreign Expenditure TL billion --- US$ iillion 2/ ---- _ A. Project Investments of Wh.cn odn Would Finance Eligible Costs Rehabilitation: Pavement 7.77 14.43 22.20 24.28 45.09 692'7 65 minor earthworks 2.19 2.11 4.30 6.85 6.59 1'.44 49 Investment works equipment(ICB) 5/ - 5.92 5.92 - 18.50 18.50 100 Investment works equipment(LCB) 5/ 0.40 1.61 2.01 1.26 5.04 6.30 80 Maintenance works equipment(ICB)O/ - 23.52 23.52 - 7:.5* 73.50 100 Maintenance works equipment(LCB)5/ 1.63 6.50 8.13 5.08 :'.3_ 2.40 80 Consultancy services - 0.74 0. 74 - :.i 2.31 100 Training - 0.20 0.20 - 0. ;2 0.62 100 Sub-total 1/ 11.99 55.03 67.02 37.47 171.97 209.44 82 Physical contingencies 3/ 0.50 0.83 1.33 :.56 2.58 4.14 Price contingencies 4/ 2.24 3.65 5.89 7.01 11.41 18.42 TOTAL 14.73 59.51 74.24 46.04 185.96 232.tjO 80 B. Balance of Investment Program Rehabilitation 79.11 96.93 176.24 247.83 302.91 M50.i4 55 S/dressing gravel roads 2.i2 2.i9 4.71 6.62 8.10 14.72 55 Bypasses etc. 9.85 12.02 21.87 30.77 37.60 68.37 55 Gravel roads 58.30 71.27 129.57 182.20 222.70 404.90 55 Bridges 5.64 6.90 12.54 17.64 21.55 39.19 55 Motorways 21.00 25.68 46.68 65.65 80.23 145.88 55 Equipment (reserved) 5/ 4.10 6.14 10.24 12.80 19.20 32.00 60 Total 1/ 180.32 221.53 401.86 563.51 692.29 1,255.80 C. Maintenance Program Routine & Emergency 93.60 114.40 208.D0 292.50 357.50 650.00 55 Total I/ 93.60 114.40 208.00 292.50 357.50 650.00 55 Total Expenditure (excl. Contingencies for Part B and C)) 1/ 288.66 395.44 684.10 902.05 1,235.75 2,137.80 58 1/ Base costs are mid-1984 prices 21 Exchange rate for base coat to US$I - TL 320 3/ Physical contingencies: 5S for civil works in Part A only 4/ Price contingencies: for Part A only 5/ Base costs for equipment include an allowance of about 15% spare parts 3.13 The costs of highway rehabilitation put forward by the Government for Bank financing under the first year of the proposed loan, are based on quantities which are derived from the engineering already done and the -.vC's 1984 unit price schedule for contract works. These costs are comparable to those obtained from bidding on similar works in Turkey. Costs for the rehabilitation in subsequent years are based upon the costs of the first year's program. For 1984, the foreign exchange component of the total cost of pavement works is estimated at 65%, and of related earthworks and drainage works at 49%, based on a foreign exchange rate of TL 320 = US$1. Five percent quantity contingencies have been allowed for civil works.  - 20 - 3.14 The costs of the remainder of the highway investment program and the maintenance program are based on preliminary estimates of quantities per km by KGM based upon a positive identification and detailed assessment of each road section concerned. These quantities have been multiplied by KGM's 1984 schedules of unit prices for contract and force account work (as the case may be). Physical contingencies are not included for the investment and maintenance programs as a whole, since the extent and timing of works will be reviewed annually by the Government to ensure appropriate works are carried out within the financial constraint of the Government's financing plans. 3.15 Since KGM is exempt from custom duties and sales taxes on equipment purchases, the capital cost of equipment and spares has been estimated using 1983 CIF prices for imported goods, net of import duties, and the ex-factory costs net of taxes for local goods. For locally supplied equipment, the cost of the foreign component ex-factory is estimated at about 70% of total cost. All equipment costs include an allowance of about 15% for the purchase of spare parts. On the above basis, total equipment costs for the four-year renewal program 1985-88 are about US$156 million equivalent including spare parts, of which US$92 million will be procured through ICB and US$32 million will be procured through LCB open to foreign bidders and financed under the proposed loan. The remaining US$32 million will be financed by the Government under reserved procurement. 3.16 Fellowship costs are based on current costs in Western Europe of US$2,500 per man-month. For consultancy services on pavement research and such other needs as may be agreed, a lump sum of US$2.3 million is included, based on 1984 prices. 3.17 In TL terms, the price contingency allowance for civil works is 20% for 1985, 15% for 1986 and 12% p.a. thereafter, and the corresponding US Dollar price contingencies are 7.5% for 1984, 7% for 1985 and 6% p.a. thereafter. No price contingencies in US$ terms have been allowed on equipment, training, or consultancy services since recent experience indicates that no significant increase over 1984 prices on these items is expected. D. Financing 3.18 The overall financing plan for the KGM 1985-88 highway investment and maintenance program is discussed in para. 2.25. Details of the proposed project financing plan are given at Table 3.2. It shows overall expenditure of TL 74.24 billion (April 1984 costs) with the World Bank financing 80% (the estimated foreign exchange component) and the remaining 20% being financed by Government. The evaluation of the entire investment and maintenance program provides scope for adding additional external financing at a later stage if Government so desires.  - 21 - Table 3.2: Financing Plan for Selected Components of KGM 1985-88 Plan tTL billion 1/) Proposed Turkish Total Descriprion 2/ Bank Loan Government Financing Civil Works 18.97 14.75 33.72 Equipment 39.58 - 39.58 Consultancy Services 0.74 0.74 Training 0.20 - 0.20 Total 59.49 14.75 74.24 US$ Equivalent 185.90 46.10 232.00 % Financing 80 20 100 1/ Loan amounts expressed at TL 320 = US$l 2/ Items inc;.,Ue quantity and price cortingencies at appropriate rates (para. 3.17) 3.19 The proposed loan would finance the following components selected -within the 1985-88 investment and maintenance program as follows: (i) contracts for civil works on selected road sections to be initiated durinr 1985-88 period to be submitted by KGM to the Bank in accordance with agreed orocedures; (ii) contracts for equipment and related spare parts for the KGM maintenance and construction fleet; (iii) fellowship training; and (iv) specified consultant services. The Government agreed at negotiations that it will provide funds for the local costs of project, as and when required. E. Implementation 3.20 KGM will be responsible for implementing all components of the project. KGM will be responsible for overall loan and project administra- tion. These arrangements were agreed with the Government at negotiations. Project implementation will be based upon detailed annual project implemen- tation scheduling similar to that carried out for the First Highway Project and estimated to be spread over a six-year period ending December 1990, since some works contracted, especially in the later years of the program, will have to be completed after the end of the program period. Critical path analysis is used for each component of project implementation: an example for one of the first year's highway rehabilitation sections is shown at Annex 7. A summarized Overall Implementation Schedule is shown at Annex 8. The Overall Implementation Schedule has been adjusted to allow one extra year to complete the rehabilitation works in line with the Bank's projects profiles. The project completion date is therefore estimated at December 31, 1990. During negotiations, KGM confirmed the implementation schedule (Annex 8).  - 22 - 3.21 Contracts for paving or rehabilitation works will be let in two phases, the first in 1985 and the second in 1986. Civil works needed ahead of pavement rehabilitation will be carried out under separate contracts in advance of the paving contracts because of seasonal factors and because the nature of these works do not lend themselves to cost effective combination with the major paving contracts. These advance works comprise intermittent and variable works such as road widening, supply and stockpiling of mate- rials in advance, minor route deviations, small bridges, extensions of culverts and the preparation of work sites and camps. In addition, it is necessary to have contracts spread over time and space to facilitate traffic control on major transport routes and to take advantage of short working seasons, particularly in northern and eastern Turkey. Let separately to smaller local contractors, similar advance works under the First Highway Project have proved cost-effective and practical. In order to provide necessary flexibility it has also been agreed to aliow up to US$9 million of paving contracts below US$3 million each to be procured under LCB acceptable to the Bank and freely open to foreign contractors. KGM will supervise the rehabilitation contracts with its own staff through its field divisions under both Divisional and Head Office controls. 3.22 KGM is developing adequate resources for supervision of contract works and has included training courses for its staff since 1981 to build up the quality of its control. KGM is further developing its Project Control and Coordinating Team to coordinate the standards and timing of construction and design, to deal with financing arrangements and to develop management information and reporting systems for the implementation of the investment program (para. 3.25 and Annex 10). During negotiations, KGM agreed to main- tain its Project Monitoring and Control team and to develop it as necessary to meet its responsibilities under the proposed project. 3.23 Equipment to be procured by the KGM under ICB and LCB will be in three tranches, the first in 1985, (40% of total) the second in 1986 and the third in 1987 (each 30% of total). Smaller and more frequent tranching has not been recommended in order that KGM may develop an adequate degree of standardization in its fleet, without detracting from competitive supply. It was agreed at negotiations that about US$32 million of equipment was appropriate for local competitive bidding acceptable to the Bank and open to foreign suppliers. Domestic manufacturers of equipment items to be procured under LCB (Annex 2) are actively competing in the market and the chance of foreign suppliers winning a contract is low. The equipment to be procured in each tranche should be agreed at the annual reviews for the forthcoming year, starting with the October 1984 review. This procedure was confirmed by the Government at negotiations. 3.24 The fellowships under the proposed project are a continuation and expansion of those under the First Highway Project and are expected to commence in 1985 and be complete by 1989. Consultancy services will be based upon scheduling proposed by KGM and will be in agreement with the Bank. It is estimated that these studies will start before mid-1985 and be completed by the end of 1990.  - 23 - 3.25 Project monitoring and reporting procedures include the preparation by KGM of: (i) indicative multi-year overall project programs on an annual basis; (ii) detailed annual programs each year, including the results of project implementation during the past years; (iii) quarterly progress reports on Bank-financed elements (physical and financial); (iv) feasibility study reports as required for the investment and maintenance programs; (v) bid evaluation reports; and (vi) audit reports prepared by Ministry of Finance inspectors on Bank-financed elements of the project supported by detailed official investment and maintenance budgets showing previous years expenditure and proposed expenditure on a project by project basis. Details of the required reports and programs are shown at Annex 9. Annually, and not later than October 31 of each year, commencing with 1985, the Government and the Bank will review; Ci) project performance during the current year; (ii) the detailed work and training programs of the project for the forth- coming year; (iii) the next year's selection of sub-proiects for financing under the loan; (iv) the proposed next year's procurement of equipment; Cv) the indicative program of highway investment and maintenance for the remainder of the four-year period, 1985-88; and (vi) the progress of highway safety program and status of road user charges. During negotiations, agree- ment was reached on the annual review arrangements. 3.26 A format of quarterly financial reports has been designed and agreed with the KGM for purposes of monitoring project expenditure, finan- cing resources and Bank disbursements. These financial reporting arrange- ments were agreed at negotiations. Financial control procedures are essen- tially based on a priori checking. During negotiations, the Government and the Bank agreed the reporting procedures (para. 3.25) and the auditing requirements for the project, and that the KGM will submit to the Bank not later than September 30 each year, starting in 1986, appropriate audit reports for the preceding financial year (Turkish FY ending December 31). 3.27 The base cost of civil works which KGM intends to submit for finan- cing under the loan are estimated to cost about US$83 million equivalent (US$106 million including contingencies), of which US$63 million equivalent (US$79 million including contingencies) would be let under ICB for paving contracts. Small paving contracts, less th.aa US$3 million equivalent, within an aggregate ceiling of US$9 million equivalent, including contingen- cies, may be let under LCB procedures acceptable to the Bank and open to foreign contractors. Contracts for earthworks, small bridges and ancillary works less than US$3 million equivalent each, within an aggregate ceiling of US$13 million equivalent (US$18 million including contingenzits) will be let under LCB under terms and conditions acceptable to the Bank and for which foreign contractors would also be eligible. It is expected that foreign contractors will win 25% of the ICB paving contracts and that local firms will win all the earthwork and drainage contracts. 3.28 Equipment and spares to be financed under the loan are estimated at US$123.7 million equivalent of which US$92 million will be let under ICB and US$31.7 million will be let under LCB acceptable to the Bank and open to foreign manufacturers. The equipment and spares to be procured under LCB is equipment that can be supplied by Turkish manufacturers. It is expected that local suppliers will win about two-third of LCB equipment contracts.  - 24 - F. Procurement 3.29 Consultant services will be provided in accordance with terms and conditions satisfactory to the Bank, and training fellowships proposed will be reviewed in advance by the Bank. A summary of procurement is given in Table 3.3 and full details of procurement procedures are set out in Annex 11. These procurement procedures were agreed between the Government and the Bank at negotiations. Table 3.3: Procurement Table (USt million) Procurement Method Total Project Element ICB LCB Other N.A. Cost Pavement works for highway 78.85 9.00 - - 87.85 rehabilitation (46.13) (5.27) - - (51.40) Earthworks for highway - 17.55 - - 17.55 rehabilitation - (7.90) - - (7.90) Equipment 92.00 31.70 - - 123.70 (92.00) (31.70) - - (123.70) Fellowships - - 0.6 - 0.6 - (0.6) - (0.6) Consultancy services - - 2.3 - 2.3 - - (2.3) - (2.3) Total 170.85 58.25 2.90 - 232.00 (138.13) (44.87) (2.90) - (185.90) Note: Figures in parentheses indicate loan proceeds G. Disbursement 3.30 In accordance with the financing plan, the proceeds of the proposed Bank loan amounting to US$186.40 million will be disbursed as follows;  - 25 - Amount of the X of Loan Allocated Expenditures (Expressed in to be Item Category $ Equivalent) Financed l(a) Pavement works for 45,000,000 60% highway sections agreed for Bank financing. l(b) Other civil works for 6,500,000 45% highway sections agreed for Bank financing. 2 Equipment and spare 105,700,000 100% of foreign parts for KGM expenditures, 100% of local expendi- tures ex-factory and 40% of other local expenditures 3 Fellowships 500,000 100% foreign expenditures 4 Consultants Services 2,000,000 100% of total expenditures 5 Special Account 9,000,000 6 Unallocated 17,235,136 7 Fee 464,864 Total 186,400,000 3.31 The closing date for the proposed loan is June 30, 1991. To enable prompt payment of all reimbursable expenses, and as the Government requested, provision will be made tor a revolving fund through a special account in US$, opened and operated in a Turkish Bank authorized te deal in foreign exchange. On loan effectiveness, the World Bank would disburse immediately into this account US$9 million, an estimated three-months needs of the World Bank share of eligible expenditures. The account would be replenished periodically on the basis of withdrawal applications supported by the correspondent bank's statements of account and details of expendi- tures. During negotiations agreement was reached on this disbursement mechanism.  - 26 - 3.32 So as not to discriminate against the use of local consultants and to avoid the Borrower having to finance a proportion of foreign costs, the Bank will disburse against 100% of total expenditures for consulting services. The schedule of cumulative disbursements (Annex 12) is based upon the implementation schedule showing the first batch of equipment and civil works contracts being let in 1985. This schedule was confirmed by the Government at negotiations. H. Environmental Impact 3.33 The environmental impact of the project will be favorable. Con- tinued actions to improve highway safety and to control vehicle size and loading are positive environmental objectives. Moreover, the longer term objective to divert through traffic away from city and village centers where this is economically viable would have favorable impact on the environment. IV. ECONOMIC ANALYSIS A. Introduction and Economic Context 4.01 An overview of the KGM highway investment and maintenance program for 1985-88 is given in Chapter II. The main thrust of the program is on the rehabilitation and improvement of existing roads, especially those roads serving foreign currency earning activities, and their periodic and routine maintenance. The related expenditures account for about 86% of total proposed expenditures during 1985-88. B. Investment Program 4.02 The initial investment proposals were originated by KGM's regional offices on the basis of their knowledge of the network and by the central government. In total, 610 individual works were proposed and subsequently evaluated using the RAM model developed in the Bank. As a result, KGM has retained 226 proposals for the investment program, including 180 ongoing projects and 46 new projects. Although the RAM model and data inputs have some limitations, its use by KGM as a first step in a comprehensive evalua- tion exercise is acceptable. During the coming years, KGM intends to refine the data input and use of the model and to test more advanced models such as the Bank's Highway Design and Maintenance Model III (HDM) and/or the Trans- port Investment Model II (RTIM) of the Road Research Laboratory in the UK. 4.03 The following Table 4.1 summarizes the results of the cost-benefit analysis carried out by KGM.  - 27 - Tuble 4.1: Summry of Evaluation of KGH 1984-88 Highway Rehabilitation and Periodic Maintenance Plan (Excludes Motorways and Proposed 2nd Bosphorus Bridge, and Special Bridge Works) (TL billion 1984 Prices) 1984 1985 1986 1987 1988 Rate of Return Annual Annual Annual Annual Annual Total X Class No. Cost No. Cost No. Cost No. Cost No. Cost Cost Cost Less than 10 46 14.76 47 16.D4 38 17.76 39 19.88 39 20.65 89.09 23.7 I1Z-20X 23 12.94 22 12.14 18 11.64 18 12.38 19 12.38 61.48 16.4 More than 201 126 47.76 107 47.33 89 46.12 70 43.22 59 40.91 225.34 59.9 Total Projects/ 195 75.46 176 75.51 145 75.52 127 75.48 117 73.94 375.91 100.0 Annual Cost Note: 1. It is not possible to calculate a mean rate of return for this total program, since it includes many ongoing projects for which no rate of return was estimated. However, the mission estimates abour 27%. 2. The annual totals in Table 4.1 will be seen to be lower than those in Table 2.4. This is due to: (a) Table 2.4 includes tax elements whilst Table 4.1 is net of tax; and (b) Table 2.4 is based on investment targets whilst Table 4.1 excludes projects which remain to be evaluated before inclusion in the outer years. Source: KGM 4.03 The above results show some interesting trends; in particular, that between 1984 and 1988 the number of projects per year is steadily declining from 195 to 117 and the average cost per project is rising from TL 387 million to TL 632 million. These trends reflect an effort by KGM to concen- trate its resources on fewer projects to ensure their speedier completion and thereby to improve the efficiency and benefits of its investments. 4.04 The proposed investment program, which is estimated to yield an overall rate of return of about 27%, is balanced and in keeping with identi- fied national priorities. The evaluation of sub-projects, according to special studies or through using the Bank RAM model, shows that about 75% yield rates of return in excess of 10% and 25% yield rates of return of less than 10%. These results require interpretation. Typically about 80% of the low yielding sub-projects are physically ongoing and a legacy of the past whilst about 20% or 25% of the total program are in the program's outer years, and the majority are low standard earth or gravel roads in less developed regions carrying low traffic volumes and which are to be upgraded to all-weather paved standards. Whilst it is not practicable to stop ongoing works, continued close cooperation with KGM should permit outer year projects to be reevaluated as part of a continuing review process. Although sub-project analysis data inputs are considered to be realistic they are rather limited and reevaluation should take into account a broader range of data, in particular: (i) actual traffic growth will probably be higher than the assumed growth rates; (ii) generated traffic is probably understated for sub-projects designed to achieve major improvements in operating conditions; and (iii) neither passenger value of time benefits nor benefits from improved safety have been included.  - 28 - 4.05 The KGM "Detailed Plan" for 1985-88 describes in its chapter on "Network Review" that a major goal is to ascertain the economic benefits of each of the routes of the existing network and to stop investments in roads that are found to be uneconomic. Furthermore, the KGM has applied an evaluation methodology satisfactory to the Bank to the entire 1985-88 investment plan. Since appraisal, the KGM program of reevaluation has continued as a result of which approximately 1,100 km of road may be elimi- nated from the network and this will include some of the uneconomic proposals. Also evaluation data inputs are being re-examined and this may also lead to modifications in the program and reduce the apparently uneco- nomic element. 4.06 Taking the above considerations into account, the results of the cost-benefit analysis indicate that the rehabilitation and periodic mainte- nance program proposed by KGM for 1985-88 is sound. Within this program, KGM intends to submit specific projects for financing under the proposed loan. These projects will be documented and evaluated according to an agreed methodology and criteria, as indicated in Annex 3. Major complex projects will be documented by comprehensive feasibility studies governed by specific terms of reference; important but relatively straight forward projects by feasibility studies prepared by KGM and relatively small and simple projects by an evaluation using the RAM model only. 4.07 Within this program, KGM has proposed for Bank financing the improvement of six contracts (see Annex 4 - Map IBRD 17913) on two main highways, to be started during the first year of the project period. In fact, some advance works will already have been completed before the loan becomes effective. The results of cost-benefit analyses in the feasibility studies are as follows: Table 4.2: Cost-Benefit Analyses of First-Year Rehabilitation Projects Submitted for Bank Financing Sensitivity Test Cost Best Costs+50X AD Traffic Est. Estimate Benefits-50% 1984 Feasibility Study TL bil. ERR FYR ERR FYR Light Heavy Ankara/Gerede km 100-137 2.16 83% 68% 44% 23% 1981 3567 Gerede/Osmancik 242 km 8.617 66% 42% 36% 32% 535 1251 Source: KGM 4.08 These six contracts are located on the main Istanbul-Ankara road and on the northern Istanbul to Iran road. The Istanbul-Ankara road is an important link between, not only the political and commercial centers of the country, but also between the central and southern regions and the interna- tional routes to Syria and Iraq. The Istanbul-Iran road serves domestic traffic in the northern third of Turkey, including the Black Sea coast and  - 29 - several major ports, and also the valuable export and transit traffic to Iran. Feasibility studies of the routes on which the proposed contracts are located have been prepared by the KGM Planning Department and are included in the Project File (Annex 13). 4.09 Ankara-Gerede Road Km 100 to 137. In 1984, this road is forecast to carry about 1980 light vehicles and 3,570 heavy vehicles daily, equiva- lent to a passenger car unit count (pcu) of between 16,000 and 17,000 per day. Such levels of traffic in rural areas normally warrant dual carriage- way standards on economic and safety grounds. Future traffic growth is expected to be at least 5% p.a. The proposed contract of 37 km covers the second carriageway part of this road, where earthworks are virtually complete. KGM proposes to complete construction of this carriageway and to strengthen and rehabilitate the existing road. In addition to conventional savings from vehicle operating costs due to improved surface conditions and reduced congestion, which yield a rate of return of 83%, the proposed works will probably lead to a reduced accident rate, which will oe monitored under a continuing road safety research program. 4.10 Gerede-Osmancik 242 km. In 1984 this road is forecast to be carrying about 535 light vehicles and 1250 heavy vehicles daily giving a pcu count of about 5,500 per day. Since traffic is expected to grow at least 5% per annum, pavement reconstruction and strengthening to a bituminous concrete standard is justified. In addition to savings in vehicle operating costs, due to improved road conditions, benefits also include savings from a 70 km distance reduction for traffic which is expected to divert from the crowded southern route through Ankara and Delice: in total the sub-project will yield an ERR of about 66%. In 1983, export and transit traffic to Iran comprised about 50% of the heavy traffic on the Gerede-Osmancik road; transit traffic grew by about 40% p.a. between 1980 and 1983, but this growth rate is expected to be lower in future years. However, even assuming constant traffic the payback period for the investment is estimated at 2-1/2 years. Foreign exchange income from transit traffic on the road is esti- mated at about US$250 million p.a. C. Equipment and Spare Parts 4.11 KGM has justified the proposed list of equipment to be procured by a comprehensive evaluation of total equipment requirements to carry out its force account operations in maintenance and construction, taking into account that the share of force account construction in total investment is planned to decline from 50% currently to 25% by 1993. These requirements have subsequently been compared with the fleet of available equipment, after a comprehensive survey of the exis'ing fleet and the elaboration of a program for the selective scrapping of old equipment. About 80% of the proposed equipment procurement is required to support the periodic and routine maintenance program (Annex 1). The highway maintenance program has been reviewed by the Bank and found to be technically sound, financially reasonable and relevant to the system's needs. The highway maintenance program consists essentially of two parts, routine maintenance and periodic maintenance (included in the investment program), both of which are essen- tial to at least preserve the existing capital assets: the average cost in  - 30 - 1984 prices is US$3,800 per km. The program has been based on detailed road condition inventories and proposed physical changes, such as pavement upgrading, over the next five years together with data on geophysical and climatic conditions and traffic. The economic justification for the proposed expenditure is deemed obvious, in that maintenance is necessary to protect the capital investment and is carried out at relatively low cost - probably averaging between 1% and 2% of vehicle operating costs on good pavements. Recent experience shows that highway maintenance programs typically yield rates of return in excess of 100% and there is no reason for suggesting that Turkey will not follow this pattern. Under these circum- stances a calculation of a unique rate of return for the RGM maintenance program would not be particularly useful. The question of the correct balance between highway maintenance and highway improvement is a related issue which is currently being addressed in Turkey under research into and, eventual, implementation of a modern pavement management system. KGM has started to compare the cost of routine and periodic maintenance with the cost of rehabilitation and pavement works, which in many cases may be a partial alternative. These analyses consist of a simplified approach, derived from feasibility studies carried out under the Highway Rehabilita- tion Project, using as input traffic flows, vehicle operating costs, and estimated pavement condition in relation to design standards and maintenance routines. 4.12 The problem with the existing fleet is that normal replacement has not taken place during the past few years, especially due to the shortage of foreign exchange. As a result, a substantial part of the fleet is old and should be scrapped and replaced. In addition, certain types of equipment are in short supply and need to be acquired to meet the changing character of KGM operations, especially for the rapidly expanding program of pavement resealing. KGM has estimated the total value of equipment to be procured at about US$156 million during the 1985-88 program. When procurement is com- pleted, the size of the fleet will be smaller than at present. 4.13 The evaluation process of the equipment fleet and spare parts inventory also revealed that inventory control and management procedures are somewhat out-of-date and should be made more efficient to save resources. KGM is considering proposals to this end, including the introduction of standard coding, computerization and other modern equipment management procedures and practices. If implemented successfully, this approach could also be implemented by other government agencies with large equipment fleets. As a first step towards its implementation, the KGM is already undertaking fellowships under the First Highway Project for senior officials to familiarize themselves with modern equipment management and spare parts systems in other countries (para. 3.07). D. Training and Consultancy Services 4.14 It is not possible to provide a quantified "economic" or financial justification for the proposed training or consultancy service components. Both are necessary for the successful achievement of the project's objec- tives of higher professional standards and the introduction of improved techniques in the KGM and more effective planning. Furthermore, they should  - 31 - also lead to: (i) improvements in highway safety; (ii) more economically based road user taxations; and (iii) advances in pavement management and research, especially the use of less expensive road construction materials and methods. E. Project Risk 4.15 The prospects for satisfactory project implementation are good considering that KGM has the capacity to meet the proposed expansion in its activities and that the proposed increase in its expenditures, at an average annual rate of 4% during the next four years, is in line with the forecast growth in overall economic activity and government revenue. 4.16 The principal risks for the project are that government austerity measures would lead to a decline in available finance; or that traffic, particularly transit traffic, would be sharply reduced. In the event of a curtailment of government funding, the investment program would have to be adjusted, preferably by postponing or eliminating investments of lesser priority. As to a reduction of transit traffic, the prospects are that a high volume of transit traffic will continue to be needed to meet the demands of reconstruction after the Iran/Iraq conflict. Furthermore, any reduction in such traffic could be gradually compensated by rising volumes of Turkish exports to the area. At worst under these circumstances, the benefits from the proposed investments on these transit routes could be lower than expected, but still sufficiently high to more than justify the planned investments. V. RECOMMENDATIONS 5.01 During loan negotiations, the Government confirmed; (i) the cost estimates for the project (para. 3.12); (ii) the implementation schedule (para. 3.20); (iii) the annual tranching procedures of equipment procurement for the project starting in October 1985 (para. 3.23); and (iv) the disbursement schedule (para. 3.30); 5.02 During loan negotiations, the Government agreed; (i) that appropriate feasibility studies for road sections to be rehabilitated under Bank financing will be submitted to the Bank by KGM for review before construction bids are invited (paras. 4.06 and 3.25); (ii) that KGM will implement all components of the project within its jurisdiction and be responsible for overall loan and project administration (para. 3.20);  - 32 - (iii) that KGM will maintain and develop the Project Control and Coordinating Unit to meet its responsibilities under the proposed project (para. 3.22); (iv) that for Bank-financed consultancy services, KGM will use terms of references, costs and timing schedules that are agreeable to the Bank (para. 3.29); (v) on the annual review arrangements (para. 3.25); (vi) on the auditing requirements and reporting procedures for the project (para. 3.26 and Annex 9); (vii) the procurement procedures (para. 3.29 and Annex 11); and (viii) the disbursement procedures for a revolving fund (para. 3.31). 5.03 Based upon the above assurances and agreements, the project is suitable for a Bank loan of US$186.4 million equivalent to the Republic of Turkey for a 17-year term including a 4-year grace period.  - 33 - ANNEX 1 Page 1 of 5 REPUBLIC OF TURKEY STAFF APPRAISAL REPORT OF A SECOND HIGHWAY PROJECT Analysis of KGM Equipment Requirements Equipment Fleet Status 1. According to the Highway Master Plan (September 1982) equipment fleet of the General Directorate of Highways (KGM) was composed of 18,664 items, of which about half were auxiliary and miscellaneous units. The replacement value of the fleet was US$555 million, including about US$60 million for auxiliary units and about US$184 million for equipment in scrap condition (para. 7). The main characteristic of equipment fleet is its advanced age: In 1982, 26% of principal items were over 15 years old and further 21% over 10 years, while only 20% were in the group below 5 years. The details of fleet composition are shown in Table 1. 2. Another important deficiency of equipment fleet is lack of balance among the principal units required for efficient performance of work. Due to more rapid wear and tear of graders, dozers, loaders, dumpers and bitumen distributors the proportion of such equipment in scrap condition is higher than for other types of equipment. 3. The utilization of equipment beyond its useful life, which is con- sidered to be below 10 and maximum 15 years, was possible only because of the excellent capability and capacity of the KGM central, regional and district workshops, which carry out not only maintenance, repairs and over- haul, but also converting and rebuilding of old units. However, keeping old equipment working is costly, for the cost of spare parts required grows with the age of machine and despite best efforts availability decreases. For example, the consumption of spare parts for graders as percentage of the replacement cost was estimated by the consulting firm Louis Berger Int. in their report OMAN: Road Maintenar.ce Study, December 1976, as follows: Year of service 1 2 3 4 5 6 7 8 9 10 Spare parts (M) 2 2.5 3.5 4.5 6.5 8.5 12.5 14 14.5 15 Equipment Rationalization Program 4. In the framework of 10 years highway development program the KGM decided to rationalize the equipment fleet in order to improve road mainte- nance and carry out the program's works. The scope of rationalization is to scrap and replace uneconomic overaged units and acquire the balancing equip- ment, achieving an equipment fleet corresponding to the needs of user departments, with due regard to decreasing force account operations.  - 34 - ANNEX 1 Page 2 of 5 5. The KGM equipment department had formulated in the Highway Detail Plan 1983-1993 (March 1983) the following objectives based on equipment maximum economic lifetime of 15 years or 15,000 hours, or 500,000 km: 1/ (a) in 1983 scrap all self-propelled equipment of more than 20 years; for other equipment of more than 20 years carry out individual assessment of serviceability; (b) in 1984 decide on all mobile equipment and vehicles in the age group 16-20 years; (c) in 1985 decide on all mobile equipment and vehicles in the age group 11-15 years; (d) in 1986 evaluate all equipment in the age group 6-10 years; (e) purchase, as far as is economically justified, all auxiliary equipment and principal equipment of types manufactured in Turkey on domestic market; (f) streamline procurement and management of spare parts; and (g) ensure adequate training of all personnel. 6. The five main user departments of KGM (Maintenance, Construction, Asphalt, Bridge, Traffic) and general services have submitted to the Equip- ment Department their requirements of principal equipment, based on the work program described in the Highway Detail Plan and summarized in Appendix 1 of this Annex. On the basis of these requirements, Equipment Department com- piled the list of equipment which included existing equipment in working order (under 15,000 hours or 500,000 km) and requirements of new equipment subdivided into two groups: equipment to be purchased by international competitive bidding (ICB), local competitive bidding (LCB) and equipment for reserved local procurement, in line with the objectives stated in the Plan (para. 5(e)). Table 2 shows the compilation of equipment; Table 3 shows the program of international competitive bidding and local purchase. The total estimated cost, excluding contingencies and spare parts, of ICB equipment (minus 15 dozers 300 HP being met from Kuwait Fund) is US079.0 million, local competitive bidding US$32 million equivalent and reserved procurement US$32 million equivalent. The ICB and LCB equipment would be proposed for the Bank financing under the Second Highway loan, while equipment purchased locally, which includes about 60% of foreign exchange component, would be financed by the Government. 1/ This maximum economic lifetime is high as compared with generally accepted criteria but it is not contested considering Turkish financial conditions and excellent capability of the KGM workshops.  - 35 - ANNEX 1 Page 3 of 5 7. The analysis of equipment listed in Table 2 shows the following figures: (a) total replacement value of existing principal equipment in working order is US$306 million; (b) total replacement value of principal equipment after the proposed purchase will be US$440 million; (c) the new equipment replacing scrap is estimated at US$67.7 million and balancing equipment USt65.8 million; and (d) the replacement value of existing equipment in scrap condition which does not require renewal is UStll6 million. Details of scrap equipment not to be replaced are shown on Table 4. It should be noted that in the equipment group classified as being in working condition are included units of the age group 11-15 years, representing about 20% of the fleet. This equipment will be subject to decision on its further serviceability and replacement program in 1985 (para. 5(c)). Before such program is implemented the proposed new equipment would serve also to replace units scrapped after 1984, during about 3 years. 8. The KGM highway works have two principal purposes: maintenance and construction. Maintenance works by definition include periodic maintenance: resealing and regravelling, while construction would include all works of improvement of the highway network. Thus, the needs of new equipment should be also divided in two categories: maintenance and construction equipment. Table 3 shows subdivision of new equipment as it was requested by the user departments. On the basis of percentage of maintenance works in Asphalt, Construction, Traffic and other (general services) departments (Appendix 1) the total of maintenance equipment in the estimated cost of new equipment of US$133.5 million would be about US$103.0 million or 77Z. In the ICB lot of new equipment this proportion will be about 80%. Control and Operational Requirements of KGM Fleet 9. KGM equipment is allocated to 17 geographical regions according to the road maintenance and construction programs of the respective region. In each region the workshops and stores organization are under the respective regional director for the day-to-day operations. 10. In Ankara, the Director of Machinery Park is responsible for the overall inventory control of the fleet and its needs plus the operation of central stores in Ankara, Istanbul and Iskenderun, and this is the normal type of organizational structure of Turkish Government equipment fleets. In the case of KGM, the organization has been especially effective in achieving high levels of utilization and availability despite the problems of an ageing fleet and it has achieved a fairly good level of computerized static inventory for the fleet and its central stores spare parts.  - 36 - ANNEX 1 Page 4 of 5 11. However, there are two important areas of management of the fleet which need to be improved and for which computerized programs could be developed as follows: Fleet Inventory (a) Monthly utilization and availability of units reporting at all levels. (b) Annual positive scrapping and replacement program. (c) Annual equipment needs program for all users of the fleet. (d) Monthly costing of owning, maintaining and operating the fleet for each unit and for the fleet as a whole. (e) Comparisons of the relativity of hire charges against actual costs involved. Spare Parts Inventory (a) Extend the computerized control program to all regions stores. (b) Establish maximum and minimum stocking at all levels of stores based on the total usage within KGM. (c) Revise and check validity of existing formula for initial purchase of spare parts stock for new units. 12. The computer MIS section of KGM is well developed and has ample capacity and capability for more dynamic programs to meet these revised requirements. There is, however, a lack of appreciation by the middle management of MIS, Stores and Workshops of how the existing programs and information in the computer could be used to develop better programs and more accurate and better management information than tf: present manual and static inventory systems do at present. 13. The Bank recommends that from three to five of the top and middle management staff involved in the stores - workshops and computer sections - should be jointly exposed to the operations and man&a,ement of successful private and quasi government companies such as Wimpeys, Unipart, London Transport, and IBM for at least 10 weeks in order tco identify themselves with successful computerized management systems and controls and on their return they should jointly produce a working paper for the implementation of programs which would overcome the present shortcomings of the existing programs, particularly the Spare Parts Stock Control Programs and the Fleet Inventory Costing and Utilization Program.  - 37 - AN2NEX 1 Page 5 of 5 Conclusion 14. The analysis of equipment requirements shows .h%at about 80% of the new equipment will be used to strengthen road maintenance operations. In the renewed equipment fleet valued at US$440 million (para. 7), equipment for maintenance would account for about US$350 million. There is a clear trend towards increased emphasis on maintenance and decreased use of force account for construction. In 1980, about 25% of construction was carried out by contract, in 1983 - 50% and the forecast for 1993 is 75%. Small contractors (taserons) are employed in ever increasing numbers. As they do not carry sufficient equipment to undertake a full range of tasks, the KGM rents on an increasing scale equipment for earthmoving and compaction. In a parallel study the KGM is reviewing the equipment rental system. 15. There is a need to develop computerized systems to control the use of the fleet and spare parts, viz to decide on when to repair, when to scrap, what stocks of spares should be held and what appropriate hire charges should be to cover the cost of owning, maintaining and repairing equipment.  - 38 - ANNEX 1 Appendix 1 Page 1 of 4 REPUBLIC OF TURKEY STAFF APPRAISAL REPORT OF A SECOND HIGHWAY PROJECT KGM Equipment Needs Related to Overall Work Program (Full Details in KGM Highway Detail Plan in Project File) 1. The following additional justification of equipment requirements of the Construction, Asphalt and Maintenance Departments is in amplification of the data included in the 1983-1993 Highway Detail Plan (See Item B 11 of Annex 13). Construction Department 2. The Construction Department carries out earthworks, drainage and base course. The equipment needs are based on the 1983-1993 program which includes; improvement (or construction) of 6000 km of state roads, 500 km of 4-lane highways, 5400 km of provincial roads and about 1,000 km of State Water Works Department (DSI) and touristic roads. These works are carried out by contract and force account, with force account participation declin- ing from the present 50% to 25% in 1993. 3. In order to establish the list of required equipment the Department used 3 methods: (a) the volume of earthworks in various types of soils and of base course per km was calculated on the basis of 18 completed road projects totalling 313 km, and the appropriate equipment required to carry out the works during the plan period was estimated on the basis of work quantities and equipment output; (b) it was assumed that the work will be carried out by 50 con- struction groups of which 18 would involve transporting ordinary soil, 16 would not require transport and 16 would involve excavation and transport of rocks. The equipment composition of each group was determined to carry out the related works; and (c) the above method was refined by considering 7 types of work: average soil excavation with and without transport; similar types of work for hard soils and rock, and construction of base course. On the basis of estimated quantities and equip- ment output the number of construction groups and equipment composition of each group was computed.  - 39 - ANNEX 1 Appendix 1 Page 2 of 4 4. The lists of equipment obtained were remarkably consistent, and were used to establish the Construction Department equipment requirements. The final list appears to be reasonable and acceptable. Asphalt Department 5. The Asphalt Department is responsible for black-top roads pavement construction and periodic maintenance. The department carries out by force account surface treatment, but puts to contract nearly all construction of asphaltic premix base course, binder and wearing course carpet, including periodic overlays. The department's traffic related 10-year program calls for about 11,000 km of new asphaltic carpet roads and 13,400 km of new double surface treated roads. Periodic maintenance of 36,000 km of surface treatment roads would require a seal coat at least once every 5 years. It is estimated that about 80% of Asphalt Department force account output will be for periodic maintenance. The upgrading program provides for improve- ments to achieve the following status (in km); 1983 1993 Premix paved roads 2,937 14,130 Bitumen surface treatment 34,670 38,030 Gravelled roads 16,169 6,420 Earth roads 1/ 6,337 - 1/ Certain earth roads will be declassified. 6. The Department's program includes: (a) bitumen pavement (premix or surface treatment) on all state roads; (b) premix on all roads with heavy vehicles average exceeding 500 per day; (c) bitumen pavement on more than 70Z of provincial roads; (d) double surface treatment on shoulders of all premix paved roads; and (e) periodic maintenance. Nearly all premix paving will be carried out by contract, while all surface treatment by force account. On a phasing out basis the Department operates 8 medium size premix plants for periodic overlays and small size premix projects.  - 40 - ANNEX 1 Appedix 1 Page 3 of 4 7. The action plan includes force account operation of 40 surface treatment units, 40 base course strengthening units, 34 aggregate crushing units, 8 premix laying units, 16 gravel screening and washing units, and 31 contract work supervision units. The Department's equipment requirement was based on the number of working units and their composition. It appears realistic and acceptable. Maintenance Department 8. The Maintenance Department carries out routine maintenance of black-top and gravelled roads and bridges, snow clearing and emergency repairs. It should be noted that Maintenance Department carries out only routine maintenance. Periodic maintenance of black-top roads (resealing, overlay) is the responsibility of Asphalt Department, and is financed from the investment budget. 9. The Maintenance Department needs are based on the necessary main- tenance crews and their equipment. The Highway Detail Plan criteria are: (a) one crew for 75 km of bituminous concrete pavement roads (in 1982 - 2937 km, 1993 target - 14,130 km); Cb) one crew for 50 km of surface dressed state roads or 75 km of provincial roads (in 1982: state roads 22,695 km, provincial 11,975 km; 1993 target; state roads 17630 km, provincial 20,440 km); Cc) one crew for 75 km of gravel roads (in 1983 - 16,169 km, 1993 target - 6,420 km); (d) 16 crews for bridge maintenance; (e) support equipment (graders, loaders, mobile workshops); (f) snow clearing equipment; and (g) personnel transport. 10. The total equipment requirements were estimated for the 1993 horizon to comprise 250 bituminous concrete pavement crews, 570 crews for surface dressed roads, 90 for gravelled roads and 110 for bridge mainte- nance, a total of about 1000 crews. There are currently about 600 crews in service, which is not sufficient to ensure adequate maintenance of roads. While efforts are made to maintain pavement surface, road shoulders are neglected. In order to carry out the deferred work and ensure satisfactory maintenance, the Department considers that it should increase the number of crews by about 100 each year to reach 1000 in 1987 or 1988. This program is reasonable. The details of equipment requirements of Maintenance Department are shown in the Highway Detail Plan.  - 41 - ANNEX 1 Appendix 1 Page 4 of 4 11. The program of Traffic Department is placing and maintaining horizontal markings on all roads with asphaltic carpet pavement and important surface treatment roads, highway traffic signs, traffic protecting rails, control of vehicle weight and highway safety measures. In gross approximation 80% of the department activity will be related to maintenance. 12. Other departments' equipment needs, as can be deduced from equip- ment list in Table 2, are related mainly to general services and administra- tion: flat-bed trucks, truck-tractors, cranes, personnel transport. Considering composition of this equipment, it could be assumed that at least 50% would pertain to maintenance, 25% to construction and 25% to general administration.  REPUBLIC OF TURKEY STAFF APPRAISAL REPORT OF A SECOND HIGHWAY PROJECT Breakdown of Work Equipment by Type and Age