Papua New Guinea - Second Highlands Road Improvement Project

Document of The World Bank FOR OFFICIAL USE OrNLY Rteport No, 5488 PROJECT COMPLETION REPORT PAPUA GUJINEA: SECOND HIGHLANDS ROAD IMPROVEMENT PROJECT (CREDIT 677-PNG) February 25, 1985 East Asia and Pacific Regional Office This document has a rest.iited distribuiion and may be used by recipients only in the performa^nce of | their official duties. Its contents may not otherwise be disclosed without W^orld Bank zuthoriz2tion. |  FOR OMFICIL USE ONLY PAPUA NEW GUINEA SECOND HIGHLANDS ROAD IMPROVEMENT PROJECT (CREDIT 677-PNG) PROJECT COMPLETION REPORT Table of Contents Page No. PREFACE ........................................................ i BASIC DATA SHEET. ii HIGHLIGHTS .iii I. INTRODUCTION .I II. PROJECT IDENTIFICATION, PREPARATION AND APPRAISAL. 3 III. PROJECT IMPLEMENTATION AND COST .. 7 A. Summary. 7 B. Highway Construction and Improvement. 7 C. Detailed Engineering of Highlands Highway Waterais-Togoba ..................................... 12 D. Rural Development Studies ............................. 13 E. Feasibility Studies and Detailed Engineering of Roads for future projects. 14 F. Technical Assistance to Local Civil Engineering Contractors ............................ 14 G. Costs of Project and Disbursements .................... 15 IV. INSTITUTIONAL DEVELOPMENT ..16 A. Department of Transport, Works and SuppLy (DTWS) 16 B. Local Civil Engineering Construction Industry .... ..... 'N16 C. Road Transport Industry ............................... 17 D. Road Maintenance .18 E. Right of Way and Land acquisition .18 V. ECONOMIC REEVALUATION .18 VI. CONCLUSIONS ................,. ........... 20 TABLES 1. Actual and expected Project Implementation .2 2. Actual and Appraisal Estimates of Cost. 2r 3. Economic vehicle operating Costs .27 4. Traffic Survey conducted 1983 .28 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.  -2- Page No. 5. Traffic Projections on HighLands Highway, 1974-2002 Appraisal and Actual AADT ........................ . *. 29 6. Road Improvement: Comparison of Net Benefits at Appraisal (1976) and Reappraisal (1983): Asaro-Watabung ......... 0 7. Road Improvement: Comparison of Net Benefits at Appraisal (1976) and Reappraisal (1983): Chuave-Kundiawa *........ 31 8. Road Improvement: Comparison of Net Benefits at Appraisal (1976) and Reappraisal (1983): Kundiawa-Garnigl ........ 32 MAP IBRD 11428 R 1  - i PAPUA NEW GUINEA SECOND HIGHLANDS ROAD IMPROVEMENT PROJECT (CREDIT 677-PNG) PROJECT COMPLETION REPORT Preface The following is a Project Completion Report on the Second Highlands Road Improvement Project in Papua New Guinea. The Credit, No. 677-PNG for US$19.0 million, was approved by the Executive Directors on January 25, 1977. the agreement was signed January 28, 1977, and the credit was closed June 30, 1982, when US$0.5 million remaining in the credit account was cancelled. The CompLetion Report was prepared by the Bank's East Asia and Pacific Regional Office and is based on information obtained from the East Asia and Pacific information Center, Appraisal Report No. 1250a-PNG dated January 11, 1977, staff supervision reports, consultants' final reports, data supplied by the Department of Transport and Civil Aviation, the Department of Works and Services, and information gathered by a project completion and supervision mission to PaptLa New Guinea in November 1983. In accordance with the revised procedures for project performance audit reporting, this Project Completion Report was read by the Operations Evaluation Department (OED) but the project was not audited by OED staff. The draft report was sent to the Borrower for comments; however, none were received.  - t1i - PROECT CONPLETIOIIC REFIOISrUIC DATA SrEET PAPUA MNE GUINEA: SECOND NIGHLANDS ROAD 14PROVEMENT PRoJECr (CREDIT 677-rsC) tCountry) (Prject Title) CL.nC No.) KEY PROJECT DATA Appratoal Actual or It_ Expectation Currant KCettmte Total Project Coat CUSS miltion) USS27.2CK 22.7) U 4K 24.9) /a Overrun CZ) - 2 t U47 (IOtK) LoeniCredit Amount (U5S million) 19.0 19.0 Disbursed ) 19 0 18.5 Cancelled ) - 0.5 Repaid to ) 09130183 - - Outstading to ) 09t30/83 - 18.5 Dote Physical Components Completed 09/0 1215 Proportion Completed by Above Date CR3 100 75S Proportton of Time Overrun CE) - 3DS Ecnnomtc Rate of Return (C) 27.5 16 fi CUAULATIVC DISJURSEMENTS FY77 FY78 FY79 FY8O FY83I n82 AppreLeal esttmate CUSS millton) 1.7 6.6 12.0 16.7 19.0 Actual (MS mItlion) t.3 8.11 11.2 13.5 16.4 18.A Actual as Z of estimate 76 121 93 8t 86 97 Date of final disbursemenL 06110182 Princtpal repaid to (no. /day./yr.) (USS Llion) OTHER PROJECT DATA Origtnal Actual or 1L Plan visittons Eat. Actual First 'lntlon En Files or Timetable 6 72 4 72 :overneentie Applicatton 06 12 73 t i 1 2*3 legottAtlono = 74 712/03/76 Board Approval " 4 (75 Lnon/Credit Altreement nOte I7774 _r7_ 01/Z77 Effecttveneas Date /75 t3 /76 03/02/77 Closing n..te 067lTO1/ 06/30/82 06|/10182 Borrower The Independent State of Papua Now Cutnea ExecutInR Agency Department of Transport. Works and Suppli Ftical Year of oorrover Januarv I - December 31 Follow-on Project NSow Thtrd i.hwa - Project Loan/Credit Number Loan 5/Crdit 1030-PNG Amount CUSS Million) Totl 3.0 aLon 17.07Credit 13.0) Loan/Credtt Agreasant Date 09/16180 MISSION DATA Sent No. of Yo. of Date of item bv Month. Year Weeks Persons Man-weaks Report Identification TPT 04/72 2 2 6 /i 05/18172 Preparation A_PT 05/73 1 1 1 77 0-6/11(73 Preappralsal AEPT 03/74 1 2 2 /c 03121176 Appralsal AEPT =08/74 3 2 b 7;W 01/1t177 Total 7 13 /e Supervtiaon I AFPT 07/77 2 1 2 03/28/78 Supervision II ACPT 11/78 3 2 6 if 12/07(78 Supervision III AEPT 05/79 3 2 6 jg 06/06179 Supervision IV AEPT 10179 3 2 6 jj 11i15/79 Supervision V ACPT n/a80 1 1 I fh 11/05/80 Supervision VI AEPT 03/81 3 2 6 7? 03/31(81 Superviston VII AEPTZ 11/81 1 22 7? OV17/82 Completion AEPTZ 11/83 2 2 _ 4 7-_ ____I_ 'otal ___33 /k COUNTRY EXCHANGE RATES Name of Currency (Abbreviation) Kina K Year! Appraisal Year Average Iq74 Exchange Rate: USSI - ASn.694 / Intervening Years Average IY75-81 USSI K 0.724 Completion Year 1982 (Jan-Jun) USs1 - K 0.715 In Total project coat Increase in USS equtvalent of 26:. compared with increase In King of only 101. due to appreciation of Kina relative to USS during partod of project execution. /b The projectsa econonic rate of return was calculated on the basis of road uaer and maintenance coat savings resulting from the road improvements. kc Includes supervision of First Highway Project (Loan 693/Credit 204-PNC). 7;i Includes field work for Completion Report for First Righway Project. 7e About 8 man-weeka attributable to Second Highlands Road Improvement Project (Credit 677-PSG). 7F Includes preappralsal of Third Highway Project (Loan 1856/Credit 103-PNG). 7j; Includes appraisal of Third Highway Project. lb1 Includes supervision of Third Highway Project. 7 Includes supervision of Third Righway Project. preparatton of proposed Road Improvment Project (Loan 2265-PNC), and field work for Project Completion Report for Second Ports Project (Loan 1552-PNC). I1 Includes supervision of Third RlXhway Project and Read Improvsent Project. 7i About IN man-waks attributable to Second Highlands Road Improvement Project. tl Australian dollars unttl Independence In September 19'S.  - iii - PAPUA NEW GUINEA SECOND HIGHLANDS ROAD IMPROVEMENT PROJECT (CREDIT 677-PNG) PROJECT COMPLETION REPORT Highlights i. The project accomplished its main objective of improving three exceptionally difficult sections of the Highlands Highway and established substantially all-weather road communication with the Central Highlands Region. The sections, in mountainous terrain, with highly unstable soils, had been subject to landslides and other failures, frequently blocking traffic, especially during the long season of heavy rainfall. ii. The overall economic rate of return (ERR) on the road construction/improvement is lower, at about 16%, than the 27% estimated at appraisal, based on reduced operating costs of vehicles. The reduction is due mainly to lower traffic growth, and less upgrading to more efficient types of trucks, than forecast, probably due to economic recession and restrictive regulation of commercial vehicles. Also, the construction took about a year longer than forecast and there was a cost overrun (including contingency allowances) of 7% (in Kina), or 24% (in US$ equivalent). However, the ERR indicates that the investment was justified, and probably understates the full benefit of substantially improved access to the Highlands. Iii. In spite of the overruns in construction time and cost, the successful completion of the road construction works is a notable achievement under such unusually difficult conditions of soils, terrain and rainfall. iv. The following points are of special interest: (a) obtaining bids for the main works before negotiating the credit allowed the Government to adjust the scope of the project, before commitment, to within its financial targets (paras 2.03-2.06); (b) re-bidding after about 18 months (when economic and political conditions were judged to be more favorable), produced prices about 20% lower in real terms than originally bid (paras. 2.09 and 2.11); tc) the "managedt" force account construction, as agreed for about 30% of the works, operated satisfactorily and produced finished work com- parable with that executed by contract; however difficulties of overall costing of the force account operations make any meaningful comparison of costs difficult (paras. 3.10-3.14, 3.16 and 3.17). (d) more detail engineering design should had been undertaken before bidding instead of leaving a larger than usual amount of such design details to the supervisory team (paras. 3.22 and 3.23).  i v - (e) only modest progress was made regarding institutional and transport policy issues. The recruitment and training of PNG nationals for professional posts is proceeding slowLy because of insuficient qualified candidates for the engineering school (para. 4.03). Also. limited progress was achieved with the development of local contractors (para. 4.04). (f) an important outstanding issue is the regulation of road transport, including the restrictive licensing of commercial road vehicles (paras. 4.06-4.08). (g) acquisition of right of way remains a long and troublesome process. The sclution to this problem is outside the scope of a highway project (para. 4.10).  PAPUA NEW GUINEA SECOND HIGHLANDS ROAD IMPROVEMENT PROJECT (CREDIT 677-PNG) Project Completion Report I. INTRODUCTION 1.01 Papua New Guinea (PNG) consists of the eastern half of the large island of New Guinea and about 600 smaller islands; the principal ones are New Britain, Bougainville, and New Ireland. The main part, on New Guinea Island has around two-thirds of the total area and population of PNG and 40% of the entire population lives in the central Highlands area. Historically, the Highlands were very isolated. They are separated from the southern coastal area by a rugged mountain range and, at the Western end by swamps. There is no motorable land connection. Even to the northern coast, access is difficult since mountainous areas and steep escarpments have to be traversed. Only after the Second WorLd War was a track constructed, negotiable by four-wheel drive vehicles, from the port of Lae and the Markham River Valley, up to Goroka and Mount Hagen. Gradual improvements were made during the 1950s and early 1960s, but it remained still little better than an improved track. Not only is the area mountainous, but the soils are largely of very recent, geologicaLly, volcanic origin, with steep sLopes and are highly unstable. Many sections of the road suffered large-scale slides during the prolonged seasons of heavy rainfall. Traffic was frequently interrupted for hours, and sometimes days, until the blockages were cleared, or deviations made, by heavy road machinery which had to be stationed constantly on the road. None of the road was paved. 1.02 Such was the state of the "Highlands Highway" as it is called which runs about 600 km from Lae to Mendi via Goroka, Kundiawa and Mount Hagen, the principal towns in the Highlands area. Initially, the Highlands had to be supported almost entirely by air transport. Only graduaLly was road transport able to develop between the towns and the port of Lae. Even now, air transport is important, paticularly for passengers and for traffic to the capital, Port Moresby, since there is stiLl no land connection and the only alternative is coastal shipping. It can readily be seen why the provision of improved land transport to the Highlands has long been a major concern of the Government. 1.03 The First Highway Project (Loan 693-PNG/Credit 204-PNG, totaling US$9.0 million dated June 24, 1970), was for the construction and improvement of about 150 km of the road between Kundiawa and Mendi. The sections omitted were the approximately 16 km between Minj and Kudjip, for which alternative alignments were to be studied, Togoba-Kaupena and Assissi-Mendi, which were being improved by the Government from its budget funds. These improvements were selected on the basis of the UNDP-financed Transport Survey of 1968-1969 for which the 3ank acted as executing agency. The Transport Survey had recommended the improvement of this western part of the Highlands Highway, and it also suggested a new access to the Highlands be constructed between Kundiawa and the port of Madang. The First Highway Project accordingly included a feasibility study or this proposed new route and, provisionally.  -2- also for its detailed engineering if it were found feasible, as well as engineering of the short section Minj-Kujip. The Project also included an element of technical assistance to the Department of Public Works, mainly for costing, estimating for works, and personnel administration. 1.04 With the provision of road access into the Highlands, even though still to a low standard, the number of vehicles in the Highlands grew at an average rate of 18% p.a. over the ten year period to 1974, compared with the 11 average growth for the entire country. This growth was fostered by government policies which did not restrict entry to the road haulage business. The industry was therefore competitive and relatively efficient. However, the costs of transport were very high because of the road conditions and because of the very unbalanced freight traffic, with about four times as much volume from Lae to the Highlands as from the Highlands to Lae. 1.05 In the early 1970s, the Government approached the Bank for a Second Highway Project with the main objective of improving the remainder of the Highlands Highway to all weather standard and, as far as possible, including paving. The initial approach was that the construction would probably be on the suggested new alignment between Kundiawa and Madang, depending on the outcome of the feasibility study and engineering under the First Highway Study. 1.06 The planning, design, construction, and maintenance of roads was historically the responsibility of the Public Works Department CPWD). However, following the Bank's 1967 economic mission, which had emphasized coordination of transport planning, a Directorate of Transport was set up in 1968, while the UNDP Transport Survey was in progress. In 1971 the Directorate, was succeeded by a Department of Transport with responsibility for planning and coordinating all surface transport systems, and civil aviation was added from 1973. Since the independence of Papua New Guinea in September 1975, various organizational changes have taken place. At first, the Department of Transport became the Office of Transport, and was placed in a Department of Transport, Works and Supply, which contained also a National Works Authority, which was responsible for design and execution of works. This was the position at the time of negotiating the Second Road Project, in late 1976. However, subsequently, the two functions of planning and administration of Transport, and of the design, execution and maintenance of works, have again been separated into the Department of Transport and Civil Aviation (DTCA), and the Department of Works and Supply (DWS). It is questionable whether the planning and administration of Transport should be under a different Department (and Minister) from the design and execution of works and maintenance operations. It may be argued that separation gives more emphasis and independence to the planning process, and also there is a political dimension. However, there is a penalty in making the necessary close cooperation and trade-offs between the two functions more complicated and difficult. The important interchange of the knowledge of field conditions and of construction and maintenance techniques from the workstaff to the planners and of broader planning and economic concepts from the planners to the workstaff, may therefore be substantially lost.  II. PROJECT IDENTIFICATION, PREPARATION AND APPRAISAL 2.01 Initially, it was believed by the Government and the Bank that the major part of a possible future Second Highway Project would consist of the construction of a new route to the Highlands from Madang, to Kundiawa. A feasibility study of this route was carried out by Australian consultants under the First Project (para. 1.03). The results were reviewed during a Bank mission in ApriL 1972. The conclusion was that construction of such a route would not be economically justified until the late 1980s, whereas an improvement of the existing route between Lae and Kundiawa would be justified immediately. It was therefore agreed by the Government and the Bank that detailed engineering of the new Madang route not be proceeded with and that instead the improvement of the existing route Lae-Waterais-Kundiawa be further studied and engineered for future projects. At the same time, it was noted that the Asian Development Bank had indicated interest in financing improvements to the Lae-Waterais section. It was agreed therefore, by the Covernment and the Bank that the remaining length, Waterais-Kundiawa be considered for inclusion in the possible Second Project. The Government engaged the Australian consultant who had done the feasibility study to carry out further studies and detailed engineering of this length. The consultant's work was also to include further study and detailed engineering of any additional improvements, including paving, needed between Kundiawa-Mount Hagen-Togoba. The total length for detailed engineering was around 320 km and it was agreed by the Bank that the cost of the consultant's work would be considered for possible retroactive financing under the proposed Second Project. 2.02 An appraisal mission visited PNG in August 1974, when it was deemed that the detailed engineering had progressed sufficiently far. For purposes of analysis, the consultants had divided the road into 12 sections which were rpasonably homogeneous as to terrain, road condition and traffic. The first two short sections at the Waterais (eastern) end were omitted from the Project. The first one, of 6 km from Waterais to the beginning of the Kassam pass, was to be included in the proposed ADB financed Project, while the 8 km Kassam pass section was being constructed by the Government, financed from the budget. The remaining ten sections of the Highlands Highway, between Kassam and Togoba, totaling about 302 km were appraised for construction/improvement, including bituminous paving, in the proposed Second Project. 2.03 On the basis of the consultant's analyses and cost estimates so far available, it was believed that all the sections would be economically justified. However, the consultant's work was not due for completion until late 1974, when the final details of the quantities of work etc. would be known, and the economic analyses, further brought up to date. However, the Bank had serious misgivings as to the estimation of unit costs of carrying out works at that time. Firstly, prices of such works worldwide were being drastically affected by the oil crisis. In addition, in PNG, contractors had been rather fulLy engaged in other works, particularly concerning the mining industry in Bougainville. ALso, the capacity of locally based contractors was limited, and bidding was likeLy to be larzely dependent on foreign firms, not necessarily with anv Local base of operations. Furthermore, the country was approaching independence and it was thought that this might temporarily affect the confidence uf contracturs pending the change-over of administration.  - 4 - Consequently, it was agreed that bids for the works should be invited and received before negotiating the proposed credit. 2.04 Accordingly, the Government sent out invitations to bid in late December 1974, as soon as the documents were ready. The bids were opened in March 1975, and were found to exceed the estimates by 75Z. The Covernment and the Bank agreed that the bids appeared high. The Government considered that lower bids might be obtained if the bidding documents were revised to combine the works into two large sections, instead of the six previously bid, in the hope of achieving economies of scale, and if some improvements, from the contractors point of view, were made in the bid conditions. In particular, larger advance pavments were offered. since it was believed that contractors at that time found difficulty in financing operations. 2.05 In agreement with the Bank, the Covernment rejected the bids received and sent out invications for new bids in May 1975 (from all the contractors previously prequalified for contracts of the appropriate size). The bids were opened in July 1975, but failed to produce lower prices. The Bank indicated it was willing to consider possibly increasing the amount of financing to be offered. However, the Covernment decided the cost of the Project was too great, and rejected the bids. 2.06 In March 1976, the Covernment sent a delegation to the Bank with a proposal that a reduced Project be reformulated to cover only the most urgent sections of the Highlands Highway. The delegation consisted of senior representatives of the works and transport offices of the Department of Transport, Works and Supply, together with the Australian consultants. Preliminary reevaluations were carried out on the various sections of the Highway, based on the latest available or estimated data, as to costs, traffic and the state of the road sections. Also, alternatives were considered for improvements with or without paving, or with partial paving of short segments of particularly steep gradients. Agreement was reached that the reformulated ProjecL would consist of three sections: (i) Asaro-Watabung (18 km) (ii) Chuave-Kundiawa (27 km); and (iii) Kundiawa-Garnigl (23 km). 2.07 Section (i) constitutes the Daulo pass, a steep escarpment section which was subject to slides, frequently blocking traffic during the rainy seasons. Section (ii) is also in very mountainous terrain, and was on a bad alignment, with very steep gradients, even more unstable soil and many slips. also frequently blocking traffic for hours and occasionally for days. Most of the section required relocation in order to improve the alignment and to avoid as far as possible, or minimize, crossing areas where the soil is gradually, sliding down the mountainside. Section tiii) was improved under the First Highway Project, but is located in the steep mountainous area, with exceptionally unstable soil conditions, around Kundiawa. Although the improvements had produced a much better alignment and reduced the number and frequency of soil slips, a number of serious ones still periodically occurred. These areas required substantial remedial action and this section, as well as the other two sections, needed paving especially in view of the frequent steep gradients. 2.08 The Government delegation proposed that a proportion of the works be carried out by force account. The reasons were that there had been poor response by contractors the previous year, -he Government wished to start as  - 5 - quickly as possitle on the remedial works of Section (ii), the force account work would give government staff direct construction eyperience and training, provide a comparison on which to judge rhe contract works and costs, and chere were a number of small local equipment hire firms, which could provide and operate the equipment, but were not capable of undertaking the responsibilitV for works contracts. Agreement was reached that the most appropriate works for force account construction would be the earthworks, drainage, and subbase construction constituting the remedial works on Section (iii), and parc of Section II, Chuave-Kundiawa. rhe remaining part of Section (ii) would be undertaken by contract, as well as the whole of Section Ci), including its paving. Paving of Sections (ii) and (iii) would be carried out by contract, as a subsequent operation. This two-stage construction was considered advisable because in such unstable soil conditions, even with good engineering, it was likely that at least a few segments would still be liable to some movement after construction, and these could be repaired before paving. It was further tentatively agreed that the force account remedial works on Section (iii) would be started by about June 1976 with assistance from consultar:ts to manage all the force account works, and provide on-the-job training, and that the works and consultants' services would be considered for retroactive financing. 2.09 It was also agreed that the Australian consultants would go ahead immediately to revise and prepare bid documents for Section (i) and for the two parts of Section (ii) as well as prepare designs for the remedial works for Section (iii). The documents would be prepared for separate contracts for the earthworks, drainage and subbase, and for subsequent contracts for paving Sections (ii) and (iii). The Government also undertook to update the feasibility analyses for the three sections. with the help of the consultants. as quickly as possible, so that the Bank's 1975 draft appraisal report could be revised. The Bank suggested that a reappraisal mission should be sent, since the original appraisal had been carried out in 1974. However, the Government considered this unnecessary and the Bank withdrew the suggestion. in view of the Government's undertaking to provide the revised engineering and economic data. Once again, it was agreed that bids for Section (i) and for the earthworks, drainage and subbase for Section (ii) be obtained before the credit negotiations. The Covernment and the consultants expressed hope that there had been an improvement in the climate for bidding. It was believed that some contractors were in need of additional work, and the transition to independence had already taken place, thus removing some real or imagined uncertainties. 2.10 Revised bid draft bid documents were prepared and agreed with the Bank in July 1976, as well as revised cost estimates, and updated traffic data. Also, following readvertisement by the Covernment, additional contractors had pre-qualified bringing the total to 14. Bids were invited tor Section Ci) and for the first stage (earthworks, drainage and subbase) on Section (ii) in August. and were opened in October, 1976. In the meantime. the Bank had prepared a revised draft appraisal report for the reformulated Project, with cost estimates prepared by the Government and consultants on th. basis of the previous bids received. The new bid prices in October 1976 were in facL about 10Z lower in financial terms than the bids received in 1975. .nd at least 2OZ lower in real terms. Negotiation *t the Credit took place in th Bank in earlv December 1976.  -6- 2.11 In view of the somewhat prolonged preparation and the discussions in March, 1976, agreement was quickly reached on the construction and improvement element, consisting of the three sections referred to above. The Bank agreed that the Australian consultants supervise all the works. It was further agreed that another firm of Australian consultants be employed to assist the Government in managing the force account works to be carried out by the National Works Authority (NWA) (para. 1.06), and that disbursements from the Credit for such works would be on the basis of unit prices for each kind of work, to be agreed with the Bank, and on certified measurements by the supervisory consultants of the quantities of work carried out; in other words, on a basis similar to payments for contracts. The unit prices were agreed during negotiations, on the basis of the bid prices received from the contractors. 2.12 Agreement was also confirmed on proposals which had previously been discussed for including rural development preparation studies, in the Enga and Chimbu provinces, which are among the provinces served by the Highlands High- way. Also, included at the request of the Government was a feasibility study, to be followed by detailed engineering if found justified, of the Togoba- Wapenamanda road (about 63 km). This is the principal road connecting the Enga province with the Highlands Highway. A further item agreed was-the provision by consultants of technical assistance and training for local contractors. The object of this was to develop a number of the existing equipment hire local small firms to be able to undertake full responsibility for contracts. 2.13 Leading up to and immediately following independence, the Government service had lost a large number of expatriate technical and other senior staff. The Bank had expressed concern that this might weaken the Government's ability to execute projects and to carry out maintenance which hitherto had been good. The ultimate aim was, of course, to localize the service at all levels. However, the major obstacle to effecting this within a reasonable time was the lack of suitably educated local candidates. This severely limited the Government's training programs, including those already existing within the Department of Works and Supply, to prepare local staff to take over. For a prolonged period, it would therefore be necessary to continue substantial staffing with expatriates and agreement was reached during negotiations that the Government would provide in this way adequate staffing in the Transport and Works Offices of the Department of Transport Works and Supply, in addition to continuing its training programs. 2.14 A further point on which the Bank expressed some anxiety, was the total volume of force account works to be undertaken by the DWTS. Agreement was reached that the Department wouLd not undertake any force account works in the Project other than those already agreed, and also that it would not divert resources, including labor and equipment, from road maintenance works in order to undertake the force account construction. 2.15 The Project was approved by the EDs, January 25, 1977, the Credit Agreement for US$19 million signed January 28, and the Credit became effective March 2, 1977.  rII. PROJECT IMPLEMENTATION AND COST A. Summary 3.01 The Project was completed with a time overrun of one year and a cost overrun (in Kina) of about 10%. This can be considered satisfactory having regard to the very difficult nature of most of the construction works; the three sections of road had been selected for construction because they were in the worst condition, with frequent interruptions of traffic, and presented exceptional difficulties of soils and terrain. The works have transformed the vehicle operating conditions of the road and practically eliminated traffic interruptions. The studies and engineering under the Project formed the basis of subsequent Highway and provincial rural levelopment projects that are being financed by the Bank. 3.02 The overrun of twelve months occurred on the two road sections where paving was to be carried out separately as a second stage, after completion of the earthworks. It was decided to wait until all the earth works were completed and then award a single contract for the paving. This decision was probably justified since it offered some economies of scale and more impor- tantly it enabled failures in the newly constructed earthworks to be detected and repaired before paving. The cost overrun of 10% (in Kina) should not be considered excessive in view of the exceptionally difficult terrain and soil conditions encountered. The overrun in US$ equivalent of about 26Z is higher because of the appreciation of the Kina relative to the US$ during the period of Project execution. The exchange rate was about US$ 1.00 to Kina 0.83 at the time of negotiations and finalization of the cost estimates, but it fell to an average of about Kina 0.72 during the construction period. B. Highway Construction and Improvement (i) Asaro-Watabung (18 km) 3.03 As noted above (para. 2.10) bids for this section, as well as for 18.5 km of Section (ii) Chuave-Kundiawa, were opened in October 1976. Three bids were received and the contract was awarded to the lowest, an Australian contractor, in February 1977, shortly after the credit was signed. The work included construction of a box culvert, for which separate bid documents had been issued. The Australian consultant who had undertaken the engineering was appointed to supervise the construction. 3.04 During discussions in Washington in 1976, the representatives of DTWS stated that after the consultant had completed the engineering of this section in 1974, the Department's maintenance forces had carried out substan- tial amounts of work, largely when repairing sections repeatedly damaged by earth slides. As the section of road was being widened and improved almost entirely on the existing alignment, it was suggested that the quantities of earthworks and drainage shown in the bid documents be substantially reduced, and this was done. However, it became apparent when the work started that the amount of work done by the maintenance forces had been exaggerated. It was therefore found necessary to further widen the road in many places and much of the drainage had yet to be added. There was consequently a significant physical overrun in quantities of these works and these were agreed with che  contractor, together with an extension of seven months in the time for comple- ting the contract. In addition, during construction, a number of sections of the existing road collapsed in the Daulo Pass area due to earth slides or settlement in chat unstable soil area. The necessary repairs and reconstruc- tion involved some further additional work. The work on the section was completed in August 1979. Notwithstanding the satisfactory execution of the repair/reconstruction works on the failed sections, in addition to the widening, it must be expected that some new failures will occur from time to time in the future. However, it is unlikely that they will be nearly as frequent or severe as was the case before the Project works were undertaken. (ii) Chuave-Kundiawa (27 km) 3.05 As noted in para 2.08, this section was divided into two parts. One part (of 18.5 km), was to be carried out by contract. The remaining part (8.5 km) was to be constructed by force account by the DTWS National Works Authority (NWA). The contract part included construction of a bridge near Kundiawa, for which separate bid documents were prepared. 3.06 Bids were opened in October 1976 for the KM 0.0 - KM 18.5km 'icontract" length. The low bidder was the Australian contractor who had submitted also the low bid for Section (i) above (para. 3.03). The contract for this part, includirg the bridge, was awarded to him in February 1977, at the same time as the contract for Section (i). As noted, the terrain and soil conditions on the Highlands Highway are generally difficult. However these conditions in the area of Chuave-Kundiawa are exceptionally difficult. In addition to the steeply sloping, recently deposited, volcanic soils, presen- ting slide problems during wet weather, there were extensive deposits of shale which presented major problems. Firstly, the slopes to which the shale could be cut, with reasonable stability, depended on the dip of the bedding planes of the shale. Such slopes could be relatively steep where the dip was away from the roadway cutting but had to be substantially flattened where the dip was towards the roadway. These factors could be predetermined after carrying out a substantial amount of investigation. However, another major factor was the degree of rupturing in the shale caused by earthquake tremors which are common in the region, and the resulting amount and path of surface water penetrating into the shale. The result of these factors was the occurrance of many slips in the deep cut faces in the shale. It was virtually impossible to predict, or locate, such ruptured areas in the shale before roadway excavation took place. 3.07 The contractor suggested a general flattening of all the cut slopes. However the consultant pointed out that there was a very big difference in stability, and therefore in the steepness of stable slope which could be obtained, in the shale depending on its bedding plane dip and the amount of rupture it had suffered. The stable slope varied between three quarters:one and four:one. To have cut back sufficiently to flatten all the slopes to the worst case condition (which occurred largely at random) would have been a prohibitive increase in excavation. It was decided therefore to adjust the angle of the cut slopes to the known dip of the bidding planes, but not to try to take account of the potential slip areas. These were simply dealt with as they occurred. invoLving additional excavation and drainage as found necessary.  - 9 - 3.08 The worst problem which occurred was a major landslide for a length of about 150 m along the road alignment. The slide extended for 800 meters up the hillside from the road and to a depth of many meters in the soil. The solution here was a substantial relocation for over a kilometer in the road alignment. Many smaller landslides, and slips (in the shale) occurred and had to be dealt with. The result was an increase of about 25% in the earth works quantities over those shown on the original drawings. The additionaL quanti- ties of work were of course measured by the consultant and payment made to the contractor. However, the contractor put in a large number of claims for addi- tional payments at higher unit rates. To try to resolve the question, a number of trial repair operations were monitored to try to establish agreed rates in October 1978. However the consultant's valuation in December 1978 was not accepted by the contractor. The contractor put forward further cLaims during the following year and by January 1980 the total of his claims amounted to K 4 million and the contractor stopped work. The DTWS agreed to advance the contractor K 1.0 miLlion against a Bank guarantee pending the finaL adju- dication on the claims. The contractor then resumed work and completed the contract in August 1980. The contractor's final claim amounted to K 5,921.000 and would thus double the original contract amount of K 5,893,000. The con- sultant and the contractor were unable to reach agreement on the claims, with the consultant maintaining that only a small fraction of the total was justi- fiable. It seemed probable that the contractor would call for arbitracion under the terms of the contract. 3.09 A meeting was then held between the contractor and the DTWS, with the consultant present. It is understood that the Government was anxious if possible to avoid the prolonged and expensive procedure of arbitration, possibly followed by a court appeal. The expenses of arbitration could well amount to over K 0.5 million and a great deal more if a court appeal was involved. Furrhermore, a great deal of the time of senior department staff would have been involved. The negotiations resulted in a settlement with the contractor for a payment of K2,680,000 over and above the payments certified by the consultant, in accordance with the measured quantities of work, in his Final Certificate. 3.10 The earthwork, drainage, and sub-base, on the remaining 8.5 km of Section (ii) KM 18.5-KM 27.0 were undertaken by the Government by force account. As noted in para. 2.11, the agency was the National Works Authority (NWA) of the DTWS. The basis for the arrangement, and for payments to be made by the Bank, was an "agreement" between the NWA and the DTWS including esti- mated quantities of work and unit prices similar to those in a contract; the unit prices were in fact agreed on the basis of bid prices received from the successful contractor on the remainder of Section (ii). The NWA, as had been tentatively agreed, started work in July 1976 with the understanding that the work would be eligible for retroactive financing if and when the proposed credit became effective. 3.11 NWA force account construction unit was set up with a management team provided by another firm of Australian consulting engineers, staff pro- vided by the DTWS, and a smaLl amount of equipment and vehicles provided by the DTWS, but the bulk of the equipment, especially heavy earth moving machines, and trucks, was provided by a number of small equipment hire Eirms which exist in Papua 'ew Guinea. This arrangement had the substantiaL merit that it avoided the DTWS having to obtain. service and operate a large amount  - 10 - of equipment. The equipment hire firms, however merely provided and serviced the equipment, and provided the operators. Their work was directed by the NWA staff. Similar arrangements have quite often been used by the DTWS in the past on construction and maintenance works. 3.12 The nature of the work, soils and terrain conditions, and difficul- ties encounte.:ed, on this section were very similar to those which occurred with the Section KM 0.0 - KM 18.5 constructed by the Australian contractor, described above (paras. 3.06 - 3.08). Similar problems had to be dealt with in regard to the unstable soil slides and the shale with varying angles of dip and random unstable ruptured areas, causing slips. In fact the overrun in quantities of earthwork excavation amounted to about 80%. However the total quantities of work on the shorter NWA Section were substantially less than on the contractor's Section. The actual quantities of work were, of course, measured and certified for payment by the design/supervision consultant, as in the case of the part carried out by the contractor. 3.13 The NWA force account construction unit (later named the Intensive Construction Group (ICW)) completed the earthworks, drainage and subbase on their 8.5 km part of Section (ii) in May 1979. The total cost certified by the Australian Design/Supervision Consultant, in accordance with the measured quantities, was K 3,703,000 compared with the initial estimated amount (excluding contingency allowances) of K 2,431,000 (or K 3,281,000 including contingency allowances). Overall, the cost overrun was therefore about 13%. 3.14 It took some time for relations between the design/supervision con- sultant and the management consultant to settle down. Inevitably, they some- times tended to have their different opinions as to how the work should be carried out, as seen from their different viewpoints. Nevertheless, after a while a good working relationship was established and the work was satisfac- torily completed. 3.15 From the above narrative, an impression might be formed that there was a good deal of trouble in carrying out the works and friction between the design/supervising consultant and the contractor, and to some extent the force account construction unit. However, this aspect should rot be overstressed and should be seen in the context of the conditions under which the work was carried out. The fact is that the works were successfully completed under great difficulties. The terrain is mountainous and the road had to be con- structed largely on severe gradients, across steep side slopes with highly unstable soils, and under heavy rainfall. In the end, the works were comple- ted at least as well as could reasonably be expected under such circums- tances. Although some slides, settlement and other failures must be expected to continue for a considerable time, they are dramatically diminished compared with the frequent large scale failures and blockages of the road which occur- red before the construction was undertaken. Overall, therefore, the perfor- mance of the DTWS, the consultants and the contractor was good. (iii) Kundiawa-Garnigl (23 km) 3.16 As noted (para. 2.07) the work on this section, which had been improved under the First Highway Project, consisted of remedial works on a number of lengths which had given trouble. Chiefly, the work consisted of substantial repairs in piaces where soil slips, or in some cases landslides,  - 11 - had occurred. Initial examination had indicated that an important part of the remedial works would be to provide subsurface drainage since much of the soil movement was caused, or aggravated, by the movement of w.ater. As part of the assignment, the Australian design/supervision consultant undertook an investi- gation of the failed areas and proposed remedial measures to be undertaken. In the meantime, the DTWS maintenance forces had carried out temporary repairs sufficient to keep the Highway in operation, though with some difficulty. The consultants produced a report in June 1977 describing and analyzing the failures and proposing remedial measures consisting, as far as drainage was concerned, of a combination of deep french drains and horizontally drilled drains into the earth slopes. They produced a rough initial estimation of the amount of work involved, but it was considered that the final design for each site could onLy be decided after drilling investigations were carried out. Test vertical drilling was carried out in June/July 1978 to obtain undisturbed soil samples and to insert piezometers to measure the soil water pressure in each borehole. On the basis of these investigations, the consultant prepared working drawings for the eight main failed areas. He also prepared a revised schedule of quantities of work and, after agreeing unit rates with the ICC force account unit, an estimate for K 964,000 was arrived at. 3.17 The ICC, after the test drilling had been completed, started on the main remedial works in September 1978. The solution adopted at four of the sites was a combination of deep french drains and horizontally-drilled drains. On two others, a combination of deep french drains and surface cut- off drains was adopted. On the remaining two sites, it was found more econo- mical to construct or upgrade by-passes of the failed lengths. The work was completed in September 1979 at a final cost, based on the measured quantities of work and the agreed unit cost rates, of K 979,030, which is only 22 over the estimate (including contingency allowances). Sections (ii) Chuave-Kundiawa and (iii) Kundiawa-Garnigl (Paving) 3.18 Separate international advertisement and prequalification of con- tractors for the proposed paving contract (of Sections (ii) and (iii)) were carried out in 1978-79. This produced four qualified contractors in addition to the seven prequalified for the earlier works. Altogether there were four contractors from Australia, three from Korea, and one each from Japan, U.S.A., Italy and New Zealand. With the approaching end of the earthworks, drainage and subbase construction, bid invitations for the paving were issued in September 1979 and opened at the end of November. Of the three bids received, the lowest was submitted by a PNG/New Zealand joint venture and the bid was accepted in April 1980. Work was started in June 1980, with a contract com- pletion date in August 1981. The work was to consist essentialLy of prepara- tion of the already constructed subbase and the addition of a base course, and double bituminous surface treatment, and the making up of the shoulders. How- ever, as a number of the road sections had been open to traffic for prolonged periods, some additional works were needed, including making up subbase material which had been lost, correcting the deformities which had appeared, and widening where necessary. In addition, some work was included for repairing and stone pitching of table drains and the provision of guardrails, guideposts and striping of the completed surface. 3.19 The contractor performed verv weLL on the contract. Relations with the supervising consultant were good and there was complete cooperation in  - 12 - undertaking any additional works found necessary and coping with difficulties which arose. Among the difficulties were civil disorders which occurred in the Chimbu province. A further factor was considerably heavier than normal rainfall that occurred in the period June through November 1981. The work was substantially completed and all the road open to traffic in December 1981, nominally about four months later than the completion date. However, exten- sions of time were given principalLy for additional works (of some categories) carried out, the unusually heavy rainfall, delay in obtaining delivery of trucks (because delay by the Government in awarding the contract resulted in late ordering of the equipment from overseas) and disruptions of works through the civil disorders. The work was well carried out and the contractor submit- ted no claims for additional payments, beyond the normal payments for measured quantities of work. The final cost of the paving contract for the entire sec- tion Chuave-Kundiawa-Garnigl was K 3,821,000 compared with the initial con- tract sum of K 3,790,000 (exclutding physical and price contingency allo- wances), or K 4,805,000 (including contingency allowances). The reasons that the contingency allowances were not used were mainly that the bituminous prime coat was found not to be needed on the surface of the base course as constrlc- ted, and the price escalation was less than estimated. 3.20 The total cost of the construction of the three road sections was K 20,947,000, compared with the appraisal estimate of K 19,550,000 (including contingency allowances). The overrun, expressed in Kina, was therefore about 72. However, expressed in USS equivalent, the overrun was about 24X, because of the appreciation of the Kina relative to the US$ during the construction period (Table 2). C. Detailed Engineering of Highlands Highway Waterais-Togoba 3.21 Following the decision in 1972 to improve the existing route Waterais-Kundiawa, the Government had the Australian consultant who had done the feasibility study of the Highlands Highway undertake detailed engineering on the approximately 320 km length Waterais-Kundiawa-Togoba (para. 2.01). The engineering was financed by the Government, with the understanding that the cost would be considered for retroactive financing in the proposed Project. The consultants started in September 1973, and substantially completed the engineering in August 1974. The total cost was about US$1.08 million and pay- ment was made by the Government. The foreign exchange cost of about US$800,000 was financed retroactively in 1977 under the Credit. 3.22. The engineering was carried out satisfactorily as far as it went. However the time allowed (about 11 months) was not really adequate to enable the consultants to carry out full investigations of the very difficult soil conditions. In particular, as described in A. (paras. 3.12-3.16), it was difficult to predict the angles of cut slopes required for stability in the extremely variable shales and loose volcanic soils encountered. In practice, rather general assumptions were made, based on Limited investigations, in preparing the design drawings, and detailed modifications to the designs were left to be done during construction as the ground was opened up. If more time had been allowed, and more detailed investigations undertaken, at significant- ly extra cost, somewhat closer designs might have been prepared, at least to take into account the varying angles of dip of the shale. However, even then i. would not have been possible to identiEy the locations and severity of rup- turing of the shale caused by pre7ious earthquakes. In any case, the main  - 13 - benefit of the extensive additional soil investigations would have been to prepare somewhat closer estimates, rather than to change the actual work which would be carried out during construction. Similar considerations apply to the decision to leave detailed location and design of piped culverts to the con- struction supervisory team, rather than take additional time and incur addi- tional expenditure, during the design stage. The lack of detailed culvert drawings at the beginning of the contract led to some arguments with the con- tractor. However, it appears that any real delay or impediment to his work was small, since the supervisory team apparently produced the detailed designs promptly, early in the construction period. 3.23 The question of the balance of detailed engineering which should be carried out in advance and the detailed design which may be Left to the super- visory team, is of course debatable. It is normal to leave some details to the supervisory team and, in any case, some design revisions are always found to be required during the construction phase. Perhaps in PNC the tendency is to be rather restrictive as to the amount of detaiLed engineering to be carried out in advance. Nevertheless, the main problems which have arisen are really due to the difficult soil and terrain conditions, rather than the design efforts made before work starts or, for that matter, while construction is in progress. D. Rural Development Studies 3.24 Three of the provinces served by the Highlands Highway are Chimbu, Enga, and Southern Highlands. The three provinces were targetted by the Covernment for rural development projects. Preparation of a rural Project was already underway for the Southern Highlands Province, but for Chimbu and Enga Provinces, it was considered appropriate by the Government and the Bank to include rural development project preparation studies in the Second Highlands Road Improvement Project. Clearly the substantial upgrading of the Highlands Highway, and the growth of traffic on it, is closely linked with the develop- ment of the provinces for which it serves as the only surface transport connection. 3.25 At the start of the Project, the Government indicated to the Bank that before preparing detailed terms of reference for the Chimbu and Enga studies it would prefer to complete the preparation of the Southern Highlands Development Project, so as to incorporate the experience so gained. The Bank accepted this proposal and rural development including the Southern Highlands was included in the Rural Development Project (Credit 841-PNG for US$20 mil- lion) in September 1978. The Terms of Reference for the Chimbu and Enga Project preparation studies were agreed with the Bank in 1978, consultants appointed, and work on the studies started in January 1979. about 18 months later than originally planned. The Chimbu study was carried out by a joint venture of two UK firms. The Enga studies were carried out by individual consultants (mainly from Australia and New Zealand) engaged by the Government, and by the Government's own staff. The studies were completed in June 1982. 3.26 The Government decided not to go ahead immediately with a rural development project, based on the study. in the Chimbu province, possibly influenced by the somewhat disturbed state of the province at that time. However, the Enga study formed the basis for the Enga Provincial Development Project, (Loan 2125-PNC for US$6 miLlion) in June 1982.  - 14 - E. Feasibility Studies and Detailed Engineering of Roads for Future Projects 3.27 This item provided for: (a) feasibility study of about 63 km of the Togoba-Wapenamanda road, to be followed by detailed engineering if found justified; and (b) updating of the 1972-73 feasibility study of the Highlands Highway between Waterais and Togoba, to prepare for further stages of its improvement. 3.28 Since the Togoba-Wapenamanda road is the chief route into the Enga Province the Government proposed that its feasibility study be deferred and carried out at the same time as the Enga Rural Development study. This was agreed with the Bank and the Government accordingly appointed an Australian firm of consultants in April 1979 to carry out the feasibility study and it was completed in January 1980, a little more than two years later than origi- nally scheduled. Although the study indicated that the road should be improved, the works were not scheduled by the Government to start immediate- ly. Also, at that time, it appeared likely that the total cost of the Second Highlands Road Project would exceed the cost estimates. The Government there- fore decided, in agreement with the Bank, to defer detailed engineering of the Togoba-Wapenamanda road and include it instead in the proposed Third Highway Project, and this was done. 3.29 The Government appointed UK consultants to update the previous feasibility study of the Highlands Highway, Waterais-Togoba. Their work was started in December 1978 and completed in September 1979, about 21 months later than scheduled at appraisal. The study was used in the preparation and appraisal of the Third Highway Project (Loan 1856-PNG for US$17 million/Credit 1030-PNG for US$13 million) in September 1980. F. Technical Assistance to Local Civil Engineering Contractors 3.30 The Government appointed an Australian Consulting firm in September 1978 to perform these services. The firm provided an expert with wide experi- ence in the civil engineering contracting industry, to formulate and carry out a program suitable for developing the local contracting industry in PNG. There were few local firms that had any significant ability and capacity to undertake civil engineering works. Most such works of any magnitude were carried out by expatriate firms, or their local subsidiaries. However, there were many existing domestic small firms which owned and operated equipment which they hired on an hourly rental basis. It was believed that, given some training and assistance in getting started, a number of these firms might graduate to undertaking the responsibility of contracts for carrying out works and so help develop a more competitive local construction industry. 3.31 The intention was to provide the technical assistance in two phases. The first phase would be to formulate a program, identify firms or individuals to be included in it, and to carry out training programs for them. The second stage would be to provide assistance to them in undertaking and managing contracts. The first phase,was carried out between September 1978 and February 1980. At first the consultant identified a very large number of local firms and individuals who owned equipment or vehicles for hire on works. However, the bulk of them were owner-operators of single trucks. Few were considered to have vehicles, equipment, and the potential to become contractors. Eventually about 20 firms were identified as suitable for inclu- sion in the program.  - 15 - 3.32 The consultant had first contemplated running a relatively formal series of instruction courses at a single center. However, it was decided that it would be more practical, and acceptable to the firms, to carry out a series of courses in different parts of the country. Accordingly, the consul- tant prepared material for the instruction and gave a number of such courses. These were chiefly aimed at instruction in the principles of contracting for civil works, general conditions of contracts, specifications and drawings, estimating, bid preparation, job management, elementary costing and financial control, and the selection and use of appropriate equipment. These courses were to be followed by practical training on a number of small projects, to be selected from the national or provincial works programs, and the contractors given the opportunity to bid on them. The main instruction was carried out by the construction industry expert. Some support was given by a specialist on financial matters, and a training officer experienced in teaching methods. 3.33 The 20 equipment-hire contractors deemed to have the potential LO graduate in the near future to civil works contractors were invited to the training sessions. The consultant produced two manuals in December 1978: (a) Manual for Civil Engineering Contractors; and (b) Manual for Plant-Hire contractors. With the completion of the first stage of the program in February 1980, the Government considered that there would be no purpose in continuing with phase two since there were insufficient civil engineering works at that time from which to select suitable small packages for trial/instruction contracts for the candidate firms. The services of the consultant were then terminated. C. Costs of Project, and Disbursements 3.34 By late 1980, it was apparent that the construction works (base con- struction and paving) of the Chuave-Kundiawa and Kundiawa-Garnigl sections would run a year or a little more beyond the time expected at appraisal. By a letter dated December 3, 1980, the Closing Date was extended by a year to June 30, 1982. The construction was actually completed in December 1981, but some payments continued into the first half of 1982, and the last disbursement was made on June 10, 1982. 3.35 The total project cost was K 24.90 million, about 10% more than the appraisal estimate of K 22.70 million (including contingency allowances). However, in US$ equivalent, the cost was US$34.41 million, about 26% higher than the appraisal estimate of US$27.24 million, because of the appreciation of the Kina relative to the US dollar, during the construction period. About K 1.4 million of the cost increase was in the construction works and about K 0.8 million in consultant's services, mainly additional supervision because of the time overrun. Disbursements totalled US$18.5 million against a Credit of US$19.0 million and an amount of US$0.5 million was cancelled. This was chiefly because the payment of K 2.68 million by the Government to settle cLaims by the contractor (para. 3.09) had not been recommended by the supervi- sory consultant, and no disbursement was made against it.  - 16 - IV. INSTITUTIONAL DEVELOPMENT A. Department of Transport Works and Supply (DTWS) 4.01 The project had only limited direct institutional development content in regard to the DTWS. At the time of appraisal in 1974, prior to independence, the senior staff of DTWS, especially in professional posts, was almost entirely expatriate. It was clear that it would be necessary to rely heavily on expatriates for a prolonged period, since local staff was not available, and was likely to become availabLe only slowly. The limitation was the very restricted output of PNG nationals for relevant professions, particu- larly engineers. The technical university of Lae had a school of engineering, which could produce graduates in civil, mechanical and electrical engineer- ing. However, its annual output of graduates was less than 20 because of the small number of candidates available with sufficient education to be able to undertake the courses. There was aLso a high wastage, extending even to some students who could have completed the courses. Of those who finally gradu- ated, only a proportion went into Government service, including the DTWS. Clearly any acceleration of the output of engineers would be dependent on the increase in numbers and standards of secondary school students and that would be outside the scope of a highway project. 4.02 For postgraduate courses for PNG engineers, the Australian Govern- ment was giving active assistance. It provided the courses and financing for the students sent to Australia. Some financing for fellowships had been included in the First Highway Project. However, this had been used only for paying the cost of transport for the DTWS (then Public Works Department) studencs to Australia and return. 4.03 For the lower grades of technical staff, the DTWS already had training schools and courses which had been running for several years to provide in-service training for its works staff. The main concern of the Bank at negotiations was therefore that the Government should continue to provide adequate professional staff and a covenant to this effect was included. It was appreciated that a large proportion of the professional staff would have to continue to be expatriate. After independence, such staff has been provid- ed only on relatively short-term contracts, usually about 2-3 years, and there has been a large turnover. Typically, in late 1979, the DTWS had provision for about 150 professional posts, of which about 100 were filled, all by expatriates, except for about 12 nationals. The situation has not greatly improved since then, as less than 10 new graduates are obtained per year. These have to be trained on the job, and given experience, and in the meantime some wastage occurs in graduate nationals previously recruited. During the course of the project, the DTWS was separated into the Department of Transport and Civil Aviation (DTCA), and the Department of Works and Supply (DWS), (para. 1.06). The position, in regard to the localization of the professional posts is similar in the two Departments to that prevailing before the split. B. Local Civil Engineering Construction Industry 4.04 As noted under Chapter III F. above, limited progress was made through the technical assistance provided under the project. The position remains that only a small number of local concractors exists, chiefly in or  - i1 - near the main towns of Port Moresby and Lae, and virtually all larger scale works are undertaken by expatriate firms, or local subsidiaries. However, the numerous local equipment-hire firms continue to operate. The use of their equipment by the Department of Works and Supply (DWS) has become an establish- ed practice, and it amounts to force account works as far as management, and supply of labor and materials are concerned, but it has the merit of avoiding the Department having to provide and maintain a Lot of construction equip- ment. The equipment element of road works undertaken by the DWS wouLd proba- bly account for 30% to 50% of the total costs. Nevertheless, it would be desirable to develop a local construction industry, even if initially on a modest scale. To promote this, it may be necessary for the Government to divide projects into smaller contract segments, and this would admittedly involve somewhat more supervision. Nevertheless, it would particularly in the longer term provide more competition and avoid the Government continuing to have to depend on expatriate firms to carry out the buLk of the major civil works program. These objectives are to be pursued under the latest Road Improvement Project (LoRn 2265-PNG for US$31 million of April 1983). C. Road Transport Industry 4.06 After the start of the Second Highlands Road Improvement Project. later in 1977 the laws governing the licensing and reguLation of road trans- port were made significantly more restrictive. In particular, whereas there had previously been reLatively little attempt to restrict the numbers of vehicles operating, under the new regulations, rather severe restrictions were imposed on new licenses, and rGutes and tariffs were regulated. The restric- tions were particularly severe for expatriate operators, as a major objective of Government has been to favor the shifting of ownership and operation of vehicles to PNG nationals. For example, the new regulations prevented expa- triates from expanding or upgrading their vehicle fleets, and licenses were issued only for a period of a year. The larger road haulage firms were origi- nally expatriate owned and they operated the bulk of the larger vehicles including the semi-trailers for long distance haulage. The effect of Govern- ment regulation has been to force them into local ownership. 4.07 The cutting off of expatriate ownership and financing may help to explain why the upgrading of vehicles, including the introduction of semi- trailers, failed to occur after the improvement of the Highlands Highway under the Second Highlands Road Project. Furthermore, the restriction in licensing of additional vehicles led to a lack of competition in the industry and the raising of rates charged to shippers in many cases well beyond the costs of an efficient haulier. This was noted at the time of appraising the Third Highway Project in 1979. It was noted that the haulage rates charged by operators were not sensitive to improving road conditions; rather, they appeared to increase the profit margins of the operators. This raised doubt as to the economic benefits of improving roads, if they were not passed on to the shippers and through them to consumers and the general economy. Accordingly, a covenant was included in the Credit Agreement (1030-PNG) for the Third Highway Project that a proposal., to be agreed with the Bank, would be submitted by June 30, 1981 to the National Executive Council for the deregu- lation of the trucking industry. However. such proposals were not presented and the latest position is that the subject of Road Transport Regulation will be included in the studies to be carried out under the Road Improvement Project (Loan 2265-PNG).  - 18- 4.08 A further aspect of motor vehicle regulations is the question of the legal limits for weights and dimensions. Under the agreement for Credit 677- PNG the Government undertook to discuss with the Bank any proposals for changes in such regulations, which are the responsibility of the Minister for Police. It is understood that some new regulations, to relax somewhat the currently restrictive regulations were drafted, but have not been approved. The draft would have permitted an increase in maximum axle weight from 8.2 to 8.5 metric tons. It may be questioned whether a somewhat higher axle and vehicle weight limits should be adopted in view of the substantial upgrading which has taken place in the Highlands Highway in recent years, and the sensi- tivity of the costs of road transport to the size of loads which can be carried. Since the proposed new regulations have been held up for several years, it seems appropriate to reexamine the economic basis for them and to consider a possibly greater relaxation. D. Road Maintenance 4.09 The national roads are still being reasonably well maintained. However, there are signs that the attention being given to maintenance may be slipping. The budget allocations are now no more in financial terms than they were ten years ago, while costs have increased during that time. During the appraisal of the Second Highlands Project in 1974, it was noted that repairs of the national roads were being executed promptly and the standard of mainte- nance was generally good, taking into account the poorly developed state of the roads. However, at the present time, it is noticeable that repairs, including settlements and potholes on paved surfaces, do not appear to be identified and carried out promptly in many cases. On the organizational question, considerations have been made over a number of years to separate the road maintenance function from the construction function within the Department of Works and Supply. However, the separation has not yet been done with the field staff, with a probable consequent lack of emphasis given to mainte- nance. The provision of adequate maintenance budgets, and the setting up of a regular maintenance organization in the DWS should be given high priority. E. Right of Way and Land Acquisition 4.10 Covenants have been included in each project for the Covernment to provide promptly, and in advance of contracts, the right of way and other land required for road projects. However, some problems arose on the Second High- lands Road Project in regard to right-of-way, and land required for obtaining materials, or disposing of excess excavation, though the problems did not generally cause major disruption to the works. However, the position seems to be worsening in subsequent projects. The trouble seems to stem from the fact that land in rural areas is not generally registered, and it is difficult to establish the ownership and therefore to negotiate its purchase. The Bank has repeatedly raised this question, and the Long-term solution seems to be to register land, although this may be a major undertaking, outside the scope of a highway project. V. ECONOMIC REEVALUATION 5.01 The proiect's main objective was to assist in the development of the central Highlands Region by providing for the first time a reliable all  - 19 - weather highway through the region to the main port of Lae. This was achieved by reconstructing and paving three priority sections of the highway which were of low standard, steep and subject to serious interruptions of traffic caused by soil slips and sometimes large scale land slides. 5.02 Prior to appraisal the Government had prepared a seven year program to carry out their improvement and paving of the Highlands Highway from Lae ti Togoba, a total of 475 km. The three sections totaling 68 km included in the project were identified as having the highest priority. A feasibility study of the improvement and paving of the Highlands Highway was completed by con- sultants in 1972-73, followed by detailed engineering in 1973-74. The feasi- bility study was updated for the three selected road sections in late 1976 following receipt of bids for the earthworks and drainage (para. 2.10). At the time these studies were carried out traffic ranged between 300 and 450 aadt with the proportion of trucks ranging from 30% to 50%. However, due to the poor condition of the road and steep terrain most trucks were of the small to medium category and one of the major benefits of the improvement was to alter significantly the composition of traffic by making it possible for semi-trailers to operate on the road thereby resulting in productivity increases and reduced transport costs. 5.03 Vehicle operating costs were estimated by consultants for various types of vehicles on roads in various conditions using modeling techniques to arrive at the benefits from the road improvements with and without the project. Economic rates of return for the three separate road sections were calculated over an assumed 20 year life of the investments and, at appraisal ranged between 18% and 64%, with an overall rate of 27.5%. 5.04 Project benefits were recalculated in 1983 by using data supplied by Covernment on traffic and vehicle operating costs. Table 5 compares forecast totals of traffic at appraisal and actual total traffic counts taken in 1983 for the three project roads being reevaluated. Of particular significance is the fact that while traffic has met or exceeded appraisal estimates for 1983, it is not expected that future growth will occur at the rates forecast at appraisal and that in the case of the Asaro-Watabung and Kundiawa-Carnigl roads, traffic in the year 2002 will be Lower than appraisal estimates. Also to be noted is the fact that the forecasts made of semitrailer traffic appear to have been over-optimistic. However, it now appears that this is due to restrictive regulatory practices which require annual operating licenses and which favor local carriers who do not have the capital required to purchase the larger more efficient trucks. 5.05 Comparison of the ERR's estimated at appraisal with the corres- ponding values derived from reappraisal yields the following results: Appraisal Reappraisal 1. Asaro-Watabung 64.0 29.00 2. Chuave-Kundiawa 25.1 11.00 3. Kundiawa-Garnigl 18.3 17.00 Overall ERR 27.5 15.9  - 20 - 5.06 Tables 6, 7 and 8 Road Improvements: (comparison of Net Benefit flows at Appraisal and Reappraisal) contain the detailed information from which the above summary has been derived. The individual ERRs are lower than estimated at appraisal due to delays in construction and the lower than expec- ted benefits attributed to the use of smaller trucks than assumed at appraisal. Nevertheless, the overall ERR while lower than the appraisal esti- mate is still above the opportunity cost of capital and suggests that the road improvements were indeed needed and that the investments were justified. VI. CONCLUSIONS 6.01 The project achieved its principal purpose of providing, for the first time, a virtually all weather road into the Central highlands region, to facilitate its development. Through its studies and engineering, the project also helped prepare further projects, which are presently underway, with Bank financing, in the highlands. These include the Third Highway Project (Loan i.156/Credit 103-PNG), the Enga Provincial Development Project (Loan 2125-PNG), and parts of the Road Improvement Project (Loan 2265-PNG) (para. 3.01). 6.02 The three sections of the Highlands Highway constructed under the project were chosen because their soil and terrain conditions presented particularly severe difficulties to traffic, especially during the prolonged season of h^-vy rainfall. The landslides and major slips in the earthwork cuttings, which frequently blocked traffic, have been practically elimi- nated. The work took about a year longer than scheduled, but their successful completion is still a commendable achievement under exceptionally difficult conditions. The cost of the works, in Kina, exceeded the estimate by 7% (24% in US$ equivalent). Also the traffic increase, and upgrading of the types of vehicles in use, have not been as great as forecast; this is probably due to the effects of economic recession and restrictive vehicle regulations. Never- theless, the economic reevaluation shows an average ERR of about 16%, which indicates that the investments were justified (paras. 2.06, 3.02, 3.20 and 5.04-5.06). 6.03 Only modest progress was made with some institutional and transport policy issues. The recruitment and training of PNC nationals for professional posts is proceeding slowly and the Departments of Transport and Civil Aviation (DTCA), and of Works and supply (DWS) must continue to rely very greatly on expatriate staff. The reason is chiefly the lack of sufficient qualified candidates for the engineering school. Maintenance of the national roads, while still fairly good, is showing signs of slipping, and needs greater emphasis. This would be easier to achieve if the DWS separated its mainte- nance operations from construction, but this has not yet been done with its field staff (paras. 4.03 and 4.09). 6.04 Limited progress was also achieved with the development of the local construction industry and efforts should be made to provide relatively small contract packages which would give opportunities for potential local contrac- tors to enter the Eield and gain practical experience (para. 4.05). Acquisi- tion of right of way remains a long and troublesome process and the situation appears to be even more difficult for provincial rural roads. A radical soLu-  - 21 - tion, such as involving registration of land. would be a major undertaking (para. 4.10). An important outstanding issue is the regulation of road trans- port. Action should be taken to overcome the apparently damaging economic effects of restrictive licensing of commercial road vehicles (paras. 4.06- 4.08). Most of these issues have been under review and are to be addressed further under the ongoing Road Improvement Project (Loan 2265-PNG), and possible future projects.  iv / -=L! ,, :so - e- er  PAPUA NEW GUINEA SECOND HIGHLANDS ROAD IMPROVEMENT PROJECT (CREDIT 670-PNG) PROJECT COMPLETION REPORT Actual and Expected Project Implementation % of the Completion works com- 'lid receipt Contract award Beginning of work of work pleted by Length expected corn- Project component (km) Contractor Actual Expected Actual Expected Actual Expected ACtual Expected pletion date A. Construction & Improvement of 3 sections of the High- lands Highway: (i) ASaro-Watabun8 Contracts: 28-30-502 (culvert) 10/19/76 10/19/76 02/15/77 02/15/77 03/07/77 03/07/77 09/03/77 09/03/77 100 28-30-503 18 10/19/76 10/19/76 02/15/77 02/15/77 03/07/77 03/07/77 08/10/79 08/29/78 75 (Li) Chuave-Kundiawa Contracts: 28-30-501 (bridge) 10/19/76 10/19/76 02/15/77 02/15/77 03/07/77 03/07/77 02/20/78 06/30/80 100 28-30-504/505 18.5 10/19/76 10/19/76 02/15/77 02/15/77 03/29/77 03/29/77 08/29/80 06/30/80 95 28-30-506 8.5 (Force account) 07/23/76 07/23/76 07/23/76 07/23/76 05/07/79 10/31/79 100 28-30-507 /a (27) 11/30/79 03/01/78 04/14/80 05/01/78 06/12/80 06/01/78 12/19/81 09/30/80 40 (paving) (iii) Kundlawa-Garnigl Contracts: 28-30-500 23 (Force account) 09/14/78 06/01/77 09/14/78 06/01/77 09/01/79 12/31/79 100 (remedial measures) 28-30-508 /a (23) 11/30/79 03/01/79 04/14/79 05/01/79 06/12/80 06/01/79 12/15/81 09/30/80 40 (paving) Total 68 / H /a SeParate COntraCtS fOr PaVing8 after completion Of COntraCts EOr earthWOrkS, drainage and SUbbaSe.  Actual and Expected Project Implementation Z of the works comr- Beginning of work Completion of work pleted by expected Project component Actual Expected Actual Expected completion date B. Detailed Engineering of the Highlands Highway: Waterais-Togoba (317 km) - - .12/74 (Retroactive financing) C. Rural Development Project Preparation Studies In the Provinces of: 01/15/79 07/01/77 06/30/82 09/30/78 Chimbu Enga D. Feasibility Studies (l) For the construction 04/07/79 06/01/77 01/31/80 12/31/77 and improvement of 63 km of Togoba-Wapenamanda road (ii) Updating existing 12/01/78 06/01/71 09/30/79 12/31/77 feasibility study of the Highlands Highway Waterais-Togoba E. Technical Assistance To local civil engineering 09/01/78 11/01/77 02/28/80 08/31/79 About 50Z n S contractors 1 & N I-  PAPUA N!W GUIlNA sEeo9D HIGHIWIDS ROAD 11Q8M1MIT PROJECT (CUEDIT 670-Pm) PawOcr OYWLETIOH RZPOIT 1ca nd Apualoal EatIste of Cost (tI kito 'hg tod *nd slo In equivalent US2 thouosadl Actual cost Contract I ' orm orttOo e2 Ount ~~~~~~~~~~~~~~~~~~~Actuol Coat. s lappraisal Appraisal sat.1 Conr"tract1 (lIt lit 1977 19ln o9I9 19 _0 19S1 1982 Totl etis c ost of olt (2) e(2) Project cooponant KInn or use ra or Usl oIN or UCJ tis or USI Kiss or U55 rtin or - CS Atex or 015 Ki. or IISS tn hls 1 IISS 10 iris I 0 1. Cen;truetlon 6 Itprovexont of I astloog of the Hgh- lande HlIhvaf; (GI Aro-VAtabun It hk Contreetel 2-o-50-02 (bot culnart 9 t 69 8 S7 - - - - - - - - - - 69 87 18-10-SOl (contract 3I066 O ,219 8 e 1,097 803 3,334 227 119 - - - - - - 3898 2,550 subtotal (a) focl. cont. allovwnces 1.131 3.162 Z Z - Z Z Z - Z - - Z Z 1.011 1.214 Inl. cont. *llovaoreo - - 937 1 184 803 1.134 277 39 : _ 1.965 2.637 1. ' .l * 1I2 I1S 171 122 (b) ChwAe,-lundlava 27 km Cotd rct l: 28-30-501 214 217 l83 231 44 o 2 22 11 - - 249 324 18-30-104/05 (contract) 5.893 7,072 3,224 6,202 1,427 2,031 3,373 1,930 1,624 2,124 2.680 1,961 - - 10.228 1,2.1 2e-10-0 (forc ace.) 2,413 2,917 2,753 3,492 704 996 26 3431 - - - - - - 3,7013 819 28-33-307 (pavina) 2.683 3,11 - - - - - - 1.0S7 ,1576 3,04) ,1SS1 - - 2102 1,310 Subtotal (b) cl. *ool. ltonance 11.I1 13.17 Z Z Z - a - Z Z - 9_.742 II.690 Intl. cont. allowances - i.O2e2 7.915 2.I1 1.070 1.517 2,106 2.tSI 3.700 1.72S 51.9 - - 16.262 221528 13.172 16.O06 IZ 360 3S46 168 (c) Eundiawa-Carnlai 23 km Contracts, 28-30-300 (force ace.) 964 1,611 - - 371 524 608 SSA - - - - - - 979 13,78 2a-30-508 (paving) 2,162 2,U94 - - - - - 66 I,X9 55 1 ,272 - - 1,719 2,143 Subtotal (c) focl. coat. allowancso 3.12t t.232 - Z Z Z 3.490 4.388 Inl. coot. allowances - - 371 124 608 61 A 1.289 8S5 1.272 2.698 2_939 4.790 1,748 16 G9 86 94 Total Conatr. * I!orow.: fuel. ront, allowances 1%.662 18.S91 - _ _ - - 14.243 17.,092 Inel. cont. allovaness 1.199 9.s09 1 9 4.728 2.676 1.477 3.341 6.989 4.580 6.933 Z Z 20 947 29.104 19.SS0 23.410 107 124 l33 313 / Aosounts puld In hina have been converted Into usS oqutrolect at average rates for each year CUSS per kins)i - 19717 $1.2FA; 12979; *1.4117; 197S9 Sl.t0331 I"90 81.49136 198; S1.68713; 1982 $1.31559.  Actual and Meoralist ntimtes *F Cast (in kilo thousand d also i equilent "t ) hntml et Cataract as a prn"ortlfe of maca4t Mts et sIpraimal Appresal esat. C2csuant (initial) 1971 3975 1979 etc0 19531 1392 Totals estite of cost of coat ttL sto ct treject eoeoonet Kiss or US$ Tins or 15'7 iusa or us5 Lis or 05-5 is oar 5$ Kiss or 05 Kiss or 5S$ Kis o or IL8-Is or CSS Total Constr. * lrow.: (from Page 13 gul. cont. allorassee 15.526 33"9 Z Z - Z - 14.243 17.092 Inel. cont. allovaces z 99 9 099 3 349 *.728 2.474 3 477 3.345 4.9t9 4f50 6 .I - 20.947 29.104 19.550 23.460 107 124 132 153 : Gultnt 335 Services Csa V.iiilee enslnesrln oft Illslsl Mtgwfy. Watsrtli-Togobs (IO) 900 1,080/b 900 3.00 - - - - - - - - - - 9 1.00 900 1060 100 100 100 100 (h) 5BasTwlsion: CA) Naiulssnat of forts account workts (SC) IS0 390 I30 254 173 243 35 50 - - - - 535 737 i Supertlslos of Coostructlon (Vli) Il 53S 65e 38o 545 402 565 212 3l 26 324 - - 1,731 2,391 Subtotal Supetvieiom, Cxcl. cont. sllolasseoe Z - 1 - Z Z - -OS- 3.095 1.313 tact. eost. s1i1sess - - 69 o S 566 799 575 e 247 35L 21 324 2.275 3.132 1.503 1.602 153 174 - (e Rral DevulopretntStieado of Fgs A ChAbau prowlacas Le. Incl. cout. Slovesces = - -Z - Z- - 206 250 Incl. ont. allsa_ee Z Z 220 30 70 90 134 60 51 440 623 2It 343 154 IU (t iht b 3Se " ,.A 120 14 - - - - 106 152 12 17 - - - - 120 169 (snadals & Freteara) (ii) Updsting feasib. atidis af UNghsnds 1 Watersls To 64 - _ _ _ 70 6 _ _ _ 70 98 Tosobs (RUT Ite. Std. Crop) Subtotal Feasibillat Sandia. ael. coot. allesacese 190 225 Z _Z: : 20o 250 stel. cont. sllol ce - -0 176 250 12 17 190 267 256 343 76 100 Ill (a) technical Assistaseal To local civil eonlneerizg ca- tractors (Hsndel a Psrtmre) lzal, cont. alloasces 150 180 - -Z 12=5 ISO tlac. cont. tlloseses - -o 56 90 326 38 23 I" 1 20? u0 206 07 IOD f 11 Total Consultants' Service: Eant, cant. allovaoee - - _ 2.536 3.043 *nul. cont. allcascs - I 569 1 926 606 8S5 1.063 1 493 367 492 306 45S 60 81 3.953 5.305 3.145 3.f7i 126 140 - _- Crsad Total: u txcl. eont. ollwsm Z Z Z16.779 20.135 N