Mexico - Highway Maintenance Project

Document of The World Bank FOR OFFICIAL USE ONLY "t.AV ..'/'. 6t Report No. P-4562 ME MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IT AN AMOUNT EQUIVALENT TO US$135.0 MILLION TO THE BANCO NACIONAL DE OBRAS Y SERVICIOS PUBLICOS GUARANTEED BY THE UNITED MEXICAN STATES FOR A HIGHWAY MAINTENANCE PROJECT TO BE EXECUTED BY LA SECRETARIA DE COMUNICACIONES Y TRANSPORTES September 16, 1987 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Mexican Peso (Mex$) US$1 Mex$ 1416 Mex$1 million US$706 (July 1987) FISCAL January I - December 31 WEIGHTS AND MEASURES Metric System ABBREVIATIONS BANOBRAS National Bank for Public Works and Services ICB International Competitive Bidding LCB Local Competitive Bidding SCT Secretariat of Communications and Transport  FOR OFFiCIAL USE ONLY MEXICO HIGHWAY MAINTENANCE PROJECT LOAN AND PROJECT SUMiMRY Borrower: Banco Nacional de Obras y Servicios Publicos (BANOBRAS) Beneficiary: Secretaria de Comunicaciones y Transportes (SCT) Amount: US$135 million equivalent Terms: Repayment in 15 years, including three years of grace at the standard variable interest rate. Onlending Terms: Loan proceeds to be relent to Government (for SCT) on same terms and conditions as the Bank loan with the Government bearing the foreign exchange risk. Financing Plan: Government US$146.5 million IBRD US$135.0 million TOTAL: US$281.5 million Economic Rate of Return: 40% Staff Appraisal Report: No. 6634-ME of May 20, 1987 This document has a restricted distribution and may be used by recipients only in the performance of their omcial duties. Its contents may not otherwise be disclosed without World Bank authorization.  4EMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE BANCO NACIONAL DE OBRAS PUBLICAS Y SERVICIOS GUARANTEED BY THE UNITED STATES OF MEXICO FOR A HIGHWAY MAINTENANCE PROJECT TO BE EXECUTED BY LA SECRETARIA DE COMUNICACIONES Y TRANSPORTES 1. The following report on a proposed Loan to the Banco Nacional de Obras y Servicios (BANOBRAS) for US$135 million equivalent for a Highway Maintenance Project to be executed by the Secretariat of Communications and Transport (SCT) is submitted for approval. This proposed Loan would be repaid over 15 years, including 3 years of grace, at the standard variable interest rate. 2. Background. In response to the accelerated growth in traffic throughout the 1970s, Mexico initiated a program to relieve congestion and improve the condition of its road system. The economic crisis that began in 1982 has resulted in major reductions in the funds available for transport investments, particularly roads, forcing a reorientation of the highway program--focussing more on maintenance and less on relieving congestion. While sufficient funds have generally been made available for routine road maintenance, the economic crisis and budgetary restrictions of the last few years have resulted in neglect of necessary periodic maintenance of federal roads and bridges, and a backlog of urgent maintenance works has built up. In addition, present maintenance policies are less than optimal in terms of cost-effectiveness and maximization of economic benefits, and, maintenance planning and management need to be improved. In order to halt the resulting rapid deterioration of roads, the Government is embarking on a five-year maintenance improvement program wlich the proposed project loan would support. 3. Rationale for Bank Involvement. Bank loans in the highway subsector, including the ongoing Second Highway Sector Project (Loan 2428-ME), have focussed on Mexico's road construction and modernization programs, in an attempt to ensure the application of appropriate technical and economic evaluation criteria and to carry on a dialogue concerning general sector policies. While the ongoing Highway Sector Project has been reoriented to include an expanded road strengthening program covering critically weak sections of the federal network, there is a need for extending the Bank's technical and financial support directly to road maintenance. The proposed project would focus on overall maintenance and the institutional improvements required, as well as other deferred maintenance needs, and would complement the ongoing sector project. The Project is consistent with the Bank's country strategy by focussing on the rationalization of public sector expenditures, while ensuring that Infrastructure is in a satisfactory condition to support the economic recovery, including the development of non-oil exports.  -2- 4. Project Objectives. The proposed project would, primarily, assist the Government and SCT In Improving road maintenance operations for the federal network, so that the present backlog of deferred periodic maintenance can be eliminated and, in future, maintenance requirements can be provided on a timely basis. In addition, the project would promote appropriate institutional and operational efficiencies and cost recovery policies for road users. 5. Project Description. The project would help to support the Government's five-year Federal Road Maintenance Improvement Program (1987-1991). Financing would be provided for a portlon of that program and would Include: (a) periodic malntenance of paved federal roads and bridges; (b) provision of new, improved or expanded workshop facilities, including required machinery, tools and spare parts; tc) procurement of road maintenance equipment; (d) implementation of SCT's equipment overhaul and rehabilitation program; (e) training in equipment operation, repair and maintenance and in road maintenance planning and operations; and (f) consulting services for training and for studies and technical support to upgrade maintenance planning, design and execution. The estimated total cost of the project is US$281.5 million equivalent, about 31% of the cost of the Government's five-year Federal Road Maintenance Improvement Program. Of the project costs, US$135 million (48%) are foreign costs. Schedule A shows the breakdown of project costs and the proposed financing plan. Amounts and methods of procurement and disbursement and the disbursement schedule are presented in Schedule B. The timetable of key project processing events and the status of Bank Group operations are given in Schedules C and D, respectively. The Staff Appraisal Report No. 6634-ME, dated May 20, 1987, is also attached. 6. Agreed Actions. During negotiations, agreement was reached with BANOBRAS and the Government on the following: (a) annual consultations to be held on the highway sector expenditure program to ensure an appropriate balance between construction, rehabilitation and maintenance; the annual program to be satisfactory to the Bank; (b) carrying out of a Road User Cost Recovery Scheme to recover road damages attributable to trucks and other heavy vehicles; (c) the proposed Federal Road Maintenance Improvement Program, its scope and composition, methodologies and technical and economic criteria used to be satisfactory to the Bank with annual consultations to be held to review each yearly program; (d) works to be included in the first year program; (e) provision of necessary budgetary resources to carry out the Federal Road Maintenance Improvement Program; (f) scope and composition of the training program; (g) scope and timing of consulting services, outline terms of reference and estimated cost; th) equipment procurement program, workshop construction and improvement program and the equipment scrapping program; (i) physical and operational targets to be achieved to help the executing agency manage, monitor and evaluate the progress of the Federal Road Maintenance Improvement Program; and (j) procurement procedures for works, goods and services to be financed under the Project. 7. Agreement was also reached on: (a) the 1987-88 Annual Project Implementation Schedule and the methodologies and technical and economic  - 3 - criteria to be used for updatIng the subsequent Annual Project Implementatlon Schedules to ensure that the objectives of the project are achieved efficiently; and (b) project reporting requirements. It will be a condition of loan effectiveness that the Borrower and the Guarantor enter into contractual arrangements satisfactory to the Bank for the transfer of loan funds. 8. Benefits. Experience of the Bank's Borrowers clearly shows not only that neglect or deferral of maintenance produces higher capital, repair, and rehabilitation costs, along with shortened facility life, but that provision of adequate and timely maintenance results in reductions in road user costs. Economic rates of return are well above the opportunity cost of capital, especially for high traffic roads, as in Mexico, where over half of the federal network carries more than 2,000 vehicles per day. Quantified economic benefits derive from vehicle operating cost savings from improved road conditions. The economic evaluation of the pluriannual road maintenance program found an overall economic rate of return of above 40%. Maintenance strategies which have been selected would set the priority among road sections of the maintenance program, thus maximizing overall economic benefits. 9. Risks. There are three main risks with regard to the Project. The first concerns the possible failure by the Government to allocate sufficient budgetary funds on a timely basis. However, this risk is mitigated by the Government's agreement to hold annual consultations on road investments and to provide the necessary budgetary resources to carry out the Federal Road Maintenance Improvement Program. The second, concerning the Road User Cost Recovery Scheme, involves the possibility that future progress on this policy issue may face political resistance, particularly regarding increases in taxes to fully recover the cost of soad damage attributable to trucks and other heavy vehicles. However, the Government has taken a series of measures to increase taxes on trucks in the 1987 tax law, including an initial 130% increase in road tolls for trucks which are to b. further raised to bring the total increase to 260% in 1987, as well as substantial increases in annual truck permit taxes. Also, the prlce of diesel fuel has been lncreased by 130% during the past year to bring it close to border prices. In light of the foregoing, and the Government's agreement tG implempnt the Road User Cost Recovery Scheme and raise user taxes on tricks and other heavy vehicles to cover at least the related marginal costs attributable to them, this risk is also acceptable. Lastly, there is the risk that the institutional strengthe:ing aspects will not be given the necessary priority. Project preparation has proceeded in close collaborition with Government authorities in order to ensure commitment to objectives and minimize these risks. 10. Recommendation. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank, and recommend that the Executive Directors approve the proposed loan. Bar'er B. Conable President Attachments September 16, 1987 Washington, D.C.  Schedule A Page I of I M4EXICO HIGHAY MATNANMCE PROJECT Bank Parti- Estimated Costs I/ Local Foreign Total ciPation - - US$ Millions Civil Works Periodic Maintenance 94.60 60.40 155.00 60.40 Bridge Rehabilitation and Maintenance 15.25 9.75 25.00 9.75 Workshops 3.75 2.25 6.00 2.25 Maintenance Equipment Repair and Rehabilitation 2.50 5.50 8.00 5.50 Procurement of New Equipment 2.50 32.50 35.00 30.00 Training Training Program including Technical Support for Training 0.90 0.50 1.40 1.40 Consulting Services Consulting Services and Technical Support 1.70 0.80 2.50 2.50 Total Base Costs 121.20 111.70 232.90 111.80 Physical ContIngencies 12.10 11.20 23.30 11.20 Price Contingencies 13.20 12.10 25.30 12.00 Total Prcject Cost 2/ 146.50 135.00 281.50 135.00 Financing Plan US$ Million Government 146.5 Bank 135.0 Total 281.5 1/ At May 1987 prices. 2/ Includes US$45 million equivalent in taxes and duties.  Schedule B Page 1 of 2 HEXICO HIGWAY MAINTENANCE PROJECT Procurement Procurement Method (US$ Million)l/ Project Element ICB LCD Other Total Civil Works Periodic Maintenance Program for Roads on the Federal Highway Network - 187.4 - 187.4 (72.5) (72.5) Repair and Rehabilitation Program for Existing Bridges and Culverts on Federal Highway Network - 30.2 - 30.2 (11.7) (11.7) Workshop Construction, Rehabilitation, Improvement and Expansion Program including Workshop Tools and Equipment and an Initial Stock of Spare Parts for Scheduled Maintenance - 6.7 0.5 2 7.2 (4.2) (0.3) (4.5) Equipment Rehabilitation and Repair of Existing Equipment - 9.7 - 9.7 (6.6) (6.6) Procurement of New Road Maintenance Equipment including associated Spare Parts 42.3 - 42.3 (35.0) (35.0) Training and Consulting Services Training - 1.7 1.7 (1.7) (1.7) Consulting Services - - 3.0 3.0 (3.0) (3.0) Totals 42.3 234.0 5.2 281.5 (35.0) (95.0) (5.0) (135.0) 1/ Amounts in parentheses show the allocations from the proceeds of the Loan. 2/ International Shopping and Off-the -Shelf Local Purchase.  -6- Schedule I Page 2 of 2 MEXICO HIGHWAY MAINTENANCE PROJECT Disbursements Amount Allocated Expenditures Loan Category (US$ Millions) to be Flnanced M . . I. Civil works 72.4 39% II. Maintenance EqulPment (a) Purchase of New Equipment 30.0 100% of foreign expenditures; 100% of ex-factory cost for locally manufactured Items; 65% of the cost of locally procured items. (b) Repair and Rehabilitation Program 100% of foreign for Existlng Equipment 5.5 expenditures; 65% of local expenditures. III. Training Training Program including Technical Support for Training 1.4 100% IV. Consulting Services Consulting Services and Technical Support 2.5 100% V. Unallocated 23.2 TOTAL 135.0 Estimated Disbursements World Bank Piscal Year 1988 1989 1990 1991 1992 1993 1994 US$ Millions - -- Annual 14.01/ 9.0 28.3 32.4 25.7 17.5 8.1 Cumulative 14.0 23.0 51.3 83.7 109.4 126.9 135.0 1/ Early disbursements due to retroactive financing of initial works.  -7- Schedule C Page 1 of 1 MEXICO HIGHWAY MAINTENANCE PROJECT Timetable of Key Project Processing Events a) Time Taken to Prepare the Project: 12 months b) Project Prepared by: Secretaria de Comunicaciones y Transportes (SCT) c) First Bank Mission: November 1985 d) Appraisal Mission: October/November 1986 e) Negotiations: April 27 - August 25, 1987 f) Planned date of Effectiveness: January 1988 9) Relevant PCR's and PPAR's: Loan 528-ME (Third Highway Project), PPAR No. 832 of August 8, 1975; Loan 695-ME (Fourth Highway Project), PPAR No. 2575 of June 29, 1979; Loan 968-ME (Seventh Highway Project), PCR No. 5162 of June 25, 1984; and Loan 1671-ME (First Highway Sector Project), PPAR No. 6896 of July 20, 1987.  Schedule D Page 1 of 2 STATUS OF BANK GROUP OPERATIONS IN MEXICO t/ 3ccc a usS cc == == CCfl = ean c OU eq = emcee A. Statement ot Bank Loans (As of Juno 30, 19871 (us$ nittion) Fisceat Amount Loas Undei- Loan No. Year Sorrower Purpoos CanoeLLetions bursed 70 Loans futtly dioburand 4,700.81 1708-5 1979 NAFINSA Irrigation 82.00 91.11 1858-5 1980 NAFINSA Irrigatian 160.00 120.89 191i 1S99 SANOSRAS Water Suppty