Philippines - Highway Management Project

.2-A! / 3'93O Document of The World Bank FOR OFFICIAL USE ONLY Rqept No. 9439-PH STAFF APPRAISAL REPORT -HILIPPINES HIGHWAY MANAGEMENT PROJECT OCTOBER 4, 1991 Infrastructure Operations Division Country Department II Asia Regional Office 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 EOUIVALENTS (as of July 1991) Currency Unit Philippine Peso (P) P 1 D US$0.036 US$1.00 = P 21 WEIGHTS AND MEASURES 1 meter (m) 3.2308 feet (ft) 1 kilometer (km) 0.62 mile (mi) 1 square kilometer (km2) - 0.3861 square mile (mi2) ABBREVIATIONS AND ACRONYMS ADB - Asian Development Bank BOM - Bureau of Maintenance CIAP - Construction Industry Authority of the Philippines COA - Commission on Audit DBST - Double bituminous surface treatment DENR - Department of Environment and Natural Resources DILG - Department of the Interior and Local Government DOTC - Department of Transportation and Communications DPWH - Department of Public Works and Highways EIA - Environmental Impact Assessment EIRR - Economic internal rate of return EIS - Environmental Impact Statement EMB - Environmental Management Bureau EMK - Equivalent Maintenance Kilometer ERR - Economic rate of return ICB - International Competitive Bidding LCB - Local Competitive Bidding MTPIP - Medium-Term Public Investment Program NEDA - National Economic and Development Authority OPSF - Oil Price Stabilization Fund PMO - Project Management Office PPAR - Project Performance Audit Report QAU - Quality Assurance Unit RMS - Road Management System SOE - Statement of Expenditure UNDP - United Nations Development Programme USAID - United States Agency for International Development voc - Vehicle Operating Costs VPD - Vehicles Per Day FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY PHILIPPINES .IGHWAY MANAGEMENT PROJECT Loan and Proiect Summarv Borrower: Republic of the Philippines Amount: US$150 milti.on equivalent Terms: Repayable in 20 years, including five years of grace, at the standard variable interest rate project The proposed project would support efforts of the Department esrLgtion: of Public Works and Highways (DPWH) to improve the condition of the country's deteriorated arterial highway network and establish a sustainable institutional capability to manage the network. For this purpose, DPWH has developed an arterial highways investment program with a significant focus on rehabilitation and has introduced measures to improve the delivery of services on arterial roads: it is decentralizing responsibilities to the regions and encouraging private sector participation in road maintenance. Under the project, DPWH would (a) develop and implement a management system for annual and multiyear progra-ming and budgeting of pavement and bridge works for arterial roads; (b) carry out civil works subprojects to begin in 1992/93 and 1993/94 to upgrade, rehabilitate, strengthen or resurface some 1,400 km of deteriorated or damaged arterial highways and substandard bridges; and (c) engage consulting services to assist it to (i) coordinate project activities, (ii) improve road design and construction quality, (iii) initiate a road accident reduction program, (iv) develop a manpower planning and training program to meet DPWH's changing staff needs due to decentralization and contract maintenance, and (v) increase DPWH capacity to produce environmental impact statements for its projects. The project would also finance consulting services to assist the Construction Industry Authority of the Philippines (CIAP) to carry out studies and implement measures to strengthen the local construction industry. Benefits The main benefits expected from the project are lower road and Riska: transport costs and savings in road maintenance costs. Benefits accruing to competitive truck and bus companies will ultimately be passed on to producers and consumers through lower prices of goods and services. The main project risk is the pace of the institutional reforms to be supported. Particularly at risk are the decentralization process, contracting of maintenance and the related reduction of maintenance staff. However, in view of progress already made in these areas, this risk is regarded as acceptable. In addition, civil works under previous projects have been delayed and construction quality has sometimes been poor. 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 authorzation.  - ii - Under the proposed project, these potential problems would be addressed by appointing consultants to help ensure project coordination and technology transfer, completion of actions already begun by DPWH for timely subproject preparation, and quality assurance measures. Estimated Cost: Local Foreign Total - - - - (US$ million) - - - - Arterial Road Subprojects 52.6 72.6 125.2 Consulting Services to DPWH Project support 9.3 6.5 15.8 Capacity building 2.2 3.8 6.0 Consulting Services to CIAP 1.2 0.6 1.8 Equipment 0.3 4.9 5.2 Base Cost 65.6 88.4 154.0 Physical contingencies 6.6 8.8 15.4 Price contingencies 11.6 17.7 29.3 Total Project Cost Aa 83. 114.9 198.7 Financuinm, Plan: Government 48.7 - 48.7 IBRD 35.1 114.9 150.0 Total 83.8 114.9 198.7 Estimated Disbursements: IBRD FY 1992 193 I9 I9 1996 1997 19 1999 - - - - - - - - - - - - -(US$ million) - - - - - - - - - - - - Annual 0 9 23 30 30 29 22 7 Cumulative 0 9 32 62 92 121 143 150 Economic Rate of 19% to 126% for individual subprojects to begin in 1992/93, with an overall weighted return of 33% IBRD No. 22787 La Including estimated taxes and duties totaling about US$28.1 million equivalent.  - iii - PHILIPPINES HIGHWAY MANAGEMENT PROJECT Table of Contents Page No. Loan and Project Summary ................... . i 1. THE TRANSPORT SECTOR A. The Transport System . . . . . . . . . . . . . . . . . . 1 B. Government Investment Program, Objectives and Policies . 2 C. Bank Lending to the Sector and Sector Strategy . . . . . 2 2. THE HIGHWAY SUBSECTOR A. The Network . . . . . . . . . . . . . . . . . . . . . . . 5 B. Road Transport. 6 C. Highway Administration. 8 D. Highway Expenditures and Revenues from Road Transport . . 9 E. Highway Investment Program . . . . . . . . . . . . . . . 10 F. Highway Planning, Design and Construction . . . . . . . . 12 G. Highway Maintenance .13 H. Staffing and Training .15 I. Environmental Aspects . . . . . . . . . . . . . . . . . 16 3. THE PROJECT A. Objectives .16 B. Rationale for Bank Involvement . . . . . . . . . . . . . 17 C. Project Description . . . . . . . . . . . . . . . . . . . 17 D. Project Cost and Financing . . . . . . . . . . . . . . . 22 E. Implementation . . . . . . . . . . . . . . . . . . . . . 24 F. Procurement .25 G. Disbursement .27 H. Auditing, Monitoring, Reporting and Supervision . . . . . 27 I. Environmental Impact . . . . . . . . . . . . . . . . . . 29 4. ECONOMIC EVALUATION A. Objectives .29 B. Benefits and Beneficiaries . . . . . . . . . . . . . . . 29 C. Economic Analysis .29 D. Project Risks .31 5. AGREEMENTS REACHED AND RECOMMENDATION . . . . . . . . . . . 31 This report Is based on the findings of a September 1990 preapprisal mission couprising Peter Long (Highway Engineer and Task Manager), Antonio Cittatf (Highway Engineer), Maurice Le Blanc (Transport Economist), Francesco Same (Procurement Specialist), Renato Schulz (Transport Economist), Witli Barker (Training Expert, Consultant) and Byron Nickersen (Envirormntal Specialist, Consultant), and a December 1990 appraisal mission coeprising Messrs. Long, Cittati and Barker. Nohit Ganguli (Transport Economist, consultant) and Patricia Brereton-Niller (Operations Assistant) contributed to writing the report. The Peer Reviewers for the project were tfltf Paterson (Highway Engineer) and Jean-Marie Lantran (Construction Industry Speciatist). The project was cleared by Jeffrey Gutman (Division Chief, AS21N) and Goutam Koji (Director, AS2DR).  - iv - TABLES 1. Public Investment Program: Transport Sector, 1990-94 2. Policy Action Plan for Roads and Road Transport 3. Road Network by Length and Surface Type, 1989 4. Condition of Arterial Roads, 1989 5. Motor Vehicle Registrations, 1981-89 6. Revenues from Road TranEport and Expenditures on Roads, 1981-89 7. Comparative Petrcleum Product Prices To End Users in Selected Asian Countries, January 1991 8. Arterial Highways Investment Program, 1990-96 9. Arterial Highways Investment Program, Regional Distribution 10. Design Standards, Philippine Highways 11. Project Arterial Highlways Program: First Year's Works 12. Detailed Project Costs by Year 13. Estimated Disbursement Schedule 14. Economic Returns ANNNEXES 1. Highway Maintenance by Contract 2. Road Management System: Draft Terms of Reference 3. Outline Terms of Reference: Consultant Team for Project Coordination, Construction Quality Improvement and Road Safety 4. Strengthening the Environmental Impact Assessment Capability of the Department of Public Works and Highways 5. Assistance to the Construction Industry Authority ' the Philippines: Outline Terms of Reference 6. Project Monitoring Indicators 7. Supervision Plan 8. Selected Documents &nd Data Available in the Project File GM-RTS 1. Organization of the Ministry of Public Works and Highways 2. Project Implementation Schedule IBRD No, 22787: Philippines: Highway Management Project  1. THE TRANSPORT SECTOR A. The TransRort System 1.1 In 1990, the Philippines' Gross Domestic Product grew by less than 2.5%, after achieving about 6% growth in 1988-89. As part of its strategy for regaining a sustainable growth path, the Government is attempting to increase the efficiency and competitiveness of the economy by undertaking measures to, among other things, render transportation services more reliable and less costly. The proposed project would support this effort by helping the Government to establish a sustainable institutional capability to manage the road network, increase the efficiency and cost-effectiveness of road maintenance and construction, and improve the country's economically significant arterial road network. Transoort Infrastructure and Services 1.2 The Philippine transport system comprises some 157,500 km of public roads, 19 major ports and 314 private ports, a railway system of some 700 km in Luzon, and 6 international and more than 80 other public airports. The system is basically bimodal: road transport and interisland shipping together account for almost 100% of national freight and 97% of passenger movements. Most transport services are provided by the private sector, with the exception of scheduled domestic air transport and rail services. Government organizations develop, operate and maintain the transport infrastructure and facilities (except private ports) and regulate commercial services. 1.3 For decades, government policies in the transport sector have been characterized by a strong regulatory bias. Over time, a number of contradictory, discriminatory and anti-competitive regulations and taxes have accumulated in the transport sector which impede rather than enhance the growth of both the sector and the economy, especially exports. Among the most damaging regulations are franchising requirements for entry into the passenger and freight services industry, single operator rules in some areas, measured capacity criteria to control entry into road transport and interisland shipping services, and import restrictions on vehicles, equipment and spare parts. Recognizing the constraints such regulations put on the economy, the Government is gradually deregulating the transport industry. Deregulation of road transport is discussed in Chapter 2. Segtor Afministration 1.4 The Department of Transportation and Communications (DOTC) is responsible for overall transport policy and for administration and regulation of the sector. Infrastructure is provided by specialized agencies, all of which, except those dealing with roads, report to DOTC. The Department of Public Works and Highways (DPWH) is responsible for national and barangay (village) roads, which comprise about 70% of the public road net 4ork. The Department of the Interior and Local Government (DILG) is responsible for provincial, city and municipal roads, functioning both centrally and through the relevant local government authority (para. 2.11). The National Economic and Development Authority (NEDA) monitors and coordinates public investments in the sector and plays an advisory and coordinating role in the formulation of sector policies.  -2- The Government is reorganizing the responsibilities of DPWH and DILG under a new Local Government Code, now being considered by Congress. The Bank is currently assisting the Government to examine the implications and feasibility of decentralization as part of its sector fork. B. Government Investment Program. Objectives and Policies 1.5 The updated Medium-Term Public Investment Program (MTPIP) for 1990-94 envisages total public investments of P 592.3 billion, of which P 104.7 billion or 17.7% would be for the transportation sector, the second largest allocation after the 18.4% devoted to energy, power and electrification. The bulk of transport investments (P 64.2 billion or 61%) would be for roads and bridges (Table 1). The road sector would thus receive about 11% of the total MTPIP program, reflecting tha high priority attached by the Government to improving the country's road infrastructure. The Government's general objectives for transport sector development, as stated in the MTPIP, are to stimulate agricultural production and thus increase rural incomes, reduce disparities in socioeconomic conditions among regions by developing regional growth centers, and achieve greater efficiency in the use of transport facilities through, among other things, improved maintenance. At the policy level, emphasis is being placed on deregulation, increased private sector participation, and organizational decentralization. Under this policy stance, the Government is in the process of deregulating trucking, interisland shipping and port operations, restructuring road user charges, and rationalizing vehicle import restrictions. C. Bank Lending to the Sector and Sector Strategy Past Lendin 1.6 The Bank Group has assisted the treuisport sector through five highway projects, two rural roads projects which were mainly oriented to provincial roads, four port projects and one shipping project. Total lending for highways and rural roads has been US$499 million. Four of the highway projects (Lns. 731, 950, 1353 and 1661-PH) have been completed. Implementation of the ongoing Fifth Highway Project (Ln. 2418-PH) was at first seriously delayed by disruptions associated with the change in Government in 1986 and a lack of counterpart funds, but progress has since improved and project completion is expected by end-1992. The Rural Roads Improvement Project (Ln. 1860-PH), carried out by DILG (then the Department of Local Government) and DPWH, was delayed by about four years, partly due to the country's economic and political crisis during the mid-1980s. The ongoing Second Rural Roads Improvement Project (Ln. 2716-PH) is about three years behind schedule, largely due to problems within DILG. Lessons Learned 1.7 The Project Performance Audit Reports (PPARs) (No. 2449, April 4, 1979 and No. 4757, October 25, 1983) for the first two highway projects found that the projects' economic returns were realized despite implementation delays caused by civil disturbances in the area of the first project and difficulties with one construction contract on the second project. The PPAR for the third project (No. 7316, June 30, 1988) and the Project Completion Report (PCR) for the fourth project (No. 3053, September 7, 1989) found that project targets had  - 3. generally been achieved, although completicn of the fourth project was considerably delayed by the economic crisis that occurred during implementation as well as slow contractor prequalification procedures and slow selection of consultants for technical assistance. The PCR for the Rural Roads Improv(5ent Project (dated October 24, 1990) traced implementation problems to DILG's lack of adequate technical capability to administer activities in the roads subsector and contractor problems caused by the Government's contracting policies. 1.8 Several Bank reports, including the PPAR for Ln. 1353-PH and a study carried out by the Bank's Operations Evaluation Department (OED),Ll have focused particularly on the inadequate maintenance of both the arterial and the rural road networks. Regarding the arterial system, the PPAR concluded that the issue of highway maintenance had not yet been resolved despite continuing efforts of the Government and the Bank and called for a renewed government commitment to maintenance and for the Bank's adoption of a clear strategy in its maintenance support. The Report recommended that the Government and Bank both evaluate the maintenance situation and together produce a plan of action, drawing on the findings of a 1988 Bank paper, "Road Deterioration in Developing Countries." The Report specifically noted the need for greater recourse to the private sector as an effective means of improving maintenance efficiency anc reducing costs, as well as the need for capacity building, an effective road management system and increased internal accountability. C.onsistent with the OED recommendations, the Government has decided to replace the existing maintenance system, which was not working, with a decentralized system based on contracting out 80% of all maintenance (para. 2.30). The action plan to institute this change is now being implemented. 1.9 Regarding rural roads, the OED report recomme.gded, inter alia, that the Government prepare a comprehensive maintenance development plan and that the Bank support preparation of the plan and envisage preparation of a rural roads maintenance program in the Philippines. Terms of reference for this study have been prepared by the United States Agency for International Development (USAID), and the study is expected to be carriee out with USAID funding. The Government is also preparing a Rural Infrastructu4re Project, including barangay roads, for Bank financing. 1.10 While inadequate and poor quality maintenance is one factor responsible for the poor condition of Philippine roads, also contributing are a lack of timely pavement strengthening and upgrading, poor initial road design, poor construction quality and inadequate construction supervision. Consequently, under the proposed project, a broad range of capacity-building measures would be implemented both to support the maintenance action plan and to address the various problems affecting the road system. These measures include the installation of a Road Management System to optimize project planning and programming, improved design techniques, quality assurance, and strengthening of the construction industry. Measures will also be taken under the project to avoid the delays and other problems that hampered implementation of previous projects, including early initiation of preconstruction activities (engineering jX "World Bank Support for Rural Roads Maintenance - Philippine Case Study," OED Report No. 7228, April 20, 1989.  -4 studies, prequalification of contractors and bidding) to allow a prompt start to project civil works, early recruitment of consultants for project coordination, and assistance under the project to improve quality control procedures and standards. Sector Strategy 1.11 The Bank's strategy in the sector is based on lessons learned in the course of previous projects and its Transport Sector Re-iew (Report No. 7098-PH, March 31, 1988,, which indicated the following key sector issues: a regulatory policy tilt hampering the provision of efficient transport infiastructure and services by both the public and private sectors; a complex, overly-centralized government administrative structure; inadequate infrastructure management; operatioual inefficiencies; a shortage of available financing for private sector investments; and limited private sector involvement in some key aspects of the sector. In the last few years, the Government has come to recognize these problems and has adopted a new policy stance aimed at decentralization, deregulation, increased private sector participation in the sector, and general institutional reform (para. 1.5). Actions already taken by the Government to further these reforms, including the privatization of operations at the port of Manila, increasing privatization of road maintenance operations, deregulation of road freight operations countrywide and of intercity passenger transport in Luzon, etc., indicate a serious commitment to change. The Bank is therefore supporting the policy reorientation, with a focus on the major transport modes, roads and shipping. 1.12 The range of institutional, technical and policy concerns requires a mixture of lending instruments to effectively address the various types of issues and the different responsible agencies. A series of four projects is envisioned. The Industrial Restructuring Project, approved by the Board on January 3, 1991, addresses issues relating to the financing of transport fleet renewal. The proposed Highway Management Project and a maritime sector project, now being prepared, would address institutional and technical issues in the two key sectors and deal mainly with the government operati g agencies. A fourth loan, a sectoral adjustment operation, is also programmed to address the broader cross-sectoral policy issues involving normative government agencies like DOTC. highway Subsector Strategy 1.13 Bank highway lending is directed toward supporting the Government's introduction of policy and institutional reforms. With respect to policies, the deregulation of freight and passenger transport services will be supported, as will infrastructure-related policies governing the quality and timeliness of interventions. In institutional development, Bank assistance w'll initially support the Government's goal oZ strengthening the central administration by building up its capacity to efficiently manage the arterial highway system -- the backbone of the whole network. This is the aim of the proposed project and is expected to require further support under subsequent projects. Other operations in the future will target the provincial roads and the rural system, in line with Government's efforts at decentralization.  - 5 - 1.14 The Bank's strategy has been closely coordinated with that of the Asian Development Bank (ADB), whose recently approved Road and Road Transport Sector Program builds on recommendations of the Bank's Transport Sector Review and is aimed at policy reforms and related measures pertaining to deregulation of the road transport industry, road infrastructure managoment, road safety, import policies for road transport equipment and vehicular air pollution in Metro Manila (see Table 2). In view of the policy emphasis of the ADB Program, the proposed Bank project will have an institutional/management emphasis, expanding on measures initiated in the context of ADB's dialogue with the Government. Since sustainable institutional r Corm will require a sequence of projects, a cooperative effort involving both MiB and the Bank will be required. USAID is also active in the subsector and has concentrated on rural roads. 2. THE HIGHWAY SUBSECTOR A. The Network 2.1 The Philippines has a total road network of approximately 157,500 km, including 26,100 km of national roads, 29,150 km of provincial roads, 16,600 km of city and municipal roads, and 85,600 km of local (barangay) roads (see Table 3). About 14% of the network is paved with either Portland cement concrete or bituminous surfacing and about 86% is gravel/earth-surfaced (see Table 3). The network is generally adequate in location and extent, but the condition of many roads is poor because of inadequate design, substandard construction (to which poor supervision and quality control have contributed), inadequate maintenance, and damage from overloaded vehicles. A recent DPWH survey of national roads indicated that only 18% are in good condition, 48% are in fair condition and 34% are in poor condition, and, according to a DPWH estimate, at least 40% of provincial roads and 50% of barangay roads are in such poor condition that they cannot be maintained and must be rehabilitated. Many bridges are also substandard for current traffic volumes and vehicle weights. 2.2 National roads are meant to be primary roads linking main population centers or provinces, and many carry significant traffic vol-umes. Provincial (mainly secondary) roads constitute the basic network within the provinces and usually carry medium or low traffic volumes. City and municipal roads are generally urban arterial and collectors/feeders, while barangay roads function mostly as penetration, feeder or farm-to-market roads. The classification system does not, however, reflect actual functions since classifications have become increasingly determined by funding, administrative and/or political considerations, rather than the function of the roads. A Functional Road Classification Study for modification of the current system was carried out by DPWH in 1986, with funding under the Bank's Fifth Highway Project (Loan 2418-PH), but the recommendations of the study were not adopted by Congress. The study did, however, provide a basis for the definition of the arterial network by DPWH. A new classification system will be introduced following an updating of the study and completion of an inventory of the entire road network, which are now being carried out with ADB assistance. 2.3 In 1989, partly in recognition of the current classification system's limitations, DPWH identified a network of some 13,650 km of arterial roads, consisting of the north-south backbone, the main east-west laterals, and other  -6 roads of regional imptrtance. These roads are the most important to the economy as they serve priority produ_.tion areas and important population centers and they contribute to the country's socioeconomic integration. T.e arterial network comprises about 9% of the total road network but carries about 35-40% of all domestic freight and passenger traffic. About 40% of the arterial system is still unpaved; about 2,000 km (15%) of arterial roads are in poor condition while another 9,575 km (70%) are classified as fair (Table 4). B. R2#A_T_M0p_*rt Vehicle Fleet and Traffic 2.4 The registered vehicle fleet in 1989 totaled some 1.43 million, including 0.33 million motorcycles/tricycles (see Table 5). This represents an average ownership rate of 24 vehicles per 1,000 population, which is rather low compared to other Asian countries (e.g., 50 in Indonesia and 113 in Thailand). During 1981-89, the fleet increased by an average of about 4% a year. About 65% of the trucks have two axles, 25% have three axles and 10% are truck/semi- trailers. Almost 90% of the commercial fleet is diesel-powered. 2.5 Traffic volumes vary from about 55,000-90,000 vehicles per day (vpd) on the 120 km of toll expressways serving Manila to less than 10 vpd on some rural roads. A nationwide traffic counting program was established by DPWH in 1975 with the Bank's assistance and improved in 1986. At present, almost 1,500 counting stations are in operation, of which about 125 are automatic. Traffic Safety 2.6 In 1985, about 20,000 traffic accidents involving personal injuries occurred in the Philippines, including 4,800 fatalities and 16,500 injured persons. Traffic accidents now cost the courtry some P 1 billion a year. With Bank financing under Loan 2418-PH, a Road Traffic Safety Study was carried out in 1985-87 to review the adequacy of laws and regulations governing traffic safety, accident reporting procedures, highway police activities, and the linkages of road design and safety, with the aim of recommen- ing a suitable action plan for improvements. The Study recommended that the safety issues be addressed through measures such as the creation of a Road Safety Board to coordinate the agencies involved, driver training, improved vehicle inspection, better enforcement of regulations, revision of road and intersection design standards, and improvement of road geometrics. An Interagency Road Safety Committee under the chairmanship of DPWH was established by Presidential order in May 1991 to prepare and implement a detailed course of action. Physical road safety measures (e.g., black spot improvements, provision of guard rails and road signs, etc.) will be implemented by DPWH, with assistance under the proposed project. In addition, DOTC is carrying out a program to increase its effectiveness in testing vehicle roadworthiness by constructing additional motor vehicle inspection stations, with assistance from ADB and the Japan International Cooperation Agency.  -7- R,oad Transport Industra 2.7 Structure. The Philippine road transport industry comprises some 1,740 registered trucking companies with a total of about 13,800 trucks, some 885 bus companies with about 10,700 vehicles, about 88,000 jeepneys and some 12,200 taxis. In the trucking industry, owner-operators with only one truck represent about 25% of the industry, 52% own between two and five vehicles, and large operators with 50 or more units represent only 1%. All the companies are privately owned. 2.8 Regulation and Industry Performance. Officially, the road transport industry is fully regulated. The basic prerequisite for providing transport services _.s an official authorization or "franchise," issued as a certificate. Issuance of a franchise requires the provision of proof of the applicant's satisfactory financial status and citizenship (or the company's majority local ownership) and assurance that the operation will promote the public interest. This last factor poses a major problem for prospective passenger transport operators since local authorities and current operators can object to the issuance of a new franchise on these grounds. Passenger operations are also limited by the standard criteria used for determining the number of vehicles allowed to operate on any route. Franchises restrict truckers to their own island and describe the route, schedules, stops, etc. of passenger carriers. In addition, the Government sets transport fares, requiring uniform rates per ton-km for general cargo, despite major differences in operating costs throughout the country. Passenger transport rates are, however, differentiated by region, type of vehicle and passenger class. Trucks are also licensed for either own-account (T licenses) or for-hire (TH licenses) operations. 2.9 A large number of commercial transport operations nevertheless take place outside the existing legal framework. The officially registered commercial truck fleet (with TH licenses) accounts for only about 10% of the country's total truck fleet because many private vehicles registered for own-account use (T licenses) operate on a for-hire basis. This has probably accounted for the responsiveness of the industry to the demand for trucking services as well as the competitiveness of the industry. Both truckers and their clients have also disregarded the government-specified road freight tariff levels, making the cost of trucking more responsive to demand. Similarly, despite government regulation of passenger transport services, in practice, only bus services are regulated and minibus, jeepney and tricycle services are de facto deregulated. Because of this de facto partial deregulation of passenger services, in mcqt areas there are a varietv of services offered which are competitive in cost and quality, and, except where roads are in poor condition, passenger services are considered adequate. Formalization of the industry'- de facto deregulation as well as the introduction of policy reforms is being carried out by the Government under the ADB-assisted Road and Road Transport Sector Program (Table 2). For example, a bill to eliminate the licensing distinction between private and for-hire trucks has been filed in Congress, some franchises valid for more than one island are now being issued, legislation is being introduced in Congress to replace the Common Carrier Tax on commercial vehicles with an annual road users' fee applicable to all vehicles, import policies governing road transport equipment are being liberalized, fares on air-conditioned intercity buses have been  - 8 - deregulated, and the current single fare for provincial bus transport services is, on a pilot basis in Luzon, being replaced by a policy of permitting a fare "range" of plus or minus 15%. Vqhicleo te ePulations 2.10 Many trucks in the Philippines are grossly overloaded, and enforcement of the present low axle load limits is lax. After a thorough study of all potential costs and benefits, a Pavement and Axle Load Study completed in 1986 with Bank assistance under Loan 2418-PH recommended new load limits of 13 tons for single axles and 23 tons for dual tandem axles. L2gislation to enact these recommendations has recently been introduced by the Government, along with required budgetary appropriations and staffing levels for improved enforcement of the new regulations. The Government has already rehabilitated and improved the operation and management of its 16 existing weigh bridges, and additional weigh bridges and portable loadometers will be procured with ADB financing. Introduction of the new weight limits will, however, require the Government to bring the road network in several key areas up to standard and to maintain that condition. C. Highway Administration 2.11 Responsibility for the public road network in the Philippines is divided, with some overlap, between the national government and local government agencies. In the national government, DPWH, the recognized technical highway authority, is responsible for the national highways system and for providing technical assistanea to other government agencies. At the local government level, provincial governments, cities and municipalities, under the general supervision of DILG, are responsible for the provincial, city and municipal roads in their areas, through Provincial, City and Municipal Engineers Offices, respectively. Barangay roads are administered by DPWH and the barangay councils. These arrangements are under review by the Government (para. 1.4). The organization of DPWH is shown in Chart 1. Aside from its headquarters staff, DPWH has a field network comprising 15 Regional Offices, 95 District Offices and 55 City/Municipal offices. 2.12 To provide more effective delivery of basic services at the provincial and barangay levels while simulta..eously improving the condition of the arterial highway network, DPWH is in the process of focusing its activities on the arterial highways, while decentralizing and devolving some of its current responsibilities to field offices and to local government units. With decentralization and the new emphasis on arterial roads, DPWH Regional Offices would be responsible for arterial roads. Training to be provided under the proposed project would prepare DPWH staff to assume their new responsibilities. The rest of the national network would effectively be reclassified as secondary roads, not of national impoctance, and could eventually be the responsibility of the Provincial Governments. Devolution would involve the transfer of DPWH's District Office staff to the Provincial Governments and the provinces' assumption of responsibility for the expanded provincial network and, eventually, barangay roads. Five provinces (Tarlac, Laguna, Negros Occidental, Davao del Norte and Batanes) have been selected on a pilot basis to test the efficacy of devolution,  - 9 - and agreements between DPWH and the five provincial governors were signed in March 1990. D. Highway Expenditures and Revenues from Road Transport ExRenditures 2.13 Highway expenditures by the national government for both maintenance and construction during 1981-89 increased from P 4,087 million to P 10,428 million in current terms (Table 6). However, in real terms, using constant 1978 prices, road expenditures dropped to about half their 1980/81 level during the mid-1980s due to the country's financial crisis. Since 1984, however, expenditures have made a significant recovery, with an average growth of almost 13% p.a. up to 1989, and in 1989 road expenditures in real terms returned to their 1980 level. In 1990, expenditures increased 37% over 1989 in nominal terms, equivalent to a 17% increase in real terms. 2.14 During 1981-88, about 25% to 30% of total national government expenditures for roads was allocated for recurrent maintenance. This percentage decreased in 1989 and 1990 owing to increases in the investment budget, which is largely driven by donor-financed projects and has increased more rapidly than the maintenance budget. Consequently, despite a 20% increase in maintenance expenditures in 1990, the proportion of maintenance in total national government expenditures on roads was 17%. The fall in the proportion of maintenance in the overall road budget did not necessarily mean that recurrent maintenance funding was inadequate on the arterial network. In the Philippines, most periodic maintenance activities, such as pavement overlays, are included in the investment budget, and the maintenance budget covers only routine items. Allocations for routine maintenance of the arterial network, based on the funding formula used (para. 2.33), were adequate in 1990 but should be maintained at that level in real terms. Revenugs 2.15 During 1981-89, revenues from road user charges (fuel taxes and motor vehicle fees) rose from P 5,149 million to P 13,361 million (Table 6). By and large, government revenues from road users have exceeded public road expenditures by a substantial margin for most of the past decade. There are, however, three deficiencies in present road pricing policies: first, rigid two- and three-axle trucks do not pay adequately toward the damage they cause to the roads; second, the Common Carrier Tax unfairly favors own-account trucks; and third, congestion costs, which are mainly significant in Metro Manila, are in general not adequately recouped from the vehicle operators. The first two issues are now being addressed by the Government under the ADB program (Table 2). 2.16 Fuel Pricing. Three companies, two private and one Government-owned, operate in the sector, under the supervision of the Government's Energy Regulatory Board. In principle, pump prices follow the international price of crude oil and the peso-dollar exchange rate. In order to cushion against the effects of fluctuations in the international price of crude oil, a buffer mechanism was set up in the mid-1980s, the Oil Price Stabilization Fund (OPSF), financed from a levy on petroleum products during periods of low international  - 10 - oil prices. The OPSF worked satisfactorily up to 1989 when the Government, because of socioeconomic considerations, began to intervene increasingly against upward adjustments of pump prices which were required for cost recovery. This led to growing deficits in the OPSF, which were made worse by the crisis in world petroleum markets brought about by events in the Middle East since August 1990. The Government has responded to this situation by terminating the OPSF as of December 31, 1990 and committing itself to deregulate fuel prices completely by the end of 1991. 2.17 Fuel prices at the pump in the Philippines are generally higher than those in other countries in S.E. Asia, although they are significantly lower than those in Japan, Western Europe and Africa (Table 7). The landed prices of gasoline and diesel in the Philippines are $0.82 and $0.61 per US gallon respectively (May 1991), compared with pump prices of $2.57 for premium, $2.41 for regular, and $1.24 for diesel. The large spread in pump prices between gasoline and diesel is typical of S.E. Asian countrier and much of the developing world, as governments attempt to tax higher income on auto owners and to avoid taxation of non-transport users of diesel. No significant distortions are discernible in the consumption of gasoline versus diesel despite the price differential. Accounting and Auditing 2.18 While all levels of the government have accounting systems and all accounts are financially audited by the Central Government's Commission on Audit (COA), until 1989 no effective accounting existed for expenditures on construction and maintenance of roads at the lower government levels. Because funding allocations to the local governments were made to a single public works account, no separate accounting categories were established for road construction, road maintenance, and other types of public works. This was a major problem and led to the diversion of funds from road maintenance to improvement or construction of roads. In 1989, DPWH revised its system for monitoring the use of funds being allotted to the regions and districts for maintenance of national roads and for ensuring that the funds allocated by the National Government for maintenance of provincial, city and municipal roads are actually utilized for the purposes intended and supplemented by matching funds from the local governments. Accounting and auditing requirements for the proposed project are described in para. 3.37. E. Highway Investment Program Obiective