Mexico - Second Federal Highway Project

R EsTR ICTED RETURN TO Report No. TO-382a REPORTS DESK WITHIN 0 .K This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF SECOND FEDERAL HIGHWAY PROJECT MEXICO September 6, 1963 Department of Technical Operations  CURRENCY EQUIVALENTS US $1 = Ps. 12. 50 Ps. 1 million = US $80, 000  M E X I C O APPRAISAL OF SECOND FEDERAJJ HIGIIJAY PROJECT TABLE OF CONTENTS Page SUIVMARY i_ii I, INTRODUCTION 1 II. BACKGRORMD INFORI-MTION 2 A. Highway Network 2 B. Highway Organization and its Adequacy 2 C. Highway Financing 3 III. THE PROJECT 5 A. Description 5 B. Highwiay Program 5 C. Procurement of Maintenance and Laboratory Equipment 6 D. Cost Estimates and Financing 7 E. Execution of the Project and Procurement 8 IV. ECONOU1C JUSTIFICATION 10 A. General 10 B. Road Users' Benefits - Rate of Return 10 a. Improvement of Existing Roads 10 b. Construction of New Trunk Roads 11 C. Feeder and Penetration Roads 11 D. Other Benefits 12 V. CONCLUSIONS 13 AMNEXES  AP=LS TABLES 1. Registered vehicles, 1932-62. 2. Total actual and planned expenditures for construction, reconstruction and maintenance of roads in Mexico 1955/6.6, 3. Taxes affecting road users and highway expenditures 1959/62. 4. Summary of works included in the Project. 5. Design standards for roads included in the Project. 6. Cost estimates and timing of e:.penditures for roads included in the Project. 7. Average unit cost per km. for road construction for various types of roads and topographical conditions. 8. Maintenance and laboratory equipment. 9. mLements considered in computation of Iconomic rate of return based on road users' savings. APPZNDIX On economic benefits. FIGTJTRhS 1. Organization chart of the Secretariat of Public Works. 2. Organization chart of the Department of Maintenance of Federal Highways. 1. Federal Highway system with location of Maintenance Division Headquarters and repair shops. 2. Main Highwiay network showing the roads included in the Project.  M E X I C O APPRAISAL OF SECOND FEDERAL HIGHWtAY PROJECT SUMIARY i) The Mexican Government has asked the Bank to assist in the financing of a Highway Project which is a part of its general economic development program. This will be the second loan for Federal highways made to Mexico by the Bank, ii) The proposed Project provides for: i) the partial improvement or reconstruction of 11 paved roads totaling 2,154 km,; ii) the completion of 20 roads already under construction totaling 2,021 km; iii) the construction of 9 new roads totaling 793 km; iv) the procurement of additional maintenance and laboratory equipment. iii) The total estimated cost, including contingencies, is US$96 million equivalent, of which the Bank will finance US$hO million which represents the foreign currency cost. The local currency cost will be provided by the Government through annual appropriations in the Federal Budget. The Project is expected to be completed by the middle of 1966. iv) Traffic on the existing road system has increased steadily and as a result some of the main roads should be improved and their standards raised. Other roads are to be completed and new roads constructed to fill gaps in the main highwiay network of the country and to penetrate into regions not yet served by the highway system. The Project is limited to roads in the Federal Highway system. v) The Project is technically sound and is economically justified on the basis of savings in transport costs and/or the expected increase in production and economic development in the areas to be served by the new roads. vi) The responsible executive agency will be the Secretariat of Public Works acting through several of its departments. The planning and design of the roads is being carried out by the Department of Projects and Laboratories. Construction will be supervised by its Department of Construction of Federal Highways and maintenance by its Department of Maintenance of Federal Highways. These Departments have a sound organization with clear lines of authority. Their staffs are qualified and experienced; therefore, consultants are not required.  - ii - vii) The design standards adopted for the different types of roads included in the Project are satisfactoryo Engineering surveys and designs have been completed for many of these roads with preliminary surveys made for the remainder. The cost estimates are reliable and adequate contin- gencies have been included. viii) The contracts to be financed by the Bank will be awarded through international competitive bidding, except for contracts which have already been let and for those small road sections which cannot be grouped into sizeable contracts, local coinpetitive bidding being applied in such cases. Procurement of maintenance and laboratory equipment will also be made through international competitive bidding. ix) The proposed Project provides a suitable basis for a Bank loan of US$40 million equivalent. An appropriate term for the US$31.5 million portion pertaining to the roads would be 20 years with a 4-year grace period; for the Us$8.5 million portion pertaining to equipment, a term of 6 years with a one year and a half grace period has been requested by the Mexican Government in view of the circumstances explained in paragraph 18.  I. INTRODUCTION 1, The Mexican Government has asked the Bank to assist in the financing of a three-year (1963-66) Federal Highway Program which comprises the improve- ment and partial reconstruction of 2,154 Im of existing roads, construction or completion of 8, 84 km of roads, together with the purchase of laboratory and maintenance equipment for the Federal Highway network. The total cost of the proposed Project is estimated at about US$96 million equivalent, of which the Bank will finance the total foreign exchange cost amounting to US$40 million. The Project, which is part of Mexico's general development program, is based on studies made by the Secretariat of Public Works and was appraised by Bank missions to Mexico in Ncvember-December 1962 and February-March 1963. 2. In October 1960, the Bank made a US$25 million loan to Kexico to meet the foreign exchange cost (36.4%) of a US$64 million program for the construction or reconstruction of about 3,150 km of its Federal Highway System. The works are about 50 percent completed. The amount of the loan disbursed to date is US$8,3 million. Although the scheduled completion date is late 1964, it now appears that mid-1965 is more realistic, 3. In June 1962, a US$30.5 million loan was made to cover the foreign exchange cost of a US$67 million program for the construction or completion of three toll roads totaling 384 kms, four access roads, and five toll bridges, and for the purchase of a ferry boat. Tenders have already been received for about one-half of the highway and bridge works. The balance will be tendered for during 1963. The order for the ferry was placed recently. The project is about 25 percent completed and is scheduled for completion in late 1964. Loan disbursements to date amount to US$6.7 million.  -2- II. BACKGROUND ITTOF?J1ATION 4. The Mexican Government has submitted for the Bank's appraisal a general development program for the next three years. This program, which has been analyzed by a special Bank mission, covers all aspects of the economy: industry, agriculture, transportation, social services, etc. The highwqay sector, which includes about US$270 million equivalent for construction and reconstruction of all types of roads, accounts for about 10% of total planned investment. This total includes work under loans 268-ME and 317-ME, the proposed project, State and local roads, and a small amount of federal roads outside of the project. A. Highway Yetwork 5. The MIexican road network, although small in relation to area and population, has been growing at a rapid pace as shown by the following figures: Length of networlk in km December 1955 December 1962 Toll hi;hways 238 424 Federal roads 13,056 20,972 State and local roads* 12,324 25,304 25,618 46,700 6. At the same time, the number of vehicles has increased steadily (Table 1). Over the ten years, 1952 to 1962, it has more than doubled from Il,000 to 906,000 which represents an average annual increase of 8%. 13. Highway Orgarization and its Adequacy 7. The planning, engineering, construction and maintenance of the Federal HighwTay System fall under the direct responsibility of the Secretariat of Public 'A1orks (S.O.P.) acting through its various specialized departments. The organization structure of the Secretariat is outlined in Figure 1. 8. The Department of Planning and Programing carries out studies and makes recorimendations to the Secretary for such matters as the selection of roads on the basis of economic priorities and justifications, the co- ordination of highway programing with the programs of other Government entities, and with project financing. * Roads for which State and local entities participate in the financing.  -3- 9. The Denartment of Projects and Laboratories performs the basic engineering for the roads with the use of modern techniques. The choice of design standards is based on detailed traffic studies. 10. The Department of Construction of Federal Highways handles such matters as selection of contractors and their control wqhile executing the works. The local construction industry in Mdexico is well developed. The National Chamber of the Construction Industry has a membership of 1,700 contracting comoanies which own equipment estimated to be worth some U.S. $290 million equivalent. In general they build roads efficiently and economically. The specifications provided to them are well prepared and enforced by an S.O.P. staff of more than 500 engineers and technicians. Thus proper control of the works is achieved. 11. Maintenance of federal highways is carried out by the Department of Maintenance of Federal Highways, the organization of which is sliown in Figure 2. For maintenance purposes, the country has been divided into 21 Divisions (see Map 1), each headed by a chief engineer assisted by an appropriate number of superintendents, foremen, etc. The Divisions have the necessary facilities such as repair shops, stocks of spare parts, radio and telephone communications, housing, etc., as well as the appropriate maintenance equipment. In 1959 the S.O.P. through an external loan, purchased maintenance equipment worth $6 million. Some units of equipment purchased earlier and some of those acquired under this loan are now at the limit of their economic life and need replacement. The recent and expected development of the road network requires additional maintenance equipment. New equipment for laboratory control and research in the Depart- ment of Projects and Laboratories is also required. 12. In general roads are adequately maintained. Satisfactory legislation exists to control the weights, speed and dimension of vehicles. These are enforced by road patrols operating under the Secretariat of Transport and Communications. 13. The departments, which will be charged with the various aspects of the proposed Project, are adeqiu,ately staffed with competent personnel. They operate efficiently and do not require outside consultants. C. HighwZay Financing 14. The construction, reconstruction and maintenance of highways (other than toll roads) are financed through annual budgetary appropriations of the Federal and State Governments and, to a lesser extent) through foreign loans and credits. The total program of highway exoenditures for the period 1955-65 is shown in Table 2; figures up to 1962 are actual, those for 1963-65 are as presently planned. The total expenditure other than for toll roads has tended to increase; over the 8-year period, 1955-69, it averaged about Ps 900 million a year and is excpected to be about Ps 1,300  - 4 - per annum over the years 1963-65. For toll highways, investment, partly financed by Loan 317-TE, is expected to be particularly heavy in 1963 and 1964. 15. The various taxes collected either directly or indirectly by the Federal Government from vehicle owners are redistributed on 1ogally fixed percentage bases among the Federal Government itself, the State and Federal District Governments and the Comite Nacional de Caminos Vecinales. There is also a separate tax on income from the sale of gasoline in the Federal District. 16. Highway users as a group appear to make a reasonable contribution towards the cost of highways in l-lexico. To illustrate, in order to replace the whole of the existing Mexican highway system would cost approximately Ps. 17.80 billion at cutrrent prices. If it is assumed that some 5 percent of the total existing road length would not be replaced because it has outlived its original economic function, then, on the basis of an average life of 25 years for the highways, the amount of the annuity at 8 percent interest required to amortize the investment would be Ps. 1.22 billion per annum. To this must be added annual maintenance costs of Ps. 0.30 billion, giving a total figure of Ps. 1.52 billion. 17. In 1962 the taxes paid by vehicle owners amounted to Ps. 1.20 billion, (See Table 3). This figure, however, excludes vehicle registration and driver license fees collected and kept by the State governments as well as spec_al taxes paid to some of these governments from property owners wihose land has increased in value as a result of new road construction. In addition, some proportion of general taxation could be allocated as a contribution for other administrative and social benefits which accrue to the general public from the highways. Thus it can be concluded that the total contribution by the direct beneficiaries of the highway system is fairly close to the Ps. 1.52 billion figure above. 18. Financial procedures of the Federal Government prevent the Secretar- iat of Public Works from keeping a depreciation cr renewals fund supplied by monies out of the regular budgetary allocat on. Depreciation charges are recorded only for accounting purposes. Therefore, when the Secretariat requires either replacement or additional maintenance equipment it has to request funds either directly through its annual estimates submitted to the Ministry of Finance or indirectly through an external financial agency. It is Government policy that the time period for loans obtained to purchase equipment should not exceed the average expected life of the equipment. The service payments on these loans constitute in a sense, the only permitted form of obtaining annual budgetary allocatiQns for the depreciation and renewal of equipment.  - 5 - III. THE PROJECT A. Description 19. The proposed Project provides for: i) the partial improvement and reconstruction of 11 roads totaling 2,l154 km; ii) the completion of 20 roads, already under construction, totaling 2,021 km; iii) the construction of 9 new roads totaling 793 km; iv) the procurement of additional equipment for maintenance of the Federal Highway networks and for laboratories and control of con- struction works. B. Highway Program 20. The Project roads have been selected by the Government as those having a high priority. This judgment is confirmed in Section IV below on the economic justification of the Project. 21. Although the main highway network has grown steadily, some import- ant gaps still remain. New penetration roads are required for the develop- ment of potentially rich areas. The increases in the number and size of vehicles on some of the major highways necessitates their improvement or reconstruction. The Project roads are scattered throughout the country (Map 2). Details of the type of work to be done on each road are given in Table 4. 22. In general, roads Noo 1 to 11 in Table 4 require the same type of work. Many of these sections were built some twenty years ago to standards which are inadequate for the needs of the present heavy traffic volumes; widening, realignments and base strengthening are necessary. Included in this group are three very important east-west highway sections which serve major agricultural and industrial areas: Road No. 3 - Monterrey to Torreon - 346 kn to be reconstructed - average traffic 700 to 2,500 vehicles per day; Road No. 4 - Celaya to Tepic - 405 km to be reconstructed - average traffic 800 to 3,400 vehicles per day;  - 6 - Road No. 7 - Mexico City to Veracruz - 262 km to be reconstructed - average traffic 800 to 5,200 vehicles per day. The Acapulco-Zihuatanejo Road (No. 10) which forms part of the Pacifico Coastal Highway was severely damaged by a cyclone in 1961 and requires rehabilitation. 23. A special case in the Coatzacoalcos-Frontera Road (No. 9) which is located in an area where no road aggregates are available, and will be constructed with a "mix in place?l bituminous stabilized base. 24. Roads No. 12 to 31 are those on which construction began before 1963 and which are expected to be completed under the 1963/66 program. 25. The remaining roads (No. 32 to 40) may be divided into two groups: i) The two roads (No. 33 and 37) will fill gaps in the National Highway network. In addition to shortening the distances between their terminal points, they are expected to stimulate the economic development of the areas they will cross. ii) The remainder (Nos. 32,34 through 36, and 38 through 40) are penetration roads into areas where development is hampered through the lack of satisfactory communications. 26. Design standards for the roads included in the Project are detailed in Table 5. Taking into account the varying topographical conditions, each one of the four standards is modified for flat and rolling, hilly, medium mountainous, and heavy mountainous country, making a total of 16 different standards in all. These standards which are the same as used for the Loan 268-PIE project are satisfactory. The particular choice of standards for each road takes into account the expected volume of traffic in the given topo- graphical conditions. Comprehensive traffic studies taken over the past 12 years, which cover such aspects as congestion trends, vehicle growth by types, origin and destination surveys, etc., are used as the basis for road design; electronic computers are now being used for this purpose. Ce Procurement ef Maintenance and Laboratory Equipment 27. The Project provides for the procurement of maintenance equipment to replace worn out machinery, to intensify mechanization of operations and to meet the increased needs resulting from a growing network carrying an increasing amount of traffic. An indication of the increased maintenance requirements on the Federal HighJay network is given by the trend of annual expenditures which increased from Ps. 111 million in 1955 to Ps. 263 in 1962 and are expected to reach Ps. 323 million for 1965, a threefold increase in 10 years. H4aintenance equipment to'be procured includes vehicles, machinery, spare parts, tolls for repair e1wpe, togvthor with r^dao camnicatiomi equipment.  - 7 - 28. In addition to the needs of the Maintenance Department, the Depart- ment of Projects and Laboratories, which is in charge of the design and scientific control of the highways, needs additional equipment because of the expansion of the network. Most of this equipment would be of foreign manufacture. A summary list of the maintenance and laboratory equipment is given in Table 8. D. Cost Estimates and Financing 29. The total estimated cost of the Project is Ps. 1,199 million (US$96 million equiv.), made up as follows: Local Funds IBRD Funds Total Ps. US$ equiv. Ps. US$ equiv. Ps. US$ equiv. Improvement and Reconstruction 277 (22.1) 156 (12.5) 433 (34.6) Completion of Construction 266 (21.3) 150 (12.0) 416 (33.3) New Construction 156 (12.6) 88 ( 7.0) 244 (19.6) Maintenance Equipment - - 96 ( 7.7) 96 ( 7.7) Laboratory and Control Equipment - 10 ( 0.8) 10 ( 0.8) Total 699 (56.o) 500 (40.0) 1,199 (96.0) 30, Cost estimates for each road in the Highway Project are given in Table 6. These estimates which were prepared by the Secretariat of Public Works are based on experience obtained in the recent execution of a large amount of works. For new construction works, the estimates are based on average unit cost per km for each type of road, taking into account topo- graphical conditions (Table 7). The cost of small bridges is included in the average cost of drainage. The cost of larger bridges has been computed separately but included in the total for each road. For reconstruction works, the estimates are based mainly on unit prices for different types of works. The unit prices which were estimated for different parts of the country according to local conditions are regularly reviewed and approved by a National Commission of Unit Prices, the Chairman of which is the Secretary of Public Works. 31. The costs shown for each road in Table 6 include an addition of 10 percent for engineering and administration and a further 10 percent for physi- cal contingencies. An overall price contingency factor of 10 percent was then added to the overall cost of the Highway Project to allow for price increases during the period of its execution. The amounts shown in paragraph 29 include all these additions. 32. The estimated cost cC maintenance and laboratory and control equip- ment is based on recent quotations by local representatives of manufacturers including 5 percent for spare parts. Since the bulk of the equipment is to be procured abroads transport costs to Mexico are included in the estimate.  - 8 - 33. The cost estimate of the Project appears reliable, both on the basis of the method followed and on the Bankts experience with Loans 268-NE and 317-ME, for which the Project estimates were also prepared by the Secretariat of Public lWorks. 3h. The execution of the roads Project is expected to take about tbXco. 7ycars. .intn e and labor.wrt bq ipmcvnt XLo7d be purehascd within one year and a half. The annual breakdown between the estimated local crurfeny and the foreign exthange uxpenditures is as follows: Total Local Currency Foreign Exchange Expenditures Expenditure Expenditure Ps. US$ equivalent Year Ps. Ps. (millions) (millions) a_____________________ 0-oO,oo J 00 __ -_______________-------- 1963 (Sept.) 190 102 88 7tl 1964 554 306 248 19.8 1965 404 259 145 11,6 1966 (June) 51 32 19 1.5 1,199 699 500 -0