Honduras - Transport Sector Rehabilitation Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 10680-HO STAFF APPRAISAL REPORT HONDURAS TRANSPORT SECTOR REHABILITATION PROJECT T .-.; ,-< t 1- - >~~~~~~ ~~~~~~ I - 'i'- tiT{d- January 11, 1993 Country Department II Infrastructure and energy Operations Division Latin America and the Caribbean 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 EQUIVALENTS Currency Unit = Lempiras(L) US$1.00 = 5.40 Lempiras (September 14, 1992) FISCAL YEAR January 1 to December 31 UNITS OF WEIGHTS AND MEASURES Metric British/US Equivalent 1 kilometer (km) = 0.62 mile (mi) 1 meter (m) = 3.28 feet (ft) I gram (g) = 0.0022 pounds (lb) i kilogram (kg) = 2.20 pounds (lb) i ton = 2,205 pounds I cubic meter (MI) = 6.29 barrel (bbl) I cubic meter (M3) = 35.32 cubic feet (ft' or SCF) ' cubic meter (MI) 264 U.S. gallons (gal.) ABBREVIATIONS CABEI Central American Bank for Economic Integration CBT Low Traffic Roads Model DGC Directorate General of Roads of SECOPT DGCA Directorate General of Civil Aviation of SECOPT DGCCA Directorate General of Roads and Airports Maintenance of SECOPT DGPS Directorate General of Sectoral Planning of SECOPT DGT Directorate General of Transport of SECOPT ENP National Port Company FNH Honduran National Railways GOH Government of Honduras HDM m Highway Design and Maintenance Standards Model (Third Version) ICAO International Civil Aviation Organization IDB Interamerican Development Bank PURC Public Utility Regulatory Commission REMITRAN Meetings of Central American Transport Ministers SECOPT Secretariat of Communications, Public Works and Transport SECPLAN Secretariat of Planning, Coordination and Budgeting SSPF Under Secretariat of Planning and Finance of SECOPT TRR Co. Tela Railway Company TSEP Transport Sector Investment Program UMA SECOPT's Environmental Unit UNDP United Nations Development Programme USAID United States Agency for International Development VPD Vehicles per day  FOR OMCIAL USE ONLY HONDURAS TRANSPORT SECTOR REHABELrTATION PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. CREDrT AND PROJECT SUMMARY ................................... i I. THE TRANSPORT SECTOR AND THE ECONOMY ....................... 1 A. Background . ............................................. 1 Macroeconomic Linkages .................................... 1 The Honduran Transport System ................................ 2 B. Institutional Framework ........................................ 3 - C. Main Sector Issues . ........................................... 4 Weaknesses in Planning and Regulation ........................... 4 Environmental Issues ........... ............................ 6 Highway Subsector Issues .................................... 8 Port Subsector Issues ..................... 11 Airport Subsector Issues ..................... 14 Railway Subsector Issues ..................... 16 Il. THE PROJECT ..................... is A. Rationale for IDA Involvement ..................... 18 Lessons of Past Experience . ....................... 18 Rationale of the Proposed Sector Project ............ ......... 19 B. Project Objectives ......... ............ 19 C. Project Description ......... ............ 20 Policy Component ..................... 20 Investment Component ..................... 21 institutional Development and Technical Assistance Component .... ......... 26 D. The Action Plans ............................................ 29 Actions to be Taken ......................................... 29 E. Project Cost and Financing . ...................................... 31 Project Costs . ........................................... 31 Project Financing . ......................................... 31 F. Project Execution ............................................ 33 implementation Arrangements ........... ....................... 33 Project Reporting .......................................... 33 Annual and Mid-term Reviews ........... ........................ 34 0. Procurement and Consultancy Services ........ ...................... 34 H. Disbursements and Auditing . .................................... 36 I. Economic Justification ......................................... 37 J. Environmental Impact .............................. 38 K. Project Risks and Safeguards ............. 39 This report is based on the findings of an appraisal mission that visited Honduras June 29 to July 17, 1992. Mission members were Messrs./Mmes. Mirtha Pokorny (Task Manager), Guillermo Ruan (Highway Engineer), Zvi Ra'anan (Port Specialist), Jose Baigorria (Railway Engineer); Robect Mongtomery and Magdalena Mayorga (Consultants). It also incorporates tk findings of earlier preparation work by Mr. Cesar Plaza (Environmental Specialist). Messrs. Edilberto Segura, Paul Knotter and Ricardo Halperin are respectively the responsible Department Director, Project Adzisor and Division Chief. Ms. Martha Leal assisted in the production of this report. 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.  m. AGREEMENTS REACHED AND RECO M MAEONS ...................DAT. 39 TABLES Table 1.1: Distribution of Traffic between ports, 1975 and 1991 ........ ....... 12 Table 2.1: Transport Sector Expenditure Program (1993-1996) ............... . 22 Table 2.2: IDA Financed Components ................................ 24 Table 2.3: Summary of Technical Assistance and Training Component .... ....... 28 Table 2.4: Estimated Financing Distribution by Major Donors ................. 32 'Table 2.5: Procurement Method ................................... 35 Table 2.6 Estimated Disbursement ................................. 37 ANNEKES Annex 1: GOH'S Transport Sector Policy Declaration and Action Plan .... ......... 42 Annex 2: Istitutional Development Plan ............................... 53 Annex 3: The Road Subsector .............. ........................ 68 Annex 4: The Bridge Department ............ ........................ 81 Annex 5: The Ports Subsector .............. ........................ 93 Annex 6: Technical Assistance to the Aviation Subsector .................... 126 Annex 7: The Railway Subsector ............ ........................ 135 Annex 8: Past Bank Group Lending ................................. 141 Annex 9: Supervision Plan .................................. 147 Annex 10: Estimated Schedule of IDA Disbursement ........ ................ 152 Annex 11: Economic Evaluation .............................. ... 153 MAP EBRD 24228  i HXONDUTRAS TRANSPORT SECTOR REHABILTATION PROJECT STAFF APPRAISAL REPORT CREDIT AND PROJECT SUMMARY Borrower: Republic qf Honduras Executing Agencies: Secretariat of Communications, Public Works and Transport (SECOPT); National Port Company (ENP); and Honduran National Railway (FNH). Benefidiaries: Project benefits would accrue to the economy as a whole. The reduction of transport costs expected from the project would increase the competitiveness of Honduran goods and result in increased economic activities and households income. Also, the new public- private sector mix supported under the project is expected to have a positive fiscal impact, supporting the Government's efforts for sustainable growth and increasing Honduras' attractiveness for investments and subsequent job creation. Credit Amoumt: SDR 46.9 million (US$65 million equivalent) Terms: Repayment in 40 years, including 10 years of grace with a charge of 0.75% per year. Project Objectives: The project has two sets of major objectives: (a) to help improve the institutional and regulatory framework of the sector so as to: (i) encourage greater private provision of transport services; (ii) establish investment and pricing policies based on efficiency and equity considerations; (iii) integrate into SECOPT's work the systematic consideration of environmental concerns; (iv) strengthen SECOPT's planning and regulatory capability; (v) restructure the port subsector and redefine the role of the ENP; (vi) design and implement a strategy for the development of the airport subsector; and (vii) rationalize railway operations; and (b) to help improve and rehabilitate transport infrastructure in the main trade corridors in support of the Government's efforts for export-led growth and reduce the backlog of deferred maintenance. Achievement of these objectives would remove bottlenecks to trade, reduce transportation costs, attract private investment to the transport sector (reducing the need for public funding) and help redirect the focus of the state away from the provision of services. Project Descrption: The project would have three components: (i) the pic is reflected in the Government's Transport Sector Policy Declaration, which spells out a medium-term strategy for the sector, and in the related Action Plans specifying the measures io be taken to address  ii the most important sector issues; (ii) the investment coniv,mpnn (total cost US$79.6 million, IDA financing US$61.7 m;llion) would finance a time slice of the Government's 1993-1996 Transport Sector Investment Program amounting to US$545.7 million, and consists of: (a) rehabilitation of about 150 km of roads in the main export corridors; (b) periodic maintenance of ahoutt 1800 km of the road network;(c) construction and rehabilitation of about 1000 m of bridges; (d) rehabilitation of about 1000 km of feeder roads in agriculturally rich areas; and (e) rehabilitation of the runway, taxiway and apron of the San Pedro Sula airport. The institutional development and technical assistance component (total cost US$3.3 million, all IDA financed) would provide technical assistance to: (a) strengthen the capabilities of SECOPT's Under Secretariat of Planning and Finance and the Directorate of Traasport to carry out project evaluation and implement a regulatory framework consistent with the new public-private sector mix; (b) expand the role of the Environmental Unit to encompass all transport modes and effectively integrate environmental aspects into SECOPT's investment decisions; (c) support implementation of the Action Plans in the areas related to privatization/divestiture measures for the port and airport subsectors; and (d) strengthen SECOPT's capacity for bridge management. Project Benefits: The project is expected to support the introduction of major policy and structural reforms and help strengthening the sector's institutions through the implementation of the various Action Plans covering a wide range of policy and institutional improvements. By addressing sector specific issues and overriding institutional weaknesses, the project would contribute to enhance Honduras comparative advantages in international trade and substantially reduce transport related distortions in the economy. Direct benefits of the project would be derived from: (a) increasing the quality and cost- effectiveness of transport services through: (i) improving the efficiency and accountability in the road subsector; (ii) making ports and airport services more responsive to user needs; and (iii) eliminating intermodal distortions by phasing out railway services; (b) strengthening sector planning and policy formulation; and (c) improving the sustainability of resource use through the development of a technical foundation for an environmentally sound transport arrangement. The project's benefits would therefore go well beyond the returns on specific individual investments. Risks and Safeguards: There are no important technical risks or major environmental issues, as no large projects with potentially significant environmental impact are being planned. Because of the project's policy emphasis, there are risks related to the Government's commitment and ability to implement the needed institutional and policy reforms. These are deemed acceptable in view of Honduras' generally good performance under the ongoing structural and sectoral adjustment operations. Up- front actions in support of these reforms, such as firther reduction of SECOPT's personnel, closure of the La Ceiba Railway line and appointment of consultants to implement the ports  iii privatization/divestiture program should reduce these risks. In addition, specific targets have been identified in the process of sector reform and their achievement wi1l be closely monitored. Nevertheless, the risk of funding shortages cannot be discounted, and may lead to slower than planned implementation cf the investment program. Annual project implementation re-views would ensure that projects with the highest rates of return are given priority. Economic Rate o! Return: The cut-off rate of reurn for the inclusion of investments in the expenditure program is 12%, except for investments in access roads with a strong social impact, not exceeding 10% of total expenditures in access roads which wottld be subject to less stringent economic (but standard environmental) criteria. A sample of projects reviewed during appraisal had rates of return in the 12-50% range. Program CostY:l (US$ million) 1993-1996 |PRCKGRAM COMPONENTS IO Foreip TOTAL |ROAD INVESTMENTS -Road Constuotion 4.68 7.03 11.71 -Road Improvement 15.50 23.24 38.74 -Road Paving 25.57 38.39 63.96 -Bridg Construction and Rehabilitation 4.75 7.13 11.88 -Road Rehabilitation 47.80 71.72 119.52 -Periodio Maintenanc 38.74 59.66 98.40 SUB TOrAL 137.04 207.17 344.21 AIRPORT INVESTMENTS -San Pedro Sula-Runway Rehabilitation 4.80 7.20 12.00 -San Pedro Sula-Pasenger and Fr-ght Terminal 13.20 30.80 44.00 -Roatin-passngerTerminal 1.15 2.85 4.00 SUB TOTAL 19.15 40.85 60.00 PORT INVESTMENTS -Puerto CortesExpansion Container Termina 3.20 4.80 8.00 -Puerto Cortes-Constructionof Re-Ro facility 1.60 2.40 4.00 SUB TOTAL 4.80 7.20 12.00 TECHNICAL ASSISTANCE AND STUDIES 14.55 32.85 47.40 TOTAL BASE LINE COST 175.54 288.07 463.61 Physical Contingencies 16.10 25.52 41.62 Prlce Contingencies 15.55 24.93 40.47 TOTAL PROGRAM COST 207.19 338.52 545.70 I/ Costs of the IDA finaned components of the 1993-1996 Transport Sector Investmn Program are presented in Table 2.2.  iv Program Miancug (US$ milUons): l Donor Local Foreign Total IGIDA 26.0 39.0 65 0 IDB 76.0 114.0 190.0 CABEI 120 18.0 30.0 USAIID 8.0 12.0 20.0 Government of Spain 14.4 35.6 50.0 Government of Taiwan 8.0 12.0 20.0 Other 3.6 5.4 9.0 Central Government 48.4 72.6 121.0 Unidendfied 10.8 26.3 40.7 Total 207.2 338.5 545.7 timatea I Disbursemenh (US$ nMllion): g ~~~~~I BANK FY 1993 1994 1995 1996 1997 Annual __5.7_ 13.3 21.6 14.6 9.8__ Cumlative 95.7 1o0 40.6 T 55.2 65.0 l I CoreSponds to the US$4 milion ial deposit in the Special Account plu2 retwact finncn Of UP to US$1.7 mnillion for eligile expnditures incurrd after July 31, 199.  HONDURAS TRANSi'ORT SECTOR REHABLITATION PROJECT I. TH3E TRANSPORT SECTOR AND THE ECONOMY A. Background Macroeconomic Linkages 1.1 For many years, Honduras' development strategy was based oin import ustitution behind high protective barriers and on extensive state intervention involving subsidies, price controls and tax incent;ves, all of which created strong price distortions and encouraged low productivity. In the early 1980s, a steep decline in world agricultural commodity prices and sharply rising international interest rates and oil prices precipitated an economic crisis. In response, the Government resorted to expansionary policies which stimulated economic growth but intensified pressures on tha balance of payments and contributed to the acceleration of inflation. By end-1989, the parallel market exchange rate was double the official rate, international reserves had been virtually exhausted, and Honduras had accumulated arrears of about US$750 million on its external debt (including about US$165 million to multilateral agencies). 1.2 The administration that took office in early 1901) set as its first priorities economic stabilization and the immediate restoration of financial reiations with multilateral agencies. In addition, the Government initiated a bold program of structural reforms with the aim of achieving sustainable export-oriented economic growth. The stabilization program comprised a sharp devaluation of the lempira, sizable adjustment to public utility rates, tax increases (including the introduction of temporary export taxes to absorb the windfall gains associated with the devaluation), and major cuts in government expenditures. The Government's structural reform agenda aims to reduce the complex regulatory framework that pervades the economy, encourage private sector investment through reform of the trade and exchange rate regimes, deregulate piices and markets, and reform the financial sector. Other important objectives of the Government's economic program are the reduction of the size of the public enterprise sector through privatization and/or leasing arrangements and an increase ;n the efficiency of public enterprises that remain state-owned. 1.3 In the transport sector, the Government is committed to achieve an efficient industry driven by market forces. To this end, Government efforts seek to increase the role of the private sector in the provision of transport service and to reduce the regulatory burden, maintaining only those regulations justified by non-competitive markets and/or safety and environmental considerations. Present aims, which the proposed project would support, are to increase road maintenance by contract, rationalize railway services, including closing non-economic lines; reorganize the port subsector and encourage the establishment of a number of privately-operated terminals to handle a significant share of the traffic; upgrade airport facilities and privatize their operation; and free the trucking industry from restrictive entry or service regulations. The interface of transport policies and environmental issues, including rapid deforestation, soil erosion, and water and air pollution, is also an integral aspect of the Government's sectoral policy. NMeasures the Government is taking or will be taking to integrate environmental considerations into transport sector policies are discussed in subsequent sections of this report. Annex 1 presents the Government's Policy Declaration Statement  outlining the strategy for the sector and specific action plans that will be implemented in connection with the proposed project (para. 2.9) The Houduran Transport System 1.4 The Honduran transport system .s cunceptually simple (see Map IBRD 24228) and comprises: (i) a highway network which includes about 2,400 km of paved roads and 11,700 km of unpaved reads; (ii) a port system dominated by Puerto Cortes, followed by the increasingly used Puerto Castilla and the under-utilized Puerto San Lorenzo, the onlv Honduran port on the Pacific coast; (iii) a small agriculture-oriented railway system used mainly to transport. bananas in the north; and (iv) four international airports, only two of them (in Tegucigalpa and San Pedro Sula) with significant international traffic. 1.5 Distances in Honduras are relatively short and the terrain is rugged. Economic activities are spread widely over the national territory. Land suitable for agriculture represents about 25% of the total area and is located in several valley systems and in the northern coastal plain. Forests are largely concentrated in the Olancho area. while coffee is produced in the hilly areas of central and western Honduras between 700 and 1,200 m above sea level. Cattle raising is common in central and western Honduras and the northern coastal plain. Banana plantations are located in the Sula valley and the northern coastal plain. The Sula valley dominates the regional economy centered in San Pedro Sula, some 60 km from Puerto Cortes, where most of the agricultural and industrial development of Hondurvq has taken place. There is an almost total reliance on roads and road transport, which accounts for over 95% of total domestic freight (ton - km) and nearly all non-urban passenger traffic of around 5 billion passenger-km annually. The primary road network is centered in the cities of Tegucigalpa and San Pedro Sula, with a feeder system that connects the major areas of economic activity to these centors. Value added by the transport sector has remained at about 7% of GDP for the last ten years. 1.6 A relatively new economic development in Honduras is the growth of non-traditional exports, i.e., perishable agricultural production and manufacturing in the Free Zones of Puerto Cortes and Choloma. With Honduras entering global sourcing for international markets, the reliability of transport services, which are the main consideration in the transport of high-value low-volume goods, will become increasingly important. The improvement of reliability will require the appropriate regulatory framework to encourage the development of transport operators, such as freight forwarders. In terms of infrastructure needs to attend this new demand, the major shortconming is the lack of adequate storage facilities in the major airports, an issue that the Government is addressing through planned investments in San r-VJro Sula (para 2.11). Further investments in cold storage and other specialized facilities should bal developed by the private sector as both ports and airports become more open to private participation. 1.7 The future development and improvement of transport infrastructure will be shaped by: (a) Honduras' heavy reliance on the export of agricultural commodities and the development of the tourism industry, which are sensitive to both the cost and the reliability of domestic transportation facilities, and (b) the growth of intra-regional trade due to increased economic integration. Investments in the sector in the short to medium term should emphasize: (a) the improvement, rehabilitation and maintenance of neglected road and airport infrastructure; and (b) modernization/expansion of some airports and specialized port facilities. The Government's 1993-  -3- 1996 Transport Sector Investment Program (ISIP) (para. 2.11) is based on these objectives. The Government, in line with its strategy of increasing the role of t!e private sector in transport services, is assessing possible schemes to attra. private investments to the sector. The main focus is on ancillary infrnstructure and equipment for specialized activities in ports and ahpirts. Investments in the road subsector, however, will continue to be financed through public funds since low traffic densities in most of the network makes toll collection unattractive for the recovery of capital investment. B. Iastitutional Framework 1.8 The transport sector is formally under the jurisdiction of thK Secretariat of Communications, Public Works and Transport (SECOPT), which is directly responsible for the h ghway and aviation subsectors, and indirectly (through the participation of the Minister in the respective Boards of Directors), for approval of investment and operational decisions in ports and railways. For highways there are two general directorates, construction (Directorate General of Roads - DGC) and maintenance (Directorate General of Roads and Airports Maintenance - DGCCA). 1.9 The National Port Authority (ENP) and the Honduran National Railways (FNR.) are parastatal organizations with a high degree of independence. The Board of Directors of ENP comprises the Ministers of Economy (who acts as President of the Board), of SECOPT, of Natural Resources, and of Planning, Coordination and Budgeting (SECPLAN), and includes represerntatives of the Navy, the Chambers of Commerce and Industry, organized labor and the national shipowners and agents. The General Manager of ENP advises the Government on port policy and there is no other Government office specifically concerned with port policy or maritime issues. FNH is run by a Board of Directors presided over by the Minister of SECOPT and composed of representatives of the Ministries of Economy and Finance, the Central Bank, SECPLAN, the Chamber of Commerce of Sari Pedro Su!a and the railroad union. 1.10 Honduran civil aviation responsibilities, although under the jurisdiction of SECOPT, are distributed among several Government Agencies, including: (a) the General Directorate of Civil Aviation (DGCA), responsible for airport planning, meteorology, airport administration, air transport, tariffs setting, and all technical services (including aid to navigation, and communications); (b) the General Directorate of Urbanism and Civil Works, Department of Airport Infrastiucture, responsible for the studies, engineering, costing and implementation of all new works in civil aviation infrastructure; and (c) the DGCCA, responsible for all infrastructure maintenance. Although DGCA provides the billing for much of its services, the Ministry of Finaace is responsible for collection. Since there is no feed-baclr r Ystem, the DGCA has no way to know if its bills are being honored. This is a poor system that .ids to lack of commercial accountability (para. i.45). 1.11 Within SECOPT, the Directorate General of Sectoral Planning (DGPS) was responsible for the planning, control and budgeting of investments in the transport and communication sectors until the creation in August 1992 of the Under Secretariat of Planning and Finance (SSPF) (para. 1.14). The Directorate General of Transport (DGT) is responsible for regulations and controls related to the freight and passengers road industries.  -4- 1.12 The sector organizational arrangements, with the exception of the airports subsector, are adequate in general. In practice, however, SECOPT bas had little involvement with ENP and FNH, intermodal planning and coordination are weak (para. 1. 13), and DGT is mostly a permit issuing office with little capabiRity to assess the impact of different regulatory and pricing policies (para. 1. 15). Thu, Government is reviewing the organization of the sector, and intends to provide SECOPT with a clear mandate as the normative, regulatory and monitoring agency for all transport modes. In practice, this will entail the appointment of the Minister of SECOPT as the head uf the Board of Directors of ENP which is expected to take place during 1993. It also requires strengthening SECOPT's functions for transport planning, coordination, project evaluation and policy analysis. The airport subsector, however, needa a complete redefinition of the institutional, legal and regulatory setting under which it will operate in the future. Strengthening transport planning and coordination and transforming the aitports into financially self-sufficient entities operating on a comnmercial basis are among the main issues to be addressed under tbe proposed project. C. Main Sector 'Issues Weaknesses in Planning and 'egulation 1.13 SECOPT's planning performance has traditionally been weak due to: (a) insufficient commitment to planning arising from politic-l instability and - past succession of Govermnents with short-term objectives; (b) inadequate in-house planning capacity; and (c) weak planning capabilities in the modal agencies. As a result, its sectoral planning directorate, DGPS, orty fulfilled marginally the role assigned to it and was functioning mostly as an advisLry body carrying out specific assignments at the Minister's request. 1.14 lThe Government, recognizing the need to establish an effective system for planning and programming transport sector investments and to advance further the efforts already made in the planning and programming of road works (para. 1.28), carried out a comprehensive institutional analysis of SECOPT. The analysis focused primarily on the role of DGPS and its relationship and interaction with the operating units within SECOPT, as well as with SECPLAN and the Ministries of Economy and Finance, and identified the principal gaps in terms of the activities DGPS should be performing and of the human resources necessary to carry them out. The Institutional Development Program, consisting of technical assistance and training, was designed to help SECOPT bridge the gaps in its capabilides. As a first step, SECOPT decided to raise the hierarchical location of the planning, programming and budgeting functions within the Ministry and established, through Decree 41-92 of August 11, 1992, the SSPF. This Decree was subsequently amended to empower SSPF to carry out broader activities for investment decisions in the sector. DGPS was dismantled and its staff either left the Ministry or was reassigned to other units, in order to provide SSPF the opportunity of a fresh start with a small cadre of qualified professionals. The Government is in the process of appointing the Vice-Minister in charge of SSPF. Prior to credit effectiveness SSPF would be in operation, meaning that the Vice-Min;ster and at least one economist and one engineer each have been appointed (para. 3.2(a)). The Institutional Development Program (Annex 2) includes technical assistance and traning to SSPF to design and implement an organizational structure suitable to carry out its functions. The Prograrm would be implemented in two phases: (a) a first phase in which participatory methods would be used for the diagnosis and design of improved systems and procedures and to define SSPF's organization and staffing needs; and (b) an implementation phase.  -s- The main focus is on: (a) extending SECOPI'3 planning functions to ivclude preparation of pluriannual transport invesmnt plans based on sound economic, technical and eavironmental considerations; (b) developing the neceary planning and project evaluation tools at the ministerial levels; and (c) assisting the modal agencies to strengthen their planning capacity. Ihis program is at the core of the institutional development actions supported under the proposed project. Agreement on the tems of reference and timing for its techical assistance and training component was reached dureng negotiations (para. 2.21). Progress in implementing the Instiutional Development Program winl be monitored during annual and mid-term reviews (para. 2.34). 1.1S DCrr, SECOPT's transport directorate, is responsible for the planning, organization, regulation and control of freight and passenger road services (urban and interurban) and the control of axle load and vehicle dimensions. In its present form, DGT does not have the necessary capao.ty to discharge its responsibilities in a satisfactory manner. Its main weakness is lack of qualified staff and of the basic information and analytical tools required to define and evaluate different transport policies. One of the main priorities for the present administration is to develop DGT's capacity for policy analysis and design, and for the administration of transport regulations. The present legal frs aework for the provision of freight transport services, although seldom enforced, allows for excessive Government involvement in the market. In particular, own-account transport by non- transport firms are prohibited and for-hire services require specific route and product licensesv'. In the case of urban transport, the present subsidizad bus fare system, which is costing the Government about US$8.5 million per year, is highly regressive. To make a daily journey to their informal jobs or to the market, the poorest peple of Tegucigalpa, who tend to be confined in areas of higher slopes where buses do not circulate, rely on smaller non-subsidized public vehicles. Thus, they pay for their trips about three times more than other public transport users. 1.16 Transport regulations are being revised in order to limit government intervention to those aspects related to environmental and safety concerns and to regulation of urban transport services to ensure public services in low density areas and affordable transport to the lowest income groups. In connection with the proposed project, the Government has stated in its Policy Declaration Statement and related Action Prans (Anneu 1 and para. 2.23) its intention to revise the present Transport Law and related regulations and the curent system of urban transport subsidies, which is not properly targeted to the lowest income groups. Progress in iMplementing legal and pricing changes in the sector would be monitored during the anmnal and mid-term project implementation reviews (para. 2.34). The project, through the Istitonal Development Program, would also assist SECOPT to strengthen DGT's role in road transport regulation by providing technical assistance to: (a) redefine the role of DGT in light of a new regulatory framework; (b) help design and implement the necessary data base on traffic, vehicle fleet age and composition, and road safety; and (c) develop the necessary methodologies for the evaluation of diferent urban transport pricing schemes and subsidies. 1/ Freight ad pamuar trasort n in the hands of private operator. Entry to the industry requires licnsing ftom DOfT, wih ao n rates for he tansoit of fuel and cement, and for psengr ervices. Althouh tee are rgatios regading roouts nd tpe of goods to be tsported by oach operatr, DOIT seldom ef them. oTheefore, except for the coment and fuel makets, the industy i qui competv.  -6- Environmental Issues 1.17 Current construction rules and regulations in the transport sectoIt were enacted over 30 years ago and have not been updated to incorporate measures to mitigate potential enviromnental impacts caused by construction or rehabilitation of civil works. To a large extent, the lack of regulations in the sector stems from the fact that environmental legislation is still in its infancy in Honduras and that there is no institutional framework for this purpose. A proposed new environmental law (Anteproyecto de Ley General del Medio Ambiente) was submitted to Congress in October 1992 and is expected to be approved in early 1993. This would be an umbrella-type legislation under which sectoral laws and regulations would have to be designed and established. The proposed law would give autonomous status to the central environmental regulatory agency, the National Environmental Commission (CONAMA), which would be responsible for enforcing the proposed law and for helping to establish norms for all sectors. The Bank, through the Institutional Development Fund (IDF), is providing financing for technical assistance to CONAMA, to train its staff and help it to develop norms and procedures. The Environmental Unit in SECOPT (UMA), with technical assistance to be provided under the project supported Institutional Development Plan (para. 1.25), is expected to play an instrumental role in helping CONAMA to develop the regulatory framework related to transport environmental impacts. 1.18 The transport sector faces a number of environmental issues. The most obvious and serious one in the roads subsector is the invasion of the right of ways along main highways by temporary shops and housing. Aside from safety factors, the consequence is that solid waste is dumped into drainage ditches and eventually obstructs drainage canals and pollutes rivers, streams and wetlands. Also, soil erosion in road embankments is common because plants species used for cover are inadequate for the type of soils present. Moreover, deforestation in the upper and lower watersheds increases floods beyond the natural carrying capacity of rivers, and roads and bridges are destroyed during the rainy season. Inadequate coordination with other institutions, such as the Forestry Developmexnt Corporation (COHDEFOR), prevents or delays reforestation of upper watersheds and of areas used as sources of road building materials. 1.19 To address the environmental problems of the road subsector, in 1991 SECOPT established an environmental unit (UMA) attached to DGC. This unit, however, has not been officially approved and is not yet fully operational. Its main functions would be to assist DGC to incorporate environmental considerations into the design of new roads and into the rehabilitation of existing ones. To perform this function the unit would assist DGC to classify road investments according to potential environmental effects and to commission environmental assessments (EA) to private firms for those investments considered to have a severe environmental impact. 1.20 So far UMA's capacity to carry out its functions has been minimal since it has no staff permanently assigned to it, except for one part-time consultant. Because it has not been officially established and lacks internal procedures, it has difficulty reviewing and influencing proposed road investments that may have questionable environmental merits and may not protect natural resources adequately. SECOPT relies on consultants to carry out Eas or to advise it on major environmental issues. Professional staff, contractors and consultants lack technical training and experience in the 2/ Roadways LAw of 1959.  ,reparation, analysis and execution of impact assessments. This problem is further aggravated by the lack of baseline information and standards regarding environmental conditions. Thus, environmental studies tend to be general in scope and recommendations lack specificity and quantitative analysis. 1.21 To comply with environmental requirements of external lending institutions, UMA has helped DGC prepare terms of reference for environmental assessments of road works to be carried out with external financing. However, it does not have the capacity to monitor implementation of remedial or mitigating actions recommended in the Eas. 1.22 While UMA, if properly staffed, would help DGC address environmental problems related specifically with the roads subsector, it needs to expand its role to handle the potential adverse environmental impact of activities in SECOPT's other General Directorates involved in road and airport maintenance, civil aviation, and urban civil works. These directorates may sometimes introduce their own rules and regulations, which might adversely impact the environment. In addition, some decentralized entities with close institutional links with SECOPT, such as ENP and FNH, are responsible for activities that influence resource management and that may have an adverse impact on the environment. 1.23 To deal with environmental matters from a sectorai standpoint, the environmental unit should be centrally located within SECOPT's organizational structure, and should be placed at a high level in the hierarchy to enable it to influence the decision making process and to obtain sufficient budgetary support for proper monitoring of environmental protection measures. The unit should be in a position to screen proposed investments before they are incorporated into an institution's program. Taking these considerations into account, and as a result of the institutional analysis carried out during project preparation, the Government has decided to relocate and properly staff the present UMA under the SSPF (para 1.24). 1.24 The main responsibilities of the UMA would be: (a) reviewing and clearing all investment subprojects of SECOPT and of its decentralized entities before a civil works contract is advertised for bidding; (b) preparing Environmental Guidelines to be used by SECOPT's operational divisions and by civil works contractors; and (c) supervising the preparation of Eas by consultants and monitoring compliance with Eas recommendations during implementation. Detailed terms of Reference for the UMA and its staffing plan are presented in Annex 2. Formal establishment of UMA under SSPF and adequate staffing of the unit, according to its staffing plan, will be a condition of credit effectiveness. (Para. 3.2(b)). 1.25 Staff training in environmental protection would be an important element of SECOPT's Institutional Development Plan, and agreement on the Terms of Reference for this training component was reached during negotiations (para. 2.21). The training program would include seminars, workshops, and international study trips. Consultants would be recruited for long-term assignments to assist UMA to: (a) screen and rank investments for potential environmental impact; (b) design EA formats to meet domestic and foreign legal requirements; (c) establish techniques for conducting rapid environmental inventories and analyses; (d) define and interpret environmental impacts; and (e) prepare terms of reference for consultants and bidding documents for contractors.  -8 - Highway Subsector Issues 1.26 Background. Honduras' national road network of 14,100 km of all-weather roads serves the country reasonably well. However, the ecologically fragile northeast, with only 246 km of roads, is less well served. The Northern Highway, which connects Tegucigalpa with San Pedro Sula (the second largest city in the agriculturally rich Sula Valley) and with Puerto Cortes, Honduras' main port, is the country's road traffic backbone. 1.27 The Pan American Highway and the Western Highway (which begins in Chamelecon in the North and serves the Northwest) are the main corridors through Central America. Only the former has consistent design standards on both side of the border. The roads from Guatemala and El Salvador connecting to the Western Highway are unpaved and in poor condition. As part of the current efforts to increase regional economic integration, the transport ministers of Central America and Panama have created a permanent forum for addressing the main transport bottlenecks to the flow of inter-regional trade. The Meeting of Ministers of Transport (REMIIRAN) has already identified the need to upgrade international road connections, mainly in the countries bordering Honduras. The 1993-1996 TSIP supported under the proposed project includes investments to rehabilitate the main corridors that connect Honduras to Guatemala, El Salvador and Nicaragua (para. 2.1 1). Details on the road subsector are presented in Annex 3. 1.28 Highway Planning. It was not until 1991 that SECOPT made significant progress in introducing planning tools in the evaluation and selection of road reconstruction, rehabilitation and maintenance projects. In mid-1991, DGCCA, assisted by the Roads Directorate of Chile's Ministry of Public Works, and by individual consultants, implemented the Highway Design and Maintenance Standards Model, Version IH (HDM-l). SECOPT is now screening projects on the basis of economic rates of return and organizing the justifiable projects in a pluriannual road investment and maintenance program. The responsibility for the HDM unit is being transferred to SSPF. To ensure an adequate flow of technical information from the operational directorates to SSPF, and to improve coordination between DGC and DGCCA, SSPF is to create a Planning Committee, headed by its Vice-Minister, with the participation of the Directors of Roads and Maintenance, and the Vice- Ministers of Public Works and Transport. The main functions of this Planning Committee are described in Annex 2, para. 4. Transfer of the HDM unit to SSPF and creation of the Planning Committee are part of the Institutional Development Plan supported under the project and will take place during the first phase of the project financed technical assistance for strengthening planning and coordination (para. 2.20(a), and Annex 2). 1.29 Similar efforts are being made in the planning and evaluation of feeder road projects. In late 1991, DGCCA, with consultant assistance, implemented Version 3.0 of the CBT (Caminos de Bajo Transito) Model to be used to evaluate feeder roads with traffic volumes under 50 vehicles/day. As with HDM HI, SSPF will become responsible for planning and programming feeder road works. 1.30 Highway Maitenance. The Honduran road network deteriorated during the past decade due to inadequate maintenance levels, weak institutional capabilities, and relaxation of axle load regulations. While insufficient maintenance funding were, to a large extent, the result of the fiscal crisis of the late 1980s (road expenditures fell in real terms by 12% between 1988 and 1990), the problem was compounded by an unbalanced allocation of funds between maintenance and investment and the allocation of funds to non-productive labor in DGCCA. The current administration is taking steps to correct deficiencies: (a) axle load regulations are being tightened and will be reviewed by a  -9- study under an ongoing IDB loan3'; (b) maintenance budgets have been increased over the last two years to reduce the backlog of deferred maintenance-between 1990 and 1991, expenditures on road maintenance more than doubled in real terms and the allocation of funds for road rehabilitation almost tripled (Annex 3). In addition, the Government is studying the possibility of creating a Road Fund to secure adequate financing for road maintenance (para. 1.34) and; (c) DGCCA is being restructured to increase private sector participation in road maintenance-this entails a radical change in focus and a large reduction in staff. The target is to reduce the staff to only 1,700 by 1994, compared to 5,000 in 19894'. This reduced staff will be made responsible for maintaining one third of the network-the remaining two thirds will be contracted out to the private sector. The maintenance equipment fleet has been reduced and about half of the 1,100 units have been either auctioned or sold as scrap. Progress in further reduction of redundant labor in DGCCA would be monitored through annual and mid-term reviews against annual staff reduction targets (para. 2.34) agreed upon during negotiations (para. 1.32). 1.31 To adapt to this aggressive shift in maintenance practices, DGCCA will need to develop new administrative and managerial skills in the areas of contract management, preparation and evaluation of bidding documents, methods of payment, supervision, and development of maintenance programs. Training in these areas will be provided under the ongoing IDB loan. The loan also provides technical assistance to strengthen DGC and DGCCA, establish operational and control systems consistent with the new policy of involving the private sector in road maintenance, and develop a maintenance management information system that will enable measurement of DGCCA's physical and financial performance and thus help increase its accountability. These objectives are contained in the Government's Action Plan for the highway subsector (para. 2.24 and Annex 1). Progress in the achievement of these objectives would be monitored during the annual and mid-term project implementation reviews (para. 2.34). 1.32 The Government is committed to ensure the sustainability of the benefits expected to be derived from the substantial investments being made to rehabilitate the road network and bring it to maintainable conditions. This in turn requires adequate funding for road maintenance and more efficient use of available resources. The Government has already approved for 1993, a road maintenance budget of US$36 million equivalent, about 28% above the 1992 budget. The target is to reach, by 1996, budgetary allocations of US$45 million equivalent per year to cover: (i) 100% of the maintenance needs of the paved network; (ii) 100% and 60%, respectively, of the routine and periodic maintenance of gravel roads; and (iii) 60% of the routine and periodic maintenance of feeder roads. This implies allocation of US$40 million equivalent in 1994 and US$42 million equivalent in 1995. Interim targets will be monitored during the annual and mid-term project implementation reviews (para. 2.34). During negotiations, assurances were obtained on the Government's commitment to carry out the Action Plan for the highway subsector and that the Government will: (i) 3/ In December 1991, the llDB approved a US$110 million loan to Honduras for the rehabilitafion of the road network. The histitutional component of the project includes: (i) strengthening DOC and DGCCA capabilities to carry out road wors by contract; (ii) improving pavement managemont including the implementation of a modem system of axle-load controls; (iii) reviewing road user charges and establishing a system for fimncing road maintenance; and (iv) improving engineering techniques and developing standard manuals. DGCCA has already redvu.-d its staff by 1,000 in 1990, 400 in 1991, and 839 in 1992.  - 10- allocate each year the necessary funds for road maintenance, (ii) maintain its road network, and (iii) continue the staff reduction of DGCCA, all according to the schedule set forth in the key project indicators presented in Table 1 of Annex 9 (para. 3.1(a)). 1.33 One of the reasons for past neglect of road maintenance in Honduras is the allocation of funds to politically visible projects, such as new road construction, and maintaining redundant staff on the payroll. With road construction budgets already cut to a minimum however, and budget resources restricted in the other transport subsectors, there are limited opportunities for resource transfers between the subsectors. Also, the shift to road maintenance by contract, and the award of pluriannual contracts, is expected to "lock in" funds for maintenance activities to reduce the potential for missallocations within the annual road budget. Given the Government's need to maintain a sound fiscal framework, the question arises as to whether road users are adequately covering the costs of expanding, upgrading and maintaining the network through various road-related taxes and whether there are opportunities for increasing revenues, minimizing the fiscal impact of the increase in the maintenance budget. A review of 1990 road user charges in Honduras shows that total revenues from all road users are insufficient to cover total road construction and maintenance needs. More importantly, trucks were not even covering the marginal road costs (maintenance costs) attributable to their use of the highway network. The design and implementation of a system of user charges that take into consideration the damage that each type of vehicle causes to the network, will be part of a study that SECOPT will carry out with IDB's assistance (para. 1.34). 1.34 The normal annual maintenance expenditures required, once the Government implements its road rehabilitation program and the rnetwork is in good condition, were estimated at US$45 million equivalent using the optimal road maintenance policies derived from the application of the HDM model. These levels are well above past maintenance expenditures, which were approximately an average of US$11 million per year during the 1988/1991 period. Taxes paid by the users, mainly through taxes on fuel, new vehicles, annual registration fees, etc. (but excluding general taxation), amounted to US$34 million equivalent or 72% of the estimated needed maintenance expenditures. About 60% of the revenue were generated by automobiles and less than 30% by trucks, in inverse proportion to the allocation in 1990 of road maintenance costs based on axle and vehicle equivalencies. It is not possible, however, to draw conclusions regarding the general level of user charges from the results in 1990. Since the Government controls fuel prices in the domestic market, tax revenues from oil products become a residual which fluctuates with the price of imported crude. In 1989, user charges from this "variable tax" amounted to 84% of all user charges. In 1990, because of the Gulf crisis and subsequent increase in oil prices, that share dropped to 48%. In 1991 this percentage is likely to have increased, as domestic fuel prices were not lowered while world prices fell, but data is not yet available to quantify the increase. The government is designing and implementing a petroleum liberalization plan supported under the Energy Sector Structural Adjustment Credit (Credit 2306-HO of October 31, 1991), which should be substantially in place by the end of 1993. The plan calls for opening the oil market to competition and for the establishment of explicit taxes on petroleum products. These should incorporate appropriate user charges for the road network combined with vehicle licenses which varv with vehicle weight, in order to provide a more equitable charging instrument. SECOPT, with financing from the IDB's loan, will carry out a study to identify mechanisms to mobilize resources from road users and channel them for the maintenance of the road network. The study will include an assessment of road user charges and the evaluation of schemes to secure a continuous flow of funds for road maintenance, including the possible creation of a Road Fund. The proposed project would provide a vehicle for continuing the dialogue with the  - 11 - Government on cost recovery and road maintenance funding, through the support of the related measures included in the Government's Action Plans (Annex 1, and para. 2.24). 1.35 Engineering. The engineering standards for highway-related work, particularly for work on bridges, where many of the deficiencies noted during project preparation are directly related to obsolete design practices, need updating. In addition, the organization, staffing and work procedures of DGC's Bridge Department should be revised to make it more responsive to the needs in this field. The design and implementation under this credit of a bridge management system (para. 2.20(c)). would address most of the deficiencies of the Bridge Department. For further details on the Bridge Departm,nt, and terms of reference for the proposed technical assistance to be financed under the project, see Annex 4. Other highway design deficiencies noted during project preparation, such as inadequate slope protection, will be addressed under the IDB loan through technical assistance to develop a highway design manual, which is expected to be completed in March, 1994. Port Subsector Issues 1.36 Honduras has six commercial ports. Five are on the Atlantic coast: Puerto Cortes, Tela, La Ceiba and Puerto Castilla/Trujillo, with Roatan serving the Bay islands. The port complex of San Lorenzo/Amapala is on the Pacific coast. The ENP also owns land at Tela, La Ceiba and Isla del Tigre. No precise figures are available on the area owned and it is understood that, in some cases, there is doubt concerning appropriateness of title. 1.37 Ship calls in 1991 totalled 1,538, of which 1,445 were at Atlantic coast ports and 93 at San Lorenzo on the Pacific coast. Container (Li/Lo) and Roll on/Roll off (Ro/Ro)y' vessels predominated, with totals of 523 and 32X respectively, amounting to 31 % of all calls. A small proportion of vessels have both Li/Lo and Ro/Ro capability and are classified as container vessels. Puerto Cortes was the busiest port with 1,195 calls, followed by Puerto Castilla with 187 calls. 1.38 Port Trfic. Port traffic has increased from 2,322 thousand tons in 1975 to 3,589 thousand tons in 1991, an average annual growth of 2.8%. Imports have increased from 1,089 thousand tons to 1,793 thousand tons over the same period, with an average annual growth rate of 3.2%, and exports have grown from 1,233 thousand tons to 1,680 thousand tons, with an average annual growth rate of 1.9%. The import figures for 1991 include "cargo in transit" of 238 thousand tons. The above figures also include a small tonnage of coastal traffic, about 50,000 tons per year, principally outward from Puerto Cortes/La Ceiba to the Bay islands and to the province of Mosquitia. Oil imports are the single largest item of import cargo, followed by general cargo. For exports, "specialized cargo" (predominantly bananas) is the largest single category, followed by general cargo. Dry bulk accounts for about 20% of all traffic. I/ Li/Loand RolRo refer to the method of cargo handling used by the ship. Li/Lo or 'Lift on /LiR offo means that the containers are lifted on and off the ship by crane (which may be either on the ship or on the quay), whilst Ro/Ro or 'Rofl on Roil off' means that the cargo enters and leaves the ship on trailers or some other wheeled equipment.  - 12- 1.39 The distribution of traffic between the ports has changed substantially over the years, as shown in Table 1.1. Table 1.1: Distribution of tmffic between ports, 1975 and 1991 (thousand metric tons) Year Pto. Tela La Ceiba Pto. San TOTAL Cortes Castilla Lorenzo 1975 1,828 131 235 - 128 2,322 1991 2,765 239 6 497 82 3,589 1.40 The principal differences between 1975 and 1991 on the Atlantic coast are due to the opening of Puerto Castilla in 1983 and the transfer of the La Ceiba traffic to Puerto Cortes, after the former was damaged by a hurricane. Tela has maintained its share, benefitting from the construction of an oil distribution depot. Oil traffic has replaced, in tonnage terms, the reduced banana traffic in this port. Banana loading installations were destroyed by fire in 1992 and are unlikely to be rebuilt. The period has also seen the substitution of the newly constructed port of San Lorenzo for the previous lighterage installations of Amapala though, on account of the collapse of timber exports from the Pacific coast, without any reflection in the traffic figure. Puerto Cortes has maintained and strengthened its dominant role, principally because of its location for markets in Europe and the East coast of North America, its proximity to San Pedro Sula and the adequacy of its installations, especially for containers. 1.41 Although ENP as a whole has made reasonable profits in recent years, Puerto Cortes, by exploiting its monopolistic position and charging considerably more than the costs of its own operations, has been used to subsidize other ports in the system (including the free zones under their responsibility, which have only recently started to produce an operating surplus). Revenues from Puerto Cortes are being used to service the debt incurred as a result of the construction of the Bank- financed Puerto Castilla and Puerto San Lorenzo, (Loan 767-HO, US$6 million, June 1971; and Loans 1395-HO, and 1396-HO for US$12 million and IDA credit 696-HO for US$5.5 million, all approved on April 1977), without need for recourse to fiscal assistance. Port revenues contribute to the development of port municipalities or local councils, through a 4% levy on all ENP revenues. As a result, there is almost no relation between port costs and the present price structure for dues and tariffs. Since the "dollarization" of charges to ships (and containers) after the 1990 devaluation of the Lempira, there is a serious distortion whereby services to ships account for a disproportionate part of port revenues. Services to cargo, on the other hand, have not been adjusted in over ten years, although costs have risen considerably. The result is that ship-related charges heavily subsidize shore-side operations and that ship owners and operators see the ports of Honduras as among the dearest in Latin America. The Government is now in the process of carrying-out a cost and tariff study, with financing from the Canadian Government. This study, which is expected to be completed by March, 1993, would serve as a basis for establishing cost-based dues and tariffs in Puerto Cortes  - 13 - by not later thaia June 1993. These measures are included in the Government's Action Plans for the port subsector supported under the project (para. 2.25 and Annex 1). 1.42 Early in 1992, the Government created a Public Utility Regulatory Commission (PURC), formed by representatives from the Government, users and labor unions, with the authority to approve tariffs in several public entities, including the ports. The main purpose of the PURC is to isolate pricing decisions from the political influence of Congress, which was previously in charge of tariff approvals. To date, the PURC has had a limited, albeit timely and adequate, role in tariff setting for ports. In every instance, the PURC approved ENP's recommendations for tariffs changes. The regulatory framework has been further enhanced by the recent creation of a forum for regular meetings between ENP and port users. The ongoing study for the revision of port tariffs is one of the results of this interaction designed to make the ports more responsive to the client's needs and limit ENP's monopolistic power. For those port services about to be privatized (para. 1.44), agreement will have to be reached with the operators, as part of the leases or concessions of ENP, on how "fair" port charges shall be determined. This is partictlarly true for those services to be provided by one sole operator, where competition will not bring about a matching of prices with marginal costs. Based on the cost and tariff study, once it is completed, and as part of the initial lease agreements, the PURC would establish maximum prices, subject to periodic reviews on the basis of ENP's recommendations. Operators will then be free to charge users in acccrdance with volumes handled, relative efficiency, or other commercial criteria, provided they do not exceed the maximum price. The Government, in its Transport Sector Policy Declaration (para. 2.9) states its commitment to propose to the PURC, through its representatives in the Commission, that port tariffs to be charged by private operators would be allowed to fluctuate below the maximum price established by the PURC on the basis of ENP's recommendations. 1.43 ENP is a fairly efficient organization by regional standards, but bureaucratization and lack of effective competition are eroding its performance. In particular: (a) ENP's monopolistic position has permitted the steady growth of administrative costs and personnel. The number of employees has increased from 755 in 1975 to 1,028 at present. This trend resulted in an increase of the ratio of administrative costs to direct operational costs from 2:1 in 1986 to 2.5:1 in 1990; (b) the high cost of Honduran ports relative to other ports in the Region, particularly in relation to charges for port services such as port dues, berthing, and mooring, may tend to discourage new traffic from transhipment services, as well as increasing the cost of international trade; (c) the present organization of operations within the ports is uncompetitive; ship agents do not need to invest directly as most investments are made by the public sector. These public sector investments are not always demand- driven; (d) the shipowner are not tied to the ports through their own investment in port installations; and (e) planning and control techniques on the container terminal in Puerto Cortes have not kept up with the increase in container traffic. These issues would be addressed under the proposed project, through the implementation of cost-based tariffs, the involvement of the private sector in port operations and the creation of a separate administrative and operational unit for the container terminal in Puerto Cortes (para. 1.44). 1.44 In the port subsector, many changes that improve competition come about as a result of pressure from shipping lines, national shippers, trading partners and equipment manufacturers seeking the advantages of through transport from origin to destination, including improved total transport speed, lower inventory costs, more predictable collection and delivery, less packaging, and reduced damage and lower insurance costs. Thus, ports are adapting rapidly to containerization, introducing computers, and automating container terminals. The new technologies require operators with  - 14 - sophisticated computer knowledge and the ability to absorb large amounts of rapidly transmitted information and use information technology in response. Port workers need higher levels of skills and more training that emphasizes independent decision-making. Based on its strategy of decentralizing port management and promoting private sector participation in port operation, the Government has developed an Action Plan, approved by ENP's Board of Directors on June 12, 1992, detailing the steps to be taken to improve the operation o. tort facilities (para. 2.25 and Annex 1). In particular, the Plan calls for transferring the La Ceiba port to local interests; concessioning Puerto Castilla and Tela to the users; concessioning Puerto San Lorenzo or, alternatively. limiting ENP's role to administration and maintenance; and creating in Puerto Cortes a separate administrative and operational unit for the container terminal6. The plan, which has already been partially publicized and positively received by prospective concessionaires, is expected to promote the involvement of shipowner and ship agents in the operation of Tela, Puerto Castilla and San Lorenzo and encourage private investments in ancillary equipment. Implementation of the Action Plan would be under the responsibility of an Implementation Committee (IC), including the Minister of SECOPT and of Economy, and a Technical Implementation Unit (lMU) composed of operational and financial staff of ENP supported by international experts to be financed under the project. Appointment of the IC took place in September 16, 1992 through Presidential Decree No. 001945. As a first step, the IC and ENP, with the support of consultants to be financed under the project, will evaluate the financial and economic impact of alternative privatization schemes and define the actions that will be implemented in each port. A second phase technical assistance would help ENP to implement those actions selected as the most advantageous to increase efficiency in port operations. Hiring consultants to carry out the first phase of the technical assistance would be a condition of credit effectiveness, and the consultants for the implementation phase would be hired not later than October 31, 1993 (para. 2.21). Annex 5 provides further details of the port subsector and includes the outline terms of reference for the technical assistance to be financed under the proposed project. During negotiations agreement was also reached that the Government will: (i) implement the Action Plan (para. 2.9); and (ii) cause ENP to reduce its staff in accordance to the key project indicators presented in Table 1 of Annex 9 (para. 3.1(b)). Compliance would be monitored during supervision and through annual and mid-term reviews (para. 2.34). Airport Subsector Issues 1.45 The Law of Civil Aviation establishes DGAC as responsible for, among other things, guaranteeing air transport safety, licensing aeron_*tical personnel, keeping registry of permits, licenses and navigability of airplanes, overviewing national and private airports and administering the former, promoting the development of civil aviation, supervising the performance of civil establishments for aeronautical education, overviewing the inspection and testing of airplanes, and investigating air accidents. DGAC is only partially carying out its operational functions. Because of a lack of commercial objectives and the involvement of other agencies in air transport management, such as the Ministry of Finance (responsible for honoring DGAC's bills), the Ministry of Economy (in charge of tariff setting) and DGCCA (responsible for infrastructure maintenance), decisions are 6I Jnmplementation of this plan would reut in the following reduct:ons in BNP's staff: (a) 128 in 1993, of which 40 would be from La Ceiba and 88 from San Lorenzo; and (b) 100 in 1994 of which 11 are from Tela, 40 from the privatization of the Free Zones and 49 from ENP's redundant administmive staff.  - 15 - often inconsistent and frequently run counter to the stated objectives. Because of insufficient resources and lack of accountability darived from the present organizational structure, airport services are deteriorating rapidly, and disruptions caused by malfunctioning equipment are frequent. 1.46 One major problem is that the airports do not have their own budget. Government allocations to DGAC totalled L 7.0 million in 1991, of which 82% were for wages and salaries. DGCCA received in the same year L 13.5 million, of which about 50% were for intensive maintenance of the badly deteriorated runway in the San Pedro Sula airport. Revenues generated by the airport subsector in 1991 totalled L 36.8 million, of which 62% corresponds to taxes on international and domestic air tickets. There is substantial room for increasing airport revenues through fees normally charged to users of international airports but not in Honduras; i.e., taxes on aviation fuel and airfreight, fees for illumination as a percentage of landing fees, reduction of free airplane parking rights to about 2 hours (currently 6 hours for passenger and 8 hours for freight airplanes), airport fees to domestic travellers and elimination of exemptions for international passengers (currently an estimated 35% of international travellers are exempted from paying airport fees). Available data on airport costs is very unreliable and indicate a dismal operation. The Government, has decided to ensure the financial self-sufficiency of the airports and the improvement of its operations through a major restructuring effort and an involvement of the private sector to bring a measure of commercial orientation and accountability to the subsector, a process that will be supported under the proposed project, in close collaboration with the International Civil Aviation Organization (ICAO) (para. 1.48). 1.47 The present administration has taken the first steps towards involving the private sector in airport management. A proposed law for concessioning the airport of Tegucigalpa tC the local Chamber of Commerce was presen>ted to Congress in October of 1990, but was not brought to the floor. The Government subsequently recognized that the institutional and financial schemes proposed in the law did not shield airport operations from politically based decisions and the proposed law was recently withdrawn from Congress. 1.48 Under a technical assistance program with the United Nations Development Programme (UNDP) and ICAO, the Government is developing a plan for civil aviation, including the definition of the appropriate institutional setting for the subsector, future infrastructure development, an analysis of the options for incorporating the private sector into airport management and a detailed action plan for implementing the agreed recommendations. As a first step the Government, with ICAG's support, is developing the institutional framework needed if the airports are to operate independently of the central budget. The options being studied include: (a) continuation of DGAC as a SECOPT Directorate with full responsibility for airports administration, but able to retain resources generated by the airports for airport operations and maintenance and the mandate to establish cost-based tariffs; (b) establishment of DGAC as an independent Airport Authority to operate in a way similar to ENP; and (c) establishment of the Honduran Council for Civil Aviation, Airports and Related Services, integrated by representatives of the public and private sectors, to be responsible for all aspects of civil aviation. The Council would carry out its duties through three subsidiary entities: (i) the Administrative Council, in charge of policy-formulation for Civil Aviation; (ii) the DGAC, that would have normative, regulating and monitoring functions; and (iii) the Directorate General of Airports and Related Services, in charge of airport operations and related navigation aids. In all these cases, most airport activities and commercial and service areas would be in the hands of private concessionaires. Furthermore, two basic rules would be respected, regardless of the chosen public-private mix: (a)  - 16 - resources generated by the airports would remain for use in the airports: and (b) airport managers would have complete responsibility and would be accountable for all airport operations, including overseeing that the procedures for operations such as immigration, customs, or security that are delegated to or intrinsically dependent on third parties, are properly followed. ICAO's recommendations on the institutional framework for the subsector, including those on private sector participation in airports, are under preparation. ICAO is also helping the Government to develop procedures and cost centers to operate the airports on a commercial basis. Their technical assistance for the institutional and organizational subsector reform is expected to be completed in April 1993. 1.49 Preparation and approval of the required institutional changes and concessioning airports administration would take about one to two more years. The Government has decided that, in the interim period, with IDA-financed assistance, it would start operating the airports on the basis of ICAO's procedures and tariffs to recover operating and maintenance costs. The technical assistance would help familiarize DGAC's technical staff with modem management practices and operational procedures and, in the process, make the costs of and demand for various airport services more transparent, enabling a better assessment of the value of future concessions to the private sector. Annex 6 presents the terms of reference for the Technical Assistance to the airport subsector agreed upon at negotiations and the division of responsibilities between ICAO and IDA. Hiring the consultants for this technical assistance would be a condition for disbursement of credit funds to finance the rehabilitation of the San Pedro Sula airport runway (para. 2.21). To implement this scheme, budgetary allocations to DGAC should be sufficient for the adequate operation and maintenance of the airports. During negotiations, it was agreed that the Government, with the support of the IDA financed technical assistance, would prepare and furnish to IDA, not later than October 31, 1993 an operations and maintenance plan for the airports satisfactory to IDA and, subsequently provide in its annual budget, starting in 1994, sufficient funds to DGAC to implement said plan until an entity with juridical personality and financial autonomy is established to operate the airports (para. 3.1(c)). The Government's Action Plan for the Airport subsector (para. 2.26 and Annex 1) describes the steps to be taken to design and implement the new institutional and operational schemes to increase the airports autonomy. Compliance with the Plan would be monitored during the annual and mid-term project implementation reviews (para. 2.34). Railway Subsector Issues 1.50 The Honduran railway system has 886 km of track, of wuich 204 km are currently operated by Ferrocarriles Nacionales de Honduras (FNH) in the Valle de Sula region, 336 km in the same region are concessioned to the Tela Railway Co. (TRR Co.), a subsidiary of the United Fruit Company, and 346 km serving the Ports of Tela and La Ceiba are out of service due to their deteriorated state and lack of demand. 1.51 Traffic volume in general has been gradually deteriorating. Freight traffic decreased from a peak of 705,200 tons in 1985 to 264,000 tons in 1990. Traffic in the main commodities, bananas and wood, which together accounted for 73% (496,100 tons) of the total freight in 1985, by 1991 had dropped to 121,400 tons or 46% of the total volume transported. Banana traffic decreased sharply from 246,000 tons in 1985 to 71,600 tons in 1991. Demand growth concentrated -n non-traditional high-value-low-volume exports, not suitable for railway transport, and exports of containerized banana and pineapple. The latter has shifted from La Ceiba to Puerto Castilla, which is not served by rail.  - 17 - The ongoing widening of the San Pedro Sula - Puerto Cortes road to four lanes will further reduce the railways' comparative advantage. (The railway subsector is discussed in more detail in Annex 7). 1.52 FNH is experiencing growing operating deficits, totaling about US$1 million in 1991. About half of this amount was caused by the La Ceiba line which, although not in operation, continued to have 139 employees on its payroll, in addition to 48 paid security guards. FNH has been able to cover part of its operating deficits through the sale of land assets. The labor union, howe"er, is pressuring FNH to use its land assets to cover future pension claims, for which the railway company has made no provisions. Because of PNH's poor physical and financial situation, and pessimistic forecasts for the future of its market, it is unlikely that rail service can be continued without increasing government subsidies. In view of this pessimistic outlook, the Government recently hired consultants to evaluate the railways' options. Based on the results of the study, it concluded that the low traffic volumes and the relatively short distances between the major markets and Puerto Cortes are not conducive to the railway's long-term financial viability, even were they to be run efficiently by a private operator. The Government plans to concession the sections Puerto Cortes - Baracoa and Higuerito - Progreso (a total of 55 km) to TRR Co., and to phase out the remaining sections by 1996 through a combination of measures involving discontinuation of passenger traffic and gradual transfer of freight traffic to the road by increasing railway tariffs to equal truck tariffs. The planned reduction in railway services and traffic volumes will be accompanied by reductions in FNH personnel, which, based on the schedule to scale down FNH's operations, are expected to reach 290 in 1994, and 175 in 1995.2' By 1996 railway services will be completely discontinued and the remaining staff will be separated from their positions. The plan also calls for the gradual disposal of FNH's assets to finance staff severance payments. The operational deficit of FNH is expected to be reduced to at least US$0.75 million in 1993, US$0.50 mi1lion in 1994, US$0.25 million in 1995, and completely eliminated in 1996, when FNH will discontinue its operations. During negotiations agreement was reached that the Government will: (i) implement the agreed Action Plan (para. 2.9); and (ii) cause FNH to reduce its operating deficit in accordance to the key project indicators presented in Table 1 of Annex 9 (para. 3.1(d)). Compliance with the Action Plan would be monitored during supervision through annual and mid-term reviews (para. 2.34). As a first step, the Government, on November 30, 1992 closed the La Ceiba line. All staff totalling 143 employees, including all operational personnel, accepted a voluntary retirement program with severance payments financed by the US Agency for International Development (USAID), and no new staff will be assigned to the line. 2/ The rsducticn of 50 FNH's peronnel in 1994 would be achieved by: (a) reducing locomotive crew from 2 to 1 membrs (6 pOople); knd (b) reducing redundan workshop taff (44 people). in 1996 FNH would cam operations and the remaining 175 employoes would be separed from the company.  - 18 - II. THE PROJECT A. Rationale for IDA Involvement Lessons of Past Experience 2.1 Transport infrastructure in Honduras has improved significantly over the last four decades, to a network of highways and feeder roads that covers most of the country, and a port system that is adequate. Substantial institutional development has taken place during the period, and management capabilities in the highway and port subsectors have been improved. These major infrastructure and institutional developments are largely the result ofT eight highway projects and three ports projects funded by Bank/IDA (Annex 8). Implementation of the highway projects started in 1955 with a Highway Maintenance Project, and ended in 1986 with the closing of the Eighth Highway Project. Port projects started in 1966 with the Puerto Cortes project and ended in 1984 with the closing of the Third Port Project. 2.2 The Bank/lDA participation has been instrumental in developing the Honduran transport system. In the highway subsector there was a logical and well designed sequence of project components throughout the eight loans. The first projects concentrated on construc.ion of major sections of highways, and development of a road maintenance capacity. The emphasis then turned to secondary and feeder roads, improving access to and from rural areas. Institution building was emphasized through several technical assistance programs. While there was some progress in maintenance planning and operations, results were often described as below expectations. In the ports subsector, after a successful first project providing Puerto Cortes with much needed modern facilities, the subsequent projects, because of optimistic demand projections, created excess capacity in Puerto Castilla and Puerto San Lorenzo. However, institutional objectives were accomplished successfully and ENP became a well run and relatively autonomous enterprise. 2.3 Past Bank/IDA lending for the transport sector focused on specific investments with limited regard to the sectoral conte.a. Key policy elements such as intersectoral resource allocation and cost recovery were not given the importance they deserved. The strategy for the transport sector that would be supported under the proposed credit would have a sectoral approach with a focus on resource allocation issues, such as user charges for the funding of investment and maintenance, adequacy of institutional arrangements and improvement of analytical capacity and achievement of a better private-public mix to ensure transport efficiency. Legal, regulatory and institutional reforms to improve transport management already under way indicate the Government's commitment to reform and should ensure that the proposed program to increase sector efficiency and involve the private sector is implementable. With this strategy, the risks of investing scarce resources in a distorted environment will be minimized and measurement of investment priorities will be improved. 2.4 Finally, Bank experience has shown that the development of planning capabilities should move away from the preparation of massive and highly sophisticated Master Transport Plans that rapidly become outdated, and toward providing the basic tools for dynamic planning. Delivery of the technical assistance should be based on participatory approaches in which the recipients have an important role in identifying their needs and carrying out their planning tasks, with training provided on day-to-day specific problems. The design draws upon the experience and lessons learned under previous Bank/IDA loans and credits to Honduras' transport sector, which show that institution building is a slow process and requires continued support to strengthen transport sector management.  - 19 - In addition to these country-specific lessons, Bank experience worldwide indicates the need to address the following types of issues: increased accountability in the government agencies; a better public- private sector mix; a strong regulatory framework especially in to those areas in which there are clear market failures; and pricing and investment policies to ensure an economy free of distortions. These findings are fully addressed in the policy and institutional development components of the project (paras. 2.9 and 2.20). Ratio-ale of the Proposed Sector Project 2.5 IDA's lending strategy for Honduras aims to support private-sector led growth and help the Government develop the appropriate institutional and policy framework within key sectors, at a time when the Government is showing strong commitment to sector reform. IDA's strategy for the transport sector seeks to: (a) support institutional and policy changes designed to encourage private sector participation in transport; (b) strengthen investment selection procedures to ensure that they are based on sound technical, economic and environmental criteria; (c) help maintain and rehabilitate existing assets (maintenance and rehabilitation have been shown to yield higher economic returns than new investments); and (d) promote more thorough assessment of the environmental and efficiency implications of transport investment and pricing policies. Building on the Government's successful ongoing structural and sectoral adjustment program, IDA is in a unique position to support the Government's efforts to restructure the transport sector and help coordinate the efforts of other institutions, such as IDB and ICAO, which also have an important support role in the development of sector policies. 2.6 The proposed sector credit broadens the past Bank/IDA strategy of project-specific lending to embrace sector-wide concerns. The credit would support policy and institutional reforms in the transport sector and finance a percentage of the sector's investment program. The purpose of the policy and institutional improvements to be supported under the proposed project is to redefine the state's role in transport by transferring to the private sector those services that it can better provide, and to strengthen the capability of the public sector for transport management. The new public- private mix would reduce the demand on the Government's fiscal resources and prevent the deterioration of existing investments during periods of public funding constraints, and thus contribute to sustainable investments in the sector. B. Project Objectives 2.7 Consistent with IDA's lending strategy, the project has two major objectives: (a) to help develop the institutional and regulatory framework of the sector so as to: (i) encourage greater private provision of transport services; (ii) establish investment and pricing policies based on efficiency and equity considerations; (iii) strengthen SECOPT's capability to discharge its planning and regulatory functions; (iv) integrate into SECOPT's work the systematic consideration of environmental concerns; (v) restructure the oort subsector and redefine the role of ENP; (vi) design and implement a strategy for the development of the airport subsector; and (vii) rationalize railway operations; and (b) help improve and rehabilitate transport infrastructure in the main trade corridors in support of the Government's efforts for export-led growth, and reduce the backlog of deferred maintenance. It is designed as a sector investment project with strong policy-based objectives aimed  - 20 - at improving sector performance by strengthening its managerial and planning capabilities and stimulating competition and private sector involvement. C. Project Description 2.8 Project Description: The project would have three components, as follows: I. Policy component: The project would assist in further developing and supporting ongoing measures to increase private sector participation in transport and to implement regulatory and pricing policies aiming at improving competition and cost recovery in each subsector. A Sector Policy Statement provides the GOH's medium-term strategy for the sector and related Action Plans, to be supported under the project, specify measures to be taken to address important issues in each subsector. These plans would aim, in particular, at: (i) designing and implementing an appropriate regulatory framework for urban and inter-urban road transport, including the revision of the existing Transport Law; (ii) increasing the role of the private sector in road maintenance; (iii) implementing sound systems for road user charger and axle load controls; and (iv) designing and implementing measures to reorganize the port, airport and railway subsectors. II. The investment component (US$79.6 million) would finance a time slice of the CGovernment's 1993-1996 TSIP totalling US$545.7 million and would support: (i) rehabilitation of about 150 km of roads in the main export corridors (24% of total IDA financed project cost); (ii) periodic maintenance of about 1800 km of the rod network (25%); (iii) construction and rehabilitation of about 1000 m of bridges (7%); (iv) rehabilitation of 1000 km of feeder roads in agriculturally rich areas (21 %); and (v) rehabilitation of the runway, taxiway and apron of the San Pedro Sula airport (19%). The first year program includes the rehabilitation of the Choluteca-Guasaule road (44 km) and the Tela-La Ceiba road (100 km). HI. The institutional development and technical assistance component (US$3.3 million, 4% of IDA financed total cost) comprises consulting services for: (a) implementing the Government's Institutional Development Program for: (i) strengthening the capabilities of SECOPT's SSPF and DGT to carry out project evaluation and implement a regulatory framework consistent with the new public-private sector mix; and (ii) expanding the role of the Environmental Unit to encompass all transport modes and effectively integrating environmental aspects into SECOPT's investment decisions; (b) supporting the implementation of the Action Plans in the areas related to privatization/divestiture measures for the port and airport subsectors; and (c) strengthening SECOPT's capacity for bridge management. The following paragraphs provide further details on the project components. Policy Component 2.9 The close and active policy dialogue on transport issues that IDA and the Government maintained throughout project preparation has helped to identify and give impetus to important sector reforms. During 1991 and 1992, to address issues that IDA had previously identified as impeding sector development, the Government: (a) increased road maintenance by contract, reduced DGCCA staff and auctioned maintenance equipment to the private sector; (b) approved, through ENP's Board of Directors, a detailed program for decentralizing port administration and concessioning operations to local and private interests; (c) agreed with ICAO on a comprehensive technical assistance program for commercializing and privatizing airport operations and a start on redefining the institutional and regulatory framework for the subsector; and (d) carried out an in-depth evaluation of the railways sector options, closed La Ceiba Railway Line, eliminating from FNH's payroll all its operational  -21 - staff, and approved a plan for phasing out FNH operations. In connection with the proposed project, the Government and IDA, agreed during negotiations: (i) on the Transport Sector Policy Declaration presenting the Government's medium-term strategy for the sector; (ii) on the implementation of the Action Plans to address the key sector issues according to the timetables set forth in the Action Plans, including, jn alia, the revision of the present Transport Law and related regulations (these Action Plans are summarized in paras. 2.22 to 2.27 and contained in Annex 1); and (iii) that it would be an event of default if the Government takes any action or adopts any policy within the sector not consistent with the policies outlined in the Transport Sector Policy Declaration (para. 3.1 (e)). During the annual and mid-term project reviews (para. 2.34) IDA and the Government would jointly evaluate the progress made in implementing the Policy Declaration and related Action Plans and agree on any necessary adjustments. Investment Component 2.10 The US$77.5 million investment component of the project would finance a time slice of the Government's 1993-1996 TSIP totalling US$545.7 million. The proposed IDA credit would finance selected rehabilitation, periodic maintnance and improvement works of this program. The level of expenditures in the TSIP is considered adequate to attend to high priority construction and rehabilitation works in order to upgrade the road network to maintainable conditions, provide for a reduction of the backlog of deferred rood maintenance and address the unmet needs in the airport subsector. Table 2.1 summarizes the 1993-1996 TSIP. During negotiations agreement was reached on: (i) the 1993-1996 TSIP; and (ii) that any change to the 1993-1996 TSIP, which would be reviewed during the annual and mid-term reviews to update its scope and content in view of progress achieved in the previous year and possible changes in priority, would have to be satisfactory to IDA (paras. 2.34 and 3.1(f)). 2.11 The investments in the transport sector would help improve and maintain Honduras' infrastructure to support both export-led growth and regional economic integration. The main investments included in the program are: (a) in the hif,ay subse , construction of nearly 1,500 km of roads, mostly feeder roads; improvement (widening) of 86 km of the main road network to relieve congestion on the roads links connecting San Pedro Sula to Puerto Cortes and to the neighboring industrial parks, and the road between San Pedro Sula and Progreso; paving of 587 km of the secondary road network; conEtruction and rehabilitation of bridges; the rehabilitation of nearly 2,500 km of roads including main connections with Nicaragua (i.e. Jicaro Galan-EI Espino and Choluteca-Guasaule), with Guatemala (Cbamalecon-Entrada), and with El Salvador (La Paz- Goascaran); and road maintenance works. About 56% of road works included in the program have already been initiated (Table 6 in Annex 3); (b) in the aor se , rehabilitation of the runway and construction of a new passenger and freight trminal at the San Pedro Sula airport, and construction of a passenger terminal in Roatan; and (c) in the VWubsetr expansion of the container terminal and constrution of a Ro-Ro facility at Puerto Cortes.  Table 2.1: Transport Sector Investment Program (1993-1996) Estimated Costs (US$ mlion) 1993- 1994 1995 1996 1993-1996 PROJECTrCOMPONENTS Local Foreign Local Foreldn Local Foreign Local Foreign Local Foregn TOTAL ROAD INVESTMENTS - Road Construction 1.72 2.59 1.06 1.58 1.16 1.75 0.74 1.11 4.68 7.03 11.71 - Road Inmveme 15.50 23.24 15.50 23.24 38.74 - Road Pavin 5.20 7.81 &78 5.68 7.96 11.95 .63 1295 25.57 38.39 63.96 - ridge Consructonand Rehaimaton 1.74 2.62 1.66 2.49 1.17 1.76 0.18 0.26 4.75 7.13 11.68 - Road Rehablitalon 23.90 35.90 12.90 19.30 6.50 9.70 4.50 6.82 47.80 71.72 119.52 - Periodc Mainenance 7B 13.22 9,32 13.98 10.20 15.30 11.44 17.16 3&a4 an 9 SUB TOTAL 55.64 85.38 28.72 43.03 26.99 40.46 25.49 38.30 137.04 207.17 344.21 AIRPOT INVETMENTS - San Pedro Suia-RunwayRehabUltadon 0.96 1.44 2.40 3.60 1.44 2.16 -- -- 4.80 7.20 12.00 - San Pedro Sub-Passenger and Freight Terminal 1.32 3.08 9.00 21.00 2.88 6.72 -- -- 13.20 30.80 44.00 - Roatan-Passenger Terminal 0025 0.75 .s90 2.10 -- -- -- -- 1.15 2.85 4A SUB TOTAL 2.53 5.27 12.30 26.70 4.32 8.68 -- -- 19.15 40.85 60.00 PORT INVESTMENTS - PuesoCortes-Expanslon ContainerTerminal 1.20 1.80 200 3.00 -- -- -- -- 3.20 4.80. 8.00 - Pueno Cones-Consiructica od Ro-Ro facility 0.40 0.60 1.20 180 1.60 240 4.00 SUB TOTAL 1.20 1.80 2.40 3.60 1.20 1.80 -- -- 4.80 7.20 12.00 TECHNICAL ASSISTANCE AND STUDIES 3.75 11.25 2.60 1Q80 5.20 7.80 300 3.00 1455 325 47.40 TOTAL BASE LINECOST 63.32 103.70 46.02 84.13 37.71 58.94 28.49 41.30 175.54 288.07 463.61 Physicalcontlingencies 5.96 9.25 4.34 7.33 3.25 5.11 2.55 3.83 16.10 25.52 41.62 Price Contingencles 2.49 4.07 3.69 6.74 4.62 7.22 4.75 6.88 15.55 24.93 40.47 TOTAL PROJECT COST . 71.77 117.02 54.05 98.20 45.58 71.28 35.79 52.01 207.19 338.52 545.70  - 23 - 2.12 No investment with an economic rate of return (ERR) below 12% and/or which is not environmentally sound, both evaluated using methods and parameters satisfactory to IDA, would be included or subsequently entered into the 1993-1996 program, except for a limited number of investments in access roads (not to exceed 10% of the total expenditures in access roads) that have an exceptionally strong social impact in terms of improved access to social services and employment. The economic efficiency criteria would be relaxed for these investments, but they should still meet standard environmental criteria. These projects must meet the following conditions: (a) new roads would not exceed 14 km in length; and (b) construction of access roads would not exceed US$650 per capita of the population served1. Assurances to this effect were obtained during negotiations (para. 3.1(g)). 2.13 The overall size of the TSIP, approximately US$136 million per year corresponds to about 4% of current GDP, i.e. some 20% below the annual average 5% of GDP allocated to the sector during the 1980s. The program represents a substantial shift from construction to rehabilitation and maintenance, which is appropriate, particularly considering the past neglect of the road transport infrastructure and the need to upgrade airport facilities. The relative amounts allocated to the various modes also correctly reflect their economic roles and needs: about 74% of the total is for highways, 13% for airports, 3% for ports, and 10% for technical assistance and studies. For highways, about 29% of expendituees will be for maintenance, 38% for road and bridge rehabilitation, and 33% for road construction, improvement and paving. The allocation of about 61 % of road funds for the rehabilitation and maintenance of the network correctly reflects the high priority of the administration is giving to the protection of the existing capital stock. The capability of the contracting industry to carry out road rehabilitation and maintenance was reviewed during appraisal and found satisfactory. 2.14 The investments in road improvement, rehabilitation and periodic maintenance for the 1993- 1995 program (see Annex 3) are based on carefully analyzed economic feasibility and priority ranking. For 1996 they are based on estimates that take into consideration maintenance needs for the rehabilitated road network. These needs have been identified through the evaluation of alternative maintenance policies in order to minimize both maintenance expenditures and vehicle operating costs. Construction of passenger and freight terminals for the San Pedro Sula Airport are based on an Airport Development Plan carried out by a Spanish Consultant firm with financing from the Government of Spain. Construction, on a turnkey basis, is also being negotiated with a Spanish firm. About 65% of the cost of these airport investments is for equipment and the Government is reviewing ways to reduce these costs. In particular, SECOPIT is reevaluating the need for primary and secondary radars, and for loading and unloading equipment for the freight terminal-such equipment could be provided by the future private operator. The proposed airport investments will fill an important gap in the transport infrastructure of Honduras, but further investments will be needed to modernize the country's airport services and provide an acceptable standard of efficiency and security. The most obvious need is to replace the unsafe Toncontin Airport in Tegucigalpa, and alternative sites would be studied as part of ICAO's supported Airport Development Plan. Meanwhile, to attend the growing demand for air cargo, the military has agreed on the use of This indicator is based on assumptions regardng potential i"-creasem in community earning through outside employment, some incroases in the value of local production, and the potential magnitude of other social benefits compared with the average cost of nmral road improvements, as calculatd in similar Bank/DA projects in Latin America.  - 24 - Palmerola Base, located at about 75 km from Tegucigalpa, for freight traffic. Future sharing of Palmerola for military and civil use is one of the options the Government is considering for the replacement of Toncontin. For ENP, the 1993-1996 program for port development includes investments in the container terminal of Puerto Cortes, to be financed with ENP's own resources. Within the 1993-1996 TSIP, works expected to be financed under the proposed IDA credit are presented in Table 2.2 and discussed below. Table 2.2 IDA Financed Components (US$ Milion) IDA IDA Sharo PROJECT COMPONENTS Local Foreign TOTAL Share 1A) A. Main Road Rehabilitation (I150 m) UZ 8.74 14f IlES so B. Feeder Roads Rehabilitation (1000 km) QAm LH I 12L1. 80 C. Periodic Maintonance (1800 km) 1/ j L 18848 10.41 62 D. Bridge Program (1000 m) in 3.09 L