Peru - Transport Rehabilitation Project

7-A-I - // /'- /-J / Document of The World Bank FOR OFFICIAL USE ONLY Report No. 12309-PE STAFF APPRAISAL REPORT PERU TRANSPORT REHABILITATION PROJECT FEBRUARY 17, 1994 MICROGRAPHI CS Report No: 12309 PE Type: SAR Infrastructure Operations Division Country Department I Latin America and the Caribbean Regional Office This document has a restrcted distibution and may be used by recipients only in the performance of their officiad duties. Its contents may not otherwise be disclosed without World Bank authoriztion.  CURRENCY EOUIALENTS Currency Unit = Sol US$1 = 2.15 Soles (October 15, 1993) WEIGHTS AND MEASURES Metic System FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS CEPRI - Special Privatization Committee (Comite Especial de Privatdzaci6n) CMCPL - Lima Municipal Bank for Popular Credit (Caja Municipal de Credito Popular de Lfrna) COPRI - Commission for the Promotion of Private Investment (Comisi6n de Promoci6n de la Inversidn Privada) CORPAC - Peruvian Airport and Commercial Aviation Corporation (Corporaci6n Peruana de Aeropuertos y Aviaci6n Comercial) DGC - General Directorate of Roads (Dlreccf fn General de Caminos) DGTA - General Directorate of Air Transport (DirecciOn General de Transporte Aereo) ECLAC - U.N. Economic Commission for Latin America and the Caribbean ENAFER - National Railway Company (Empresa Nacional de Ferrocarriles) FCC - Central Railway (Ferrocarril del Centro) FCS - Southern Railway (Ferrocarril del Sur) FCSO - South-eastern Railway (Ferrocarril del Sur Oriente) GDP - Gross Domestic Product GTZ - German Agency for Technical Assistance (Gesellschaft fir Technische Zusammenarbeit) ICAO - International Civil Aviation Organization ICB - International Competitive Bidding IDB - Inter-American Development Bank ]ERR - Internal Economic Rate of Return w - Metropolitan Planning Institute (Instituo Metropolitano de Planificaci4n) IRI - International Roughness Index KfW - German Development Bank (Kreditanstalt fr Wiederaujbau) LCB - Local Competitive Bidding LIB - Limited International Bidding MEF - Ministry of Economy and Finance (Ministerio de Economfa y Finanzas) MLM - Municipality of Metropolitan Lima (Municipalidad de IUma Metropolitana) MTCC - Ministry of Transport, Communications, Housing and Construction (Ministerlo de Transportes, Comunicaciones, Vivienda y Construccidn) NGO - Non-Governmental Organization NMT - Non-motorized Transport PCU - Project Coordination Unit (Unidad de Rehabilitaci6n de Infraestructura de Transporte - URK) PPF - Project Preparation Facility SINMAC - National Highway Maintenance System (Sistema Nacional de Mantenimiento de Carreteras) SOE - Statement of Expenditures UCPP - Loan Coordination and Preparation Unit (Unidad de Coordinaci6ny Preparacion del Pr'stamo)  FOR OMCAL USE ONLY TRANSPORT RENABTUrATONYRS Tableof CnU= Loao anddPtojectSummary ................................ ... Hi I. THE ANSPRTSECRANDTREECONOR ....................... I A. IheeCoumtryandits EconomicSeuing . ...., 1 B. TheTransportSector . . . 2 C. Road Transport ............................................ 4 D. Raiways .... 6 E. irTrasport ..................... ....................... 10 F. Transportin theL mMetropolitanRegion ........................... 11 G. Sector ad Policy sues ..................... 12 H. Previous Bank Experience in the Transport Sector .......... ............ 13 ii. THEPRQI ........... . .......................... 14 A. Rationale for Bank Involvemet .................................. 14 B. Project Objectives .................................... 14 C. Project Description .................................... 15 D. Project Costs and Financing .................................... 19 E. Projectlementaon ................................... 21 F. Procurement .......................... 23 0. Dioursements,Acco ting and Audits .............................. 26 H. Reportng, Monitoring and Superiion ............................. 27 T. FinancIsAndysis .......................................... 28 J. EconomicJustification .. 31 K. Enviromental Aqspc .. 34 L. Project Risksand Safepa .. 35 IIIL AGfE.EM REACE AND REWUMMA= . .. 37 Mais report is bad on th finding of an appraia misio wh vistd Pau in June and July 1993. Tb mission comprised Mess./ines. Gethard Mwkhoff Clask Manage). losd Beia (alway EBner), Pa Gudnk Crapspcii), FrannieHumuplick(Eonomist), Gardsiutad (ighway Eng Moz MMdka (FnlAnalyst, Norna Rodrd (Opions Astnt), Juan David Qro (ionmel Spoeis), and Jaime Crmllana, Leif looes, Serglo PMan, Pet Schefes and Ulbe van Loon (Conulan). Mudi of do prjet wu prepaed by consua washing in the Loan Coordinion and Ppaaon Uni (UCPP), inchdWi Mart Julia Guan (Coordinor), NStOr Ps, Ro Garots, Sara Ball, Amando Rivera Enges). RotAo PIas, Luas ibadott, Maoelorac, EsheVadivis ( omist), and Henia ArisizibAl, Anoni Clve, Wiledo Gutnz, and Jos Ris (uvuom Spel). T pcer w em e Mess. Sephe Star nspotSpecalis) adl Rebeloa Plan). Mes Aifai, Orvie Grm and Rainer St hanarerespectrvly managingDin ClefP4ojeAdviser, adDepamDie rothwopeon Ms. Glria Berneo aisted in t production of tis report. This document has a restrctod distribution and may be used by recipients onl in the performance of their official duties. Its contents may no otherwie be disclosed without Wodd Bank authorization.  ii ANNE= 1. AnCOvehewofTransportConditions andlBues ............... ........ 40 2. Policy Objecdves, Stratees and Priorities, and Refoms in the >rKSport Ser ........... . ...... . 55 3. Previous BanExpeeer ie elthTra.sp. te.t.r.... 59 4. Road Rehabilitadon and Mainteance . . . . . . .... ... . ........ 63 5. Road Administration and Finance .. . ... . ......... ... 74 6. PivatioionandRhailitaonof the Riawas .................... 80 7. RehabilitationofLimaAlrportRnway .. 96 8. PiotProjectforNon-MotorizedTransport nLima. . . . .104 9. Technical Assistance ............... 110 10.TrdingProgrm . .. 113 11.DeaDled ProjectCostsand Fnancng ........................... . 116 12. 1Iementation Schedule, Monitoring Indicators and Project Superido ....118 13.EstimatedScheduleofBank LoanDisbusements . . . . 127 14. Econonic Evaluaton ................ 128 15. EnvionmentAql Aspes. . .. 136 16. Selected Documents andDataAvailable lntheProject F.....142 TABLES Tablel ModalDistribution ofDomeslc FreigtTrafficc ...... . .......... 4 Table2 ENAFER-SelectedFinancial Data,1990-92 ............ 9 Table 3 Project Cost Summary .......................... 19 Table4 Financing Plan..... 20 Table 5 Procurement Arrangements ............................. 24 Table 6 E ed Disbusement .. ............................. 26 Table7 LoanDisbursementsbyCategory ......................... 27 Table8 Trends inRaiwayTraffic,1987-1M ........ .............. 29 Table9 FianiPojecdonforRallways ...... ................... 30 Table 10 Economc Evaluation of Road RAiationSh ........Schemes . .... 33 MAPS Nationa Transport System: MD 25544 Pilot Projec for Non-Motrized Transpo in Lima: IBRD 25105  In PERU TRANSPORT R 1HAJITATION PROJECT Loan and Project Sun_nary Borrower: Republic of Peru. mplauen-Ing Agendes: Minwtry of Trprt, Com cations, Housing and Construction National Railway Company (ENAFER) Municipality of Metropolitan Lima. Amount: US$150 million equivalent Tom: Repayment in 20 years, including five years of grace, at the Banks standard variable iterest rate. Project Objectves: The main objectives of the project are to: (i) rehabilitate eential nsport infrastructre which, primily because of insufflcient maintennce, has fallen into disrepair; Qi) assist Government in Lmplementg institutional reforms in the road and raflway subsectors, aiming at improved resource use and sustnable development; and (I) lay the ground work for future projects focussing on strengthened road management, increased private participation in the tansport sector, and improved mobility of the poor. Project Descipdon: TMe project would consist of five components, the most importan concerning ma reabi1=ittan nd maintnance. Six roads totaling 725 km would be rehabilitated under the project. Of these, 307 km were included in the Wodd Bank's previous highway loan, but could not be completed. In addiio tis component would include (i) a bridge program Involving the acquisition and recovery of Bailey bridges and the reoostruction of derelict old bridges; (Ui) a pilot maintenan program focussing on 620 km of road in a specified corridor, and Ol a traffic safety program. In parallel, the project would support govemment efforts to rebuild an intitona structure capable of maintainingthe road system. The second component would help to patizeand rebabilitate the UaDway. by (I) reducing staff redundancy, (u) rationalizing raiway debt, (iii) closing down or receiving budgetary transfes from the Government for unprofitable services, and (iv) ilitating tracks, telecom cons and locomodves to keep the railway in operating condiion whfle the privtzaton process is underway. The third component concerns the reabiliadon of Lima's aiXort tunway which, acrding to ICAO and some major airlines, is in urgent need of repair, before it becomes a danger to viation. The fourth component would be a piot poject for nonmtotized tansr  iv inLimato test methods of promoting the use of bicycles by low- income residents. The fifth component, technicl asistne and aning would (I strenen the suonal capacity for magng roads and bridges, and to support the creation and fostering of au autnomous agency reponsible for planing, opeat, fiancing, and the highway network; (11) build capacity In the MCC to mae enron l Isues; and (li) assist the railway in its pVzaton and imprving its manement Project Bendits: The main project benefit would be a more efficient and cost effective transport system that will stimulate a higher level of economic acdvity in the county. lbe project would contnue to remove physical constis i transport infrastructure, reduce tauport costs for goods and passengers, anmd would support expors, farm production, and the mobility of people. It would help alleviate rural poverty in the poorest areas of Peru, through provision of improved roads and employment generationthrough labor-based road works. The in economic rate of return for te ovall project is 27 pernt, ranging between 22 and 39 percent for the road rehabilitaton schemes, 15 percent for the ralwa rehbilitation, and 25 percent for the runway rehabilitation at Lima airport Projet Ris: Possible risks include: (J) inadequate provision of counterpart funds for project implementaion; (I) insufficient budgetary resources for road maintenance during and after the project; (ii) inefective project managemIIt, especiy arising from a lack of insttional capacity of the imlementg agencies; (iv) Isfficent absorptive capacity of the domestic couction indtry; (v) lack of sustained commitment in reforming the railway; and (vi) mishaps or inordiate delays in the high-visibility airport nuway rehabilitation. Finally, a risk that cannot be discounted is the possibility of armed terworism against the contacors during the execution of the works. Rate of Retun: 27 per Pot Catego: Not applicable. FAtmated b (U$ million): ___ _.__l_________-_'- r * L ___________ 1994 1995 I 1996 1997 1998 1999 Annual 15.0 30.0 48.0 36.0 18.0 3.0 Cumulat 15 5.0 f 93.0 129.0 147.0 150.0  V Esmated Project Costs (US$ milion): Projed Comnpon Lal Fo Tam Totl % Foeg Road Rehaiite (il. Deigp and &"pv.) 53.0 28.6 6.8 88.4 32 &lUg. RhbIliaon (md. leaip and Supev.) 11.6 7.9 27 222 36 Road M8 nane (mol Desip n Supaviuon) 5.1 2.8 0.7 8.6 33 Eqimet for Road Lbot 0.0 0.2 0.1 0.3 67 ,afUM Safdey ?MM 0.3 0Q 0.2 1.0 50 Dei of Puto Road Reilitaio Schemes 2.2 1.2 0.6 4.0 30 Railway Privatiation and Rdehbilion 5.9 21.0 8.1 35.0 60 Runway Rehbiiton at Lim Aipost 8.9 13.8 2.0 24.7 56 Pilot Poject for Non-Motorized Tapt in Lima 2.0 1.1 0.3 3.4 32 Technial Anoe and Tmuin 2.0 2.8 0.9 5.7 49 projetmanag t 4.1 0 0 4.1 0 Subtotak lDe Cst 95.1 79.9 22.4 197.A PIW*d C"Sngmda 14.0 11.8 3.3 29.1 Pxioe Contin s 7.5 6.3 1.7 15.5 _ GRAND TOTAL 116.6 98.0 27.4 ze.0 41 Projec Ftmadng S$ miion): ProjeI. Compe oank KEW ToWal Road Rehabilitation (mcI. Design and Superv.) 18.1 52.2 38.0 108.3 Bridge Rehabilitation (mcl. Design and Superv.) 5.6 22.2 27.8 Road Mantenance (mcl. Design and Superv.) 2.1 8.7 10.8 Equipment for Road Laboratory 0.1 0.3 0.4 Traffic Safety Program 0.2 1.0 1.2 Design of Future Road Rebabilitation Schemes 0.7 4.1 4.8 Railway Privatization and Rehabilkation 10.5 31.7 42.2 Runway Rehabilitation at Lima Airport 8.6t 21.6 30.2 Pilot Project for Non-Motorized Trspt in Lima 1.0 3.1 4.1 Techmical Assistance and Training 2.1t 5.0 7.1 Project Mnagement 5.0 0.1 5.1 GRAND TOTAL 54.0 .0 38.0 242.0 t Inling $5 mmlion c ton fium OPEC Pund * Vahw4dd tau an hpan teohnial suiatan grnt ($1.1 mMiin).  L THE TRANSPORT SECTOR AND TIlE ECONOMY A. The Coutry and Its Economic Set 1.1 Peru, with an area of 1.3 million kin2, is a latd of great physical contrasts. The Andes, running the length of the country, constitute a towering barrier to counications between the narrow coastal plains in the west and the Amazon lowlands in the east, and present a chalenge to the provision of traport irastrmcture and the conduct of economic and social activities. According to the 1993 census, Peru has a population of 22 million, which is growing by 2.2 percent a year. Urban centers with more than 2,000 people now account for 70 percent of the total population. The Lima-{allao metpolitan area with 6.5 mfllion people accounts for 29 percent of the country's population, or 42 percent of the total urban population. 1.2 Peru's economy, which is based on the exploitation of its vast natural resources, is underdeveloped. It is the world's second largest silver producer, fifth largest copper producer, has abundant fishing and hydrocarbon resources, yet only 3 percent of its mineral wealth is tapped. Peru has a comparative advantage in value-added textile actring which transforms high-quality Puvian inputs - Pima and Tanguis cotton, Andean llama, alpaca, and vicufia - into sports and fashion garments. Additionally, Peru has a promising agro-industrial base which could trn its coastal valleys into high-production zones for agricultural exports (asparagus, melon, grape, tomato, coilla, mango, and fresh flowers). The accessibility, retiability, and cost of transport are key fictors detemining the success of these activities. In 1990, manufacturing contrbuted about 22 percent to GDP, followed by agriculture and livestock at 13 pert, and mining and quarrying at l1 percent. IThe government share of GDP was about 8 percent, construction about 6 percent, and fisheries about 1 percent. 1.3 For the last three decades, Peruvian politics and economic policies have been marked by instability, elected goverments altening with miltary adminons. During these decades, Peru developed a legal structure and policy envionment inimical to economic development. A state-led development strategy created a complex network of controls and large, inefficient state-owned enterprises. Heavy goverment intrvention in economic activity led to a waste of resources and deteriorating economic performarce. 1.4 The first BelaiSnde administration (1963-1968) placed high priority on the developwent of transport infrastrucure (especially highways) to systematically integrate the Siera (the mountainous roon) and the Selva (the Amazonic plains of eastern Pem) into the national fabric. These projects were carried out tirough a mix of large public works programs and thousads of small self-help projects. During the next twelve years of military mle (1968-1980), the Goverment dramatically increased its direct participation in the economy through large-scale expropriations of foreign-owned companies inolved in sategic aspects of the economy. Government tervention became more pervasive during the second Belinde (19801985) and the subsequent Garcfa (1985-1990) administrations. 1.5 Under the expansionary fiscal policies of the 1980s, large expenditures were undertaken in the trart sector. Resources were used to fnance uneconomic investments for premature or over-designed projects, such as Lima's partially-built rapid transit line, tren eldctrco. Policies to expand demand followed by the Garca adminion, such as direct subsidies and rigidly-controlled public sector prices,  -2- initially contributed to economic growdt. This also resuted, however, in an increased fiscal deficit, higher inflation, and a deeline in the efficiency of the transport sector. Available resources were used inefficiently and public sector agencies responsible for the maintenance of ifrastructure were starved of funds. Ihis has resulted in a large infrastructure rehabilitadon backdog. 1.6 In July 1990, the Fujimori administion inherited an economy on the brink of collapse. The bankrupt and disintegrating State had no money to proprly maintain its infrastructure, and its authority was constantly challenged by subversive activities. The deteriorated transport system was unable to serve its intended function. This administration lamuched a sweeping program of reforms to stabilize the economy and restore financial relationships with multilateral agencies. A number of measures taken by the Government had a direct impact on the transport sector, including: (i) drastic adjustments of public sector prices and tariffs (e.g., the price of gasoline was raised 32-fld in August 1990 to US$1.50 per gallon); (i) stringent controls on public spending; and Ciii) elimination of import licenses and streamlining and simplification of import tariffs. The State began to disengage itself from activities bettvr handled by the private sector. 1.7 Within the transport sector, the reform program has the following objectives: (i) to rehabilitate transport infrastructure; (ii) to provide efficient and economic transort services; (iii) to establish competition in the transport sector markets; and (iv) to transfer to the private sector those functions Inappropriate for the public sector in its new role. 1.8 Transport efficiency has been improved by reforms introduced since July 1990. Nearly all ransport regulations were abolished, including the tariff-setting Condsmin Reguladora de Tarifas de 7Tansporte, the CREIT commission. The result has been a general decrease in transport tariffs, especially for freight (rail, trucking, and shipping). Urban transport tariffs have increased at a rate lower than inflation, despite the drastic increase in fuel prices. A mnuber of public enterprises have been privaized (urban bus, airine and shipping companies) or are undergoing a restrucuring process to permit increased private sector participation (airport, port and railway companies). Private contractors can now execute maintenance and rehabilitation acdvities, and enabling legiation for even more private sector participation is in place. The private sector is now directly involved in port and airport operations, and private operators and transshipment centers in the hinwteland can make use of multi-modal shipments. In air transport, the Government retains authority over all traffic control operations; preparations for privatizing landside operations at Lima asiport as well as awarding concessions for managing regional airports are currenty underway. The decentralization of responsibility for financing, building, and maintaining ihfrstucture projects to local governments is,currently being considered. Decentralization of responsibilities for the provision and naintenance of infrastructure to local governments is also under consideration. Annex 2 gives a detaied summary of the Government's policy objectives, strategies and priorities, as well as the status of reforms in the ransport sector. B. The Tanport Sector ihe Peruan Thnspo system 1.9 There are four disdnct transport zones in Peru: (i) the central corridor (Callao-Lima-La Oroya- Huancayo); (ii) the southern corridor Matarani-Arequipa-Juliaca-Puno); (iii) the coastal region from Talara in the north to Ilo in the south; and (iv) the Amazonic Selva. The cental corridor serves an economic function, transporting mostly minerals from the mines and smelters at La Oroya to the port at Callao. Rai and trucking carry about equal shares of the mineral and concentrate cargo in this corridor, while trucking has a larger share of all other products. In t'he southern corridor, where product markets  -3- are more varied, rail and trucddng are eqaly important. Wifitinthese corridors, there are segments that rely solely on rail (e.g., Huancayo-Huancavelica). The coastal region involves some compeNtion between trucking and coastal shipping for long- and short-haul cargo. The Pan-American Highway carries passengers and freight along the coast and serves as a conduit for export traffic to Peru's Pacific coast ports. The Amazonic Selva is served by a system of river ports with access to the Atlantic. Cargo is collected in barges from points on the Ucayali and Maafidn rivers, through the port of Iquitos on the Amazon river to Brazilian and overseas ports. Dlue to Peru's rugged terrain, airports serve the imporant function of integrating the four zones. Most air traffic either originates or termines in Lima, with few direct traffic movements among regional airports. 1.10 The Peruviantrmsportsystem comprises: (i) a classified road netwok of nearly 70,000 km. of which about 11 percent is paved; (ii) a system of 24 maritime and river ports; (Mii) a railway network (2,074 kn) made up of seven separate systems, with litte physical or operational integration; (iv) 300 airports and landing strips, only 16 of which have paved runways; and (v) a system of pipelines, the most importa of which is the 900 kan North Peruvian pipeline from the oilfields in the Selva to the coast at Bayovar. Annex 1 presents a detailed description of the transport system in Peru. 1.11 Transport plays a crucial role in Peru's domestic trade, conmunications, and national integration because of the country's geographic and demographic setting. Communites on opposite sides cf the Andes are barely accessible to one another without air travel, and the few highways and railways th penetrate the mountains are periodically ravaged by floods and slides - the Central Cofridor route is closed to traffic for as many as seven days a year. Neither are the urban areas of Peru served by efficient and reliable transport systems. The poor in urban areas mostly live in low-income settlements (pueblos Jdvenes) on the outskirts of the city and travel to the center for work and social purposes; in Lima, many poor also live in the center. The city centers are congestd due to poor traffic management and ill- defined use of space. Most roads in the pueblos jdvenes are unpaved and often poorly maintained. Insthu*on Framework 1.12 The transport sector operates through a mix of central and local government bodies, public and private enterprises, and formal and informal sectors. The exten and scale of private sector participation snd decentralization of services in the transport sector has greatly increased following the recent privaization and restructuring of sta-owned enteprises. Tn addition to the already privatized public enterprises in the transport sector - ENATRU, Aeroperd, and CPV - the Goverment intends to privatize ENAFER, ENAPU, and CORPAC. Privatization committees (Com}its Especdales de Prtvadzacidn - CEPRIs) uader thk aegis of COPRI (ComisIdn de Promocidn de la Inversldn Privada) have been set up for these companies. 1.13 The Ministry of Transport, Comcations, Housing and Construction (MTCC) has overall charge of the transport sector. The Vice-Minstry of Transport has four General Directorates responsible for: Roads (DGC), Land Transport, Waterborne ransport, and Air Transport (DGTA). It also oversees the three state-owned enterprises which are not yet privadzed: CORPAC, which operates and manages public airports and landing strips as well as the air traffic control system; ENAPU, in charge of operating and managing Peru's maritime ports and ioland waterways; and ENAPER, the national raiway company. 1.14 Following a succession of decentralization measures with respect to provision of transport infrastructure (maWy roads), Peru's departmental authorities and municipal governments exercise road maintenance and traffic management responsibilities. Regional directorates and municipalities have the responsibility of maintaining and rehailitatg about 54,300 km (78 percent) of the total road network. However, they are limited in resources such as finances, staff, and equipment. Several municipalities  -4 have joined together to coordinate municipal efforts in large metolitan areas One such case is the Municipality of Metopolitan Lima (MLM), which is a grouping of 42 municipalities, jointly mangg the transport system in the Lima-Callao metroitan area. MLM has five main rponsibflides: (@ plannint ; (ii) construction; (iii) maintenance of primary and Inter-district roads - some responsibiities for malvmenance sdill remain In the hands of district municipalities; (iv) traffic operations and control; and (v) provision of limited bus service. Rol of Private Sedor 1.15 Private sector puticipation in the sector includes: (i) several private mining rai lines; (ii) several priWae airports and landig strips; and ffii) associations of multi-modal cargo shippers (CONUDFI), formal trucking companies (ANATEC), and urban bus operators (CETU). There is an extensive network of informal service providers who operate without permits and licenses, thus avoiding payment of corporate taxes and fees paid by the fonnal operats. Ihese Minformals" serv a significat part of the passenger and goods market in urban and inter-urban tansport, handling for example about 30 percent of all domestic fruit and vegetable transport Prior to the liquidation of ENATRU, informal bus opeators were making about 90 percent of all daily trips in the capital. Most intercity passenger road trasport is handled by owner-operator and informal bus operators. 1.16 In 1992, road transport accounted for about 71 percent of all demestic reight, as indicated in Table 1. Tne use of trucking has grown substantially following the elimination of Import restrictions and the deregulaion of the road transport industy. The trucking fleet is increasing, resulting in a rising market share vis-l-vis river and coastal shipping and railuways. Table 1: MODAL DISIBUTION OF DOMESIC FREGHT TRAFFIC (ercenae dilru*on of tonage) Year Total 11*31 Road Air Shipping 1983 100 8 33 0.31 59 1988 100 6 36 0.20 57 1992 100 4 71 0.06 25 C. Road Tnsport The Road Sym 1.17 Road Network. About 22 percent (15,700kbm) of the road system forms the national network, comprising: (i) tree north-south axes: the 3,050 km Iong Pan-American Highway stretching along the coast from Ecuador to Chile, the 3,500 km long Inca Highway in the Andes, and the parly-built Carretera Marginal de la Selva (1,733 km); and (ii) twenty transversal links totalling 7,410 km in lengh. Only about 37 percen (5,740 km) of the national roads are paved. The fully-paved Pan-American Highway accounts for two-thirds of the total national paved roads. The departmental network (14,443 kcm, 21 percent of the overall system) consists of mostly engineered gravel and some (1I066 kn) paved roads. The remaning 57 percent of the road system are classified as feeder roads and consist primaily of earth tracks. The . c Id network deteriorated badly in the 1980s. Ihis trend has been receady reversed 'I  -5- as a result of central govanment Investm rehliadon and matena. By December 1992, about 29 percent of the natdo network was raed Oporo, nary 54 percen f , and only 17 prce rgood". 1.18 TraMc Volumes and Road Sety. Pu had about 600,000 regstrd motor veicles in 1990, the latest ye for wich dat ae avaiable. About 40 pen of dhs wer bus and goods vhides, and the remainder primariy autmobiles. The higes nonurban traffi volume occur nea Lima, with about 6,000 vehicles per day (vpd) on the Pan-Anm Hghway and over 2,000 vpd on the Cad Highway. Farther away fo LUa, tho Pan-Amcan Highway carris 1,S00-3,000 vpd in its nother sectlons and 700-2,500 vpd in the sou. On the rmgag 60 pert of th paved national road network, volumes are between 500 and 800 vpd. The volumes on upaved rads am much lower, wit 80 percent of theseads carr le tasm 200 vpd. Thes unved rads, however, play an Ipo4an role In linkng dffet regions. The Isue of safety in the road sector needs attenon. ithere are about 53 annal fatities per 10,000 vehicles, raking Peru among the worst in the wodd with regard to traffic safety. 1.19 n work i largely dentralized, wih MCC etaining resnsiblity for the national road nw At preet, about 50 peet of o n the naiona network X carrid out by force account; 40 percent by pivae taor and the remainig 10 percet by labory based progms. Due to sever neglect, about 50 pect of the national network needs etnive stregthnn and ovelay, whie another 40 peret neds facng and sealing to minz deroration. Local and departmental goven.ents gneraly lack the Qm to maintn equipment which I thus nea the end of its usefife. As a result, abor-based t ni bave been relied upon wit some measure of succes. ilon r ead pv sector pricipation In road mainteace b being consderd, including the use of concession-type conts. Other important measures hve also been take In 1993 to impwve the pefomance of maitenance acdvities on the naIon oad netwrk, such as the creaton of a road fuid and the setnup of anatlonal system of road m (SNMAC: Stm Nadonl denMlmleo 4* adnCWe). Annex4providesfrther detailsonthat issue. 1.20 Elnandng and A tio. Fing Is provided through centrl govemen budget allocatons. Ihe Goverment colects taxes from vehide ownes on purchaes of fuel and on th registration of the vehicles. At present, revenues from these sources exceed the funding required for road maintenace by a fao of five. Government has flrmed at loan negotiaons tha It inteds to contnuo Its policy of taxit road ue for at least the amount spent on routne and peiodic road mainteance. May toll collecton stat were set up in 199 on the Pan-American bighway and dsewhere, opeatd by a variety of loca autorities. As a result of the apprent disorder and misuse in toll collection, t'he Govenmt abolised most toi staDons and, In August 1993, gave flC the exclusive right to collect tolls on the nationa road network Tll revnes will be put into a road fund (Fondo Vl) and ae to be used exclusively for road maintenance. Alternaive mecham for toad funn arwe also being considered, indclig the ollecto of excie taxes on vehides, licenes, and fae. In 1990, the sources of reve were mtly from fud taes (95 perceat), with the remainder coming from liens, registration fees, and Imt taxes on vehicles. The proportonal allocation of central goverment fuds to the road subsector has declined steadily from a high of about 87 pecent of all cent goveramet expenditures for transport in 1981 to a low of about 19 percent in 1989. bi trend has recty been reversd wit the proportional allocadon to the road sub-sector in 1991 increasg to 60 pecent of all transport funding. Annex S provides a detailed discion of road administai and fiancing issues.  2he Road 1)mpoit Indus" 1.21 Trudkng. The trucking industry has a US$2 billion annual rnover, employs over 300,000 persons, and is completely deregulated except for the emergency authority vested in the Ministry of Economy and Finance (MEF) to limit inflationary rises in the price of transport services. Peru's fleet is estimated at between 70,000 and 80,000 trucks, of which 10,000 to 15,000 are inoperable, and another 20,000 to 25,000 are very old. This leaves Peru with an active fleet of 40,000 to 45,000 trucks in good operating condition. The average fleet age is sevem years. 1.22 TIe lifting of import restrictions and deregulation of transport tariffs have resulted in intense competition within the trucking industry and between trucking and rail. The result has been: (i) a significant lowering of tansport costs (by about 50 percent in the central corridor between 1990 and 1992); (ii) a restrucuring of the trucking industry with a higher percentage of owner-operators than large trucking companies; and Qii) an increase of trucking in markets traditionally dominated by rail and shipping. The main benefits of these policy reforms have been reduced transport tariffs and increased reliability of transport. 1.23 Import liberaization has allowed the entry of trucks which, when fully loaded, exceed the capacity of Peru's highways and bridges. The central government has defacto legalized such importation but has set up a schedule of fines for excess axle weights ranging from US$360 for an excess of 5 tons to a maximum of US$520 for an excess of 15 tons or more. However, due to financial and resource constraints these regulations are not being enforced. The existing schedule of fines was based on outdated pavement and bridge designs and needs to be revised, along with gross axle load and vehicle dimension regulations. The issues related to axde-load regulations will be addressed in a stL ;, funded under a loan of the Inter-American Development Bank (IDB). 1.24 Inte-urban Passenger Servie. In 1991, it was estimated that inter-urban bus passenger trips originating or termintng in the Lima-Callao area were on the order of 18,000 per day. Formal inter- urban buses represent a US$8 million industry, served endrely by the private sector, with services affordable to the lower income groups. For example, the 1992 fare for the 1,000 kn trip from Arequipa to Lima was only US$8. Thera are no Inter-urban bus or truck terminals in the Lima metropolitan area; buses therefore drop passengers alongside major roads, creatinpg congestion as they enter the city center. Likewise, passengers are picked up by the roadside, thereby affecting the flow and safety of traffic. D. Rilways 1.25 Railways play an important economic role in Peru, transporting minerals, petroleum products, and other bulk commodities which represent a substantial part of total Peruvian exports. Railways also provide an essential socal service, being the only mode of transport available for passenger and freight services in certain corridors (e.g., parts of the Huancayo-Huancavelica and Cuzco-Quillabamba lines) or during periods of heavy ra1i. Peru's railway network, comprising seven separate systems, is currently managed by three different entities. The national railway company, ENAFER, owns and operates five of these systems: 0i Central (FCC - 346 kin of standard-gauge main line) linking the port of Callao to the Central Sierra; (ii) Huancayo-Huancavelica (FCHH - 129 km of narrow-gauge main line) linking these two important cities; (iii) Southern (FCS - 855 km of standard-gauge main line) connecting the port of Matarani with Cuzco, and with Bolivia via Puno by ferry over Lake Titicaca; (iv) South-Eatern (FCSO - 172 km of narrow-gaue main line) from Cuzco to Machu Picchu and Quillabamba; and (v) the Tacna-Arica line (60 km of standard-gauge main line) at the border with Chile. Centomin, the State-  -7- owned mining company, owns and opera two lines (272 kIn) and the pdrvate mining company, Southerm Peru Copper, also owns and oeates a 240-km ai line. 1.26 Institutional Framwork. ENAFER has a six-member Board of Directors headed by a president, who is appointed by MITCC. The administrative and operating responsibilities for ENAFER are vested in the General Manager, who is appointed by the Board. ENAFER has two opeaional headquarters, In Lima and Arequipa; FCC and Huancayo-Huancavelica operations are maged out of Lima, which also serves as a headquarters for ENAFER; and the southem routes are under the control of the Arequipa office. 1.27 The decline in ENAFER's traffic and finances, and the deterioratin of its In ctur and rolling stock, started in early 1985 and has been acute since 1990. These problems are partly due to declining mineral exports, diversion of rail traffic to roads, oversafg, political intrence, and the Inability of management to adapt the company to the changing economic envronmen ENAFER needs a radical reorganization including Its physical operations and financial procedures. More speciicaly, it needs: (I) clear delineation of management responsibilities; (ii) rationalization of the role of the Government In ENAFER's management; (iii) a stresmlined set of adnive and legal procedures; and (lv) greater accountability and efficiency, including a drastic reduction in its staff. 1.28 Tramffc and Operatons. ENAFER has experienced a steady decline in its market share of the transport industry durig 1985-1993, from about 8 percent of total domestic freight in 1985 to just over 4 percent in 1993. During the period 1987-1992, freight traffic dropped by 47 percent for FCC (from 1.5 to 0.8 mIllion tons) and by 45 percent for FCS (from 1.1 to 0.5 million tons). The general economic recession and securiy concerns, especially trorist acdvities in the cenral corridor, have fturther reduced the demand for railway services. Raway Traffic, 987-992 2,000 1,800- FCC ) 1,600 \CS (raw) 1,400 FCS) 1,200 .CS l l x 400 200 0 1987 1988 1989 1990 1991 1992  4-8 1.29 Inefficient operaig practices have also contributed to ENAFPEs decline. In the cm of FCC, the railway climbs from sea level to 4,829 meters over 182 kmn rahing the use of doubleeading locomotives on the Callao-Huancayo line, where switchbacks make it Ipossibleto accommodate a trai of more than ten cars and one locomotive. Maiine locomotves travel less tham 44,0CO km per year, and freight cars less dtha 9,000 km on FCC. Locomotive power and rolling stock I bet deployed on FCS, which has a more faorable topography and longer avra baul dita . Is locomotve utiization is about 120,000 km per year, with freight cars averagig 14,000 kim, stll low by intnatinl standards. The averag freight car tunaru time is 9 days on FCC and 18 days on FCS. IThese figures could be halved by improved scheduling. 1.30 ENAFER's locomotive and wagon fleet deteriorated significay betweea 1985 amd 1992, as finial constraints made it difficult to carry out necssary maintece. Locomotive availability remains around 27 percent on FCC and 42 percent on FCS, compared to Internationl standards of 80 to 90 percent Freight car availability is also low: 68 percent on FCC and 79 percent on FCS (the industy standard is 90-95 percent). Mechanical workshops are old, lack spare part, and are poorly located. Ihe resulting higher maint ce cost result in loss of business. 1.31 A similar problem has occurred with the tracks. Speed restricdom had to be Imposd on several sections for safety reasons. It has been difficult to put on longer but less frequent trains to accommodate the reductions in speed because of the low hauing capacity of its poorly-m ined locomotives. A recent survey of tracks indicates an urgent need for track mateials on ciical sections of the line. Ihis Is prfculy true of FCS. There is lo an overal sge of tack equlpmnt, and maintenance has been further affected by the staff reduction program. The proposed investment progrm includes emergency funds for track, telecommunications, locomotives, and roiling stock to afrest further deterioration of railway services. 1.32 Staffing. ENAFER is renegotating its labor agreements and, through a staff reduction progm saed in December 1992, has reduced its staff from 5,440 to 4,068 (Decmb 1993); however, the present ratio of 2.61 employees per lkm of track is stll high. A study of manpower requrements showed at about 2,200 further employees are to retire by December 1994, provkIed fnds are avaiale to make the legally required redundancy payments. This wil reduce total ENAFER employment by 54 percen to 1,857, or 1.19 employees per km of trackt As this target is being achieved, ENAFER will improve its operational and financial performace. The action strategy for the railwas requirs the Governmen to provide ENAFER with about US$9.4 million to implement the stff reduction program. 1.33 Thmnael Performance. In 1990-1992 there was a serious deterioration of the railway's financial position, caused by a loss in revenues with no corresponding decrease in costs. The loss was mainy caused by a 21 percent decrease in freight hauled in 1992 as compared to 1990 twms of ton- kilomete). Passenger traffic decreased even more sharply, by nearly 52 percent Further drops during the first half of 1993 have brought the total reduction in passenger traffc to 71 percent Table 2 demonstras that, during the period 1990-1992, operating revenues dropped by S1 pecent while the decrease in the operatig expenses was only 22 percent. Operating expenses have remained high mainly due to high labor costs, which accounted for more than onehalf the total 1992 opatig expes. 1.34 Operating losses during the review period 1990-1992 were financed by acmulating liabilities - by not servicing the railway's debt and by deferring payments for personnel-reled contributions to social secity, pension, and health plans. This futher weakene ENAFE's fincial position, as delays In the servicing of debt and short-tem financial obligatons resulted in interest capitalization and late paymet charges. As a resut, 1992 non-operating expeses exceeded the opaing expenses, and tot expenses were nearly three times total revenues; the total outtanding debt at the end of 1992 was US$132  -9- Table 2: ENAFER - SELECTED FINANCIAL DATA, 1990-92 (743 VnMwa4g) 1990' 1991' 1992 Operating Reee 54,017 43,935 26,269 Operating Expenses 49,822 60,200 38,776 Net Operating Inome 4 194 (16,264) (12,507) Net Income (69,422) (49.846) (52,785) Working Ratio 76% 113% 125% Operaing Ratio 92% 137% 148% Debt-Equity Rado 127% 195% FCC Working Ratio 79% 131% 150% Operating Raio 110% 161% 183% FCS Working Radio 64% 97% 113% Operating Raio 71% 116% 130% FCSO Working Ratio 112% 135% 108% Operatng Ratio 126% 171% 133% gOpag Ratio: Operating expee divided by opertig rves Woing Rato: Oprating exponses as daton dved by opeting revenues t Exchange esployed in conoerng Soles to Dollars: 0.21 (1990); 0.73 (1991); and 1.24 (1992). * Negatve equty. milion1. These inome losse together with etensive exchange rate depreiion, led to a drastic redution in total eqity: from US$380 milliom at dte begining of 1990 to -US$9 million at the end of 1992. 1.35 PrIvate Sector Paticipation. Privatzation of state-owned entprises is a key element of the Govermen's program for prvate sector development and public sector reform. The privatization program alms to p most public sector enterpdses by mid-1995. To this end, the Government initiated in early 1993 the pdvatzatlon of ENAFER, and has formed a special privatzation committee - ComiE4pedalde Pfvazacd6n(CEPRI-ENAFER). CEPRI-ENAFER has contracted an internaional advisor to: assess the viability of ENAFERs various routes and services; recommend options for ' Debt outtng includes: acouns pay"bl wbich are overue by more than ane year (US$46 miion), ahorterm pordon of to bog-Wm det (US$27 miion), ngntem dbt (US$37 million), and provision for social befeits (US$22 million).  -10- restucturing and prnvatzaton; prepare a privatizaton straegy; provide advice to CEPRI on the privatiation process; and help CEPRI-ENAFER in engaging qualified privatization consulats. The privatization consultancy, expected to start In July 1994, will evaluate ENAFER and will be responsible for issuing the sales memorandum and the tender documents by the end of 1994. Ihe consultants wiJl be financed under the Bank's Privatization Technical Assistance Loan, 3540-PE. 1.36 At present ENAFER's main attraction to potentid buyers rests in its real-estate holdings and the scrap value of hts operating assets. An Action Strategy has been prepared to accelerate the administative and operational reforms of the railways deemed necessary for a successful privaizatlon. The Action Strategy envisages ENAFER's resolution of its fiancial obligations with government help and entails in addition: (i) the execution of a voluntary staff retirement plan; (H) the sale of selected non-operating assets; (iii) renegotation of the collective union agreements; (iv) organizationad restructuing into cost centers, including separation of management and operations for the non-profitable lines; and (v) rehabilitation of railway infastructure and rolling stock to maintain railway operations during the privaization process. 1.37 The Action Strate also includes improvements in train operations, and workshop and permanent way maenance. It also provides for the critical emergency investments needed to keep the railways operational. Major capital investments would be left for fuatre private owners of the railways to make. This stat which aims to transfer a restrucured and functioning railway to the private sector should: (1) reduce labor redundancy and remove excessive financial obligations; CH) assess the viability of the various railway lines and services; (il) analyze structural options for privatizing ENAFER; Civ) evaluate the company and its respective operating units; (v) prepare the tender documents for the sale of ENAFER; (vi) process the tenders, and (vii) transfer the railway lines and operations to their new private owner(s). E. Air Trasport 1.38 Ihere are about 300 airports and landing strips in Peru. About 130 of these are privately owned, and more than 110 are under the control of Per's regional governments. ITe Corporacldn Peruana de Aertos y Avicn Corda (CORPAC) is in charge of the country's airports, landing strips, and air traffic control as well as en-route navigation systems. It is responsible for 59 facilities, all of which have a single runway, including the international airport in Lima. Aircraft can refuel at only 12 of CORPAC's 59 airports and at 27 of its landing strips. In terms of navigational aids, 11 airports have directional equipment, three arports provide instrument landings, 20 provide voice radio contact, and 29 have only radio directional beacons. Only 12 airports are linked to the regional air traffic control system. 1.39 Peru's airport system is not equipped to meet the challenges of an export economy and support aional integration. The reasons for its poor performance include lack of resources, poor planning and management, minimal maintenance, and obsolete navigation equipment Lima airport, the primary aviation hub and the country's only airport with foreign airline services, Is badly in need of rehabilitation. The runway pavement, which has not been upgraded since its original construction in about 1960, is showing signs of severe deterioration (cracking and spalling) and is rated 'of concern" ty international airlines. 1.40 Traffic Composition and Trends. In 1993, Lima airport was used by 33 airlines seving 38 international and 29 domestic desdnations. In the same year, Lima accounted for 26 percent of aircraft operations, 41 percent of passenger travel, and 70 percet of freight tonnage at the CORPAC-managed aiports. Domestic traffic, which accounts for two-hirds of all aircraft operations at Lima, peaked in  -11- 1987 and declined in the following five years due to depressed economic conditions; data for 1992 and 1993 indicate a reversal of that downward trend. International traffic has shown erratic Increases in both passenger and freight volumec. The rehabilitation of Lima airport is a high priority for the aviation sector and for economic activity in Pen. 1.41 CORPAC. CORPAC is a public enterptise which is supposed to be fimancially self-sufficient, but since 1989 it has operated at a signficant loss equivalent to US$24 million in 1989, US$13 million in 1991, and US$4 million in 1992. However, with the sale of Aerperd - which owed CORPAC large debts for services rendered as far badc as May 1985 - opeating results are expected to improve. CORPAC has reduced its labor force by one-third which should impwve its financial performance. In order to reduce operating costs, CORPAC is proceeding with a privaization program to contract out some of its aiport services. 1.42 There were ten domestic carriers in 1993: Faucett, Americana, Aeropern, Aeronaves, Aereo Tumi, Adreo Continente, Adreo Condor, Adreo Sata, Imperial, and Expreso Adreo, in order of market share. Aeroperd carried about 12 percent of domestic traffic and a significant part of international trsffic; it caried a total of 400,000 passengers and 3,800 tons of freight, of which domestic transport accounted for 66 percent and 31 percent respectively. Faucett and Americana had 44 percent and 39 percent of the domestic market share, respectively. Te- domestic carriers compete in most market segments except for the specalized cargo airlines such as Expreso Adreo. Smaller carriers supply tourist services, such as Adreo Condor wbich provides sight-seeing trips from Lima to Nazca. F. Trsport In the L3ua Metropolitan Region 1.43 The Municipality of Metropolitan Lima (MLM), which is run by a provincial govemnment, is headed by an elected coundl which sets policy for the metropolitan area with assistance from the municipal coordination assembly cnstiting 42 district mayors. The province does not include the port of Callao, which is independent, with special provincial status. The chief executive officer is the MLM mayor, elected every three years, who also serves as the mayor of Lima Cercado, the historic center of the city. Because of the high degree of administrative independence of the metropolitan districts, coordination within MLM remains difficult. 1.44 Traffic and Safety. AU urban tansport in Lima is by road. In 1988, about 6.4 million trips were made by Lima residents using motorized means; about 81 percent of these were by public transport. ouses are the main means of transport for low-income groups. The public transport fleet in 1992 comprised about 2,000 buses and 10,000 microbuses. While cars and taxis are the principal cause of traffic congestion, trucks and buses contribute significanty to congestion, accidents, and air pollution. Accident rates are high, with about 70 percent of fatal accidents resulting from vehicle-pedestrian incidents. These problems are caused by poor traffic management, inefficient use of road space, malfunctioning signals, bad sign postng, inadequate pedestrian walkways, and unsafe driving behavior. 1.45 Non-Motorzed Trmport. A municipal program for non-motorized transport was established In 1990 to promote the use of bicycles in Lima. Tbis program aims to: (1) provide transport for people who curently walk long distances; (ii) reduce tranWort costs for low-income residents now using the bus, as well as save them time and improve their health; and (rii) reduce air pollution by divetng passengers from buses and minibuses to bicycles. Recandy built bicycleways and experiments run by this program have shown early promise. Annex 8 describes a pilot project component for non-motorized transport in Lima.  -12- G. Secor and Poilcy asues 1.46 The overall economic dedline and civil strife have exacerbated the major issues in the transport sector, which arise from inappropriate policies such as: O) ill-advised investment policies and decisions; (it) chronic deferral of mainta leading to a staggering maintenance backlog; (ii inefficient public sector agencies; (iv) regulatory and administrative failure; and (v) unclear and overlapping allocation of responsibilities among national and local governments, community organizations, and the private sector. Reforms made since July 1990 (Annex 2) have addressed some of these shortcomings; however, much remains to be done. Ihe increase in private sector participation has itself raised new issues such as the scope and rationale of interim investments in public sector enterprises targeted for privatization, and appropriate regulation of private services. 1.47 Maintenance. The transport infrastructure is disintegrating due to sheer neglect over the last 10 years. Only 17 percent of the national road network is in good condition; locomotive availability is down to 37 percent; and Lima's airport faces the risk of being closed to traffic if no significant action is taken soon. Transport services to peripheral urban areas are limited by the poor state of roads. The Inadequacy of secondary and rural roads has been a major obstacle to rural transport and has hampered agricuural production. The main objective of this project is to finance emergency rehabilittion works to correct the extreme maintenance backlog, and to initiate reliable and stable maintenance practices. 1.48 Weak Pubgc Instiutions. The capacity of sectoral ministries and associated public sector agencies has been eroded due to (i) loss of qualified personnel seeking higher salaries, as well as voluntary and mandatory lay-offs, and (ii) the lack of formal training of personnel in the public sector because of fmancial constraints. Overstaffing, common in many public sector agencies, has been drastically reduced following their restructuring or sale to the private sector. Similar drastic reductions were made in MTCC's staff. Most agencies are now barely able to conduct day-to-day operations. Low public sector wages also hamper attempts to retain capable employees, particularly technical staff. The training component of the project will provide MTCC and its affiliates assistance to expand their technical capacities during the restructuring process. As described in Annex 9, the project also includes policy studies on highway issues and organizational reform of MTCC, and provides advisory services to MTCC, ENAFER, and MLM. 1.49 Enviromnental and Safety Issues. MTCC is currendy unable to address environmea Issues associated with transport projects. Responsibilities for enviromnental and safety regulations are scattered among agencies, and little environmentl regulation and enforcement exist. Urban environmental concerns center on autmotive pollution and high accident rates in large cities. In rral areas, exisdng roads show evidence of increased erosion, slope instability, and poor drainage caused by inferior road design, construcon and maintenance. Ihe principal environmental concerns about railway operations are the collection and treatment of waste water, and the disposal of solid waste from workshops and mntenn ce units. Existing workshops have no run-off collection systems, or oil and grease traps; however, oil recycling is a standard practice. Solid waste is disposed of in open dumps along railroad tracks. The project proposes strengthening the environmental capacity of MTCC (Annex 15) to address the foregoing issues. The project also promotes the use of bicycles in Lima, thus partially addressing the issue of automotive pollution. It firther includes a road safety component to stem the growth of traffic accidents, which exert a heavy toll throughout the country. In the railway sub-sector, the project supports an envirorunental audit of the permanent way, stations, and workshops, to be financed under the Bank Privatzation Technical Assistance Loan 3540-PE.  -13- IL Previous Bank Experieoe In the rnhport Sector 1.50 As detalled In Annex 3, the Bank has made ;7 loam to Peru in the tmsport sector totalling US$491 mMion. However, only twothirds of this m have boon disbursed. Of the total, 41 percet wa for highways, 21 percent for urban projecs (a large part of which had urban tsport components), 16 percent for mli-modal projes, 12 percent for aviaon, 6 percent for riways, and 4 percent fo pors. kmlemetio of these projects has been difficut due to the technical problems caused by extme physical conditions, inadequate engineering designs, lack of counterar funds, and weak project w aavatd by low salary levels for professionals in the execudtg agencies, which have resud in difficultes In recruitment and retention of qualified managers and engineers. 1.51 bewmaroeonomic conditions which beset the country om 1983 eventually led the Government to default on its debt service payments to the Bank, resulting in the supension of all Bank disbursemens to Peu In May 1987. Lack of countepa funds and istional weaknesses were the main reasons for the unsatsfary performce and delays in transport projects. Other Bank projects faced the same difficulties, which suggest ht ition building (the main aim of the Eighth Highway Project, Loan 2091-PE), regrdless of how well-intentoned, should not be limited to selected ministries in Isolation from the generd coutry context 1.52 Other donors are active in the transport sector in Peru. Ihe Government has obtained a US$210 milion road rehabilition loan frm IDB, US$30 milion from the US, and grs from Japan for project preparadon and locomotive rehabiitaton for ENAFER. KfW and the OPEC Fund are also asssting Peru hough cofinancing of the Bank project, as described in the following chapter.  -14 I. Tim PROJECT A. Ratoale for Bank nvolvemt 2.1 Until the mid-1980s, the World Bank played a major role in Peru's development. To the transport sectr alone, It lt nearly US$500 million drough 17 project loans, of which tre were active when the previous Government Insted is debt moratorium leading to ttie suspension and evena cancelladon of those loans. The Fujimori administraon, on asumig office in July 1990, lnwhed a program of stabilization and structua rerm. Ths Bank has sported the Governmes economic refbrm program through four adjustment loans siped in 1992 and 1993, economic and sector work, and crical techical asAtance. 'he proposed project wold be one of the first investment loans to Peru since 1986, and would address needs which are critical to rnewed economic and social development 2.2 The goals of Bank assistance to Peru are to: (i) sustain stabilization and consolidate structural reforms; (i) fost pra devlopment and public sector reform; (i) alleviate poverty and promote human resource developmen; and (rv) rehabilitate key infrastcture and redefine policies related to its operation, maitce, an finance. B. Project Objetives 2.3 The pwposed project emphasizes the fortht of the above stegic goals but also supports the other three. The main project objectives are to: * rehabilItat essental transport inastructure which, primarily because of insufficient mainenance, has fallen into diseair; * assist Goverment in implementing institutional reforms in the road and ralway sub- sectors, aming at impved resou use and sustnable development; and * lay ithe groundwork for futre projects focussing on strengthened road management, inresed prvte pardcipation in the transport sector, and improved mobility of the poor. 2.4 The project ft into the Bank strategy in seval ways. Firs, it addresses the core istrucre deficiencies through rehbiitaton, com nents in the road, raglway and airport sub-sectors. Second, through the priatzation of sport sector entities and the strengthening of restructured public sector agencies remaining after pr on, the BDank will influence policy reforms with regard to pivtzaton. Some of the policy areas addrssed by the project concern user charges and financing of infrastructure Ilvestments under mixed ownesp ublic/private) and decentraized responsibilities for maintenace and rehabilitation. Third, the project will help alleviate poverty through: ) support to labor-based programs for road maitenance; () provision of low-cost mobility through a non-motorized transport component; and (Iii) improvement of rural access as most of the road components are In agricultural areas poorly served by transport. Finally, with respect to concerns, the project will (i) by promoting the use of bicycles, help to contain air and noise pollution generated by motor vehidles, ii) reduce soil ersio and pevet landdides by mroving rad drinage and stabilizing the bed of the raiway, (1i) establish new en m t cria for road constucdon and maintenace, and (lv) strengten MA C's capacity to set and control envronmental stdards in the trasport sector.  -15- C. Project Desaiption 2.5 In view of the dilapidated state of Peru's transport system, the project emphasizes the urgent rehabilitation of key road, railway, and airport facilities. In addition, it supports the privatization of ENAFER, the state railway company. To prepare a basis for fiture physical and policy improemens in the transport sector, the project also includes technical assistance as well as a pilot project to support non-motorized transport. The five project components are summaized on the following pages and are described in greater detail in the Annex. IL Road Rehblo and HaiWtewaOe 2.6 The project includes the rebabilitation of six national road sections, totalling 725 km in length. As described in Annex 4, they are key roads linking agricultural areas in northern and central Peru with the coast. The coastal and central highways are being rehabilitated under a US$210 million loan of the Inter-American Development Bank (IDB)1. The roads to be rehabilitated are: 1. Tarma-La Merced 72 km 2. La Merced-Satipo 122 kn 3. Hugnuco-rgo Marfa 120 ka 4. Tarapoto-Rioja 135 km 5. Rioja-RIo Nieva 100 km 6. RIo Nieva-Coral Quemado 176Ikm 725 km 2.7 The roads linkdng Tingo Marfa with Pucallpa (256 kIm) and Puente Chanchamayo (Reiter) wih Villa Rica (38 kIn) had also been consiered for inclusion in the project, but were subsequently deleted in view of overall funding constraints. Nevertheless, detailec engineeing will be carried out for both of them (and additional roads yet to be identified) under the project, so they can be implemented as soon as funding is available. 2.8 The road component also includes the acquisition and recovery of Bailey bridges, renewal of derelict bridges, a pilot road maintenace program focusing on roads linked to the Corral Quemado-Rioja- Rfo Nieva-Tarapoto axis, and a traffic safety program. The bridge rehabiitation program involves the acquisition of a minimum stock of Bailey bridges (tewmporary structures), the recovery of preiously installed Bailey bridges and their replacement with permanent sttuctures, and the replacement of derelict bridges. Most of the latter group will be identified through a general bridge study including the inspection of existing structures and identification of rehabilitation priorities.Asies. loan noiationm for the replacement of derelict bridges, an internal economic rate of return over 20 percent will need to be demonstrated for all bridges estimated to cost more that US$500,000. Altogether, and excluding the 16 permanent bridges to be built under the road rehabilitation program, the bridge component involves the construction of about 44 new reinforced concrete structures. The pilot road maintenance program focusses on 620 km of roads feeding directly into the Tarapoto-Rioja-Corral Quemado corridor. This pilot program alms to: (i) provide a base for estimating unit costs to perform typical n teance activities by contract; (ii) test and promote the use of micro-enterpises for road maintenance; (iii) examine the deterioration patterns of various road surface types under altnative maintenance strategies; (iv) provide a focus for field training; and (v) lay the foundation for a 'Irhuy Rq and Maance Poject appwed in Jamnary 1992.  -16- entralized road ma_tace sta and the stren ing of local Insions. lhe trafc safety progam consists of the acqubition of sone urgently neoded mateials (such as guard rails) and a study to develop a comprehsive traffic safety strategy, followed by urgent inestments to start implementng the strtegy. 2.9 Paallel to the physical road investm , the project wil support goverment for to rebuild an insdttional structure capable of maiaining the natioes road system, at the nationa and local level. Recen reforms have led to the emasculation of road maintenance agencies and a near-chaotic imposition of decentrized road tolls, the mere collection of which is esimated to consume 2040 percent of revenues. The more promising ways to taclde this problem revolve around the creadon and/or sngthening of decerized agencies with clearly defined responsibilities and sources of income. on posile solution pursued by the World Bank in Africa, and promoted by ECLAC for Latin America, involves the creation of auonomous etees responsible for road management, similar in funion to public uilities responsible for electricity or water supply services. In collaboration with the Germa Ageq yfr Technical Asistac (IZ), a progrm of echnical assistance and an action plan was fomulted for iutional and policy refom in the roads sub-sector. Through a progr of technical assistance the project will sWort the process of improving road adminion and fince. With uning from the IDB - supported highway project, MICC with soon itiate analyses of road user carges and road administraton issues. A&reement was reached at loan nefftiations that MICC will keep the Bank iformed on the progress of and issues considered by those analyses, and that MTCC's acdon plan with regard to road finance and n wll be submitted to the Bank no later than Deember 31, 1994. 2.10 Excludig the rehabilitaon and maina opert-ions to be carried out under the MDB-financed progm (3,450 kn) and under this project (725 km of road rehabilitation plus 620 km of the road ma*int ce pilot program), the Gov eent will still have to cope with the reguar maintenance of about 11,300 km of priay road. As shown in Annex 4, at least US$50 million are required annually to adely mainai those roas. Covermnent Dmdded a ces at loan neotiations that, for the duraion of the project, an annual allocation of not less than US$50 million, to be updated and agreed with the Bank between July and October of each year, would be made in the budget for the mantenace of atio roads other t those covered directly under extnly financed projects, and that these funds would be released in a thiely manner. 2.11 In the meantm and peing the implemeon of an agreed new inshtionra structre, the project includes a mnmber of immediate actions to improve the capacity of the Genera Directorate of Roads areccn GeweTal de Cam os - DMC) for more adequate plannig, costing, execution and control of the program to be caried out in the next several years on the primay road network, and for providing technical advice to local govnments. These actions include: (i) the carrying out of a ntwork inventory comping a pavement surface conditon survey and traffic volume counts over the national road system; (ii) the setting up of departmenta agencies responsible for the detailed d.esign, budgetg, implemenion and monitoring of the mainenance acties falling within their respective geographical territories; this measure involves either the reassignment of the engineers who were formerly agen of the DGC but were lat trnsfred to the Regions or the containg of engineers from the private sector; and (Iff) the strengthening of the National Road Laboratoy, in tems of both equipment and stg, thu enabling thi Instion to beter play its role in data collection, technical advice, quality control, standard aon, d research. The actions under Oi and (ii) were initiated in late 1993, in 2 Untd NaWo= B9onom Comnllu for LAtn ica ad the Caibbem (ECLAC), Cmbo, ax nw auqe pare 1