Conformed Copy - L3901 - Secondary, Tertiary and Rural Roads Project - Supplemental Letter

Page 1 KINGDOM OF MOROCCO July 7, 1995 International Bank for Reconstruction and Development 1818 H Street, N.W. Washington, D.C. 20433 United States of America Re: Loan No. 3901 MOR (Secondary, Tertiary and Rural Roads Project) Criteria for road section for inclusion in annual programs Gentlemen: We refer to Section 3.03 of the Loan Agreement of even date herewith, between the Kingdom of Morocco (Borrower) and the International Bank for Reconstruction and Development (the Bank), concerning the above- referenced project and, on behalf of the Borrower, wish to inform you of the following: We confirm that roadworks sub-projects can only be executed if they are fully justified by the economic studies. These studies will be carried out in accordance with a methodology tailored to the individual case, the general principles of which are summarized below: Cost-Effectiveness of Rural Roads The evaluation will be carried out in two phases: 1. The preliminary selection of rural roads will be made by the local authorities concerned on the basis of a multi-criteria analysis designed to rank the sub-projects under consideration. Following the methodology described in the CID/BCEOM report ("Upgrading and Maintenance Program for Earth Roads in Green Land Areas" volume 2.1, chapter 5), each of the roads will be given a classification rating based on three different criteria: (a) frequency of traffic interruptions; (b) administrative and social importance of the road's zone of influence; and (c) agricultural potential of the zone of influence. The multi-criteria classification rating will be the arithmetical mean of the three ratings for (a), (b) and (c), in accordance with the rating scales established in the national plan by DRCR. A rating less than 8 will be eliminatory. 2. The roads selected will subsequently be the subject of a specific economic analysis by DRCR, which will essentially follow the methodo- logy based on application of the HDM III model described in the above- mentioned CID/BCEOM report. Surveys will be conducted to measure normal traffic and also the number of days of traffic interruption following storms. The cost of the works will be deducted from the amount earmarked for engineering studies. The benefit analysis will be done at several levels: (a) for traffic trends during normal weather, the cost differential in vehicle operation following the planned rehabilitation; (b) for traffic interruptions, the reduction in transportation cost resulting from the reestablishment of motorized transportation; and Page 2 (c) for a paving project for a rural road whose current traffic does not exceed 50 vehicles per day, traffic generation will be estimated in a manner exogenous to the CID/BCEOM model, following the method set forth in the SETEC report ("Study of Secondary and Tertiary Roads," July 1990. pp. 13-14) or any other equivalent method approved by the Bank in advance. Where applicable, account will be taken of traffic diverted to the new paved road. Cost-effectiveness of the secondary road program 3. The inclusion of sub-projects in the program will have to be justified by an economic analysis using the methodology based on application of the HDM III model described in the CID/BCEOM report ("Widening of Narrow Roads," February 1994, Volume 4). Traffic counts and measurements of roughness will be carried out. Benefits will be derived from: (a) lower vehicle operating costs and road maintenance costs, in the case of surfacing or strengthening work; and (b) in the case of surfacing or strengthening work combined with widening, a reduction of traffic on the shoulders and of the cost of maintaining these shoulders, together with lower additional operating costs caused by repeated deceleration and acceleration and the low travel speeds attributable to the narrowness of the roads in question. Economic return criterion and sensitivity analysis 4. Two indicators will be used to demonstrate the economic justifi- cation of the sub-projects: (a) the internal rate of return which must be at least 12%; and (b) the discounted net benefit. 5. Sensitivity tests will be performed to verify how indicator 3.(a) varies when less favorable values are assigned to the most significant analysis parameters: (a) in the case of rural roads: total traffic, traffic growth and generation, cost of investment, traffic interruptions; and (b) in the case of secondary roads: total traffic, traffic growth, proportion of traffic on the shoulders of roads, cost of investment and vehicle maintenance cost. The calculation will establish the variation rate for the most sensitive variables in order to bring the economic rate of return to a minimum of 12%. Very truly yours, KINGDOM OF MOROCCO By /s/ Mohamed Benaissa Authorized Representative