Algeria - Sixth Highway Project

Document of The World Bank Report No. 13439-AL STAFF APPRAISAL REPORT DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA SIXTH HIGHWAY PROJECT JANUARY 6, 1995 Private Sector Development, Finance and Infrastructure Operations Division Maghreb and Iran Department Middle East and North Africa Regional Office  EXCHANGE RATE Currency Unit: Algerian Dinar (DA) = 100 Centimes Eguivalency of I US$ in DA since 1985 1985 5.03 1986 4.70 1987 4.85 1988 5.92 1989 7.46 1990 8.60 1991 17.35 1992 22.49 1993 22.00 1994 (DECEMBER) 43.70 FISCAL YEAR January I - December 31 GLOSSARY OF ACRONYMS AND ABBREVIATIONS ANA : Agence Nationale des Autoroutes APC : Assemblee Populaire Communale APW : Assemblee Populaire (le Wilaya BAD : Banque Algeriennc de Developpement CC : Chemins Communaux CNAN : Compagnie Nationale Algerienne de Navigation CNP : Conseil National de Planification CTTP : Organisme de Contr6le Technique des Travaux Publics CW : Chemins de Wilaya DEER : Direction de I'Exploitation et de l'Entretien Routiers' DRHR : Direction des Ressources Humaines et de la Recherche DPAE : Direction de la Planification et des Affaires Economiques DR : Direction des Routes DTP : Direction des Travaux Publics EPA : Entreprise Publique Administrative EPE : Entreprise Publique Economique EPIC : Etablissement Public Industriel et Commercial ERL : Economic Rehabilitation Loan FPC : Fonds de Participation "Construction" IMF : International Monetary Fund MEAT : Ministere de l'Equipement et de l'Amenagement du Territoire MIRP : (Ministry of Infrastructure and Regional Planning) MF : Ministere des Finances MICLERA : Ministere de l'Interieur, des Collectivites Locales, de l'Environnement, et de la Reforme Administrative PCD : Plans Communaux de Developpement PW : Public Works RN : Routes Nationales SAETI : Societe Algerienne d'Etudes d'Infrastructures SNTF : Societe Nationale de Transport Ferroviaire WILAYA : Province I/ The French word "entretien routier" connotes routine and periodic maintenance only, while the English word "maintenance" includes road rehabilitation.  ALGERIA SIXTH HIGHWAY PROJECT STAFF APPRAISAL REPORT TABLE OF CONTENTS Loan and Project Summary ................... i - iv I. COUNTRY AND SECTOR BACKGROUND . . A. Country Background .1 B. Recent Economic Performance. 2 C. Medium Term Economic Outlook. 2 D. The Transport System. 3 Overview .3 Transport Institutions. 4 Status of Transport Deregulation. 5 Transport Investments in Recent Years. 5 E. Transport Sector Issues. 7 F. Previous Bank Involvement and Strategy in Transport. 8 II. THE HIGHWAY SUB-SECTOR ....................... 11 A. The Road Network ............................. 11 B. Road Administration .12 C. Planning and Programming .13 D. Engineering and Controls .14 E. Human Resources Development .15 F. Implementation Capabilities .16 G. Road Budgeting and Financing .17 The Project was prepared on the basis of an appraisal mission in June 1994 led by Michel Ray (Pr. Highway Engineer) and comprising Michel Loir (Senior Transport Economist) Luc Cosyn, Mohamed Ayadi, Claude Fevre, Charles Parey. Bernard Heritier, Patrick Morissey, Jean-Luc Delorme (Consultants). Peer Reviewer was Luis Pinilla (Senior Highway Engineer). Secretarial assistance was provided by Amelia Williams. The processing of the project was supervised by A. Amir Al-Khafaji, Chief, Private Sector Development, Finance and Infrastructure Operations Division (MNIPI) and Daniel Ritchie, Director, Country Department (MN1DR).  III. THE PROJECT .................................. 21 A. Background and Objectives ....... ................. 21 Rationale for Bank Involvement .... ............ 21 Project Objectives .......... .. .. . .. .. .. . .. . 21 B. Project Description ............. ... .. .. ... .. .. . 22 Pavement Strengthening of High-Traffic Roads ..... . . . . . . 22 Policy .................. .... .... .... . . 22 Objectives ............... .. ... ... ... .. . 23 Description .............. ... ... ... ... .. . 23 Rehabilitation of Medium-Traffic National Roads ..... . . . . . 23 Rehabilitation of Priority Bridges ........ . . . . . . . . . . . . 24 Periodic Maintenance of National Roads ...... . . . . . . . . . . 25 Rehabilitation and Maintenance of Saharan Tracks and Purchase of Equipment for Traffic Counting ..... . . . . . 26 Pilot Program for Municipal Roads ....... . . . . . . . . . . . . 27 Audit of Enterprises from the Public Works Sector ..... . . . . 29 Technical Assistance and Studies for ANA ...... . . . . . . . . 30 Modernization and Training Actions ....... . . . . . . . . . . . 31 Studies, Research and the Ministry's Access to Foreign Technical Expertise ........ . . . .. . . . . . . . . 33 Urban Transport Study ........... .. .. .. .. .. .. .. . 33 C. Cost and Financing ............. ... .. .. ... .. .. . 35 D. Procurement ................................ . 37 E. Disbursements .................. .... ... .... . . 39 F. Reporting and Auditing ........... .. .. .. .. .. .. .. . 41 G. Environmental Impact ............ .. .. .. .. ... .. . . 42 IV. ECONOMIC EVALUATION .............. ... ... .. ... . 44 General ................................... 44 Project Benefits .............................. . 44 Non -Quantified Benefits ............. .. .. ... .. .. . 45 Sustainability ............................... . 46 Risks ................................... 46 V. AGREEMENTS AND RECOMMENDATION ....... . . . . . . . . . 47 Tables Estimated Project Cost.. iii Financing Plan.. iii Estimated Disbursements ..iv Transport Investment Expenditures over 1990-1994 .. 6 Structure of the Algerian Highway Network in 1992 ..11 Paved Road Condition - Evolution between 1987 and 1992 .12 Evolution of Road spending in Recent Years ..18 Cost and Financing ..35 Procurement Method ..38 Allocation and Disbursement of the Bank Loan ..39  List of Annexes 1. Detailed Project Costs .................................. 48 2. Project Implementation 2.1 Implementation and Procurement Time Schedule .. ........ . . . 49 2.2 Preparation of Project Implementation Volume .. ......... . . . 56 3. Letter on Road Sector Policy ........... ................. . . 58 4. Action Plans on "Quality", "Public Works Laboratories" and "Acceleration of Payments and Disbursements" . . .65 5. Action Plans on "Bitumen Supply and Quality" and "Granular Materials" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 6. List of Studies on Road Sector Policy and Technical Guidelines . ....... . 69 7. Coordinated Action Program for the Modernization of the Ministry in Charge of Infrastructure ....... . . . . ............ . . 70 8. Economic Evaluation ........... .. . .. .. ............... . 76 - and list of road sections for strengthening/rehabilitation 9. Maintenance Strategy and Development of Network-Based Maintenance . . . . 84 10. Funding of Municipal Road Maintenance ....... . . ........... . . 90 11. Technical Background on Road Strengthening and Rehabilitation ............ .. .. . .. ................ . 92 - Strengthening/Rehabilitation/Maintenance Handbooks - Pavement Evaluation Measurements 11(a) Maintenance and Rehabilitation of Unpaved Roads in Southern Algeria . . . . 95 12. Organization Chart of Ministry of Infrastructure and Regional Planning . . . . 104 13. Key Performance Indicators ......... . ............ . . .. . . . . 106 14. Status of Road User Charges ............................. . 108 15. Environment Mitigation and Monitoring Plan .................. . 114 16. Supervision Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 17. Previous Bank Involvement in Transport ....... ............ . . . . 116 18. Selected Documents and Data Available in Project Files .. ....... . . . . 119 19. Map - IBRD 26124   ALGERIA Staff Appraisal Report Sixth Highway Project LOAN AND PROJECT SUMMARY Borrower: Democratic and Popular Republic of Algeria Beneficiary: Ministry of Infrastructure and Regional Planning Amount: US$ 130 million equivalent Terms: Seventeen years, including a five-year grace period, at the Bank's standard variable interest rate. Objectives: The objective of the Project is to enhance the capabilities of the Borrower to manage its road sector by: (i) reducing the backlog of roads and bridges in need of rehabilitation and maintenance; (ii) strengthening the Borrower's agencies responsible for the management and maintenance of roads; (iii) providing sustainable solutions to finance road rehabilitation and maintenance works; and (iv) creating an environment conducive to the efficient utilization of human and financial resources in the Borrower's road sector, in particular through increased competition, participation of the private sector and implementation of a quality improvement strategy. Project Description: (a) road rehabilitation works (44% of project costs): (i) strengthening high-traffic basic economic network pavements (ii) rehabilitating medium-traffic national roads with appropriate low- cost technologies (iii) rehabilitating priority bridges (iv) related design and supervision (b) road maintenance (41% of project costs): (i) periodic maintenance by contract for national roads (ii) purchasing of equipment for current and emergency maintenance of Saharan tracks and for traffic counting  -ii- (iii) providing technical assistance for and executing a pilot program for maintenance of municipal roads (iv) related supervision, general studies and training (c) Training. Technical Assistance and Studies (15% of project costs): (i) auditing road enterprises (ii) providing technical assistance to the National Agency for Motorways (ANA) (iii) launching economic, financial, environment and engineering studies for motorways (iv) supporting the Ministry's modernization and training of road administration professionals (v) financing road related studies, research of general interest, and urban transport rehabilitation study (vi) facilitating the access of Ministry's Directorates to foreign technical expertise Proiect Benefits: The main benefits are the following: (a) direct benefits will accrue to road users, as reduced vehicle operating costs, and to central and local Governments, as avoided reconstruction costs of roads and bridges. Economic rates of return are expected to be 18-89%, with a weighted average of 59.5%; (b) secondary benefits are to come from the more enabling environment created; streamlining of input supplies to work sites, and enhancement of quality control will reduce road maintenance costs and extend durability of pavement works; (c) moreover, better road management will result in much more efficient uses of scarce resources. These secondary benefits are significant albeit hard to measure. Project Risks: Restoration of peace in the country is an essential condition for smooth project implementation and Bank supervision. More controllable risks are (a) the opposition of vested interests to reforms; action plan implementation will help overcome this risk; (b) a possible failure in the pilot municipal roads program implementation preventing its replication nationwide, a risk minimized through careful project supervision; and (c) insufficient counterpart funds, a lesser risk when a road fund is established.  SCHEDULE A DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA SIXTH HIGHWAY PROJECT Estimated Project Costs and Financing Plan A) Estimated Cost Local Foreign Total --------------US$ Million----------- ITEM A. Strengthening and Rehabilitation 1. Strengthening 20.4 25.1 45.6 2. Road Rehabilitation 8.7 10.7 19.5 3. Bridge Rehabilitation 5.4 8.1 13.5 4. Control of Works 2.6 1.7 4.4 5. Technical Studies 0.8 1.6 2.4 Subtotal Strengthening & Rehabilitation 38.1 47.3 85.3 B. Road Maintenance 1. Periodic Maintenance by Contract 22.9 28.1 51.0 2. Equipment for Current Maintenance and traffic counting 4.3 8.1 12.4 3. Municipal Road Maintenance 6.0 7.3 13.3 4. Supervision, General Studies & Training 0.9 1.7 2.5 Subtotal Road Maintenance 34.1 45.2 79.3 C. Training, TA and Studies 1. Audit of Road Enterprises 0.7 1.3 2.0 2. TA to ANA and training 1.2 2.2 3.4 3. Economic, Financial, Environment and Detailed Engineering Studies (Motorways) 3.0 5.7 8.8 4. Modernization and Training Actions (MIRP) 3.9 7.4 11.3 5. General Studies and Research 2.2 4.1 6.3 6. Specific Technical Assistance for MIRP 0.7 1.3 2.0 Subtotal Training, TA and Studies 11.7 22.1 33.8 Total Investment Costs 83.8 114.6 198.4 Total BASELINE COSTS 83.8 114.6 198.4 Physical Contingencies 7.4 9.3 16.7 Price Contingencies 6.5 8.5 15.0 Total PROJECT COSTS 97.7 132.3 230.0 B) Financing Plan IBRD 9.6 120.4 130.0 Government 88.1 11.9 100.0 Total Sources 97.7 132.3 230.0  -iv- ESTIMATED DISBURSEMENTS Bank FY 1995 1996 1997 1998 1999 2000 2001 2002 Annual 0 20.8 31.0 26.4 20.0 15.6 15.6 0.6 Cumulative 0 20.8 51.8 78.2 98.2 113.8 129.4 130.0 Economic Rate of Return: Weighted average 59.5% Staff Appraisal Report: 13439-AL MaD: IBRD 26124 M:\R&y\Algeria\Loanprog.sum  THE DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA SIXTH HIGHWAY PROJECT I. COUNTRY AND SECTOR BACKGROUND A. Country Background 1.01 With an area of about 2.4 million square kilometers and some 29 million inhabitants, Algeria is by far the largest of Maghreb countries. Its geography unfolds from North to South in a succession of three contrasted zones, namely: (a) the northern coastal area, covering barely 4 percent of the national territory, but home to 70 percent of the population and a base for most of Algeria's agriculture and industrial production; (b) the "High Plateaux", comprising 7 percent of the national territory and 22 percent of the population, which sustains small-sized economic activities; (c) the Saharan South, covering 89 percent of the national territory and 8 percent only of the population clustered in sparse oases surrounded by sand and stone deserts, but holding the oil and gas fields and mineral deposits from which Algeria draws most of its export revenue. Local geography makes transport a key condition to economic development and international competitiveness. Its GNP per capita of US$ 1,830 in 1992 ranks Algeria second in Maghreb after Libya. 1.02 For 25 years after independence in 1962, Algeria followed a socialist model emphasizing centralized planning and heavy industrialization. Large resources generated by steep oil price increases in the seventies were sunk into industrial projects, which rarely achieved their objectives. Most of the industrial plants are running at below 50 percent of capacity. Collectivization of lands has been one factor which dampened agriculture production and yields, raising Algeria's dependence on food imports to about two-thirds of its needs. Sweeping policy reforms are now promoted by the Government to transform the Algerian economy into a market economy, with the private sector to become the principal source of growth and employment generation. Agriculture currently contributes around 11 percent of GDP, industry about 47 percent (of which 21 percent for hydrocarbons and mining, but only 10 percent for manufacturing), and services 42 percent. Although it declined from over 3 percent annually in the early eighties to 2.7 percent in 1992, population growth remains high, and demographic pressures have been especially strong in urban areas where severe housing shortages have developed. The urbanization rate of less than one-third in 1962 has grown to over two-thirds at present. B. Recent Economic Performance 1.03 GDP growth averaged about 0.5 percent p.a. over 1985-92. The collapse of oil prices in 1986 caused a 50 percent drop in Algeria's terms of trade, and jolted the economy. Borrowing was used to absorb the shock, with the result that the country's external debt soared to US$ 25 billion in 1987. This led to the imposition of import restrictions and a slowdown in investment triggering output stagnation and a decline in private consumption. A  -2- far-reaching program of macroeconomic stabilization and structural reforms toward liberalization was initiated, and supported by the Bank which had lent about US$ 350 million annually to Algeria over 1987-91. The falling oil prices, and efforts by the Government to keep servicing the external debt without rescheduling brought a significant slowdown in the pace of reforms, and trade and payment restrictions were tightened in 1992. Financial discipline was also relaxed, translating into higher wages and subsidies to public enterprises. The budget deficit rose to 9.2 percent of the 1993 GDP, itself falling by 2 percent from previous year. Inflation shot up, and the unemployment rate reached nearly 25 percent. Deterioration of the Bank's dialogue with the Government on reforms showed up in a decreased annual lending amount of US$ 200 million during FY92-94. 1.04 In the first quarter of 1994, weak world oil prices, growing macroeconomic imbalances, rising inflation, and accumulation of external debt arrears forced the authorities back onto the path of reforms. A stabilization program was launched to correct economic distortions, adjust the exchange rate, promote trade liberalization, reduce the fiscal deficit, and move to positive real interest rates which would then play a greater role in the allocation of credit. The Algerian dinar was devalued by some 50 percent by April 1994 and the ad- hoc inter-ministerial committee overseeing foreign exchange allocation was abolished. At the same time, the administered prices of essential food staples were raised in March 1994 in order to reduce the burden of consumer price subsidies which still represented 5.8 percent of GDP in 1993. A one-year Stand-by arrangement was approved by the IMF Board. It will likely be followed by a three-year Extended Fund Facility covering 1995-98. The Government also reached agreement with the Paris Club on the rescheduling of interest payments, and has approached the London Club debt for the same purpose, which should be a considerable relief. With other active loans, Bank disbursement in 1994 may reach US$ 600 million. The other international donors provide additional financial support to the Stabilization Program. C. Medium-tern economic outlook 1.05 Accompanied by a deepening of structural reforms, the stabilization program will provide a solid basis for a medium-term macroeconomic framework geared to supporting adjustment and setting the economy on a permanent high growth path. The authorities have developed medium-term projections for the period 1996-98, endorsed by the IMF and the Bank, indicating continued expansion of the economy with annual GDP growth rates of about 6 percent through 1998. Foreign exchange earnings will be boosted by larger gas exports and expected recovery of oil prices. Public expenditures will be trimmed down, and channelled to priority projects with high economic rates of return. The income policy will focus on restraining real wage growth as a way to contain inflationary pressures and promote employment. A key objective is to facilitate exchange rate unification by reducing the excess demand for domestic credit which is driving, in part, the excess demand for foreign exchange. Further multilateral debt rescheduling will be sought to maintain the external debt service burden at a sustainable level.  -3- 1.06 Macroeconomic stabilization will help the transition to a market economy, and the reforms proposed will facilitate the emergence of the private sector as the engine of sustainable growth over the medium term. The action program being implemented in the context of the Economic Rehabilitation loan emphasizes some aspects highly relevant to the proposed project: (a) development of the private sector: the dominance of public enterprises on many sub-sectors presents a challenge to promotion of the private sector, essential to stimulate competition among domestic firms. The strategy focuses on development of labor-intensive small to medium-scale enterprises. This offers the best prospects for job creation. A legal framework to support free competition has been drafted and the pan-territorial pricing requirement has been dropped for all but a small number of essential commodities. Actions to support small and medium-scale enterprises include the authorization of imports of used equipment. Specialized financial institutions will address financing needs of the nascent private sector. (b) Public expenditure reforms: improving the efficiency of public expenditures is a key objective of the stabilization program. Specific measures focus on consolidating the withdrawal of the Treasury from the financing of the public enterprises (PEs) investments, and the completion of the financial restructuring program for PEs. The authorities have established a transparent framework for future expenditures of the PE Restructuring Fund, as well as a calendar for phasing it out. (c) Public enterprise sector reform: The action program deepens PE reform through, inter alia: (i) the establishment of a legal and institutional framework for privatization and (ii) the implementation of a market oriented framework for PE restructuring. D. The Transport System Overview 1.07 The transport network is relatively well developed and provides good geographical coverage of transport needs. The infrastructure at present comprises some 95,000 km of roads, 10 major ports, 5,100 km of railroads, 28 airports of which 11 are at international standards, and about 5,000 kilometer of oil and gas pipelines. Road transport is the dominant mode for domestic passenger and freight transport: recent surveys estimated to 93 percent its share of total intercity passenger traffic, compared to 3.8 and 2.8 percent for railways and air transport respectively. For international freight, most of the traffic goes by sea, but oil and gas pipeline transport is on the rise. About 83 percent of total domestic freight traffic is hauled by road. Rail transport specializes on bulk traffic, where it holds a 45 percent market share against 55 percent for roads. Coastal shipping takes no more than 2 percent of total domestic traffic. Road transport demand, which had grown at an annual rate of 10 percent between 1975 and 1985, seems to have stagnated, if not receded, in recent  -4- years as a result of deteriorating macroeconomic conditions. The transport sector as a whole is estimated to contribute 5-7 percent of GDP. Transport Institutions 1.08 Main responsibilities for infrastructure management and operations are split between two ministries. (a) The Ministry of Infrastructure and Regional Planning (MIRP) handles infrastructure maintenance and development, excluding railroads, through specialized directorates for ports, roads, and airports. This Ministry is now also in charge of Regional Planning. The investment program is coordinated by the "Direction de la Planification et des Affaires Economiques"(DPAE). Few semi-autonomous public entities are still supervised by MIRP, like the "Agence Nationale des Autoroutes" (ANA). Most public contracting and consulting firms took advantage of the 1988 reform law to become autonomous as "Entreprises Publiques Economiques" (EPEs) owned by "Fonds des Participations" (FPs). (b) The Ministry of Transport (MOT) is more directly involved in transport policy matters and prepares through the "Direction de la Planification et de la Cooperation" (DPC) the national transport plan which is approved by the Government. Five directorates for shipping, ports, land transport, road traffic and urban transport, and civil aviation prepare and monitor implementation of transport regulations. MOT supervises those of the some 30 transport public enterprises, such as ship-owner and the railroad company, not yet established as EPEs. 1.09 Other institutions actively involved in the highway sector are as follows: (a) The "Conseil National de la Planification"(CNP) provides planning guidelines to technical ministries and local Governments, and reviews and clears their investment plans. CNP plays a key role in transport capacity development through its infrastructure division; (b) The Ministry of Finance (MOF), in charge of the current budget, has a say on transport budgets, especially for periodic and routine maintenance and transport subsidies; (c) The Ministry of Interior. Local Authorities. Environment and Administrative Reforms (MICLERA) oversees 48 Wilayas and 1,541 municipalities most of which have little cash available. It can influence their road budgets by setting conditions for access to Government subsidies. MICLERA is also involved in road safety and law enforcement; (d ) The Wilava, an intermediate tier of the deconcentrated organization, makes decision on its road budgets, and oversees the municipalities and local transport parastatals; and  -5- (e) The Municipalities, currently managed by executive appointees nominated by the Wali under transitory measures, have their own road networks and budgets, and regulate local transport. 1.10 A Ministrv of Industrial Restructuring and Participation has been created to activate the PE restructuring program, and will play a key role in the privatization of the contracting and transport industry, both included in phase 1 of the Government's divestiture program. Under the current organization, autonomous public enterprises are jointly owned by the FPs acting as fiduciary agents for the State. One of them specializes at the sector level and exerts leadership. The public road construction firms, for instance, are under the "Fonds de Participation pour la Construction" (FPC). These funds are overseen by shareholder committees which only include high-ranking Government officials, a system that allows former line ministries to influence the corporate strategy of public enterprises and promote non-commercial objectives. Status of Transport Deregulation 1.11 Sweeping policy changes took place after 1987. (i) Deregulation has gone the farthest for freight road transport; licensing as a way to control transport supply disappeared in 1993, and truckers enjoy full operational and pricing freedom. The only restriction is on import of second-hand vehicles more than 8-years old. (ii) For passengers, regulations remain in place. Private operations must be authorized and adhere to prescribed services. Fares are fixed by the Government, or enacted by the Wali after approval by the local departments of MICLERA and the Ministry of Commerce depending on where services are provided. (iii) Rail transport is a de-facto monopoly of SNTF, a parastatal with limited managerial autonomy and no pricing freedom. (iv) Shipping, dominated by CNAN and the other specialized public shipping lines that it spun off, remains a Government monopoly. The shipping lines operate mainly within bilateral governmental agreements. Algeria ratified the multilateral Code of Conduct of Maritime Conferences, but its application remains limited to date. (v) Air transport is tightly regulated. Bermuda-type agreements have been signed to share traffic rights on bilateral foreign routes. A parastatal, Air Algerie, monopolizes these rights as well as domestic air transport with tariffs agreed by the State. Transport Investments Strategy In Recent Years 1.12 Transport investments financed by the Government over 1990-1994 are estimated at DA 79.6 billion, including development of the municipal road network under the "Plans Communaux de Developpement" (PCDs). They represented about 20 percent of all Government investments over the period, a relatively high percentage which reflects the fact that the central budget bears the brunt of transport investments which cash-strapped transport parastatals have difficulties financing. The National Transport Study had estimated the share of Government financing to 70 percent of "planned investments"over 1980-89. Assuming no significant change, that would bring transport investments by Government and parastatals to about AD 113 billion over 1990-94, or only 8-9 percent of all public investments, compared  -6- with 13 percent or more in Tunisia and Morocco. The country should increase the amount and efficiency of spending for transport, as evidenced by the generally aging infrastructure and poor service delivery. The urban transport crisis in Algiers showcases for foreign visitors the nature of transport issues and their negative impact on travel times, operating costs, and the environrment. Transport could be a bottleneck to economic recovery if it is not modernized and expanded promptly. 1.13 The distribution of Government transport investments among modes is practically unchanged from what it was during the eighties. Roads get 49 percent of investments, which may be not enough given their share of total traffic. Construction of the Algiers-Blida motorway was the major project implemented during the period. The proportion of investments going to railways, namely 32 percent, is relatively high. Costly projects were executed without economic justifications, like the Jijel-Ramdane Djamel railroad, and the first sections of the "rocade des hauts-plateaux". This area of Government investmnent policy calls for in-depth revision. Port investments absorbed slightly less than 10 percent of total, consisting of rehabilitation of breakwaters and quays in major ports, development of roll on- roll off termninals in some, and construction of a new deep sea port at Djendjen. Details on the investment breakdown are shown in Table 1. Table 1: Transport investment expenditures over 1990-1994 (in current DA million) Sub-sector 1990 1991 1992 1993 1994 1990-94 (actual) (actual) (actual) (actual) (budget) (actual) in % -roads 4250 4950 8000 9800 12000 39000 49.0 (PCD)* (1500) (1850) (2400) (2800) (3000) 11300) -ports 1020 1930 1900 2100 1650 8600 10.8 -airports 341 610 1350 2000 2200 6501 8.2 -railways 3412 4970 5200 5800 6100 25482 32.0 total: 9023 12460 16450 19700 21950 79583 100.0 Source: CNP, except for road investments under PCDs which have been tentatively estimated as 20 percent of total PCDs. 1.14 The investment strategy recommended for transport infrastructure other than roads (discussed in chapter 2) is designed to increase productivity, and rehabilitate and maintain the capital stock, with a higher priority than development of new infrastructure. (a) In railways, elimination of the track maintenance backlog is the highest priority. Other investments should focus on increasing railway competitiveness for services to realize potential comparative advantages over road transport. Freight transport is where the brightest prospects exist. Expansion of suburban services to relieve traffic congestion in main towns is badly needed. Improving reliability of basic services and enhancing operational safety should be pursued by upgrading the telecommunications and traffic control systems. Track doubling and new line construction projects should be put on hold until after completion of ongoing works.  -7- (b) In ports, the ongoing construction of container facilities in Algiers and Oran under the Bank Third Port Project, when completed, will allow accommodation of traffic until year 2000, and expansion of these terminals outside the present limits may have to be initiated in 1997-98. Rehabilitation of breakwaters, and provision of modern grain terminals constitute other high priorities. Newly built away from urban centers, the port of Djendjen could be developed as a center port for grain import and redistribution by coastal ships and rail. Large bulk carriers can be received in Djendjen, which will reduce the Algerian maritime bill. (c) In airports, the 1993-1997 program covers construction of the new terminal building in Algiers, strengthening and lengthening of runways, various investments by the airport agencies (EGSAs) mainly to expand and equip southern airports, and investments for modernization of guidance systems and other air control equipment. The updating of the national scheme for airport development has been finalized. A study on economic and regulatory environment has been launched to adapt it to ongoing changes. E. Transport Sector Issues 1.15 Deficient transport investment planning is one of the most serious, long-standing issues. Investment rationalization is much needed, requiring greater attention to sound economic criteria and better institutional coordination. The effects of weak planning are quite apparent. The transport sector has remained too conventional, and containerization and intermodalism have made few inroads in Algeria to date. Insufficient maintenance has hastened deterioration of roads and port infrastructure. The Government is aware of planning issues, and remedial action to address them is being taken, such as commissioning by MIRP of a road master plan study and of economic and financial studies on motorway development. 1.16 Transport remains dominated by public enterprises which, in "strategic" areas, are de facto monopolies. Their privileges go from easier access to credit and budget support for financial restructuring, to a tradition of doing business with major local suppliers and customers also publicly owned. Freight forwarders and intermediaries, so essential to the efficient functioning of the transport market, are still absent from the scene. Protection against foreign competition is an underlying concern in decisions made by the Government. Creating a level playing field for public and private transport operators in order to elicit a strong supply response and cost effectiveness of transport services, constitutes the thrust of actions needed to improve transport performance. 1.17 Inadequate cost recovery left many of the transport parastatals financially impaired. There were few incentives for commercial dynamism, technical innovation, and cost containment in an operating environment dominated by captive markets, and Government interferences on matters of tariffs and employment protection did not help to solve the situation of the sector. Large resources have been spent by the Government in recent years to try to salvage EPEs. The railway company, SNTF, shows how a company's future can be  -8- undermined by insufficient management autonomy, limited pricing freedom, lack of performance, cost-accounting, and continuing investments with low immediate return. Restructured in 1988, SNTF was again faced with severe liquidity problems in 1993. Urban transport, especially in Algiers, is another case where cost recovery objectives have been superseded with adverse financial consequences by social objectives. The trucking and bus transport parastatals are unable to renew their aging fleets because they do not generate enough cash. Cross-subsidization is another pervasive issue; denying economic distances distorts the spatial distribution of production, as well as technological choices. 1.18 Infrastructure cost recovery is inadequate as well. Construction and maintenance costs of port and railway infrastructure are not recovered. Some of the airport infrastructure costs are recouped by the managing entities, but major investments and maintenance works are on the Government budget and transferred to these entities free of charge. Of all modes, road infrastructure is the one where cost recovery is the most satisfactory. The recent evolution of road user charges, however, suggests that they may be set below the long-run marginal cost (this is discussed in Annex 14). Differences in the cost recovery achieved by each mode also indicate possible distortions in traffic allocation, especially between road and rail. F. Previous Bank Involvement and Strategy in Transport 1.19 The transport sector in Algeria has received ten loans from the Bank. These loans, totalling US$ 814 million, financed five highway projects, three port projects, and two railway projects. Generic project implementation problems have been experienced in relation to cumbersome administrative procedures for procurement and disbursement. Projects were generally completed behind schedule, a characteristic common to most projects in the Bank's investment project portfolio for Algeria. Contract execution involving foreign suppliers occasionally ran into difficulties related to slow payment and settlement of claims. The association of local and foreign consultants to execute Bank-financed contracts has not always led to best results with implementation delays. Going to loan negotiations before completion of bidding documents proved to be a frequent cause of poor project performance. 1.20 Capacity building in road administration made significant progress under the ongoing Fifth Highway Project. The Highway Network Directorate was reorganized in 1990, the former maintenance sub-directorate being upgraded to a directorate status (the "Direction de l'Exploitation et de l'Entretien Routiers", or DEER). This development enhanced the maintenance function and fostered growth of current budget allocations to road maintenance from AD 525 million in 1990 to about AD 1.6 billion in 1994. The Government awareness of road maintenance problems has grown much sharper. DEER's internal organization is well structured and good monitoring systems have been developed. Many interesting initiatives were taken in the last two years by the two road directorates to improve cohesion in the decentralized road administration and stricter adherence to national standards. Norms on processing time of procurement and disbursement matters are being imposed on regional directors of public works. There is a genuine desire to modernize the road administration  -9- and to bring practical solutions to issues. The notion that substantial benefits can be derived from competitive award of road maintenance contracts has been internalized by the public works administration, and local competitive bidding has become standard practice for periodic maintenance contracts, as it already was for heavier type of maintenance activities. Annex 17 provides additional insights on previous Bank lending experience. 1.21 Bank lending strategy for transport in general and highways in particular is designed to eliminate the maintenance backlog and modernize infrastructure. Institution building is a paramount objective. Improving public sector management and investment rationalization are at the core of this strategy which draws on main findings presented in the World Development Report (1994 WDR), of which those relating to better responsiveness by the Government to effective demand for infrastructure, development of competition and of public-private partnerships in financing appear to fit the specific needs of Algeria well. The 1994 WDR pointed out that high levels of public spending for new infrastructure in many developing countries failed to produce the expected development benefits, and that wasteful investments and inefficient service delivery had yet to be tackled. It established a link between infrastructure provision failures, poor public management, and lack of accountability to users. Hence its recommendations to operate transport infrastructure on business principles and to encourage private sector involvement in the sector. 1.22 The proposed project will seek adjustment in public spending for roads by increasing the priority in favor of maintenance, and seeking greater selectivity in the road investment policy especially for large projects. "Guidelines on economic evaluation and choices of road investments" will be developed under the Project. The project follows on the recommendation made in the June 1994 Country Brief that a sustainable response to structural adjustment requires improvement of transport infrastructure. Better prioritization of public spending for roads appears all the more needed as the Government budget will be tightly constrained under the Stabilization Program approved in May 1994 by the IMF Board. By supporting privatization of the public works industry, 90 percent of which is currently controlled by parastatals, the proposed project also falls in the mainstream of reforms pursued under the Economic Rehabilitation Loan (ERL). 1.23 The whole set of measures designed to straighten out the incentive framework in the road maintenance industry, which ranges from streamlined bidding documents and improved contract management by the road administration, to elimination of technical and institutional bottlenecks for supply of bitumen and granular materials, will strongly contribute to deepening, in the highway sector, of reforms (namely private sector promotion, enhanced competition, development of small- and medium-scale enterprises, privatization, and public enterprise restructuring) sought under the ERL scheduled for Board approval in January 1995. 1.24 The privatization objective has already been approved in principle by the Government which, through the Ministry of Industrial Restructuring and Participation, is actively engaged in working out the details of its implementation. Public works enterprises have been  -10- included in the list of activities that could be divested by the Government in a first phase of its privatization program. Finally, improved infrastructure cost recovery constitutes an essential objective, and increased reliance on properly designed user charges will be sought to alleviate funding constraints and increased accountability and responsiveness to road users. The proposed Sixth Highway project fully fits the Bank strategy for transport in Algeria.  -11- II. THE HIGHWAY SUB-SECTOR A. The road network 2.01 The transport infrastructure is well developed with a 95,500 km-long highway network and 2,700 bridges. With an average density of 3.3 km per 1,000 inhabitant, Algeria is ahead of Tunisia and Morocco (density of 2.3 in both cases). The classified network comprises three categories of roads. The paved road network is about 62,500 km long or two-thirds of the total which is high compared to Maghreb average. Municipal roads represent nearly half of the road network. Motorways (two or three lanes each way) were the latest addition to the network, totalling about 110 km at present along the northern east-west corridor, plus 56 km under construction. Detailed engineering is under preparation for another stretch of 200 km of motorways. Table 2 gives details on the composition of the Algerian network in 1992. Table 1. Structure of the Algerian highway network in 1992 (in km) classification paved unpaved total Motorways 110 0.2% 110 0.1 % National roads (RN) 22445 35.9% 3624 11.0% 26069 27.3% Wilaya roads (CW) 18846 30.2% 3286 9.9% 22132 23.2% Municipal roads (CC) 21049 33.7% 26144 79.1% 47193 49.4% total 62450 100% 33054 100% 95504 100% 2.02 Most unpaved roads are in the municipal network; those of the national network are found in southern regions, with average daily traffic below 50 vehicles. The average daily traffic on paved roads ranges from close to 3,000 vehicles on RNs to about 1,200 vehicles on CWs, whereas traffic on municipal roads is estimated to be below 500 vehicles. Three concepts are relevant for discussion of the maintenance policy. The "reseau principal" consists of about 19,000 km of paved roads inter-connecting major towns, ports and airports, all belonging to the RN network with average daily traffic in excess of 2,000 vehicles. The National Transport Study delineated a larger network of 22,466 km which includes 20,472 km of RNs, 1,952 km of CWs, and 42 km of CCs. Some 5,000 km of the priority network constitute the basic economic network which includes roads with average daily traffic above 3,500 across in northern areas where two-third of economic activities are concentrated. 2.03 About half of paved roads are 7-m wide or above (against 10% in Morocco). Road standards as of December 31, 1991 were distributed as follows:  -12- (a) expressways: - 2x3 lanes (2xl0.5m) 72 km, or 0.1% of total; (with motorway - 2x2 lanes (2x7m) 466 km, or 0.5% " or semi-motorway characteristics) (b) highways: - 4 lanes (from 12 to 14m) 82 km, or 0.1% " - 3 lanes (from 9 to 10.5m) 344 km , or 0.4% - 2 lanes (from 5 to7m) 94,540 km, or 98.9% 2.04 The paved roads network expanded from 48,062 km in 1987 to 62,450 kms in 1992 (+30 percent). Construction of new paved roads (RN and CW) was limited to about 1,000 km over six years, less than the annual addition to the municipal network estimated between 1,500 and 2,000 km. Deconcentration of road management decisions boosted demand for road construction in a systematic effort to integrate remote communities in the nation. Daily traffic on trunk roads have grown in excess of 10,000 vehicles in many spots (15,000 plus on the 2 lanes RN4 road near Oued Fodda), reducing travel speed and safety. 2.05 Road condition is generally mediocre, and has deteriorated since 1987. On average, 61 percent of paved roads were in good to fair condition in 1992, compared to 75 percent in 1985. The low priority given to maintenance in the eighties was a factor. The CW network fared better than the RN one due to their lighter traffic: the proportion of bad roads was unchanged at 24 percent for the former, but rose to 32 percent between 1987 and 1992 for the latter. The condition of municipal roads, mostly found in rural areas, is the least satisfactory. Unpaved roads are not managed in practice and are often in bad condition. Main characteristics on the evolution and current status of road condition are given in Table 2. Table 2. Paved road condition. Evolution between 1987 and 1992 (in % of total) Classification 1987 1992 good fair bad good fair bad - national (RN) 49% 27% 24% 41% 27% 32% - wilaya (CW) 49% 27% 24% 42% 34% 24% - municipal(CC) 20% 20% 60% (sources:Etude Nationale des Transports. Volume II: Transports routiers. Table 3.3 Premier Congres National de la Route. Tome II. Decembre 1992) B. Road Administration 2.06 The road administration was deconcentrated in the mid-eighties. At the center, the Direction des Routes (DR) is in charge of new construction and major maintenance such as road strengthening and rehabilitation. DEER handles other maintenance operations, from resealing to routine maintenance of roads and bridges. DEER and DR exert line  -13- responsibilities over the director of Public Works (DTP) in each of the 48 administrative divisions of the country. Execution of the RN budget is deconcentrated though, meaning that the Head of the Wilaya administration, or Wali, has delegated power from the Minister of MIRP to commit and spend most of resources earmarked for RNs except for motorways and a few other major projects still controlled at central level. Deconcentrated road management fully applies to CWs and CCs. The current and capital budgets, especially for CWs and CCs, are designed by DTP and voted by local governments under conditions giving DR and DEER limited opportunities to influence their choices of priorities. 2.07 The road administration in the DTPs and MIRP comprises about 500 staff at management level out of about 1,300 engineers in the subdivisions, plus 7,000 laborers for execution of works by force-account of which 3,000 are casual. The labor force is in excess of what the current scale of operations requires, but will find redeployment opportunities when regular maintenance is extended to the CW and CC networks. The 48 DTPs control some 257 territorial subdivisions. The DTP reports to the Wali on matters related to networks other than the RN's. The municipal network is "owned" by the municipalities which are responsible for programming, funding, and executing their maintenance. The local public works subdivisions provide technical assistance to the municipalities, especially for the PCD projects, services which are not clearly defined by legislation, and take too much time to go beyond rubber-stamping technical documents. In general, the deconcentration has been accompanied by some dilution of responsibilities, less cohesive road policies, and weakening of construction and maintenance standards. 2.08 The Agence Nationale des Autoroutes (ANA) was created as a semi-autonomous public administration in July 1992 and operates with a core staff of about 40, gradually taking over the motorway functions formerly vested in the Highway Network Directorate. A three-year technical assistance program is financed under the Fifth Highway Project to help develop ANA. Long term advisers will train local counterparts while performing specific tasks in relation to detailed engineering of motorway infrastructure, contract management, project economic appraisal, and quality control. They will be complemented by short-term advisers as needs may arise. C. Planning and Programming 2.09 The pressure of major demands at both the national and local level, and of the absence of a reference framework such as a medium- and long-term national scheme or master plan, have made it difficult to come up with a coordinated road plan which meets economic criteria. In recent years, investments were therefore concentrated on priority road connections belonging to the principal network. Projects are first studied at the local- government level (wilaya, municipalities) then, when the Annual Plan is prepared, are submitted to MIRP and the services of the Planning Delegate for joint approval. The last few years have seen the development of technical analysis tools (traffic levels, road classification, regional studies); this makes it easier to take economic criteria into account when choosing investments, in addition to social criteria in cases dealing with accessibility to  -14- remote areas (high plateaux, South). A better balance should be sought between these two dimensions of analysis. Improvement is also required in the degree of project maturity, most particularly as regards the quality of studies and the lifting of project implementation constraints. Preparation of a master plan for roads and highways was begun in 1994 with a view to expanding programs and giving greater emphasis to priority works on the road network vis-a-vis construction of motorways. 2.10 The quality of costing information in the new inflationary context has decreased, and the traffic counting system was interrupted after 1990 for lack of appropriate equipment, depriving planning officials of key data. Furthermore, investment appraisal techniques are rudimentary. Demand forecasting is based on overly simplistic assumptions without taking into account the structural impacts of projects, the inter-sectoral and inter-spatial linkages, and the influence of macroeconomic constraints on transport. There are too few transport planners in the central administration, and they lack needed skills and experience. The proposed project (see Annex 7, para. 2) will address main planning issues under the modernization and training component. In a context of funding scarcity, the Bank strongly recommends that road/motorway investments have an ERR of at least 12%. 2.11 Programming of road maintenance has been based on good engineering judgment within tight budget constraints which, at present, only allow for taking regular care of the priority network, or less than a fourth of Algerian roads. The strategy followed by DEER is to catch up with the road strengthening backlog for the most trafficked RNs of the basic economic network and carry out surface renewal as needed, namely every 10 years on average. Road rehabilitation applies to roads with daily traffic of 1,000-3,500 vehicles. The extent of resealing varies from year to year between 1,000 km and 1,600 km. About 80 percent of maintenance budgets including pavement strengthening and rehabilitation is spent on the basic economic network (10,000 krm). Network-based maintenance is now being developed under the ongoing Fifth Highway Project. The road data base will cover the basic economic network in phase 1, and 35,000 km in phase 2 to be financed under the proposed project. A study will be financed under the proposed project to define a strategy for maintenance of Saharan roads. The maintenance policy is further discussed in Annex 14. D. Engineering and Controls 2.12 MIRP is responsible for the design and supervision of RN works. It is assisted by (mainly local) consultants. Foreign consulting firms carried out most road studies during the first twenty years following independence, but they have been replaced by local consulting firms which call upon them occasionally to bridge technical expertise gaps. The motorway program paved the way to closer association of local and foreign firrns and created renewed opportunities of technological transfers under contracts jointly won. The five local engineering firms established as EPEs employ about 1,000 staff, 20 percent of which are highway engineers. The local consulting industry has been overly protected to date, as consultants were selected in the majority of cases on a sole-source basis by the road administration. That was not conducive to good performance, as evidenced by the low  -15- quality of detailed engineering studies of motorways carried out in the early eighties, or cases in which the detailed engineering of road strengthening works had overlooked structural defects, and chronically weak control of works by teams that did not always include a qualified engineer. Competitive bidding should become the rule for Bank-financed contracts. 2.13 The Organisme de Contr6le Technique des Travaux Publics (CTTP) maintains privileged working relations with MIRP, because of its control and supervision functions on the whole national territory, and its experience gained during the Fifth Highway Project. It should also continue to develop the national technical guidelines and their dissemination during the Sixth Highway Project. It competes with the other consulting firms for more traditional types of works, namely geotechnical surveys and project design. CTTP was established as an EPE in 1988 with design, control, and laboratory functions. It received extensive support under the Fifth Highway Project for the development of technical skills, lately in the form of a 1992 convention for technical assistance in effect through 1994 and helping CTTP in carrying out a two-year training program on road maintenance (the "Plan Formation") for the 500 "subdivisionnaires" and line managers in the Public Works administration encompassing a wide range of basic technical and managerial skills. CTTP is also in charge of developing HDM III in Algeria. 2.14 There are five public-works laboratories. Four are specialized by geographic area. The fifth, CTTP, maintains some of the functions formerly held by the central laboratory, LNBTP. They employ about 2,500 staff for an annual turnover slightly above US$ 1 million. The productivity per employee is low, and labor costs grow much faster than turnover, resulting in serious financial imbalances despite the high fees charged for services. Controls performed along the whole "quality chain", from suppliers, contractors, and laboratories, to the client, need urgent strengthening. The laboratories do have useful in-house professional expertise constituting the "national technical memory", but the current status of the four regional laboratories is serious enough to justify corrective action. Annex 4 outlines the main features of the "Laboratories" action plan annexed to the road sector policy letter. Following a Bank financed audit, a new dynamic has emerged, in particular, towards the creation of a PW Laboratory Network. E. Human Resources Development 2.15 An action for continuous training is being developed to address the long-standing issue of quality deficit of road engineers at entry in the profession, which has costly consequences. Highway engineers are trained by the Ecole Nationale des Travaux Publics (ENTP). Created in 1966 and placed in 1983 under the Ministry of Education pedagogic "tutelage", ENTP works under the supervision of DRHR (MIRP). ENTP has some growth problems which undermine its operational efficiency. Quality of the academic training given to highway engineers is generally low in project management, procurement, economic appraisal of road investments, and new technologies. The development of post-graduate courses with foreign technical assistance is envisaged to enhance academic skills of ENTP  -16- students. In addition, an engineering degree in urban techniques was introduced by MIRP in 1994. 2.16 The Direction des Ressources Humaines et de la Recherche (DRHR) is committed to both raising the skills of newly recruited engineers, and maintaining and developing professional skills throughout their careers. The key player in this field will be the Centre National de Perfectionnement de I' Hydraulique (now being transformed into the "Institut National de Perfectionnement de l'Equipement") which, after two years in operation, will no more be limited to host seminars conducted by others. INPE will evaluate training needs in the PW organization on a permanent basis, and design and deliver training programs tailored to those needs. The objective under the Sixth Highway Project is to set up an organization capable of assessing positions and job requirements and handling career development matters. The proposed project would train managers and trainers, finance a complement of training aids and technical documentation, and support implementation of a comprehensive training program for DR and DEER personnel. In the current context, quality training, locally and abroad, is an important incentive for progress. F. Implementation Capabilities 2.17 There are 33 EPEs for execution of road works, including the former MIRP's equipment fleet regionalized in 1984 and then transformed into autonomous public enterprises. Competition for road contracts is not strong as these firms are all publicly- owned and assured of getting the minimum market share to stay in business from the Government-client concerned about social protection. The private sector is confined to periodic and routine maintenance contracts, with one exception in 1993. LCB procedures have yet to strike a right balance between needs to protect the administration against risks of poor performance by newcomers, and to create opportunities for enterprises willing to take up more complex works. Prequalification or postqualification criteria will be adapted to meet this requirement under the proposed project. In view of recent cases of contract execution disrupted by cash flow problems, it is no less important that more weight be given to financial criteria to select contractors. Last, but not least, the proposed project will finance complementary studies to the ongoing technical and financial audit of 27 large parastatals and the road sector policy letter defined stages of the dialogue leading to an action plan, with its progress being assessed at the project's mid-term review. The improvement of the payment delay situation will also be addressed and have an impact on the cash flow (see Annex 7, para. 6). 2.18 Force-account works more or less coincide with routine emergency maintenance, and have been considerably downsized from the pre-1984 level when they covered most road works. About 60 percent of the 1994 road current budget is contracted out. There is scope for further reduction of force-account. Development of municipal road maintenance should be done by small contracts as far as technically possible.  -17- 2.19 No less than 20 percent, and sometimes up to 40 percent of road work completion delays, are linked to irregular supplies of bitumen by public quasi-monopolies. Production of local bitumen is entrusted to Naftec, the national refiner. Import, storage, and local distribution of bitumen is handled by Naftal. Pure bitumen (40/50 grade) widely used for road overlays, was imported until recently. Foreign exchange scarcities led Naftec to add production of 40/50 bitumen in Skikda to its existing production of 80/100 bitumen in Arzew from imported reduced crude oil. The import substitution achieved is not yet satisfactory in terms of quality, due to inadequate production processes. Naftec's storage capacity is short of peak-demand needs. The Naftal distribution system includes port storage tanks in Mostaganem, Algiers, Bejaia, and Skikda, an emulsion processing plant at Setif, mobile depots for supplies across the country, and an important tanker-truck fleet, a large proportion of which is out of service due to lack of spare parts which forces Naftal to contract part of its transport needs to SNTR. Low quality bitumen is one of the main causes of premature defects of road overlays. A task force on bitumen was formed in 1993 by the Government, and made excellent progress in looking for solutions with active support from Bank-financed technical assistance. The main content of an Action Plan on Bitumen Supply and Quality are outlined in Annex 5. This Action Plan is annexed to the Policy Letter. 2.20 Close to 1,000 quarries are registered in Algeria. The Entreprise Nationale de Granulat (ENG) is the largest public firm to have specialized in quarry operations. Many public road contractors have developed quarrying as a branch of their activity. The private sector operates smaller quarries with a combined production capacity of less than 20 percent of total. Quarrying is subject to authorization by local authorities, generally ill-equipped to specify and enforce the technical clauses in concession agreements. The heavy demand for road materials in the eighties triggered complacency in granting permits to operate quarries, to the effect that shortages of good-quality gravel and sand materials used in road works, together with loose control of specifications by laboratories, have become a recurrent problem in recent years, causing large completion delays, cost overruns, and early defects of new overlays. The quarrying industry is weak and operates at less than 50 percent of its capacity. The aging equipment used cannot be repaired easily for lack of foreign exchange to buy spare parts. MIRP appointed a technical committee in January 1993 to review issues and propose remedial measures; a National Conference was held in December 1993 to raise awareness on issues, and build up a consensus on priority actions. Updating the legislation, developing relevant training, and facilitating access to foreign exchange to renew the equipment and purchase spare parts are important steps toward rehabilitation of the industry. The proposed project will focus on improving the control performance of quarries by local laboratories, and on "filialisation" of quarries. It will finance a study of national quarrying resources and help develop better management. G. Road Budgeting and Financing 2.21 Funding of road construction and maintenance comes under various budgets, with a system of "Autorisations de Programmes" allowing the commitment of resources within limits under multi-year projects, and "Credits de Paiement", fixing annual spending limits.  -18- (a) The Government investment budget comprises four chapters: chapter 528 for motorways, chapter 521 for RNs, chapter 522 for CWs and 591 for CCs. A variety of functions are covered, from rehabilitation to realignment, widening, and paving, of which the financial reporting system in use does not allow monitoring. Accounting should be improved to isolate maintenance expenditures and facilitate the analysis of road investment budgets. (b) The MIRP recurrent budget for RNs is under Chapter 35-12, which covers resealing and routine maintenance. Chapter 35-13 includes funds for protection from floods plus minor bridge repairs. Maintenance of CWs is under chapters 904 and 951, with the latter nornally covering major repairs but more often used for reconstruction. (c) The current municipal budget comprises "depenses de voirie" with line items broken down along a subjective classification by basic input. The capital budget includes chapters for road construction and rehabilitation. Funding of municipal road maintenance is very insufficient. This issue is further discussed in Annex 10. (d) Investment resources for municipal roads are available under the "Plans Communaux de Developpement" (PCDs). The PCDs are approved by CNP after discussion at the Wilaya level where requests from municipalities are screened and credits are distributed. The PCD funds are budgeted under chapter 591. 2.22 Table 3 gives details on road expenditures and investments between 1990 and 1993. Table 3: Evolution of road spending in recent years (in current DA million) type of works 1990 1991 1992 993 (budget) Recurrent maintenance (RM)': - national roads (Chapt. 35-12) 525 583 809 1589 - Wilaya roads: Chapter 904 172 246 331 385 Chapter 951 160 250 315 414 sub-total 332 496 646 799 - municipal roads 462 450 (*) 500 (*) 500(*) total RM 1319 1529 1955 2888 Heavy maintenance & construction (HC): - national roads (Chapter 521) 2504 2722 4900 5688 - wilaya roads (Chapter 522) 246 378 700 747 - municipal roads: PCDs 1500 (*) 1850 (*) 2400 (*) 2800 (*) total HC 4250 4950 8000 9235. total spending 5569 (*) 6479 (*) 9955(*) 12123(*) gross national product (GDP) 536300 793100 986900 1 150000est. road spendifl in percent of GDP 1.04% 0.82% 1. 0% 1.05% Note: amounts shown under Chapter 521 include spending for motorways; those marked with an asterisk were tentatively estimated by the appraisal mission. / Recurrent maintenance includes routine and light periodic maintenance.  -19- 2.23 The above table contains approximations that had to be made to overcome the paucity of financial data provided to the Bank before and during appraisal, and gives a picture which is deemed reasonably accurate. It shows road expenditures more than doubling in nominal terms from about DA 5.5 billion in 1990 to DA 12.1 billion between 1990 and 1993. Still, the budget allocations to roads have been hovering around 1 percent of GDP during the period, an indication that road budgets were following inflation without upward adjustment, and remain low by international standards which have road budgets at about 1.5 percent of GDP. The 1994 budget is regressive, since resources allocated to DR and DEER are unchanged from previous year while inflation is running at an annual rate of 39 percent. Some budget components fared better than others in the last 5 years. Periodic and routine maintenance under chapter 35-12 received much larger allocations which made it possible to expand the resealing program from 700 km in 1992 to 1,700 km in 1993 (it went down to 1,253 km in 1994). Allocation to bridge maintenance rose to AD 128 million in 1993, a substantial increase over the DA 45 million budget of 1992 and a sign of increased awareness of bridge deterioration issues across the country. Bolstered by foreign donor contributions (the Bank and the African Development Bank essentially), the "purchasing" power of the DR budget did not change much, allowing to, respectively, strengthen and rehabilitate 500 km of RNs and 200 km of CWs on average per year. In contrast, the means allocated to maintain roads in the Wilaya and municipal networks have been eroded by inflation, and are largely inadequate. Payment procedures are slow, and processing of withdrawal applications at every step of the local cycle, including the BAD, has been unduly long to date. Remedial action is being taken to improve the situation. 2.24 Too much emphasis is still placed on new construction in road budgets, the balance of which should be tilted in favor of maintenance2. About 20 percent of the DR budget during 1986-1988 went to maintenance of RNs and CWs. Reports on physical execution of projects from 1988 to 1992 indicate a change of priorities and allow to estimate the share of road maintenance to around 40 percent of the DR budget. Actual spending of AD 5 billion in 1993 was equally split between motorway construction and the DR maintenance program. Given the extent of the maintenance backlog, new construction should be slowed down and contained to within 40 percent of the DR budget. Making road spending more cost-effective is another priority target. Maintenance unit costs are high and could be reduced by promoting stiffer competition between contractors, improving contract management, ensuring timely supplies to the work site, and facilitating access to foreign exchange to purchase equipment and spare parts. 2.25 The municipal budget is too narrow to bear the cost of road maintenance. Pending municipal finance reform in Algeria, interim solutions must be worked out to channel additional budget support to municipal road maintenance. An agreement was reached in June 1994 by representatives of the three ministries MF, MICLERA, MIRP and of CNP. DEER 2/the terminology used is a frequent source of confusion in Algeria. The english term "maintenance" not only covers "routine and periodic maintenance", financed under the current budget, but road rehabilitation and pavement strengthening also, financed under the capital.  -20- in relation with MICLERA, MF, DTPs, local PW sub-divisions and local authorities, will be able to launch the pilot program covering road maintenance which is part of the project. An agreement between municipalities and DTPs is an important aspect to ensure sufficient funding of maintenance, operational efficiency at procurement and execution stages, and good design and supervision of works. 2.26 The rationale for creating a Road Fund was discussed at appraisal. Tax earmarking could be a valid way to safeguard the road capital stock through implementation of high- return investments, and make it possible to target untapped road user surpluses toward expanding the charging base while facilitating a consensus on spending more for better roads. It could be of particular relevance for the under-funded Wilaya and municipal road networks. The maintenance backlog is conspicuous, and road users would be able to monitor the improvements against payment of higher user charges. Specializing the Road Fund on key maintenance tasks with specific criteria for fund allocations, and having it operate under strict accounting standards, would reduce risks of macroeconomic distortions in the allocation of resources and streamline road management. The Government expressed willingness to study the practicality of a Road Fund solution in Algeria, and will set up an inter-ministerial commission to that effect. Technical assistance will be financed under the proposed project. 2.27 Payments of consultants and contractors are slow and have major consequences on local firms' financial situation and the interest of foreign firms/consultants to bid; for example, payments after six to twelve months in local currency, after two years in foreign currency have been observed during the Fifth Highway Project. A strong and dynamic action is needed to speed up all payments, especially in the context of privatization. DPAE in MIRP is in charge of developing closer coordination between all parties concerned to decide, on the specific immediate actions to expedite payments. A specific action plan has been discussed and finalized during negotiations; it is annexed to the road sector policy letter; (see annex 4). A special study is to be financed under the modernization component to deepen the analysis and develop further actions. M :\Ray\AWgeria\Chapter I sar  -21- III. THE PROJECT A. Background and Objectives 3.1 The careful supervision of previous road projects, especially Highway V, enabled detailed identification of the key physical and institutional bottlenecks for the road sub-sector, transport sector and road- specific studies to analyze alternative priority actions, and means to address issues, and a quality and in-depth dialogue with decision makers. In this context a relatively global modernization process is being developed and this Highway VI project is an important step to support this effort. 3.2 Rationale For Bank Involvement. Good maintenance of road infrastructure is essential to economic development as roads carry the brunt of traffic. The current maintenance backlog must be reduced. Road budgets are tight and extensive external financing is needed. Bank involvement is important to: (a) maintain the priority on maintenance during the stabilization program; (b) support modernization and training efforts at MIRP, and (c) restore donor confidence. The wealth of experience acquired by the Bank in similar situations bodes well for its ability to assist in addressing organizational and financial issues. In many ways, the Bank can effectively help at this particular juncture of time when Algeria moves toward liberalization of its economy, The road industry remains dominated by the PEs. Much greater dynamism would be possible, were the private sector given more opportunities to participate (see para. 1.21 on Bank Strategy). 3.3 Project Objectives. The objective of the Project is to enhance the capabilities of the Borrower to manage its road sector by (a) reducing the backlog of roads and bridges in need of rehabilitation and maintenance; (b) strengthening the Borrower's agencies responsible for the management and maintenance of roads; (c) providing sustainable solutions to finance road rehabilitation and maintenance works; and (d) creating an environment conducive to the efficient utilization of human and financial resources in the Borrower's road sector, in particular through increased competition, participation of the private sector and implementation of a quality improvement strategy.  -22- B. PROJECT DESCRIPTION 3.4 The project comprises three principal components: (a) Road Rehabilitation Works (44% of project costs): (i) strengthening high-traffic basic economic network pavements; (ii) rehabilitating medium-traffic national roads with appropriate low-cost technologies; (iii) rehabilitating priority bridges; and (iv) related design and supervision (b) Road Maintenance (41 % of project costs): (i) periodic maintenance by contract for national roads; (ii) purchasing of equipment for current and emergency maintenance of Saharan tracks, and for traffic counting; (iii) providing technical assistance for preparation and execution of a pilot program for periodic maintenance of municipal roads; and (iv) related supervision, general studies and training; (c) Training, Technical Assistance and Studies (15% of project costs): (i) auditing road enterprises; (ii) providing technical assistance to the National Agency for Motorways (ANA); (iii) launching economic, financial, environment and engineering studies for motorways; (iv) supporting the Ministry's modernization and continuous training of road administration professionals; (v) financing road related studies and research of general interest, and an urban transport rehabilitation study; (vi) facilitating the access of Ministry's Directorates to foreign technical expertise. The description, background, and objectives of each project component are provided below. Detailed cost tables are in Annex 1; all indicators are described in Annex 13; procurement aspects are described in Chapter III, Part D; implementation and procurement schedules of main components are in Annex 2. Costs given in paras. 3.6 to 3.39 by component/sub-component are July 1, 1994 appraisal costs. They include physical but not price contingencies. Costs are given in Tables 4, 5, 6 and Annexes 1 and 2 are December, 1994 costs (negotiation). (a) ROAD REHABILITATION WORKS (a) (i) Pavement Strengthening of High-Traffic Roads 3.5 Policy. A "basic economic network" of about 5,000 km, with daily traffic ranging from 3,500 veh/d to 20,000 veh/d, has on average a very weak pavement structure compared  -23- to its traffic (see Annex 11 on Technical Background); an appropriate pavement strengthening program has been launched under Highway V and needs to be continued under Highway VI to reduce the backlog. 3.6 Objectives. This $48.8 million work component (including physical contingencies) is the leading road activity to support several of the key transformation/modernization actions; the main objectives are to: (a) restore the pavement asset and maintain an appropriate level of service; (b) develop local and international competition; and (c) mobilize all actors towards quality works, and consistency between estimated implementation time and contract. 3.7 Description. Twelve sections between 16 and 62 km each and carrying on average between 2,200 and 17,000 veh/day have been identified for strengthening at an average cost of US$130,000 per km. Bidding will be invited for three tranches: one just after Board presentation and the others at twelve-month intervals. A limited number of small road improvements, including for example, rectifying curves and pavement leveling in flood-prone areas, may be incorporated, subject to good economic justification within 10 percent of the section strengthening cost; road safety audits are being launched. Funding for all road strengthening and rehabilitation works to be implemented under the project have already been secured through the "inscription" at CNP. (a) (ii) Rehabilitation of Medium-Traffic National Roads 3.8 Policy. National roads that are not in the "basic economic network" have fewer than 3,000 veh/day, and represent the majority in length and replacement value. They usually have high roughness indices and/or weak structures, but cannot be strengthened with the same technologies as the basic economic network due to budgetary constraints. Therefore, it is essential to develop (a) a consistent set of appropriate technologies for rehabilitating such roads, and (b) a program of significant size for immediate implementation (see Annex 11 on Technical Background). 3.9 Context Synthesis. Following two years of dialogue with the Bank, and in preparation of Highway VI, comprehensive guidelines have been prepared, at the Road Director's request, by the CTTP with the help of leading Algerian experts. It comprises six documents: methodology, inventory of techniques, economic analysis, sample bidding documents, road safety, and environment. Extensive comments have been provided by the Bank and foreign experts. A pilot work program has also been carried out under Highway V to test methodologies. Studies of six long sections have been carried out by the CTTP; the final bidding documents have been reviewed by the Bank. 3.10 Objectives. This US$20.8 million work component (including contingencies) will (a) launch the development of priority medium-traffic route rehabilitation at a reasonable cost, (b) strengthen competition because large asphalt plants are not necessary for a majority  -24- of such works (which mainly use surface dressing technology over good quality granular base without bitumen or cement) and (c) help the modernization actions described for road strengthening works. 3.11 Description. Six sections totalling 256 km, each between 24 and 67 km in length, have been studied. The average cost is about $60,000 per km. Bidding will be invited for three tranches at 12-month intervals. The track rehabilitation of 120 km of the Tamanrasset- Ain Guezzam national road and other studies are also part of this component; see para....... describing the Saharan track policy. (a) (iii) Rehabilitation of Priority Bridges 3.12 Policy. The 2,699 bridges on National Roads (1,789) and Wilaya Roads (910) represent a total bridge deck surface of 880,000 m2. Bridges have not been appropriately repaired for a number of years; many are in bad condition, some are even dangerous for road safety. The Road Maintenance and Operations Directorate (DEER) recently started a consistent and comprehensive policy to progressively maintain and rehabilitate bridges. This policy starts at the bridge management system level and covers detailed condition surveys and specialized construction industry skill improvements. In this very favorable environment, the proposed project supports the development of the whole process from studies to works. 3.13 Context Synthesis. At DEER's request, CTTP is developing a comprehensive handbook for sound bridge management under Highway V, which includes: identification/glossary of bridge parts, deterioration identification manual, current maintenance techniques, condition surveys, and a computerized bridge management system. A national bridge rehabilitation committee has also been set up with all the main actors to select and evaluate bridges to be rehabilitated, and to develop standard specifications and bidding documents for studies and works. Studies are now being developed to prepare detailed diagnostic reports, the rehabilitation design, and the bidding documents. 3.14 Objectives. The US$13.2 million work component, with an additional 15% for physical contingencies, aims to (a) support the whole policy and rehabilitate first priority bridges, (b) help in the development of a "quality chain" from the studies to works quality control, and (c) help develop local capabilities for bridge rehabilitation studies, condition measurement, works and control through regular works, competition, and technical assistance. 3.15 Description. The loan will finance: (a) 50% of bridge rehabilitation works, awarded in two tranches to facilitate the capitalization of experience, with one first tranche (18 bridges) designed to develop sound local competition with some foreign technical assistance where  -25- needed; and the second tranche designed to attract foreign contractors for advanced-technology works; (b) rehabilitation studies of about 40 bridges for US$1.2 million, including condition surveys, diagnosis, design, and preparation of bid documents; priority rehabilitation works for these bridges will be implemented under the second tranche of works; (c) the continuation of general studies to implement the bridge management system; (d) the corresponding training; and (e) the control of works for US$0.7 million. The recent development of the bridge rehabilitation policy explains the less-advanced stage of this component compared with the well known pavement strengthening program. A minimum ERR of 12% will be a criterion for bridge rehabilitation works to be financed under the project. Rehabilitation works are limited to less than one third of the replacement cost; a large majority of these bridges are on the "basic economic network" with the highest traffic. (a) (iv) Design and Supervision of each sub-component are also part of the project; control of works costs are 5% of work costs; special attention is devoted to quality through the audit and action plan concerning the laboratories and quality control. (b) ROAD MAINTENANCE (b) (i) Periodic Maintenance of National Roads 3.16 Policy. Progressive development of competition for periodic maintenance works on national and Wilaya roads has been one of the most significant achievements of the Fifth Highway Project. This still needs to be expanded in terms of geographical coverage, because 20 Wilayas have had only three years of experience and in some cases, the local situation makes true competition more difficult than elsewhere. Furthermore, four additional years of support to this activity can also complete the work started on maintenance management and quality control of works. As mentioned earlier, periodic maintenance of national and Wilaya roads needs to be sustained to tackle the significant backlog of periodic maintenance, also an urgent priority. The project only finances national roads but maintenance of Wilaya roads will be implemented in parallel by the DEER and local DTPs. The component will support the progressive transfer of know-how on pavement management systems from the National Roads to Wilaya roads. 3.17 Context Synthesis. During the implementation of the Fifth Highway Project, a national working group developed a comprehensive maintenance handbook, procedures for prioritization of maintenance sections at the local and national level, and sample bidding documents. Specific section identification is done in the autumn each year for the works for the following year, with actual works starting in the spring.  -26- 3.18 Objectives. The US$50.0 million work component aims to (a) carry out priority maintenance on National roads and indirectly help for the same at Wilaya road level, (b) complete the development of sound competition, (c) improve quality control, and (d) enable the development of small/private road contractors. 3.19 Description. Works to be financed are mainly surface dressing (cheap seal) on medium traffic RNs, and in some cases bituminous mixes on heavy traffic RNs, with corresponding preparatory works. A total of 3,500 to 5,000 km will receive such periodic maintenance for an average cost of US$14,000 per km, during four annual programs. All 48 Wilayas will be involved. DEER will agree on a specific action plan for each Wilaya to improve competition, quality of works, and quality control based on the lessons learned from Highway V pertaining to each Wilaya. (b) (ii) Rehabilitation and Maintenance of Saharan Tracks, and purchase of equipment for traffic counting 3.20 Policy. Three main issues need to be addressed concerning Saharan unpaved national roads: (a) maintenance and rehabilitation are not currently carried out appropriately, which leads to about approximately 50 percent of roads being in bad condition and is a serious concern among the local population and decision makers; (b) the combination of budgetary constraints and low traffic levels, from 10 to 50 vehicles per day on average, and very difficult climatic conditions, raises hard- to-solve technical and economic issues; and (c) the cost of heavy equipment for large force-account rehabilitation is prohibitive and long- term effectiveness is unproven; at the same time, attracting good contractors for small annual contracts is impossible. The main ideas of the proposed policy to address these issues are the following: (a) track maintenance and rehabilitation have to be developed on a timely and effective basis; otherwise, accessibility would be at stake; (b) a global maintenance and rehabilitation policy for the 6000 km of national Saharan roads needs to be developed in full consistency with foreseeable budget constraints and reasonable ERR criteria, which implies identifying standards of service adequate for low traffic, and implementing an organization adapted to climatic and distance constraints; (c) large multi-annual contacts including both rehabilitation and subsequent maintenance need to be developed by route or area to attract sustainable competition; for routine and emergency maintenance on routes or areas without rehabilitation and maintenance contracts, local administration maintenance units need to have a consistent and reliable set of small equipment, trained personnel, financial resources and appropriate incentives to perform effectively; the tasks to be perforned have been carefully selected in accordance with the criteria of (i)  -27- degree of difficulty to correctly program such tasks, and (ii) degree of difficulty to quantify and supervise. 3.21 Objectives: (a) maintain Saharan national track roads and make the best use of available scarce budgetary resources, (b) increase the level of service of the highest-traffic 2000 km network by ensuring current and emergency maintenance by effective intervention units, appropriately equipped, (c) contract out a pilot rehabilitation-and-maintenance package for a route long enough to attract contractors and competition, and (d) test the above mentioned strategy and propose a global maintenance strategy. 3.22 Description: The component comprises three levels of intervention and an independent specific action: (a) one multi-annual civil works contract of US$5.3 million to rehabilitate and maintain the badly deteriorated 120 km of the 800-km Tamanrasset-Ain- Guezzam route (highest traffic track; 80 trucks/day; US$44,000/km). This rehabilitation is already included in the national road rehabilitation component; (b) small equipment estimated at $8 million will be purchased under ICB for use by eleven southern maintenance units and five support units in routine and emergency maintenance tasks (see Annex 11 bis); (c) a US$1.2 million study sub-component will (i) evaluate the condition of all Southern roads, optimize level of service requirements, set priorities for rehabilitation works according to technical and economic criteria, and propose a comprehensive strategy and a multi-annual work program, (ii) develop detailed engineering plans for the Tamanrasset-Ain-Guezzam 120-km section, and (iii) make a preliminary study on three routes to optimize the date to invest in pavement. These studies are part of the rehabilitation study component; (d) in addition, MIRP urgently needs to replace its equipment for traffic counting in the whole territory, estimated cost - $1.3 million. (b) (iii) & (iv) Pilot Program for Municipal Roads 3.23 Policy. The very significant issue of recurrent under-maintenance of the 47,193 km municipal roads is described in Chapter 2 and Annex 10. DEER has initiated a CNP/MICLERA/Ministry of Finance coordination to set up a framework to progressively enable reasonable maintenance of municipal roads; the policy orientation aims at addressing four main issues: (a) institutional: it is necessary to define the respective roles of MIRP and local governments with regard to technical assistance to the municipalities;  -28- (b) financial: an agreement in principle was reached to finance periodic maintenance; (c) implementation: periodic maintenance is to be carried out by contract; and (d) quality: the local sub-divisions will be the executing agency by delegation; special attention will be devoted to developing constructive cooperation with the municipal level, thus avoiding demobilizing local decision-makers concerning the management of their roads. The main aims of the pilot program are to: (a) test all arrangements before expanding them to all municipal roads; and (b) test key orientations to determine how municipal infrastructure can be maintained in practice. Closer cooperation is being developed: (i) at the central level by DEER (MIRP) with the Ministry of Finance, MICLERA and CNP to facilitate the financing of municipal road maintenance and set up a coordination committee in charge of monitoring the pilot program and supervising the future dissemination of lessons and their implementation; and (ii) at the local level, by DTP and their subdivisions with the municipalities concerned (see para. 5.02). 3.24 Objectives. The general objectives of this project component are to (a) support the development and implementation of this policy towards actual municipal road maintenance, and global and systematic policy for municipal roads "extra muros", (b) develop regulatory documents defining the roles of APC and DTP subdivisions, (c) validate these proposals and detail their implementation rules through a pilot works program in several tens of volunteering municipalities in the territory of several volunteering "subdivisions", and comprehensive technical assistance brought by the "subdivisions" of the DPW and the CTTP, and (d) implement an information seminar for DTP and subdivision engineers to validate and disseminate the handbook for municipal road maintenance. 3.25 Description. A three year program will develop: (a) US$13.0 million of periodic maintenance works on municipal roads, to be awarded by competition and to be financed under the central budget; these works will start in 1996 and be part of the project but will not be financed by the loan. (b) US$1.5 million of studies and training will include: - a general study to fully develop a global strategy for municipal roads with CTTP and necessary technical assistance; the study covers: a comprehensive proposal of the institutional setup, complementary proposals of financing mechanisms (for instance: periodic, current maintenance), an inventory of municipal roads, a condition survey necessary to formulate a global maintenance policy and a three-year implementation plan;  -29- - preparation of a handbook and its dissemination through a seminar and the DTP "sample agreement" to provide technical assistance; and (c) US$1.0 million for the CTTP-contracted part of the supervision and technical assistance to the DTPs and several tens of pilot municipalities to manage intercity municipal roads; The above-mentioned sub-components b) and c) are together in the tables under the heading b(iv) "Supervision of General Studies and Training"; they concern municipal roads. (c) TRAINING. TECHNICAL ASSISTANCE AND STUDIES (c) (i) Audit of Enterprises from the Public Works Sector 3.26 Policy. Comprehensive audits of road sector EPE enterprises are being developed to prepare and facilitate the necessary restructuring and privatization drive. The appraisal mission discussed the issue of privatization of road sector enterprises. Following an initiative by the "Fonds des Participations pour la Construction" (FPC), and in line with the Government's policy led by the new Ministry of Industrial Restructuring and Participation, MIRP requested a special component for the audit of public works enterprises. Close collaboration with privatization actions carried out in the framework of the Economic Rehabilitation Loan (ERL) will be maintained. The road sector policy letter describes these aspects in more details. 3.27 Objectives: (a) define and launch necessary actions to improve the effectiveness of national enterprises in charge of studies or works in the public works sector, (b) identify enterprises whose financial health and productivity potential would predispose them for easy privatization, (c) take the opportunity of such audits to transfer analysis methodologies to the enterprises themselves for future development of a corporate strategy, and (d) prepare privatization of road sector EPEs, in particular by giving a fair market value to their assets. 3.28 Description. A series of audits has been launched and concerns (i) individual enterprises (ii) groups of enterprises, and (iii) some horizontal aspects of a whole set of enterprises in the sub-sector. Two million dollars will finance complementary studies following up this first ongoing series of audits. FPC will be the implementing agency for the sub-component in coordination with MIRP and other actors concerned until the new law on privatization is passed. Appropriate complementarity should be ensured between international experience, especially recent experience with Eastern Europe, and local experience with in-depth knowledge of these local enterprises.  -30- (c) (ii) (iii) Technical Assistance. Training and Studies for the National Motorway Agency (ANA) 3.29 Policy. (see part II for background information). There are three main policy aspects in the motorway progressive-development context which the project will support: (a) ANA is in charge of motorway development; the hiring of new staff to handle new kinds of tasks requires robust technical assistance and training for about three years; (b) preliminary studies have been developed for the whole East-West motorway corridor and reviewed with all central and local administrations concerned; the economic and financial study is essential to phase and scale down the program to levels consistent with economic priorities and affordability; detailed engineering studies of sound sub-projects will be developed; various alternatives for motorway concessions and financing will be studied; and (c) MIRP will launch the environmental assessment studies, with Bank support. 3.30 Objectives. The general aim of this US$11.9 million component is to streamline Algeria's global approach for motorway development in this changing macroeconomic environment. The specific aims of this component are to: (a) support ANA's institution building, through the three-year contract for technical assistance and training; and (b) develop quality studies and competitive local consultants for detailed engineering of priority sections through sound international competition, which optimizes the use of local expertise and appropriate study supervision by ANA. 3.31 Description. (a) the US$3.3 million component for the ANA technical assistance and training contract started under Highway V for its first phase, and will be followed up by the proposed project in its second and third phases; (b) the US$8.6 million component for studies comprises: (i) the continuation of the economic and financial study (US$0.8 million) which is essential for all future policy orientations; (ii) the completion of detailed engineering of the Bou Medfaa-Khemis Miliana section (US$0.5 million), (iii) the launching of the detailed engineering of the Hamiz-Lakdaria section, whose priority is justified by land reservation purposes, prepared under Highway V (US$1.3 million); and (iv) the procurement of further detailed engineering studies (US$6.0 million) will require that the sections to be studied be appropriately justified in view of the conclusions of the economic and financial study. They will be awarded after international competitive bidding. (c) (iv) Modernization and Training Actions Modernization and training are two important but different actions of MIRP, their coordinated description illustrates their direct complementarity:  -31- 3.32 Policy. a) Modernization The MIRP requested the Bank in June 1993 to develop an analysis of the current effectiveness of the Ministry to design a modernization action plan focussed on (a) operational efficiency, (b) human resources management, (c) relations within the structure of the ministry, and (d) relations with the private sector. b) Training The Directors of Roads and Maintenance drew the lessons from the Fifth Highway Project to design the priority training activities which need to be implemented during the proposed Sixth Highway Project, in relation with DRHR. In addition, a training abroad of 500 managers on management is an important action of MIRP. 3.33 Context Synthesis. a) Modernization Several Bank missions with specialized assistance have provided assistance to MIRP and a modernization and a priority action plan are being finalized in the Ministry; Annex 7 gives a short description of this large undertaking and its conclusions; coordination has been developed in the Ministry as well as within the Bank to enable complementarity and compatibility between action recommendations resulting from this analysis and the preparation of the Sixth Highway Project. A report entitled "Institutional Modernization in the Infrastructure Sector in Algeria" conducted by the Public Sector Management team of the MENA Technical Department in close coordination with MIRP has been finalized and was instrumental in the development of an unusual degree of ownership in this modernization process. A detailed survey has been completed in Algeria on the four priority areas mentioned above. b) Training The three Directorates concerned, Road Directorate (DR), Maintenance and Operations Directorate (DEER), and the Research and Human Resources Directorate (DRHR) have developed detailed proposals for training engineers already working in the field and young engineers completing their initial training. Although with significant delays, under the Fifth Highway Project, a large training component on road maintenance for more than 400 local engineers has been successfully implemented. 3.34 Objectives. The main objectives are: (a) For the modernization sub-component, to: (i) foster improved operational efficiency, including computerization at central and local levels, (ii) rationalize investment choices, budget management and master costs and time schedule, (iii) master human resource management at central and local levels, and (iv) improve the relations between the Ministry and local governments, private and public enterprises, and with local agencies; (b) And for the training sub-component, to: (i) implement the DR and DEER priority training plan for adapting and improving the skills of engineers already working in the local DTP directorates; (ii) purchase training equipment for the main training centers; (iii) develop pedagogical engineering capabilities to create long-term sustainability in INPE and ENTP; and (iv) significantly change and improve management by training 500 managers abroad.  -32- 3.35 Description. This US$10.6 million component will have five main sub-components classified below by implementation's agency: (a) the set of modernization actions for a total amount of US$1.6 million will contain studies carried out by foreign and local consultants; a special task force and a "Delegate to Modernization" have been designated by the Minister to coordinate these activities; (b) training of DPW engineers for US$2.4 million will concern target group sizes between 48 and 498 on seven priority subjects: bridge management, equipment pool management, current-maintenance techniques, public road domain rules, road strengthening, road rehabilitation, and road owner obligations; (c) institutional development of the National Institute for Continuous Training in Infrastructure (INPE) for US$0.6 million will include technical assistance, training of trainers and managers and training equipment; the last two actions will be combined under one TA and training contract to facilitate coordination; (d) development of post-graduate courses for US$2.0 million, with: (i) three sessions of training for specific target groups of about 100 engineers each on three different subjects: economics applied to public works, project management, and infrastructure owner role, (ii) related pedagogical engineering; and (iii) related equipment needed for these sessions, technical documents, and software. The contract for these post-graduate courses would be procured by competition and the National University for Public Works (ENTP) would be in the short list if the action plan following the ongoing audit is acceptable to DRHR and the Bank; (e) the training abroad of 500 managzers for US$4.0 million. (c) (v)/(vi) Studies of National Interest and the Ministry's Access to Foreign Technical Expertise 3.36 Policy. To prepare sectoral national policy, MIRP needs the results of studies to be conducted under its directives by autonomous entities under specific contracts, and with a high quality of institutional capitalization and technical information upstream. It also needs direct and immediate access to foreign technical expertise, otherwise important subjects cannot be discussed on time with sufficient openness to foreign experience; when local agencies serve as intermediaries they may have a conflict of interest. 3.37 Context Synthesis. Several important national studies will be at the middle of their implementation by the closing date for Highway V; the audit of the laboratories identified several studies of national significance to be contracted out; recurrent circumstances during Highway V implementation clearly showed the current difficulty for the Ministry Directorates to obtain appropriate foreign advice on a timely basis when needed. 3.38 Objectives. The general aim of this component is to ensure that MEAT's work is effective while limiting its staff size to a decision-making structure without large technical teams. The main specific aims are:  -33- (a) for the general Studies part, to: (i) ensure appropriate capitalization of national experience for developing national directives and technical guidelines, (ii) ensure team work between the various technical institutions involved, and (iii) develop studies like the road data bank and assure their effective use on the whole territory; and (b) for the TA to the Ministry Directorates, to: (i) facilitate easy and quick access to TA, and (ii) maintain the high quality and openness to foreign experience in national studies, key research, and policy advice. 3.39 Description. A US$5.1 million program of general studies and preparation of technical guidelines is described in annex 6 and a US$2 million contract will finance short term missions of foreign high-level advisers on specific subjects of immediate importance for DR, DEER, DPAE, DRHR, and DAG Directorates during the entire project implementation period, this contract could also cover short term missions of small policy teams to assess foreign experience. (c) (iv) Cont. Urban Transport Study 3.40 Policy The urban population has developed at a fast rate over the last two decades. Current estimates put it at slightly above half of the total population in Algeria. Provision of urban transport infrastructure and services have not kept pace with the rapidly growing demand, and the major cities are faced with serious congestion problems. This, together with the imposition by government of low bus fares, placed a heavy burden on the public enterprises which are still the main providers of urban transport services and are not able to generate sufficient cash to renew their fleet in a timely manner. Services are of low quality. The private sector participation appeared in 1987 and is sharply increasing in a significantly deregulated market. The Government needs to formulate a new strategy to address current transport issues so critical to sustainable urban development. 3.41 Context synthesis The government sought Bank assistance in definition and implementation of the strategy, and the Fifth Highway Project was amended in December 1991 to allow for financing of a study for preparation of an urban transport enterprise project. Consultant selection and contract signature occurred in October 1993 but exceptional circumstances delayed study launching and the closing of the Fifth Highway Project on December 31, 1994 requires financing which the Sixth Highway Project will secure. 3.42 Objectives The study focusses on transport in six major cities: Algiers, Oran, Constantine, Annaba, Blida and Setif. It has two phases: (a) the first phase will assess the demand, both satisfied and unmet, for urban bus services, the transport supply by public and private operators, and the operational and financial performance of the former;  -34- (b) the second phase will project the transport demand in 1998 and 2003, and see its implications in terms of infrastructure requirements and transport supply; actions designed to improve urban transport will be identified, and economic calculations will be carried out to select the most effective ones. 3.43 Description US$1 million will be earmarked to finance completion of the Urban Transport Rehabilitation and Development Study for the six above-mentioned cities. The "Direction des Transports Urbains et de la Circulation Routiere" at the Ministry of Transport will oversee implementation of the component which is expected to end by late September 1995. The amount for this study is integrated in tables under c(v).  -35- C. Cost and Financing 3.44 Project costs are summarized in the attached table 4: (In AD Million) (In US5 Million) Local Foreign Total % Foreign % Total Local Foreign Total % % Exchange Base Foreign Total Costs Exchange Base l ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Costs A. Strengthening & Rehabilitation 1. Strengthening 893.2 1,098.7 1,992.0 55 23 20.4 25.1 45.6 55 23 2. Road Rehabilitation 381.4 469.1 850.5 55 10 8.7 10.7 19.5 55 10 3. Bridge Rehabilitation 236.3 351.9 588.2 60 7 5.4 8.1 13.5 60 7 4. Control of Works 115.1 76.2 191.3 40 2 2.6 1.7 4.4 40 2 5. Technical Studies' and 37.0 69.7 106 7 65 1 0.8 1.6 2.4 65 Superilsion Subtotal Strengthening and 1,663.0 2,065.6 3,728.7 55 43 38.1 47.3 85 3 55 43 Rehb iltation B. Road Maintenance 1. Periodic Maintenance by 999,6 1,229.6 2,229.2 55 26 22.9 28.1 51.0 55 26 Contrat 2. Equipment for Current 189.7 352.2 541.9 65 6 43 8.1 12.4 65 6 Maintenance and Traffic Counting 3. Municipal Road Maintenance 260.9 321.0 581.9 55 7 6.0 7.3 13.3 55 7 4. Supervision, General Studies 38.5 72.7 111.1 65 1 0.9 1.7 2.5 65 At Training" (Municipal Roads) Subtota Road Maintenance 1,488.7 1,975.4 3,464.1 57 40 34.1 45.2 79.3 57 40 C. Trainkng, TA nd Studies I. Audit of Road Enterprines 30.8 58.1 88.9 65 1 0.7 1.3 2.0 65 1 2. TA to ANA & Training 50.8 95.9 146.7 65 2 1.2 2.2 3.4 65 2 3. Econonic, Financial, 132.5 249.9 382.4 65 4 3.0 5.7 8.8 65 4 Environm ent & Detailed Enginecring Studies (Motorways) 4. Moderrnzation & Training 171.0 322.6 4935 65 6 3.9 7.4 11.3 65 6 Actions (MIRP) 5. General Studies &Technical 95.5 180.2 275.7 65 3 2.2 4.1 6.3 65 3 guidelines 6. Specific Techmcal Assistance 30.8 58.1 88.9 65 I 0.7 1.3 2.0 65 for MIRP Subtotal Training, TA & Studies 511.3 964.8 1,476.1 65 17 11.7 22.1 33.8 65 17 Totai Investnent Costs 3,663.1 5,005.9 8,668.9 58 110 83.8 114.6 198.4 58 100 TOTAL BASELINE COSTS 3,663.1 5.005.9 8.668.9 58 1(3 83.8 114.6 198.4 58 100 Physical Contingencies 323.0 405.9 728.9 56 8 74 9.3 16.7 56 8 PTice Contingencies 1,772.5 2,373.4 4,145.9 57 48 6.5 8.5 15.0 56 8 TO'TAL PROJECT COSTS 5,758.6 7,785.1 13,543.8 57 156 97.7 132.3 230.0 58 116 I/ Nota Bene: The Technical Assistance component categories and sub-categories in this Table are presented according to the MIRP Directorates who will be responsible for their implementation. It is useful to note that all these components have a strong ownership by the borrower. Another interesting split is presented below with total US$ amounts (costs at appraisal): (i) Policy Support: US$10.0 million (ii) Institutional Development and Capacity Building: US$16.6 million, of which US$9.6 million in training; and (iii) Project Preparation and Implementation: US$16.7 million, of which US$4.6 million in control of works, US$8.1 in detailed engineering studies and US$4.0 in applied research linked to project implementation.  -36- 3.45 Financing will be: (i) $130.0 million: IBRD loan (ii) $100.0 million: Algerian government  -37- D. Procurement 3.46 All contracts financed by the Bank will be procured in accordance with Bank Guidelines for Procurement. Contracts for road strengthening and rehabilitation works larger than US$5.0 million equivalent, contracts for bridge rehabilitation larger than US$3.0 million equivalent, contracts for equipment larger than US$0.35 million equivalent will be procured through international competitive bidding (ICB). In addition, for the second and third tranches of road strengthening and rehabilitation works, appropriate packages of calls for bids launched by the various Wilayas will be coordinated in time and procured through ICB for a minimum total amount of US$10.0 million; similarly for the bridge rehabilitation works after the first tranche, all calls for bids will be coordinated to form package(s) of at least US$5 million. For contracts for the supply of goods procured through ICB, a margin of preference of 15 percent or the actual customs duties, whichever is less, would be allowed for domestic goods. 3.47 All other work contracts will be procured under local competitive bidding with the exception of contracts costing less than US$50,000 equivalent and not exceeding US$2.0 million cumulative per year (US$16.0 million in total) which are allowed to be procured under local shopping. Developed over the last five years under the Fifth Highway Project, the procedures for these small contracts went well; a new step in the improvements and simplification is designed in the modernization action program. All other goods contracts will be procured under international shopping, with the exception of contracts costing less than US$50,000 equivalent and not exceeding US$0.5 million cumulative per year which will be procured under local shopping. 3.48 Consultant services will be procured in accordance with the Bank's Guidelines on the Use of Consultants. Some important consultant services or studies (see para. 3.31 (a) and (b) (i) to (iii))have been launched under the Fifth Highway Project following Bank Guidelines, have received the Bank's no-objection and will be continued under the Sixth Highway Project. The small contracts with laboratories for quality control of works will introduce competition for the third tranche of works; an audit of these laboratories, developed by the Bank during project preparation is translated into an action plan to strengthen global quality approach, institutional development, and training at their own cost. 3.49 The Bank's Sample bidding documents in French will be used for the procurement of goods and consultant services; sample bidding documents for works, agreed with the Bank, and already used under Highway V, will be used for bidding under ICB and LCB procedures. 3.50 Prior review of contract documents will be carried out for: (a) procurement of contracts estimated to cost the equivalent of US$ 1.0 million or more for civil works and US$ 300,000 or more for goods, (b) all consultant contracts for consulting firms estimated to cost over US$100,000 or for the employment of individuals estimated to cost over US$  -38- 50,000, (c) all sole source contracts estimated to cost over US$50,000, and (d) all terms of reference. Prior review would cover about 75 percent of the total amount of contracts. The DTPs are responsible for carrying out the procurement for works in their Willaya territories under the supervision of DR for road strengthening and rehabilitation and DEER for periodic road maintenance, similar to what was done under the Fifth Highway Project. Quarterly reports and supervision missions are important to monitor progress. Table 5: Procurement Method PROCUREMENT METHOD PROJECT ELEMENT TOTAL ICB LCB OTHER N.B.F. COST A. Road 40.5 13.5 - - 54.0 Strengthening (22.3) (7.4) (29.7) B. Road 17.3 5.8 - - 23.0 Rehabilitation (9.5) (3.2) (12.7) C. Municipal Roads a/_ 16.8"' 16.8 (0) D. Periodic ^ 60.4 - - 60.4 Maintenance (33.2) (33.2) E. Equipment 10.9 - - 2.5 13.4 (7.1) (7.1) F. Technical - - 45 5"- 45.5 Assistance & (38.0) (38.0) Studies G. Bridge 10.1 6.7 - - 16.8 Rehabilitation (5.6) (3.7) (9.3) Total 78.8 86.4 45.5 19.3 230.0 (44.4) (47.5) (38.0) (0) (130.0) Note: Figures in parenthesis are the respective amounts financed by the Bank loan. N.B.F.: Not bank financed. a. Financed by the Algerian Government; procured under LCB. b. Procured in accordance with World Bank's Guidelines: Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency, August 1981.  -39- E. DISBURSEMENTS 3.51 The Bank will disburse on the basis of Table 6: Allocation and Disbursement of the Loan. The loan is expected to become effective in May 1995, and to be fully disbursed by the closing date of December 31, 2002. This is broadly in line with the historical seven-year disbursement profile for transportation projects in Algeria issued in August 1993. Project investments are designed for full execution within five years and the two extra years given by the country profile provide safety margin against investment slippages and disbursement lags. Large components have been designed to be ready for immediate implementation at effectiveness: the first tranche of strengthening and rehabilitation works, the first year of periodic maintenance, the purchase of maintenance equipment and several studies (see Annex 2.1 and time schedule charts). They have the effect of accelerating disbursement between 1996 and 1998, compared to the standard profile. Without such exceptions, which are fully justified, the project costs and the loan would both increase by US$1 million (plus 0.4 and 0.8 percent respectively). The disbursement table and corresponding graph are in Annex 2.1 3.52 Full documentation will be required for disbursements (a) for works or goods procured under contracts valued at more than US$ 300,000 and (b) for consultant services studies and training, under contracts valued at more than $100,000 for contracts for the employment of consulting firms and $50,000 for contracts for the employment of individual consultants. All other disbursements will be made against Statements of Expenditures (SOEs). Supporting documents will be made available to the Bank's supervision missions and to the auditor. These documents will be retained for two years after Bank receipt of the audit report for the fiscal year in which the last withdrawal from the loan account was made. Streamlining payments and disbursements will be developed in phases (see para. 2.27). Table 6: Allocation and Disbursement of the Bank Loan Loan Amount Disbursement Percentage US$ In % of Million Total A. Civil Works 80.3 61.8 55% of tax-inclusive expenditures B. Equipment & Goods 6.8 5.2 100% of foreign expenditures and 65% of local tax-inclusive expenditures C. Consultant Services, 33.8 26.0 100% of expenditures net of Studies & Training tax Subtotal 120.9 93.0 Unallocated 9.1 7.0 Total 130.0 100.0  -40- 3.53 To facilitate disbursements, a Special Account will be opened and maintained in US dollars and operated on terms and conditions satisfactory to the Bank. The Special Account will cover the Bank's share of eligible expenses in both local and foreign currencies. The authorized allocation will be US$7 million, i.e. the Bank's share of the estimated four-month average of project expenditures. The Borrower will submit regular monthly replenishment applications promptly after receipt and reconciliation of monthly bank statements from the bank holding the account. During period of heavy expenditures, applications may be submitted at intervals of less than a month.  -41- F. REPORTING AND AUDITING 3.54 DPAE will prepare quarterly progress reports in a format acceptable to the Bank. Each report will give project performance indicators data2, will indicate progress made, problems encountered, remedial steps proposed, and project activities scheduled for the next quarter. At the end, DPAE will prepare the overall implementation completion report (ICR), on the basis of input from other implementing departments and agencies, which will be issued no later than six months after the physical completion of the project works. This report will include in particular, a detailed account of final project costs and disbursements, general characteristics of project execution and benefits, the degree to which project objectives were achieved, and an assessment of how the Government and the Bank implemented their respective obligations. 3.55 A computerized project accounting system will be developed by DPAE to record project transactions from project start-up in accordance with appropriate financial and administrative practices; expert assistance needed to that effect will be financed under the Fifth Highway Project. The accounting records will identify all project transactions under the various components and show their financing. They will made it possible to monitor commitments and payment arrears. Control systems will be introduced for use of SOEs, which will be recorded separately. All supporting documentation will be retained for audit and review by the Bank. Quarterly accounts will be prepared in a format approved by the Bank and incorporated in the quarterly progress reports. These accounts will summarize actual versus planned expenditures both per fiscal year and cumulated to date. BAD will maintain the general project accounts on an on-going basis and keep separate records of project-related payments made out of the Special Account, and against SOEs. Implementation of the computerized system to maintain project accounts at MIRP as a Condition of Effectiveness. 3.56 The "Inspection des Finances" will audit the project accounts, including examination and certification of SOEs and of transactions under the Special Account. The audit will employ principles acceptable to the Bank, and will include sample verifications of accounts kept by the DTPs, of the effectiveness of control procedures and adherence to Bank guidelines for disbursement and procurement. The report, in a "Long Forn," will be submitted to the Bank not later than nine months after the end of the fiscal year. 2/ the indicators for each major component are described in Annex 13.  -42- G. ENVIRONMENTAL IMPACT 3.57 The main areas in which negative, as well as positive, environment impacts of the project are possible concern the road rehabilitation works, road safety, and the detailed engineering of future motorway sections, even though no motorway works are part of the project. Annex 15 gives a mitigation and monitoring plan. At the Bank's request during the project preparation phase, a special environment handbook was developed on road pavement strengthening works by the CTTP utilizing foreign bibliography and addressing the most recurrent issues in the Algerian context. The handbook will raise the awareness of the operators and users, it provides: (a) a list and summary of the Algerian environment legislation; (b) details of the most recurrent impacts of quarries (in mountains or river beds), crushing equipment, asphalt plants, unused materials, tree cutting, and soil erosion; and (c) a list of mitigation actions and more detailed bibliography on implementation. 3.58 Road Works. Road strengthening/rehabilitation, bridge rehabilitation, and pavement maintenance, will involve no realignment (only very limited, small curve correction), only narrow widening (50 to 80 cm) on existing right of way, drainage improvement, and mainly bituminous or non treated base/surface courses. No sensitive area is concerned. Most granular materials are supplied from existing quarries or quarry sites. The handbook contains numerous photos taken on past Algerian road works, which illustrate very well what should be avoided in practice. In the Sample Contract for Works, a new Chapter 6 has been introduced on Environment; its clauses cover noise, dust, replanting where necessary, waste material disposal and requests a restoration plan for asphalt plant area after the works are completed. The new Algerian legislation on emission thresholds (Decret 93/165 of 10/7/93) limits dust emission to 70 to 485 mg/mi3; it has been requested that laboratory contracts be updated to measure dust emission around asphalt plans, especially near urban areas; measures will be developed during the first work tranche, then implementation recommendations will be developed for the road sector and works contracts will be amended for the following tranches; Similarly, a short handbook has been developed on road safety in the context of road strengthening and rehabilitation to improve road infrastructure safety. Road safety studies per section or route start being developed to identify and correct blackspots. Special guidelines are being strengthened concerning the safety of road users and workers during the job under traffic.  -43- 3.59 The sample bidding document for motorway feasibility and detailed engineering studies now incorporates the detailed terms of reference on environment assessment proposed by the Bank. In addition, DR and ANA plan to clear the backlog of environmental assessment for motorway sections already studied, to identify additional mitigating measures needed. The economic and financial study on the planned motorway system will introduce necessary and specialized environmental assessment methodologies for the future; relevant training on "roads and environment" is also planned. A special technical assistance to ANA, financed under the project, includes environment advice services; all these studies have been chosen by DR to implement the new Algerian regulations on Environmental Impact Assessment in close relation with the Environment authorities. M:\Rny\Algeria\Chapter3  -44- IV. ECONOMIC EVALUATION General 4.01 The program focusses on maintenance of heavily-trafficked roads to reduce a substantial maintenance backlog that was allowed to accumulate for years. By nature, the sub-projects generate high returns on investments. Details on the economic evaluation are given in Annex 8, and the main conclusions are summarized hereafter. Project Benefits 4.02 Main benefits from road maintenance, from light surface treatment to strengthening, are associated to vehicle operating costs savings with reduced road roughness. Other benefits come from not having to reconstruct a road when maintenance is deferred, or from minimization of maintenance costs over time when comparing two maintenance strategies. Preliminary calculations have been made. The road strengthening program covers some 410 km with traffic of 2,200 to 17,400 vehicle per day. The economic rates of return (ERRs) range from 40 to 89 percent (weighed average of 67 percent). For the road rehabilitation program, covering 256 km with traffic of 770 to 5,200 vehicle per day, ERRs range from 18 to 65 percent (weighed average of 44.7 percent). 4.03 For bridges, the detailed engineering studies of the first phase comprised of 18 bridges are in progress, and the component start-up is only due in year 2 of project implementation. The second phase, covering 15 bridges necessitating more complex engineering studies, is deferred to year 3. The economic analysis will be carried out after completion of the detailed engineering, and programming of sub-projects will be contingent upon verification that they achieve ERRs of at least 12 percent. The methodology to be used for the economic evaluation was reviewed and discussed at appraisal. It consists of a software package developed in Hungary, based on sound analytical principles and a large data base, which will be adapted to Algerian conditions. The model was tested on a sample of project bridges (8) and calculated ERRs were in the 22-68 percent range. The component is strongly justified. 4.04 Periodic maintenance of paved roads will apply to the RN network which have traffic of more than 2,000 vehicle per day and offer guarantees of high ERRs. The economic evaluation will be preliminary step to annual programming of works. Only sub-projects with ERRs of 12 percent or above will be eligible to financing under the project. The HDM III model is currently being developed in Algeria, and the refined calibration of main parameters will be completed before year end. Preliminary tests were conducted on a sample of about 2,000 km of roads and showed very high ERRs for periodic maintenance (well above 100 percent). Although they may not be accurate, since the HDM III model is not yet operational, these results confirm the robust economic justification of the component.  -45- 4.05 The economic justification of the project financed equipment was assessed on the basis of benefits likely to be derived from the pilot maintenance program for Saharan roads to which it will be assigned. The equipment will be used to ensure minimum maintenance of about 4,600 km of unpaved roads in four Wilayas with average daily traffic of 29 vehicles, including 83 percent of trucks. Main tasks include spot maintenance to restore traffic conditions (after floods, sand accumulation, and rocky deposits) and, to a lesser extent, regravelling and grading. These tasks would be executed by an organization comprised of 11 intervention units endowed with a standard set of light equipment and mobile homes, and 5 reserve units equipped to provide support when heavier equipment is needed or to cope with peak workload. The combined output of the pilot maintenance organization would be 12,000 m3 per year for spot improvements and 11,000 km per year for grading. With 80 percent of the equipment operating cost incurred in relation to spot maintenance, the model assumes economic unit costs of US$8.3/m3 and US$33 km for the two elementary tasks, based on an average depreciation over 6.5 years. The HDMIII model has been used to compare two strategies: (a) stretching the maintenance capacity for modulated coverage of the full 4,600 km network; (b) concentrating this capacity on about 1,900 km of roads with daily traffic above 20 vehicles. Without the project, minimum routine maintenance was assumed at a cost of US$20/km. Benefits would come from reduced roughness (from a current IRI index of 15), elimination of days when roads are not passable (assumed as 10 at present), and traffic creation growing to 30 percent of existing traffic. Strategy (a) was found to maximize the net present value (NPV) of the pilot program, with an ERR of around 70 percent. Non Ouantified Benefits 4.06 As intermediary goods, transport has a pervading influence on the economic system. By contributing to making roads better, and through passing on of at least a portion of direct benefits to consumers and producers, the project investment is bound to have consumption and production effects. These secondary growth benefits may be a multiple of measured benefits, given the large unemployment prevalent in Algeria and the low utilization rate of the production capacity. The project is also to have a positive impact on road safety. Road deterioration creates driving hazards, put vehicles under greater strain, and increases the probability of accidents by loss of vehicle control and mechanical failures. Normal preventive car maintenance is nearly impossible given the shortages of equipment and spare parts, making the vehicle fleet more vulnerable to bad roads. The capacity building at MIRP and ANA bears other substantial, albeit deferred, benefits which elude quantification. Road construction techniques will be improved, leading to cheaper and more durable works. Project preparation and road programming skills will also be developed, resulting in cost effective uses of scarce budget resources. This is especially true for motorway development. The Bank review of preliminary engineering studies underscores a need for a more thorough assessment of project constraints and possible alternatives toward optimization of the motorway design and minimization of its costs. The motorway construction will by far be the largest road investment for the next 15-20 years, and the project will ensure better conditions for preparation and implementation.  -46- Sustainability 4.07 Good road management is essential to project sustainability, as is regular funding of maintenance. The proposed capacity building is tailored to meet the first requirement, especially through development of new curricula of advanced engineering studies to ensure higher qualification of young recruits at entry in the profession. Generalization of the funding mechanism tested under the pilot municipal road program, and the targeted establishment of a Road Fund by mid-term review will strongly work toward meeting the second requirement. In addition, Action Plans to eliminate long-standing bottlenecks in quarry and bitumen supplies, and to improve performance of public laboratories, both part of the Bank up-front conditionality, are at the core of the strategy to create an enabling environment for the road industry. A healthier competition on quality and prices will allow to make the most of resources allocated to road maintenance, a goal also pursued by privatization of public works contractors. Risks 4.08 A sensitivity analysis was carried out to ascertain the impact of adverse changes in the value of main parameters on calculated ERRs. It showed that the economic justification of the road strengthening and rehabilitation components was little affected by assumptions on traffic growth rates, and that underestimating the investment costs and overestimating the first year traffic are the most critical factors. Project investments, however, are expected to generate high ERRs because they apply to highly trafficked roads for which maintenance is generally overdue, and the sensitivity analysis indicated that it would take a lot larger investment costs, and a small fraction of assumed traffic before ERRs would fall down to lowest acceptable level of 12 percent. For the road maintenance equipment, the sensitivity analysis measured the impact on NPV of doubling the working expenses (NPV reduced by 20 percent), cutting the overall capacity by 50 percent (NPV reduced by 17 percent), assuming no induced traffic (NPV reduced by 18 percent) and no less disruptions to traffic (NPV reduced by 4 percent). These results confirm the strong economic justification of the equipment component. M: \RayA IgerTw\Chapter4.sar  -47- V. AGREEMENTS AND RECOMMENDATION 5.01 Agreement was reached during negotiations on the following dates: (i) draft action plan on bridge rehabilitation available not later than June 1, 1995; with implementation not later than December 1, 1995 (para. 3.15); (ii) economic, financial and environmental study of East-West motorway starting not later than June 1, 1995 and results available not later than June 1, 1996; with implementation of study's recommendations not later than December 1, 1996 (para. 3.31 (b)); (iii) user charges study update available not later than December 1, 1995; with implementation not later than June 1, 1997 (paras. 1.18, 2.26 and annex 14); (iv) progress reports on project implementation available not later than February 1, May 1, August 1 and November 1 of each year until completion of the project; and (v) mid-term progress report available not later than June 30, 1997 and mid-term review to be held not later than September 30, 1997. 5.02 As condition of loan effectiveness, MIRP will send to the Bank the decisions creating the following committees, with membership and terms of reference acceptable to the Bank: (i) committee to study the feasibility of establishing a road fund (para. 2.26); and (ii) committee to monitor the implementation of the pilot program on municipal road maintenance (para. 3.23). 5.03 Agreements having been reached on the issues outlines in Chapter III and IV, and subject to the condition of effectiveness set forth in para. 5.02, the proposed project is suitable for a Bank loan of $130 million to the Government of Algeria for a term of 17 years including 5 years of grace. M:\Ray\A1geria\Chapter5  -48- Annex 1 Page 1 of 1 THE DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA SIXTH HIGHWAY PROJECT Detailed Project Costs (In AD Militon) (In USS Million) Local Foreign Total % Foreign S Total LoDsCi Foreign Total % Exchane Bane Foreign Total Costs Exchange BCoe Costs A. Strentbening & Rebabilltatior I. Strengthening 893.2 1,098.7 1,992.0 55 23 20.4 25.1 45.6 55 23 2. Road Rehabilituuion 381.4 469.1 850.5 55 10 8.7 10.7 19.5 55 10 3. Bridge Rehabilitation 236.3 351 9 588.2 60 7 5.4 S.1 13.5 60 7 4. Control of Works 115.1 76.2 191.3 40 2 2.6 1.7 4.4 40 2 5. Technical Studies and 37.0 69.7 106.7 65 1 0.t 1.6 2.4 65 Supervision _ Subtotal Strengtbening and 1,663.0 2,065.6 3,728.7 55 43 38.1 47.3 85.3 55 43 RebabilitatI.n B. Rod Maina4nsne I. Periodic Maintenance by 999,6 1,229.6 2,229.2 55 26 22.9 28.1 51.0 55 26 Contract 2. Equiprent for Current 189.7 352.2 541.9 65 6 4.3 8. l 12.4 65 6 Maintenance and Traffic Counting 3. Municipal Road Maintenance 260.9 321.0 581.9 55 7 6.0 7.3 13.3 55 7 4. Sngervision, General Studies 38.5 72.7 111.1 65 I 0.9 1.7 2.5 65 I & Training (MunicipaJ Roads)III Subtotl Road Makitenane 1,4N8.7 1,975.4 3,464.1 57 40 34.1 45.2 79.3 57 40 C. Training, TA and Studks I. Audit of Road Enterprises 30.8 58.1 88.9 65 I 0.7 1.3 2.0 65 2. TA to ANA & Training 50.8 95.9 146.7 65 2 1.2 2.2 3.4 65 2 3. Econotnic, Financial. 132.5 249.9 382.4 65 4 3.0 5.7 8.8 65 4 Environment & Detailed Engineering Studies (Motoeways) 4. Modernization & Trining 171.0 322.6 493.5 65 6 3.9 7.4 11.3 65 6 Actions (MIRP) 5. General Studies &Technical 95.5 180.2 275.7 65 3 2.2 4.1 6.3 65 3 guidelines 6. Specific Techncatl Assistance 30.8 58.1 88.9 65 I 0.7 1.3 2.0 65 fnr the MEAT SubiotalTralning, TA & Studks 511.3 964.8 1,476.1 65 17 11.7 22.1 33.8 65 17 Totl Inestmenet Casts 3,663.1 5,005.9 8,68.9 Se 100 83.8 114.6 196.4 58 I10 TOTALBASELINECOSTS 3,663.1 5,005.9 8,668.9 58 100 83.8 114.6 198.4 58 t10 Physical Contirngencies 323.0 405.9 728.9 56 8 7.4 9.3 16.7 56 8 Price Contingencices 1,7.5 2,373.4 4,145.9 57 48 6.5 8.5 I 150 56 8 TOTAL PROJECT COSTS 5,758.6 7,785. 1 13,543.8 57 156 97.7 132.3 230.0 58 116 M \Ray\Algreia&Anoex.l  -49- Annex 2-1 Page 1 of 7 THE DEMOCRATIC AND POPULAR REPUBLIC AF ALGERIA SIXTH HIGHWAY PROJECT Implementation and Procurement Schedule The tables of pages 4,5,6 and 7 describe the implementation and procurement schedules agreed on during appraisal for the main works and goods representing about 75% of total project costs. Concerning the training, TA and studies component , many TORs are finalized allowing signature of consultant service contracts at effectiveness; the implementation time of the subcomponents is planned to be between two and three years, depending on the specificities of the 1995-97 context, with the exception of the post-graduate degree which will be launched after the in-depth diagnosis of the Ecole Nationale des Travaux Publics, planned by DRHR for mid 1995. The tables of page 2 and 3 describe expenditures and disbursements estimated on the basis of the combination of procurement scheduled and Algeria Transport disbursement profiles.  -50- Annex 2-1 Page 2 of 7 THE DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA SIXTH HIGHWAY PROJECT Expenditure Accounts by Years - Totals including Contingencies (In US$ Million) Todals IndCuding Conlingencks 1995 1996 1997 1998 1999 2000 2001 2002 Total A. Strengthening & Rehabilitaion I Strengthening 7.6 8.8 9.0 9.3 9.5 9.8 - 54.0 2. Road RehabiliLation 3.2 3.8 3.9 4.0 4.1 4.2 - 23.0 3 Bridge Rehabilitation 1.9 4.9 4.2 28 2.1 0.9 16.8 4. Control of Works 0.7 0.8 0.9 0.9 0.9 0.9 - 5.2 5. Technical Studies & 0.5 0.9 0.6 - - - - 2.6 Supervision _ _ ___ Subtioal Strengthening nd 12.1 16.2 19.3 18.9 17.2 17.0 0.9 101.6 RehbAliltxt B. Road Malnuensn I Periodic Maintenance by 8.5 9.9 10.1 10.4 10.6 10.9 60.4 Conbtrc 2. Equipment for Current 1.3 11.4 0.7 . . - 13.4 Maintenance ani Traffic Counting 3. Municipal Road Maintenance 1.7 1.6 1.6 2.8 3.2 3.0 2.9 16.8 4. Superision, General Studies 0 5 0.9 0.7 0.6 - - 2.7 & Training (Municipal Roads) Subtotal Read Maintenance 12.0 23.8 13.1 13.8 13.9 13.9 2.9 93.3 C. Training. TA and Studes I Audit of Road Enterprises 0.5 0.5 0.5 0.6 - - - 2.1 2. TA to ANA & Traininrg 0.8 0.9 0.9 0.9 3.5 3. Ecoronic, Financial, 2.7 3.6 2.8 9.0 Environment & Detailed Engineering Studies (Motorways) 4. Modernizatin & Training 3.4 4.1 4.2 . 11.7 Actions (MIRP) 5. General Studim & Research 1.6 1.6 1.7 1.7 6.6 6. Specific Technical Assistance 0.5 0.5 0.5 0.6 2.1 for (MIRP) Subtotal Training, TA & Studies 9.5 11.2 10.6 3.7 - 35,1 Total lnsstanent Camts 33.6 51.2 43.0 36.3 31.1 30.9 3.8 _ 230.0 TOTALPROJECT COSTS 33.6 51.2 43,0 36.3 31.1 30.9 3.8 = 230.0  -51- Annex 2-1 Page 3 of 7 THE DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA SIXTH HIGHWAY PROJECT Estimated Disbursement per Bank Fiscal Year in US $ Million 1995 1996 1997 1998 1999 2000 2001 2002 Annual: 0 20.8 31.0 26.4 20.0 15.6 15.6 0.6 Cumulative: 0 20.8 51.8 78.2 98.2 113.8 129.4 130.0 Profile for Al2eria:. Prof L forAle 0 23.5 33.5 49.5 70.5 101.5 127.4 130.0 Algeria Highway VI Disbursement '400 150 E .7 la 100- E ....... 0. 1995 1 996 1997 1998 1 999 20CC 2001 2002 Years - Plenned disbursements per Bank fiscal year (cumulative) . Profile for Algeria I I ~ ~I I I II ; Nota Bene: Explanations on estimated disbursement pace are given in para. 3.47 and in Annex 2.1 - page 1. M:\XRyAgria\Anncx.2  II l.4Jl"A VI IlI"IIIWAYl IRMU LT 1995 1996 1991 1998 1999 2W J M M J S N J M M J S N J m M J s N J m m .1 S N J M M J S N I m M J S _________ ________________ F A J~~~~ ~~~~~ A 0 0FA J A 0 0 F A J A0 F A J A 0 [) F A J i 0 ottlA,lO. l.~tjo ~t~I 0.ol I I,&,,t.tt., F .j,k,oti zl *0 0 AO Wdpl ~Ps I Io.. [tl.,t 1.1 1 lalt-tloY Mo*del -1rt1-" don. U.ad I I..tt.... lilyttlractwatuno .,,ttrtt bylalottatot It.'.ttt,., ltt d,,. yIb,- W.A.t 30*[C Us~~~~~~~~~ d,,tI., -ttaread  .53- Annex 2-1 Page 5 of 7 .,z< 4 1 4! _ 2_ C -~~~_ -1 '.i,.4',  .11.111Ak %I' IIIGllWAV PH4ULICT 1995 1996 1997 1996 1999 2000 MM .1 S N J M M J S N .1MM. 5 N j M M S N J M M J SN .1 M M J S N ______ ______ _____ ______ _____ ______ ___ F A J A 0 0 F A J A 0 F A . A 0 D F A J1 A 0 D F A J A 0 D F A J A 0 [1 19916 All C-to...gtt 1991 .-pa.gn AN ttojo..W CAl I., 6ts I., RN RN C-.-9.t. 1998 -P.pg Cd lo ldoloV A I baltatllt COM,ttOi RH Ctattpa.g. Ctngta.g Repot I rnoolo-tt .Okcal-.l 1995 and 1999 campaigns are also included in the project with the same annual time schedule. .u t. 0 1 OQ I  I F lIA VI lIiNlIIWAI I'KIkEiHT on tn.l M-..Op.l R.*d, 1995 1996 199 7 1998 1999 2000 i M M SN]J MM]i S NJ MM J S N J MM J S N] MM J SN J M M J S N _______________________________ F A J A 0 0 F A]J A 0 O) F A]J A 0 O F A] A 0 D F A]J A 00D F A J A0 LI 1. d,go, In f,,, tl,,nle I,, 1i. srrpe-vsIOn o! lh. -u.cp.pi rads don. ton I.,, Ia.I-o 2 .-'! 3 ,,I I?. swroy do.* Scrvrc -rl.lot I.,0 MiNI! In,-- 2 -nd 3 01 fh I-,,$ln A......,.1r.. pr...I'l.l U Ualal m rs I-t - *-2  -56- Annex 2.2 Page 1 of 2 THE DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA SIXTH HIGHWAY PROJECT Preparation of Project Implementation Volume 1. The Project Implementation Volume (PIV) is important because many actors at the local level will be involved and because the absence of such document has had a negative impact on Highway V implementation pace; the designing and writing of the Volume chapters by each responsible Directorate is a key factor for success; comprehensive handbooks/guidelines/sample bidding documents have already been developed on road strengthening, rehabilitation, and maintenance. 2. Examples of similar PIV have been distributed during appraisal and annex 1, 2, and 3 of its aide-memoire give the key points for all sub-components; the draft PIV is due by March 31, 1995 and to be distributed at the project launching workshop planned for April 1995. 3. The planned table of contents is the following: Table of Contents Project Implementation Volume Executive Summary 1. Introduction 2. General Project Scope and Objectives 2.1 General Description 2.2 Summary of Project Components 3. Project Organization and Management 3.1 Organization Structure 3.2 Role/Objectives/Responsibilities of - DPAE and the "Facilitator" - DR - DEER - DRHR - Fonds de Participation 3.3 Role/Objectives/Responsibilities of other Actors (CTTP, Laboratories, CNPH- INPE, etc). 4. Detailed Component Description, Implementation Schedules, Indicators. For all 14  -57- Annex 2.2 Page 2 of 2 sub-components, the same format is being used: 1. - Objectives 2. - Description 3. - Costs 4. - Organization 4.1 Financing 4.2 Implementation responsibilities 4.3 Procurement 5. - Indicators and Reporting 6. - Implementation and Procurement Schedule. 5. General Procurement Rules 5.1 Regulations and Procedures 5.2 Procurement of Works 5.3 Procurement of Services 5.4 Procurement of Goods 6. Accounting System and Audits 6.1 Payment Procedures 6.2 Disbursements 6.3 Financial Statements and Reports 6.4 Performance Indicators of Payment and Disbursement 6.5 Audits 7. Monitoring and Reporting Annexes - All guidelines for procurement - All TORs for studies - Detailed references to key local documents/sample bidding documents - Sample quarterly report formats  -58- Annex 3 Page 1 of 7 THE DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA SIXTH HIGHWAY PROJECT LETTER OF ROAD SECTOR POLICY The President World Bank Washington, D.C. Dear Mr. President: On the occasion of the sixth loan granted by the World Bank for highway development in Algeria, I should like to express my appreciation of the way in which your institution is continuing to support our country's highway sector. Roads are indeed the most important transport mode in Algeria, accounting for over 93% of traveler-km and approximately 85 % of ton-km. The highway network, which includes some 95,000 km of roadway, today represents a heavy burden on the budget, owing to the fact that maintenance constraints are increasing as pavements deteriorate with age and traffic volumes increase. It has become necessary to optimize public expenditure in order to reconcile road network development needs and preservation of the road assets. The sector therefore intends to grant priority to preservation of the existing highway network and improvement of its management. The safeguarding and management of the existing network, and the motorway construction works in progress or awarded priority will represent the focal points of highway sector development over the next few years. This program will center mainly on: (a) continuation of actions to improve road network management, operation and maintenance; (b) priority treatment of the high-traffic roads included in the basic economic network through pavement strengthening or rehabilitation; (c) continued implementation of road network decongestion programs, particularly in the country's central region and around Constantine;  -59- Annex 3 Page 2 of 7 (d) stimulation of the road works market. The actions identified within this framework will essentially involve: - installation of some 300 small emergency maintenance units [unites d'intervention rapide - UIR] to handle small-scale emergency maintenance needs on national roads and wilaya roads; - preparation and dissemination of bridge management and maintenance guides; - implementation of a pilot maintenance program for municipal roads, designed to ensure better organization of the management of that part of the highway network; - development of a highway network maintenance strategy designed to optimize works programming; - implementation of actions geared to the development of the industry producing aggregates and bitumen, and improvement of the quality of road works thanks to improved laboratory perfonnance. The physical works comprise: strengthening and rehabilitation of over 4,000 km of roads, including Saharan tracks; construction or rehabilitation of approximately 100 bridges; construction of priority sections of the East-West motorway, in accordance with the conclusions of the economic and financial study. Road maintenance Many efforts have been made over the past few years in the area of maintenance of the national roads, which alone account for over 80% of road transport volumes. The principal pavement strengthening operations have focussed on the basic economic network, which carries the major part of the country's highway traffic. Road maintenance budgets have increased substantially over the past few years. Maintenance budgets more than doubled between 1990 and 1993. Accounting for inflation, this represents real growth on the order of 20%.  -60- Annex 3 Page 3 of 7 The 1993 highway maintenance budget totaled DA 7 billion, while the total for 1995 will be DA 9 billion, or approximately two thirds of the overall highway budget. This effort in the allocation of budgetary resources to road maintenance will be continued throughout project execution. Municipal roads A study will be carried out within the framework of the Sixth Project to improve the management and maintenance of municipal roads. This study will define a pilot maintenance works program to be launched in 1996, in order to implement the institutional, financial and technical mechanisms necessary to guarantee regular maintenance over the long term. The necessary budgetary funding for this program will be mobilized. Motorway program While the motorway program responds to a basic aspect of the country's economic development, its implementation demands financing on a scale incompatible with the country's difficult economic circumstances. The economic recovery strategy consists of allocating available resources to those actions that are the most likely to solve immediate problems. The sector will pursue the motorway works in progress and give priority to works with the highest rate of return, this being the only way to set up financial arrangements open to participation. Stimulation of highway studies-and-works market The highway industry market is presently dominated by enterprises in the public sector. The objective is to reinvigorate this market through the continuation of a number of actions, as well as the initiation of new measures, in liaison with the institutions concerned, the principal goal being to gradually expand the field of competition and thereby achieve more efficient performance. The conditions to be met for real and sustainable competition are currently being reviewed by the Government within the framework of the draft law to promote competition. Thus, and without waiting for formalization of this new action framework, the Ministry of Infrastructure and Regional Planning will work to achieve its overall objective of improved performance by: gradually strengthening the criteria for evaluating the financial capacities of road works contractors submitting bids;  -61- Annex 3 Page 4 of 7 pursuing its present policy of developing the use of small local contractors whenever appropriate; ensuring, as far as public enterprises within its sector of activity are concerned, that the Government's policy decision is observed, namely that it have no part in the management of public enterprises, once their liabilities have been definitively cleared, whenever this is justified. Within this framework, a review of the situation of public enterprises in the highway sector is now being carried out, chiefly for the purpose of determining which enterprises are actively engaged in an internally generated recovery process and identifying the necessary components for their financial restructuring, based on validated recovery plans and performance contracts. Such restructuring is not planned for enterprises in difficulty, which do not show signs of an internally generated recovery process and meet the criteria for liquidation. In application of these principles, the treatment of public enterprises in difficulty should no longer depend on government intervention but should be approached through the new mechanisms set up, and in particular: Articles 24 and 25 of the supplementary finance law for 1994, entitling public enterprises to sell their assets and open up their capital to individuals or bodies corporate under public or private law. These provisions also represent significant means of improving the economic efficiency of viable public enterprises; the provisions of legislative decree 94-09 of May 26, 1994 allowing enterprises to adapt their staffing to their potential level of activity; the amendments to the Commercial Code, sanctioning the principle of bankruptcy and liquidation of nonviable public enterprises. Concerning public works contractors in the public sector, and in relation to the above principles and the actions already in progress or planned for the public enterprises, the infrastructure department has both a specific role linked to its function as owner of highways and a general role linked to its mission as a government agency. It should be noted in this connection that the Ministry of Infrastructure and Regional Planning has already informed the World Bank of the establishment of a unit of economists to monitor this important aspect and to enable our Ministry to gain a strategic vision of the available means of the sector. With respect to actions intended to improve the economic efficiency of enterprises and to expand the field of competition, and to sectoral actions involving public works contractors, these are carried out, in consultation with the Ministry of Industrial Restructuring and Participation and the Ministry of Finance, essentially through the Fonds de Participation Construction. They  -62- Annex 3 Page 5 of 7 are implemented in accordance with the guidelines, objectives, and timing of the Government's economic rehabilitation program, which is also under discussion with your institution. A first basic document entitled "Recovery of the National Economy and Restructuring Policy" has already been prepared and adopted within this framework, and is mentioned in the National Planning Council's letter to the Bank of November 30. The decisions to be taken on a case by case basis, following the review of the situation of each enterprise as mentioned above, and the changes to be made to this component within the framework of the Government's economic rehabilitation program, will be discussed with your institution in terms of their possible impact on the Sixth Highway Project. This discussion will take place as soon as possible, the conclusions being taken into account during preparation of the action plans for those areas, and a report will be prepared within the framework of the mid-term review of the Sixth Highway Project. Highway development The quality of highway management should be developed in order that the highway budgets be utilized more efficiently. The actions selected within this framework relate in particular to: the study covering measures to update the highway taxation system, carried out within the framework of the National Transport Study; the creation of a road fund designed to protect the highway maintenance budgets from unforeseen economic contingencies, make managers more accountable, and develop procedures better oriented to improved performance. Its income will come essentially from the proceeds of the user fees identified by the highway taxation study, and its expenditure will cover all of the recurrent costs of the highway networks, including strengthening and rehabilitation; the continuation of an approach launched some two years ago, focussing in particular on: (i) quality of the works (ii) bitumen (iii) aggregates  -63- Annex 3 Page 6 of 7 (iv) laboratories (v) payments This approach is part of a process whereby lessons are learned from the past, through consultation with all of the actors concerned, as well as from international experience in this field. The corresponding action plans are attached. Departmental modernization The conditions for project preparation and monitoring will be improved within the framework of the component of the Sixth Highway Project covering modernization of the infrastructure department. Particular emphasis will be placed on strengthening of the capabilities for performing economic appraisals of investment projects. Project selection criteria will be strengthened through the formulation of study guidelines. Plans are under way to expand the highway data bank and operation of the network management systems to the entire priority network by December 31, 1996. Special efforts will be made to disseminate sample bidding documents and study terms of reference. Wilaya directorate oversight mechanisms will be set up, through the development and use of performance indicators and of rapid and reliable information systems. Staff motivation will be achieved through better personnel management, for example through implementation of an upgrading program for each staff category. Training In the area of training, the principal actions will involve development of the Institut National de Perfectionnement de 1'Equipement and of the E~cole Nationale des Travaux Publics de Kouba, through upgrading cycles designed to raise the technical level of engineers employed by the wilaya directorates and public works subdivisions. A program will be set up under the Sixth Highway Project to provide management training abroad for 500 professionals.  -64- Annex 3 Page 7 of 7 Assistance to municipalities Very few municipalities have highway engineering divisions, most of them relying on support from the public works subdivisions. This technical assistance to the municipalities will be clarified and formalized in new regulations to be enacted during 1995 by the Ministry of Infrastructure and Regional Planning and the Ministry of the Interior, Local Authorities, Environment, and Administrative Reform. Laboratories A technical audit of the laboratories carried out in 1994 resulted in several recommendations designed to improve laboratory performance in the road construction area. These recommendations related to: - creation of a laboratory network - redefinition of key skills and functions - regularization of the financial situation and establishment of an investment and equipment renewal plan - redefinition of relations between the infrastructure department and the laboratories. An action plan implementing the above recommendations, prepared by the Ministry of Infrastructure and Regional Planning, the laboratories concerned, and the Fonds de Participation Construction, is annexed hereto. The foregoing represents the major thrust of the highway sector development program to be implemented by the Ministry of Infrastructure and Regional Planning over the next few years. We trust that this program will be executed under the best possible conditions, in close collaboration with the World Bank. Accept, Mr. President, the assurances of my highest consideration. The Minister of Infrastructure and Regional Planning M:%Rxy\Aygter\Annex.3  -65- Annex 4 Page 1 of 2 THE DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA SIXTH HIGHWAY PROJECT Action Plans for "Ouality". "Public Works Laboratories" and "Acceleration of Payments and Disbursements" Ouality Chain 1. The situation of the "quality chain" and the laboratories is described in Chapters 1 and 2. In the framework of the project objective to implement a quality improvement strategy, and following a strategic audit of the four regional laboratories, an agreement was reached during the appraisal mission on the following: (a) the laboratories represent a significant asset for Algeria but improvements are necessary; (b) the audit report recommendations are endorsed and are the basis for the detailed action plan: (i) create a network of laboratories, to better share technical information, but maintaining financial and management autonomy of each laboratory; (ii) redefine and update missions pertaining to the laboratories; (iii) rehabilitate the financial situation; (iv) redefine the relation between the Ministry and the laboratories; (v) launch a systematic quality approach; (vi) reorganize laboratories by competencies; (vii) establish a computerization plan; and (viii) establish a selective plan for equipment. (c) the Director of Roads decided to: (i) take steps to improve the "quality chain" among local administration engineers and in laboratory control contracts; (ii) set up specific and progressive criteria to qualify each laboratory for each tranche of works, thus encouraging them to implement the short- and medium-term audit recommendations; and (iii) subordinate the access of laboratories to general studies and research financed under the project, to key-action implementation related to the development of an effective "network" of laboratories in the field of training, quality approach plan, computerization, and technical information sharing. 2. Two detailed action plans (in french) are annexed to the policy letter:  -66- Annex 4 Page 2 of 2 one on "Quality for Studies, Works, Contract Management, Control and Competition", with 20 specific actions, one on "Laboratories", with 23 specific actions. Acceleration of Payments and Disbursements 3. DPAE in MIRP, in close relation with main actors concerned, has developed a first- step action plan to address issues described in para. 2.27; this action plan with 5 key actions includes an analysis of issues with a sample of contracts and the preparation of a local manual for payment and disbursement procedures. This action plan (in french) is annexed to the policy letter. M:\Ray\AIgeria\Annex .4  -67- Annex 5 Page 1 of 2 THE DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA SIXTH HIGHWAY PROJECT Action Plans for "Bitumen Supply and Ouality" and "Granular Materials" Bitumen Supply and Quality 1. The lessons learned from Highway V project implementation concerning bitumen supply shortage and quality are described in Chapter 2. In the framework of the project objective to create a more enabling environment for efficient utilization of scarce resources, and following the audit reports on bitumen supply and quality, agreement was reached during the appraisal mission on the following: (a) the diagnosis and recommendations described in the audit reports are endorsed and the Director of Roads will inform the other decision makers, from the bitumen supply side, Ministry of Heavy Industry, Ministry of Commerce, Sonatrach, Naftec and Naftal, requesting them to take appropriate actions; (b) the Algerian national working group on bitumen developed the action plan based on the already detailed action plan proposal developed by the audit reports; the key points concern: Supply side: (i) the technical specifications used in future contracts to produce non- rutting, non-cracking bitumen; (ii) the need to concentrate at least production and distribution in one hand (for example Naftec) for the bitumen refined in Algeria, and to create a competitor directly importing road bitumen (for example Naftal); (iii) the importance of producing appropriate bitumen grades at least in the two refineries and to charge the real transport costs; (iv) the development of a consistent quality control system by the producer; (v) the streamlining of needs assessment and the improved time scheduling of import ordering, including foreign exchange availability for it; Demand side: (vi) the strong development of a consistent quality control plan for bitumen binder procurement and production of bituminous mixes; and (c) the Director of Roads decided to: - pay for the quality control tests to be done by the administration and launch a data base on bitumen control results; - systematically demand quality conformity certificates when bitumen is bought by contractors; and - launch a demonstration project on the use of bitumen emulsions.  -68- Annex 5 Page 2 of 2 2. A detailed action plan of 55 specific actions (in french) on bitumen supply and quality is annexed to the policy letter. Granular Materials for Roads 3. Following a national seminar aimed at identifying key actions to improve the availability and quality of granular materials for roads, an action plan has been developed by DEER and is incorporated in the project. Eleven key actions are described (in french) in an annex to the policy letter. M:\Ray\AWgeria\Annex.S  -69- Annex 6 Page 1 of 1 THE DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA SIXTH HIGHWAY PROJECT List of Studies on Road Sector Policy and Technical Guidelines Road Directorate (DR) - Preparation of Guidelines and Recommendations on Highway and Motorway Studies - Preparation of Guidelines on Environment Impact Assessment of Road Projects - Preparation of Guidelines on Economic Evaluation and Selection of Road Projects Outside Cities - Preparation of Guidelines, and Advice on Geotechnical Studies for Roads and Bridges - Study for the Implementation of a Quality Approach in the Laboratory Network. Operations and Maintenance Directorate (DEER) - Study on Organization and Management of Municipal Roads Outside Cities (Part of b - iv - in chapter III) - Road Maintenance Strategy Study with the Use of HDM III Model on National and Wilaya Roads (35,000 kim) - Audit of Main Quarries; as part of the action plan on Granular Materials - Study to Develop at National level "Technical Certification" on New Technologies Used for Roads and Bridges. These studies and technical guidelines have been designed in consistency with project priorities and corresponding actions plans. The time schedule of contract launching will flexibly take into account the evolution of relative priorities together with the qualification steps of concerned actors. The complementarity between local and foreign expertise will be sought from origin to supervision with special care. M:\RayWAIgeria\Annex.6  -70- Annex 7 Page 1 of 6 THE DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA SIXTH HIGHWAY PROJECT COORDINATED ACTION PROGRAM FOR THE MODERNIZATION OF THE MINISTRY IN CHARGE OF INFRASTRUCTURE 1. Origin of the action program: This sub-component of US $1.6 million is the result of an in-depth study of organization and regulations in the infrastructure sector conducted by the Bank between June 1993 and April 1994. The study has aimed at enhancing the global efficiency of the operations undertaken by the Ministry and its local offices; it has also be designed to support the smooth implementation of Bank projects in the sector. Since this study' has been requested by the Minister himself, it has been conducted jointly with the Algerian counterpart from the Ministry, based on a substantial contribution from its personnel arising from the process of internal examination and review. It has also used the results of a large-scale survey2 of government officials and of about 150 public and private enterprises and local communities conducted in 11 of the 48 Algerian administrative districts (Wilayas). A broad agreement was reached on the identification of needed reforms and a high degree of ownership of the action program was achieved; the 27 actions included in the action program, based on Bank's proposal has been graded by the Algerian counterpart; the recent appointment of a senior manager as head of the modernization department has been one of the signals showing the commitment to implementation of the action program. 2. Strengthening the design of investment programs and projects: The analysis of existing investment choice methods reveals serious weaknesses. The major ones relate to the nearly complete separation of preparation of the operating budget from that of the investment budget, the inadequacy of economic evaluation, the absence of systematic review of the costs and benefits of major projects during their implementation, and the absence of evaluation upon their completion. Four actions are planned to address this issue: The enhancement of investment selection methods and the review of major investments effectiveness, the setting up of an economic appraisal unit within the DPAE and the launching of a pilot project designed to ensure consistency and trade-offs between operating and investment budgets. 3. Improving the methods used for project studies: The Ministry and its deconcentrated offices in the Wilayas (and the agencies to a lesser extent) have been analyzed as units I "Institutional Modernization in the Infrastructure Sector of Algeria" - White Cover - July 1994, EMTPM 2 .Modernisation du Secteur de l'Equipement' - Enquete-Diagnostic realises par le CNAT. Volume I: Entretiens effectues aupres de 5 wilayat - echantillon. Volume II: Rapport d'Enquetes aupres des DTP/DHW des Entreprises et des Services Locaux, mars 1994.  -71- Annex 7 Page 2 of 6 producing a variety of complementary services throughout all stages of investment projects, from studies to supervision and maintenance. Because an institutional strengthening component was included in the World Bank water supply and sewer rehabilitation project, the emphasis of this study was placed on the roads sub-sector. An analysis of recent highway or water infrastructure projects revealed very frequent cost and schedule overruns and a relative mediocrity in the quality of work. The poor quality of studies is apparent from the project formulation stage. Six actions are designed to address the needs in this area: The introduction of a quality control over the terms of reference of complex or large-scale study, the analysis of study quality impact on project implementation, the assistance in developing partnership between national and international consulting/ engineering firms, the experimentation of introducing critical review of the quality of projects study, the development of a method to deal with relocation of utility networks, and a "handbook" on Rights-of-Way, and the implementation of a cost database. 4. Reform of procurement and contract award procedures: Sound project management also requires the prior existence of a "good contract" with the enterprise in charge of performing the work. Procurement procedures are widely criticized by the field survey respondents -- both the enterprises and the public agencies. Two large actions and a third, smaller one, have been designed to help address this issue: The first would after detailed analysis of the contribution of standard contracts, prepare and implement up- to- date contract documents and develop indicators for follow up on delays in preparation of contract documents; the second would develop "handbooks" for reviewing bids and for handling of award procedures for projects financed by foreign institutions; the third would specify the job description and the training needs of special correspondents to international development institutions. 5. Facilitation of project execution: Following the analysis of the project preparation stage, the report scrutinizes the administrative and financial management of projects. This analysis reveals excessive complexity, incomplete information on regulations and procedures within the public sector, and unwillingness to accept individual responsibility. This results in misspent time and energy and disputes with contractors, which are a source of waste and frustration. Thus, the "enabling" measures proposed in the report should make it possible to improve administrative efficiency. Experience worldwide has shown that competition among contractors plays a driving role in this respect. Large competition has only recently been allowed in Algeria, and even now there are only few deliberate actions to encourage it -- for instance by advance publication of preliminary project timetables or identification of the most mobile contractors so as to broaden the bidding. An action is therefore planned to develop information of enterprises on forecasted programs and bidding; 6. Promotion of private sector participation: An analysis of the infrastructure sector must include consideration of the problems and possibilities of the public and private  -72- Annex 7 Page 3 of 6 enterprises that build or maintain the infrastructure. On the basis of the field survey of 147 enterprises, a number of regulatory and material problems emerged. Relations between enterprises and the department are not standardized and rely much too heavily on ad hoc personal relationships. This is inimical to accountability and, indirectly, to efficiency. In addition to the procedural simplifications previously mentioned, the enterprises manifest a wish for standardizing relations among the various participants in the process, simplifying the process of procurement, improving technical staff, and institutionalizing the interface with the Ministry offices. An action is included to set up a monitoring mechanism to track private sector participation. An opening of procurement and contract-award regulations has contributed to reducing some of the formal discrimination against the private sector, but its participation is still minuscule. Yet, while weak, the private sector has some basic advantages in terms of flexible management. It is therefore recommended to exploit the complementarity between public and private enterprises which was underlined by a number of respondents and an action has been designed to deal with this topic. Delays in payment are rightly criticized by all types of enterprises, national public, local public and private, responding to the survey. Payment delays embarrass and weaken contract managers. The situation is even worse when foreign currency payments are late -- 12 months are routinely cited -- because this results in early disputes . An action is planned on handling delays in foreign currency payments. 7. Modernization of budget procedures and management tools: The analysis of the applicable budget procedures within the Ministry and the agencies revealed that substantial progress has already been made by discontinuing the use of the single Wilaya budget, and that the rules and procedures have been thoroughly assimilated. However, a great deal remains to be done in order to provide the managers with the indispensable tools they need to support the exercise of managerial initiative. Two actions have been planned to develop information on costs and return on services, and to enrich the content and methodology of the budget preparation phase. Moreover, managers are not actively encouraged to assume responsibility, and are corseted by a plethora of controls, ex ante and ex post. Without questioning the basic intent of the structure of controls (i.e., preventing waste, fraud and misallocations), it is possible and essential to strike a new, much simpler balance. This simplification should go hand in hand with the gradual introduction of management by objectives, of use of all information needed for comparison among offices or individuals, and of explicit recognition of individual and group achievements. An action has been designed to prepare senior management training. To increase operational efficiency, a plan of action for gradually extending computer use has been included in this sub-component, starting with the simplest and cheapest applications, and promoting their use by stepping up the pace at which computers are made available to the offices or individuals who are the most responsive in using them well.  -73- Annex 7 Page 4 of 6 8. Strengthening and developing human resource management: The following key problems in human resource management were pinpointed: responsibility for human resources widely dispersed through the central administration; substandard initial training, both in termns of curricular content and in terms of quality of teaching; lack of basic data on personnel and of expeditious ways to exchange and summarize data which exist; failure to apply merit-based performance evaluation rules, especially for the purpose of allocating bonuses and allowances; poor mobility among higher-level staff. Three far-reaching actions have been planned to introduce a full-fledged human resources policy, through institutional reorganization, methodological assistance in surveying and managing staff and posts, assistance in setting up the system of adjusted bonuses to individual performances and development of institutional communication. 9. Amplify the support to the Wilayas and clarify the role of local offices for assistance to the municipalities: Because of the vast scope and delicate implications of the subject, the report provides a limited synthesis of the main results of the deconcentration and decentralization policy conducted in this sector. It is based on data from the field survey of enterprises and public officials. As for the first part, deconcentration, it was found that the technical offices did gain the needed autonomy and national policies were more closely implemented after the system of exclusive reliance on the Wali (prefect) was abandoned. A better balance between the technical and the political has been achieved. However, there is still much to be done to assist, support, and guide the technical personnel within each Wilaya. An action has been designed to consider regional arrangements in order to support the Wilayas. On the other hand, the technical directors, and especially their subdivision officers, provide technical assistance to the municipalities, which appreciate this service. But there is no consistent framework for this service. This issue is the starting point for an action included in the program. It will assess, among other questions, if standard contract or agreement should be drawn up for each category of services provided by the technical offices. Technical assistance should also regularly include a component for on-the-job training of municipal personnel. Where agencies play a predominant role in projects design and execution, the policy of delegation should be pursued; an action has been designed in this respect to establish formalized contractual relations. 10. Support to the process of change: The process of change involved in the institutional modernization recommended in this study has already been launched as the report was being written, and has seen its first concrete applications by the higher level staff at the Ministry.This is in keeping with the original vision of the study, i.e., to make sure that institutional modernization in all its aspects is embraced by the top management and future "conductors" of the modernization process. It would then become possible to move to the subsequent stages: the initial results should be highlighted in a widely circulated communication; the different staff levels and provincial offices should be brought into the modernization activities; an action aiming at the general support to the modernization task force has been included in the program.  -74- Annex 7 Page 5 of 6 11. List of Titles of Specific Actions On the basis of the list of 27 actions to strengthen institutional capacity, the 4 following packages of terms of reference grouping related subjects have been prepared by MIRP, to call for tender: (i) financial and budgetary procedures, (ii) operational capacity, (iii) external communication and partnership, (iv) human resource development and analysis of cost and return on services. 1. The first package contains the following: * Action Al: Consistency between investment and operating budgets. * Action B20: Remedies to payment delays, both in foreign and domestic currencies. * Action Bi1: Appointment and training of special counterparts to international financing institutions. * Action B2: Strengthening of budgetary preparation. 2. The second package contains the following: * Actions A2/A4: Enhancing investment selection methods and reviewing the effectiveness of major investments. * Action A3: Supporting the setting up of an economic appraisal unit within the DPAE. * Actions B1/B2: Quality control action on specifications (and terms of reference) for large-scale studies. Analysis of effect of studies on project implementation. * Action B5: Experimentation on "cross-comparison with the study" (contradiction a l'etude). * Action 136: Study of conditions for the implementation of cost indexes. * Action 138: Assumption of responsibility for problems arising from rights-of- way and from utility relocations.  -75- Annex 7 Page 6 of 6 * Action B9: Enhancing the quality of procurement and contract documents, and monitoring preparation times. * Action B1O: Strengthening the quality of bid evaluation. 3. The third package will include the following: * Action B3: Partnership between national and international consulting firms. * Action C3: Development of institutional communication. * Action El: Development of a partnership between enterprises with a different status. * Action E2: Development of enterprise sector information on prospect and planning of infrastructure operations. * Action D4: Establishing formal contractual relations between the ministry and the agencies. 4. The fourth package will include the following: * Action C2: Adjustment of bonuses to individual performance. * Actions C4/C5: Human resource management, organization and operating methods. * Action B23: Analysis of cost and return on services. N.B. Numbers refer to the Modernization Study numbering. M \Ray\Algeria\Anncx7  -76- Annex 8 Page 1 of 8 THE DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA SIXTH HIGHWAY PROJECT ECONOMIC EVALUATION A. Road Strengthening and Rehabilitation Component Methodology used 1.01 Adaptation of the HDM III model to Algerian conditions is still in progress, preventing its use in the economic evaluation of the component which, therefore, was done by CTTP on the basis of the locally-developed EVEC (for EValuation EConomique) model. EVEC is a computer model designed to perform a basic economic evaluation of periodic maintenance. Its review by the Bank showed it had the right structure to handle this kind of analysis. The methodology, similar to the one used in HDM III, compares estimates of the road agency costs and of vehicle operating costs between two scenarios: without and with the project. These costs are defined as a function of road characteristics and conditions. Costs and benefits to society are apprehended by discounting them at 10 percent per year, and eliminating taxes from the calculation. The analysis assumes free-flow conditions. 1.02 The condition of the road is assumed to deteriorate as a function of time and traffic. Once the two key parameters are entered (namely, roughness and deflection indexes for homogeneous sections of a particular road, measured in the course of preparation of detailed engineering studies), the model computes the roughness progression without the project, based on deterioration laws defined by the HDM III model. Depending on the surface treatment selected under the project, a value is given to road roughness and deflection indexes at the conclusion of works, and entered in the model for prediction of road deterioration with the project. The EVEC model does present some drawbacks, the main one from limitation of the analysis period to 10 years: it does not allow to compare maintenance strategies, and integrate impacts deferred to after year 10. The model further lacks flexibility in the definition of the best maintenance strategy without the project, testing the amount of pothole patching is a preferable approach that HDM III makes possible, because it has important bearings on the calculation of rates of return. Nevertheless, the EVEC model provides a good approximation of the economic value of road strengthening and rehabilitation works. Vehicle operating costs 1.03 Thorough studies have been carried out under the National Transport Study for deternination of main features of the Algerian vehicle fleet, its composition, age, and  -77- Annex 8 Page 2 of 8 utilization factors. Both the analysis and results are contained in a Special Report' dated in September 1992. These results have been updated by CTTP on the basis of mid-1994 prices. The methods and mechanistic relationships used for prediction of vehicle operating costs are directly derived from Bank research on the subject. The type of surface, and the horizontal and vertical geometry of roads under study have been parameterized for 3 main categories of the environment: (i) Ti is for low-gradient and low-curvature roads; (ii) T2 is for low-to- average-gradient, and average-curvature roads; (iii) T3 is for average-to-high-gradient, and high-curvature roads. 1.03 Six categories of vehicles are representative of the Algerian fleet: - P1 is for the light vehicle, a composite of the Renault 19 (< 1,800 c.c.). It represents around 40 percent of the vehicle fleet and travels an annual distance of 21,500 km on average. -P2 is for the pick-up truck, featured as the Peugeot 504 of such type, carrying a 1-ton payload, and running an average 24,000 km annually. - P3 is for the average bus: the locally assembled SNVI 49V8 with 50 seats and travelling 64,000 km per year. - P4 is for the light truck, the K66 SNVI, with a gross vehicle weight (GVW) of slightly less than 6-ton, and annual travel distances of 64,000 km. - P5 is for the heavy truck, a SNVI c 250, or equivalent, with a 16-ton GVW, and annual travel distances of 74,000 km. - P6 is for the tractor/semi-trailor is the SNVI TB 3051, with a 25-ton GVW, and annual travel distances of 74,000 km. 1.04 The average speed is assumed to range from 60 km/h for heavy vehicles to 70 km/h for light ones. The average useful life is between 12.5 and 15 years. The economic fuel costs were based on ex-factory prices quoted by Naftal, which were found to be close to border prices. The maintenance costs reflect average market conditions. i/see: Bedat & Dar Al-Handasah: "Etude Speciale: Couts de Transport. Volume 11: Couits d'Exploitation des Vehicles" September 1992  -78- Annex 8 Page 3 of 8 1.05 The results of VOCs' calculations are given in table 1. Table I Evaluation of Vehicle Overatinz Cost (in Algerian Dinar per Veh/km) costitems Pi P2 P3 P4 P5 P6 Fuel 0.283 0.494 1.089 0.814 1.380 2.132 Tires 0.048 0.110 1.132 0.326 1.529 2.095 Lubricants 0.043 0.041 0.065 0.072 0.065 0.108 Maintenarce 1.327 1.544 9.492 3.615 10.833 21.420 Capital Cost 2.619 2.364 8.123 2.165 5.471 8.235 Crew 0.000 0.000 1.873 1.745 2.262 2.132 Overhead 0.009 0.010 0.000 0.305 0.000 0.000 Total 4.329 4.563 21.774 9.042 21.540 36.122 ource: CTTP."Schtma lDirecteur Routier National. Actualisation des coufts d'exploitation des vehicule's" Otober 1994.(VOCs are computed at roughness 2.0 IRI on slightly curved roads in relatively flat terrain - Ti environment) Investment costs 1.06 They are estimated in June 1994 prices based on the detailed engineering studies carried out by CTTP for each road, which detail the bill of quantities per cost item'. Average tax inclusive costs per kilometer amount to AD 5.6 million and AD 3.2 million for strengthening and rehabilitation works respectively. Implicit and explicit taxes have been excluded for the economic analysis; they include the value added tax which, on average, represent 13 percent of tax-free estimates for works carried out by local contractors, and an estimated average of 7 percent corresponding to taxes and customs duties paid on materials and equipment purchased by contractors. Several technical options have been considered: (i) a base-coarse gravel-asphalt layer of various thickness depending on the extent of structural defects, to obtain a roughness index of 2,000 mm/km; (ii) a base-coarse gravel layer, to obtain a roughness index of 2,500 mm/km; (iii) surface renewal only, with has no effect on roughness. Physical contingencies represent 10 percent of base costs. The works are assumed to last 18 months on average from start to finish. Maintenance costs 1.07 Without the project, the strategy is to provide for a minimum standard of service through regular maintenance and spot repairs. The average maintenance costs per km and per year are estimated around AD 200,000 in year 1, to AD 800,000 in year 10 (plus or 2/CTTP:"Preparation du Vleme Projet Routier.Estimation des Projets de Renforcement et RWhabilitation" October 1994.  -79- Annex 8 Page 4 of 8 minus 20 percent, depending on traffic intensity and the initial condition of the road). With the project, road maintenance costs are considered negligible during the first three years following completion of works, and rise thereafter from about AD 20,000 in year 4, to AD 40,000 in year 10. Traffic levels 1.08 They were estimated per homogeneous section of each road on the basis of traffic counts dating back to 1990-1991and updated to 1994, assuming regular traffic growth at 5 percent per year. It certainly gives uncertain estimates. On the other hand, the traffic counts that could have been made in late 1993-early 1994 would have been much affected by the deep economic crisis that Algeria is through, and which is expected to be over by end of the stabilization period. On balance, relying on estimates reflecting average conditions that existed before the crisis may give a more reliable picture of the long term trend, and a better estimate of the economic value of road projects which carry their effects over a long period. The uncertainty inherent to the choice made can be mitigated by checking the impact of lower first-year traffic on the economic rates of return in the sensitivity analysis. Results of the economic calculation 1.09 As one normally expects for investments of that nature, the road strengthening and rehabilitation program is highly justified, with rates of return ranging from 40 to 89 percent, for strengthening (weighed average of 67 percent), and from 18 to 65 percent, for road rehabilitation (weighed average of 44.7 percent). Table 2.1 and 2.2 summarize the results. Table 2.1 Road Strengthening Component PROJECT LENGTH INVESTMENT AVERAGE 1994 RATE OF (AD MILLIONI INVESTMENT DAILY TRAFFIC RETURN PER KM ITTCI MAXIMUM MINIMUM (AD MILLION) TRAFFIC TRAFFIC RN 06 MASCARA 27 190.1 7.3 7577 6049 72.2 N 08 BOUIRA 20 84.5 4.3 5585 4189 64.8 RN 23 16 96.9 5.4 9302 7505 83.3 MOSTAGANEM RN 21 GUELMA 23 107.4 4.4 6400 6400 44.4 RN 05 BOUIRA 49 217.9 4.5 15990 9762 76.3 RN 05 MILA 37 216.8 6.0 10830 7651 56.3 RN 26 BEJAIA 62 377.2 6.4 14965 7238 60.9 RN 0S MEDEA 15 101.6 6.5 3937 3655 43.9 RN 12 BOUMERDES 46 257.6 5.6 8917 8917 79.2 RN 28 M'SILA 28 154.5 5.0 3609 3160 64.6 RN 46 BISKRA 54 320.8 5.9 4465 2204 39.5 RN OS SETIF 33 211.4 6.1 17380 13698 88.6 ToTAL GENERAL 410 2336.7 5.7 l  -80- Annex 8 Page 5 of 8 Table 2.2. Road Rehabilitation Component PROJECT LENGTH INVESTMENT AVERAGE 1994 RATE OF (AD MILLION) INVESTMENT DAILY TRAFFIC RETURN PER KM (TTCI MAXIMUM MINIMUM lAD MILLION) TRAFFIC TRAFFIC RN 06 EL-BAYADN 24 56.9 2.4 2069 2069 49.3 LOT I RN 06 EL-BAYADH 24 56.8 2.4 2069 1336 42.8 LOT 2 RN 06 ADRAR 60 106.7 1.8 770 770 17.6 RN 06 SAIDA 32 105.9 3.3 3300 3300 34.0 RN 30 TIZI-OUZOU 49 157.5 3.2 5200 2500 64.5 RN 18 MEDEA 67 195.2 2.9 2961 2718 48.4 TOTAL GNEML 256 679.0 2.65 1.10 The sensitivity analysis was carried out to ascertain which parameters would be critical to achieving a satisfactory return on the investment. Three factors were tested: - investment cost estimates; - the assumptions on daily traffic; - the traffic growth rate; A sample covering all rehabilitation sub-projects, except the RN6 Saida, and the strengthening sub-projects in relation to RN6 Mascara, RN23 Mostaganem, and RN26 Bejaia brought strong evidence that the assumptions on traffic growth rates have very little impact on the ERRs. Should actual traffic be stagnant from year 1 onward, the ERRs would only be reduced by 7 to 15 percent, depending on project roads. As the traffic is quite high in most cases and maintenance is generally overdue, it comes to no surprise that main risks are associated with errors in the investment cost estimates and the daily traffic counts. Table 2.3 shows that a quite substantial margin of error could be tolerated without impairing the project's economic justification.  -81- Annex 8 Page 6 of 8 Table 2.3. Road Rehabilitation Component: sensitivity analysis Road sub-projects time investment cost should share of base case daily traffic increase to bring NPV to 0 which brings NPV to 0 1. Strengthening: RN6 Mascara 7.1 6% RN8 Bouira 6.9 9% RN23 Mostaganem 9.0 7% RN21 Guelma 4.4 15% RN5 Bouira 13.5 3% RN5 Mila 7.7 7% RN26 Bejaia 7.4 9% RN8 Medea 3.5 17% RN12 Boumerd6s 115 5% RN28 M'sila 6.5 8% RN46 Biskra 3.3 19% RN5 Setif 13.0 4% 2. Rehabilitation RN6 El Bayadh. LI 3.7 5% RN6 El Bayadh. L2 3.1 17% RN6 Adrar 1.4 68% RN6 Saida 2.7 25% RN30 Tizi Ouzou 6.4 12% RN18 Medea 4.3 14% B. Rehabilitation of bridges 1.11 No detailed economic analysis is available at this stage for the bridge rehabilitation component. The program, estimated at a total cost of some US$ 13.2 million, provides for execution of works in two tranches. The first tranche comprises 19 bridges on heavily trafficked roads (average daily traffic in a 3,400-25,000 vehicle-range) and presenting relatively simple technical problems. The second tranche comprises 14 bridges requiring complex studies and works. The detailed engineering studies for the second tranche will be financed under the project. Ongoing studies for the first tranche are financed by the Government, and related works are not likely to start before year 2 of project execution. The economic evaluation will therefore be carried out on the basis of a methodology approved by the Bank. This methodology was tested on a sample of 8 bridges, giving a broad indication on the likely economic rate of return of investments under the component. It is understood that no sub-project would be financed by the Bank unless it satisfies the condition of a minimum 12 percent rate of return. 1.12 A computer model has been developed in Hungary to guide choices by the Ministry of Transport on rehabilitation and reconstruction of bridges. It was updated several time, and the latest version was issued in March 1994. The intrinsic quality of the model and the complete lack of expertise on the subject in Algeria led the Bank to recommend its adaptation  -82- Annex 8 Page 7 of 8 to local conditions. A copy of the model was given to an Algerian delegation which visited Hungary shortly before Bank appraisal. They had brought technical data on 8 bridges of the first tranche which were used by the Hungarian specialist to run the model for demonstration and training purposes. Main findings are summarized hereafter. 1.13 Methodology The computer model compares the flows of costs and benefits over 30 years with, and without bridge repairs. (a) On the infrastructure side, the model includes deterioration functions calibrated on the basis of data on bridges that never underwent major repairs. The data base spans several decades. The investment strategy comprises 7 standard options: (i) raising the load capacity; (ii) widening the bridge; (iii) a combination of the two previous options; (iv) periodic maintenance; (v) complete reconstruction; (vi) closing the bridge, and substituting it with a pontoon or a ferry boat; (vii) reconstructing the bridge and road connections. An option (viii) allows to consider any other possible solutions. The characteristics of the existing bridge that are processed relate to its geometry, the type of construction, the surface roughness along the deck, the utilization constraints to traffic in terms of speed and load factors. The characteristics of access roads are also taken into consideration: gradient, curvature, width, and surface cover. (b) On the traffic side, vehicle operating costs are measured in accordance with the the traffic composition which includes 5 categories (light vehicles, light trucks, heavy trucks, semi-trailers, and buses). The model also allows for computation of travel time costs. (c) The benefits come from improved traffic conditions. Without repair, the bridge will reduce the average speed of vehicles, especially if one of the lane has to be closed, and force diversion of an increasing share of the heavier traffic component to other itineraries, thereby increasing operating costs and travel times. Savings on vehicle operating costs are also computed if the bridge is resurfaced. Traffic was assumed to grow at an annual rate of 5 percent. 1.14 Notional results Eight bridges were summarily analyzed and economic rates of return were found ranging from 22 to 68 percent, with a weighed average of 46.8 percent. The main characteristics of the calculation are shown in table 3.  -83- Annex 8 Page 8 of 8 Table 3 Sample analysis of the economic dustification of the bridge component location capital cost length 1994 traffic percentage of N.P.V. IRR (in AD million) (in m) (average/day) light vehicles (AD million) Oued Ghroura (RN8 Pk 30.5) 7.9 15 5390 81.5 % 3.6 23 % Oued Hamidou (RN8 Pk 39,1) 3.1 12 5390 81.5 % 1.0 38 % Oued Barek (RN29 Pk 46) 12.1 43 8613 74.8 % 3.3 31 % Oued Ghraba (RN24 PkIlO) 1.5 14 1535 50.6 % 0.3 22 % Oued Kniss (RN113 PkO.2) 45.1 109.5 4500 88.9 % 11.2 68 % Boufarik ramp (RN4 PkO.6) 8.5 40 18140 69.5 % 2.1 33 % Oued Harrach (RN61 Pkl3) 9.7 40 9780 67.8 % 5.5 57 % Oued Chiffa (RN4 Pk17.5) 35.0 49 8228 61.7 % 11.0 33 % M :\RAY\annex8.sar  -84- Annex 9 Page 1 of 6 THE DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA SIXTH HIGHWAY PROJECT MAINTENANCE STRATEGY AND DEVELOPMENT OF NETWORK-BASED MAINTENANCE 1.01 Tight budget constraints have long been a major determinant of the road maintenance strategy in Algeria, and will so remain in the medium term as the Government has committed to reducing the public deficit and reallocating resources to the productive sector under the Stabilization Program approved by the IMF in 1994. The national road network is the only network which receives regular maintenance within an explicit strategy. For roads of the Wilaya and the municipal networks, technical priorities are assessed by the decentralized public works administration, but the decision on its road budget is made by the Wilaya assembly alone, and budget implementation remains vulnerable to severe budget scarcity; the annual Wilaya road recurrent budget, for instance, averaged about AD 650 million during 1990-93, but actual spending was less than two-thirds of budgeted amounts partly due to late budget opening for CW. Funding shortages are even more severe for municipal roads outside the perimeter of cities; only 20 percent of the some 1,450 municipalities have resources available for road maintenance; the remaining 80 percent follow the implicit and costly strategy to use investment subsidies from the state investment budget for reconstruction of the road when it finally collapses after years of maintenance neglect. As far as national roads are concerned, the large disproportion between available resources and the extent of maintenance needs somewhat facilitated decision on how to allocate funds since critical priorities were easy to figure out based on good engineering judgment. More analytical network-based methods will be needed, though, when the ongoing effort to catch up with the road strengthening backlog comes to an end. They are being developed under the Fifth Highway Project. A. Main thrust of the current strategy for national roads 1.02 MIRP has direct responsibility to maintain some 26,000 km of national roads, or about 27 percent of total. The budget restrictions are such that the basic economic road network (about 10,000 km) takes a majority of resources allocated to roads. Issuance, in the last two years of guidelines for strengthening, rehabilitation and maintenance works was an important step toward greater cohesion in the maintenance policy followed nationwide and definition of technical standards that had previously been weakened by the excess of road management deconcentration. These guidelines are being disseminated through seminars organized by CTTP.  -85- Annex 9 Page 2 of 6 1.03 The main unpaved national roads totalling 3,600 km are found in the South; they have not been maintained for more than 15 years, and the low standard of service offered to users, predominantly trucks, is gaining more visibility. This, together with such equity considerations that most Algerian natural resources originate in the South led the Government to promote road improvement there, starting with the definition of a maintenance strategy through a pilot program to be implemented under Highway VI. 1.04 To date, the strategy for paved roads maintenance provides for systematic strengthening of the "basic economic network" that includes some 5,200 km of roads with daily traffic above 3,500 vehicles and combining around 60 percent of the Algerian road traffic. Road strengthening in Algeria is an elaborate and costly treatment designed to adjust the pavement bearing capacity and level of service to larger and heavier traffic, and to extend the economic life of a road for a very long period, provided periodic maintenance is done thereafter when needed, which represents an average at regular intervals of about 12 years. The treatment includes a 15-20 cm-thick layer of base course gravel asphalt mix ("grave bitume") covered with a 5 cm-thick asphalt concrete overlay. Results are generally satisfactory, but there are some cases where structural defects were not properly detected leading to fast deterioration of the road soon after completion of strengthening works. Overlay ("rechargement") is a cheaper alternative to road strengthening for roads of lesser traffic, consisting of a 5 to 8 cm asphalt concrete overlay alone. Following bad experiences and for high traffic roads with very weak pavement structures, it is seldom used, as the pavement strengthening option is always selected when it achieves a minimum rate of return of about 25% on the investment, even though higher rates would be obtained under the overlay option. The portion of the basic economic network yet to be strengthened includes about 3,000 km, and the objective is to complete the program within 10 years. At current AD 4.5 million per kilometer, the annual budget for national road strengthening is estimated at close to AD 1.4 billion. 1.05 Road rehabilitation in Algeria applies to roads in fair-to-poor condition with daily traffic at intermediary level (between 1000 and 3,500 vehicles). It consists of a 15-20 cm- thick layer of base coarse gravel ("graves concasses non traitees") covered with an asphalt concrete overlay or, alternatively, a double or triple layer of surface dressing with stone aggregates of a diameter of 3-8 mm at the top and 15-25 mm at the bottom. The works are designed for a 10-year life expectancy and constitute an interim treatment pending execution of more expensive strengthening works when traffic growth makes it economically justified. The cost per km is around AD2.3 million at present. Whereas rehabilitation used to be carried out selectively on the most damaged sections of a road, the policy is now to do it on its full length but adapting the base course presence or thickness to the structural and leveling needs; this approach enables a "route approach" more adapted to user needs and safety. The network that would normally fall under this maintenance policy includes 4,000 km of national roads, giving annual work programs of 400 km on average at an estimated cost of AD 1.2 billion. The budget constraints only allowed for implementation of 50 percent of the desirable rehabilitation program in recent years.  -86- Annex 9 Page 3 of 6 1.06 Periodic maintenance should normally be carried out when needed, i.e. on average, at 10-year intervals with the hypothesis that surface dressing quality/lifetime increases, implying annual treatment of 2,200 km of national roads at an estimated cost of AD 2.5 billion. The actual length maintained decreased from 1,253 km in 1985 to 700 km in 1992. A much larger budget in 1993 allowed to carry out periodic maintenance over 1,568 km of national paved roads. The 1994 budget is unchanged from previous year in nominal terms, but has been eroded by inflation and will only allow for periodic maintenance of 1,253 km as in 1985, representing a 57 percent coverage of normal requirements. Periodic maintenance consists in a "monocouche" or a "bicouche" surface dressing. Current techniques makes extensive use of cut-back bitumen which is both expensive and irregularly supplied. Development of cheaper alternatives, like emulsions, will be actively pursued under the proposed project. A 5 cm asphalt concrete layer is the usual treatment for high traffic roads of the basic economic network. 1.07 Routine maintenance is mostly executed by force account across the national road network. More than 7,000 workers are employed; half of them are journeymen. The extent of surface dressing vary between 1,500 and 2,000 km annually while patching works vary from 1.7 to 3 million square meters per year. Other tasks, like clearing of ditches and culverts, are performed in adequation to needs. Overall, routine maintenance is budgeted for around AD 650 million which is satisfactory. The funding gap is essentially in relation to periodic maintenance for which an additional AD 750 million would be required, raising the total allocation under chapter 35-12 of the current road budget from AD 1.6 billion to AD 2.4 billion in 1994 prices. 1.08 A maintenance strategy has yet to be defined for bridges. The national road network comprises a total of 1,789 bridges, or two-third of all bridges in Algeria. Recent surveys showed that as much as 271 bridges were in need of extensive repairs, calling for substantial increases in budgetary allocations of AD 126 million in 1993, cut to AD 94 million in 1994. A pilot program will be launched under the proposed project covering needs of 40 bridges located on roads of the basic economic network. The objective is to proceed fast with local capacity building in the area of technical studies and preparation of detailed engineering documents, and encourage development of specialized units in existing enterprises for bridge repairs by increasing the scale of bridges-related public works programs. B. Development of network-based maintenance: local application of the HDM III model 1.09 Development of a road inventory data base ("Banque de Donnees Routieres, or BDR) covering 5,069 km of main paved roads has been contracted out by DEER to CTTP with financing provided under the Fifth Highway Project. Implementation has been delayed by insecurity and slow data transmission by field units. About 60 percent of data collection had been completed by mid-1994 (none about deflection though), and the contract is likely to extend through 1995, well past the initial completion date of December 1993. The BDR  -87- Annex 9 Page 4 of 6 builds on a traffic survey system established by LNTP during 1985, and relies on annual collection and update of visual data by the regional public works department, supplemented by roughness and deflection measurements conducted by centrally-based teams. Systematic borings are conducted alternatively on both sides of each lane every 4 km to carry out tests of structural soundness of the roads. The main equipment used consists of 1 bump integrator and 1 APL 25 for determination of roughness indexes, plus 1 deflectograph. The system repeats measurements at 4-year intervals, and covers all the information needed for preparation of maintenance programs, combining the road inventory and traffic data. For each link, it should register the following information: (a) road surface and pavement condition (roughness, depressions, texture, potholes, rut depth, patched area, edge damage, structural condition); (b) traffic (daily traffic by type of vehicles, loading patterns); (c) inventory update (age of pavement, nature and date of works completed); (d) work activities (unit costs and quantities per task); and (e) committed programs (planned dates, technical characteristics, estimated costs). The traffic counting system relies on a combination of fixed and mobile recorders, the former covering about one tenth of the network. It has not been operational since 1991 because transport restrictions did not allow to keep up with the required schedule of field surveys, and fixed recorders were increasingly malfunctioning. Renewal of the counting equipment will be financed under the proposed project. For the time being, economic studies have assumed constant traffic growth at an annual rate of 5 percent from the last available traffic counts dating back to 1991 or earlier to estimate the 1994 traffic. This assumption is very questionable, and the inherent uncertainty it creates can only be dealt with through adequate sensitivity analysis. 1.10 Another contract to implement HDM III model and adapt it to Algerian conditions was awarded to CTTP in 1991 and is financed under the Fifth Highway Project. The idea was to make a first application of HDM III limited to the 5,000 km of the basic economic network for preparation of the road strengthening program under the proposed project. By mid-1994, the study had only reached mid point. Its current status is given hereafter. (a) The primary calibration of the road deterioration model is completed; the vehicle classes have been determined and vehicle operating costs were computed based on surveys executed in 1991. Values were assigned to the roughness-age deterioration factor applicable to each major climatic region, and other technical factors representative of techniques used in road construction and repairs. Unit costs were initially estimated in 1991 prices and  -88- Annex 9 Page 5 of 6 later updated to 1994. Changes in relative prices triggered by the devaluation of the Algerian dinar in 1994 and uncertainties in the distribution between local and foreign cost components makes it necessary to carry out new updates of economic parameters which will be done before year end. (b) First simulations were carried out late in 1993 over 2,548 km of roads already registered in the data base, including the roads selected for strengthening under the proposed project. These roads were grossly divided into 130 homogeneous sections based on 5 classes of daily traffic and 4 classes of structural numbers. Four strategies were devised other than the base case providing for patching of all potholes and other routine maintenance, namely: overlays, either done irrespective of the actual road condition at regular intervals of 5 years, with a 2.5 cm-thick bituminous layer, and 8 years with a 5 cm-thick asphalt concrete overlay; or triggered when deterioration thresholds are reached: deterioration over 20 percent of the pavement surface within 9 years with addition of a surface dressing whereas roughness indexes getting above 3,000 mm/km within 10 years would call for implementation of the asphalt concrete option; strengthening, with thickness of the base (coarse gravel asphalt mix) varying from 12 cm for traffic below 4,000 vehicle per day, to 20 cm for daily traffic of 10,000 vehicle or more; this option is selected when road roughness reaches 4,000 mm/km within 15 years of the last strengthening works; periodic maintenance, then strengthening: under this option, periodic maintenance is carried out until the above-defined conditions for strengthening are met; the asphalt concrete option prevails for daily traffic of 4,000 vehicle, and is substituted by a surface dressing below that level; strengthening, then periodic maintenance, an option that combines in reverse order the specifications of above strategies. 1.11 Preliminary results suggest that strengthening is the most economical option for only 20 percent of the roads reviewed, a conclusion that seems at odds with the "heavy" maintenance strategy favored by the road administration to date. Clearly, the study needs to be refined before more definite conclusions can be reached; the pavement deterioration laws of 5 cm overlay and thick strengthening over existing pavement with various structural strength levels need to be calibrated in Algerian climatic and material conditions.  -89- Annex 9 Page 6 of 6 (c) Refined calibration of the HDM III model is essential to ensure accuracy of its prediction, and will be carried out before December 1994 with support from foreign consultants financed under the Fifth Highway Project. A road sample representative of the local diversity will be selected to carry out comparisons between the observed and the predicted deterioration rates. An ongoing study on performance of 14 sections recently strengthened, also carried out by CTTP, will generate a wealth of relevant data. 1.12 The proposed project will finance a second stage of the study to cover a total of 35,000 km of roads. M:\.Armmx9ja  -90- Annex 10 Page 1 of 2 THE DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA SIXTH HIGHWAY PROJECT FUNDING OF MUNICIPAL ROAD MAINTENANCE 1.01 The municipal road network includes 50 percent of all roads in Algeria and a third of paved roads. Municipalities are entrusted with management and development of this network under supervision by MICLERA, but they have neither the internal technical expertise nor the financial resources to manage their roads, except for an estimated 20 percent of them (300 out of some 1,540 municipalities). Municipalities receive technical assistance from the territorial subdivisions of DTPs. Road works used to be carried out in the past by the "entreprises communales" that municipalities had set up to cover the whole range of their infrastructure maintenance needs. These enterprises were poorly managed and called to execute all kind of works not always fully funded. Many have been liquidated. Notwithstanding a high level of employment, the Municipalities have limited force-account capabilities, and road works are generally contracted out. 1.02 Revenues raised by local Governments are small, and most municipalities heavily rely on Government subsidies channelled through the Fonds Commun des Collectivites Locales (FCCL) to balance their budget. Nearly 90 percent of budget resources are pre- emptied for coverage of personnel costs (70 percent), social programs (20 percent), and the legally-imposed minimum participation to capital expenditures (10 percent). Of the remaining 10 percent, only half goes to road expenditures estimated around AD 500 million at present for the entire municipal network (a paltry US$ 250 per km on average). Meager investment resources under local budgets rarely find their way into road programs, given the many higher priorities that exist for primary education, health care, etc.. Road capital expenditures are mostly dependent on subsidies allocated by FCCL to priority projects screened at the Wilaya level. The difficult situation of local finance and the pressure of social needs give few opportunities to MICLERA to influence the local budget structure. As a result, municipal roads are neglected, and 60 percent of them are in bad condition. The economic consequences are severe, in terms of higher vehicle operating costs and erosion of the road capital stock. A preliminary assessment of associated losses have them around US$ 100 million per year. The study on municipal roads carried out by CTTP will generate more precise data on economic losses from maintenance neglect. 1.03 Within the national plan, the Plan Communal de Developpement (PCD) finances projects catering to basic socio-economic needs. Government resources are transferred to each Wilayas for distribution among municipalities. The budget allocated to PCD in 1993 amounted to AD 15 billion which is substantial. These funds, however, are scattered among many municipalities, barely giving each the possibility to finance 2 or 3 small projects. About a fourth of PCD is used to rebuild roads after years of maintenance neglect. This is a wasteful policy in many ways: (i) regular road maintenance is a much more economical  -91- Annex 10 Page 2 of 2 alternative; (ii) the municipal road works are too small to allow for economies of scale; (iii) technical standards followed in preparing the detailed engineering documents are low, and the execution of works by small local firms is often mediocre, reducing the economic life of projects. The local representative of the public works administration is called to deliver a technical visa before payment by Treasury, but real controls are not exerted. The Bank contributed to raise the concerned-administration's awareness of the key importance of these issues at stake, including of governance, which largely transcend road maintenance needs and rather call for an in-depth reform of the municipal finance. 1.04 Funding maintenance of municipal roads does not seem to have other alternative than (a) making an optimal use of scarce funds by selecting priority works with the right pavement treatment, and supervising their execution by contract with the assistance of the PW subdivisions; (b) transferring funds from the central budget, a largely impractical option at present; (b) restructuring the allocation of central resources to local Governments, by developing a better consistency between the investment level achieved and the maintenance effort to launch. The Government has expressed willingness to launch a pilot program covering a sample of municipalities, and comprised of studies for definition of a maintenance strategy (targeted service standards, institutional framework for provision of technical support by PWs, financing systems, etc..) and of a maintenance three-year campaign. One formula could be that funds allocated to PCDs for road rehabilitation and investments and currently shown under chapter 591 be redirected to chapter 962 ("Programmes pour Comptes de Tiers") managed at the Wilaya level which includes resources earmarked for small municipalities. The DTPs would use the funds for maintenance of municipal roads outside the urban perimeter under a convention with municipalities involved. An agreement, in principle, has been concluded between MIRP and MICLERA to decide on a detailed plan addressing the needs of the pilot program: sufficient funding of maintenance, operational efficiency at procurement and execution stage and good design and supervision of works. M\RAY\ANNEXIO.SAR  -92- Annex 11 Page 1 of 3 THE DEMOCRATIC AND POPULAR REPUBLIC OF ALGERIA SIXTH HIGHWAY PROJECT Technical Background on Road Strengthening and Rehabilitation 1. Strengthening and Rehabilitation The old pavements of the main national roads with high traffic generally need a heavy strengthening because the existing structure is either weak or deeply deteriorated; typical works consist of: - a widening of 50 to 80 cm to reach the standard 7,5m pavement width, - a new base course of 12 to 20cm of 4 to 5% bitumen mix, and - a 5 cm wearing course of bitumen mix. Thinner overlays have proved to deteriorate quickly under heavy truck traffic. For traffic levels lower than 3,000 veh/d, such design strategy would be too costly and have a low ERR; however many national roads are often very uneven and need some ways of structural strengthening; the "rehabilitation" strategy was developed to address these issues; the typical features are: (i) defer widening where the traffic level is insufficient, (ii) use non-treated bases to achieve low cost and enable better leveling of existing pavement, (iii) use bituminous mix wearing course only for traffic higher than about 2000 veh/day, and surface dressing (chip seal) elsewhere to reduce cost, (iv) put a special emphasis on drainage efficiency, treat a functional road link with appropriate variable treatments, and analyze possibilities of improving road safety black spots. Such a strategy leads to ERR similar to road strengthening, and cost between 70 and 50% less per km. 2. Technical Handbooks In the last four years, and at the request of the Road Directorate, the CTTP has developed the following: - Le guide des renforcements - Le guide de la rehabilitation (and "le guide de l'entretien" for DEER)  -93- Annex 11 Page 2 of 3 These national technical dossiers were among the first ones for the sector where all Algerian technical organizations worked as a true network. The typical outline of these guidelines/handbooks is as follows: (i) methodology and pavement condition measurement (ii) inventory of techniques and design method (iii) economic analysis (iv) organization of controls (v) road safety analysis (vi) environment (vii) bidding documents (viii) TOR for studies. These handbooks are being disseminated and significant training is being organized under the project. 3. Road Condition Measurements Detailed measurements have been developed for all roads to be rehabilitated or strengthened, typical synthesis tables describe for each 100m section (see attached sample sheet): (i) the road characteristics (width, profile, fill/cut, etc.) (ii) the last works, (iii) the drainage, (iv) the results of recent boring (courses thicknesses and soil Ip, CBR, W, etc.) (v) the deflexions of both sides of pavement (vi) severity of deteriorations (cracks, rutting, material loss, etc.) (vi) the evenness (vii) the traffic.  Co.ToTP SCHEMA ITIN[RAIRE N'S WILAYA , MASCARA ROUTE * RN 6 TRONCON *PR1O 04o AU PK 201+ 030 SCEM' A Ot LA'ROUTE - - OR S _____2 _=__ Pa8 PV19 = =_ t-lqL _ iiiL _ _ _ _ _ _ m~~~~~ia _ _-X TRACE EN PLAN PROFIL EN LONG [)tFL[10NS CitCrER5110U5 t I -4=: = -t-H tLL k LOD_e I 0 01MIFF6 TAAVAU rvrTt El"Is'r*ijus IT ASSUINjSMNr -- - w tIII SOL SUPPORT Lp COUPE DE CHAUSSEE tM1im'Fs DLrS - 11/9E- Xt < Hs ESSAIS GEOTECCHNIQJES SODLEXIONSC IUS - A---Sm1S RROBSEq~E PEOI/SW I EUIIALE IU~ftiSLI I L6O7