Honduras - Sixth Highway Project

FILE COPY DOCUMENT OF INTERNATIONAL BANK% FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DE3VELOPMENT ASSOCIATION Not For Public Use Reort No. 1O la-HO HONDURAS APPRAISAL OF A SIXTH HIGHWAY PROJECT May 4, 1973 Latin America and the Caribbean Projects Department This report was prepared for official use o:nly by the Bank Group. It may not be publshed, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility forthe accuracy or completeness of the report.  Currency Equivalents Currency Unit = Lempira (L) US$l.00 = L2000 Ll = US$.50 L 1,000,000 = US.$500,000 Fiscal Year January 1 - December 31 System of Weights and Measures: Metric M4etric British/US Equivalent 1 meter (m) - 3.28 feet (ft) 1 kilometer (km) - 0.62 mile (mi) 1 square kilometer (km) - 0.386 square mile (sq mi) 1 metric ton (m ton) - 2,204 pounds (lb) Abbreviatiors and Acronyms ADT - Average Daily Traffic BR - Brown and Root (Consultants) CABEI - Central American Bank for Economic Integration DGC - Direcci6n General de Caminos, General Directorate for Highways DGM - Direccion General de Mantenimiento, General Directorate for Maintenance HHK - Howard Humphreys, Keeble and Partners (Consultants) TDB - Inter-American Development Bank SCOPT - Secretarxa de Comunicaciones, Obras PTiblicas y Transportes, Secretariat for Communications, Public Works and Transport STP - Secretarfa Tecnica del Consejo Superior de Planificacion Econ6mica, Technical Secretariat of the. High Council for Economic Planning USAID - United States Agency for International Development  HONDURAS APPRAISAL OF A SIlXTH HIGHWAY PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS ............................. i 1. INTRODUCTION ........ ................................ 1 2. TAE TRANSPORT SECTOR ................................ 2 A. General ........................................ 2 B. The Transport Modes ..... ....................... 3 C. ''ransport Policy and Coordination .............. 4 3. TiE HIG11WAYS . ....................................... 5 A. 'The lligh-sway N4etwork ............................ 5 B. Characteristics and Growth of fload Traffic ..... 5 C. Hi-hway Planning and Financing .................. 6 D. Highway Administration ......................... 7 EZ. Highway Engineerin.g ............................ 3 F. Jigaway Construction. 8 G. Nighway Maintenance. 9 4. THIE PROJECT .................... 9 A. General Description. 9 B. Cost Estimates, Financing and Disbursements 13 C. F,xecution ....................,.,.,.,.... 16 5. I]CONO'rIC EVALUATION . .... 17 A. General ........ ................................ 17 P). Construction of the Tegucigalpa-Talanga Road.... 13 C. Improvement of Secondary and Feeder R'oads ...... 20 6. AGREEMENTS REACHED AND RECOMMENDATION ............. .. 20 'This Appraisal iReport has been prepared by ;lessrs. R. Paraucl (Engineer) arid B. Chatelin (Economist) and has been edited by 'liss V. Foster.  TABLE OF CONTENTS - Continued TABLES 1. Public Investment (Transportation) 2,. Development of the Highway Network 1960-1971 3. 'Vehicle Registration 1960-1971 4., 'Vehicle Fuel Consumption 1963-1972 5.. Higlhway Expenditures 1965-19 71 6. Road User Charges 7. D)esign Standards for the Tegucigalpa-Talanga Road 8. Civil Works other than the Tegucigalpa-Talanga Road 9. Feeder Roads to the Tegucigalpa-Juticalpa Road to be Studied 10. Traffic Forecast (Tegucigalpa-Talanga Road) 11. Velhicle Operating Costs (Tegucigalpa-Talanga Road) AN1NEXES 1. External Financing by Agencies other than the Bank Group 2. Details of IDB Loan 291/SF-HO for Highway Maintenance 3. Schedule of Disbursements 4. Probability Analysis CHA:RTS I. Organization Chart of the Secretariat for Communicationis, Public Works and Transport II. Organization Chart of the General Directorate for Highways III. Organization Chart of the General Directorate for Maintenance MAP - 11.ndu':as - Main Hlighway Network, IBRD-10395  tiONDURAS APPRAISAL OF A SIXTH HIGHWAY PROJECT SUMMARY AND CONCLUSIONS i. The major part of the economic activity of Honduras is centered in the western half of the country and along the north coast where population is dense. Transport facilities are concentrated mainly in these areas. The prime traffic mode is road transport and the highway network, comprising about 5,600 km, is basically well developed. The railway network, totaling about 1,200 km, comprises 1,040 km of private lines along the Caribbean coast serv- ing private companies, primarily for shipping bananas. The national railway line (about 160 km) is also located in the northern part of the country. Inland water transportation is negligible, and air transport, which played a vital role in the development of the country, is still important; passenger air traffic is steadily increasing. Three ports on the Caribbean coast and one on the Pacific coast handle over 90% of the country's international trade; Puerto Cortes on the Caribbean coast is by far the most important seaport of the country. ii. The recently published Six-Year Investment Program (1972-1977) of the Government, totaling about US$560 million equivalent, allocates about US$145 million equivalent to the transport sector. This allocation was made on the basis of the recommendations of a survey carried out by Stanford Research Institute and completed in 1962; 1/ it is estimated that about 73% would be obtained from external financing. About 80% of the proposed invest- ment would be devoted to highway improvements or reconstructions, including feeder roads, which are needed to achieve full development of the areas served by the main roads. iii. The main element of the proposed project (construction of the Tegucigalpa-Talanga road, 55 kmi) is a first stage of the Tegucigalpa-Juticalpa road (175 km) which serves forest areas where lumber exploitation is intensive and agricultural development is; promising. The present Tegucigalpa-Talanga road is not suitable for the present and future traffic needs and the Govern- ment has allocated the first priority for its construction. The second section of the road (Talanga-Juticalpa) crosses a more gentle topography and its reconstruction is envisage(d as a second stage. The feasibility study for the Tegucigalpa-Juticalpa road was carried out by the UK consultants Howard Hlumphreys, Keeble and Partners (HIIK) with financing provided under Loan 495-HO. Detailed engineering is being f-inanced by the Central Anerican Bank for Economic Integration (CABEI) in cooperation with the UK Government. iv. The proposed project provides also for the construction of a secondary road and improvement of about 80 km of feeder roads, as well as 1/ Ten-Year Highway Program for Honduras; Stanford Research Institute, 1962.  - ii - for economic and technical studies for about 375 km of feeder roads. Finan- cing of technical assistance for transport planning and for a training pro- gram is also proposed. v. Execution of the project is expected to take about three years and will be the responsibility of the Secretaria de Comunicaciones, Obras Publicas y Transportes (SCOPT) 1/ and the Secretaria Tecnica del Consejo Superior de Planitficacion Economica (STP) 2/. Consultants contracted under terms and conditions acceptable to the Bank will carry out the studies, will assist in prequalifying bidders and evaluating bids, and will supervise construction. Construction contracts for the main road will be awarded on a unit price basis after international competitive bidding following normal Bank Group procedures. The secondary and feeder road construction program will be advertised locally only. vi. Major developmental benefits will accrue from the construction of the new Tegucigalpa-Talanga road by the facilitation of access to existing and potentially rich forest and agricultural areas. Expected benefits resulting from the construction elements of the project would derive from savings in maintenance and vehicle operating costs. The economic return from construction of the Tegucigalpa-Talanga road is 13%, and from the secondary and feeder road construction program as a whole is 19%. The economic return for the project as a whole is about 14%. vii. Total project cost is estimated at US$25.8 million with an estimated foreign exchange component of US$18.8 million (73%), to be financed by the proposed loan. It is possible that the foreign exchange component for consulting services will be less than estimated, in which case the proposed loan would finance some local costs. In addition to the normal contingencies for possible increases in quantities and prices, a special contingency of 15% of the con- struction cost of the Tegucigalpa-Talanga road has been included to cover the risk of high bid prices resulting from the uncertainty of the response of the market to contracts of the size proposed for the above-mentioned road. Local costs amounting to about US$7.0 million equivalent would be provided by the Government. The project includes an amount of US$50,000 for retroactive fi- nancing to cover services of consultants to be engaged prior to loan signature for assisting the Government in prequalification of contractors and bid evaluation. viii. The project provides a suitable basis for a Bank loan of US.$18.8 million: on country grounds, a term of 30 years, including a five-year period of grace, is appropriate. 1/ Secretariat for Communications, Public Works and Transport. 2/ Technical Secretariat of the High Council for Economic Planning.  HONDURAS APPRAISAL OF A SIXTH HIGHWAY PROJECT 1. INTRODUCTION 1.01 The Republic of Honduras has requested Bank assistance to help in the financing of a highway project comprising (a) construction of a main road about 55 km long; (b) reconstruction of a secondary road about 45 Ian long; (c) construction of a bridge about 200 m long; (d) improvement of about 80 km of feeder roads; (e) consulting services for supervision of construction, for feasibility and engineering studies and for technical assistance; and (f) a training program for highway staff. The total cost of the proposed project is estimated at about US$25.8 million equivalent; the estimated foreign cost component of US$18.8 million equivalent is proposed for financing by a Bank loan, and the balance of US$7.0 million equivalent in local costs would be provided by the Government. 1.02 This will be the sixth highway project for Ilonduras financed by the Bank Group. In 1955, a loanL of US$4.2 million (135-HO) was made to finance the establishment of a road maintenance organization. Three years later, a loan of US$5.5 million (195-HO) was made, primarily to reconstruct the main roads between San Pedro Sula and Puerto Cortes, and between Teguci- galpa and the Inter-American Highway. This project also included the construction of bridges on the Western Highway between Chamelecon and Santa Rosa to make the highway passable during the rainy season. All work under these projects has been successiFully completed. 1.03 The first IDA Credit of USS9 million (1-HO) was made in 1961 to finance (a) improvements of sections of the Western Highway between Chamele- con and Santa Rosa to gravel standard and the construction of an extension to the highway from Santa Rosa to the El Salvador border; (b) construction of feeder road connections with the Western Highway; (c) strengthening of the highway maintenance organization initiated under the first loan; and (d) a highway transportation survey to prepare a long-term road investment pro- gram. The survey was carried out by Stanford Research Institute and the report 1/ was issued in 1962. The extension of the Western Highway was completed in 1964 and other construction works were completed in 1967. 1.04 In 1965, a credit of US$3.5 million (71-HO) and a loan of US$6 million (400-HO) were made to finance reconstruction of the North road from Tegucigalpa to Potrerillos; works were completed in 1971. Finally, in 1967, a loan of US$8.6 million (495-HO) was made to finance (a) reconstruction of the remaining sections of the Western Highway and paving over its full length; and (b) feasibility studies for feeder roads and for the Tegucigalpa-Juticalpa road (the main road leading to the fertile Olancho region). Feasibility 1/ Ten-Year Highway Program for Honduras; Stanford Research Institute, 1962.  - 2 - studLes were completed in 1970, and reconstruction and paving works were completed in 1972. The total amount of highway loans and credits provided by the Bank Group has thus totaled US$36.8 million equivalent. 1.05 The Bank has also made two port loans to Honduras: Loan 463-HO, in 1966, financed the expansion of Puerto Cortes; and Loan 767-HO, in 1971, is fLnancing further improvement and expansion of Puerto Cortes as well as the construction of a deepwater port at Henecan. Implementation of the latter project is about 18 months behind schedule, mostly because of indecision on the part of the previous Government regarding the best location for a deep- wate r port on the Pacific coast; the new Government has decided to carry out the construction of the Henecan port project. 1.06 In addition to the above-mentioned financing by the Bank Group, Honduras has received external financing for highways from the Export-Import Bank and USAID (US$13.0 million), from the Inter-American Development Bank (IDB) (US$26.6 million) and from the Central American Bank for Economic Integration (CABEI) (US$35.1 million); details are presented in Annex 1. 1.07 The proposed project is a further step in the expansion and improve- ment of the highway and feeder road network; moreover, it will bring about addiitional improvement in transport planning. The appraisal of the project was based on economic and technical studies prepared by consultants Brown and Root (BR), US, and Howard Humphreys, Keeble and Partners (HHK), UK; on information provided by the Government; and on the findings of an appraisal miss:ion, comprising Messrs. R. Paraud (Engineer) and B. Chatelin (Economist), which visited Honduras in November/December 1972. The report has been edited by Miss V. Foster. 2. THE TRANSPORT SECTOR A. General 2.01 Honduras, with an area of 115,200 km , is the second largest of the five Central American countries. Its population has been growing at an average of 3.4% per annum over the last 10 years, reaching 2.7 million in 1971. 2.02 The Gross National Product (GNP) has been increasing in real terms by 5.6% per annum over the last decade, but the per capita GNP (US$290 equivalent in 1971) 1/ is still the lowest of the Central American countries; the growth rate of GNP for 1972 has been estimated to be about 3.5%. Honduras presently faces some urgent economic problems because of a combination of adverse factors, including hurricane damage to the banana plantations and the consequences of the short war with El Salvador in mid-1969. 1/ Calculated using World Atlas methodology.  -3- B. The Transport Modes 2.03 Transport facilities are mainly concentrated in the western half of the country and along the north coast where the population is dense. The four paved roads, San Lorenzo-Tegucigalpa-Puerto Cortes (the main north-south road), San Pedro Sula-Ocotopeque (to the El Salvador border), San Pedro Sula- La Ceiba (along the north coast) and the Inter-American Highway (in the extreme south), constitute the main highway network. Railways run along the Atlantic coast between Puerto Cortes and Sonaguera. In general, the rugged nature of the topography makes construction and maintenance of the land transport system difficult and expensive. 2.04 In 1971, more than 86% of all freight traffic (in tons) was carried by road, 11% by rail and less than 3% by air. Highways clearly constitute the most important transport mode, but the railways are the most specialized. The relative importance of roads is even greater when passenger traffic is considered (road, 96.6%; railway, 0.6%; and air, 2.8%). Highways 2.05 The highway system is described in detail in Chapter 3. Railways 2.06 Honduras has three railway lines totaling about 1,200 km, all located on the north coast near the ports and serving a very small area. Two of the lines (about 1,040 km) are owned by private companies and are used primarily for shipping bananas. The third (San Pedro Sula-Puerto Cortes, 160 km), owned and operated by the Government since 1958, carries about 500,000 tons of freight and about 100,000 passengers annually. It is one of the few railways in the world that operates at a profit. Air Transport 2.07 Until recently, air services played a vital role in the development of the country, providing transport for many remote areas. Three private companies, owning 24 aircraft and providing national and international serv- ices, carried about 340,000 passengers and 15,000 tons of freight in 1971. As a result of the recent improvement of the highway system, however, domestic air service has been withdrawn in many areas (e.g., along the Western Highway); nevertheless, air traffic, especially for passengers, has been steadily increasing. The bulk of the traffic moves within the triangular area between Tegucigalpa (the capital city), San Pedro Sula (the country's main industrial center) and La Ceiba. Ports 2.08 Over 90% of the country's international trade is handled by the ports, and the Government attaches high priority to their development. Puerto  - 4 - Cortes, on the north coast, is the principal port with a total traffic ex- ceeding 2 million tons per annum. It handles about half of the total banana exports, while the two other specialized ports east of Cortes, Tela and La Ceiba (also on the north coast), handle the remainder. Amapala, on the is- land of El Tigre, and El Muerto are the only accessible anchorages on the Pacific coast for ocean-going ships; they are lighterage ports and cargoes are hnauled by barges to and from San Lorenzo on the mainland. About 120,000 tons of lumber, representing two-thirds of the total traffic through the port, are exported annually through Amapala-San Lorenzo-El Muerto. C. Transport Policy and Coordination 2.09 The policy of the new Government (which came into power in December 1972) is to attach top priority to agricultural development; it intends to focus the highway program on feeder road construction to support that policy. The Government, nevertheless, proposes to proceed with reconstruction of the Tegucigalpa-Juticalpa road (part of which is included in the project) since that iLs one of the few major road sections yet to be reconstructed, and since it would have a significant impact on forestry development and land colonization in the area east of Juticalpa. 2.10 Modal competition is not a serious problem in Honduras because the railway serves only a very small part of the country and neither coastal ship- ping nor inland water transportation is of any significance. As in other de- veloping countries with rugged terrain, air transport opened up some difficult- to-reach areas but these are now being economically served by roads and the air services have been withdrawn (para. 2.07). Internal air services still serve cities and toxns which are also served by road (e.g., Tegucigalpa and San Pedro Sula), but each mode caters to a different segment of the market and there is no uneconomic competition. 2.11 Even where competition exists between modes, there is no regulation of traffi'c; users are free to select the mode of transport best suited for their needs. The importation of trucks and entry into the road transport industry are unrestricted. 2.12 The transportation investment program is planned by the Secretaria Tecnica del Consejo Superior de Planificacion Economica (STP) 1/ after dis- cussions with the Planning Unit 2/ of the Secretaria de Comunicaciones, Obras Publicas y Transportes (SCOPT) 3/ and the Port Authority. A Six-Year Trans- port Investment Program (1972-1977) was prepared in 1972 and is now under 1/ Technical Secretariat of the High Council for Economic Planning. 2/ Created by the Government following agreements reached in connection with Loans 400-HO and 495-HO. 3/ Secretariat for Communications, Public Works and Transport.  - 5 - review by the new Government; it follows the recommendations of the Stanford Research Institute study (para. 1.03). With a total of about L 290 million (US$145 million equivalent, Table 1), this Program will represent around 26.5% of the total public investment. About 72.5% of the Program would need external financing. A major portion of the proposed investment will be de- voted to road improvement (about 80%). 2.13 This Six-Year Transport Investment Program is not supported by an economic evaluation, but it contains much information which could be useful for additional transport studies. Staff in both the Transport Department of the STP and the Planning Unit of the SCOPT lack planning experience and have little basic material with which to work. To remedy these shortcomings, the proposed project includes the financing of technical assistance to strengthen transport planning through the services of a traffic engineer and a transport economist for about one year; these specialists will assist the Government in the establishment of an adequate transport data collection system and will train local counterparts. 3. THE HIGIWAYS A. The Highway Network 3.01 Significant road development in Honduras started only in the mid- 1950's; by 1960, there were about 3,230 km of roads, out of which only 110 km were paved. Major efforts were made during the last decade to extend and im- prove the highway network; however, while there are road connections between the major population centers, some parts of the country, mainly in the east and northeast, have no roads. The present road network comprises about 5,590 km, about 1,170 of which are paved (Table 2). B. Characteristics and Growth of Road Traffic 3.02 Road transport has expanded rapidly in the last 10 years, and the vehicle fleet has been increasing. by about 11% per annum, reaching some 31,000 vehicles in 1971 (Table 3). The fleet is mainly concentrated around the two main cities (Tegucigalpa - 48%, and San Pedro Sula - 12%). Vehicle density, 11 vehicles per 1,000 inhabitants, is the lowest in Central America. Overall the fleet can absorb the transport demands, although locally there may be surpluses and shortages of truck capacity, since many truckers are reluctant to work on itineraries which do not allow them to run to the main cities of Tegucigalpa and San Pedro Sula. 3.03 Road transport is largely in the hands of individual owner-drivers and competition among them is keen. To reduce this competition, the Director- ate General for Transport, recently created within the SCOPT, has drafted a law to regulate truckers. The main objectives of this law will be:  - 6 - (a) to regulate the highway transport industry; and (b) to adjust the number of licenses to the prevailing needs, as- signing specific routes to each truck, in order to transfer some trucks from roads where the supply exceeds the demand to other roads where the demand is presently in excess. This law was under discussion in Congress when the new Government took over in December 1972 and it is expected that it will be considered in the near future. The proposed law includes desirable safety regulations, but its intention to regulate traffic through road licenses is controversial. During negotiations, it was emphasized to the Government that such a law might hamper the development of a competitive transport system. The Government intends to request the Bank's technical assistance with regard to this problem; such as- sistance would comprise, inter alia, the organization of a seminar in Tegucigalpa on the subject. 3.04 On the Inter-American Hlighway, average daily traffic (ADT) is cur- rently atbout 350, and on the other three major paved roads (para. 2.03), ADT is in the range of 1,000-3,000. On the Tegucigalpa-Juticalpa road, ADT is of the order of 500; elsewhere on the country's road network, ADTs are rarely above 15CI. Traffic counts in the past were infrequent and the results are of doubtful value (para. 3.05); hence, a rational determination of traffic growth on this basis is difficult. A more dependable basis can be established from the records for fuel consumption (Table 4), which show that consumption of both gasoline and diesel oil over the period 1963-1972 has been increasing at about 5% per annum. The rate of growth of traffic can therefore be esti- mated at about 5% per annum. C. Highway Planning and Financing 3.05 The highway investment program is prepared by STP, after discussion with the planning unit of SCOPT, for approval by the Government; SCOPT is re- sponsible for its execution. '.lajor planning obstacles are still the absence of a transport data collection system and a suitable basis for evaluating these data. I)espite the efforts made under previous Bank-financed highway projects, traffic data are not collected regularly by SCOPT: however, consul- tants have recently been carrying out traffic counts for feasibility studies and other purposes. The location of the counting stations and the period when the counts are taken vary considerably from year to year so that the compari- son of traffic data over several years would not lead to meaningful conclu- sions. A road inventory carried out by the consultants BR in 1970 should be updated. The technical assistance to be provided under the proposed project for transport planning (para. 2.13) would review the highway element of the Six-Year Transport Investment Program (para. 2.12) which envisages paving of about 460 km of roads and improvement of a further 1,500 km for a total amount of about US$115 million, without any obvious economic justification. The tech- nical assistance will also take part in data collection and evaluation, and in updating the road inventory.  3.06 Highway expenditures are financed from budgetary sources; details of such expenditures over the period 1965-1971 are given in Table 5. About 75% of highway investment has been financed from external sources and the Bank has participated in about 30% of this external financing. 3.07 Highway revenues from road users currently total about L 15 million (US$7.5 million, Table 6). This iLs less than present total expenditure on highways, but appreciably exceeds expenditure on administration and mainte- nance alone. Even allowing for a desirable increase in maintenance alloca- tions (para. 3.16) and for the fact that some of the revenue from road users is utilized for urban purposes, the remainder would still cover the total of highway maintenance and administration expenditure for the rural network. 3.08 Revenues from road-user charges are not earmarked for roads, however, and the Governnient has some difficulty in finding funds for adequate road main- tenance (para. 3.17). Although tlhe level of road-user charges is considered acceptable from the point of view of promoting efficient use of transport facilities, further consideration needs to be given to increasing these charges, taking into account the country's fiscal problems. D. Highway Administration 3.09 The Direccion General de Caminos (DGC) 1/ within the SCOPT (Chart I) is responsible for planning and constructing all roads in the country. DGC's organization (Chart II) comprises departments for planning, administration, engineering, materials and research, and construction. Until the recent change in Government (December 1972), the responsibility for maintaining the road network was entrusted to a seaparate department within SCOPT, reporting to the Under-Secretary of Public Works and to DGC as well. To define respon- sibilities more clearly than previously, the new Government created, within the same Secretariat, the Direccion General de Mantenimiento (DGM) 2/ (Chart III). This clear division of responsibility is intended to increase effi- ciency in maintenance operations. 3.10 Under Loan 400-HO (Febrlary 1965), the Government agreed to carry out a number of important reforms in highway administration, such as improve- ment of road maintenance practices and cost accounting procedures, strengthen- ing of the planning unit, enforceiment of traffic regulations, and institution of a civil service system of professional staff to ensure stability and continuity in highwav operations. Some progress has been made on most of these reforms, although the low salary scales and the established procedure of removing most of the high officials from office with every Government change hamper the creation of a strong civil service. 1/ General Directorate for Highways. 2/ General Directorate for Maintenance.  - 8 - 3.11 In June 1958, Honduras signed the Central American Agreement on Highway Traffic, which was intended to regulate traffic in all five Central American countries. The load limits and dimensions prescribed in this agree- ment were set according to the normal practice (legal axle limit, eight tons); discussions are currently being held among the Central American countries to update the agreement. Early in 1969, the Government issued a new law of Land CommurLications which, unfortunately, did not indicate limits for vehicle weights and dimensions; it stated only that a special transit permit would be required when vehicle weights and dimensions exceeded highway specifica- tions, and established fines for infractions. 3.12 According to surveys carried out by the consultants BR and HHK, about 70% of the trucks are presently overloaded. The Government is aware of the problem and has obtained a loan from CABEI (No. FCIE-30) amounting to US$475i,000 which provides, inter alia, for the financin2 of a network of weipht: control stations. The newly created Directorate General of Trans- port intends to enforce regulations starting in early 1974. The IDB mainte- nance loan (Annex 2) will also assist in establishing a network of weight control stations. Assurances were obtained during negotiations that the regulations on vehicle axle limits will be enforced. E. Highway Engineering 3.13 DGC undertakes design work on a limited scale for minor improve- ment works or for some feeder roads. Nevertheless, it is desirable to im- prove the technical expertise of its staff, and the proposed project provides for training of highway engineers and technicians (para 4.09). 3.14 DGC has a set of geometric design standards for road construction which takes terrain and traffic into account. The standards follow generally accepted engineering practices and can be applied to suit specific conditions. They have been coordinated with the standards agreed upon for the five Central American countries. INhen major construction is to be carried out, as in the case of the present project, the consultants are asked to develop specific design standards. F. Highway Construction 3.15 Construction of major modern highways started in 1957 with the Inter-American Highway, financed by the Export-Import Bank, and continued thereafter with external financial assistance. Construction is generally carried out under unit price contracts awarded on the basis of competitive bidding. There are about six local firms capable of executing small or medium scale construction works and, for recent bids, most of these firms have been associated with foreign contractors. As a result, there are about four foreign/local joint ventures with permanent offices in Honduras, which normaLly submit bids for major construction works. Recent uneven budgetary allocations and the uneven flow of foreign financing for highway construc- tion have led to uncertainties and idle periods for the contracting firms, jeopardizing the possibilities of creating a stronger contracting industry.  - 9 - There are about 20 small firms specializing in drainage structures and minor earthworks which are periodically engaged by DGC. DGC also undertakes small scale betterment works by force account. Government-financed highway work is normally supervised by DGC staff whereas foreign-financed construction works are supervised by consultants. G. Highway Maintenance 3.16 Routine maintenance is carried out by force account through seven maintenance districts. The control of maintenance operations has been re- cently taken over by the DGM (para. 3.09). Each district has its own tech- nical and administrative staff, equipment, workshops and service facilities. The technical expertise and equipment of the highway maintenance organiza- tion have been materially strengthened with financial assistance from the Bank/IDA (Loan 135-HO and Credit 1-HO) but, despite Government undertakings in connection with previous Bank Group lending, maintenance has recently deteriorated because of a shortage of budgetary allocations for routine operations and for replacement of wornout equipment. Budgetary allocations for maintenance have been rather erratic (Table 5) and, according to SCOPT's estimates, future allocations should be substantially increased in order to cover deferred and routine maintenance. 3.17 In 1971, IDB made a loan to Honduras amounting to US$6.3 million, which included about US$2.6 million for the financing of (a) consulting serv- ices to study means for improvement in the maintenance operations at SCOPT and (b) the purchase of maintenance, workshop and weight control equipment (details are given in Annex 2). Consultants for (a) have been selected and it is expected that, if SCOPT allocates the necessary counterpart funds, this IDB project will effect a substantial improvement of highway maintenance in Honduras. The consultants' study may take about three years, and then a fur- ther period would be required for implementation; during negotiations, there- fore, the Bank stressed to the Government the need for increases of the main- tenance budgetary allocations in the period pending implementation of the IDB study. The amounts to be allocated in 1974 and 1975 (L 5.5 and 6.0 mil- lion respectively), which were determined during negotiations, would cover only part of the needs for routine and deferred maintenance, but the Government has indicated that it considers the agreed amounts as a minimum and intends to allocate additional funds for maintenance. 4. IHE PROJECT A. General Description 4.01 The project consists of: (i) construction of a new paved primary road between Tegucigalpa and Talanga (about 55 km); (ii) reconstruction of a secondary road between Comayagua and La Libertad (about 45 km);  - 10 - (iii) construction of a 200 m long bridge over the Ulua River; (iv) improvement of about 80 km of feeder roads; (v) consulting services for: (a) supervision of (i) through (iv); (b) engineering studies for items (ii), (iii) and 45 km of (iv); (c) feasibility studies and, if practicable, detailed engineering of about 330 km of feeder roads; and (d) technical assistance for transport planning. ('i) a training program abroad for highway engineers, supervisors and technicians. The project is expected to take about three years. Construction of the Tegucigalpa-Talanga Road 4.02 The existing Tegucigalpa-Talanga road (55 km), which is the first section of the main route between Tegucigalpa and Juticalpa (175 km), serving the rich Olancho region, is located in difficult terrain on the south side of the Choluteca valley. It is poorly aligned, narrow and unpaved, and driving is hazardous. The road is not suitable even for present traffic, and Govern- ment has allocated high priority within its highway investment program for reconstruction of this Tegucigalpa-Talanga section. The feasibility of re- constructing this section was considered in the whole Tegucigalpa-Juticalpa road feasibility study which was financed under Loan 495-HO. The study in- dicated inter alia that a new road between Tegucigalpa and Talanga on the north side of the Choluteca vallev was technically and economically feasible, and the detailed engineering for its construction, proposed for inclusion in this project. was recently carried out by the consultants HHK, financed by CABEI and the UK Government. The new road (also about 55 km in length) is in equally difficult terrain (all the country east of Tegucigalpa is moun- tainous) but has the advantage of opening up the other side of the valley. The standards to which the new road has been designed are acceptable and are indicated in Table 7. The nature of the terrain -- much of the road will be in rock excavation - is such that labor-intensive techniques would not be appronriate; therefore, for this road, in spite of an unemployment rate of about 7%, the Government does not favor substitution of labor for equipment, because of a substantially longer construction period, higher financial costs and lower quality of work. The design has, therefore, been based on normal equipment usage. 4.03 The new Tegucigalpa-Talanga road starts from a suburban avenue, located on the outskirts of the city of Tegucigalpa, which has been paved to a point about 800 m distant from the starting point of the new road; the last  - 11 - stretch of this avenue is dangerous and should be improved and paved. Agree- ment was reached during negotiations that the Government will construct and pave this 800 m section before completion of the new Tegucigalpa-Talanga road and will connect it with the interchange to be provided under the proposed project. Reconstruction of the Comayagua-La Libertad Road (about 45 kIn) and Construction of a 200 m :Long Bridge over the Ulua River 4.04 The Comayagua-La Libertad road serves a potentially rich area, ad- jacent to the North road, but development is hampered because of high trans- port costs resulting from the inadequacy of the alignment and the width of the road, as well as the lack of a drainage system adequate to ensure traffic all year round (paras. 5.12 and 5.13). The upgraded gravel road will even- tually become part of the secondary highway system. The bridge proposed for construction is located on the La Ceibita-San Nicolas feeder road, which it- self is to be reconstructed under the proposed project (Table 8). Its con- struction will ensure year-round traffic between two important regions of the country (para. 5.14). 4.05 The improvement of the road and the construction of the bridge were proven technically and economicaLly feasible by the consultants BR, and the proposed project includes both the detailed engineering and the construction. It is estimated that detailed engineering would be prepared in a six-month period and construction could start immediately thereafter. The possibility of including only the detailed engineering in the proposed project and post- poning the financing of construction until a possible further highway loan is made to Honduras (say, in about two years' time) was considered and found to be inadequate, since only a few months would be required for detailed en- gineering preparation and it would be unreasonable to postpone construction for a long period, thus delaying unnecessarily the development of potentially rich areas of the country. However, the feasibility of constructing the road and the bridge will be reviewed in the light of final cost estimates, and the corresponding loan amounts will be cancelled if the feasibility is not con- firmed. During negotiations, assurances were obtained that the reconstruction of the secondary road and the construction of the bridge will be carried out only after their economic feasibility has been confirmed. Improvement of about 80 km of Feeder Roads 4.06 The few origin/destination surveys already performed in the country show that the traffic on the main roads is mwstly between the large cities, with very little local traffic feeding in. The Government is aware of the problem and has asked that the proposed project include provision for improve- ment of about 80 km of feeder roads scattered in various regions of the coun- try (Table 8). The feasibility of improving these roads has already been demonstrated by the consultants BR. The project, therefore, includes this improvement work and provides for the engineering of 45 km (the remaining 35 km are being engineered with SCOPT financing). Since the roads would be constructed to relatively low standards, the normal level of detailed engineer- ing would be too expensive and inappropriate; following a Government request,  - 12 - the project provides for a "light" engineering preparation, which would pro- vide a. reasonable estimate of average cost per km and a suitable basis for preparation of contract documents. Consulting Services 4.07 The proposed project provides for the financing of feasibility and engineering studies for 14 feeder roads totaling about 330 km (Table 9). All of these roads are along the Tegucigalpa-Juticalpa route and, when constructed, would contribute to the development of the region served by the main route. According to the importance of the areas to be served, and considering that some of the proposed roads may become a part of the secondary highway system, the engineering of the feeder roads will be carried out as follows: (a) for nine roads totaling about 140 km, engineering would be "light", as explained in paragraph 4.06 preceding; and (b) for five roads totaling about 190 km, normal detailed engineering would be prepared. During negotiations, assurances were obtained that engineering for the feeder roads will not be undertaken until their economic feasibility has been demonstrated. 4.08 The proposed project also provides consulting services for supervi- sion of all construction and reconstruction works. The preparation of detailed engineering for the secondary road and for the bridge (paras. 4.04 and 4.05) is included. Since feasiblity studies have already been completed for the 80 km of feeder roads to be improved (para. 4.06) and engineering for 35 km is being financed by the SCOPT, the proposed project will provide only for the engineering of the remaining 45 km. Feasibility studies and, if practicable, engineering studies for about 330 km of feeder roads (the construction of which could be financed by the Bank at a later date) are included. At Gov- ernment Ts request, the proposed project will include technical assistance for transport planning because of the lack of a proper data collection sys- tem and the inexperience of the personnel (para. 2.13). This technical as- sistance is expected to consist of the services of two experts for about one year to aid the Government in improving its work. During negotiations, assur- ances were obtained from the Government that the terms of reference for the experts and the schedule for implementation of the technical assistance will be satisfactorv to the Bank. Training of Highway Personnel 4.09 To improve the efficiency of the highway personnel (para. 3.13), it is proposed that a training program be established for highway supervisors and technicians (equipment operators, mechanics, and road foremen) and engineers. Such a program, for which US$150,000 is provided in the proposed project, would cover areas such as design, construction and maintenance of highways, soils and materials testing, operations and maintenance of equipment. Accordingly,  - 13 - the SCOPT will prepare and send to the Bank, for its review and approval, a training program, including: (a) program objectives; (b) number and types of personnel to be trained; (c) training timetable and estimated man-months for training experts required; and (d) estimated cost of training, showing a breakdown of costs for training locally and abroad (if any). Although the program envisages training for both technicians and engineers, the former will receive first priority. It is expected that training of all technicians will be carried out in Honduras by a firm which is expert in the training of highway maintenance personnel. However, consideration will be given to the training of some technicians (eqluipment operators and mechanics) to be con- ducted in the Latin American region, e.g., the School of the Americas in Panama. The training of engineers by training experts may also take place in Honduras, or, alternatively, in other Latin American countries where ad- vanced techniques are applied. In the latter case, the engineers would be selected by SCOPT in agreement with the Bank and would be sent out in groups of about five, so that the limited technical forces of the DGC and DGM would not be seriously affected. The duration of training for each group is esti- mated at about four to six months, although the exact program duration for each trainee will be assessed after the selection of candidates. B. Cost Estimates, Financing and Disbursements 4.10 The total cost of the project is estimated at US$25.8 million, in- cluding contingency allowances; the proposed loan will finance the estimated foreign exchange component of US$18.8 million equivalent. A summary of project costs is given on page 14 following. 4.11 The construction cost for the Tegucigalpa-Talanga road has been es- timated by the consultants HHK on the basis of completed detailed engineering. Construction costs for the Comayagua-La Libertad road, the bridge and the 80 km of feeder roads have been prepared by the consultants BR on the basis of average costs per km of similar works, and are acceptable. Costs for con- sulting services have been estimated on the basis of costs for similar serv- ices being carried out in Honduras. The costs for technical assistance items have been estimated on the basis of man-months required for assistance to STP and SCOPT. 4.12 A contingency allowance of 10% of the construction costs has been included to allow for increases :in quantities. A further contingency of 11% has been included for price esca]Lation of construction costs on the basis of a 4% average annual increase for local expenses and 6% for foreign expenses, from the time of bidding until completion of construction. The same percent- age has been included for consulting services to cover possible cost increases of these services during the project execution period. The above-mentioned contingency allowances are considered adequate. 4.13 Although detailed engineering for the Tegucigalpa-Talanga road has been satisfactorily completed and the unit prices used for the calcula- tion of cost estimates appear reasonable, it is difficult to judge the re- sponse of the market to bidding, and hence to estimate the general level of bidding for this road, since no .Large contracts have recently been awarded for major highway work. Two courses of action have been considered:  - 14 - L Million US$ Million Equivalent % Foreign Local Foreign Total Local Foreign Total Exchange A. CiviL Works (i) Construction of the Tegucigalpa-Talanga Road (55 km) 6.80 20,60 27.40 3.40 10.30 13.70 75 (ii) Riconstruction of the Comaya ua-La Libertad Road (45 km) 0.80 2060 3.40 o.40 1,30 1.70 75 (iii) Construction of a 200 m bridge over the TLua River 0.40 1,20 1.60 0.20 0,60 0,80 75 (iv) Improvement of about 80 km of Feeder Roads 100 100 2.00 0.50 0.50 1.00 50 Sub-Total 9.00 25.40 34.40 4.50 12.70 17,20 74 B. Consilting Services for (i) Supervision of con- struction of works under A 1.28 1.92 3.20 o.64 o.96 1.60 60 (ii) Engineering studies for items A (ii), (iii) and 45 km of (iv) above 0.16 0.24 0.40 o.08 0.12 0.20 60 iii) Feasibility studies arid, if feasible, de-tailed engineering of about 330 km of feeder roads 0940 0,80 1.20 0,20 0.40 0,60 60 (iv) Tebchnical assistance for transport - 0.20 0.20 - 0.10 010 100 pLanning - Sub-Total 1.84 3.16 5.00 0.92 1.58 2,50 C Trainiirg Program for Xi gineers,_Supervisors and Technricians - 0,30 0,30 _ 0115 0.15 100 D. Contingencies (i) Physical (about 10 of A'l 0,90 2.54 3.44 0.45 1.27 1,72 (ii) Price escalation (about 11% of A and B) 1.20 3014 4,34 0.60 1,57 2.17 (iii) Special 1/ (about 15% . of A (i) 1.06 3.06 4.12 0.53 1.53 2.06 Sub-Total 3.16 8.74 11,90 1.58 4e37 5.95 74 GRAND TOTAL 14.00 37.60 51.60 7.00 18*80 25.80 73 2/ See para, 4.13.  - 15 - (a) to await bids (early July 1973) before processing the project; (b) to proceed with the project on the normal schedule (which would imply presentation of the project to the Board prior to receipt of bids), but to provide a specific contingency against unex- pectedly high bidding in order to avoid the possibility of an intolerable strain on the Government's financial resources during the construction period. The Government prefers the latter course, since it wishes to press ahead with construction of this road, which has important developmental Implications, and wishes to have finance assured. It was considered that the risk of the bids being very high was not so great as to warrant the course of action men- tioned in (a) above being adopted; hence, the course of action in (b) above was adopted by adding a special contingency of 15% to the estimated cost of the road. This bidding contingency will be cancelled if the lowest evaluated bid is below the cost estimate (excluding quantity and price contingencies) and will be cancelled pro rata if the bid is in excess of that figure. This procedure was discussed and agreed during negotiations. 4.14 The foreign exchange component for the construction of the Teguci- galpa-Talanga road has been estimated at 75%, based on the assumption that construction would be carried out by foreign firms in joint venture with local firms or in subcontracting part of the works to local firms. The high foreign exchange is an indication of the general lack of construction resources within the country and the high proportion of equipment cost in the works (particularly the heavy earthworks and rock excavation). For works under Loan 495-IO (1967), the foreign exchange component was estimated at 70%; the proposed increase to 75% for the present project reflects the heavy input of equipment required to excavate significant amounts of rock. For the feeder road construction, the foreign exchange component has been estimated at 50%, assuming that construction will be more labor-intensive and will be carried out by local firms. The foreign exchange component for consulting services (supervision of construction, feasibility and engineering studies) has been estimated on the basis of past experience in Honduras when these services were provided by foreign firms, with some participation of local firms. It is possible that, as a result of the recent development of the local consulting industrv, the foreign exchange component of these joint ventures will be lower than the lestimated 60%. During negotiations, how- ever, the Government requested, and the Bank agreed, that the Bank would maintain its 60% participation, even if this implied some local cost fi- nancing (estimated to be up to US$0.4 million). This arrangement would encour- age Honduras' infant consulting industry. 4.15 The Government has invited for prequalification of contractors and intends to issue the invitations to bid before loan signature. Since consul- tant services are required for assisting the Government in carrving out these tasks as well as in analyzing the bids, retroactive financing will be required in an amount of about US$50,000. 4.16 The proposed loan will finance all foreign exchange costs of the project and possibly a small amount of local currency for consulting ser- vices (para. 4.14). Local costs will be met by Government from budgetary  - 16 - allocations. The financial situation of the country has been strained re- cently, and payments to contractors have been delayed. However, the amounts of road user charges collected during the recent years are increasing (Table 6). The local counterpart funds needed for the proposed project roads are high compared to past yearly expenditures for the transport sector (about L 14.0 million for three years). However, the Government considers this project of the highest priority and will allocate the needed resources to carry it out. During negotiations, assurances were obtained from the Gov- ernment that adequate funds will be provided to meet local costs. 4.17 Disbursements will be made on the following basis: (a) 74% of ex- penditures for civil works contracts (which represents the estimated foreign exchange component); (b) 60% of total expenditures for consulting services; and (c) 100% of foreign expenditures for the technical assistance for trans- port planning and for the training program. Based on this and on the proposed project execution schedule, an estimated schedule of disbursements has been prepared (Annex 3). Surplus funds remaining in the loan account on comple- tion of the project would be cancelled. C. Execution 4.18 Execution of the project will be the responsiblity of SCOPT through DGC and DGM (for all construction, studies and training). Technical assis- tance for planning will be under the responsibility of STP and SCOPT. 4.19 Consulting services under the project will be provided by consul- tants on terms satisfactory to the Bank. The Government intends to retain the consultants HHK for assistance in prequalification of contractors and evaluation of bids as well as for supervision of construction of the Tegucigalpa-Talanga road; this will be acceptable. For the supervision of the secondary and feeder road works and the bridge construction, as well as for the engineering studies for the remaining 45 km of feeder roads (para. 4.06) and the feasibility and engineering studies for the additional 330 km of feeder roads (para. 4.07), the Government intends to retain the services of at least two consulting firms, BR and another firm established in Honduras. The terms of reference for consulting services were agreed during negotiations, and SCOPT will submit proposals to the Bank detailing the services to be pro- vided by each firm. 4.20 For the Tegucigalpa-Talanga Road, there will be international com- petitive bidding. SCOPT proposes to divide the work into two unit-price con- tracts (about US$7.0 million and 27 km each) which would be attractive both to joint ventures of local and foreign firms (para. 3.15) already established in the country and to foreign firms not yet established. The rough topography and the difficult access from the existing road to the center line of the new road make it impracticable to open many workfronts and, hence, to subdivide the work further. Prequalified bidders will submit bids for each of the two sections separately or as a package for both sections. The bidding and con- tracting procedures for this were discussed and agreed during negotiations.  -- 17 - 4.21 Bidding for reconstruction of the bridge and for improvement of the secondary and feeder roads (both of which will also be on a competitive unit price basis) will be advertised 'Locally only; this will not, of course, ex- clude participation by foreign firms. Bids for fieeder roads would also be "packaged" as far as practicable. The procurement procedures for carrying out the above-mentioned construction works were also agreed during negotia- tions. 4.22 No delays are foreseen in acquisition of right-of-way. Civil works are expected to start by the fourth quarter of 1973 and to be completed by the fourth quarter of 1976. Reporting requirements and the schedule for project execution were discussed during negotiations. 5. ECONOMIC EVALUATION A. General 5.01 Except for a few sections, the main highway network, if properly maintained, would be able to absorb the present transport demand. Neverthe- less, SCOPT is faced with three major problems: (a) Some gravel roads with very heavy traffic and in very poor condition must be improved and eventually paved; (b) the main highway network must be completed with an adequate feeder road system to facilitate agricultural development; (c) large parts of the country (mainly the northeast) are still virgin, and road construction should be included in the general development program for these regions. 5.02 With more than 460 vehlicles per day, the Tegucigalpa-Juticalpa road has the highest priority among the gravel roads to be improved. Th.is road crosses the richest wooded area in Honduras and links the capital, Tegucigalpa, to the very fertile Olancho region located near Juticalpa. Together with the Juticalpa-Puerto Castilla road (a feasibility study of which is now under way), it will provide an additional link between the capital and the north coast and will open up part of the virgin northeast. The construction of the first section of this Tegucigalpa-Talanga road con- stitutes the main element of the proposed project. The financing of the second section, up to Juticalpa, may be considered for a future Bank high- way loan. 5.03 SCOPT, aware of the problem created by the insufficiency of the feeder road system, has carried out a study with the consultants BR, consid- ering about 2,000 km of secondary and feeder roads all over the country. The proposed project will provide financing for improvement of about 45 km of sec- ondary roads and about 80 km of feeder roads and construction of a 200 m bridge. This program has been selected from the 2,000 km of roads recently studied on the basis of their traffic.  - 18 - 5.04 Construction of the Tegucigalpa-Talanga road and construction and improvement of the 125 km of secondary road and feeder roads and the bridge represent about 95% of the proposed project cost. B. Construction of the Tegucigalpa-Talanga Road 5.05 With more than 600 curves in its 55 km, the Tegucigalpa-Talanga road is very difficult. In 1971, the 26 sawmills in the area served by the road produced about 35% of Hondurastlumber production, and the road, which is not paved, is no longer adequate for neavy traffic. A traffic count carried out by consultants HHK in 1971 on the Tegucigalpa-Talanga road showed an ADT of about 600 vehicles. Tlhis figure seems over-estimated; the traffic count carried out by the SCOPT during appraisal showed an ADT of about 460 vehicles, 54% being heavy vehicles. This last traffic count has been used in the economic evaluation. No previous traffic counts are available for this section. Since 85% of the heavy traffic is carrying lumber, it is estimated that the total traffic has been increasing at the same annual rate of growth as that of lumber production (about 5%). 5.06 The proposed construction of the Tegucigalpa-Talanga road will be a paved road, with a fully engineered alignment, but on the other side of the Choluteca valley from the existing road (para. 4.02). By reducing the vehicle operating costs substantially, this new road will generate traffic which is estimated at 20% of the total traffic (assuming a low elasticity of about 0.35 between generated traffic and reduction of vehicle operating costs). Since the new road will not follow the location of the present road, it has been estimated that about 10%. of the total traffic will remain on the present road to serve existing villages. With normal maintenance, the present road will be able to bear the very limited local traffic. 5.07 The consultants, assuming that the two sections of the Tegucigalpa- Talanga-Juticalpa road would be opened at the same time, forecast an average traffic increase of 9% per year; however, this will not be the case. After opening of the first section (Tegucigalpa-Talanga), the traffic will not in- crease at such a rate, since no important agricultural development can be ex- pected along thnis section. It is estimated that the traffic will increase by 7' per year during the first five years after opening of the project road, and by 10'% per annum during the following five years, assuming that the Talanga- Juticalpa section would then be open. 1/ The rate of growth is assumed to be 7%0 for the last 10 years of the economic life of the project road. The remaining local traffic on the existing road is expected to increase by 5% per year as in the past (Table 10). 5.08 The proposed project includes construction of the first section, Tegucigalpa-Talanga, of the road to Juticalpa; this road will play a major 1/ Assuming an annual traffic increase of only 7% per year during the 30 years of the project (in the eventuality of any delay in the construc- tion of the Talanga-Juticalpa section), the economic return will be reduced by only about 0.5% (para. 5.10).  -- 19 - role in the development of the country. On the highways financed by previous Bank loans, the benefits resulting from savings in vehicle operating costs have been largely transferred to the users by means of a reduction in the rates charged by truck and bus operators (by about 30% on the Western High- way and 50% on the North road). The opening of the new road, by reducing vehicle operating costs, would lead to substantial reductions in rates and would increase the competitiveness of agricultural production in the area traversed by the road. 5.09 The fact that agriculture is presently limited to relatively small areas of mountainous terrain in various parts of the country is responsible for the low productivity in the agricultural sector. More intensive use of the potentially productive valley lands is a most urgent need in the develop- ing of Honduran agriculture, and the new Government is considering coloniza- tion schemes to help remedy this problem. There are numerous areas where agricultural production could be increased. The Olancho region (adjacent to Juticalpa) is one of the most fertile; it is one of the nearest to the capital city and the Government owns a large part of it. The agricultural development of this region would largely satisfy the increasing demand for basic products (such as maize, rice and sugar) in Tegucigalpa. There is considerable land suitable for cotton production and, if ginning and trans- portation facilities in the Olancho region could be improved, production and exports could rise substantially, given the stimulus of currently high world prices. Land is also suitable for meat production. Cotton and meat are among those products for which export can be substantially increased in order to maintain the general economic growth of Honduras. 5.10 There will thus be major developmental benefits from the construc- tion of the new Tegucigalpa-Talanga road. For the economic evaluation, the readily quantifiable benefits only - reduced vehicle operating costs (includ- ing time saving) and lower maintenance costs 1/ - have been considered. The vehicle operating costs are abnormally high on the present road due to the very bad riding conditions and poor geometry. The new road will reduce these costs substantially by improving the riding surface, reducing the number of curves and increasing the average speed. Details of the vehicle operating costs are shown in Table 11. From a probability analysis, taking into consideration factors having a significant degree of uncertainty (traffic counts, traffic forecast, construction cost, vehicle operating costs and time cost), it appears that the most likely economic return would be about 13% (giving a first year benefit/cost ratio of about 10%). Even by measuring only the readily quantifiable benefits, the probability analysis shows that the economic return will have a 75% probability of being higher than 10%. Details of the probability profiles assumed in the calculations and the re- sults are indicated graphically in Annex 4. 1/ Maintenance costs have been estimated by the consultant HHK at 2,000 + 0.67 (ADT) Lempiras per km on the new road and 600 + 8 (ADT) Lempiras per km on the old one; these figures are acceptable.  - 20 - 5.11 The economic evaluation of the improved road does not take into account (a) the possible eventual installation of a steel plant in Agalteca near Talanga, which is now being considered by the Government; or (b) the possible construction of an international airport near Talanga. C. Improvement of Secondary and Feeder Roads 5.12 The project includes improvement of one secondary road (45 km) and five feeder roads (80 km) and construction of one bridge located on one of the feeder roads (Table 8). Thle proposed investment will consist of upgrad- ing poor gravel or earth roads into all-weather roads by gravel surfacing and small drainage works. The present ADT on the roads selected ranges from 100 to 273. By their developmental effect, these roads will generate important traffic; however, since very little information is available on the past traffic growth, the future traffic is assumed to increase at the same rate as the annual average increase of the total traffic in Honduras measured by the increase in fuel consumption - about 5% per year (para. 3.04 and Table 4). 5.13 The improved roads will stimulate colonization and development in the area by providing all-weather roads and by reducing transport costs. The small farms along the roads will increase production, with the possibility of enter:Lng the national market. The project will benefit about 150,000 inhab- itants (6% of the total population). Even measuring only readily quantifiable benef:its based on vehicle operating costs (see detail in Table 3) resulting from the Droposed road work (these discounted over eight years for the feeder roads and 15 years for the secondary road), the economic returns range from 10% to 42% (19% for the program as a whole), and are high enough to justify the proposed work. 5.14 The 200 m bridge to be built over the Ulua river on the La Ceibita- San INicolas road w4ill provide an all-year-round exit for agricultural products in the areas between the Ulua river and the Atima mountains. Presently, the road is closed about half of the year for lack of a bridge. The benefit from the bridge construction tias been computed by taking into consideration only the generated traffic and, by doing so, considering the developmental effect of the bridge for tne area to be opened (about 200 sq kmi). The generated traffic ihas been estimated by the consultants BR to be approximately 200 vehicles per day. (Present traffic is about 120 vehicles per day.) The economic return for the bridge construction is about 12% computed over 25 years. 6. AGREEMENTS REACHED AND RECO0,MNDATION 6.01 During negotiations, agreement was reached with the Government on the following: (a) Enforcement of regulations on axle limits of vehicles (para. 3.12);  21 - (b) Increase of budgetary allocations for highway maintenance (para. 3.17); (c) Construction, including paving, of an 800 m section of road within Tegucigalpa (para. 4.03); (d) Reconstruction of the secondary road and construction of the bridge to be carried out only after their economic feasibility has been confirmed (para. 4.05); (e) Engineering for the feeder roads not to be undertaken until their economic feasibility has been demonstrated (para. 4.07); (f) Terms of reference for ithe planning experts and the schedule for implementation of the technical assistance to be satis- factory to the Bank (para. 4.08); (g) Procedure for dealing with the special contingency allowance of 15% of construction costs of the Tegucigalpa-Talanga road (para. 4.13); (h) Provision of local costs for the project (para. 4.16); (i) Terms and procedures for retaining consultants (para. 4.19); (j) Procurement arrangements for civil works (paras. 4.20 and 4.21). 6.02 The proposed project provides a suitable basis for a Bank loan of US$18.8 million for a term of 30 years, including a five-year grace period. May 4, 1973   TABLE 1 HONDURAS SIXTH HIGHWAY PRDJECT Public Investment (Transportation) (Leipiras-Millions) ACTUAL: Year Highways Ain2orts National Railways Ports Total 1965 9.0 0,3 0.1 - 9.4 1966 9.1 0,4 0.8 - 10.3 1967 10.0 1.D2 3.0 - 14,2 1968 21.1 1.3 0.5 2.5 25,4 1969 32.0 1.2 2.1 8.6 43.9 1970 44.9 1.7 1.3 2,1 50,0 1971 42.6 0.2 1i1 1.2 45.1 1972 (Estimate) 25.8 3.5 0.7 3.4 33.4 FORECAST: / 1973 37.0 2.5 0,8 3.6 43.9 1974 38.3 4.0 10o 4.6 47.9 1975 41.6 14.1 1.1 7.3 54.1 1976 41.1 5.4 1.2 6.6 54.3 1977 43.6 15.3 1.3 5.0 55,2 i/ 1972-1977 Transport Investment Program (para. 2.13). Source: Secretar'a Tecnica del Consejo Superior de Planificacion Econ6mica - December 1972. January 1973  TABLE 2 HONDURAS SIXTH HIGHWAY PROJECT Development of the Highway Network 1960-1971 (in kilometers) YEAR PAVE GRAVEL EARTH TOTAL 196C' 110 3,118 3,229 1961 345 3,,040 3,385 1962 380 3,025 3,05 1963 380 3,057 3,437 1964 382 1,805 1,1408 3,595 1965 407 1,852 1,380 3s639 1966 407 1,928 1,713. 4,048 1967 416 1,978 1,955 4,349 1968 472 2,120 1,978 4,570 1969 622 2,102 2,004 4,728 1970 745 2,162 2,033 4,940 1971 1,168 2,988 1,433 5 ,589 Source: SCOPT, December 1972 January 1973  TABLE 3 HONDURAS SIXTH HIGHWAY PROJECT Vehicle Registration 1960-1971 1/ YEARS TOTAL CARS BUSES TRUCKS- VARIOUS 1960 10,989 5,505 1,269 3,914 301 1961 11,338 5,680 1,334 4,001 323 1962 11,606 5,850 1,407 4,025 324 1963 14,329 7,476 1,661 4,881 311 1964 16,002 8,759 1,217 5,9o9 117 1965 18,797 10,273 1,526 6,682 316 1966 21,609 11,786 1,784 7,871 168 1967 22,570 12,042 1,704 8,784 30 1968 24,748 11,045 1,982 11,617 104 196