Papua New Guinea - Second Highlands Road Improvement Project

Report No. 1250a-PNG L Appraisal of a Second Highlands Road Improvement Project Papua New Guinea January 11, 1977 Transportation Division East Asia & Pacific Region FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS * Currency Unit = Papua New Guinea Kina (K) 1/ US$1 = K 0.83 K 1 US$1.20 K 1 million = US$1,200,000 * The exchange rate is floating, but the rate used in this report is indicated above. FISCAL YEAR July 1 - June 30 (until December 31, 1977) January 1 - December 31 (from January 1, 1978) WEIGHTS AND MEASURES Metric System Metric British/US Equivalent 1 meter = 3.2808 feet (ft) 1 kilojneter 2 = 0.6214 mile (mi) 1 square kilometer (km ) = 0.3861 square miles (sq. mi) 1 kilogram (kg) = 2.2046 pounds (lbs) 1 me'tric ton (m ton) = 2,204 lbs or 1.1023 US short ton (sh ton) ABBREVIATIONS AND ACRONYMS aadt - Annual average daily traffic ADB - Asian Development Bank DTW - Department of Transport, Works and Supply OT - Office of Transport NWA - National Works Authority PNG - Papua New Guinea UNDP - United Nations Development Programme VLD - Vallentine, Laurie and Davies (Australian Consultants) 1/ New Papua New Guinea currency, the "Kina" was introduced in April 1975.  PAPUA NEW GUINEA APPRAISAL OF A SECOND HIGHLANDS ROAD IMPROVEMENT PROJECT TABLE OF CONTENTS Page No. SUMMARY .....o...... ........... ......................... i- i Is INTRODUCTION ..1...................... ..oo ... 1 II. THE TRANSPORT SECTOR ..o ........... ........ .......... 2 A. Geographic, Demographic and Economic Background .. 2 B. Recent Developments in the Sectoro........o....... 4 C. Transport Administration and Planning so.so............. 5 D. Transport Coordination ............................ 6 III. HIGHWAYS o...o.................... ............o 6 A. The Network .......* ......... . ... ......... ..... 6 B. Traffic ............ *............... .... .......... 7 C. Administration ..o .... ................ ..*. .. 8 Do Planning ............ ......... -oo ............... see ....o.o.. 9 E. Financing . ..... . . .. ... . * .. . ... * .o........*.... .s . ...... . 10 Fo Engineering ................. o..o........................o..o..... 11 Go Construction o..o. oo .......................... o......... oo ... ..o. 11 H. Maintenance sees....................................... .......... 12 I. Training o..o...... es... oo ..... os.... o............. .......o ..... 12 IV. THE PROJECT .... oo ... ..o..oo ................... .. 13 A. Description ..... ... *... *........ ...... .....o.................. 13 B. Cost Estimates and Foreign Exchange Component .... 16 C. Financing ...... . .. ........ .. .000 ... 19 D. Implementation ........ .....0000............... .............. 19 E. Disbursements . . . . . ................ . .. .... ..... 21 V. ECONOMIC EVALUATION o .... o... ......o ......... 21 Ao General .. ..... ... * .... . . . ........ ....... . .... .*. 21 B. Development Potential and Traffic o o............... . 22 C. Benefits of the Project ...........see............ 23 VI. RECOMMENDATIONS ..o ...... * .. ....... . ...... ..o..o. . .... 25 This Report was prepared by Messrs. P. R. Morris (Engineer) and S. Y. Park (Economist).  -2- ANNEXES 1. Description of Highlands Highway Sections to be Constructed and Improved TABLES 1. Public Roads Networks 1975 2. Vehicle Fleet - Number of Vehicles on Register 1963-74 3. Air Freight Movements at Highlands Airports 1963-75 4. Expenditures on Roads 1968-76 5. Revenues from Use and Ownership of Vehicles 6. Design Standards for Rural Roads 7. Estimated Cost of Project 8. Project Implementation Schedule 9. Schedule of Estimated Disbursements 10. Regional Income Data for Four Highlands Provinces 11. Past and Projected Road Freight between Highlands and Coastal (Lae) Regions 12. Traffic Projections on Highlands Highway 1974-2002 13. Estimated Vehicle Operating Costs 14. Net Benefit and Cost Flows CHART World Bank 16758 - Department of Transport, Works and Supply: Organization MAP IBRD No. 11428 Ri  PAPUA NEW GUINEA APPRAISAL OF A SECOND HIGHLANDS ROAD IMPROVEMENT PROJECT SUMMARY i. Development of the Central Highlands interior of Papua New Guinea (PNG) has been hampered by poor communications, although about 40% of the total population lives in the area and it has high economic potential. Until about 10 years ago, the area depended almost entirely on air transport. How- ever, a road has been constructed, initally as a track, and gradually im- proved partly under the First Highway Project, but it is still inadequate for present and projected traffic. The Government now aims to complete over a seven-year period the improvement, including paving, of the Highlands High- way from the main port of Lae to Togoba, west of Mount Hagen. Towards this end, the project will improve and pave three priority sections in mountainous terrain with unstable soils and steep gradients. This will, for the first time, permit reasonably reliable, all-weather, low cost land transport for the area. ii. Improvement of the Highlands Highway, though an essential pre- condition for further development in the Central Highlands, is not alone sufficient to ensure that rapid development will take place. Rural Develop- ment Project Preparation Studies in the Enga and Chimbu Provinces of the Central Highlands have therefore been included in the project, as well as feasibility studies and engineering of the Togoba-Wapenamanda Road, which links the Enga Province with the Highlands Highway. iii. The Government originally proposed that the project include improve- ment and paving of all the 302 km length of the Highlands Highway presently unpaved between Kassam and Togoba and this was included in the appraisal in 1974. However, it was agreed that before negotiating the credit, bids would be obtained for the works. When bids were received in March 1975 they were found to exceed the cost estimates by 75%, and re-bidding in July 1975 failed to obtain lower prices. The Government rejected the bids and decided, in consultation with the Association in March 1976, to re-formulate a reduced project to cover initially only the most urgent sections. iv. The Second Highlands Road Improvement Project provides for: (i) improving and paving three sections of the Highlands Highway between Goroka and Garnigl totalling about 68 km; (ii) detailed engineering of the Highlands Highway between Waterais and Togoba, totalling 317 km, with retroactive financing; (iii) Rural Development Project Preparation Studies in the Central Highlands; (iv) feasibility studies and detailed engineering of the Togoba- Wapenamanda Road, and updating an earlier feasibility study of the Highlands Highway, to prepare future projects; and (v) technical assistance to local civil engineering contractors.  - ii - v. The total cost is estimated at US$27.5 million. The foreign ex- change component is US$19.25 million of which US$19.0 million will be financed by the credit and the remaining cost of US$8.5 million will be financed by the Government. The credit includes retroactive financing of about US$1.4 million including US$800,000 for detailed engineering of the Highlands Highway and US$600,000 for force account work, including supervision, on drainage and earthworks on one of the road sections to be improved and paved. The credit would be made to the Government of PNG and execution would be the responsibility of the Department of Transport, Works and Supply (DTW). vi. About 70% of the construction works will be carried out through five contracts, to be awarded after international competitive bidding in accordance with the Bank guidelines. The remainder will be carried out by force , Works and Supply (DTW). vi. About 70% of the construction works will be carried out through five contracts, to be awarded after international competitive bidding in accordance with the Bank guidelines. The remainder will be carried out by force account. Because of the difficulty of estimating costs in PNG, and experience on the First Highway project, it was agreed that bids would be obtained for the most difficult road works, amounting to about 50% of the total, prior to negotiation of the credit, and they have been. However, con- tracts will not be awarded until after approval of the credit by the Board. Supervision, technical assistance to local contractors, and assistance in management of force account work, will be by consultants. Construction is expected to take 4 years, and the whole project would be completed by December 1980. vii. The improvements of the Highlands Highway included in the project are estimated to yield a rate of return, based on transport cost savings alone, of about 27%. However, additional benefits will result when the Government takes appropriate complementary measures for development in the Central Highlands which will be identified and prepared through the Rural Development Studies. viii. The project is suitable for an IDA Credit of US$19.0 million, rep- resenting about 70% of the total project cost, on the normal terms.  PAPUA NEW GUINEA SECOND HIGHLANDS ROAD IMPROVEMENT PROJECT I. INTRODUCTION 1.01 The Government of Papua New Guinea has asked the Association to help finance a Second Highlands Road Improvement Project consisting of: (a) con- struction and improvement, including paving, of three sections totalling about 68 km of the Highlands Highway between Goroka and Garnigl, including supervi- sion of the work and assistance in management of force account work; (b) ret- roactive financing of detailed engineering by consultants of 317 km of the Highlands Highway between Waterais and Togoba (including the 68 km in (a) above); (c) Rural Development Project Preparation Studies, by consultants, in the Enga and Chimbu Provinces of the Central Highlands area; (d) feasibility study of the Togoba-Wapenamanda Road, about 63 km, to be followed by detailed engi- neering, if found feasible; (e) updating of the feasibility study of the Highlands Highway between Waterais and Togoba to prepare a further stage of improvement of the highway; and (f) technical assistance to local contractors, by consultants. The main object of the project is to assist in developing the Central Highlands Region. In particular, it will: (i) provide, for the first time, a reasonably reliable all-weather highway throughout the Highlands region towards the principal port of Lae, and significantly reduce transport costs; and (ii) prepare high priority rural development projects and road improvement projects for future investment. 1.02 The request for Bank Group financing was first made to an Associa- tion identification mission in April 1972 for a larger project for the con- struction and improvement, including paving, of about 317 km of the Highlands Highway between Waterais and Togoba. A feasibility study, financed by the Government, was made in 1972-73 by the Australian consultants Vallentine, Laurie and Davies (VLD), and detailed engineering was carried out by the same consultants in 1973-74. Retroactive financing of the detailed engineering was included in the request, as well as new Rural Development Studies and feasibility studies and detailed engineering of further roads. Because of uncertainties in the cost estimates, it was agreed that bids should be obtained for the construction before negotiating a loan. Accordingly, the Government obtained international bids, in accordance with Bank Group proce- dures, in March 1975. A total of only eight bids were received for the six road sections and the sum of the low bids was about US$47 million, or about 75% higher than estimated. After discussions with the Association, the Government rejected all bids, and called for new bids on the basis of revised bid documents, including regrouping the work into two large sections, in the hope of obtaining lower prices. However, the three bids, received in July 1975, gave an even higher minimum sum of about US$51 million. In each case the amounts excluded contingency items and supervision. The Government informed the Association in September 1975 that it did not intend to proceed with the project, but would consider whether to propose a smaller project instead. In March 1976, the Government sent a delegation to the Association and, after discussions, requested Association financing for the smaller project, covering the most urgent sections of the Highlands Highway, described in para 1.01.  1.03 The Bank Group's assistance in the transport sector has included acting as executing agency for the UNDP-financed Transport Survey of 1968-69, and financing the First Highway Project, and a Port Project. The UNDP Trans- port Survey provided the framework for the subsequent reorganization of trans- port administration and for the preparation of initial investment programs. The First Highway Project was financed under Credit 204/Loan 693-PNG in 1970. It provided US$9.0 million for construction and improvement of sections of the Highlands Highway totalling 150 km between Kundiawa and Mendi, at the western end of the highway. The work was satisfactorily completed at the end of 1973, but with a cost overrun of about 90% due chiefly to bid prices being 60% higher than estimated, but also because of greater than expected quantities of unsuitable soil which had to be replaced. The overrun was financed by the Government. The Port Project provided US$9.2 million under Credit 326-PNG in 1972 for extending port facilities at Port Moresby, Lae and Kieta, and for constructing new port facilities at Alotau. The project is proceeding satisfactorily and is expected to be completed in early 1977. 1.04 The total cost of the Second Highlands Road Improvement Project is estimated at US$27.5 million of which the foreign exchange component is US$19.25 million. This estimate is based on unit prices of work in the bids received in October 1976, for about half of the civil works. An amount of US$19.0 million will be financed by the credit; the Government will provide the remaining US$8.5 million. 1.05 This report is based on information provided by the Government, on the feasibility studies and detailed engineering carried out by the consultants VLD, and on the findings of an appraisal mission in August 1974 composed of Messrs. P.R. Morris (engineer) and S.Y. Park (economist), and was revised in accordance with the amended project formulated in discussions with the Government delegation in March 1976 and further information provided by the Government and the consultants in June and July 1976 and during nego- tiations in November-December 1976. II. THE TRANSPORT SECTOR A. Geographic, Demographic and Economic Background 2.01 Papua New Guinea (PNG) became independent from Australia in September 1975. Physically, PNG comprises the eastern half of the island of New Guinea and some 600 smaller islands. A number of the islands form part of Papua but most are part of New Guinea, including the larger islands of New Bri5ain, New Ireland and Bougainville. PNG has a land area of ab2ut 477,000 km (about the same size as Spain) spread over some 2,000,000 km of the Western Pacific Ocean. The indigenous population numbers about 2.8 million and is growing at 2.8% p.a. The non-indigenous population (largely from Australia) in 1975 numbered about 40,000 persons, which is a decrease from 54,000 in 1971. With Independence, the rate of decrease in expatriate population is gradually slowing down.  - 3 - 2.02 The country is at an early stage of development, with an economy based on primary production. The non-monetized sector, which provides the indigenous population with most of its necessities, accounts for about one- sixth of the GNP and is growing at an estimated rate of less than 1% p.a. The monetized sector has been growing at more than 10% p.a. in real terms over the last 10 years. The economy is heavily dependent on external trade; exports in 1975/76 were valued at about K 357 million. About one-half of the value of exports was accounted for by copper concentrate exported from Bougain- ville. The Government estimates that exports in 1976/77 will reach some K 490 million with a similar proportion as the previous year to be accounted for by copper concentrates. The decrease in world copper prices in recent years has adversely affected the trade balance and since May 1975 the trade balance has been in a deficit position. From April 1976 however the trade balance showed some surplus. Other export commodities are coffee, cocoa beans and copra. 2.03 The latest (1975) available estimate of per capita GNP of all per- sons resident in Papua New Guinea, including the small and decreasing number of expatriates, is K 360 p.a. The corresponding figure for the PNG nationals alone is estimated at about K 250. The Central Highlands 2.04 Historically, economic activity in PNG was based on centers such as Port Moresby (Papua), Lae and Madang (New Guinea), and Rabaul (New Britain), which were traditionally supplied by sea, but later also by air. These centers were, however, no more than economic enclaves, and little development took place in the interior of the country. 2.05 In the last few decades the economic potential of the interior, notably of the Central Highlands in the west-central part of the mainland, has been recognized. Economic activity there was initially supported almost entirely by air transport. Gradually, however, a road was developed from the port of Lae, and was completed about 1966. Today the road, called the High- lands Highway, runs 600 km from Lae to Mendi via Mount Hagen, the administra- tive center of the Western Highlands Province. It provides a land access, albeit a somewhat difficult and unreliable one, to the Central Highlands and to the estimated one million people living there. 2.06 The Central Highlands consists of five provinces; they are Eastern Highlands, Chimbu, Western Highlands, Enga and Southern Highlands, with provincial administrations located at Goroka, Kundiawa, Mount Hagen, Wabag and Mendi. At present the cash economies of these provinces are relatively undeveloped, but rapid development of cash crops, notably coffee and tea, is taking place, and would be accompanied by development of processing industries and of tourism. Of the five provinces, Southern Highlands is the least developed and Chimbu is the most heavily populated.  - 4 - 2.07 With about 40% of the country's population living in the five High- lands provinces, and with the favorable possibilities of sustained economic growth, the Central Highlands appears poised to play a major role in the economic development of the country. B. Recent Development in the Sector (a) General 2.08 The terrain of the 'mainland' of PNG is unfavorable for development of land transportation inwards from the ports. Generally, the coastal plain is narrow and is terminated abruptly by formidable mountain ranges; even where the plain extends some distance inland, as in the southwestern part of the mainland, it tends to be intersected by major rivers and to be low- lying and swampy. The major trade movements to and from the Highlands are unbalanced. For the mainland as a whole, the tonnage of imports is almost twice that of exports. On the Highlands Highway the imbalance is even greater; in 1975, for example, freight moving inland from Lae was about 200,000 tons, while the outward movement was only 44,000 tons, a ratio of 5 to 1. (b) Highway Transport 2.09 Before World War II, road transport played a very minor role in PNG. However, since the War, the road system has been expanded considerably, but nevertheless, it is still comparatively limited considering the size of the country. Lack of reliable data on the extent of the system year by year since the War precludes a calculation of annual growth, but it is estimated that the system totalled about 18,300 km (Table 1) in 1975, the last time that the roads were inventoried, which represents a nine-fold increase during the post-War period. The vehicle fleet, more than half of which consists of motor cars, station wagons and motorcycles, has increased by about 12% p.a. since 1963 and now numbers nearly 40,000 (Table 2). (c) Ports and Shipping 2.10 PNG has about 50 ports of various sizes, 10 of which (Port Moresby, Lae, Madang, Wewak, Samarai on the mainland, and Rabaul, Kavieng, Kieta, Kimbe and Lorengau on other islands) handle overseas trade. Cargo handled at the major ports totalled 1.5 million tons in 1974/75. 2.11 Overseas shipping services are provided by 16 companies. Coastal and inter-island services are provided by about 240 locally owned small ves- sels greater than 10 m in length. These operate between main ports and provide feeder services to outports. 2.12 The Harbours Board has recently completed a program of port development at Port Moresby, Lae, Kieta and Alotau at a total cost of US$11.4 million of which 82% was financed by IDA.  -5- (d) Civil Aviation 2.13 Air transport is a major mode of passenger travel both in- ternally and between PNG and other countries; passenger traffic has been in- creauing steadily by about 10% p.a. between 1964 and 1974. Freight is also movei by air, particularly to the more isolated areas, but the importance of air freight has declined substantially in recent years (Table 3). 2.14 Airports and airstrips numbered 470 in December 1974, but only Port Moresby is used for scheduled international flights. The extension of the Port Moresby airport, making it capable of handling the largest commercial jets, and the construction of a new international airport near Lae are being financed by the Australian Government. PNG is adequately served by inter- national flights. Internally, scheduled services are provided by Air Nuigini (60% Government-owned), which has a low aircraft utilization rate due to the restriction of flights to daylight hours. Four other companies operate scheduled commuter services and a further 25 operators are licensed for charter or aerial work operations. C. Transport Administration and Planning 2.15 Prior to 1967, responsibility for transportation was shared among several departments of the Government. In that year a Coordinator of Trans- port was appointed, and in 1968 a Directorate of Transport was set up and given responsibility for policy and planning in all forms of land and sea transport, air transport remaining largely within the jurisdiction of the Australian Department of Civil Aviation. 2.16 The Department of Transport (DOT) was established in August 1970, and in February 1976, as part of a policy of rationalization and simplifica- tion, the Government combined DOT and the Department of Public Works into the Department of Transport, Works and Supply (DTW) in a single Ministry. The functions were renamed the Office of Transport (OT) and the Office of Works, respectively. In August 1976 the office of Works absorbed the Plant and Transport Authority and became the National Works Authority (NWA) within the DTW (Chart). The relationship between the OT and NWA is the same as the former relationship between the departments. Further rationalization of Gov- ernment functions is expected to follow but the relationship between the OT and the NWA and their respective responsibilities is expected to remain similar. The main functions of the OT are: (i) to develop policy for land, sea and air transpor- tation throughout the country; (ii) to undertake the necessary economic studies and surveys related to all modes;  - 6 - (iii) to prepare, evaluate and revise as necessary the capital and recurrent expenditure plans for all modes to meet the requirements of consumers, trans- port operators and the Government; and (iv) to regulate and administer each of the modes. 2.17 As regards highways, the OT prepares plans in conjunction with the NWA, the office responsible, inter alia, for most of the road construction and major road maintenance in PNG (Chart). The OT defines highway needs in broad terms; these needs are then designed and costed by the NWA as spe- cific projects. Projects are then considered by the OT on economic grounds, taking duly into consideration the availability of other modes. In brief, the OT supplies the economic expertise for the development of highway pro- jects and the NWA supplies the technical expertise. D. Transport Coordination 2.18 The OT plans infrastructural development of air, sea and road trans- port. The responsibility for local aviation planning was handed over to the OT from the Australian Department of Transport in December 1973. The OT is strengthening its Planning Division for preparing more effective and coordi- nated development of infrastructure and services in the transport sector. The problems which require the attention of the Government for improved intermodal coordination are the role of air transport in the face of continuous develop- ment of road transport, and the relative economic merits of coastal shipping, vs overland or air transport, including a possible cross-island highway, which, if built, would connect Port Moresby and Lae and which was under consideration by the Government in the past. The OT is to undertake the preparation of a National Transport Plan to develop a phasing schedule for transport infrastructure investment in PNG and a policy statement for overall transport development. III. HIGHWAYS A. The Network 3.01 The public road network totals about 18,300 km (Table 1). The roads are predominantly located in the areas containing the bulk of the population, that is, in and near the main coastal towns, and in the Central Highlands. Because of the extremely mountainous terrain, and difficult soil and climatic conditions, the road system is not continuous and consists of a number of regional networks.  - 7 - 3.02 The Government has two classifications of roads, one administra- tive and one technical. The Administrative Classification for Rural Roads (Table 1) consists of Highways, and Trunk Roads (both maintained by the Central Government), and Feeder, Access, and Declared Minor Roads (mostly maintained by the local authorities). The Technical Classifications for Rural Roads (Table 6) are Primary, Rural Class 1, Rural Class 2, Rural Class 3, Access Class 1, and Access Class 2. With the setting up of Pro- vincial Governments, now in progress, responsibilities for some roads will be changed. The highways will remain the responsibility of the Central Government and other roads will become the responsibility of the Provinces. B. Traffic 3.03 Because of the absence of a continuous road system, and the con- centration of much of the population in centers around the coast, road traffic volumes are generally low, both for passengers and freight. Most traffic is short distance; long-distance traffic between main centers is chiefly by air for passengers and by sea for freight. An important excep- tion is the Highlands Highway which runs for a distance of about 600 km from the main port of Lae to Mendi, through the Central Highlands which contains about 40% of the total population of PNG. The highway already carries a substantial average traffic volume of about 450 aadt, mainly trucks, largely on long-distance haulage to and from the coast. Furthermore, in recent years there has been a shift from trucks of 5 to 7 tons capacity to 12 ton trucks with 10 ton trailers, particularly for the haul from Lae to -Goroka. 3.04 There is presently no restrictive licensing of entry and operations in the road freight industry. As a result, a competitive and efficient in- dustry has evolved, made up of a great number of firms ranging in size from one with a fleet of about 50 vehicles down to many owner-operators with only 1 or 2 vehicles each. However, the Government has recently submitted for Parliamentary consideration proposed legislation for licensing regulation of heavy vehicles. Some provisions in the proposed legislation caused the Asso- ciation concern in that they may stifle competition in the trucking industry. During negotiations, the Government representatives assured the Association that the intention of the Government is not to use the law to inhibit com- petition but rather to promote the continued sound development of an efficient and competitive transport industry within certain administrative regulations. The smaller trucking firms are mainly owned and operated by nationals, some of which have combined into cooperatives. Although the larger firms were until recently mainly owned and managed by expatriates, they are now accepting increasing participation by nationals in ownership and operation; this is in line with the Government policy of increasing Papua New Guineans' involvement in business. The Government has been assisting local entrepreneurs in acquir- ing ownership of larger haulage firms through financial and management support. The present legal limit for vehicle weight is 9.6 tons for a single axle, which is reasonable. During negotiations, the Government undertook to ex- change views with the Association regarding economic justification of any  - 8 - material alterations which may be proposed to: (i) regulations governing weights and dimensions, or operation, of motor vehicles; or (ii) taxation of larger vehicles. 3.05 The Land Transport Division of the OT is being strengthened, in- cluding the establishment of a full-time traffic counting unit. Confir- mation was obtained, during negotiations, of the Government's intention to continue to improve the collection and analysis of traffic data, including the extension of counting to the local authority roads. 3.06 Since the First Highway Project appraisal in 1970, the OT has re- leased 25 information bulletins on traffic and freight surveys which have been undertaken. One of these indicates that freight rates on the Highlands Highway (Lae-Goroka, 275 km) in current prices have fallen over the last ten years from more than 144/ton-km to the present rate of about 7.5w to 8J/ton- km. The reduction has been brought about by the improvement of the highway and increasing competition and efficiency in the road transport industry. The reduction is the more remarkable since many prices and costs, including those on other highways in PNG, have increased during the period. C. Administration 3.07 As noted in paragraphs 2.16-2.18, under the present Government organization, the OT is responsible for all highway planning, and the NWA is responsible for design and execution of works, both capital and recurrent. However, the NWA delegates to the Local Government Councils (under the Depart- ment of the Prime Minister and Development Administration) the maintenance of most of the roads other than highway and trunk (paras 3.10 and 3.14); it also delegates to the Local Government Councils some of the minor improvement works on less important rural roads. 3.08 The OT under the Minister for Transport and Works (Chart) is re- sponsible for transport policy and planning, as well as for administration and regulation of transport. These duties involve the assessment of transport demand, including undertaking traffic surveys, and preparing statistics and forecasts. The OT is responsible also for economic studies and the prepara- tion of capital and recurrent programs. The OT was established in August 1970 (initially as the Department of Transport) and has made significant pro- gress in its ability to discharge its responsibilities. Like the NWA (para 3.09) it is expected to continue to depend on expatriates for its senior staff for some years. 3.09 The NWA in the DTW (Chart) will be responsible for execution of the project, as its predecessor, the Department of Public Works, was for the First Highway Project. It is a general purpose works organization which deals with water supplies, buildings and airports in addition to roads. The NWA handles directly all major works and it is mainly dependent on expatriate staff for its engineers. It has 118 engineer posts of which 92 are filled.  - 9 - The Government is continuing to conduct an active recruiting campaign over- seas, including the Philippines, UK, and New Zealand, as well as Australia from where most of the staff have been obtained in the past. There are also about 350 posts for technicians and supervisors, of which about 150, mainly the senior posts, are occupied by expatriates. Here also, after a period of an ab)normally high rate of departures, the situation has stabilized, with overseas personnel filling key positions for which suitably qualified local personnel are not yet available. The NWA is pursuing a comprehensive and energetic training program to accelerate the staffing of the Office with qua- lified nationals as much as possible (paras 3.21-3.23). However, it will take many years to train local staff to take over all the senior posts. In the meantime it is clear that reliance must be placed on expatriate staff for most of the engineers and some of the senior technical posts. During nego- tiations, confirmation was obtained that the Government will continue to strengthen the NWA and the OT, including recruitment and training of staff. 3.10 There are a number of Local Government Councils (including Port Moresby) which carry out works on a small scale, chiefly with hand labor, and with the technical assistance of the NWA Regional Works Engineers and Provin- cial Works Managers (para 3.07). The OW is now increasing the number of its engineers in the field who will be working with the Councils and in future with the new Provincial Governments. Also, Government, through the DTW, is already running a training program for Local Government Council works staff (para 3.22). 3.11 In July 1974, the Government set up a Plant and Transport Authority which took over responsibility for the procurement, maintenance and operation of all Government transport and mobile equipment. This included the trans- port and equipment of the Office of Works, as well as its main workshops. However, in February 1976, the Plant and Transport Authority became part of the DTW under the Minister of Transport and Civil Aviation and in August 1976 the Plant and Transport Authority became the Plant and Transport Division within the NWA. It is too early to judge the effects of these changes. D. Planning 3.12 Transport planning is the responsibility of the DTW under the Minister of Transport and is carried out by the OT through its Planning Division. Responsibility for coordinating all economic and social planning, including transport, rests with the National Planning Office which was set up in November 1973, and reports to the Cabinet Committee on Planning. The National Planning Office is responsible for preparing, in collaboration with other ministries, national development programs, and assisting in the pre- paration of annual budgets. Pending the receipt of a long-range commitment on aid from Australia, economic planning was on an annual basis, with only generalized broad long-term objectives. The Australian guarantee, in March 1976, of over K 1,000 million for the period 1976-1981 will permit long-range development plans to be prepared in consultation with the new Provincial Governments, when they have been established.  - 10 - 3.13 In the meantime, the OT has been planning projects which are a continuation of previous development programs, and preparing other projects of obvious high priority. In general these are for: (a) connecting, with all-weather roads, the major population, production and resource areas to the ports and, where necessary, to each other (the most important such road is the Highlands Highway (Lae-Mendi)); and (b) gradually improving, in stages, access roads to smaller population centers and rural areas, largely through the "Rural Improvement Program". These projects, particularly those in (b), are based on proposals received by the OT from the NWA and other Government departments, and from Local Government Councils, and other public and private agencies. In addition, the OT Planning Division itself carries out recon- naissance of existing transport facilities and assesses improvements required to meet demand. Expenditures on roads for the period 1968-76, and estimated expenditures for the year 1976/77 are given in Table 4. E. Financing 3.14 Financing for construction and improvement of public roads, and for maintenance of highways and trunk roads is provided through the Govern- ment's annual budget. In addition, the Local Government Councils (and in the case of Bougainville the Provincial Government, which has already been set up there) provide funds for maintaining minor (feeder and access) roads (para 3.07); the Councils derive about one-third of their finances from Central Government's grants and the remainder from local taxes. The new constitution includes provision for eventually setting up of Provincial Governments in all areas and they will have wider responsibilities and powers. 3.15 The Government's annual expenditures on roads (Table 4) increased by approximately 240% in financial terms between 1968/69 and 1976/77. Expend- iture is expected to remain around K 40 million per year in the immediate future. Revenues (Table 5) from use and ownership of vehicles (road user charges) amount to only about a fifth of expenditures, in spite of the Govern- ment having raised the duty on motor fuel in late 1969 and again in late 1975, in accordance with recommendations of the consultants who carried out the UNDP-financed transport survey in 1968/69. Notwithstanding the setting up of Provincial Governments, it is expected that the Central Government will con- tinue to provide the great bulk of the financing for highways from the general budget, for which it receives assistance from Australia. Also in line with the UNDP consultants' recommendations, the OT has begun a study with a view to formulating a rational transport user charge system. The study is being carried out by an economist provided through the Commonwealth Fund for Tech- nical Cooperation. The progress of the study was reviewed during negotiations and it was agreed that further exchanges of views would take place in the course of completing the study.  - 11 - F. Engineering 3.16 The NWA is responsible for engineering of road works, and has for- mulated design standards (Table 6) which give a reasonable range for the various types of roads and terrain conditions. Most major design work is carried out for the NWA by consultants, mainly local subsidiaries of Australian firms. The NWA, including its field staff, undertakes the designs for minor construction and improvement works to the limit of its capacity. The quality of the engineering is satisfactory, for the nature of the work and the physical difficulties in PNG. G. Construction 3.17 Virtually all major construction works are carried out by contract. Improvement of existing roads is carried out partly by contract and partly by force account. On the highways and trunk roads, force account improvement work is normally undertaken using equipment supplied partly from the Govern- ment's own resources and partly obtained from contractors and equipment-hire firms. Improvement and maintenance of minor roads (feeder and access) is carried out to low standards, largely by hand labor, but also using equip- ment when necessary, usually supplied through the NWA which also provides technical assistance to the Local Government Councils. 3.18 Civil engineering contracts in PNG are not adequate in scale and frequency to support a domestic contracting industry with a number of large contractors capable of undertaking major construction works. However, a local contracting industry has evolved, largely run by expatriates, but with varying degrees of participation, including ownership, by PNG nationals. There are nine such firms capable of undertaking medium construction contracts (up to about K 2 million) and smaller ones (up to about K 500,000). In addition, there are four wholly-owned subsidiaries of foreign firms presently operating in PNG which could undertake large contracts. Through international adver- tising, three other large international firms prequalified to bid on the project. There are also many small local firms which can undertake minor works, often on a sub-contracted basis, or hire equipment to the Government. The NWA arranges contracts in size, and in variety of work, to suit the struc- ture of the contracting industry; contracts range from large-scale, including heavy earth works, sufficient to attract major international contractors, to medium- and small-size contracts within the capabilities of the local firms. This practice is being followed in the composition of the five contracts prepared for the project works (para 4.19). 3.19 Supervision of major construction works is usually carried out by consultants for the NWA. The NWA itself supervises smaller contracts and force account work. The quality of works is normally satisfactory.  - 12 - H. Maintenance 3.20 Maintenance of the national road system is carried out by the NWA, through its Regional Works Engineers and Provincial Works Managers. The standard of maintenance is good considering the early stage of development of the road system and the adverse physical and climatic conditions. Many landslides and areas of erosion occur in the mountainous terrain due to heavy rainfall and, in many places, unstable soils, but repair crews and equipment are promptly directed to the works, and repairs are carried out as quickly as possible. The Government has provided adequate funds for maintenance purposes. However, it is impracticable to draw an entirely clear distinction between maintenance and minor improvements; thus, over a period of time, some improve- ment of the road system has gradually occurred through maintenance operations, in addition to the effect of the specific improvement works which are sepa- rately funded, particularly through the Rural Improvement Program. This im- provement work is carried out by the NWA, including both trunk and provincial (feeder and access) roads. Maintenance of provincial roads is formally carried out by the Local Government Councils, but with assistance from the NWA. Such roads are, in some cases, passable only with difficulty even in dry weather and in the rainy season normally only with 4-wheel drive vehicles. Traffic volumes are small. During negotiations confirmation was obtained that the Government will continue to carry out satisfactory maintenance of the national road system. I. Training 3.21 The NWA has a comprehensive and vigorous training program. Good progress has been made in localizing the staff of the NWA but, as noted in para 3.08, it will be many years before all the engineer and senior technical posts can be occupied by qualified PNG nationals. The NWA has 18 PNG engineers out of a total establishment of 118. The University of Technology in Lae started courses (5 year) in civil engineering in 1967. A total of 27 had successfully completed courses to the end of 1975, a further 8 graduated in 1976, and thereafter the numbers will increase to about 30 per year in 1980. In addition, the University started to produce about 8 mechanical engineering graduates per year from 1973, and about 11 electrical engineering graduates per year from 1974. These numbers are expected to increase slowly to about 15 per year and 20 per year, respectively, from 1980. Many of the students are sponsored by the Public Service Commission and by private firms. The Government expects to recruit perhaps half of the graduates, but even so, it will take many years to adequately staff the public service with nationals. The limiting factor at present is the number of suitably qualified students produced by the high schools. A practical training scheme for engineering graduates (preferably after they have had about two years experience on works in PNG) is provided in Australia by the Commonwealth Government. 3.22 Training for higher grade technical staff is provided by Lae Tech- nical College, which runs 3-year courses leading to certificates in civil,  - 13 - mechanical and electrical engineering. In addition, part-time (12 weeks per year) courses are run for students already in Government and private employ- ment. The Iduabada Technical School in Port Moresby trains tradesmen for the engineering and building industries. 3.23 For training of staff already in the service, the NWA operates three training schools. The largest one is for technical training and its staff and facilities have been built up to train about 30 supervisors and operators per year. The aim is to train all such staff presently in service within a period of seven years, though courses will continue thereafter to replace losses; also more advanced courses may be introduced for selected staff. The NWA also runs a school for training about 70 junior managers per year in administration. Since 1974 the NWA has also operated a training school for local council staff in road construction and maintenance. It is training about 60 supervisors and operators per year. IV. THE PROJECT A. Description 4.01 The principal object of the project is to assist in the development of the Central Highlands Region. It will do this firstly by providing, for the first time, a reasonably reliable all-weather highway through the region towards the main port of Lae. This will be achieved by reconstructing and paving three priority sections of the highway which are presently of low standard, steep, and subject to serious interruption of traffic caused by soil slips and sometimes large-scale land slides. The works, which will complete the improvement and paving of all sections of the highway having gradients of 10% or more, will allow large trucks and trailers to operate from Lae to Mount Hagen, instead of only to Goroka, thereby further reducing transport costs. Secondly, through the Rural Development Project Preparation Studies and the feasibility study and detailed engineering of the Togoba-Wapenamanda road, it will prepare high priority development projects for future investment. 4.02 The project consists of: (a) construction and improvement, including bituminous paving, of three sections totalling about 68 km of the Highlands Highway between Goroka and Garnigl, including supervision of the work by consultants; (b) detailed engineering, by consultants, for about 317 km of the Highlands Highway between Waterais and Togoba, including the 68 km in (a) above; (c) Rural Development Project Preparation Studies in the Enga and Chimbu Provinces;  - 14 - (d) feasibility study for construction and improvement of the Togoba-Wapenamanda road, about 63 km, to be followed by detailed engineering if found to be justified, and updating of the feasibility study of the Highlands Highway between Waterais and Togoba to prepare a further stage of improve- ment of the highway; and (e) provision of technical assistance and training for local contractors, by consultants. (a) Construction and Improvement 4.03 The Highlands Highway, and the work to be carried out under the project, are described in detail in Annex 1. Briefly, the work covers three sections of the road, all including paving: (i) Asaro-Watabung (18 km) where the road will be improved on the present alignment; (ii) Chuave- Kundiawa (27 km) where the road will be constructed on a new alignment for 20 km (shortening the route by 4 km), and improved on the present alignment for 7 km; and (iii) Kundiawa-Garnigl (23 km), which was improved under the First Highway Project and its alignment will be retained, but several slips have occurred and these will be repaired, including installation of deep sub- soil drains. The three sections will all have two-lane bituminous paving 5.5 m wide throughout with 1 m wide shoulders. The design standards are generally "Rural Class 1 - Mountainous" (Table 6), although in a few places the gradient exceeds the standard limit of 12%, and are reasonable. 4.04 All three sections of the Highlands Highway included in the project traverse mountainous terrain with steep side slopes which in many places con- sist of unstable colluvial soil and shales. Section (i) Asaro-Watabung has already been widened and the side slopes have largely become stabilized, but further improvements to the drainage are required and paving is needed, espe- cially as the road through the entire section has gradients of 10% to 15%. Section (ii) between Chuave and Kundiawa is narrow, poorly aligned and also has steep gradients of up to 15%. It is subject to frequent slides, parti- cularly during the rainy season, which block traffic for hours and sometimes days, in spite of prompt efforts by the Government's maintenance forces. Section (iii) Kundiawa-Garnigl was improved under the First Project and its alignment is as good as practicable for the terrain. However, the road has gradients of up to 12% and this increases the need for paving. Also per- manent repairs will be carried out to some slips which have occurred and this will include installation of deep subsoil drains. 4.05 The Government has a seven-year program to complete the improvement and paving of the Highlands Highway from Lae to Togoba (total length 475 km of which only 45 km is presently paved). The remaining section of the High- lands Highway, between Togoba and Mendi, is not included in the program since its improvement was completed in 1973, partly under the First Highway Project, with a gravel surface, and is likely to be adequate for traffic for some years. The construction and paving of three sections (68 km) in the project constitutes the first and most urgent phase of the seven-year program. How- ever, traffic on the remainder of the road has grown to a level where paving  - 15 - would be justified. On the 156 km section between Lae and Kassam, the high- way is already paved for the first 30 km, from Lae to Munum. The Government expected to improve and pave the remaining 126 km from Munum to Kassam with ADB financing. A loan was made by the ADB in 1973 to finance two roads, in- cluding the 120 km from Munum to Waterais; engineering was completed in 1974 but in the meantime the estimated cost had escalated, and the Government de- cided to defer starting its construction. However the Government expects to obtain future financing from ADB for the Munum-Waterais-Kassam section of the Highlands Highway. The final phase of the program will consist of widening and paving the sections Kassam-Kainantu-Goroka and Minj-Kudjip; minor improve- ment and paving the sections Goroka-Asaro and Watabung-Chuave; and paving the sections (which were improved under the First Project) Garnigl-Minj and Kudjip- Mount Hagen-Togoba. (b) Engineering of the Works 4.06 A feasibility study of the improvement and paving of the Waterais- Togoba Highway (about 317 km) was completed by the Australian consultants Vallentine, Laurie and Davies (VLD) in 1973, financed by the Government. The same firm carried out detailed engineering, which was substantially com- pleted in December 1974, also financed by the Government, but with the under- standing that the foreign exchange cost, which was expected to amount to about US$800,000, would be considered for retroactive financing by the Bank Group; this sum has therefore been included in the credit. For the Kundiawa-Garnigl section, however, the Government recently decided to have VLD carry out further field investigations during the present rainy season before finalizing the designs for the repair of the slips (para 4.03). (c) Supervision and Management of the Works, including Technical Assistance to Contractors. 4.07 The Government intends to engage: (i) the same consultants, VLD, to carry out supervision of all the construction and improvement works, to be carried out both by contract and by force account; (ii) another firm of Australian consultants, Snowy Mountains Engineering Corporation, to assist in management of those works to be carried out by force account, including train- ing of NWA local staff (paras. 4.20 to 4.23); and (iii) other consultants to provide technical assistance to local contractors (paras. 3.18 and 4.19). (d) Rural Development Project Preparation Studies 4.08 The Enga and Chimbu Province studies are expected to take about fifteen months and will identify and prepare high priority rural development projects for these districts and formulate an implementation schedule. The studies will be carried out in accordance with terms of reference and a time- table to be agreed with the Association, by consultants to be selected and appointed in consultation with the Association. The Government undertook to discuss the study findings with the Association with a view to agreeing on priority development projects for these two provinces, and a schedule for their implementation.  - 16 - (e) Feasibility Studies and Detailed Engineering of Further Roads 4.09 The project includes studies, by consultants, for preparation of future road projects: (i) feasibility study of Togoba-Wapenamanda Road, about 63 km, to be followed, if found to be justified, by completion of de- tailed engineering which had been previously partially carried out; and (ii) updating of the feasibility study of the Highlands Highway between Waterais and Togoba, together with minor revisions of the detailed engineer- ing if found necessary, to prepare a further stage of improvement of the Highlands Highway. The Togoba-Wapenamanda Road serves the Enga Province. It passes through hilly and mountainous terrain and is poorly aligned in some sections, narrow, inadequately drained, and has a rough gravel and earth surface which erodes during rainy periods. Present traffic is about 180 aadt. (f) Technical Assistance to Local Civil Engineering Contractors 4.10 Technical assistance will be made available to local civil engineer- ing contractors to help develop a wider and more competitive local construc- tion industry. It will be aimed largely at the existing small firms which mainly supply equipment on an hourly rental basis. Training will be given by consultants in contract procedures, job management, estimating and cost and financial accounting. B. Cost Estimates and Foreign Exchange Component 4.11 The cost of the project, including contingency allowances, is estimated at about US$27.5 million. The foreign exchange component is esti- mated at about US$19.25 million or about 70%. Estimated costs are shown in Table 7, and are summarized on the next page. The estimated average costs per km, excluding contingency allowances (including contingency allowances shown in parentheses) are: (a) for construction and improvement, including bitumi- nous paving, US$251,000 (US$347,000); (b) for supervision by consultants US$19,000 (US$25,600); and (c) for feasibility studies and detailed engineer- ing by consultants for future highway sub-projects, US$3,300 (US$4,000). The cost per km of construction appears relatively high, but reflects the difficult terrain, soil and climatic conditions. The cost per km of supervision appears correspondingly high, but represents about 7.7% of construction cost and is reasonable. A total of about 240 man-months is estimated for supervision, with a cost per man-month of about US$5,400.  - 17 - K (million) US$ (million) Foreign Project Item Local Foreign Total Local Foreign Total Component A. Construction, 4.273 9.970 14.243 5.128 11.964 17.092 70 Irprovement and Paving of Asaro- Watabung, Chuave- Kundiawa and Kundiawa-Garnigl sections of High- lands Highway B. Engineering and Supervision (i) Detailed Engineering of Waterais- Togoba (retroactive) 0.180 0.720 0.900 0.216 0.864 1.080 80 (ii) Supervison of A 0.328 0.767 1.095 0.394 0.919 1.313 70 C. Rural Development Studies 0.041 0.167 0.208 0.050 0.200 0.250 80 D. Feasibility Studies & Engineering 0.041 0.167 0.208 0.050 0.200 0.250 80 E. Technical Assist- ance to local contractors 0.025 0.100 0.125 0.030 0.120 0.150 80 Subtotal A-E 4.888 11.891 16.779 5.868 14.267 20.135 F. Contingency Allowances: (a) Physical /a 0.471 1.117 1.588 0.565 1.340 1.905 (b) Price /b 1.287 3.042 4.329 1.545 3.650 5.195 Subtotal F 1.758 4.159 5.917 2.110 4.990 7.100 Total Cost of Works 6.646 16.050 22.696 7.978 19.257 27.235 71 G. Right of Way 0.250 - 0.250 0.300 - 0.300 Total Cost of Project 6.896 16.050 22.946 8.278 19.257 27.535 70 /a 10% on all items except B(i). /b Price increases on all items except B (i) and G (on "base" prices at end of September 1976) at estimated rate of 12% per year.  - 18 - 4.12 Cost estimates for the construction, improvement and paving of the three sections of the Highlands Highway were prepared by VLD on the basis of detailed bills of quantities of work compiled after substantially completing detailed engineering. However, it was recognized that cost estimating for major works is difficult in PNG, particularly at the present time, because: (a) bidding on large-scale projects is carried out infrequently; (b) there is high risk involved in undertaking works in mountainous and unstable terrain; (c) only a small number of firms capable of carrying out substantial highway works are continuously operating in the country; (d) large increases in costs have taken place recently, both worldwide and locally and it is difficult to forecast future trends; and (e) political change has taken place recently with the country's Independence in September 1975. Also, bids (which were rejected) for the Kassam-Togoba road in 1975 were about 75% higher than the estimates (para 1.02). It was agreed, therefore, that bids should be obtained, before negotiating the credit, for about 50% of the works, including the most diffi- cult section Chuave-Kundiawa and for the section Asaro-Watabung. Accordingly, after international advertisement and prequalification of contractors, the Government received bids on October 19, 1976 for the earthworks, drainage and subbase for Chuave-Kundiawa (for 18.5 km, that is excluding the 8.5 km to be constructed by force account, ref. para 4.20) and for drainage and paving of the section Asaro-Watabung. The lowest evaluated bidder for all of the (four lots is Barclay Bros. (N.G.) Pty. Ltd., the Papua New Guinea subsidiary of an Australian firm. Contracts will not be awarded, however, until after Board presentation, and the Credit Agreement has been signed. Cost estimates were revised, during negotiations, by the Government and VLD to take account of the bid prices, which are about 10% lower than those received in 1975 and are reasonable. 4.13 The cost estimates for detailed engineering of the construction and improvement works included in the present project (para 4.06) are based on the actual payments which have already been made by the Government, and for which retroactive financing of the foreign exchange has been requested. The estimates for the Rural Development Project Preparation Studies (para 4.08) are based on a forecast of about 30 man-months required to carry out the work, a rate of about US$8,300 per man-month (excluding contingency allowances), and on the cost of similar studies carried out on other Bank projects. 4.14 The cost estimates of feasibility studies and detailed engineering for further road projects (para 4.09) are based on the cost of similar work previously carried out, adjusted to present day prices; a total of 40 man- months has been estimated, and a rate of about US$6,200 per man-month (ex- cluding contingency allowances). The scope of all the studies were reviewed and agreed during negotiations. 4.15 Contingency allowances, which are considered reasonable, have been allowed at 10% for physical quantities of work to be carried out, and for price escalation (at an annual rate of 12% for domestic and foreign costs). During credit negotiations, the cost estimates were reviewed and agreed with the Government.  - 19 - 4.16 The consultants VLD estimate that the foreign exchange component for the highway construction and improvement works is about 72% if carried out by foreign contractors, and about 65% if carried out by local contractors or force account. It is expected that nearly 70% of the work will be carried out by foreign contractors, or their local subsidiary companies, and the remainder by local contractors and by force account (paras 4.19 and 4.20). The weighted average is therefore expected to be about 70% foreign exchange component. The foreign exchange component of the consulting services is estimated at 70% for supervision and 80% for other services, based on expe- rience in recent contracts with consulting firms. C. Financing 4.17 The total cost of the project is estimated at about US$27.5 million. The foreign exchange cost is estimated to be about US$19.25 million (Table 7) and US$19.0 million is to be financed by the credit. The remaining cost of about US$8.5 million will be financed by the Governfient. The Government has asked that the Association finance retroactively US$800,000 of foreign cost for detailed engineering (para 4.06), and this has been included in the cre- dit. 1/ The Government has also requested that the Association finance re- troactively about US$600,000 of foreign cost of the work on an 8.5 km length (km 18.5-27.0) of the section Chuave-Kundiawa (to be carried out by force account) which was started in July 1976 (para 4.21). The Government provided promptly the funds needed for expenditures under the First Highway Project, and it was confirmed during negotiations that it will make timely provision for its share of financing for this project. D. Implementation 4.18 The DTW will be responsible for the execution of the project. However, other departments will be involved in varying degrees. These will include, in connection with the Rural Development Project Preparation Studies, the Department of Provincial Affairs (which will coordinate them), and the Department of Primary Industry (which includes Agriculture). Consultants will assist the Government in supervising construction and managing the force account work, and in carrying out the Rural Development Project Pre- paration Studies and the feasibility studies and detailed engineering of further roads. 4.19 The construction and improvement works will be carried out mainly through contracts to be awarded after international competitive bidding in accordance with the Bank Group's guidelines and the remainder by force account by the NWA of the DTW. The aim is to carry out about 70% of the work through five contracts, arranged in two groups for bidding. This permits relatively 1/ The Bank Group indicated, in a cable dated May 24, 1973, that such retroactive financing would be considered.  - 20 - small local firms to participate, but at the same time the grouping of con- tracts gives adequately sized packages to attract international contractors. The Government has obtained bids for the first group and intends to award the contracts shortly after approval and signature of the Credit (para 4.12). PNG does not have preferential tariffs on imports. 4.20 The work to be carried out by force account amounts to about 30% of the total and consists of: (i) earthworks, drainage and subbase construction on a length of 8.5 km at the Kundiawa end of the Chuave-Kundiawa section; and (ii) the permanent repair of slips on the section Kundiawa-Garnigl, including installation of deep subsoil drainage and reinstatement and compaction of the earthworks. A major reason for such force account work and for starting it in advance of the bidding is that in view of the Government's disappointment with previous bidding on this road in 1975 (paras 1.02 and 4.12), it wishes to have an alternative construction agency already established and working on the site. The aim was to demonstrate to bidders that their fears about difficulties of working in the area had been exaggerated and to create, indirectly, a climate of greater competition. The Government's other reasons for force account con- struction are that the repairs to the slips in (ii) above would be difficult to specify precisely in advance, and are thus not well suited to contract procedures; and also for training staff of the NWA. If future bids received on any part of the construction works are not considered satisfactory, the Government may wish, in agreement with the Association, to carry out additional works by force account. During credit negotiations agreement was reached with the Government that: (a) resources, including labor and equipment, will not be diverted from road maintenance works in order to carry out force account con- struction works; and (b) no additional force account construction of works in the project will be undertaken, except as the Association shall otherwise agree. 4.21 The force account work will be carried out by labor directly em- ployed by the NWA with assistance in management provided by a team supplied by consultants. The equipment will be partly supplied by the Plant and Trans- port Division of the NWA, and partly by local plant hire firms. It is anti- cipated that force account works to a value of about US$800,000 might be car- ried, out by the end of January 1977, which, together with the cost of consult- ants' services for management and supervision, will have a foreign exchange component of about US$600,000 (para 4.17). 4.22 The Government is already acquiring the land for the 40 m wide right-of-way and expects to complete acquisition before contracts are awarded for construction. This was confirmed during negotiations, and agreement was reached on a project implementation schedule (Table 8) and on procedure for reporting progress. 4.23 In executing the construction, contractors are free to choose their own methods, including the most economical use of mechanical equipment and labor, subject to their work complying with the specifications. It would be impracticable to stipulate that contractors should carry out the work chiefly or largely by hand labor because it would be technically very difficult to achieve satisfactory quality and cost would be greatly increased. Similar considerations apply also to the works to be carried out by force account. Nevertheless, it is expected that the works will give direct employment to an average of about 300 workers over a total period of about 48 months.  - 21 - 4.24 The project is not expected to have any significant adverse ecolo- gical effects. Care has been taken in the design to minimize the risk of slips or erosion by avoiding unstable soil areas as far as practicable, and taking measures to deal with them where encountered, and also by providing adequate drainage systems. Paving the road will of course eliminate the present nuisances caused by dust and mud. E. Disbursements 4.25 Disbursements from the credit will be on the basis of: (i) 70% of the total cost of construction and improvement works; and (ii) 100% of the foreign exchange cost of the consultants' services. In the case of force account works, the cost will be determined on the basis of an agreed esti- mate, consisting of bills of quantities and unit rates; payments will be made according to the quantities of work performed and with unit rates adjusted periodically for price fluctuations on the basis of formulae similar to those included in the agreements for the works carried out by contractors. On that basis, and on the schedule for execution of the project (para 4.22), a Schedule of Estimated Disbursements has been prepared (Table 9); this was reviewed with the Government during negotiations. The quantities of work performed, both by contractors and by force account, will be measured monthly and certified by the supervisory consultants. Payments will be subject to internal audit by the DTW and to audit by the Government Auditor-General's Office. Arrangements for payment and auditing were confirmed during negotiations. In the event that not all the contingency allowances are found to be needed, any surplus which may remain in the credit account should be used to extend the bituminous paving of the Highlands Highway in the Goroka- Garnigl area, as has been informally suggested by the Government; such paving would restore a small part of those works which were originally included in the appraisal, and are economically justified, but which were eliminated to reduce the cost of the project because of the Government's budgetary con- straints (para 1.02). V. ECONOMIC EVALUATION A. General 5.01 The Central Highlands Region, consisting of five provinces (Eastern Highlands, Chimbu, Western Highlands, Enga and Southern Highlands), contains about 60% of the population of the main island of PNG. It has a mild climate (ecologically having close affinities to the temperate rain forests of Australia), relatively fertile soils which are suitable for grow- ing coffee, tea, tobacco, other upland crops and vegetables, fruits, etc., and extensive grasslands suited for livestock raising. The fertility of the soils of the Highlands is in contrast to many of the low land soils in PNG which are shallow, heavily leached and relatively infertile. Having been  - 22 - opened up to the outside world only a generation or so ago, the region is one of the least developed parts of the country, and its resource potential is barely tapped. The region therefore is one of the poorest parts of the country, accounting for about 45% of the country's subsistence economy. 5.02 The region's development is hampered by, among other factors, the difficult transportation conditions. Before the Second World War, the region's only connection with the coastal regions was air transport. (Even today, some considerable quantity of fresh vegetables is flown out to the coastal regions, particularly to Port Moresby which is not connected to the Highlands by a road.) Since the War, the road connection between the port of Lae on the northeastern coast and the Highlands has been built, first as a track, and then improved in stages; these included construction and improvement, including gravel surfacing, of three sections totalling about 150 km under the First Highway Project. Particular difficulties in trans- portation have been encountered at three sections of the road to be improved under the project, where topographical and soil conditions are very diffi- cult. Because of their weight and lengths, large-size trucks encounter difficulty in operating on these sections, and consequently cargoes to and from the port of Lae have to be transshipped. The proposed project will improve the conditions of three sections of the Highlands Highway to permit the operation of semi-trailers on the entire itinerary of the highway between the port of Lae and Mount Hagen. B. Development Potential and Traffic 5.03 The majority of the people in the Central Highlands Region is engaged in subsistence agriculture. Virtually the only commercial production at present is coffee and tea. While from the natural resource point of view the region has potential to expand productive activities, such as tobacco, vegetables, cattle, etc., social, administrative and land tenure problems make it difficult to initiate a rapid development process. Along with the improvement of the difficult sections of the highways, the Government would have to formulate imaginative development strategies to induce and encourage the people of the region to improve their economic conditions. Aside from agriculture, the region has potential for tourism development. 5.04 While there have been noteworthy developments in coffee and tea exports in recent years, the agricultural sector accounts for only about 35% of the region's income, the largest part currently being derived from the Government's budget expenditure. For example, in 1973 the public ex- penditure accounted for 55% of the regional income (Table 10). The central Government's expenditure alone accounts for nearly 45% of the total regional income. Manufacturing and forestry account for 9.4% and tourism for 4%. 5.05 The low level of development and the importance of public expend- iture as a source of income are reflected in the unbalanced nature of cargo movements between the port of Lae and the Central Highlands, i.e., more  - 23 - inbound traffic than outbound. For example, as mentioned earlier, in 1975, the inbound traffic was 200,000 tons compared with the outbound traffic of 44,000 tons, a 5 to 1 ratio. The volume of imported goods traffic has in- creased fivefold in 10 years between 1965 and 1975 and the outward tonnage by 6 times during the same period (Table 11). While the very high rate of traffic growth is not likely to continue indefinitely, it is considered likely that the present imbalance between inbound and outbound road trans- port tonnage will remain unchanged for the foreseeable future. Freight move- ment on the highway is expected to increase threefold in both inbound and outbound tonnage during the 21 years between 1975 and 1996, or an average annual rate of growth of about 6%, compared with the past growth rates of between 18% and 19% (Table 11). This projection is based on conservative estimates of future growth of regional income from both production and Govern- ment expenditure, reflecting a likely slow-down of growth after the country's Independence. The deceleration in the growth rate is expected to be parti- cularly drastic in the case of the central Government's capital expenditure in the region, which is projected to decrease from the annual average rate of growth of 20% during the past 8 years to a little over 4.5% between 1973 and 1997. This would be partly the consequence of the expected continued departure of Australian personnel from the region. The number of expatriate personnel in the Central Highlands Region is expected to decrease from 660 in 1972 to 140 in 1996 and their expenditure from A$4.4 million to A$1 million. 5.06 1974 traffic volumes on the three project segments ranged between some 300 and 450 aadt. The proportion of truck traffic varied between 30% and 50%. The traffic growth rates were estimated for quinquennial intervals beginning 1977 (Table 12). The expected opening year of the improved and paved highway would be 1980. The overall growth rate for the period of 1980-85 is expected to be some 8-10% p.a. with variations depending on vehicle type. The growth rates are projected to taper off to some 1-4% p.a. toward the end of the twenty year economic life of the project. The fact that the assumed growth rates are conservative, even after allowing for possible slowing of business following Independence, can be seen by comparing the projected growth rates with those in the years between 1972 (when the improvement of the highway began under the Bank's first project) and 1974. The annual growth rate during the period ranged between 11% and 28% in in- dividual links, with an overall average of 22% p.a. The improvement of the project road sections will materially alter the composition of traffic by making it possible for semi-trailers to operate between the port of Lae and the Highlands Region. A large part of the medium-size truck traffic would be replaced by semitrailers and the resulting cost economy is an important part of project benefit. The changing composition of traffic on three project sections is shown in Table 12. C. Benefits of the Project 5.07 The immediate effect of the proposed project will be lower trans- port costs due to reduction in fuel consumption and wear and tear of vehicles, higher speed of vehicle operation and the introduction of larger and more  - 24 - efficient vehicles. Under the competitive conditions prevailing in the road transport industry, the main part of the saving in vehicle operating costs is expected to be passed on to shippers in the form of reduced transport charges, as in previous cases (para 3.06). The improved highway would tend to maintain and increase the degree of competition in the transport industry by encourag- ing more operators to enter the business. To the extent that the demand for transport is not completely inelastic, the lowered transport cost will induce some additional productive activities using hitherto unemployed resources and this, in turn, will generate additional traffic on the highway, which would not have existed without the project. A complete analysis of a project there- fore must include a detailed review of the possibility of traffic generation based on a study of the region's human and natural resource potentials and the Government's development programs. 5.08 Under the economic and social conditions prevailing in the Highlands Region, however, the highway by itself, unless the Government takes comple- mentary measures to encourage additional economic activities, may not give rise to any significant increase in production, i.e., the spontaneous res- ponse of farmers to the improved road conditions may be minimal. The ques- tion of realizing developmental benefits is considered in paras 5.11-5.12. 5.09 In order to estimate the variations in vehicle operating costs on the highway, a computer model was used to simulate road and vehicle operating conditions for each project section of the highway. The determination of transport cost savings through the simulation model is based on the consult- ants' detailed estimates of operating costs of various vehicle types on roads in various conditions. The vehicle operating cost data are shown in Table 13. The results of the computer run show an average return for the project as a whole of over 27% based solely on direct savings in transportation costs (Table 14). The construction standard of the road sections (fully sealed to Rural Road Class I) was chosen based on incremental analysis for each section, which compared the incremental costs and incremental benefits for alternative construction standards, e.g., improved gravel road and minimal improved gravel with partial seal to make operation of larger vehicles possible. The additional cost required for each increment of construction standards is shown to yield returns ranging between about 50% and 90%. The construction to fully sealed standard is therefore justified. 5.10 The calculated economic rate of return on this basis was tested for its sensitivity to variations in costs or benefits. A 20% cost in- crease or a similar reduction in benefit would lower the rate of return to about 24%. 5.11 As noted in para 5.08, these rate of return calculations do not include benefits from traffic generation from productive activities to be induced by the project. This tends to underestimate project benefits, as an important purpose of the project is to induce economic development in the Central Highlands Region served by the highway, and not merely to save costs on the existing traffic. Moreover, economic development to be in- duced by the improved highway is a necessary condition for ensuring a full  - 25 - participation of the poor farmers of the highland region in the benefits of the project. However, since the Government does not yet have a comprehen- sive development program for the region, there is little, if any, basis to quantify additional benefits. In order to realize more fully the benefits of the project, the Government agreed, during negotitions, to prepare and re- view with the Association a development strategy for the Enga and Chimbu provinces on the basis of the Rural Development Project Preparation Studies covering those two provinces, which will be carried out by consultants (para 4.08). The studies would commenced by July 1, 1977 and be completed by September 30, 1978. 5.12 While the benefit estimates, based on transport cost savings alone, understate the true magnitude of the benefits, these estimates under the circumstances are not irrelevant for purposes of an investment decision. On the contrary, the relatively high rate of return of 27% based on only a partial estimate of benefits should be considered as evidence of the via- bility of the project. Furthermore, improvement of efficiency of existing transport facilities normally leads to some production increase even with- out other Government measures and therefore is consistent with the aim of developing the region's economy. Therefore, it is justified to proceed with the improvement of the project sections without waiting for the com- pletion of the proposed Rural Development Studies. VI. RECOMMENDATIONS 6.01 During negotiations, the Government and the Association agreed on a number of matters, the more important ones being that the Government will: (i) exchange views with the Association regarding the economic justification of any material alteration which may be proposed to its regulations governing the weights and dimensions, or operation, of motor vehicles, or the taxation of heavy vehicles (para. 3.04); (ii) continue to strengthen the NWA and OT, including recruitment and training of staff (para. 3.09); (iii) continue to exchange views with the Association in the course of completing the Govern- ment's current study of transport user charges (para. 3.15); (iv) carry out Rural Development Project Preparation Studies in the Enga and Chimbu Provinces in accordance with agreed terms and time schedule and will exchange views with the Association on the study findings with a view to agreeing on high priority development projects and a schedule for their implementation (paras. 4.08 and 5.11); and (v) carry out by force account only such works in the project as are agreed with the Association, and in accordance with agreed procedures, and will not divert resources from road maintenance works (paras. 4.20 and 4.21). 6.02 The project is suitable for a Development Credit of US$19 million on the usual terms.   ANNEX 1 Page 1 PAPUA NEW GUINEA SECOND HIGHLANDS ROAD IMPROVEMENT PROJECT Description of Highlands Highway Sections (Between Goroka and Garnigl) To Be Constructed and Improved General 1. The Highlands Highway extends for about 600 km from the port of Lae to Mendi via Waterais, Goroka, Kundiawa and Mount Hagen. It is the only means of transport, apart from air, for the entire Central Highlands Region. The highway has been gradually upgraded since World War II from a primitive track, but is still inadequate for much of its length. Only short sections, of about 30 km between Lae and Munum, 8 km through the Kassam Pass near Waterais, and 7 km between Mount Hagen and Kagamuga, have bituminous pavement, and for most of its length between Lae and Kundiawa the road is narrow and, in some sec- tions, poorly aligned. Furthermore, a number of segments run through mount- ainous areas with soils which are very recent geologically and are unstable and subject to frequent slips and sometimes to large-scale slides. Even with prompt maintenance, such soil movements often interrupt traffic for several hours and occasionally for days. 2. Under the First Highway Project, three sections totalling 150 km were reconstructed between Kundiawa and Mendi: (i) Kundiawa-Mini, (ii) Kudjip- Mount Hagen-Togoba, and (iii) Kaupena-Assissi. The Government from its own resources improved the remainder of the road between Mendi and Togoba. All these sections received a gravel surface except for 7 km of bituminous sur- facing in Mount Hagen and connecting the town with its airport near Kagamuga. The remainder of the Highlands Highway also requires improvement, that is Lae- Waterais-Kundiawa, and Minj-Kudjip and traffic has increased to a level which would justify bituminous paving of the entire length of the highway between Lae and Togoba. The Government expects to reconstruct, including bituminous pavement, the 126 km presently unpaved through the Markham Valley between Lae (Munum) and Kassam, with financial assistance from ADB. 3. The Second Highlands Road Improvement Project includes the construc- tion or improvement, including bituminous paving, of high priority sections, totalling about 68 km between Goroka and Garnigl. This forms the first phase of the Government's Seven-Year Program to complete the improvement and paving of the entire Highlands Highway between Lae and Togoba. The design standards for the road are generally "Rural Class 1" (Table 6). The total width is 7.5 m, consisting of a 5.5 m bituminous pavement and 1 m shoulders.  ANNEX 1 Page 2 4. Detailed engineering was carried out on a total length of 317 km of the Highlands Highway between Waterais and Togoba in preparation for further Bank-financed projects and was divided, for design and economic analysis, into 12 sections, including the three priority sections which have been selected for the Second Highway Project. A description of each of the three sections included in the project, and the work to be carried out on them, follows. Asaro-Watabung (18 km) 5. From Asaro the road traverses hilly terrain for 5 km, where the alignment is fairly good, with maximum gradients up to 5%. The road then traverses the Daulo Pass for a distance of 18 km, rising to a height of 2,400 m. The alignment through the pass is governed by the rugged mount- ainous terrain and there are many small radius curves, some with a design speed as low as 30 km/hr, and with steep gradients, between 10% and 15% for the entire length. The Government has recently widened the section, but further improvements to the drainage are required. During the wet season slips frequently occurred on the steep side slopes and cuttings and the Government stationed a maintenance force there to clear the obstructions as they occurred. However, the slopes have gradually become stabilized, and with further improvement to the drainage, future slips are not expected to interfere seriously with traffic. There is one single-lane permanent bridge, and one temporary Bailey bridge. 6. The 18 km section through the Daulo Pass will be constructed mainly on the existing alignment. The temporary bridge will be replaced by a culvert, but the single-lane permanent bridge is in good condition and will be retained. The present traffic is 250 aadt (50% trucks, 42% 4-wheel drive vehicles, and 8% cars). There is no agricultural or other develop- ment in this mountainous section, and there is virtually only through traffic. Chuave-Kundiawa (27 km) 7. The existing road is 31 km long and passes through very mountainous country. The alignment is bad and there are steep gradients of up to 15%. The soil is unstable and many slips occur and sometimes major slides, fre- quently blocking traffic for hours or even days, in spite of the Govern- ment keeping earthmoving equipment on the stretch to clear it as quickly as possible. Also, drainage is bad partly due to soil movements damaging many culverts and drainage channels. There is one 70 m long single-lane bridge over the Chimbu River near Kundiawa. 8. After investigating several alternatives, the best solution was found to be the construction of the road on a new alignment for about 20 km, and to follow approximately the existing road for the remaining 7 km. The new alignment will shorten the road by about 4 km and, in addition, will have a better alignment, located so as to avoid most of the unstable soil areas.  ANNEX 1 Page 3 However, it will still have steep gradients up to 12%. A new two-lane bridge will be constructed over the Chimbu River. The present traffic is 350 aadt (40% trucks, 53% 4-wheel drive vehicles, and 7% cars). The area immediately adjacent to the road is densely populated and a number of feeder roads serve other densely populated areas of the valley. Coffee is the main cash crop. Kundiawa-Garnigl (23 km) 9. This section was improved under the First Highway Project and the alignment is good. However, the road traverses a mountainous area with many steep gradients up to 12% and with steep side slopes. Several slips have occurred during the rainy season where the road crosses gullies filled with unstable colluvial soils. Some of the slips have already been permanently repaired by the Government and the remainder temporarily repaired or temporary diversions constructed around them. 10. The new work will consist of carrying out permanent repairs on the slips, including installation of deep subsoil drainage, as well as paving the entire length. The present traffic is 600 aadt (35% trucks, 50% 4-wheel drive vehicles, and 15% cars), all through traffic since no traffic is generated within the section. December 1976  PAPUA NEW GUINEA SECOND HIGHLANDS ROAD IMPROVEMENT PROJECT Public Roads Networks 1975 Road Networks in Kilometers (by Province) Urban Highway_ Trunk Declared Not Not Not Minor Province Paved Paved Total Paved Paved Total Paved Paved Total Feeder Access Roads Total 1. Western 26 26 179 861 1,066 2. Gulf 23 23 101 101 64 86 274 3. Central 147 163 310 22 22 8 378 386 588 444 22 1,772 4. Milne Bay 25 25 34 34 218 121 6 404 5. Northern 3 9 12 134 134 290 80 516 6. Southern Highland 64 64 92 92 82 82 796 411 1,445 7. Eastern Highland 11 48 59 188 188 140 140 530 456 1,373 8. Chimbu 2 9 11 58 58 132 132 210 322 733 9. Western Highland 8 50 58 8 112 120 218 218 339 209 110 1,054 10. Enga 27 27 113 113 359 238 3 740 11. West Sepik 16 16 25 25 79 79 275 164 559 12. East Sepik 22 35 57 205 205 179 179 347 410 16 1,214 13. Madang 25 31 56 37 37 287 287 420 282 10 1,092 14. Morobe 37 71 108 31 148 179 270 270 219 515 1,291 15. West New Britain 9 22 31 39 88 127 294 365 817 16. East New Britain 38 13 51 61 13 74 27 222 249 304 439 18 1,135 17. New Ireland 9 15 24 282 282 388 388 411 275 1,380 18. Manus 9 9 32 32 49 33 123 19. Bougainville 32 17 49 _ 553 553 348 352 1,302 Totals (kin) 343 673 1,016 100 ;1182 1,282 74 3,430 3,504 6,240 6,o63 185 18,290 Source: Office of Transport, DTW. December 1976 |  PAPUA NEW GUINFA SECOND HIGHLANDS ROAD IMPROVEMENT PROJECT Vehicle Fleet - Number of Vehicles on Register 1963-1974 (as of December 31) Vehicle Type 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 P.A. Growth Motor Cars 4930 5517 6072 6888 8377 10123 11543 14634 14917 15673 14813 13396 10 Highlands 218 248 n.a. 3411 512 669 892 1034 1144 1283 1263 1135 16 Other Districts 4712 5269 n.a. 6547 7865 9454 10651 13600 13773 14390 13550 12261 9 Station Wagons & Jeeps 872 1127 1460 1650 2155 2812 2969 2880 4048 4384 4227 3914 15 Highlands 63 107 n.a. 182 232 313 328 348 453 530 531 490 21 Other Distiricts 809 1020 n.a. 1468 1923 2499 2641 2532 3595 3854 3696 3424 14 Motorcycles 558 684 896 1136 1520 2035 2231 2857 2994 3047 2949 3395 18 Highlands 177 183 n.a. 258 278 348 418 552 580 531 528 605 12 Other Districts 381 501 n.a. 878 1242 1687 1813 2305 2414 2516 2421 2790 20 Tractors 1/ 430 523 598 699 990 1111 1410 1717 1749 1921 1940 1863 14 Highlands 82 109 n.a. 175 296 313 397 462 487 547 560 535 19 Other Districts 348 414 n.a. 524 694 798 1013 1255 1262 1374 1380 1328 13 Commercial Vehicles 4742 5199 6286 6888 7654 9378 11083 12579 14455 14673 15077 16398 12 Highlands 534 637 n.a. 966 1309 1819 2209 2598 2797 2921 3150 3224 18 Other Districts 4208 4562 n.a. 5922 6345 7559 8874 9981 11658 11752 11927 13174 11 Total 11532 13050 15312 17261 20696 25459 29236 34667 38163 39698 39006 38966 12 Highlands 1074 1284 n.a. 1922 2627 3462 424- 4994 54-61 5812 6032 5989 17 Other Districts 10458 11766 n.a. 15339 0809 21997 24992 29673 32702 33886 32974 3277 11 1/ A large number of tractors are not subject to compulsory registration and are therefore not included in these figures. n.a. Not available Source: Office of Transport, DTW December 1976  PAPUA NEW GUINEA SECOND HIGHLANDS ROAD IMPROVEMENT PROJECT Air Freight Movements at Highlands Airports 1963-75 (as of June 30) (Tons) Airport 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 Kainantu 1732 2301 485 34 18 54 15 375 217 30 28 19 30 Goroka 11508 13985 12806 699 3493 1621 1046 925 1166 1210 1453 1744 1964 Minj 871 807 1077 541 377 121 233 120 34 23 14 31 32 Banz 1946 3249 3043 4429 2481 457 113 44 12 12 46 6 2 Mount Hagen 7168 10134 14003 14310 10168 6285 4749 4509 3146 4827 3697 3391 3225 Wabag 712 618 679 1089 1078 799 482 229 107 102 200 273 395 Wapenamanda 496 807 1058 1088 1587 1466 744 733 238 263 127 280 193 Mendi 494 1077 1539 1267 1492 1564 2200 2524 2037 1847 3268 2540 2401 Total 24933 32951 34608 32957 20694 12367 9582 9457 6957 7866 8833 8284 8242 * Kundiawa 1974 - 298 tons 1975 - 233 tons M Source: Office of Transport, DTW L December 1976  TABLE 4 PAPUA NEW GUINEA SECOND HIGHLANDS ROAD IMPROVEMENT PROJECT Expenditures on Roads 1968-76 (K Million) Actual Estimated Type of Project 1/ 68/69 69/70 70/71 71/72 72/73 73/74 74/75 75/76 76/77 (a) Capital: Highway 1.3 2.4 3.5 8.2 7.9 7.5 9.3 9.7 13.5 Trunk 2.1 1.3 2.8 2.3 1.9 - - 4.3 3.2 Development, Agriculture and Resource 2/ 0.4 0.7 0.4 0.8 1.1 - - - - Rural Improvement 0.4 0.9 1.0 1.1 1.0 1.9 4.2 4.8 5.0 Urban 1.7 1.5 1.6 3.6 1.5 - - - - Unclassified - - 0.1 0.2 - - - - - Subtotal 5.9 6.8 9.4 16.2 13.4 9.4 13.5 18.8 21.7 (b) Maintenance: Roads and Bridges 6.0 6.9 8.5 9.6 9.9 13.2 18.9 16.3 18.9 Total 11.9 13.7 17.9 25.8 23.3 22.6 32.4 35.1 40.6 1/ Road projects have been classified according to their economic purpose as follows: Highways: Principal traffic arteries connecting several major centers and on which major works are needed, involving large-scale expenditures. Trunk: A road connecting two major centers over which there is substantial existing traffic. Development, Agriculture and Resource: Roads constructed to enable the util- ization of major natural resources, including agricultural and forestry development and mineral extraction. Rural Improvement: Roads conferring general social or administrative benefits on which large-scale expenditure cannot be justified. Government R.I.P. Grant only is shown. Urban: Roads servicing existing or proposed urban centers or population. 2/ Excluding road construction associated with land development projects. Source: Office of Transport, DTW December 1976  PAPUA NEW GUINEA SECOND HIGHLANDS ROAD IMPROVEMENT PROJECT Revenues from Use and Ownership of Vehicles (K '000) Import Duties Vehicle Regis- Petroleum Motori pare Tyres Year tration Fees Products* Vehicles Parts and Tubes TOTAL 1958/59 143 319 284 82 n.a. 828 1959/60 156 291 261 61 n.a. 769 1960/61 176 343 342 60 n.a. 921 1961/62 205 351 370 60 n.a. 986 1962/63 225 431 458 88 n.a. 1,202 1963/64 252 434 500 62 n.a. 1,248 1964/65 299 530 732 88 n.a. 1,649 1965/66 374 643 1,050 127 n.a. 2,194 1966/67 451 749 1,215 159 n.a. 2,574 1967/68 535 875 1,207 179 n.a. 2,796 1968/69 628 n.a. n.a. n.a. n.a. n.a. 1969/70 725 1,392 3,117 194 210 5,638 1970/71 830 1,970 2,313 265 242 5,620 1971/72 1,176 2,297 2,657 198 243 6,571 1972/73 1,233 2,208 1,960 280 281 5,950 1973/74 1,310 2,690 1,610 260 300 6,170 1974/75 1,400 2,880 1,590 270 320 6,460 1975/76 (est.) 1,700 n.a. n.a. n.a. n.a. n.a. * Automotive gasoline, distillate, lubricating oil, lubricating grease, hydraulic brake fluid. Sources Office of Transport, DIW December 1976  PAPUA NEW GUINEA SECOND HIGHLANDS ROAD IMPROVEMENT PROJECT Design Standards for Rural Roads Class of Road Terrain Design Max. Speed Absolute Desirable General Absolute Maximum Maximum Overall Pavement Speed for Sight Minimum Minimum Maximum Maximum Length at Length Width Width Distance Radius Radius Gradient Gradient Absolute Desirable Between Benching Curve Curve Maximum Grade Shoulders Meters Meters Grade per per km/hr km/hr Meters Meters Meter Meter Meters Meters Meters Meters Primary Flat/Rolling 80 100 200 paved 350 .04 .07 No Limit 12 1/ 6.5 250 gravel 10.5 Hilly 60 80 125 paved 250 .06 .08 600 1,200 11 1/ 6.5 130 gravel 10 Mountainous 40 60 50 paved 90 .08 .10 250 500 8.5 6.0 60 gravel Rural Flat/Rolling 60 80 125 paved 250 .06 .08 600 1,200 10.5 2/ 6.0 Class 1 130 gravel 8.5 Hilly 50 60 95 paved 150 .08 .10 300 600 8.0 6.0 95 gravel Mountainous 30 50 30 paved 50 .10 .12 250 500 7.5 5.5 30 gravel Rural Flat/Rolling 60 80 130 gravel 250 .06 .08 600 1,200 8.5 3.6 Class 2 Hilly 40 50 60 gravel 75 .10 .12 250 500 7.0 3.6 Mountainous 25 40 20 gravel 30 .12 .14 150 300 7.0 3.6 Rural Flat/Rolling 50 60 95 gravel 150 .08 .10 500 1,000 7.0 3.6 Class 3 Hilly 30 40 30 gravel 50 .10 .12 250 500 6.0 3.6 Mountainous 25 30 20 gravel 30 .12 .14 150 300 6.0 3.6 Access As for Rural Class 3 5.0 3.6 Class 1 Access As for Rural Class 3 3.6 Full width Class 2 as required Bridge Loading: AASHO Standard H 20 - S 16 Pavement: Axle load 18,000 lbs (design based on projected number of repetitions of "equivalent 18,000 lbs axle loads"). 1/ The higher is to be adopted where traffic volume is between 2,500 and 5,000 v.p.d. 2/ " " " " " " in rolling terrain where sight distances are limited. Source: Department of Transport, Works and Supply r December 1976 0  TABLE 7 PAPUA NEW GUINEA SECOND HIGHLANDS ROAD IMPROVEM13R PROJECT Estimated Cost of Pro1ect K (Million) US$ (Million) Foreign Exchange Project Item Local Foreign Total Local Foreign Total Component A. Road Construction and Improvement 1. Construction and improvement, in- cluding bituminous paving, of 3 sections (totalling about 68 km) of the Highlands Highway between Goroka and Garnigl 4.273 9.970 14.243 5.128 11.964 17.092 70 B. Engineering and Supervision of A 1. Detailed engineering (retroactive) of Waterais-Togoba (317 km) 0.180 0.720 0.900 0.216 0.864 1.080 80 2. Supervision of A 0.328 0.767 1.095 0.394 0.919 1.313 70 Subtotal B 0.508 1.487 1.995 0.610 1.783 2.393 C. Rural Development Studies 1. Rural Development Studies of the Enga and Chimbu Provinces (about 30 man-months) 0.041 0.167 0.208 0.050 0.200 0.250 80 D. Feasibility Studies and Engineering of Further Roads 1. Feasibility studies for construc- tion and improvement of Togoba- Wapenamanda Road (about 63 km), to be followed by detailed engineering if found justified, and updating of existing feasibility study of the Highlands Highway between Waterais and Togoba (about 40 man-months) 0.041 0.167 0.208 0.050 0.200 0.250 80 E. Technical Assistance to Local Contractors 1. Technical assistance to local civil engineering contractors (about 40 man-months) 0.025 0.100 0.125 0.030 0.120 0.150 80 Subtotal A-E 4.888 11.891 16.779 5.868 14.267 20.135 F. Contingency Allowanceb 1. Physical V/ 0.471 1.117 1.588 0.565 1.340 1.905 2. Price 2/ 1.287 3.042 4.329 1.545 3.650 5.195 Subtotal F 1.758 4.159 5.917 2.110 4.990 7.100 Total Cost of Works 6.646 16.050 22.696 7.978 19.257 27.235 71 G. Right-of-Way 0.250 - 0.250 0.300 - 0.300 Total Cost of Project 6.896 16.050 22.946 8.278 19.257 27.535 70 1/ 10% on all items except B.1. 2/ Price increases on all items except B.1 and G (on "base" prices at end of September 1976) at estimated rate of 12% per year. Sources: Bid prices received October 1976 on about 50% of the work in Item A. 1. Estimates by Department of Transport, Works and Supply, and Consultants for the remainder of the project December 1976  TABLE 8 page 1 PAPUA NEW GUINEA SECOND HIGHLANDS ROAD IMPROVEMENT PROJECT Project Implementation Schedule To be implemented by Action Start Complete A. Road Construction and Improvement 1. Construction (by force account) of July 23, '76 Aug. 31, '79 8.5 km length of the Chuave-Kundiawa Section, immediately east of Kundiawa, (earthworks, drainage and sub-base). 2. Appoint consultants to supervise Jan. 31, '77 construction and improvement works. 3. Appoint consultants to assist in Jan. 31, '77 management of force account construction. 4. Construction (by contracts) of Feb. 15, '77 June 30, '80 remaining 18.5 km of Chuave-Kundiawa Section (earthworks, drainage and sub-base). 5. Construction (by contracts) of Asaro- Feb. 15, '77 Dec. 31, '78 Watabung Section (including bitumi- nous paving). 6. Construction (by force account) of June 1, '77 Dec. 31, '79 Kundiawa-Garnigl Section (earthworks, drainage and sub-base). 7. Construction (by contracts) of Chuave- June 1, '78 Sep. 30, '80 Kundiawa Section (base and bituminous surfacing). 8. Construction (by contracts)of June 1, '79 Sep. 30, '80 Kundiawa-Garnigl Section (base and bituminous surfacing). 1/ Consultants have been appointed on an interim and temporary basis to under- take, in respect of the construction and improvement works which have been in progress (by force account) since July 23, 1976, the following duties: (a) to supervise the works; and (b) to assist in management of the works.  TABLE 8 page 2 To be implemented by Action Start Complete B. Detailed Engineering of A 1. Detailed engineering of 317 km of completed Highlands Highway between Waterais and Togoba (by consultants). C. Rural Development Project Preparation Studies (by consultants) 1. Rural Development project preparation July 1, '77 Sep. 30, '78 studies of Enga and Chimbu Provinces D. Feasibility Studies and Detailed Engineering for Future Road Projects (by consultants) 1. Feasibility study of 63 km length of June 1, '77 Dec. 31, '77 the Togoba-Wapenamanda road. 2. Review, completion and amendment as Apr. 1, '78 Sep. 30, '78 necessary of detailed engineering of the Togoba-Wapenamanda road previous- ly carried out. 3. Update feasibility study of Highlands June 1, '77 Dec. 31, '77 Highway, between Waterais and Togoba. 4. Prepare bid documents for further Apr. 1, '78 Sep. 30, '78 improvements to Highlands Highway, between Waterais and Togoba. E. Technical Assistance to Local Civil Engineering Contractors (by consultants) 1. Advertisement, receipt of applica- June 1, '77 Sep. 1, '77 tions and selection of consultants. 2. Technical assistance program. Nov. 1, '77 Aug. 31, '79 Source: Department of Transport, Works and Supply, and Consultants December, 1976  TABLE 9 PAPUA NEW GUINEA SECOND HIGHLANDS ROAD IMPROVEMENT PROJECT Schedule of Estimated Disbursements Cumulative Disbursements Association Fiscal Year at End of Quarter and Quarter (US$ '000) 1976/77 March 31, 1977 1,300 June 30, 1977 1,700 1977/78 September 30, 1977 2,500 December 31, 1977 3,800 March 31, 1978 5,600 June 30, 1978 6,600 1978/79 September 30, 1978 7,600 December 31, 1978 9,000 March 31, 1979 10,800 June 30, 1979 12,000 1979/80 September 30, 1979 13,200 December 31, 1979 14,600 March 31, 1980 15,800 June 30, 1980 16,700 1980/81 September 30, 1980 17,500 December 31, 1980 18,200 March 31, 1981 18,700 June 30, 1981 19,000 Source: Estimates by Department of Transport, Works and Supply, Consultants and Association December, 1976  PAPUA NEW GUINEA SECOND HIGHLANDS ROAD IMPROVEMENT PROJECT Regional Income Data for Four Highlands Provinces (K Million) Government Expenditure % of Government Manufacturing Local Central Government Total Expenditure in Agriculture and Forestry Tourism Govt. Recurrent Capital Govt. Total Total Regional Income Actual 1965 6.15 1.00 0.48 0.20 4.82 3.34 8.36 15.99 52 1966 7.33 1.25 0.56 0.54 5.65 6.29 12,48 21.62 58 1967 8.35 1.47 0.61 0.82 6.11 8.39 15.32 25.75 59 1968 11.20 1.50 0.81 1.19 6.68 8.20 16.07 29.58 54 1969 13.10 1.85 0.97 1.82 6.64 9.16 17.62 33.54 52 1970 16.35 2.34 1.21 2.68 7.77 9.87 20.32 40.22 50 1971 18.24 2.63 1.41 3.12 8.36 11.50 22.98 45.26 51 1972 16.33 2.97 1.76 3.78 10.41 12.65 26.84 47.90 54 1973 17.17 3.35 2.48 4.35 9.66 13.99 28.00 51.00 55 Projected 1977 19.99 5.35 5.62 6.65 9.41 17.60 33.66 64.62 52 1982 29.43 8.76 9.04 8.90 11.13 22.50 42.53 89.76 47 1987 39.87 13.34 14.57 14.34 12.90 28.80 56.04 123.82 45 1992 50.59 19.03 23.46 23.09 15.41 36.70 75.20 168.28 45 1997 63.63 25.70 37.81 37.20 19.08 46.90 103.18 230.32 44 trj Source: Consultants Vallentine, Laurie and Davies December 1976  TABLE 11 PAPUA NEW GUINEA SECOND HIGHLANDS ROAD IMPROVEMENT PROJECT Past and Projected Road Freight between Highlands and Coastal (Lae) Regions (1000 Tons) Actual To Highlands From Highlands 1965 38 7.5 1966 56* 9,3 1967 70* 10.8 1968 83* 16.4 1969 92 18.5 1970 115 23.7 1971 136* 22.8 1972 142 23.8* 1973 155* 25.6* 1975 200*- 44.0* Projected 1977 222 48.8 1982 316 69.5 1987 442 97.2 1992 576 126.7 1996 660 145.2 * Estimated Source: Consultants Vallentine, Laurie and Davies December 1976  PAPUA NEW GUINEA SECOND HIGHLANDS ROAD IMPROVEMENT PROJECT Traffic Projections on Highlands Highway 1974-2002 Annual Average Daily Traffic Volume Highway Sections Asaro-Chuave Chuave-Kundiawa Kundiawa-Minj of which of which of which Total Medium Semi- Total Medium Semi- Total Medium Semi- Year Trucks Trailers Trucks Trailers Trucks Trailers Without the Project 1974 205 80 2 295 84 2 438 105 3 1977 284 98 2 394 101 2 552 125 3 1982 430 129 2 628 147 2 870 176 3 1987 668 197 2 909 207 2 1,273 241 3 1992 873 265 2 1,165 277 2 1,612 323 3 1997 990 309 2 1,221 322 2 1,865 380 3 2002 1,238 376 2 1,335 392 2 2,183 441 3 With the Project 1974 205 80 2 295 84 2 438 105 3 1977 237 28 24 343 31 25 523 43 29 1982 372 38 37 533 41 39 782 57 43 1987 565 47 54 798 52 56 1,146 67 63 1992 729 56 73 1,008 58 76 1,438 79 87 1997 818 57 88 1,034 59 91 1,164 92 104 2002 1,025 57 107 1,082 60 111 2,007 107 133 Source: Consultants Vallentine, Laurie and Davies December 1976  TABLE 13 PAPUA NEW GUINEA SECOND HIGHLANDS ROAD IMPROVEME~NT PROJECT Estimated Vehicle Operating Costs (Kina per KCm) ____ SPEED KM/HOUR ____ ___ 88 80 72 64 56 48 40 32 24 16 10 ROAD CL.ASS VEHICLE 0.03804 0.0-06 0.03608 0.03531 0.03454 0.03385 0.033,41 0.03273 0.03278 0.03254 0.03308 1 - SEALED 3: _ _ _ _ _____ _ _ _ _ _ _ _ _ _ _ ~~~~~~0 0.04336 0.04221 0.04096 0.04006 0.03926 0.03875 0.03796 0.0'770 0.03775 0.03969 i - GRAVEL - 0.04333 0.04376 0.04352 0.04392 0.04424 0.04631 11 - GRAVEL 0 0.04738 0.04878 0.04910 0.05014 0.05075 0.05292 III - GRAVEL 0.08939 0.08758 0.08576 0.08415 0.08251 0.08120 0.08075 0.08081 0.08171 0.0843C 0.08724 1 - SEALED 0.10247 0.10033 0.09760 0.09570 0.09418 0.09367 0.09374 0.09478 0.09779 0.10468 1 - GRAVEL r 0.10393 0.10577 0.10747 0.10949 0.11464 0.12213 It - GRAVEL 0.11367 0.11789 0.12121 0.1242C 0.13150 0.13958 III - GRAVEL 0.11541 0.11445 0.11415 0.11497 0.11819 0.12201 0.12932 0.14180 0.16195 0.1981) 0.25671 1 - SEALED 0.13848 0.13811 0.13796 0.14M1 0.14520 0.15260 0.16590 0.18948 0.22792 0.29264 1 - GRAVEL 0.16105 0.17328 0.19142 0.22187 0.26953 0.33885 11 - GRAVEL 0.17692 0.19398 0.21694 0.25426 0.31116 0.38507 III - GRAVEL r 0.11652 0.10972 0.11125 0.11387 0.11804 0.12489 0.13541 0.15124 0.17937 0.2300410.27883 1 - SEAL ED 0.13276 0.13460 0.13664 0.14046 0.14862 0.15978 0.17694 10.20987 0.26455 0.31786 1 - GRAVEL 0.16485 0.18144 0.20417 0.24573 0.31285 0.36805 11 - GRAVEL 0.18109 0.20312 0.23139 0.28161 0.36116 0.41825 III - GRAVEL 0.20591 0.19064 0.19295 0.19970 0.20824 0.22634 0.24979 0.28737 0.34736 0.474-45 0,54156 I - SEALED 0.26117 0.26047 0.25961 0.27695 0.29650 0.32223 0.36783 0.43768 0.58831 0.66612 1 - GRAVEL 0.33272 0.37469 0.43105 0.52104 0.69270 0.79068 11 - GRAVEL - 0.36892 0.42713 0.49427 0.60439 0.79707 0.90982 III - GRAVEL .29175 0.28387 0.28380 0.29086 0.30126 0.32057 0.34943 0.39686 0.47572 0.63484 0.71020 1 - SEALED ,, 0.38890 0.38313 0.37811 0.40060 0. 41995 0.45075 0.50798 0.59940 0.78719 0.87355 1 - GRAVEL 0.47123 0.52415 0.59529 0.71357 0.92685 1.03688 1 1 - GRAVEL 0.52252 0.59753 0.68259 0.82775 1.06653 1.20023 III - GRAVEL ).39942 0.38991 0.38289 0.38447 0.38334 0.39146 0.39366 0.44722 0.51384 0.68800 0.72187 1 - SEALED ~ 0.53416 0.51689 0.49981 0.50984 0.51281 0.50781 0.57244 0.64743 0.85312 0.88789 I - GRAVEL 0.57544 0.59048 0.67082 0.77076 1.00447 1.053912 11 - GRAVEL , .6380W7 067315 0.76921 0.8.9408 1.15583 1.21996 III - GRAVEL Source: Consultants Vallentine, Laurie and Davies December 1976  TABLE 14 PAPUA NEW GUINEA SECOND HIGHLANDS ROAD IMPROVEMENT PROJECT Net Benefit and Cost Flows (K '000) Total Project Individual Sections All Three Asaro-Watabang Chuave-Kundiawa Kundiawa-Garnigl Year Sections Section Section Section 1976 -895 -30 -775 -90 1977 -7,604 -1,055 -5,937 -612 1978 -5,019 257 -3,740 -1,536 1979 -366 909 222 -1,497 1980 4,675 963 3,031 681 1981 4,982 1,007 3,238 737 1982 5,309 1,051 3,454 804 1983 5,650 1,137 3,687 826 1984 5,742 976 3,922 844 1985 5,672 1,314 3,796 562 1986 6,679 1,405 4,393 881 1987 7,024 1,493 4,630 901 1988 7,547 1,645 4,961 941 1989 7,822 1,548 5,293 981 1990 7,942 1,952 5,269 721 1991 9,126 2,104 5,960 1,062 1992 9,656 2,260 6,293 1,103 1993 9,874 2,324 6,429 1,121 1994 9,849 2,141 6,567 1,141 1995 9,659 2,456 6,343 860 1996 10,542 2,522 6,839 1,181 1997 10,769 2,589 6,978 1,202 1998 11,058 2,659 7,162 1,237 1999 8,628 - 7,348 1,230 Economic Rate of Return 27.5% 64.0% 25.1% 18.3% Source: Consultants Vallentine, Laurie and Davies December 1976  PAPUA NEW GOUNEA SECOND HIIGHLANDS ROAD IMPROVEMENT PROJECT D.rtmnt of Trmnsport, Works and SUpply MINISTER OF MINISTER OF TRANOSRT AOUSING AND AND WORES SUFPLY DEPRTMNT OF TRASOTWRKSADSPL NATIONAL VARH ORS OFFICE OF NATIONAL WORKS| C NATIONAL AIRLINE SUTLY'HUSING 1 COMMISSION RARe TRANsPoRT AUTHORITY PLAN ARCT CRAIRMrANI ICRAIRMAC I __ .IDIRECTORI IDIROTORI _REAORI ISAERA AGENAY DIISO PLNNN SEVIE TRANPOR SEVIE MEN & TRINN D "E^R9VIFOE"| I I . . ,h I . _ I,9Th Cw,ESAvlO f I AICl AVI O- Iss RUt A T UARFAT Ih Ain FUR F lMAITMEl DIISONPANNING 4ARChRITECTURE RIDDED PROJECTS C ATINTh HCE FIAE The .POIA NSR | I i9lato .IRinnrIM I ,G.,,n MIIlOl I .aGIAII.RF.l I I cAITIRRIAROO I Id EIThOHI IbIR , AN I h h, wnv wl ionproTWi-lt~~~~~ ~ sI,,,E Ioa. 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