Bolivia - Highway Maintenance Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 2011b-BO HL~ W3PY STAFF APPRAISAL REPORT HIGHWAY MAINTENANCE PROJECT BOLIVIA May 18, 1978 Projects Department Latin America and the Caribbean Regional Office 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 1 Bolivian Peso (b$) = US$0.25, divided into 100 cents US$1.00 = b$ 20.00 1 million b$ = US$50,000 Fiscal Year January 1 to December 31 Units of Weight and Measures: Metric Metric British/US Equivalent 1 kilometer (km) = 0.62 mile (mi) 1 meter (m) = 3.28 feet (ft) 1 kilogram (kg) = 2.20 pounds (lb) 1 ton = 2,205 pounds Abbreviations ADT Average Daily Traffic CAF Andean Development Corporation COMIBOL Bolivian Mining Corporation CONEPLAN National Economy and Planning Council ENFE The Bolivian National Railways FHA Federal Highway Administration HDM Model Highway Design and Maintenance Standards Model IDB Inter-American Development Bank LAB Bolivian Airways Line MTCCA Ministry of Transport, Communication and Civil Aeronautics NTS National Transport Survey OD Survey Origin and Destination Survey SNC The National Highway Service UNDP United Nations Development Program USAID United States Agency for International Development YPFB Yacimientos Petroliferos Fiscales Bolivianos Link Acronyms used.in the HDM Model are explained in Table 3.2, Page 4.  FOR OFXIIAL UU ONLY STAFF APPRAISAL REPORT HIGHWAY MAINTENANCE PROJECT BOLIVIA TABLE OF CONTENTS Page No. I. THE TRANSPORT SECTOR ... ............................. I A. General *.*..*...*..*..*..*..**.....*..*............... .*...... . .-.0.. I B. The Transport System ... .. . ..o. ........ . ... . ... 2 C. The Development Plan ..o ....... .. .. .... ...o ... . 5 D. Transport Planning and Coordination .... ...... 7 II. THE HIGHWAY SUBSECTOR ... o ..... . ... . .o.o. ......... . 8 A . The Highway Network . .. ...... . ...... .. .... . 8 B. Characteristics and Growth of Road Traffic and Regulations .. ... ... ..... .. .... . ... ... 9 C. Highway Administration, Organization and Training ... oo . .. ........ ............. 11 D. Highway Planning and Engineering ... o .....o ..... 12 E. Highway Construction o........*..ooo....... 13 F. Highway Financing and Road User Charges .... o... 14 G. Highway Maintenance ....... o.o ......... .... ..... 15 III. THE PROPOSED PROJECT ..o ....... o ... .oooo ........ . 17 A. Project Development and Preparation ..ooo.... .... 17 B. Objectives and General Description .. ......oo. 18 C. The Four-Year Maintenance Program ... .......... 19 D. Equipment . . ... ...o..o ......... .. .... . ..... . 21 E. Workshops and Spare Parts ......*.oo ....... ooo.. 22 F. Tools and Equipment for Labor-Intensive Maintenance Activities .... .........o ..... 22 G. Training ...oo........................... 22 H. Technical Assistance .............. ............. 24 I. Preparation of Road Rehabilitation and Upgrading Program ........... .... o... 24 J. Cost Estimates and Financing ...oo..o ....... ... 25 K. Execution, Procurement and Monitoring .. o. .... 28 L. Impact and Adequacy of Technology .. ............ 29 M. Project Risk ooo..o..o ......... .o. o ....... . . 29 This report is based on the findings of an appraisal mission which visited Bolivia during November-December 1977. The mission comprised Messrs. C.-H. Mume (economist) and S. Miquel (engineer). The report has been edited by Miss V.R. Foster. Thi document has a mtrictd distribution and nuy be used by recipients only in te performance of their official duties. Its contents may not otherwise be dinclosd without World lak authorization.  - ii - TABLE OF CONTENTS (Continued) Page No. IV. ECONOMIC EVALUATION ......... . . . . .................................. . 30 A. General ........................................ 30 B. Analysis Network ............................... 31 C. Maintenance Activities and Unit Costs .......... 31 D. Traffic .................................................... 31 E. Benefits ................................................... 31 F. Economic Assessment . .......................... . 32 G. Distribution of Benefits .................... .. 33 V. AGREEMENTS REACHED AND RECOMMENDATION ................ 33 TABLES 1.1 - Freight Transported by Different Modes .... .......... 36 2.1 - Bolivian Road Network ................................ 37 2.2 - Road Density in Geographic Regions Related to Area and Population ............................... 38 2.3 - Motor Vehicle Fleet 1967-1974 ..... .................. 39 2.4 - Distribution of Vehicles in the Different Departments and Geographic Regions ............................ 40 2.5 - Gasoline and Diesel Fuel Consumption 1967-1976 ...... 41 2.6 - Average Daily Traffic (ADT) and Composition of Traffic in the Three Project Districts ........... 42 2.7 - Vehicle Dimensions and Weights ...................... 43 2.8 - Personnel of the Servicio Nacional de Caminos (1977) 44 2.9 - Geometric Design Norms for Highways .... ............. 45 2.10 - Highway Expenditures and Funding (1971-1976) ........ 46 2.11 - Road User Charges (1971-1976) ..0 .. .................. 47 2.12 - Road Maintenance Program 1976 ....... ................. 48 2.13 - SNC Maintenance Equipment and Vehicles Age and Condition ......................................... 49 3.1 - Representative Links and ADT 1976 in the Three Districts ................................... 50 3.2 - Analytical Network Inventory (4 pages) .... .......... 51-54 3.3 - Maintenance Unit Costs and Cost Adjustment Factors .. 55 3.4 - Vehicle Characteristics and Costs .... ............... 56 3.5 - Economic Vehicle Operating Costs with Project for 1982 for Selected Links ... .... 57 3.6 - Four-Year Maintenance Program in the Three Project Districts (2 pages) ...... ......................... 58-59 3.7 - "Without" Project Road Maintenance Standards ........ 60 3.8 - "With" Project Road Maintenance Standards ........... 61 3.9 - Maintenance Equipment and Vehicles Age and Condition in the Three Districts ..... ....................... 62 3.10 - Equipment, Spare Parts, Tools and Others to be Purchased under Project for the Three Districts ... 63 3.11 - Estimates of Budgetary Requirements for Road Maintenance Program (July 1, 1979-June 30, 1983) 64 3.12 - Estimated Schedule of Disbursements .... ............. 65 3.13 - Project Implementation Schedule ..... ................ 66  - iii - TABLE OF CONTENTS (Continued) TABLES (Continued) 4.1 - Economic Maintenance and User Costs "With" and "Without" Project .................................................. 67 4.2 - Project Summary of Economic Analysis (3 pages) ...... 68-70 4.3 - Sensitivity Tests, Benefit-Cost Ratios and Net Present Values ......... ......... .. ........... 71 ANNEXES 1 - The Proposed Four-Year Highway Maintenance Program (July 1, 1979-June 30, 1983) ...................... 72 2 - Maintenance Equipment for the Highway Maintenance Program ........................................... 74 3 - Outline Terms of Reference for the Technical Assistance on Highway Maintenance ................. 78 4 - Selected Documents and Data Available in the Project File ................................................... 86 CHARTS I - Organization Chart of the Ministry of Transport, Communications, and Civil Aeronautics .... ......... 88 II - Average Daily Traffic 1976 .......................... 89 III - Organization Chart of the National Highway Service .. 90 MAP IBRD 11455R3 - Railway and Road Systems Messrs. Sologuren (engineer) with the Bolivian SNC, B. Brademeyer (systems analyst) with MIT, P.E. Fossberg (engineering adviser) and T. Watanatada (economist/systems analyst) with CPS and R. Mott and K.S. Ohbi (consultants) provided assistance with the HDM model analyses of the proposed highway maintenance project. Evaluation of Highway Roughness in Bolivia was done by the Texas Research and Development Foundation.   I. THE TRANSPORT SECTOR A. General 1.01 Bolivia has an area of 1.1 million km2 and a population of 5 million; it is the least densely populated country in Latin America. The population is unevenly distributed within the three distinct geographical regions of the country: 47% live in the highlands which represent 16% of the country's area, 33% live in the valleys which cover 20% of the area, while only 20% live in the lowlands with 64% of the country s area. 1.02 The highlands (Altiplano) of Bolivia consist of the two major Andean chains, with peaks rising to 6,500 meters, and the plateau, which lies at a mean elevation of about 3,700 meters. Vegetation is sparse, but it supports a pastoral economy which, together with subsistence farming, provides the primary basis for the livelihood of the population. The highlands contain mineral deposits which are the basis for the major economic activity. Some manufacturing and processing have developed in major cities such as La Paz, Oruro, and Potosi. La Paz is the leading industrial and commercial center of the highlands and of Bolivia. Activities of Oruro and Potosi are primarily associated with the mining industry. 1.03 The valleys (Yungas) lie between the eastern mountain chain of the highlands and the lowlands of northern and eastern Bolivia. The terrain is generally rugged, but a few broad valleys are found where economic activities based on agriculture and livestock have developed. A great variety of crops are grown, reflecting the wide range of climatic conditions. In the Cochabamba Valley, there is considerable light industry. 1.04 The tropical and subtropical lowlands (Llanos) extend from the foothills of the Eastern Cordillera to the Brazilian frontier to the North and East, and to the borders of Paraguay and Argentina to the Southeast and South. The northern lowlands are drained by tributaries of the Amazon River; the southern lowlands by those of the Paraguay River. Agricultural production, characterized by commercial crops such as sugar, rice, cotton, corn, and tropical fruits, is concentrated in the area around Santa Cruz, the capital of this rapidly growing region. The livestock industry is also important, particularly in the Santa Cruz and Beni areas. There are dense tropical. forests, which are exploited only to a limited extent. The petroleum industry is a major factor in the economy of this region. Some manufacturing indus- tries have developed in the city of Santa Cruz. The Government is determined to develop the lowlands in order to realize their rich agricultural potential and to relieve population pressure in the Altiplano. 1.05 Initial development of the Bolivian transport system was based on railways and was oriented to serve mining operations and their export needs. The road network was developed later to serve mostly domestic transport and communication. Air transportation, which has grown rapidly in the last  -2- 10 years, services long-distance passenger traffic and gives access to exten- -ve isolated areas. The principal river routes in Bolivia, the Ichilo-Mamore and the Beni, are a means of supplying the vast areas in the North and Northeast, and Lake Titicaca serves as a navigable link with the southern Peru railway and the Pacific ports of Matarani and Mollendo. Pipelines were developed over the last two decades to serve the petroleum industry. 1.06 Bolivia's transportation infrastructure is still in a formative stage. The major transport modes have played, by and large, complementary roles to meet specific requirements: railways, to haul most of Bolivia's export trade of bulky mineral products; domestic aviation, to transport passen- gers and perishable goods, particularly beef; highways, to carry mostly domestic freight and passengers; and waterways, to provide access to otherwise isolated towns and villages in the lowlands. The provision of adequate trans- portation is further complicated by low traffic densities. The exceptionally difficult topography and the long distances between scattered population centers account for the relatively high cost of transport services and infra- structure, necessitating careful analysis and planning of modal allocation and investments. 1.07 Except for pipelines, the most important transport services in the country, as measured in ton-km, are performed by road and rail. The relation- ship between those services and water and air transport changed slightly from 1967 to 1974, with roads and aviation increasing their relative contributions. Apart from the specialized role of pipeline transport, road transport accounts for 65% of the remaining transport effort as compared to 28% for the railways and small contributions by river, lake and air transport (about 2% each) (Table 1.1). Between 1966 and 1976, freight traffic, measured in ton-km, grew most in aviation (15% per year), river freight had the next largest growth (12% per year), highway freight increased by 12% per year, rail freight grew by 7% per year, while lake freight remained stationary. Traffic data are incomplete, particularly for intercity road transport, although road transport is the dominant mode for passengers. In 1975, intercity passenger transport by railway totaled about 135,000 passengers, while domestic air transport accounted for about 450,000 passengers. Passenger traffic has been growing at rates between 5% and 10% over the last ten years. B. The Transport System 1.08 Most of the country is accessible by only one transport mode. Topo- graphy and the condition of existing transport infrastructure place serious restrictions on the vehicles that can be used, i.e., 5-6 ton trucks on most roads, 25-40 ton barges on the rivers, turbo-propeller aircraft of 5 tons payload at most airports and relatively short trains. The main features of the transport modes are discussed below. (i) Railways 1.09 Except for petroleum and natural gas, the Bolivian economy relies primarily on the railway system to carry its external trade. The system  -3 - consists of about 3,400 km of meter gauge railway line (Map IBRD 11455R3). The only line not operated by ENFE is that from Machacamarca to Uncia (105 km), which is operated by COMIBOL, a Government-owned mining enterprise. The rail- ways consist of two separate systems, the Western and the Eastern Systems, which are linked only by a long indirect route through Argentina. Between 1966 and 1976, railway traffic grew regularly at an average rate of about 6% per year for passenger services and 7% per year for freight, with particularly rapid growth on the Eastern System. According to Bank projections, freight traffic is expected to continue to expand at the average rate of about 4% per year on the Western System and at 9% per year on the Eastern System, and passenger traffic by 4% per year on the Western System and 10% per year on the Eastern System. 1.10 The Western System was built between 1870 and 1920, largely to serve the needs of the mining industry to transport mineral products to the ports on the Pacific Coast. The system consists of about 2,100 km of railway lines, linking the main towns in the southwestern part of the country and providing access to the ports of Matarani and Mollendo in Peru, Arica and Antofagasta in Chile, and (via Villazon) to the ports in Argentina. About 80% of the freight traffic on the Western System consists of traffic for external trade. 1.11 The Eastern System, which was built during the 1950s, consists of two major lines totaling about 1,180 km. The Santa Cruz-Corumba line (643 km) connects with the Brazilian system, and the Santa Cruz-Yacuiba line (539 km) connects with the Argentine system. The railways are the most significant mode of surface transport in Eastern Bolivia, where most of the agricultural exports, such as cotton, timber and sugar, originate. About 90% of the traffic on the Eastern System consists of traffic for external trade. 1.12 In accordance with a 1967 agreement between the Governments of Argentina and Bolivia, an extension to the Eastern System, from Santa Cruz to the north, is being built by an Argentina-Bolivian Joint Commission. To date, a stretch of 104 km between Santa Cruz and Santa Rosa has been built and transferred to ENFE. The two Governments recently decided to phase out the Joint Commission when the line reaches Yapacani. The Government has agreed, under the framework of the Third Railway Project, that further extension of the line beyond Yapacani would not be undertaken without a study of its economic justification. The same applies to the project for the interconnec- tion of the Eastern and Western Systems, which is now the object of preliminary studies. 1.13 Since 1972, the Bank Group has contributed to three rehabilitation and modernization projects for the Bolivian railway system. The First and Second Railway Projects (Credit 346-BO, US$8 million, December 1972 and Loan 1121-BO, US$32 million, June 1975) consist of rehabilitation and modernization of track, rolling stock, motive power and workshops and technical assistance. The First Railway Project has been completed satisfactorily, and implementation of the Second Railway Project shows good results. The Third Railway Project (Loan 1422-BO, US$35 million, June 1977) includes the continuation of the rehabilita- tion of track, telecommunications, rolling stock and workshops and a program for technical assistance. This project also includes a National Transport Survey (NTS) and provides advance technical assistance to highway maintenance (para 2.31).  -4- (ii) Highways 1.14 The highway subsector is reviewed in detail in Chapter II. (iii) Waterways 1.15 The river transport system is made up of an extensive network of inland waterways located in the eastern and northern parts of Bolivia, measur- ing about 1,600 km. The system consists of five main waterways, as shown on Map 11455R2. The most important river port is Puerto Villarroel, connected by road to Cochabamba. The Mamore and Beni river systems, although part of the Amazon basin, are isolated from the Amazon system by rapids. River naviga- tion, although a low cost service, has inherent limitations due to seasonal variations in water level. The rivers represent the only available surface transport mode in these underpopulated areas. As such, they perform a vital function, even though the quantities moved are relatively small (Table 1.1). 1.16 Lake Titicaca, the highest navigable lake in the world, supports domestic and external transport. Its primary function is that of an alter- native transport corridor to seaports of Matarani and Mollendo through the Peruvian lake port of Puno. In terms of ton-km of freight traffic, lake traffic is more important than river traffic (Table 1.1). (iv) Aviation 1.17 Air transport is a vital means of communication, despite its rela- tively high cost, and is likely to remain so for a long time because of the topography and low population density of the country. There are approximately 300 airports in the country, but only 30 have scheduled service provided by Lloyd Aereo Boliviano (LAB), the Government-owned airline. Airports at the four major cities -- La Paz, Cochabamba, Santa Cruz and Trinidad -- account for more than 80% of the regular passenger and 70% of the cargo traffic. Virtually all other airports are in poor condition and can accept only small propeller-driven aircraft. During the wet season, several of these airports are closed for considerable periods because of flooding and other hazardous conditions. Chartered cargo service is provided by several private operators, who are normally engaged in the transport of meat from the Department of Beni to La Paz and other cities in the Altiplano. 1.18 Demand for air transport has increased rapidly in the recent past. The number of passengers using LAB's scheduled domestic flights increased at a rate of 15% per year during the past five years; this was made possible by the introduction by LAB of modern jet aircraft with higher passenger capacities. The volume of chartered domestic air cargo, on the other hand, did not increase appreciably during the same period because of severe aircraft limitations and the continued vulnerability of many airports to poor weather conditions. The main objective of the Bank's Aviation Development Project (Loan 1423-BO, US$25 million, June 1977) is to facilitate growth in domestic  air transport by adding two airports for jet aircraft in Riberalta and Tarija and two smaller all-weather airports for turbo-prop aircraft in San Borja and Santa Ana. (v) Pipelines 1.19 The state oil company operates 2,462 km of oil pipelines and 754 km of gas pipelines. The oil pipelines allow access from the major production fields near Santa Cruz to the Pacific seaport of Arica and to the Argentine border. The Bank-financed natural gas pipeline (Loan 635-BO, US$23.25 million, July 1969) conveys gas to Argentina. Depending on the success of intensive exploration efforts now under way and the confirmation of identified reserves, significant new pipeline construction, especially to Brazil, may be undertaken. (vi) External Trade Routes 1.20 Bolivia's centers of activity are remote from the sea: La Paz is located 500 km from Arica and 1,200 km from Antofagasta. Santa Cruz, in the eastern part of the country, is 2,500 km from Santos in Brazil. Bolivia relies heavily on exports and imports for the development of its economy, and the provision of reliable external trade routes assumes a particular importance for its development. The main exports are minerals via Peru and Chile, crude oil to Argentina and Chile, gas to Argentina, and agricultural commodities, especially cotton and wood, to Argentina and to Brazil. Recently, major sugar exports to Chile also took place. Imports are mainly wheat and flour from Argentina and, via Peru and Chile, iron and steel, mechanical equipment, vehicles and other durable goods. The principal ports which serve Bolivia are those of Antofagasta and Arica in Chile, Matarani and Mollendo in Peru and, to a lesser extent, Rosario in Argentina and Santos in Brazil. 1.21 Bolivia has sought to link its transport network with those of neigh- boring countries and to diversify and modernize the various access routes to the Atlantic or the Pacific Oceans. It has relied mostly on railways to provide reliable connections with neighboring countries and access to ocean outlets. This situation would persist in the future while road transport may gradually play a more important role, especially with respect to regional trade. At present, there are no highways competitive to the La Paz-Arica and Oruro- Antofagasta railways, but some international freight is carried by truck over low standard roads to Arica. Although there is a railway connection from La Paz via Lake Titicaca to the Peruvian ports of Matarani and Mollendo, most of the freight to and from these two ports is carried by more competitive trucks. Some additional international traffic is carried by truck over low standard roads through Villazon in the West into Argentina, whereas there is almost no competition for the Santa Cruz-Yacuiba railway because of the very poor condition of the roads in the southeastern region. There is no alterna- tive road for the Santa Cruz-Corumba railway. C. The Development Plan 1.22 The Government's present Five-Year Plan for Economic and Social Development (1976-1980) includes, as major goals, the expansion of the main  -6- -xport sectors -- hydrocarbons, minerals, agriculture and agro-industries -- __ order to break the foreign exchange constraint to development. The plan recognizes that infrastructure such as transport and communications is basic to the country's development, and it is given high priority. The latest Economic Memorandum on Bolivia (March 23, 1977) concurs with this view. 1.23 The Government's main transport strategy underlying its Five-Year Plan can be summarized as follows: (a) establish a comprehensive transportation system that achieves domestic integration of the country and adequate international links; (b) continue rehabilitation and modernization of the rail system; (c) extend and improve the road network to serve high priority sectors in the economy and to provide rural communities with better access to markets and services; (d) develop air transport through an upgraded and modernized aviation infrastructure, particularly in the north and northeast; (e) improve the river transport system to assist the social and economic integration of the northeastern region and improve lake fleet and facilities on Lake Titicaca; and (f) achieve an efficient operation of each transport mode in such a way that costs are low and services satisfy the demand. 1.24 This strategy, which covers long-term objectives, would have to be translated into specific programs and policies. This was only partly achieved by the current Five-Year Plan (1976-1980), which was mostly a list of perceived investment requirements. The Five-Year Plan calls for investments, in projects already started, of about US$475 million, excluding pipelines: 56% for high- ways, 23% for railways, and 21% for aviation. In addition to these projects already under way, the Government has under study some US$440 million in possi- ble projects. The Five-Year Plan does not include capital investment for waterways, which are relatively minor. This may be compared to total public sector investment of US$2.4 billion, or almost 20%. Many of the projects included in the 1976-1980 Plan, however, are merely listed, with little or no attempt to assign economic priorities or to determine their sectoral and regional impact on the country's development. The Plan (except for railways) addresses itself primarily to new construction, but, at present, the Govern- ment gives added emphasis to maintenance and rehabilitation of the existing infrastructure, particularly roads. Although the targets of the current Plan are, in some respects, over-ambitious, it is clear that Bolivia needs, in the future, large investments in transport. The NTS (paras 1.28 and 1.29) would answer the need for improved sector planning and coordination.  D. Transport Planning and Coordination 1.25 The Ministry of Transport, Communications and Civil Aeronautics (MTCCA) is responsible for formulating, directing and executing policy in the transport sector. The investment proposals of MTCCA are reviewed by the National Economy and Planning Council (CONEPLAN) to determine the level of investments in light of national priorities. Four of the five transport modes are fully under the jurisdiction of MTCCA (Chart I): highways, rail- ways, aviation, and waterways. Pipelines are under the jurisdiction of Yacimientos Petroliferos Fiscales Bolivianos (YPFB) which, in turn, reports to the Ministry of Energy and Hydrocarbons. The organizational setup for planning and coordination is basically sound, but needs strengthening. 1.26 Important issues related to transport planning and coordination in Bolivia need attention. As an example, Bolivia is likely to have to construct and improve a substantial number of roads. This program, which may well cost several hundred million dollars, must be carefully defined and evaluated against the alternatives offered by the other transport modes. The Government of Bolivia is considering the eventual construction of a highway between Santa Cruz and Corumba (Brazilian border), practically parallel to the exist- ing railway between those points. The high cost of constructing such a high- way (about US$125 million) and the possibility that this highway is unlikely to generate substantial traffic, but, rather, might divert it from the railway, requires a careful economic study. In view of the possible uneconomic dupli- cation of investments, the Government has agreed not to proceed with the con- struction of this highway (Loan 1422-BO) until it has carried out an adequate study to determine its economic justification. 1.27 Transport planning and coordination in Bolivia have historically been weak. In recognition of this deficiency, a transport study financed by UNDP, with the Bank acting as Executing Agency, was completed in 1969. It proposed a program for integrated transport development over the following ten years. Most of the projects recommended by the study have been started or are included in the 1976-1980 Development Plan. One of the main recommen- dations of the 1969 transport study was the creation of a Directorate of Planning and Coordination. The Directorate was created and, for a time, was attached to the Ministry of Coordination and Planning, but is now in MTCCA. In 1972, the Government prepared terms of reference for a UNDP-financed technical assistance program to strengthen the Directorate. The program was canceled in 1976, after partial implementation, because of the lack of UNDP funds. 1.28 At present, the gap in knowledge regarding transport facilities and equipment, their condition, their age and their ability to meet expected demands is serious. Although individual project studies have been undertaken, there has been no sufficient coordination among them. The Government has decided to undertake an NTS, to be carried out by the Directorate of Planning and Coordination with assistance of consultants. The NTS would provide the necessary basis to plan further development of the transport infrastructure  - 8 - and also to define and introduce improved policies concerning sector management. In the fields of highway and road transport, the NTS would, inter alia, review the following matters and recommend necessary improvements: structure and collection of road user charges, adequacy of axle load limitations and their enforcement, structure of the road transport industry, and the ban on vehicle imports. Phase I of the NTS would involve the preparation of a comprehensive report on transport development and policies, followed by a two-year technical assistance program (Phase II) for implementation of major policy recommenda- tions (para 2.17). 1.29 The NTS, financed partly under Bank Loan 1422-BO (US$1.5 million) and partly by a UNDP grant of US$250,000 for which the Bank is executing agency, was to start in early 1978. The Bank had already proceeded with the selection of consultants and initiated contract negotiations. At the beginning of December 1977, the Bolivian Government, following the replacement of the Minister of TCCA, informed the Bank of its intention to postpone the starting date of the NTS. The main reasons indicated for the postponement were the tight public budget for 1978, the lack of adequate counterparts and, most importantly, possible interference of the election campaign activities with data collection in the field. In April 1978, the Government informed the Bank that the NTS would be started in July 1978. Therefore, Phase I would be com- pleted by December 31, 1979, and Phase II would be carried out over the period January 1, 1980 to December 31, 1981. II. THE HIGHWAY SUBSECTOR A. The Highway Network 2.01 Bolivia has a road network, totaling about 38,000 km, under the jurisdiction of the National Highway Service (Servicio Nacional de Caminos - SNC); about 14% are primary roads, 10% secondary roads, and 76% tertiary roads. Only 3% (1,200 km) are paved, 18% (6,800 km) are gravel surfaced, and the remainder 79% (30,000 km) are earth roads (Table 2.1). The network follows the rather uneven population distribution in the three geographical regions of the country (para 1.01). The highlands comprise 50% of the roads, the valleys 34% and the lowlands 16% (Table 2.2). The road system was expanded considerably during the sixties; total length of roads increased about 4% annually over the period 1965-1971. Since 1971, the expansion has continued at about 1% per year, while an increasing share of road investments was directed at upgrading of existing roads (Table 2.1). 2.02 The network of the southwestern region of the country, corresponding mostly to the highlands, is rather well integrated, connecting main cities (La Paz, Oruro, Potosi) among themselves as well as with the populated area around Lake Titicaca, and with the valleys to the north and east. Its southern branch extends to Argentina, and its eastern branch leads through Cochabamba  into the lowlands of Santa Cruz. The rest of the network is composed of less developed branches stretching through the valleys and into the lowlands, often lacking adequate connections with each other (Map 11455R2). 2.03 Despite considerable investment undertaken over the last ten years, Bolivia's highway network is still in its formative stage. Coverage is incom- plete, and most of the roads, including primary links, have low standards and are generally in poor condition. Only a fifth of the primary roads are paved, mostly surface treated; some of the gravel and earth roads, even within the primary system, are underdesigned for their present volume of traffic and do not receive adequate maintenance. Moreover, gravel roads have, in general, high roughness caused by the use of unscreened gravel. Earth roads are, to a great extent, unimproved, lacking adequate drainage, and are, therefore, frequently interrupted during the rainy season. 2.04 To serve the country's needs more efficiently, the present network requires added emphasis on maintenance and rehabilitation, as well as construc- tion of new roads and upgrading of existing ones. The primary network should be consolidated in the highlands and valleys and extended into the northern lowlands to achieve a development similar to that already obtained around Santa Cruz, leaving long-distance, mainly international, connections mostly to the railroad system. The secondary and tertiary road networks should be extended and developed into a more efficient auxiliary road system to feed not only the primary network, but also the railroads, river ports and airports. 2.05 The next phase of development of Bolivia's highway system would have to rest on a broad-based planning effort consisting of a detailed analysis of future transport demand and development objectives in the primary and secondary sectors. The NTS would provide the necessary basis to develop a coherent highway master plan and a well-balanced highway program covering upgrading and strengthening of primary roads, construction and improvement of secondary and tertiary roads and improved maintenance. The proposed project would initiate the improvement and buildup of maintenance capacity in the three key districts of La Paz, Cochabamba and Santa Cruz and would set the stage for further buildup of maintenance capacity as well as a program of high priority rehabilitation and upgrading projects be selected on the basis of the NTS. B. Characteristics and Growth of Road Traffic and Regulations 2.06 Road transport has expanded rapidly in recent years, and the total vehicle fleet increased by 9% per year from 1970 to 1975, reaching about 70,000 vehicles. Of these, 70% are light vehicles, 25% trucks and 5% buses (Table 2.3). The regional distribution of the vehicle fleet is consistent with the pattern of economic activity; 42% of the fleet is concentrated in the Department of La Paz, and 20% each in the Departments of Cochabamba and Santa Cruz (Table 2.4). These three Departments contain about two-thirds of the country's population, and they account for about 70% of the gross domestic product and 90% of the industrial output. Countrywide consumption of gasoline showed average increases of 7%, and diesel oil of 15% per year over the period 1970 to 1976 (Table 2.5).  - 10 - 07 SNC has been carrying out traffic counts and keeping statistics since 1969, based on 20 permanent stations with pneumatic traffic counters and about 120 temporary stations where manual counts are taken during seven days, four times a year. Traffic levels have risen rapidly in Bolivia in recent years, although from relatively low absolute levels. Representative data concerning average daily traffic (ADT) suggest average growth of about 9% per year for the last five-year period. Only a few highway sections have ADT of over 1,000 vehicles, namely the outskirts of La Paz, Cochabamba and Santa Cruz. Away from the major cities, the ADT in these three districts averaged about 750 for paved roads, about 60 for gravel roads, and about 17 for earth roads in 1977 (Table 2.6 and Chart II). Interurban traffic is characterized by the predominance of trucks and buses. Data for the Depart- ments of La Paz, Cochabamba and Santa Cruz indicate that commercial traffic amounts to 68% on paved roads, 76% on gravel roads and 77% on earth roads (Table 2.6). 2.08 There are no large transport companies in Bolivia. Intercity passenger transport is in the hands of commercial firms and of cooperatives with fleets of up to 40 vehicles and is organized into 25 syndicates which control one or several routes. Freight transport is performed by privately owned trucks also organized into syndicates. These syndicates are grouped through provincial federations into a national confederation and play a key role in representing the industry vis-a-vis the Government and in controlling its operations. The industry has generally responded quickly to shifts in demand, and the rates for buses and tariffs for trucks set by MTCCA seem reasonable (paras 2.09 and 4.11). So far, trucking has complemented railway transport. In the future, however, as the primary network is expanded and improved, it would be important to adopt policies that would ensure the economically efficient distribution of freight and passengers between these two modes. The NTS would review the present structure of the road transport industry and make recommendations for possible rationalization measures and modal coordination policies. 2.09 The National Traffic Service registers and licenses all motor vehicle fleets, and MTCCA issues licenses for commercial transport, assigns routes and authorizes fixed tariffs for buses and ceilings for trucks after negotiations with the syndicates. In 1976, the Ministry of Finance issued a ban on vehicle imports to ease the country's balance of payments. This ban has been subject to many exceptions for buses and trucks, and has, so far, been effective only for light vehicles. The NTS would analyze the effects of the ban on the capacity of the industry. 2.10 Law No. 11771, dated September 6, 1974, regulates dimensions and weight of vehicles, and its enforcement is entrusted to SNC (Table 2.7). A few overloading checks made in 1972 showed an average of 11% of overloads surpassing load limits permitted on rear axles, with the highest percentage of 24% detected on the Cochabamba-Santa Cruz road. A new axle load survey was conducted in 1976 and suggests that overloading (single rear axle in excess of 11 tons) has increased to about 20%, with the highest percentage, about 45%, detected again on the Cochabamba-Santa Cruz road. The effort to improve highway maintenance would have to be combined with a program to  - 11 - control overloading of trucks. Enforcement has so far never been attempted on a continuing basis. SNC would, therefore, have to develop the necessary organization, which in view of the relatively low volume of traffic and the high cost of permanent enforcement, would require careful planning and evalua- tion. The NTS would, in its initial phase, analyze the most effective way to control overloading and facilitate development of an enforcement program. During negotiations, the Government confirmed that, at the time of issuance of the final report on the first phase of the NTS, by April 1, 1980, it would adopt a plan satisfactory to the Bank for the enforcement of vehicle dimension and axle-load regulations throughout Bolivia and that, not later than three months thereafter, it would commence enforcement of such plan. C. Highway Administration, Organization and Training 2.11 Bolivian highways are managed by SNC, a semi-autonomous agency under MTCCA. SNC originated from a Bolivian-American Highway Cooperative Service and was established in 1955 with the assistance of the Federal Highway Adminis- tration (FHA) under a USAID program. It replaced the former "Direccion de Vialidad" which had become increasingly ineffective. The present organization of SNC (Chart III) and its responsibilities to plan, build, maintain, and administer highways are established in Supreme Decree No. 6684 of February 21, 1964, and in Law No. 7390 of February 15, 1965. 2.12 SNC is headed by a Director, assisted by a Deputy-Director and a General Counsel, and supported by the "Consulting Council" composed of the eight department chiefs. The eight central departments cover highway plan- ning; highway design; highway construction; highway maintenance; bridge design, construction and maintenance; equipment administration; finances; and general administration. Larger highway construction projects are administered independently by a Field Project Chief appointed by the Director and coordinated with the departments at headquarters. Highway maintenance is performed through nine districts, which correspond roughly to the admin- istrative setup of the country into nine departments. Each district is headed by a Chief Engineer, assisted by a Deputy, and is subdivided into two to six residencies. Countrywide, there is a total of 36 residencies. 2.13 SNC's organizational structure is basically sound, but needs to be strengthened. SNC has been overburdened with force account construction work which went beyond its managerial capabilities, resulting in a growing neglect of its maintenance obligations. Inadequate coordination between departments and between central and field units have, over the last few years, diminished SNC's effectiveness, and repeated staff changes at high management level during 1977 have added to the problem. The present Minister of MTCCA is aware of the need to restore SNC's organizational effectiveness; he plans to curtail SNC's direct involvement in construction and to strengthen its maintenance capacity. The NTS would analyze, inter alia, SNC's organization and management system (para 2.17). 2.14 The personnel of SNC comprises about 140 engineers, 115 technicians, 530 administrative employees and 3,000 mechanics, operators and laborers, show- ing a satisfactory overall balance between engineers and administrative and  - 12 - operational staff (Table 2.8). Because of the relatively low level of salaries, it is common for the engineers and the better trained personnel to hold a second job; this understandably affects their effectiveness as far as SNC is concerned. The yearly turnover of approximately 10% of the staff is not unusually high, but it affects mostly the more capable among the younger staff. In spite of the above limitations, SNC has considerable institutional resilience, especially in the districts and residences which have more sta- bility in their personnel. These units would bear the brunt of the effort required for the proposed improvement of maintenance. They would be capable of doing so with technical assistance and training to be provided under the project. 2.15 SNC field operations are hindered by the insufficient training of mid-level technicians and foremen. An SNC Training Center was established at Patacamaya in 1973 to remedy this deficiency and to train operators and mechanics. The training center has classroom and office facilities to accom- modate about 30 people and an inadequate workshop. The teaching staff includes one director and one general instructor. The center has lacked the investments and operating budget necessary to develop its operations to the desired level. It has carried out 15 short-term courses, training 300 operators and 90 mechanics. The upgrading and amplification of the center's activities would be a major objective of the project. In fact, the advance technical assistance provided under the Third Railway Project, inter alia, prepares the necessary expansion of the center in 1978. 2.16 Other agencies cooperate with SNC in the development of the road network: (a) regional development corporations or boards, set up in different Departments, mainly in La Paz, Chuquisaca, Santa Cruz and Beni, often carry out road improvement projects in collaboration with SNC, as is being done under the Bank-financed Agricultural Project (Loan 1211-BO); (b) some larger mining enterprises and the Government-owned oil company, YPFB, often supply equipment or financing for maintenance of specific road sections important for their activities; and (c) the Army Corps of Engineers and the Agricultural Ministry's Provincial Development Committees construct a limited number of roads (para 2.20). D. Highway Planning and Engineering 2.17 SNC's planning department is responsible for long-term planning, preparation of investment programs to be submitted through MTCCA to CONEPLAN (para 1.25), economic analysis of these programs, feasibility studies of specific projects, financial planning, preparation of the annual budget, and coordination with other Government agencies and external financial insti- tutions. The planning department is presently understaffed to carry out its many tasks satisfactorily. Highway programs have lacked clear definition of objectives and have not systematically included evaluation of economic prior- ities. The inventory of the national highway network has not been updated regularly. Traffic counts and complementary OD surveys are often incomplete and not systematically used for projecting requirements. The NTS and the technical assistance under the proposed project would develop the proper conceptual framework for highway planning and would strengthen the planning  - 13 - function within SNC. During negotiations, the Government confirmed that, not later than three months after the issuance of the report on the first phase of the NTS (para 1.28), it would consult the Bank on the measures required to carry out the recommendations of the NTS, including, inter alia, the recommendations concerning the organization of the road transport industry (para 2.08) and the rationalization of road user charges (para 2.23). 2.18 Responsibility for highway engineering had previously been divided between the construction department - to prepare specifications and to carry out or supervise design work - and the planning department - to contract consultants. A new department to take care of final engineering studies and road design was set up in January 1978. The specifications for geometric design of roads were established in 1972 by SNC and are generally satisfactory (Table 2.9). Engineering design work by SNC staff has been limited to minor projects and has been of adequate quality. SNC has increasingly used consul- tants for engineering of large and medium size projects, relying either on joint ventures of Bolivian and foreign firms or solely Bolivian. Design work performed by consultants has been, in general, satisfactory, although there have been some cases where closer supervision by SNC and less stringent deadlines might have prevented serious problems. E. Highway Construction 2.19 SNC's construction department is responsible for highway construc- tion and for carrying out works either through contracting, by force account, or in coordination with other Government agencies which perform special road construction projects (para 2.20). Modern highway construction methods were first introduced to Bolivia in the 1950s, when USAID and the FRA started their technical assistance program and foreign contractors were employed to build some of Bolivia's trunk roads. Two local firms that started as minor sub- contractors at that time are now the largest construction companies in the country, with capital of about US$25 million and US$5 million respectively and with 100 and 20 engineers respectively. Four smaller companies are doing highway construction jobs with capital of about US$1 million and a staff of three to five engineers each. The quality of construction work performed by these contractors is uneven, often affected by the lack of know-how in specific matters such as compaction, surfacing material selection and pavement tech- niques. Until recently, the capacity of the road construction industry has been sufficient for Bolivian needs, but the planned expanded activity in this field will necessitate participation of foreign contractors. Argentine, Brazilian and Chilean construction companies have shown interest in partic- ipating in Bolivian construction projects. The NTS will address itself to the further development of the domestic construction industry, including ways and means of strengthening its managerial capability and technical know-how. 2.20 Traditionally, SNC has carried out rehabilitation and construction of secondary and tertiary roads by force account through special regional units under a Field Project Chief (para 2.12). In recent years, however, SNC has increasingly awarded construction projects to contractors through public bidding. This trend will continue as the Government strengthens SNC's role in maintenance and rehabilitation. The Army Corps of Engineers and the Provincial Development Committees of the Ministry of Agriculture have also constructed  - 14 - roads either in strategic areas or in relation to agriculture programs. Sia,ce 1969, the Communal Development Service has carried out, with USAID assistance, the construction of low standard penetration roads, about 6,0J0 km to date. The roads have contributed toward improving communications with rural areas, but have not been adequately maintained. A followup project was initiated in 1977 to improve or construct 1,200 km of feeder roads in the districts of La Paz, Cochabamba, Santa Cruz and northern Chuquisaca. A special unit has been organized within SNC to carry out this project and to prepare a similar one for southern Chuquisaca, Potosi, and Tarija. After construction, these roads would be administered and maintained by SNC. F. Highway Financing and Road User Charges 2.21 Highway expenditures for the period 1971-1976, comprising construc- tion, improvements, maintenance and administration, are shown in Table 2.10. Over this period, the level of expenditures increased steadily from US$13.8 million in 1971-1972 to US$43 million in 1976, averaging about US$22 million annually. These expenditures have been financed from earmarked road user charges (6%), from the national budget (73%) and from external sources (21%). Estimated contributions from road user charges to Government receipt are shown in Table 2.11. The revenues from existing road user charges have, on the average, been sufficient (US$23 million equivalent per year) to cover all highway expenditures, including new construction. 2.22 The current Five-Year Plan (1976-1980) includes about US$600 million investment in highway construction, about US$270 million for ongoing projects and the balance for projects under study. This is, by all measures, an ambi- tious target. Difficulties in financing have delayed or prevented execution of the ongoing projects, and, for th; same reason, many of the projects under study would have to be postponed or cancelled. The NTS would review the investment priorities in roads and match them with foreseeable levels of expenditures to develop a coherent road development program. The financing requirements of the sector would, in turn, be used to assess the adequacy of road user charges. The NTS would also propose measures to rationalize road user taxes, some of which are now collected inefficiently (para 2.17). 2.23 A recent (November 1977) Bank staff review of Bolivia's energy sector identified the need to increase substantially (more or less double) prices for oil products in order to bring them closer to their international equivalent and provide financing for large investments required in the energy sector. 1/ The proposed increase would not significantly affect the demand for intercity road transport (para 4.10). The impact of the proposed increase would be assessed under the NTS, as part of the comprehensive review of road user taxes, in relation to future levels of highway expenditures and inter- modal coordination (para 2.17). 1/ Prices for gasoline are now about US$0.30 equivalent per US gallon (US$0.08/liter) and US$0.27 per US gallon (US$0.07/liter) for diesel fuel.  - 15 - G. Highway Maintenance 2.24 Road maintenance is financed under the SNC budget and carried out by SNC's maintenance department through its nine field districts with their "residencies" and camps. Each camp is, in general, responsible for 60 km of primary and secondary roads and 200 km of rural roads. SNC's annual road maintenance program recognizes three levels of maintenance reflecting the roads' traffic density: (a) permanent maintenance, carried out on 7,700 km of roads with higher traffic (21% of the road network, Table 2.12) includes right-of-way clearance, maintenance of drainage, maii_tenance and patching of asphalt-treated surfaces, maintenance of shoulders, and blading of gravel surfaces with frequencies reaching from a conservative five times a year to an extremely high frequency of 57 times a year on heavy traffic roads with unusually coarse gravel; (b) temporary maintenance, done on about 7,500 km of gravel or secondary earth roads with lower traffic (20% of the network, Table 2.12), is similar to permanent maintenance, but includes only 2 or 3 bladings a year; and (c) occasional maintenance, performed on only a small part of the remaining 22,000 km of roads with little traffic, considers only manual right-of-way clearance, drainage maintenance and irre- gular repair of the surface with local material. All maintenance levels also include emergency operations such as slide removal and restoration of services. These three maintenance levels do not have clearly defined borderlines, and their application is not rigorous. They do provide, however, an effort to apportion resources to traffic. The planning of mainte- nance operations would be reviewed and improvgd under the project. 2.25 SNC's maintenance program has also included minor road improvement works consisting of partial straightening of curves, widening of the roadway, and improvements of gradients, surfaces and drainage. These minor improvements consumed an important proportion of the maintenance budget until the early 1970s (35% in 1972). In the last few years, however, they have been phased out and now represent only 17% of maintenance expenditures (Table 2.10), and their share is even lower in the districts of La Paz, Cochabamba and Santa Cruz. During negotiations, the Government confirmed that, during the execution of the project, SNC would keep expenditures for minor road improvement works in the three districts at 10% or less of its budgeted expenditures for road maintenance in such districts. 2.26 Road maintenance expenditures remained almost constant during the early 1970s and started to increase by 10% per year since 1974, reaching US$7.6 million in 1976 (Table 2.10). The average road maintenance expenditures amount to US$217/km and are still very low and unevenly distributed: 72.3% is spent in permanent maintenance for 21% of the network with an average of US$917/km; 7.5% is used for 20% of the networks with an average of US$97/km;  - 16 - and 3.2% is spread over the remaining 59% of the road system, rendering an average of only US$13/km (Table 2.12). These expenditures are less than half of those in neighboring countries, Paraguay, Peru and Chile. 2.27 The main deficiencies in the Bolivian road maintenance can be classified as follows: (a) maintenance of paved roads, mostly surface treatments, is limited to some patching and surface dressing. Periodic operations, e.g., patching, seal coat, surface treatments, are neglected as well as rehabilitation and strengthening; shoulder maintenance is also inadequate; (b) maintenance of gravel roads is impeded mainly by the use of oversized materials. Although there is an abundance of good quality gravel or rock in the highlands and valleys, no screen- ing or crushing is used. The resulting high surface roughness cannot be diminished effectively, even by frequent grading. Little attention is given to reposition or reinforcement of the wearing course, and no watering or compaction is applied. Additionally, drainage and slope maintenance are often deficient; and (c) earth road maintenance is widely neglected because of insuf- ficient manpower and lack of equipment, partly caused by the concentration of the available grading equipment on gravel roads. The consequent surface deformation and the lack of adequate drainage and slide controls cause high vehicle operation costs and extensive interruptions of earth roads during the rainy season. The proposed highway maintenance project is geared to improve these mainte- nance deficiencies. 2.28 The intensive use of labor in road maintenance is quite common in Bolivia. The main source of labor evolves from the unique Bolivian duty of every male citizen between the ages of 18 and 60 to work for three days per year on road construction or maintenance. This three-day highway service (presta- cion vial) can be avoided by paying a tax of b$ 10 per year (at present US$0.50 equivalent). The low amount of this tax (eroded by inflation over the years) has induced more and more people to avoid active service. SNC is therefore proposing to increase the highway service tax to US$5 per year, which undoubtedly would increase the number of people willing to work. Another source of free labor used with varying success in many residencies is manpower supplied by some well organized rural communities, either on a voluntary basis or in exchange for equipment hours to be rendered by SNC. The tax-induced as well as the community-supplied laborers are mostly unskilled and very often do not receive adequate tools for their assigned tasks. These tasks are mainly right-of-way clearance, some of the drainage maintenance included in both permanent and temporary maintenance, and most of the occasional maintenance.  - 17 - Under the proposed highway maintenance project, SNC would, with the aid of technical assistance, explore possibilities to further extend manpower avail- ability for road maintenance and to increase its effective use. 2.29 SNC's maintenance equipment and vehicle fleet is neither adequate in composition nor sufficient in quantity and quality. It barely has any crushing, screening, watering or compaction equipment, and acquisition of other types of equipment has been sporadic, depending mainly on the availability of external funds. Two major equipment procurement programs were carried out during the 1960s with USAID financing, the latest in 1968-1969. No significant new equip- ment procurement was done until a loan was obtained from Brazil in 1974. The existing fleet of about 1,140 major units is aging and partially in poor condition. Average age is 8.3 years for specialized machinery and 6.9 years for trucks and vehicles; 25% of the equipment is more than 10 years old (Table 2.13). SNC estimates that 32% of the fleet is in good working condition, 40% needs repair or overhaul and 28% is to be scrapped within the next few years. Estimates for the districts of La Paz, Cochabamba and Santa Cruz show an average equipment availability of 50% and a utilization of 70% of available equipment, resulting in an overall equipment utilization of 35%. The proposed project would aim at increasing overall equipment utilization and renewing the fleet, adjusting its composition and carrying out overhaul of salvageable units and scrapping of obsolete ones. The project would also aim at introducing systematic renewal procedures. 2.30 There is a central workshop for major equipment repair in La Paz and a small one in each district's headquarters. The central workshop is fairly well equipped to carry out major overhauls for all districts, but the district workshops are, in general, inadequately equipped to perform needed repairs. Spare parts acquisition is insufficient and lagging, and storage and distri- bution of spare parts are not efficient. Properly trained mechanics, operators, and foremen are also very scarce. SNC equipment repair capability would be improved under the proposed project. 2.31 Advance technical assistance for highway maintenance is being pro- vided to SNC under the Third Railway Project, Loan 1422-BO (US$0.5 million). Consultants Wilbur Smith (US) and their Bolivian associates have been retained and are scheduled to commence their services in June 1978. They would help strengthen management of highway maintenance, improve and amplify training and initiate implementation of the proposed project. Additional technical assistance would be provided under the proposed project to continue and expand this initial effort. III. THE PROPOSED PROJECT A. Project Development and Preparation 3.01 At the time of formulation of the current Five-Year Plan, the Government recognized that the ambitious program for upgrading and expansion  - 18 - of the road network would have to be accompanied by improvement in road maintenance. The Bank's transport sector mission, organized in April 1976, confirmed the priority of maintenance. The Government subsequently requested Bank assistance in this field which would complement ongoing and planned assistance from IDB (highway construction) and USAID (feeder road construc- tion). The expansion of SNC's maintenance capacity is perceived as a long-term objective to be achieved gradually, starting with the improvement of field operations in key districts and leading eventually to the preparation of a possible countrywide program for road maintenance, rehabilitation and upgrading. 3.02 The proposed project, which would be the Bank's first involvement in Bolivia's highway sector, has been kept simple and focused on a primary objective: development and introduction of improved maintenance methods, expansion of capacity, and training of personnel in the three key districts of La Paz, Cochabamba and Santa Cruz. These three districts were selected for the proposed road maintenance project because they constitute the most important urban, industrial and agricultural areas of Bolivia and received priority consideration in the Five-Year Development Plan. Their 15,000-km road network comprises 40% of the national network, carries about 75% of total traffic, and extends over large areas with very different climates, topography and soil conditions, representing Bolivia's three distinct geographic regions (paras 1.02 to 1.04). Highway maintenance activities are, by nature, short to medium term, call for flexible programming and supervision and should, therefore, be handled at the district level. Road maintenance in the other districts, although not the object of specific improvement programs at this stage, would benefit from project measures dealing with SNC's central organization: improvements in the central workshop (para 3.13a) and in the countrywide maintenance personnel training (para 3.16), and the systematic exchange, at national level, of maintenance information and experience in periodic workshops and seminars (para 3.16d). The project was prepared by SNC with assistance from the Bank staff over the period March to November 1977. The methodology used for project preparation is explained below (paras 3.06 and 3.07) and in Chapter IV. B. Objectives and General Description 3.03 The specific objectives of the project are: (a) to carry out, in the three SNC districts of La Paz, Cochabamba and Santa Cruz, over the period mid-1979/mid-1983 (para 3.25), the maintenance required and to eliminate the backlog of deferred maintenance; (b) to strengthen the road maintenance organization at headquarters and in the three project districts and to improve and rationalize maintenance planning, procedures and standards; (c) to complete the fleet of maintenance equipment and vehicles in the three project districts and to improve its availability and utilization for maintenance activities;  - 19 - (d) to improve, through training, the capability of maintenance personnel at all levels at headquarters and in the three districts; and (e) to prepare a countrywide highway maintenance, rehabilitation and upgrading program. 3.04 The project components are: (a) implementation, in the three project districts, of agreed four-year programs (mid-1979/mid-1983) of about 15,000 km of roads, including deferred maintenance of about 2,000 km; (b) acquisition of maintenance equipment and vehicles to com- plete and expand, as necessary, the maintenance fleet in the three project districts; (c) buildup of spare parts stock for preventive maintenance of existing and new equipment and vehicles, and acquisition of spare parts for major overhauls of salvageable equipment and vehicles; (d) acquisition of workshop tools and equipment, and construction or expansion of workshops and warehouses; (e) acquisiton of training equipment and tools, traffic counters and specialized equipment for the SNC soil laboratory; (f) acquisition of hand tools for labor-intensive road maintenance operations; (g) technical assistance at SNC headquarters and in the project districts (i) to implement all phases of the project; (ii) to develop and carry out training programs; and (iii) to assist in the preparation of a nationwide maintenance program; and (h) engineering and economic studies to prepare the program for upgrading and rehabilitation of earth, gravel and paved roads. 3.05 The project would be carried out over a period of five years; it would be initiated during the first year and would be implemented over the four years mid-1979/mid-1983. C. The Four-Year Maintenance Programs 3.06 A review of SNC maintenance operations showed that the volume of maintenance is deficient but also that the maintenance policies and procedures are not fully adequate. It was therefore important in the preparation of the project to adopt a methodology which would allow testing of alternative maintenance policies on various types of roads within various traffic ranges. In order to carry out this analysis, SNC, in agreement with the Bank staff, adopted the Highway Design and Maintenance Standards Model (HDM) developed by the Massachusetts Institute of Technology and the Bank on the basis of  - 20 - research work carried out in Kenya. 1/ A special project was undertaken to measure, in situ, road roughness coefficients in order to use the HDM model under Bolivian conditions. 3.07 The basic steps leading to the determination of the maintenance program are: (a) the condition inventory and traffic survey of the road network of the three project districts (Tables 3.1 and 3.2); (b) assessment and costing of maintenance activities (Table 3.3); (c) the estimate of vehicle operating costs for various classes of road (Tables 3.4 and 3.5); and finally (d) determination, through an iterative process of optimization, of the specific maintenance programs to be carried out in the three districts over the project period. The programs are defined in Table 3.6 in terms of annual quantities for main types of activities. Table 3.6 also indicates expected performance concerning use of equipment (specified in terms of availability and utilization factors). Present road maintenance standards are shown in Table 3.7. The maintenance standards to be applied as a result of the iterative optimization process (para 4.09) under the programs for various types of roads and classes of traffic are indicated in Table 3.8. Table 3.6 and Table 3.8 constitute a definition of the programs to be implemented. The proposed programs are compatible with expected levels of funding (para 3.22). During negotiations, the Government confirmed that, commencing in 1979, and through the project period, SNC would review the detailed work programs for each project district (Table 3.6) and would consult with the Bank on the scope and content of these annual programs before their inclusion in SNC's proposed budget. 3.08 The salient features of the maintenance programs for the three project districts are presented in Annex 1. Average road maintenance expenditures in the three districts, not including deferred maintenance, would be US$382/km at the end of the project (Annex 1, Section 5). The optimization process stressed the high cost effectiveness of surfacing gravel roads with graded crushed materials of much smaller size than the natural gravel currently used by SNC. This process also evidenced the need to undertake rehabilitation and strengthen- ing of aging pavements, and it pointed out that the three districts have many km of earth roads and some km of gravel roads which are carrying volumes of traffic substantially above the threshold warranting upgrading. Upgrading and rehabilitation projects would, however, require further preparation as provided under the project (para 3.19). 3.09 The detailed network analysis showed that SNC has accumulated a backlog of periodic resurfacing on gravel roads which would be eliminated under the project by carrying out regraveling above normal requirements. A similar situa- tion exists for pavement maintenance where deferred maintenance is necessary. The deferred maintenance works have been integrated into the programs for the 1/ H. Hide, S. W. Abayanayaka, I. Sayer and R.J. Wyatt, The Kenya Road Transport Cost Study: Research and Vehicle Operating Costs. TRRL Report LR672, and J.W. Hodges, J. Rolt and T.E. Jones, The Kenya Road Transport Cost Study: Research on Road Deterioration. U.K. Department of the Environment TRRL Report LR673 (Crowthorne, Transport and Road Research Laboratory, 1975).  - 21 - project districts. The cor esponding volume is shown in Table 3.6, amounting in total to aboit 740,000 m of pavement repair (covering 700 km of roads) and 1,000,000 m of resurfacing of gravel roads (1,400 km)). 3.10 Deferred maintenance would be carried out in the three project districts by SNC force account as all other maintenance activities (para 2.20). Technical assistance and equipment for deferred maintenance are included in overall project requirements. In addition, the Bank would participate in the financing of direct costs incurred by the districts in carrying out the deferred maintenance works. The annual program of work, including quantity estimates and unit cost determined on the basis of analysis of such direct cost, would be prepared by SNC with the assistance of consultants each year at the time of preparation of the budget. Such program would then be discussed and agreed with the Bank. The consultants would supervise this work closely and would monitor efficiency and output. This would provide SNC a firmer basis to assess the real cost of regraveling and pavement repair for the planning of its maintenance program. These arrangements were confirmed during negotiations. D. Equipment 3.11 A major component of the proposed project would be to renew and expand the maintenance equipment and vehicle fleet of the three project districts (Table 3.9) as necessary to provide them with adequate capacity to carry out their respective maintenance programs. The analysis of equipment requirements (Table 3.10) is presented in Annex 2. It took into account the condition of the existing fleet (including planned overhaul), the overall capacity required and the agreed targets for equipment performance. The list of equipment, vehicles and tools, and overall spare parts requirements, as well as the related purchasing schedule, were reviewed and agreed upon during negotiations. 3.12 The project would also include overhaul of existing salvageable units in the three districts (estimated number 200) and scrapping of obsolete ones. Necessary spare parts would be provided under the project. The dis- trict workshops would carry out the overhaul with technical assistance from the consultants. During negotiations, the Government confirmed that SNC would (a) prepare, by September 30, 1978, with the help of the advance technical assistance, a detailed list of units to be overhauled and a scrapping program and (b) start implementation of a systematic scrapping program by July 1, 1979. The Government also confirmed that the new and overhauled equipment and vehicles would be used exclusively for maintenance and minor improvement works in the three districts and that no further acquisitions of maintenance equip- ment units would be made over the project period without informing the Bank in advance.  - 22 - E. Workshops and Spare Parts 3.13 To improve maintenance equipment and vehicle fleet availability, workshop and warehousing practices would have to be modernized and a basic stock of spare parts for preventive maintenance provided. To this end, the project would include: (a) expansion of existing workshops and warehouses in Cochabamba and Santa Cruz and construction of new facilities in La Paz; (b) workshop tools and equipment in the three districts and for the central workshop at El Alto; (c) spare parts for preventive maintenance for equipment and vehicles in the three districts; and (d) improvement of workshop and warehousing techniques and management, including acquisition, storing, controlling and distribution of spare parts. The more efficient operation of the workshops would also require adequate and timely allocation of funds to maintain a basic stock of spare parts. Stocks are frequently depleted for lack of specific provision in the budget. During negotiations, the Government confirmed that SNC would take necessary action for facilitating proper maintenance and repair of its equipment and vehicles, and that adequate funds would be provided under specific allocations in SNC's budget for purchases of spare parts. 3.14 Since the project provides spare parts only for the maintenance equipment and vehicles of the three districts, the Government confirmed during negotiations that spare parts (and all other goods and services) provided under the project would be used exclusively for the maintenance programs in the districts except as the Bank shall otherwise agree. Further, the Government agreed that the reorganization of SNC's supply and distribution system for spare parts for the three districts would be a condition for dis- bursement for procurement of spare parts. F. Tools and Equipment for Labor-Intensive Maintenance Activities 3.15 The project would assist in the efficient utilization of labor for road maintenance operations by providing technical assistance to improve the management of these operations, and an adequate supply of hand tools for vegetation control, ditch and culvert cleaning, removal of slide materials, shoulder and road bed repairs and spot regraveling. In addition, the project would provide intermediate technology equipment, such as agricultural tractors with trailers, towed graders and drags, to be used independently or in com- bination with hand labor in maintenance of earth and gravel roads. Two of these equipment combinations would be supplied to each district. G. Training 3.16 Although SNC is a well established organization, its personnel are relatively poorly trained and often employ inefficient work methods. The training component included in the technical assistance of the proposed  - 23 - project would make an important contribution toward meeting the operational targets agreed upon by SNC and the Bank. Its aim is to improve staff produc- tivity and operational efficiency through training, retraining and upgrading about 1,000 skilled workers and low, middle and high level supervisors. SNC, with the assistance of consultants (para 2.31), would: (a) establish a permanent training unit within SNC which would be responsible for the planning, implementation and super- vision of all training activities; (b) upgrade and expand the activities of the SNC Training Center (para 2.15) by improving the existing mechanical workshop and preparing short and long-term courses based on better procedures and work methods required for road maintenance. These courses would be addressed in par- ticular to low-level road and equipment supervisors; (c) carry out an expanded program for the training of about 1,000 personnel (400 equipment operators and drivers, 300 mechanics, 100 road and equipment supervisors, and 200 administrative/accounting staff). The program would possibly include the setting up of a field Training Production Unit (TPU). Personnel assigned to a TPU would thus be trained under actual working conditions while carrying out useful and much needed road rehabilitation and maintenance; (d) organize periodic workshops and seminars on different topics related to maintenance management, accounting and administration for middle and high level staff; and (e) make a study of the manpower requirements of SNC for the next five years, including related training needs, and taking special account of overall maintenance per- sonnel requirements. During negotiations, the Government confirmed that SNC would furnish to the Bank by December 31, 1978 a plan of action satisfactory to the Bank to carry out the training program. This plan, to be updated annually in consultation with the Bank, would take into consideration any additional studies and recommendations on training expected to be carried out by the new consultant services proposed under the project. Further, the Government confirmed that SNC would (a) carry out a review of its personnel management policies to identify necessary modifications, which would be the object of consultation with the Bank by December 31, 1979, and (b) use its best efforts to retain in its employ, after the completion of the Project, the persons working as counterparts to the technical assistance. Funds would be provided under the loan for the purchase of training equipment (US$300,000) and the recruitment of training specialists-instructors (US$432,000) for about 72 man-months.  - 24 - H. Technical Assistance 3.17 Technical assistance would be provided in the following areas: (a) maintenance organization and management; (b) maintenance programming; (c) workshop and warehousing practices; (d) personnel training; (e) super- vision of the deferred maintenance program; and (f) preparation of a country- wide road maintenance project. Fourteen experts (one Road Maintenance Engineer-Project Manager, two Road Maintenance Engineers, two Equipment Specialists, one Transport Economist, four Specialists in different fields, and four Training Specialists) would be required over a four-year project period for a total of about 350 man-months. During negotiations, the Govern- ment (a) agreed to the terms of reference for the technical assistance, (b) confirmed the number and qualifications of the counterpart staff for the technical assistance and the dates at which SNC would make each counterpart staff member available, (c) agreed that the availability of the counterpart personnel to the project manager, to the equipment specialist, to the road maintenance specialist and to the training specialist of the advance technical assistance (para 2.31) would be a condition for effectiveness of the Loan, and (d) confirmed SNC's commitment to consult with the Bank on any other maintenance-related technical assistance over the project period. 3.18 The technical assistance to SNC is crucial for the successful implementation of the project. SNC would have to provide experienced counter- part staff for both the advance technical assistance and the assistance provided under the project. An important objective of the technical assist- ance would be to help SNC improve the availability and utilization of main- tenance equipment by improving maintenance programming and warehouse, workshop and field organization and work control. Support equipment for laboratory and field tests and traffic counting would be provided under the project. I. Preparation of Road Rehabilitation and Upgrading Program 3.19 In order to meet high priority requirements identified during project preparation (para 3.08), the proposed project includes detailed engineering and economic studies necessary to prepare a program for rehabili- tation and upgrading of about 300 km of paved roads and 900 km of earth and gravel roads. The NTS (para 2.05) would confirm the specific sections to be considered under the proposed rehabilitation and upgrading program in the project districts as well as other districts not involved in the present project. During negotiations, the Government confirmed that SNC would (a) establish, at the time of the issuance of the final report on the first phase of the NTS, a list setting forth the paved, earth and gravel road sections for which detailed engineering and economic studies would be done, and (b) furnish such list to the Bank for its approval. 3.20 During negotiations, the Government confirmed that, to assist in carry- ing out the detailed engineering and appropriate economic studies of selected road sections, SNC would employ consultants, whose qualifications, experience and terms of conditions of employment would be satisfactory to the Bank. The number and scope of contracts to be awarded and their implementation schedule  - 25 - would be determined by SNC in agreement with the Bank. The engineering studies would pay particular attention to the opportunities to use labor- intensive methods for upgrading of earth and gravel roads. J. Cost Estimates and Financing 3.21 The implementation of the project would entail recurrent expendi- tures to carry out the agreed maintenance programs in the three districts and capital expenditures, including deferred maintenance, equipment, technical assistance etc. The Bank would participate only in the financing of the latter, which are designated as project expenditures. The financing require- ments of the project are presented in Table 3.11 and summarized as follows: (US$ million equivalent - April 1978 values) 1979 1980 1981 1982 1983 Total (half) (half) 4 Years (a) Recurrent expenditures in three project districts 2.4 5.0 5.4 5.8 3.2 21.8 (b) Project expenditures: - Government 3.2 2.3 2.2 1.8 0.8 11.3 - Bank 15.6 3.8 3.5 1.6 0.5 25.0 Sub-total (b) 19.8 6.1 5.7 3.4 1.3 36.3 Total (a) and (b) 22.2 11.1 11.1 9.2 4.5 58.1 Total project costs would be about US$36 million with a foreign exchange component of US$25 million, about 70%, which would be financed by the Bank. The balance would be financed by the Government, which would also finance about US$22 million equivalent for recurrent maintenance expenditures. The proposed loan would, over the project period, cover about 43% of recurrent and project expenditures in the three districts. 3.22 The proposed level of expenditures is in line with SNC's absorptive capacity and within the financial capacity of the Government. During negotia- tions, the Government confirmed that it would provide, promptly as needed, the funds, facilities services and other resources required to carry out the project in the three districts. To obtain a satisfactory specification of these items for the maintenance program, the Government confirmed during negotiations that SNC would reorganize its maintenance accounting system to show, from January 1, 1980 onward, itemized expenditures of routine and periodic maintenance, minor improvements, rehabilitation, major improve- ments and construction. Further, the Government confirmed that it would: (a) provide, promptly as needed, the funds, facilities, services and other resources required to enable SNC to continue, after the project period, to maintain adequately the roads in the Districts of La Paz, Cochabamba and Santa Cruz, and to keep the maintenance of roads in the Districts other than those included in the project at least at their present level; and (b) consult with the Bank by July 1, 1981 on the program for improvement and strengthening of highway maintenance, covering the entire territory of Bolivia, to be prepared with the help of the technical assistance supplied under the project.  - 26 - 3.23 Project costs (summarized on page 27) are based on SNC estimates updated to April 1978; they have been derived as follows: (a) Constru2tion of warehouses and workshops: estimates for the 4,000 m of covered area are based on recent SNC contracts for similar works; foreign exchange component is about 50%, taking into account that these relatively small works would attract only local contractors. (b) Deferred maintenance: estimates of direct costs to be incurred by the districts are based on current operating costs for SNC field units applied to overall quantities (para 3.08); the foreign exchange component amounts to about 44% including imported materials, mainly asphalt, parts, lubricants, and indirect foreign exchange costs (fuel, etc.). (c) Equipment, vehicles, spare parts, workshops, tools, etc. (see details Table 3.10): estimates are based on recent suppliers' bids and quotations and price lists (spare parts) CIF La Paz obtained by SNC for similar items. Spare parts requirements have been estimated in relation to the value of the equipment: 15% of new equipment for initial stock, 5% of the renewal value of existing equipment for constitution of preventive maintenance stock and average requirements per piece of equipment to be over- hauled (US$1,000 for light vehicles, US$3,500 for heavy vehicles and US$6,000 for heavy equipment). The foreign exchange component corresponding to CIF Bolivia border price amounts to 90% of the cost, the 10% local component representing internal transporta- tion, preparation, delivery and dealer commission. No taxes are levied on SNC imports. (d) Consulting services: estimates for technical assistance are based on rates negotiated for the recent advance technical assistance to SNC (para 2.31); the 85% foreign exchange component reflects necessary reliance on foreign experts. Esti- mates for engineering services are based on cost for similar ongoing studies; the 50% foreign exchange component reflects the expectation that Bolivian firms would participate, with, however, an important element of foreign expertise necessary, particularly for pavement studies. The total number of man- months of professional services would be about 350 for technical assistance and 400 for road studies. Rates for man-months would average about US$3,000 equivalent for Bolivian engineers and about US$7,800 for foreign experts, including living allowances, transportation and miscellaneous, which is in line with current rates for similar services. Physical contingencies of 10% have been allowed for deferred maintenance and workshops and warehouses. Price contingencies have been estimated at 14% for the foreign component and 50% for the local component, reflecting annual rates of inflation, defined in the cost table on the next page.  Project Cost Estimates and Financing Bank In B$ million In US$ million Participation (US$) Local Foreign Total Local Foreign Total fec Million % I. Civil Works (a) Workshops and warehouses 6 6 12 0.3 0.3 0.6 50 0.3 46 (b) Deferred maintenance (Table 3.6) (i) paved roads (700 km) 26 26 52 1.3 1.3 2.6 48 (ii) gravel roads (1,400 km) 52 36 88 2.6 1.8 4.4 44 Subtotal (i+ii) 78 62 140 3.9 3.1 7.0 3.1 46 Subtotal (a+b) 84 68 152 4.2 3.4 7.6 3.4 46 II. Equipment, Vehicles, Tools and Spare Parts (Table 3.10) (a) Maintenance equipment, vehicles and tools 24 216 240 1.2 10.8 12.0 90 10.8 90 (b) Spare parts (initial stock, preventive maintenance, overhaul) 6 60 66 0.3 3.0 3.3 90 3. 90 (c) Workshops, laboratory and training equipment and tools, and traffic counters 4 26 30 0.2 1.3 1.5 90 1.3 90 Subtotal (a+b+c) 34 302 336 1.7 15.1 16.8 15.1 III. Technical Assistance and Training 8 46 54 0.4 2.3 2.7 85 2.3 85 IV. Engineering and Economic Studies for Road Upgrading and Rehabilitation 18 18 36 0.9 0.9 1.8 50 0.9 46 Base Cost (April 1978) 144 434 578 7.2 21.7 28.9 21.7 V. Contingencies (a) Physical (10% of I and II (b)) 8 8 16 0.4 0.4 0.8 0.3 (b) Price Escalation 1' (50% local and 14% foreign costs) 72 60 132 3.6 3.0 6.6 3.0 TOTAL ESTIMATED PROJECT 224 502 726 11.2 25.1 36.3 25.0 1/ Based on the following estimated annual price increases: - Local: 17% for 1978 and 15% for 1979-83 - Foreign:Parts I, III, and IV 1978: 8%; 1979: 7.5%; 1980-85: 7% Part II ... .. 1978: 7%; 1979: 6.5%; 1980-85: 6%  - 28 - 3.24 Disbursement of the loan would be made as follows: (a) 46% of total expenditures for construction and expansion of workshops and warehouses and of the deferred maintenance costs; (b) 100% of the foreign expenditures for direct imports or 90% of local expenditures for local procurement of imported goods; (c) 100% of foreign expenditures or 85% of total expenditures for technical assistance and training; and (d) 100% of foreign expenditures or 46% of total expenditures for engineering and economic studies. The estimated schedule of disbursement is given in Table 3.12. Disbursement would be made against normal documentation except for deferred maintenance by force account, which would be disbursed against statements of expenditures supported by monthly certificates of work performed, approved by consultants. Documentation for these expenditures would not be sent to the Bank and would be retained by SNC for review by Bank project supervision mission (para 3.10). K. Execution, Procurement and Monitoring 3.25 Execution of the project would be the responsibility of SNC. The maintenance program would not start before July 1979, allowing for the pro- curement of the requested equipment and vehicles. The tentative project implementation schedule, shown in Table 3.13, was reviewed and agreed during project negotiations. 3.26 The technical assistance services would be provided by consultants acceptable to the Bank under terms and conditions satisfactory to the Bank. The magnitude and scope of technical assistance services clearly calls for an established foreign firm. Decree 13946, regulating consulting activities in Bolivia, requires that foreign consultants should associate themselves with local consultants and that staffing should include at least 30% of local professionals, unless not enough local professionals are available for the specialized projects at hand (Article 11). During negotiations, the Govern- ment confirmed that the proposed contract for technical assistance would fall under the exception provided under Article 11. Further, the procedures envisaged for selecting a firm were discussed, and, to ensure proper coordi- nation with the advance technical assistance (para 2.31), the Government agreed to the continuity of the counterpart staff through both technical assistance programs. 3.27 Consulting services for road engineering and economic studies would normally be entrusted to local firms or joint ventures of foreign and local firms. Selection would follow SNC established procedures. The selection of the firms, the terms of reference of the studies and the terms and conditions of the con- sultants' contract would have to be acceptable to the Bank (para 3.20). 3.28 Procurement of equipment, tools, parts, etc. would be in accordance with the Bank's "Guidelines for Procurement" (March 1977). The procurement program for equipment, parts and tools, indicating lot sizes and estimated  - 29 - costs, would be subject to prior approval by the Bank. Contracts with estimated value of over US$50,000 would be awarded through international competitive bidding. Lots, equipment, vehicles, tools and parts, which can be obtained from a number of sources with estimated values of less than US$50,000 and within an overall ceiling of US$1 million, would be advertised locally following SNC's procurement regulations, which are satisfactory. When necessary, spare parts for specific makes of equipment would be procured directly from established dealers in accordance with SNC procurement regula- tions for individual orders of less than US$50,000 and within an overall ceiling of US$250,000. The ceiling of contracts for which SNC would not require prior approval by the Bank would be set at US$50,000. 3.29 Construction and extension of workshops and warehouses would be procured through SNC regulations which allow for adequate competition. Bids would be advertised locally since only local contractors would be interested in these small-scale works (costs of about US$0.5 million each). During negotiations, agreement was reached on all procurement procedures as out- lined in paragraphs 3.26-3.29. 3.30 The progress of the project in each district would be monitored through the indicators given in Table 3.6. Monitoring data would cover (a) the scope of volume of maintenance operations shown by detailed and aggregate measures of work performed; and (b) the efficiency of the equipment fleet assessed through systematic sampling of equipment availability and utilization. During negotiations, the Government confirmed that the above indicators would be monitored following methods satisfactory to the Bank and reported on annually. L. Impact and Adequacy of Technology 3.31 The project would have no significant environmental impact. It would improve highway safety, especially through repair of damaged pavements and use of smaller size graded materials on gravel roads. The project would have an employment impact since it would require about a 10% expansion of SNC maintenance operation personnel and would make increased use of unskilled labor through the highway service and voluntary labor (para 2.28). The project would upgrade the qualifications of SNC personnel. It would assist in making better use of tax-induced labor by supplying adequate tools and improving its management. It would also consolidate and strengthen community participation in road maintenance work by utilizing, in a more systematic way, the limited experience gained so far and by setting up more efficient institu- tional arrangements. The project would explore and possibly develop intermediate technology methods for road maintenance. M. Project Risk 3.32 The main reasons for the poor level of road maintenance in Bolivia have been the lack of an adequate understanding of maintenance requirements, the insufficient capacity of SNC, caused largely by the poor condition of equip- ment, and the lack of trained personnel. The project includes a comprehensive set of measures to remedy these deficiencies. Direct participation of SNC staff in project preparation has enhanced their perception of, and commitment to, the project objectives. The funding requirements for recurrent and project expenditures have been discussed in detail and agreed with the Government.  - 30 - The magnitude of the proposed expenditures represents only a small percentage of SNC's total funds and is well within the Government's financial capacity. The participation of fully qualified international consultants in project implementation would be an important element in achieving the project's objectives. 3.33 Risks have been curtailed but are still present, especially since this would be the Bank's first project with SNC. The procurement phase of the project presents no special risk. It is possible, however, that the implementation of the specific maintenance programs would encounter delays. The annual targets of the maintenance programs for the three districts already reflect the fact that the full development of the operational capacity and efficiency of the districts would be realized gradually over the project period. However, past experience with similar projects suggests that delays in program implementation of one or two years are common even with the best prepared projects. Another eventuality is that the expected improvements in efficiency would not be sufficient to meet fully the operational targets of the programs defined for each district. Sensitivity tests carried out on both risks (para 4.10) showed that the justification of the project would not be affected. IV. ECONOMIC EVALUATION A. General 4.01 The objective of the economic evaluation was three-fold: first, to ascertain the economic feasibility of the proposed highway maintenance project as a whole; second, to take into account the different geographical conditions in the districts of La Paz, Cochabamba and Santa Cruz and third, to determine an economically "optimal" scope and composition for the project. The evalua- tion was carried out by means of the Bank's HDM model which was adapted to Bolivian road conditions through roughness measurements on representative roads in the three districts of La Paz, Cochabamba and Santa Cruz, undertaken by the Texas Research and Development Foundation (US) in 1977. 4.02 The HDM model has been used to simulate total costs for road maintenance and vehicle operation of the "without" and "with" project cases over the assumed seven-year economic life of the project, corresponding to the average economic life of the project. The specific operations undertaken by the HDM model were, inter alia, as follows: (a) compute road deterioration and maintenance estimates for both paved and unpaved roads as a function of the initial design standard, the present road surface condition, the volume and composition of the traffic during the current year, the environment and the specified maintenance poli- cies ranging from low to high levels; (b) estimate vehicle operating costs over the representative roads within the three districts as a function of surface type and condition, environment, design geometry and vehicle characteristics and costs; and  - 31 - (c) estimate the current year's traffic volumes based on the previous year's traffic and the projected growth rates by vehicle type for both normal and generated traffic. A draft user's manual describes in detail the methodology used in the HDM model. 1/ B. Analysis Network 4.03 For purposes of analysis, the networks of the districts of La Paz, Cochabamba and Santa Cruz were each divided into 10 representative links on the basis of updated inventories prepared by SNC in 1977, two to identify surface- treated roads (only one for Santa Cruz), five for gravel roads and three for earth roads. One additional link for paved roads with asphalt concrete was considered for the districts of Cochabamba and Santa Cruz. There is a detailed description of environmental and design characteristics and surface conditions for each of the 31 representative links (Tables 3.1 and 3.2). C. Maintenance Activities and Unit Costs 4.04 Maintenance was divided into five activities for paved roads and four for unpaved roads, each with its unit cost (Table 3.3). Table 3.7 de- scribes the frequency of the execution of these activities in the "without" project case, and Table 3.8 in the "with" project cases. The first is based on available data, experience and observations in Bolivia, and the second on the best estimate of the changes that would be affected by the project. The "cost adjustment factors" indicated in Table 3.3 are factors applied to the unit costs given in the same table for each maintenance activity. These factors vary, depending on the field conditions in the three districts, the intensity of maintenance operations and the increased productivity caused by the imple- mentation of the maintenance project. D. Traffic 4.05 Each of the 31 representative links defined above has a specific level of traffic associated with it, as shown in Table 3.1. Existing traffic volumes were established on the basis of traffic counts routinely conducted by SNC and by special counts and origin and destination surveys carried out by SNC in 1977. Road traffic is expected to grow at a rate of 7% in the district of La Paz, 9% in the district of Cochabamba and 11% in the district of Santa Cruz. The estimated growth rates seem reasonable and are in line with the Bank's projection of GDP growth, which is expected to be in the 5-6% range. The proposed highway maintenance project would generate traffic by reducing passenger and freight costs. The operating cost elasticities for road trans- port in Bolivia are moderate and were assumed on average, 0.3 for the typical vehicle fleet. As a result, generated traffic in the first year of the project implementation was estimated at about 4% of normal traffic. E. Benefits 4.06 Benefits from implementing the highway maintenance project were assumed to occur on account of reduced vehicle operating costs. Vehicle 1/ Draft Highway Design and Maintenance Model User's Manual prepared by Consultants in Management and Technology, Inc., Cambridge, Massachusetts in September 1977.  - 32 - operating costs were estimated on the basis of the information in Table 3.4 for both the "without" and "with" project cases. Vehicle operating costs for selected links are shown in Table 3.5. On average, about 12% of vehicle operating costs is saved by carrying out the maintenance project. Benefits not quantified in the evaluation are reduced passenger time costs, decreased or prevented economic loss due to road closures and reduced accident costs. The evaluation performed is therefore conservative. F. Economic Assessment 4.07 In carrying out the economic assessment, adjustments have been made to avoid the influence of taxes and subsidies and to account for the present very low prices of oil products (paras 2;23 and 4.10). Economic costs net of taxes and subsidies have been estimated for investment costs, maintenance costs, and vehicle operating costs. A shadow rate of 2.25 for gasoline and of 1.85 for diesel was used. Since the shadow price for labor would be only negligibly different from its market price and since there are no major distortions in the exchange rate, no shadow pricing was applied to labor cost and to the exchange rate. The economic evaluation considered the total economic costs of the proposed highway maintenance project, including the economic costs of the investments under the project as well as replacement costs during the analysis period 1979 to 1985. 4.08 The proposed highway maintenance program is clearly well justified with an overall benefit/cost ratio of about 12.1 and a net present value estimated at about US$160 million when an 11% opportunity cost of capital was used. Thus, for the project as a whole, the economic rate of return would be well in excess of 100%. These high rates of return reflect a situation when a small investment permits the productive capacity of the large investment made in highway construction to be preserved. The corresponding results for the three districts show a benefit/cost ratio of 16:1 for La Paz, of 7:1 for Cochabamba and of 8:1 for Santa Cruz with a net present value estimated at about US$110 million, US$15 million and US$40 million respectively (Table 4.1), and are explained in Annex I. 4.09 The scope and composition of the highway maintenance project resulted fr'tm an iterative optimization process which was carried out for each of the districts of La Paz, Cochabamba and Santa Cruz. The selection of the "optimal" (or at least more efficient) maintenance policy for each of the 31 representative links was based on net present value criterion, and only those which yielded a net present value greater than zero and which maximized the net present value within the policy alternatives have been selected for the proposed maintenance project (Table 4.2). The detailed findings of the optimization process are described in Annex 1 and Table 3.8. 4.10 Sensitivity tests applied to the economic evaluation consider a 25% decrease in benefits and a two-year delay in the completion of the project (para 3.34). The overall benefit/cost ratio is 9:1 and the net present value estimated of about US$120 million for the benefit decrease hypothesis,