Ecuador - Sixth Highway Project

Document of vz j The World Bank . , > ' t3" FOR OFFICIAL USE ONLY Report No. 2917b-EC STAFF APPRAISAL REPORT SIXTH HIGHWAY PROJECT ECUADOR May 30, 1980 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 Currency Unit = Sucre (S/) US$1 = S/ 25.00 Fiscal Year January 1 - December 31 System of Weights and Measures: Metric 1 meter (m) = 3.28 feet (ft) 1 kilometer (km) 2 = 0.62 mile (mi) 1 square kilometer (km ) = 0.386 square mile (sq mi) 1 metric ton (m ton) = 0.98 long ton (lg ton) = 1.1 US short ton (sh ton) Abbreviations and Acronyms CONADE - National Planning Council DAC - Directorate of Civil Aviation DGOP - General Directorate of Public Works ENFE - State Railway Corporation ER - Economic Return FEC - Foreign Exchange Component FONADE - National Development Fund FONAPAR - National Participation Fund FONAPRE - National Preinvestment Fund GDP - Gross Domestic Product ICB - International Competitive Bidding IDB - Inter-American Development Bank JUNAPLAN - National Planning Board MAG - Ministry of Agriculture MOP - Ministry of Public Works PC - Provincial Council RORO - roll-on/roll-off SAE - Sociedad Argentina de Estudios, Consultants SECAP - Ecuadoran Capacitation Service TAME - Military Transports UCCV - Feeder Roads Coordination Unit UNDP - United Nations Development Programme UPCT - Transport Planning and Coordination Unit USAID - United States Agency for International Development VOC - Vehicle Operating Costs VPD - Vehicles per Day  FOR OFFICIAL USE ONLY STAFF APPRAISAL REPORT SIXTH HIGHWAY PROJECT ECUADOR TABLE OF CONTENTS Page No. I. THE TRANSPORT SECTOR ......... 1 A. General .......................................... I B. The Transport System ............................. 1 C. Planning, Coordination and Financing .... ......... 5 D. Recommended Improvements and Developments ......... 6 II. THE ROAD SUBSECTOR .................. 6 A. The Road Network ................................. 6 B. Characteristics and Growth of Road Traffic ....... 7 C. The Road Transport Industry ..... ........... 8 D. Road Administration ..... ..................... 8 E. Road Planning ...... .............................. 10 F. Road Expenditures ...... .......................... 11 G. Road User Taxation ............................... 12 H. Road Engineering ...... ........................... 14 I. Road Construction ...... .......................... 15 J. Road Maintenance .............. . ................... 16 K. Personnel Training ...... ......................... 17 III. PAST AND ONGOING BANK ASSISTANCE TO THE HIGHWAY SUBSECTOR ................................... 17 A. Past Assistance .................................. 17 B. Projects Under Way ............................... 18 IV. THE PROPOSED SIXTH HIGHWAY PROJECT .................... 20 A. Project Objectives and General Description ....... 20 B. Cost Estimates, Financing and Disbursement ....... 21 C. Execution, Procurement and Monitoring .. ........... 24 D. Project Risks .................................... 27 This report is based on the findings of an appraisal mission which visited Ecuador in November/December 1979. The mission comprised Messrs. Sergio Miquel (Engineer), John Sargent (Economist) and Lorne Sonley (Agricultural Economist). Mr. Giuseppe Morra (Training Specialist) contributed to the preparation of the project's training component. The report has been edited by Miss Virginia Foster. 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.  TABLE OF CONTENTS (Continued) Page No. V. THE FEEDER ROADS PROGRAM .............................. 27 A. Preparation ....... ............................... 27 B. Agricultural Production in the Project Zone ...... 28 C. Improvement of about 1,500 km of Secondary and Feeder Roads in the Provinces of Guayas, Los Rios and El Oro ..... ...................... 29 D. Maintenance ................... ................... 31 E. The Feeder Road Coordination Unit .. .............. 32 F. Economic Aspects and Evaluatuon ...a o.............. 32 VI. ROAD MAINTENANCE AND TRAINING ......................... 37 A. General ..... ..................................... 37 B. Preparation and Description of Maintenance Components .............. . ........... 37 C. Economic Evaluation .............................. 38 D. Training of Personnel ............................ 39 VII. TRANSPORT PLANNING ................ 41 VIII. AGREEMENTS REACHED AND ECOMMENDATION .... .............. 42 TABLES 1.1 - Estimates of Domestic Freight and Passenger Traffic by Modes (1969-1978) ................................ 45 1.2 - Transport Infrastructure Investment by Mode 1970-1977.. 46 2.1 - Highway Network ....................................... 47 2.2 - Vehicle Fuel Consumption (1970-1979) .... .............. 48 2.3 - Vehicle Registration by Categories (1964-1978) .... .... 49 2.4 - Present Status of Secondary and Feeder Roads Management 50 2.5 - Actual and Proposed Highway Expenditures by MOP 1976-1984 ........................................... 51 2.6 - Government Road Expenditures and Road User Taxes 1975-1978 ........................................... 52 2.7 - Road User Taxes According to Type of Vehicle 1977 ..... 53 2.8 - Minimum Design Standards for Feeder Roads .... ......... 54 2.9 - Present MOP Road Maintenance Fleet .... ................ 55 4.1 - Schedule of Estimated Disbursements .o .................. 56 4.2 - Schedule of Implementation ............................ 57 5.1 - Agricultural Data for Provinces of Guayas, Los Rios and El Oro (1974) ................................... 58 5.2 - Four-Year Secondary and Feeder Roads Improvement Program ............................................. 59 5.3 - First-Year Secondary and Feeder Roads Improvement Program in Guayas .................. . ............... 60 5.4 - First-Year Secondary and Feeder Roads Improvement Program in Los Rios and El Oro ...................... 61 5.5 - Feeder Roads Maintenance Program in the Three Provinces 62 5.6 - Tentative Equipment Procurement List for Feeder Roads Maintenance ......................................... 63 5.7 - Traffic Projections for Secondary and Feeder Roads .... 64 5.8 - Vehicle Operating Costs on Roads in the Provinces of Guayas, Los Rios and El Oro .... .................. 65 5.9 - Sample Results of Economic Evaluation .... ............. 66  TABLE OF CONTENTS (Continued) Page No. TABLES 6.1 - MOP's 1981 Road Maintenance Program .... ............... 67 6.2 - Funding Requirements for the Four-Year Road Maintenance Program ................................. 68 6.3 - entative MOP Road Maintenance Equipment Procurement List ................................................ 69 6.4 - Maintenance Equipment Overhaul Program .... ............ 70 6.5 - Investments in Workshops and Warehouses .... ........... 71 6.6 - Targets for Equipment Availability and Utilization .... 72 6.7 - Highway Network Condition, 1980 ........ . ............... 73 ANNEXES 1. - Summary of Participation Agreements between MOP and the Provincial Councils of Guayas, Los Rios and El Oro 74 2. - Organization and Staffing of the Feeder Roads Coordination Unit ................................... 76 3. - Outline Terms of Reference for Preparation of Further Feeder Roads Projects ............................... 81 4. - Outline Terms of Reference for Technical Assistance on Road Maintenance .................................... 86 5. - Outline Terms of Reference for Technical Assistance for the Personnel Training Program ...................... 94 6. - Outline Terms of Reference for Land Transport Planning 109 7. - Selected Documents and Data Available in the Project File ......... ............................... 114 CHARTS World Bank 21208 - Organizational Chart of MOP World Bank 21522 - Model Organization Chart of a Provincial Council MAPS IBRD 14906 - Four-Year Secondary and Feeder Roads Improvement Program in the Provinces of Los Rios and El Oro IBRD 14908 - Four-Year Secondary and Feeder Roads Improvement Program in the Province of Guayas   I. THE TRANSPORT SECTOR A. General 1.01 Ecuador's geography and history have been determining factors in the location of its population and economic activities as well as in the development of its transport network. Two principal mountain chains, the western and eastern ranges of the Andes, run from north to south and divide the country into three distinct regions: the tropical and fertile coastal region (Costa), the temperate mountain region with fertile valleys (Sierra) and the tropical Amazon region with largely poor soils (Oriente). Historically, the population and the economic and transport activities developed separately in the Sierra and the Costa, with their respective urban centers, Quito and Guayaquil. The Sierra region, densely settled and provided with linking trails in pre-Colombian times, was further developed into an economic unit with an internal road network by the Spanish colonization. The early settlers of the coastal region, both Indians and Spanish, traveled mostly by sea and by river and did not develop many inter-connecting trails and roads. Adequate transport links between the Sierra and the Costa were established much later and rapidly evolved into the main transport corridors of the country. Only in recent decades has economic activity begun to spread into the Amazon region. 1.02 Land transport flows along several corridors: (a) the country's most important corridor links Quito, the capital city, with Guayaquil, the main port and industrial center; (b) two north-south corridors extend from the seacoast and the Colombian border to the Peruvian border -- one following the central valley of the Andean chains and serving Quito, and the other running along the Costa, from the port city of Esmeraldas in the north, through Guayaquil, and further south to Puerto Bolivar; and finally (c) the recently developed corridor between the Oriente region and Esmeraldas, channeling mainly crude oil transported by pipeline. B. The Transport System (i) Highways 1.03 Ecuador's domestic transport is based essentially on roads for general cargo and passengers, with petroleum products transported by pipeline. About 75% of all freight movement (ton-km) consists of petroleum products (Table 1.1). Apart from pipelines and some coastal shipping of petroleum, road transport accounts for over 95% of total inter-city freight transport and about 90% of total inter-city public service passenger traffic. The highway subsector and its administration are discussed in full in Chapter II. 1.04 Given the relatively short hauling distances and the rugged terrain, road transport is, in general, the most adequate mode for non- petroleum transport. The country's truck and bus fleet grew rapidly  - 2 - over the last decade and so did its share of the traffic. High demand and the absence of strong competition from railroads stimulated development of inter- city bus operations, which are adequate in terms of price, quantity and quality of services. The largely unregulated trucking industry competes actively for traffic. (ii) Ports and Shipping 1.05 Foreign and coastal shipping is handled through eight maritime ports with widely varying natural, technical and operational characteristics. There are three general cargo ports, two petroleum terminals, one specialized banana port and one fishing port. Guayaquil, which handled about 1.78 mil- lion tons of cargo in 1978, is the major port, accounting for about 80% of imports and 40% of non-petroleum exports. Esmeraldas has the major petroleum exporting terminal, handling about 7 million tons in 1977. Ports and shipping are administered through the Consejo de la Marina Mercante and the related Direccion, which report to the Defense Ministry. The Consejo is a broad policy-making body while the Direccion administers all policy and operational matters, e.g., it controls port and shipping operations and administers tariffs. However, these tariffs bear no consistent relation to costs, and an improved tariff structure is needed. The present level of tariffs, neverthe- less, provided the ports with considerable financial autonomy--in 1977-1978, about 40% of port investment was financed by port authority resources. Much of the remainder comes from domestic loans. 1.06 Under the Second Guayaquil Port Project (Loan 1255-EC, US$33.5 million, May 1976), the Bank is financing construction of additional deep water berths, a bulk cargo terminal, handling and workshop equipment, dredging operations and technical assistance for training of managers and staff. The project started off slowly because of a long delay in effectiveness (caused by a change in port management after the Loan signing) and delay in the startup of civil works (caused by a dispute over responsibility for soil stability in the area of berth construction). Civil works progress is now good. The deep water berths and the bulk terminal are expected to be completed by end-1980. The training programs and dredging operations are under way, and, together with equipment procurement, will also be completed by end-1980. There have been proposals to construct a modern banana handling facility in Guayaquil Port, but, thus far, the strong port labor unions have refused to accept further port mechanization, and less efficient hand-loading continues. 1.07 In addition to its large petroleum export terminal, Esmeraldas is constructing a roll-on/roll-off (RORO) facility. Manta, the second line general cargo port, has a good RORO installation, but the port is under- utilized for part of the year and access is inhibited by urban congestion problems. Puerto Bolivar, the specialized banana port, is being expanded, but technical problems have slowed progress. 1.08 The national fleet consists of 12 ships operated by three companies, two of which specialize in petroleum and bananas while the other deals in general freight; five other vessels are operated in cooperation with Colombia. However, the entire Ecuadoran fleet transports only 10% of the country's inter- national shipping trade because petroleum is carried mainly by foreign tankers.  - 3 - 1.09 With ongoing and already committed projects, port capacity should not be a significant problem in the near future. New fishing port construc- tion at Posorja and Manta represents the only major project activity in the offing. Some further addition to berth capacity at Guayaquil is also under consideration. However, Ecuador is lagging considerably in containerization and unitizin6 of cargo. The opportunities and the need for action in these areas are manifest. Of non-petroleum freight now being handled at the major ports, almost 40% is suitable for containers while less than 3% is actually containerized. Cargo suitable for unit loads (pallets) represents another 40% of total freight, whereas only 2% is now unitized. There is additional scope for unitized banana shipments. Thus far, the Government and local shippers have not undertaken the necessary improvements to introduce this modern and widely accepted technology. Consultant recommendations for such improvements are currently before the Government. (iii) Railways 1.10 Ecuadoran railways are administered by the State Railway Corpora- tion (ENFE) created in 1946. ENFE is an autonomous state enterprise under the supervisory authority of the Ministry of Public Works (MOP) (Chart I). The railway network has a total length of 971 km, but the only line with traffic of any importance is the Quito-Guayaquil route (446 km). The railways are run down and dilapidated. Sleepers and rails are in poor condition (only 10% of track has adequate ballast), and the communications system is practi- cally non-existent. Rolling stock is antiquated and unsafe, particularly given the narrow gauge (3'6"), steep grades (often 5-1/2%) and frequent tight curves. Steam locomotives are still used extensively. Like many railways, the Ecuadoran system is highly overstaffed in relation to its traffic and level of service. However, the 1979 employment level of about 2,600 is a substantial improvement, achieved by attrition, over the 1977 level of 3,050. Among these staff, there is only one professional engineer, who is in a top management position. Training is practically non-existent. The railway has a complex and cumbersome administrative structure with about 20 departments, but has no departments of planning, statistics or commercial operations. 1.11 Competition from roads and neglect of rail infrastructure have resulted in steadily declining traffic and a deteriorating financial position. Freight traffic declined from 82 million ton-km in 1966 to 48 million ton-km in 1974 (Table 1.1). Over the next three years, a further dramatic decline to 29 million ton-km occurred by 1978; less than 200,000 tons were handled in that year. This tonnage represented less than 2% of total inter- city freight transport, excluding pipelines. Similarly, passenger traffic dropped from 78 million pass-km in 1966 to 54 million pass-km in 1978. Finan- cial losses have been increasing, but not dramatically. From US$4 million in 1963, the deficit rose to US$5.3 million in 1974 and, in 1978, was about US$6.5 million equivalent. Since freight tariffs remained unchanged from 1961 to 1977, over which time costs rose at least three-and-a-half times, it is surprising that the losses have not been greater. Passenger tariffs remain far below long-run marginal costs. 1.12 Recent administrations have shown no inclination to close or to redimension the railway system, but also have not been willing to commit funds to maintain or improve it. The 1973-1977 rail investment plan  proposed US$12.6 million equivalent (1972 prices) for railways, but, over the period, only US$3.5 million equivalent was actually spent, and this amount went largely to maintenance; virtually no new investment occurred. In economic terms, the most obvious policy would be to close the railway completely. However, the rail network does, at present, provide the only form of access to many isolated mountain communities. Also, the Guayaquil-Quito route has a worldwide tourist reputation for its scenic attractions, including a spectacular ascent of the Andes. Therefore, if the present through-trip passenger fares (most locals make short trips) were substantially increased from their present low level for tourists, and, if track and motorized railcars could be maintained adequately, a useful role for the railway could be estab- lished at a reasonable financial cost to the Government. The new national development plan does, however, propose major rail investments, and, there- fore agreement was reached during negotiations that the Government would not consider such investments without prior adequate economic assessment (para 7.02). (iv) Aviation 1.13 Given the geographical diversity of Ecuador and the frequent lack of good land transport links between major developing zones, air transport has played a major role and will continue to do so. Aviation is essentially under the control of the Ministry of Defense. The Directorate of Civil Aviation (DAC) has authority over air traffic operations, regulation and tariffs, while individual airports are controlled by separate managers reporting to the National Council of Civil Aviation. The growth of civil air traffic has been quite rapid. International traffic through the two international airports doubled over the period 1972-1977 to about 400,000 passengers p.a. The growth of domestic traffic using the total of 34 airports and strips has slowed recently with the rapid improvement of inter-city road links, but nevertheless reached about 800,000 passengers in 1977. Ecuador has four major airlines: Government-owned Ecuatoriana, providing international services with its three Boeing 707s and three 727-720s, and three domestic carriers SAN, SAETA and Military Transports (TAME), flying about 15 Caravelles, Viscounts and Electras. The latter concentrate on the Quito-Guayaquil-Cuenca triangle, which accounts for about 65% of all domestic passenger trips. Quito and Guayaquil interna- tional airports are by far the most important. Quito airport is open only to daylight international traffic because of visibility problems, causing limita- tion in scheduling, while Guayaquil's runway is limited by the adjacent river. Feasibility studies for relocating the in-town Quito airport and upgrading the Guayaquil facility have been completed, but the Government has not given priority to proceeding with detailed design studies since present capacity is generally adequate. The principal needs are greater segregation from general urban traffic of the accesses to both international airports, upgraded naviga- tional systems at Quito to facilitate night traffic and some improvements at provincial airports. (v) Pipelines 1.14 Transport by pipeline is the responsibility of the Ministry of Natural Resources. A relatively old pipeline for refined petroleum products extends from Duran, close to Guayaquil, to Quito (358 km), carrying an annual volume of about 180,000 tons of various products, mainly premium gasoline. A crude oil pipeline, built from 1970 to 1972, extends from the Oriente oil fields at Lago Agrio to the Pacific port of Balao, near Esmeraldas (503 km),  - 5 - channeling an annual volume of over 10 million tons. Smaller feeder lines connect this pipeline at Lago Agrio with other oil fields, such as Shushufindi (16 km) and Sacha (52 km). With financial assistance from the Inter-American Development Bank (IDB) under a November 1976 loan, a new refined-products pipeline is being built from Esmeraldas to Quito (260 km). Under the same loan, a liquified petroleum gas (LPG) pipeline is to be built `rom Shushufindi to Quito (324 km). There is also a proposal to build a pipeline for petroleum derivatives from the Libertad refinery to Guayaquil (120 km), and design work is under way. C. Planning, Coordination and Financing 1.15 Transport planning, policy and administration are still fragmented among six Ministries, including the former macro-planning body, the National Planning Board (JUNAPLAN), which has now been absorbed into the National Planning Council (CONADE), and various regional and local authorities. However, the role of each mode is clearly defined and executed, and the fragmentation has not resulted in major investment misallocations or inefficiencies. Never- theless, better intermodal coordination is needed to address such problems as improving road access to major ports. The institutions dealing with transport at the levels of provinces, municipalities and state enterprises are largely unregulated by any centralized setting of priorities or goals. Under the Fourth Highway Project (Loan 1231-EC, US$10.5 million, Mlay 1976), the creation of a Transport Planning and Coordination Unit (UPCT) within MOP was undertaken and technical assistance was provided. This office has assumed responsibility in matters pertaining to land transport but has still not fully assumed its role with respect to the other modes. Planning and administration in the sea and air transport modes remain with the Defense Ministry. Under the Agreement for Loan 1231-EC, this integrated planning was to be achieved by 1978. The Government has now agreed to ensure the cooperation of sea and air transport authorities through CONADE (para 7.02). In the meantime, UPCT is advancing in the planning studies for the land transport mode and expects to have a draft ten-year plan prepared by mid-1980. 1.16 Government investment in transport infrastructure is made through the various modal agencies. Because of the lack of uniform procedures for budgetary and financial statements, it is difficult to establish an accurate picture of total capital investment in the sector. An attempt has been made, however, to reconstruct total sectoral expenditures, including investments, in Table 1.2. The total investment for 1977, which reached about US$140 million equivalent, appears to have been sustained through 1979, but no significant real increases are expected or warranted over the next five years. 1.17 Since 1973, Government expenditures have been stimulated by the increasing revenues from petroleum exports, which affected capital invest- ments as well. As a proportion of total national Government expenditures, transport and communications represented about 15% over 1970-1977, while the sector's share of public investment over the period 1973-1977 averaged 32%. The National Development Fund (FONADE) (now Banco Ecuatoriano de Desarrollo) has received a substantial portion of revenues from oil exports for financing high priority development projects, whereas the National Preinvestment Fund (FONAPRE) was set up in 1973 to finance the preparation of such projects. The  work of FONAPRE is being supported by the Bank through Loan S-006-EC (US$11 million, 1978). Improvement in project preparation capacity is an important prerequisite to sustain the current pace of public investments. While some progress has been made, further efforts will be required by the new administra- tion if large scale international financing is to be obtained. D. Recommended Improvements and Developments 1.18 Planning the future of Ecuador's transport sector, chief respon- sibility for which resides with CONADE and UPCT, would depend upon their ability to identify clearly to the new Government priority areas for policy changes and investment needs, and recommending strategies addressing these priority needs, among which the following can readily be recognized: (a) improvement of the existing road network by continued rehabilitation and upgrading of road maintenance, the objective being to pursue and consolidate the considerable advances made over the last five years; (b) expansion of the road network, particularly the secondary and feeder road system; (c) improvement of seaport capacity and maritime shipping, definition of the future role of the railways and improvement of air transport services; and (d) adoption of an adequate pricing and taxation policy for the domestic use of motor fuels, which are priced far below international levels. The latter is clearly the most important immediate issue now facing not only transport planning but national economic policy as well, in view of the implications of the present pricing system for Government finances, resource allocation and crude oil production. II. THE ROAD SUBSECTOR A. The Road Network 2.01 Road development in Ecuador has been strongly influenced by geographic conditions, as well as by population distribution and migration. These governing factors differ widely among the three major regions of the country: the Costa, the Sierra and the Oriente (para 1.01). The first roads were built to serve the temperate, densely populated Sierra region, and only much later were links established with the coast at the traditional port of Guayaquil. More recent progress of road development in the Costa region spread from Quito to the west and from Guayaquil to the north and south, completing, in the last decade, a basic network that serves the Sierra and the Costa regions adequately, except in the northern part of the country. Exten- sion of the road network into the sparsely settled Oriente region has been much slower and reaches, at present, only the eastern foothills of the Andes and the oil rich northern section of the Amazonian Basin. 2.02 In 1979, the network reached a total length of 33,800 km, of which 13% are paved, 38% are gravel and 49% are earth roads (Table 2.1, Part A). Although the network is not clearly classified in primary, secondary and tertiary roads, the main network under the direct responsibility of MOP consists of about 8,400 km of trunk roads connecting the main production centers and linking them with Colombia to the north and Peru to the south.  - 7 - About 50% of these trunk roads are paved, and slightly less than 50% are gravel surfaced. Responsibilities for the remaining 25,400 km of roads-- 1% paved, 34% gravel and 65% earth--is divided among local governments and national and regional agencies, with the occasional assistance of MOP. Investment and maintenance planning have been hampered by insufficient data regarding tne highway network. To correct this deficiency, it was agreed during negotiations that MOP would: (a) complete, by December 31, 1980, the detailed inventory of the public roads under MIOP's jurisdiction currently being carried out; (b) carry out, under the project and not later December 31, 1981, a detailed inventory of other public roads; and (c) after completion of such inventories and of a countrywide traffic survey (para 2.05), reclassify, by June 30, 1982, Ecuador's road network into primary, secondary and tertiary roads. 2.03 Between 1970 and 1979, the total length of paved and gravel roads grew by 5% annually (Table 2.1, Part B); 1,600 km of paved roads, 4,600 km of gravel roads and 5,400 km of earth roads were added to the road system. In addition, about 800 km of existing primary paved roads were improved in the years 1976-1978, and a further 200 km of improvements are currently under way. This effort has notably increased the quality and capacity of the main network, but some of the roads have been improved to standards higher than those required in the medium term. However, other existing paved roads need widening and strengthening, or pavement rehabilitation. Many gravel roads need widening, resurfacing with engineered gravel and drainage improvement. Earth roads are mostly of poor standard and are usable only during the dry season. 2.04 The last ten years have been a period of rapid development and relatively high level of expenditure for the highway subsector. Although the Government plans to pursue the development of road infrastructure, road planners would, in the future, have to manage a fairly complex network with more stringent funding constraints than in the past. They would have to expand rapidly the construction and improvement of feeder and secondary roads to support agricultural production and to provide basic services to rural communi- ties. Ecuador's road program would also have to consolidate and expand advances made in maintenance. Another important element of future road programs would be to pursue the rehabilitation and upgrading of existing roads. Finally, the road program would have to meet the requirements for completion of major projects now under way and provide for construction of selected new links to improve inter-regional communications, especially with the Oriente and with the northern part of the Costa area. The investment plan now under preparation (para 1.15) would provide a basis to develop a balanced road program taking into account anticipated funding levels. B. Characteristics and Growth of Road Traffic 2.05 A partial 1976 survey indicated average traffic on paved roads of around 1,500 vehicles per day (VPD), and 350 VPD on gravel roads. Some 1977 counts on six main highways found traffic levels of 3,000-6,000 VPD. The best estimate of the composition of traffic nationwide is about 60% light vehicles, 25% trucks and 15% buses. Overall traffic growth can also be estimated best through annual growth of vehicle fuel consumption (Table 2.2) which has accelerated rapidly from the 1965-1974 average of about 10% p.a. to almost 20% p.a. over the 1975-1979 period. MOP is still in the process of developing systematic traffic counting procedures as would be necessary to  - 8 - support improved planning of investments as well as maintenance. MOP has initiated the implementation of a countrywide counting program on main roads with recently purchased (under Loan 1231-EC) automatic traffic counters and by manual counting to provide vehicle composition data. At the time of negotiations, the Government confirmed that it would, by December 31, 1980, establish procedures satisfactory to the Bank to monitor traffic on public roads under MOP's jurisdiction and that it would, by December 31, 1981, complete a countrywide traffic survey and furnish the results of such survey to the Bank. 2.06 Estimates of vehicle registration are shown in Table 2.3. The fleet doubled over the period 1975-1978, with a growth rate over the last decade of about 13% p.a. with light vehicles, principally the more lightly taxed pickups, registering the highest growth. Because of this rapid growth of the fleet, its average age has declined rapidly, from 7.7 years in 1967 to six years in 1975 and probaby well under five years presently. C. The Road Transport Industry 2.07 Road transport is regulated and administered by a variety of Government agencies, including MOP, the Ministry of Labor and Social Welfare, and the Interior Ministry, the latter being responsible for road transport regulation. Regulations concerning trucking are complex. However, since the Government has never acted with full force to implement them, trucking is largely unregulated. The great majority of trucks are single-owner-operated, with only about 5% of trucks operated by companies or cooperatives. Competi- tion in the trucking industry is strong, and freight rates often do not fully cover capital replacement costs. Passenger transport is much more regulated than freight in regard to entry to the industry, tariffs, routes and schedules. Inter-city and rural bus services are adequate, as are those of the main cities, Quito and Guayaquil. Minibuses are used for some inter-city travel, and service permits are readily available. 2.08 The law governing the weight and dimensions of vehicles permitted to use highways specifies 11 metric tons as the maximum load for single axle, which is satisfactory. The available evidence suggests that overloading of trucks, which can seriously damage highways, is not a major problem in Ecuador. A survey conducted by UPCT in November 1979 at four of the five weighing stations found about 12% of the vehicles to be overweight. Of these vehicles, the great majority were less than 15% over the legal limit. However, the validity of this survey is suspect, largely because of the failure of many heavy vehicles to participate and the inherent difficulties in supervising weighbridge operators. The work program of UPCT over the period would include provision for collection of more reliable data on this matter (para 7.03). The loan covenant relating to proper enforcement of vehicle weight control included in the two previous loans was repeated and, in addition, the Government confirmed that it would periodically monitor the effectiveness of its enforcement program. D. Road Administration 2.09 According to Article 2 of the Highway Law (Law No. 1351 of 1964), MOP has control of all public roads and has to approve all construction projects. MOP plays a central role in all aspects of road infrastructure; it is directly responsible for about 8,400 km of trunk roads, of which about 7,400 are regularly maintained. The rest, together with some important secondary  - 9 - and feeder roads not included under the trunk network, receive only occasional maintenance carried out by local authorities or other government agencies. Provincial and, to a lesser extent, municipal authorities are nominally responsible for administration and maintenance of roads in their own jurisdic- tion. In fact, except for the strongest provinces, they do little, mostly local improvements and no maintenance. A 1974 regulation enabaed the General Directorate of Public Works to establish Road Committees (Comites Viales) to undertake joint projects with the municipalities. The Committees were author- ized to carry out improvement and maintenance works and to levy tolls. In addition to MOP and local governments, a number of development agencies at the central and at the regional levels have undertaken secondary and feeder road construction to serve the requirements of specific programs. Finally, private roads have been built in the Oriente to support petroleum exploration and production. More details are given below about the capacity of provincial authorities, while Table 2.4 provides a synopsis of the various authorities involved in road development. 2.10 The weakness of MOP in planning, the traditional independence of local governments and the general lack of institutional coordination nave created a rather confused situation for secondary and feeder roads. Until 1974, there was no coordination between MOP and the Provincial Councils (PCs) (para 2.12). The growing demand for feeder roads stressed the need for national planning, and MOP started slowly to assume a role in this field, reaching limited agreements with some PCs for planning, financing and construc- tion of specific two-year programs of secondary and feeder roads. Over the four years 1976-1979, these programs averaged an annual level of S/ 250 million (Table 2.4). There is still very little coordination between MOP and the municipal authorities; the Road Committees established for the purpose have not been effective. An adequate degree of coordination has been established so far between MOP and some regional development organizations (Table 2.4); however, somewhat paradoxically, there is little coordination between MOP and other central government agencies, in particular those attached to the Ministry of Agriculture (MAG) (Table 2.4). The proposed project would assist in improving administration and maintenance of secondary and feeder roads in the three project provinces and would lay a basis for extending these improvements countrywide (para 5.14). 2.11 MOP comprises the General Directorate of Public Works (DGOP) in charge of design, construction and maintenance of highways and government buildings and three Directorates responsible for Administration, Finances and Transport Planning (Chart I). DGOP currently comprises four Directorates for programing, engineering, construction and maintenance. MOP staff totals about 4,200, of which DGOP constitutes about 85%; there is no noticeable overstaffing. Given the rigorous restrictions on expansion of civil service establishments, there is little risk that MOP staff would expand beyond the level required to meet its growing responsibilities. Qualified engineers and technical staff are not sufficient in number either in Quito or the districts, largely because of the low salary scale. This problem, accentuated since the early 1970s when petroleum production began to create well paid jobs in the private sector, has been partially alleviated, since 1978, through on-the-job training and direct support provided by the technical assistance included in the Fourth Highway Project (para 2.37).  - 10 - 2.12 The Provincial Councils (Consejos Provinciales, PCs) of the 20 prov- inces (five in the Costa, ten mainly in the Sierra, four in the Oriente regions and one for the Galapagos Islands) take care of many secondary and most feeder roads within their jurisdictions. These PCs were established by the Constitution of 1945 as independent authorities, whose functions are the maintenance and development of culture, education, communications and other public services of provincial interest. The president and the other members of the PCs are elected officers. The PCs have their own budgets with funds received in part from the Central Government and in part collected directly from the taxpayers of the province. The typical organization of the PCs is shown in Chart II and normally includes a road section within the technical department. Capacity in road administration varies widely from a relatively high level in Guayas and Pichincha to almost non-existence in less developed provinces. The situation in the three provinces included in the proposed project is the following: (a) Guayas has a competent road department including an engineering, construction and maintenance section with a total of 12 engineers. It has an extensive, though aged, equipment fleet and minimal workshop facilities. Most road engineering and construction are done by contract; minor road improvements and main roads maintenance are performed by force account. The quality of work is generally satisfactory; however, it could be enhanced substantially through technical assistance and training. Road maintenance is insufficient; only 20% of the provincial network, totaling 2,800 km, receives regular maintenance. (b) Los Rios, with a network of 1,900 km, is typical of the medium competence level provinces; it has only one professional road engineer, one assistant engineer and a few technicians, who handle the modest road engineering, construction and improvement works. The equipment fleet is rudimentary, and no regular road maintenance is performed. (c) El Oro is one of the provinces with the least highway management capability. It does not have any road engineer or technician. MOP's regional engineer acts as the Council's road engineer, supervising whatever work is done. Its network of 1,000 km is in a precarious condition. E. Road Planning 2.13 Historically, road investment in Ecuador has not been subjected to a rigorous planning process. However, following the considerable expansion of the road network under the impetus of the oil sector after 1967, it became apparent to the Government that more rational planning of transport infrastruc- ture to support national development was required. Under the consortium highway project (para 3.03), consultants prepared the 1974 Highway Master Plan, which provided the basis for a number of important road investments. This one-time effort did not address the need to develop, within MOP, the capacity to conduct planning on a continuing basis. This planning capacity is one of the prime objectives of the Fourth Highway Project, which provided for the establishment of UPCT (para 1.15). UPCT, assisted by consultants,  - 11 - initiated, by early 1978, the preparation of a national highway investment plan for the medium (1980-1984) and long term (1985-1994). This plan, of which preliminary project priorities have already been produced, will be available in final form for consideration by the Government, and comment by the Bank, by mid-1980. In addition to the investment plan, UPCT, assisted by the consuitants, has also conducted studies of the efficiency of vehicle weighing stations, cargo transport and problems of urban road transport. 2.14 Mainly because of the late availability of counterparts, the transfer of technology under the consultants' contract, which concludes in mid-1980, has not been sufficient, particularly in the fields of economics and statistics. Counterpart staffing is at present, however, generally satisfactory. Further, because of past lack of cooperation within the Government, some tasks, such as collection of reliable traffic and vehicle fleet data, have not been undertaken. With the acceptance of planning in the highway subsector, and in transport generally, now more firmly implanted, the proposed project includes a component for financing a further two years of consultant assistance to UPCT for land transport planning (Chapter VII). 2.15 No coordinated planning for secondary and feeder roads has been attempted so far (para 2.10). The various agencies involved merely prepare lists of required roads, without developing sound criteria for road investment and performing economic evaluations, or perform limited planning for particular sectoral projects. The preparation of the proposed project has supported Ecuador's first effort to improve planning of secondary and feeder roads. This long term objective will be pursued under the project (para 5.14). F. Road Expenditures 2.16 DGOP expenditures for general highway administration, for the main network and for part of the secondary and feeder roads network are financed through the MOP budget, mostly through central treasury allocations. Annual DGOP expenditures from 1976 to 1979 and projected expenditures from 1980 to 1984 are shown in Table 2.5. The level of nominal total expenditures increased by 56% from 1976 to 1979 (about 12% in real terms) and reached a total value of about US$135 million equivalent in that year, representing an annual growth rate of 16% in current values. A further increase of 15% per annum in current values, implying little real growth, has been estimated for the period 1979 to 1984. Recurrent expenditures, comprising administration and highway mainte- nance, are financed exclusively through the MOP budget and represent about 21% of total MOP highway expenditures from 1976 to 1979. Administrative expendi- tures have progressed at an acceptable rate, suggesting that MOP was able to step up its programs without excessive administrative buildup. Maintenance expenditures have also increased regularly over the years; further increases would be needed to meet growing requirements. Capital expenditures for 1976 to 1979, representing about 79% of total MOP highway expenditures, have steadily increased in real terms throughout the years. The interim highway program prepared by the Government indicates an intention to sustain a rather high level of highway expenditures. In view of the growing complexity of the requirements, and the concern for fiscal restrictions, rigorous planning will be required to achieve a sound balance between maintenance/rehabilitation and feeder and primary road improvements. Of particular importance will be the coordination between physical planning and financial programing.  - 12 - 2.17 Capital investments are financed from the following sources: national budget (51%), special funds from the Defense Ministry for engineering and con- struction of roads in the south and southeast (25%); FONADE, for engineering and construction of feeder roads (15%); FONAPRE, with UNDP participation, for engineering and feasibility studies of main highway projects (1%); domestic loans (3%); and external loans, IDB and the Bank (5%). Ecuador would continue to rely mostly on its own resources for road expenditures, with possible occasional support from IDB and the Bank, for selected undertakings and institutional improvements. 2.18 Agencies involved in feeder road administration get needed financing through MOP and from a variety of other sources (Table 2.4). The Ministry of Finance directly funds the local government and some of the regional development organizations through the National Participation Fund (FONAPAR) and FONADE. FONAPRE finances some feeder roads engineering studies. Most of the central government and the regional development organizations draw funds from their own budgets and from international assistance programs (World Food Program and OAS funds). Finally, some agencies resort to international financing through bilateral agreements and loans by private banks (Table 2.4). A unit has recently been established in the Ministry of Finance to administer and coordinate foreign financing activities. The proposed project would attempt to achieve a rationalization of feeder roads expenditures (para 5.13). G. Road User Taxation 2.19 The structure of road user taxation in Ecuador is unusual in that very little taxation is levied on fuel, and a very high proportion of total road user taxation derives from vehicle import duties. However, as can be seen in Table 2.6, this taxation more than covered the cost of road maintenance and administration over the period 1975-1978, though covering only an average of 56% of the cost of road construction. 2.20 Import duties on vehicles, spare parts and tires represent about 50% of total taxes paid by road users. Cars pay almost 200% import duty plus a local sales tax while pickups (3/4- to 2-ton) pay 50% to 100%. Buses pay 70% duty, but medium and heavy trucks are relatively favored, paying only 15% to 30% import tax. Annual license fees are imposed by various levels of Government, but are quite small and difficult to collect. Several provinces have established toll collection systems on some of their main roads, but fees are insignificant and the collection costs relatively high. 2.21 Road users also pay taxes on gasoline and diesel oil (SI 1.88/gallon 1/ and S/ 1.14/gallon, 2/ respectively). Retail prices of petroleum products (presently US$0.18/gallon) have been almost unchanged since 1959 and rank among the lowest in the world. The local cost of petroleum products, including (a) the cost of refining, transporting and distributing petroleum products, 1/ US$0.08 equivalent. 2/ US$0.05 equivalent.  - 13 - and (b) consideration of the fact that Ecuador imports 10% of its needs, is around US$0.36/gallon. Thus, gasoline and diesel oil users receive financial subsidies of about US$0.18/gallon from other sectors of the economy. Analysis carried out for 1977 (Table 2.7) suggests that positive road user taxes are levied only on cars and pickups, while trucks and buses are being heavily subsidized. 2.22 The Government of Ecuador is not following a clear and comprehensive policy on road user taxes. The major objective, as in most countries, is not to charge for the use of roads, but to raise general revenue funds for the treasury without placing an unacceptable share of the burden on freight and public passenger transport. The road user tax system described above dictates that users pay heavy fixed taxes not related to their level of road use and very low taxes variant with the consumption of transport services. However, except for rapid growth in the pickup fleet (partly caused by the low import duty relative to car), there is no clear evidence that the road transport sector has been seriously distorted by the road user tax system or low prices for petroleum products. 2.23 While a price distortion exists in the petroleum sector in Ecuador, it does not impinge directly on the viability and appropriateness of the proposed project, concentrating as it does on secondary and feeder road improvements in highly productive agricultural areas, strengthening of road maintenance, institutional development and training. The Government, which inherited the low price structure when it came to power in August 1979, is aware of the importance of raising domestic prices. In this regard, on January 1, 1980, the Government tripled fuel prices for shipping and increased prices for jet fuel by about 75% and 60% for foreign and domestic carriers, respectively. It is also considering major increases in gasoline prices to levels which would approximately cover the financial cost of producing, transporting and retailing it, thus eliminating the financial subsidy cur- rently received by gasoline consumers. The Bank has conveyed to the Govern- ment its view that energy prices should gradually be raised to internationally comparable levels in order to eliminate the investment distortions which otherwise are bound to persist. 2.24. The Government recognizes the need to improve information on the various sources of taxes. During negotiations, the Government confirmed that, by June 30, 1981, it would carry out, through UPCT, under terms of reference satisfactory to the Bank, a study of specific aspects of road user taxes in order to recommend improvements, would promptly furnish a copy of such study to the Bank and would afford the Bank a reasonable opportunity to comment thereon. This study would, in particular, include a review of vehicle import duties and sales taxes, revision of license fees in relation to size and fuel consumption of vehicles and improvement of the present system of vehicle registration to provide more reliable data on the fleet in active use.  - 14 - H. Road Engineering 2.25 Responsibility for the engineering of the main roads and of secondary and feeder roads financed through MOP's budget rests with DGOP's Directorate of Engineering, which has four departments: highway engineering, structural engineering, geotechnics, and feasibility studies. Both the highway engineer- ing and the geotechnics departments have field offices in the seven MOP administrative zones. The Directorate's staff performs in-house only the engineering of a few minor roads or special studies. Most engineering work is contracted with local consultants (para 2.28) under the supervision of DGOP. The technical assistance provided under the Fourth Highway Project by consul- tants Sociedad Argentina de Estudios (SAE) has substantially strengthened the Directorate of Engineering by: (a) enhancing the capability of the technical personnel; (b) widening the office for geotechnical studies into an independent department which directly performs studies and supervises contracts for geological surveys and site and laboratory investigations; and (c) creation of and provision for technical assistance to a feasibility studies department, which includes a section for traffic studies. This department is preparing an inventory of main roads in Ecuador. The Directorate of Engineering will be primarily responsible for preparing the new road classification (para 2.02). 2.26 Design standards for main and secondary roads were prepared by US consultants TAMS under the consortium highway project (para 3.03) and were published in 1976. They are generally satisfactory. Design standards for feeder roads were reviewed by consultant ISRATECVIA (Israel/Ecuador) under the Fifth Highway Project. MOP has formally approved the new standards recom- mended by the consultants, shown in Table 2.8, which are satisfactory to the Bank and will be used for the design of roads under the proposed project. 2.27 According to the Highway Law, MOP should approve all road design performed by other agencies. In reality, MOP supervises only the road engi- neering financed through its own budget and that performed by a few other agencies complying with the law. As shown in Table 2.4, the other agencies involved in feeder roads rely principally on consultants for engineering. However, some use their own staff and resort to engineering during construc- tion. As a result, many roads designed by independent agencies do not comply with MOP's design standards. This problem will be addressed by enforcement of the law by MOP (para 5.13). 2.28 Increased demand for professional engineering services in highways and other sectors has contributed to a rapid development of the local consult- ing industry. Participation of foreign firms, independently or in joint ventures, has almost completely disappeared as local firms have become price competitive. A considerable number of local consulting firms or of groups of engineers specialized in highway engineering are registered with MOP. Quality of works has been weak in soil studies, structural design and programing. The concept of selecting and designing projects on the basis of economic evaluation has not yet gained full acceptance outside externally supported programs: there are several instances of recent road projects which have been somewhat overdesigned. Participation of MOP's and the consultants' staff in 20 courses on diversified subjects related to engineering and feasibility studies, offered by the technical assistance under the Fourth Highway Project has, however, strengthened professional capability.  - 15 - I. Road Construction 2.29 Construction of the main roads and of secondary and feeder roads financed through the MOP budget is managed by DGOP's Directorate of Construc- tion, which is divided into two departments, one responsible for highways and the other fur buildings. DGOP's Highway Construction Department is organized in seven zones, each being managed by an administrative engineer in Quito and a resident engineer in the field. Each zone is in charge of the super- vision of several major and smaller projects. The technical capability of the supervision personnel has been substantially improved by the technical assis- tance received under the Fourth Highway Project (para 3.05). MOP intends to carry out some of the consultants' (SAE) recommendations to further enhance the effectiveness of supervision, mainly to: (a) improve workload distribution among the different supervision teams (total contract value supervised by individual teams varies from 3 to 589 million sucres); and (b) streamline the organization of the construction department and reduce the incidence of over- lapping reporting requirements. 2.30 Road construction activities in Ecuador are carried out in various ways, involving varying degrees of MOP participation and producing varying results: (a) All main highway construction and a minor part of the construction of secondary and feeder roads financed by MOP are executed by contracts let by public bidding and supervised by MOP; in general, the quality of these works is adequate; (b) Most secondary and feeder roads financed by MOP are constructed by the PCs, either through contracts or by force account, and by regional authority force account; MOP's loose supervision of these works often results in defective execution; (c) Some road construction in the Amazonas region is contracted by MOP to the Army Corps of Engineers; results have been uneven; and, finally, (d) Construction of all secondary and feeder roads not financed by MOP is handled by a great number of independent organizations (Table 2.4), some of them using contractors, but most by force account of the corresponding agency; the quality of these works has generally been poor. 2.31 The study performed by consultants SAE in 1979 (para 3.05) noted a strengthening of the Ecuadoran construction industry during the last five years, paralleling increased demand. As mentioned earlier, MOP highway construction investment more than doubled from 1976 to 1979 (Table 2.5). Local firms were able to secure all contracts awarded through international competitive bidding (ICB). MOP's unofficial register includes about 120 firms, 50 of which accounted for 98% of works over the period 1976-1978. All big and some medium firms have substantial and diversified equipment fleets. Former weaknesses in equipment management and preventive maintenance are being overcome mainly because of the technical assistance received under the Fourth Highway Project. General management of the construction firms has been im- proved since the early seventies and was further enhanced by technical assis- tance received under Loan 1231-EC.  - 16 - J. Road Maintenance 2.32 MOP's highway maintenance works are managed by DGOP's Maintenance Directorate, comprising three departments in Quito (Maintenance and Improve- ments, Operations, and Equipment) and seven field divisions. The Directorate's budgetary allocations increased four-fold in nominal terms from 1971 to 1975 and almost doubled from 1976 to 1979. As a consequence, the quantity and quality of the maintenance work executed by MOP has been substantially improved in the last five years. However, MOP maintains only 7,400 km representing about 22% of the total network (70% of paved, 29% of gravel and 4% of earth roads), and the remaining 78% of the network receives virtually no maintenance, except limited work executed by some PCs and by some agencies involved in secondary and feeder roads. The maintenance management system developed under the Fourth Highway Project, with the assistance of consultants Roy Jorgensen and Associates (USA), has become effective in a pilot division and is being introduced to the other divisions. 2.33 MOP has a road maintenance equipment fleet of about 900 units (Table 2.9). The average age of about five years is rather low because of the impact of the 1978 procurement of 340 Brazilian units, mostly dump trucks, motorgraders, tractors and front-end loaders financed by a US$20 million bilateral loan. According to consultants Jorgensen estimates, about 50% of the older units are in good condition, 20% need minor repair, 14% require major overhaul and about 16% should be scrapped. Despite the relatively low average age and generally satisfactory condition of the fleet, availability is estimated at only 60% because of inadequacy of workshop and warehouses and shortcomings in supply of spare parts. Utilization of available equipment is about 50%, mainly due to the extended rainy season and inadequate field organization. Future acquisition under the project would be combined with measures to improve productivity (para 6.05). 2.34 Efficiency of road maintenance is curtailed by a shortage of trained engineers, supervisors and foremen. Information on maintenance operations cost is not readily available except for the pilot division that received technical assistance under the Fourth Highway Project. Available estimates of the cost of MOP's maintenance operations appear extremely high, more than double typical costs in other Latin American countries, mainly due to: (a) low efficiency of equipment and manpower because of the above-mentioned factors; and (b) inadequate accounting (many improvement works, wages of all MOP drivers and other unrelated items are accounted as maintenance expenditures). Under the proposed project, MOP would improve its accounting procedures (para 6.02). There is an obvious need for an additional training effort, for construction of warehouses and workshops, for purchase of workshop tools, for acquisition of selective additional maintenance equipment, and for establishing a satisfactory cost accounting system. Furthermore, a substantial institution- building effort is needed to expand the country's road maintenance capability to include at least part of the 78% of the network receiving no regular maintenance. The proposed project would address these problems both for the main network and for feeder roads in the three pilot provinces. The provinces have no equipment support capability to speak of, even the best organized ones. Therefore, the equipment provided under the project for maintenance of provincial roads will initially be managed by MOP.  - 17 - K. Personnel Training 2.35 Training of MOP administrative and technical personnel has been organized since 1974 by the Department of Publications and Training of DGOP's Planning Directorate, which consists of only one senior staff member and clerical personnel. The actual training effort has been accomplished mostly using the facilities and instructors of other organizations and, to a large extent, it has not been highway specific. Administrative courses were carried out under bilateral agreements with other government and private agencies, while engineering courses were offered mostly under agreements with the universities. Training of operators and mechanics fell under the responsi- bility of a government body, SECAP (Ecuadoran Capacitation Service). An annual average of about 200 staff members have received some degree of training under these different arrangements. 2.36 A considerable additional training effort has been carried out since early 1978 by the four technical assistance programs (para 3.04) under the Fourth Highway Project, through courses offered to MOP staff, private professionals and graduate students. The transfer of technical know-how and experience through on-the-job training has been quite satisfactory in highway engineering, in feasibility studies and in highway maintenance. In transport planning, it suffered for a long time from the problem of lack of continuity in counterpart staff. Among the different course programs offered, the most successful has been the one related to Engineering and Feasibility Studies carried out by SAE, in which 22 courses with a total of 350 class-hours had been offered up to the end of 1979, with over 600 attendees. SAE's second training program on highway construction has been equally satisfactory. Six courses were offered in Quito, Guayaquil and Cuenca, totaling 90 class-hours and 300 trainees. All SAE courses have been well received, and an excellent textbook has been prepared for each one. Training in highway maintenance provided by Roy Jorgensen and Associates has reached only a preliminary level: written and audio-visual courses covering different aspects of maintenance administration and operations have been prepared and are ready to be imple- mented; however, courses have been offered so far to only about 200 MOP employees and workers. Through the technical assistance provided in transport planning and coordination, the Israel Institute of Transport Planning and Research conducted three training courses in 1978 and 1979, with the partici- pation of about 150 professionals and students. This training effort will continue during the remainder of the technical assistance programs under the Fourth Highway Project until October 1980, and would be extended under the proposed project. III. PAST AND ONGOING BANK ASSISTANCE TO THE HIGHWAY SUBSECTOR A. Past Assistance 3.01 The first Bank loan to Ecuador for the highway subsector was made in 1954 to the Comite de Vialidad of Guayas (Loan 94-EC, US$8.5 million), for construction and improvement of about 500 km of trunk roads serving this coastal province. Although a few sections could not be completed because of a shortfall in project funds, the project as a whole was successful. It played an important role in the development of the province, especially by supporting the expansion of banana production.  - 18 - 3.02 Tle second loan was made in 1957 to the Government of Ecuador (Loan 176-EC, US$14.5 million) to assist in construction and improvement of 533 km of trunk roads. Three of the four project roads, totaling 377 km, were substantially completed under this project, whereas the fourth road (Chone-Santo Domingo, 156 km) was only 60% completed when, in 1962, all loan funds were extausted. Remaining civil works were eventually completed under the first phase of the subsequent project (para 3.03). In addition, this project included a limited component for improvement of highway maintenance. 3.03 In 1962, consultants were engaged to help prepare a new highway project. In view of large financial requirements, USAID and IDB joined the Bank and IDA in forming a consortium for the proposed project in early 1963. The consortium highway project had a final cost of US$69 million equivalent, of which US$33 milion equivalent was financed by external sources. The Bank contributed US$9 million (Loan 379-EC, May 1964), IDA US$8 million (Credit 51-EC, May 1964), IDB US$4 million and USAID US$12 million. The project provided for the construction of 730 km of road, a five-year highway mainte- nance program involving equipment procurement and technical assistance, and technical assistance for the preparation of future highway projects, including a Highway Master Plan. The project was completed in 1974, six years later than scheduled at appraisal. OED's Performance Audit Report (No. 1572, April 26, 1977) points to the fact that, in spite of delays and cost overruns, the construction component was successful: project roads have contributed substantially to the economic expansion of the regions they serve. Appraisal estimates of economic returns were surpassed in all cases, mainly because of higher-than-expected growth of traffic. The Highway Master Plan issued in 1974 provided a framework for several major construction projects. However, in retrospect, it does not seem to have forecast correctly the country's needs in the highway subsector. Some of its high priority projects did not show the expected rates of return in later detailed feasibility studies, and some impor- tant requirements of highway planning were not adequately addressed. Improve- ment of highway maintenance fell somewhat short of appraisal expectations, in particular because of: (a) insufficient transfer of know-how from the consultants to MOP personnel, (b) lack of MOP managerial continuity, and (c) shortage of maintenance funds. The regulatory framework for control of vehicle axle loads was established, although with considerable delays, and several weight control stations were built. Enforcement was not effective, but this question is being addressed under the Fourth Highway Project (para 2.08). B. Projects Under Way 3.04 The Fourth Highway Project (Loan 1231-EC, US$10.5 million, May 1976) emerged from the findings of the 1974 Master Plan; total cost was estimated at US$21 million. Its main objective is to improve transport planning and management of the highway subsector. The project includes four comprehensive technical assistance programs for transport planning and highway engineering, construction and maintenance. It also provides for the upgrading of the Babahoyo-Balzapamba Road (40 km). Construction of two other roads initially to be included under this project had to be postponed because of insufficient preparation. They were later included in the Fifth Highway Project. The project also included an agricultural development study of the area of influence of one of these roads.  - 19 - 3.05 Project implementation started slowly because of: (a) five months delay in fulfillment of the conditions for effectiveness, (b) the relative complexity of the technical assistance component, and (c) the cumbersome procedures for procurement of civil works and consultant services. Miost contracts were signed a year after the date of effectiveness of the loan. Project completion will extend to 1981, i.e., about 18 months later than initially scheduled. General progress is as follows: (a) Construction of the Babahoyo-Balzapamba road by two local contractors was about 70% completed by January 31, 1980. Delays in the programed execution were caused by additional engineering studies required to adjust and supplement the original design, by the resulting increased work quantities and by the unexpected length of the 1978 and 1979 rainy seasons in the region. Quality of the works is satisfactory. (b) The technical assistance programs are proceeding satisfactorily. Their general impact has been discussed in paragraphs 1.15, 2.13, 2.14, 2.28, 2.32 and 2.37. A ten-month extension of the technical assistance for transport planning, to compensate for accumulated delays due to inadequate counterpart staffing, has been granted. Transport planning has been limited so far to land transport. Lack of cooperation between MOP and the Ministries of the Interior and Defense prevented compliance with the Loan Covenant to extend planning and coordination to other transport sectors. Measures to implement this extension will be taken under the proposed project (para 7.03). (c) Administrative delays in MAG and FONAPRE caused a delay of 18 months in the conclusion of the agricultural development study of the Puerto Ila-Chone region. This component is now completed and is being used as the basis for the appraisal of a proposed Bank-financed rural development project, including a feeder road component. 3.06 The Fifth Highway Project (Loan 1429-EC, US$17.5 million, signed May 19, 1977, effective date October 1, 1977) included construction of the two roads, Duran-Boliche (25 km) and Puerto Ila-Doblones (29 km), left out of the Fourth Highway Project because of slippage in preparation. The project also inc].udes construction of about 75 km of feeder roads in the Puerto Ila-Doblones area and a study of rural roads development in the three southern provinces of Guayas, Los Rios and El Oro. 3.07 By January 31, 1980, execution of civil works was proceeding as follows: (a) Duran-Boliche, which represents about 60% of total project costs, is about 52% completed, according to initial implementation schedule; design changes, however, have generated an increase in costs; (b) Puerto Ila-Doblones is 5% completed, a year behind schedule, mainly because of slow contracting procedures; and (c) execution of lateral feeder roads, not yet begun, entails a delay of at least two years. This delay also applies to the covenants related to agricultural development in the Puerto Ila-Doblones area, which would be complied with only by the end of 1981, under the framework of the proposed Puerto Ila-Chone Agricultural Development project, now in the final stage of preparation. The study of rural road development in the three southern provinces was completed on schedule and provided the basis for the preparation of the proposed project. Project completion will extend until mid-1982.  - 20 - IV. THE PROPOSED SIXTH HIGHWAY PROJECT A. Project Objectives and General Description 4.01 The objectives of the proposed project are to: (a) support the development of the feeder road system in Ecuador and related planning capability in MOP; (b) strengthen the road maintenance capability for main roads as well as for feeder roads; (c) consolidate the achievements of the Fourth Highway Project in transport planning and coordination; and (d) strengthen the capability of MOP and three coastal provinces through training programs. 4.02 Specifically, the project would consist of: (a) design and construction or improvement of about 1,500 km of feeder and secondary roads in the three coastal provinces of Guayas, Los Rios and El Oro; (b) institutional improvement in planning, construction and maintenance of feeder roads at a national level through estab- lishment of a Feeder Roads Coordination Unit (UCCV) in MOP, for which technical support will be provided; (c) preparation of feasibility studies for followup feeder road projects in other provinces, as part of a countrywide program; (d) implementation of a four-year 1981-1984 maintenance program for the main road network and coordinated measures to build up MOP's maintenance capacity, including: - acquisition of complementary equipment, - acquisition of spare parts for overhaul of existing equipment and for preventive maintenance, - construction and improvement of workshops and warehouses, and - technical assistance to improve equipment management; (e) acquisition of maintenance equipment to be used by the three provinces mentioned in (a) for gradual assumption of responsi- bility for maintenance of all 6,000 km of feeder and secondary roads in these provinces;  - 21 - (f) continuation of technical assistance for transport planning; and (g) comprehensive training programs for MOP personnel and for personnel in the three project provinces. The project would be implemented over the period 1981-1984. A detailed descrip- tion and an economic evaluation of each project component is provided in subse- quent chapters. B. Cost Estimates, Financing and Disbursement 4.03 As shown on the following page, project cost is estimated at about US$104 million with a foreign exchange component of US$55 million (53%) to be financed by the proposed Bank loan. The Government would finance the balance, amounting to US$49 million including local tax content of about 6%, as well as operating cost of the training program (para 6.13) and recurrent expenditures for road maintenance (para 6.02). 4.04 The cost estimates for road improvements were prepared by consultants ISRATECVIA and reviewed by MOP. They are based on field estimates of quanti- ties and current unit prices for similar works and are reasonable given the standards proposed, the terrain and soils and the expected traffic (para 5.06). The final engineering of the first-year tranche of the road improvement program is presently under way and would be completed by September 30, 1980. The cost estimates for final engineering of the roads are based on costs of similar work recently carried out in Ecuador. Retroactive financing, up to US$600,000, is proposed for expenditures on the engineering of the first year tranche of the improvement program (para 5.07) made after January 1, 1980. Cost estimates for maintenance and workshop equipment and for parts for overhaul and preventive maintenance have been prepared on the basis of lists prepared by consultants reflecting manufacturer's quotations and recent purchases. Workshop, warehouse and training center construction costs are in accordance with the current costs of building construction in Ecuador, while training equipment costs were estimated on the basis of recent experience on similar projects. For the various technical assistance and training components, the estimated expendi- tures are for 450 man-months of services by foreign consultants and 186 man-months by local consultants for a total of US$5.3 million equivalent or an average cost of US$8,300 per man-month. The foreign consultant costs average US$10,200 per man-month for salary and benefits, overheads, airfares and local living allowance. Local consultant fees are US$3,800 per man-month. In addition, 20 fellowships abroad for professional staff from various direc- torates of MOP have been included at a cost of US$5,000 each.  - 22 - ECUADOR SIXTH HIGHWAY PROJECT Project Cost Estimates Est. Frgn. Bank Particip Sucres million US$ million Exch.Comp. Amount Items Local Foreign Total Local Foreign Total % (US$m) X A. Feeder and Secondary Roads Program Ci) Improvement of 1,500 kn of feeder and secondary roads including supervision 550.0 450.0 1,000.0 22.0 18.0 40.0 45 18.0 45 (ii) Final engineering of roads under (i) 25.0 37.5 62.5 1.0 1.5 2.5 60 1.7 70 (iii) Technical assistance for Feeder Roads Coordinating Unit 7.5 17.5 25.0 0.3 0.7 1.0 70 0.7 70 (iv) Studies for preparation of national feeder roads program 15.0 17.5 32.5 0.6 0.7 1,3 60 0.8 70 Subtotal 597.5 522.5 1,120.0 23.9 20.9 44.8 21.2 B. Road Maintenance Program (i) Equipment for MOP 12.5 125.0 137.5 0.5 5.0 5.5 90 5.0 90 (ii) Equipment for the three project provinces 20.0 175.0 195.0 0.8 7.0 7.8 90 7.0 90 (iii) Spare parts for (i) and (ii) 2.5 30.0 32.5 0.1 1.2 1.3 90 1.2 90 (iv) Spare parts for equipment overhaul and preventive maintenance 5.0 40.0 45.0 0.2 1.6 1.8 90 1.6 90 (v) Workshop equipment and tools 5.0 45.0 50.0 0.2 1.8 2.0 90 1.8 90 (vi) Construction of workshops and warehouses 25.0 25.0 50.0 1.0 1.0 2.0 50 0.9 45 (vii) Technical assistance for road maintenance 5.0 17.5 22.5 0.2 0.7 0.9 80 0.6 70 Subtotal 75.0 457.5 532.5 3.0 18.3 21.3 18.1 C. Training Program Ci) Construction of training center 7.5 7.5 15.0 0.3 0.3 0.6 50 0.3 45 (ii) Staffing, equipment and training courses, local and abroad 10.0 25.0 35.0 0.4 1.0 1.4 70 1.0 70 Subtotal 17.5 32.5 50.0 0.7 1.3 2.0 1.3 D. Transport Planning Technical assistance 5.0 25.0 30.0 0.2 1.0 1.2 80 0.9 70 Base Cost (at June 1980 prices) 695.0 1,037.5 1,732.5 27.8 41.5 69.3 60 41.5 E. Contingencies (i) Physical: about 10% of A(i), B(v), B(vi) and CCi) 60.0 52.5 112.5 2.4 2.1 4.5 2.1 (ii) Price: on base cost plus E(i)-1 470.0 285.0 755.0 18.8 11.4 30.2 11.4 Subtotal 530.0 337.5 867.5 21.2 13.5 34.7 13.4 Grand Total 1,225.0 2 60 49.0 55.0 104.0 53 55.0 53 1/ Price contingencies calculated as follows Local Foreign 1980 20% 10.5%' 1981 20% 9.0% 1982 15% 8.02 1983 15% 7.0% 1984 15% 7.0% Source: MOP and mission's estimate May 1980  - 23 - 4.05 The foreign exchange component (FEC) of the feeder and secondary road civil works has been estimated at 45%, which is consistent with the rela- tively lower capital intensity of the construction activity involved with these types of roads. For consultants' services for final designs and for preparation of further feeder road programs, the FEC is estimated at 60% of base costs, reflecting the fact that local firms would have to rely on foreign experts for specialized technical aspects and for economic analysis and plan- ning. Technical assistance services for the Feeder Roads Coordination Unit, for the maintenance program and for training and transport planning are esti- mated to have an FEC of 80%, reflecting the fact that these services would have to be provided largely by foreign professionals. Based on the CIF prices at the point of entry into Ecuador, the FEC of equipment, tools and spare parts has been estimated at 90% of total cost. 4.06 Adequate provision has been made for physical and price contingencies. Physical contingencies amounting to 10% of base costs have been provided for all civil works and workshop equipment items. In addition, about 26% of the project base cost plus physical contingencies has been allowed for foreign price variations and 56% for local prices over the implementation period. The related annual inflation rates assumed are shown at the bottom of the cost table and reflect the relatively high level of domestic inflation forecast over the project period. 4.07 Disbursement of the loan would be made as follows: (a) 45% of total expenditures for civil works, for construction of roads, workshops, warehouses and the training center; (b) 100% of foreign expenditures for directly imported equipment, tools and parts; (c) 90% of local expenditures for locally procured imported equipment, tools and parts; (d) 70% of total expenditures for consultants' services for the preparation and final engineering of feeder road programs; and (e) 100% of foreign and 70% of local expenditures for technical assistance services for feeder road coordination and planning, for highway maintenance, for the training program and for scholarships abroad, and for land transport planning. 4.08 Disbursement would be made against usual documentation for all items. The following would be conditions for disbursement: (a) the signing of a Participation Agreement by MOP with each one of the project provinces for the road improvement program in the corresponding province; (b) the complete staffing of UCCV for road improvement works beyond 1981; (c) the employment of consultants for technical assistance on road maintenance for MOP maintenance equipment; and (d) the signing of a Maintenance Agreement with each one of the project provinces, for maintenance equipment for the corresponding province. The estimated schedule of disbursement is shown in Table 4.1.  - 24 - C. Execution, Procurement and Monitoring 4.09 Execution of the project would be the responsibility of MOP through various Directorates and Departments as indicated below: - the Feeder Roads Coordination Unit, in coordination with the Directorates of Engineering, Construction and MIaintenance and with the three project provinces, would be in charge of the secondary and feeder roads program and the gradual transfer of responsibilities to the provinces. Until UCCV is fully able to assume its coordinating role by early 1981, the various Directorates would proceed with the engineering and contracting activities with the assistance of UCCV's coordinator; - the Maintenance Directorate would be responsible for MOP's maintenance program for the main highways and, in coordination with UCCV and the provinces, for maintenance of the feeder network, including gradual transfer of responsibilities to the provinces; - the Program Directorate's Training Department would be in charge of the Training Program; and - the Planning Directorate would be responsible for the technical assistance for transport planning. The capacity of the various units to satisfactorily perform the roles assigned to them in execution of the project is considered to be adequate, with the technical assistance contemplated to supplement the resources available in MOP. During negotiations, in addition to agreeing to the general "adequate staff and resources" clause and presenting specific staffing arrangements for project administration, the Government confirmed that the number and per- formance of the staff directly responsible for the implementation of the various project components in MOP and in the three provinces involved in the project would be reviewed by September 30 of each year with the Bank, together with arrangements for coordination among units. 4.10 As shown in the schedule presented in Table 4.2, the project would be implemented within the four-year period 1981-1984. Project expenditures related to the maintenance program (equipment and spares procurement, training program and technical assistance) would take place over the period 1981 through 1983. The first annual tranche of the road program would begin in early 1981 and would be completed over 12 months. Successive tranches would be initiated in 1982, 1983 and 1984. The project implementation schedule was reviewed and agreed during negotiations. 4.11 Engineering of the roads would be divided up into ten contracts for each annual tranche, to be awarded to qualified local consultants acceptable to the Bank and retained by MOP under terms and conditions acceptable to the Bank. Model bidding documents and draft contracts would be previously approved by the Bank. Only contracts for amounts above US$200,000 would have to be submitted to the Bank for approval prior to their signature. Other contracts would be reviewed ex post.  - 25 - 4.12 Procurement under the project would be in accordance with the Bank's "Guidelines for Procurement" (Mtarch 1977). Road improvement works would be carried out through unit price contracts awarded on the basis of competitive bidding following MIOP procedures satisfactory to the Bank. To facilitate participation of foreign firms, the Embassies of Bank member countries and Switzerland would be notified of civil works biddings 45 days prior to publi- cation of the call for bids. MOP's procedures provide for analysis of bids in two steps: first, determination of the qualification and capacity of each bidder on the basis of information provided with the tenders; and second, after opening of bids proper, the evaluation of ranking among post-qualified firms. The annual programs in each province would be subdivided into four to six lots, taking into consideration the nature of the works and geographical distribution (para 5.07). Each lot would range from 10 to 25 km with estimated costs from US$0.3 to US$1.0 million. Firms would be post-qualified for one or more lots according to their capacity. No individual lot would have an estimated cost of less than US$0.3 million equivalent, and no group of lots to be tendered jointly would have an estimated cost of less than US$2 million equivalent. Given the scattered and relatively simple nature of the works, the limited contract period envisaged for execution of each lot (12 months) and the previous lack of interest of foreign contractors in highway construc- tion in Ecuador, it is unlikely that foreign firms would be interested. 4.13 About 50 local firms would be eligible to execute construction of individual lots, and about 20 would be capable of handling the largest possible combination of lots. Only award decisions for amounts over US$500,000 would have to be submitted to the Bank for its prior approval. Other award decisions would be reviewed ex post. If the Bank should determine, after consultation with the Government, that the award was inconsistent with the Guidelines, it would have a right to refrain from financing the resulting contract and to cancel from the loan an amount corresponding to its scheduled participation therein. It is anticipated that previous award review would cover about 50% in number and 80% in value of construction contracts. Construction and extension of workshops and warehouses (costs of less than US$0.3 million each) and construction of the training center (cost US$0.6 million) would also be completed following MIOP procedures outlined above with the same arrangements for Bank review. 4.14 The procurement program for equipment, tools and parts, indicating lot size, estimated cost and proposed exceptions to ICB mentioned below, would be subject to prior approval by the Bank. The program was reviewed and agreed during negotiations. Similar items would be grouped to the extent possible for bidding purposes. All contracts with estimated costs over US$50,000 would be subject to ICB. Contracts below US$50,000 and within an overall ceiling of US$500,000 would be advertised locally in accordance with relevant MOP regulations, which are satisfactory. Spare parts for specific makes of equipment would be negotiated directly with established dealers for individual orders of less than US$50,000 within an overall ceiling of US$500,000. Bidding documents and model contracts for procurement of equipment, tools and parts would be approved by the Bank.  - 26 - 4.15 Terms of reference for the technical assistance services to UCCV and for consulting services for preparation of nationwide feeder roads programs were agreed during negotiations. International consultants acceptable to the Bank would be retained by hOP to assist Ministry staff assigned to UCCV. The preparation of further feeder roads programs would be contracted by MOP in two packages with two joint ventures of local and international consulting firms acceptable to the Bank. Terms of reference for technical assistance services for road maintenance (para 6.05) and for transport planning (para 7.04) were agreed during negotiations. MOP would retain, for these purposes, interna- tional consulting firms acceptable to the Bank. The training program would rely upon the services of a group of expatriate and Ecuadoran instructors. In order to ensure adequate coordination, these services would be provided by the same consulting firm retained for the maintenance program. Separate terms of reference for the purpose were agreed during negotiations (para 6.14). 4.16 The progress of the project would be monitored against the agreed implementation schedule and financing requirements established at appraisal. In addition, the following indicators would be monitored to assess advances made toward the project objectives: (a) physical progress and funds used for the secondary and feeder roads improvement in the three project provinces against the agreed programs (para 5.06); (b) gradual transfer of responsibilities for engineering, contruc- tion and maintenance of secondary and feeder roads from MOP to the provincial councils according to targets set at negotiations (para 5.09); (c) scope and funding of the maintenance programs carried out each year by the provincial authorities with the assistance of MOP (para 5.10); (d) use of equipment acquired under the project and allocated by MOP to provincial authorities (para 5.11); (e) implementation of MOP's annual maintenance programs in accordance with targets agreed at negotiations (para 6.02); (f) availability and utilization of MOP maintenance equipment in accordance with targets agreed at negotiations (paras 6.04 and 6.05); and (g) number of trainees participating in the Personnel Training Program (para 6.11) The purpose of these project indicators and the scope of related reporting requirements were discussed and agreed at the time of negotiations. Additionally, in the course of 1984, i.e, the final year of the project, UCCV would conduct a traffic survey on all improved roads and would under- take an impact survey on three selected roads or groups of roads, one in each of the three provinces, to reassess the validity of the assumptions used in the selection and evaluation of subprojects. The above was also confirmed at the time of negotiations.  - 27 - D. Project Risks 4.17 There appears little risk associated with the construction components of the project, the most important of which is the 1,500 km of feeder and secondary roads. Given the size and capability of the construction industry in Ecuador and the work supervision capacity of MOP, these road improvements spread over four years appear a reasonable task. The major risk associated with the feeder road component is related to the execution and institution- building aspects of the planned feeder road maintenance effort by the three provincial authorities. Using the equipment to be financed under the project and with direct assistance and training from MOP and financial help from the Central Government, the provinces are, after four years, expected to be maintaining properly the almost 6,000 km of feeder roads under their jurisdic- tion. Very little maintenance capacity now exists, in terms of personnel, in the provinces; therefore, the agreements to be signed between each province and MOP will specifically require the province to provide professional and technical staff (including equipment operators) for the required instruction, training and assistance from experienced MOP staff and consultants. This aspect of the project will be monitored closely, with MOP staff making field inspections of the extent and quality of the maintenance affected. 4.18 The institution-building goals in regard to development of an effective national feeder road administration and for continued planning efforts in land transport could encounter difficulties if adequate counterpart staffing is not made available, partly because of the current budget stringency and Government employment ceilings and the scarcity in Ecuador of the special- ized skills required. However, detailed terms of reference and counterpart staffing requirements have been agreed and were confirmed at negotiations (para 4.15). V. THE FEEDER ROADS PROGRAM A. Preparation 5.01 During preparation of the Fourth and Fifth Highway Projects, the inadequacy of Ecuador's secondary and feeder road system was recognized as one of the outstanding problems in the road subsector. Therefore, a technical assistance component was included in the Fifth Highway Project for the prepara- tion of pilot regional secondary and feeder road programs in the provinces of Guayas, Los Rios and El Oro and for the study of required institutional and organizational arrangements. The three provinces comprise the lowlands around the Guayaquil Gulf. In October 1978, MOP retained consultants ISRATECVIA to perform this study (para 3.07), which included mainly: (a) an inventory of the existing secondary and feeder roads in the three provinces (about 6,000 km); (b) a study of the agricultural production of the region; (c) a transport and traffic investigation; (d) preparation of adequate feeder road design standards; (e) determination of road construction and maintenance costs; (f) selection of roads to be upgraded; (g) recommendation of required institu- tional and organizational arrangements; and (h) preparation of manuals for design, economic evaluation, construction and maintenance of feeder roads in Ecuador. The report was completed in November 1979 and was used as a  - 28 - basis for the evaluation of the proposed project. The manual for design of feeder roads prepared by consultants under the Fifth Highway Project, 1/ hereafter known as the Feeder Road Design Manual, has been adopted by MOP for preparation of feeder road improvements, including those under the project. B. Agricultural Production in the Project Zone 5.02 There is a widespread recognition in Ecuador, by the Government and the farmers, that the upward trend in food prices and the increasing imports of food of the last two years underline the need for measures which will increase agricultural production and productivity. Agriculture (including forestry and fisheries) accounted for about 21.9% of GDP in 1976, while the rate of growth of agricultural production was 5.7% p.a. over 1970-1976. Agricultural exports rose in current value from US$260 million to US$544 million. Over the same period, food imports grew from 140,000 tons to 330,000 tons, costing US$100 million in 1976. Food imports now include rice (17,000 tons in 1979 and up to 30,000 tons in 1980), in which Ecuador used to be self-sufficient. 5.03 The three provinces of El Oro, Guayas, and Los Rios, which make up the project area (Maps IBRD 14906 and 14908), produced, in 1978, about 57% of the nation's agricultural output, accounting for 52,000 tons of cacao (71% of total output), 22,000 tons of coffee (30%), and 1.7 million tons of banana (80%). These are Ecuador's main export crops, making up over 90% of agricultural exports in 1978. The three provinces accounted also for the following output: sugar- cane, 2.7 million tons (38% of national output); rice, 212,000 tons (94%); maize, 51,000 tons (37%); cotton, 19,000 tons (71%); soybeans, 23,000 tons (91%); citrus, 103,000 tons (17%); and pineapple, 90,000 tons (72%). The three provinces contain about half of the country's irrigated area and are also important producers of beef cattle and hogs. Detailed data, based on the 1974 Agricultural Census, are provided in Table 5.1. Although this output is impressive, it is still well below the potential of this richly endowed region. The Bank is conducting an ongoing dialogue with the Government in regard to possible agricultural projects which could benefit those parts of the region where development is lagging. In the areas currently being intensively cultivated, a major barrier to more efficient agricultural exploi- tation results from the low standards and poor condition of secondary and feeder roads. 5.04 The feeder road component of the project would be the second step in a long term process to develop adequate capacity to handle the feeder road requirements of all regions of Ecuador. The initial phase, under the Fifth Highway Project, was a "pilot" study of needed feeder road improvements in the three highly productive coastal provinces. Now, under the project, the next stage would include construction of feeder roads in the three provinces and the initiation of the third step, which is the preparation of a countrywide feeder road program including the Sierra provinces which contain the largest concentrations of smaller scale, poorer farmers. The concentration of the project in three provinces would not result in these provinces attracting an abnormally high share of feeder road expenditures. Feeder roads are recognized as a national priority, and the Government intends to continue spending on feeder roads throughout all provinces in response to the needs of the rural 1/ Estudio de Caminos Vecinales, Manual de Diseno - ISRATECVIA, 1979.  - 29 - population. This spending would, in subsequent years, come under the framework of a countrywide plan with consistent selection and design criteria. Such a plan would be developed under the project. This staged approach would also avoid the constraints of technical and financial capacity which would inevita- bly be encountered in launching directly into a nationwide program. C. Improvement of about 1,500 km of Secondary and Feeder Roads in the Provinces of Guayas, Los Rios and El Oro 5.05 A thorough inventory was made of feeder and secondary roads in the three provinces. Field surveys and consultation with national and local authorities and farmers ensured that the roads studied represent the inventory of all trafficked feeder and secondary roads. Of this total, 2,800 km were in the largest province of Guayas, 1,900 in Los Rios and 1,000 in El Oro. Roads in the zone were categorized into seven distinct standards, ranging from 4-meter earth tracks to two-lane paved roads (Table 2.8). The great majority (more than 70% of the total) of existing roads are dry-weather-only narrow carriageways. 5.06 The 1,500 km of roads selected under the project include about 600 km in Guayas, 500 km in Los Rios, and 400 km in El Oro (Table 5.2 and Maps IBRD 14906 and 14908). The design standards (Table 2.8), which are acceptable to the Bank, have been agreed with the Government and were con- firmed at negotiations. The average cost for the program as a whole is US$27,000 per km. About 1,000 km would be improved only to minimum all-weather standards (Type 4 in Table 2.8) with a 4 m gravel surfacing and simple drainage, at an average cost of US$15,000 per km. About 120 km of higher trafficked roads (over 300 vpd in 1980) would warrant standards up to 6.0 m gravel base and a bituminous surface treatment at a cost of US$80,000 per km. The program has been divided into four annual tranches of about 400 km. The subprojects included in the first year tranche for 1981, totaling 430 km, have been agreed (Tables 5.3 and 5.4) and were confirmed at negotiations. The contents of subsequent tranches for 1982, 1983 and 1984 have been tentatively agreed and are listed in the Agreements between MOP and the provinces (para 5.09). Annual tranches would be reviewed each year as outlined in the following paragraph. 5.07 Detailed engineering of the subprojects included in the first year tranche is under way and would be substantially completed in June 1980. The subsequent batches of subprojects for years 1982, 1983 and 1984 would be confirmed in terms of economic priority and engineering following the criteria and methods embodied in the Feeder Road Design Mfanual complemented by ISRATECVIA's Guide for Economic Evaluation and, as appropriate, generally accepted evaluation methodologies such as the "producer surplus" method. The selection and confirmation of subprojects and their subsequent engineering would proceed as follows:  - 30 - Deadline Activity By September 30 each year MOP, in coordination with the PC, to prepare starting 1980 and submit to the Bank, for review and possible approval, an updated list of the subprojects to be engineered in the forth- coming year for execution in the subsequent year. This list to contain a summary description of each subproject with its scope and a confirmation of its priority ranking based on preliminary estimates of construction and traffic densities. By September 30 each MOP to complete and submit to the Bank for year starting 1980 review and possible approval the engineering and economic confirmation study for all subprojects scheduled for construction during the next year. MOP also to submit proposed arrangements for bidding on the basis of regional groups of subprojects to constitute lots of adequate size. The above arrangements were reviewed and confirmed during negotiations. 5.08 Engineering for the first year tranche has been contracted and supervised entirely by MOP. For the subsequent tranches, MOP would delegate some of its responsibility for supervision of the studies to the PCs according to their individual capability. The construction contracts would be awarded in the first year by MOP and supervised by its own staff with limited participa- tion of the PCs. Responsibility for award and supervision of construction contracts in the subsequent years would be increasingly delegated by MOP to the PCs according to their individual capability. MOP would, vis-a-vis the Bank, remain the Executing Agency. During negotiations, it was agreed that the field organization, logistic support and terms of reference of the super- vision teams would be satisfactory to the Bank. 5.09 One of the main objectives of the proposed project would be to assist in the gradual buildup of the three provinces' capacity to plan, construct and maintain rural roads. For the present proposed road improvements, the provinces were consulted directly concerning roads which they felt were high priority, and the economic evaluation broadly confirmed these priorities. A tentative agreement was reached between MOP and the three PCs at the time of appraisal outlining MOP's and the Councils' responsibilities in each province in the various phases of the program, the participation of the provinces' staff in MOP's training programs and the process for gradual transfer of the responsibilities from MOP to the PCs. The three provinces have provided MOP with letters of intent to participate in the project on the basis of the above agreements. The technically and financially powerful province of Guayas would have adequate capacity to undertake all requirements quite rapidly (para 2.12). Los Rios already has a significant rural road program and, with assistance from MOP, would be able to assume most tasks by 1984. The province of El Oro lacks most in staff and equipment, and a major effort would be required  - 31 - there. MOP has prepared a more detailed model agreement (Convenio de Parti- cipacion) covering all aspects of planning, engineering, construction and supervision of secondary and feeder roads in the three provinces, including the gradual transfer of responsibilities to the PCs. This Participation Agreement was discussed and agreed during negotiations. The summary content of this Agree