Turkey - Highway Rehabilitation Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 3793-TU REPUBLIC OF TURKEY STAFF APPRAISAL REPORT OF A HIGHWAY REHABILITATION PROJECT April 22, 1982 Projects Department Europe, Middle East and North Africa 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 (As of December 1981) 4 Currency Unit = Turkish Lira (TL) US$1.00 = TL 127 US$0.79 = TL 100 WEIGHTS AND MEASURES 1 meter (m) = 3.281 feet (ft) 1 kilometer (km) = 0.621 miles (mi) 1 metric ton (ton) = 0.984 long ton (1g. ton) 1 litre (ltr) = 0.264 US gallons (G) GLOSSARY OF ABBREVIATIONS AADT - Average Annual Daily Traffic DB - Maritime Bank DHMI - Turkish Civil Aviation Authority ERR - Economic Rate of Return FY - Fiscal Year GDP - Gross Domestic Product GNP - Gross National Product KFAED - Kuwait Fund for Arab Economic Development KG4 - General Directorate of Highways MPW - Ministry of Public Works MTC - Ministry of Transport and Communications NTMP - National Transport Master Plan p.a. - per annum pass/km - passenger kilometers pcu - passenger car units PT - Project Team PTT - Turkish Posts and Telecommunications SAL - Structural Adjustment Loan SEE - State Economic Enterprise SPO - State Planning Organization TCA - Transport Coordinating Agency TCDD - Turkish State Railways THY - Turkish Airlines TIR - Transit International Routier ton/km - Ton kilometers TPSIR - Turkey Public Sector Investment Review TTH - Trans Turkey Highway VOC - Vehicle Operating Costs vpd - vehicles per day YSE - General Directorate of Infrastructure (Ministry of Village Affairs) REPUBLIC OF TURKEY FISCAL YEAR March 1 to February 28 (up to Dec. 31, 1982) January 1 to December 31 (from Jan. 1, 1983)  FOR OFFICIAL USE ONLY REPUBLIC OF TURKEY APPRAISAL OF A HIGHWAY REHABILITATION PROJECT TABLE OF CONTENTS Page No. INDEX I. THE TRANSPORT SECTOR ..................................... 1 A. Effects of Geography and Socio-Economic Development on Transport ........................... I B. The Transport System and Issues ....................... 2 C. Transport Organization, Policy, Planning and Coordination ................................... 4 D. Bank Experience in the Transport Sector .... ........... 6 II. THE HIGHWAY SUB-SECTOR .................................... 8 A. The Network ........................................... 8 B. Traffic and Road Transport ............................ 8 C. Administration, Accounting and Auditing .... ........... 11 D. Planning .............................................. 12 E. Financing and Expenditures ............................ 12 F. Engineering ........................................... 16 G. Construction .......................................... 16 H. Maintenance ........................................... 16 I. Training .............................................. 17 J. Highway Safety ........................................ 17 III. THE PROJECT ............................................... 18 A. Objeties18 A. Ojectives ...........................................................1 B. Description ........................................... 18 C. Engineering ........................................... 22 D. Cost Estimates ........................................ 22 E. Financing ............................................. 24 F. Implementation .................. 26 G. Procurement ........................................... 27 H. Disbursements ......................................... 29 I. Environmental Impact .................................. 30 This report is based on the findings of an appraisal mission in November 1981, composed of Messrs. D. Powrie (Engineer), R. Bonney (Economist) and a consultant, J. de Gryse (Accountant). 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 (contd.) Page No. IV. ECONOMIC ANALYSIS ......................................... 30 A. Introduction and Economic Context ..................... 30 B. Traffic and Traffic Growth Rates ...................... 32 C. Vehicle Operating Costs ............................... 33 D. Economic Justification ..............................,. 33 E. Project Risk .......................................... 35 V. RECCMMENDATIONS ........................................... 35 ANNEXES I - Criteria and Methodology for Use in Economic Feasibility Studies ................................. 37 II - KGM Organization Diagram .............................. 41 III - Organization Diagram of KCM Regional Divisions ........ 42 IV - Budgeting, Accounting and Auditing Procedures of KGM 43 V - Project Implementation Schedule for 1982 (Critical Path Diagram) ............................. 51 VI - Summarised Overall Project Implementation Schedule .... 52 VII - List of Equipment and Materials (Initial Purchase) .... 53 VIII - Project Monitoring and Reporting Procedures .... ....... 54 IX - Terms of Reference for the Functions of the Project Control and Coordination Team .... ........... 57 X - Organization of the Project Control Team .... .......... 59 XI - Schedule of Estimated Cumulative Loan Disbursements ... 60 XII - Details of Highway Sections in the First Year's Rehabilitation Program .............................. 61 XIII - Selected Documents and Data Available in the Project File ........................................ 62 XIV - Organization Diagram for Supervision of a Highway Rehabilitation Contract .........................,. 64 TABLES 1.1 Turkish Transport Statistics. 3 2.1 The Highway Network. 8 2.2 Registered Vehicles in Turkey. 9 2.3 KGM Expenditures .13 2.4 Road User Revenues .14 2.5 Fuel Price Data .15 2.6 Vehicle Licence Fees .15 3.1 Cost Estimates .23 3.2 Financing Plan .25 4.1 Traffic Volume on First Year's Highway Rehabilitation Sections .32 4.2 Results of Economic Analysis .34 MAP IBRD 16072 - Turkey: The State Highway Network IBRD 16177 - Turkey: General Directorate of Highways: Regional Administrations  REPUBLIC OF TURKEY STAFF APPRAISAL REPORT OF A HIGHWAY REHABILITATION PROJECT I. THE TRANSPORT SECTOR A. Effects of Geography and Socio-Economic Development on Transport 1.01 Historically Turkey has always provided an important trading link between Asia, the Middle East and Europe and this function has grown stead- ily, especially with the development of the Transit International Routier (TIR) trucking system. Domestic traffic, until 1978/79, had also shown a steady growth in parallel with increasing population and a developing economy. However, severe economic problems since 1978 and higher fuel costs have had the effect of limiting both overall economic and transport growth. 1.02 The land transport system, whilst being sufficiently extensive in relation to the current distribution of population and economic activity, is inadequate as regards quality of operation and capacity. This is due mainly to either the original standards not being improved to keep pace with traffic growth, or to deficiencies in management and operations. Recommendations made as part of the Bank's Structural Adjustment Lending (SAL) to Turkey for the urgent development of agriculture and domestic energy sources (coal, lignite and fuel wood) will lead to increasing demands on the transport system. These, together with existing industrial demands, should be met by improvements and extension to the system. 1.03 For the most part Turkey has very rugged terrain with areas of slope instability and others of heavy winter frost and snow; all of which present severe engineering problems and high costs for the transport sector. Both roads and railways frequently have to follow very indirect routes thus increasing journey distances and costs. The analysis of alternative solu- tions is complicated by these factors, but railways are likely in the long term to be the most economic mode for major transport flows of bulk commodi- ties over medium and long distances. These solutions are being addressed under the National Transport Master Plan (NTMP) (para. 1.15). 1.04 Turkey remains primarily an agricultural country but the share of agriculture in GDP has declined by about 7% in the past 10 years whilst industry's share has increased by nearly 20%. Despite this growth in industry, both the agricultural and industrial sector productivity is low and, should the steps (reflected in the Bank's SAL program) being taken to raise productivity be successful, then sectoral and geographical balance could change significantly, with corresponding changes in transport demand especially road, rail and port traffic. Since 1977, the economy has been severely hit by rising oil prices and a slow-down in activity leading to changes in traffic patterns. Primarily, these changes have been: (a) growth in trans-shipment of freight destined for Iran and Iraq via northern and  -2 - southern Turkish ports; (b) a rapid development of road and rail transit, and export traffic, especially road traffic to Iraq; and (c) a decline of about 20% in domestic freight. Recent enquiries indicate that this trend towards increasing transit and export traffic will continue in 1981 and 1982. Even assuming a resolution of the Iran-Iraq dispute, truck transit traffic will continue for some considerable time in the future and could lead to higher growth rates than the 5% currently predicted (pars. 4.06). With a real growth rate of 4-5% in GNP, domestic traffic should also resume its growth. B. The Transport System and Issues 1.05 The transport system consists of approximately: (i) 60,000 km of State and Provincial roads of which about 34,000 km are paved; (ii) 172,000 km of Village (local) roads of which about 6,000 km are paved; (iii) an unspecified, but in excess of 50,000 km, length of agricultural and forestry roads; (iv) an 8,200 route km railway system; (v) 19 civil airports (includ- ing two special tourist airports) of which four cater for regular inter- national flights; and (vi) 75 public and private ports serving the 7,300 km coastline. In addition to Turkish Airlines, the national airline, there are other regular international airlines serving the country and a small private charter and freight Turkish airline. The pipeline system which is both military and civil is extensive. 1.06 Traffic statistics for the period 1975-81 have been collected by the various agencies concerned and collated by the State Planning Organiza- tion (SPO). Road transport is clearly the most important mode for both freight and passenger traffic, carrying 60% and 90% respectively of total traffic. Also coastal shipping is continuing to increase and clearly deserves close study as an alternative or supplementary form of bulk trans- port. Preliminary estimates of rail transport for 1981 indicate that the decline in freight traffic has been reversed. Table 1.1 summarizes the estimated traffic volumes carried by the different modes during this period.  - 3 - Table 1.1: Turkish Transport Statistics Estimated Ton/km and Passenger/km (millions) Mode 1975 1976 1977 1978 1979 1980 1981(est) RoadI/ ton/km 27,759 31,896 35,100 36,000 37,000 38,000 35,000 pass/km 61,920 67,020 81,000 115,582 116,000 114,000 118,000 Rail ton.km 6,774 7,259 6,334 5,635 5,548 4,970 6,121 pass/km 4,735 4,614 5,086 5,600 6,799 6,011 6,800 ShippingL/ ton/km - - 4,397 3,385 6,500 14,000 17,000 pass/km - - - 1,127 1,300 1,300 1,500 Aviation3/ ton/km 50 70 83 63 66 - - pass/km 619 889 1,073 808 830 440 600 1/ Based on traffic survey on State and Provincial roads only and, there- fore, an underestimate of total road traffic but it does include inter- national traffic. Domestic traffic breakdown is estimated at 27% agricultural products, 25.5% mineral ores and building materials, 36.4% manufactured goods, 1.9% livestock and animal products and 9% miscella- neous. 2/ Public sector dry cargo coastal shipping only up until 1980: thereafter includes all coastal shipping. 3/ Domestic traffic. Source: State Planning Organization and annual statistics of Turkish State Railways. 1.07 The main issues facing the transport sector and hence the perform- ance and development of the economy are; (a) traffic demand has reached, and in many cases exceeded, the struc- tural and capacity limits of the system. A priority program of rehabilitation, especially for highways, and for providing capacity increases, is required during the next five years if very high maintenance costs and transport constraints are to be avoided (para. 3.04); (b) the efficiency of railway operations is low and the railway can no longer accept all traffic offered, which places additional demands on road transport. This railway problem has resulted from a lack  -4- of spare parts for locomotives due to shortage of foreign exchange but organizational problems have also been a contributory factor. More foreign exchange is now being made available for needed spare parts and operating methods are to be improved following a Bank financed study. However, infrastructure investment to maintain and improve the capacity of existing lines will certainly be necessary as well if railways are to play their proper role as a carrier of bulk materials (para. 1.17); (c) current and proposed developments, particularly those generating large bulk commodity movements (especially, iron ore) will require not only increases in the capacity of the existing network but also structural alterations as origins and destinations change. This issue was not addressed adequately in the past by the Transport Coordinating Agency (TCA), due to the lack of information on the needs of transport users. However, the issue is now being studied during the preparation of the NTMP, for which the Turkish draft was prepared by mid-February 1982 (para. 1.15). If it is decided that further detailed studies are necessary, the proposed project would provide financing from a supplementary studies component (para. 3.14); and (d) the development of rural access roads has not been implemented according to systematic and valid economic criteria in the recent past. The Bank's Erzurum Rural Development Project is providing a first step towards rational selection of such roads. C. Transport Organization, Policy, Planning and Coordination Organization 1.08 Ministerial responsibilities for planning, project execution, main- tenance and regulation in the transport sector are: (a) Ministry of Transport and Communications(MTC) has overall control of: (i) railways through the Turkish State Railways (TCDD); (ii) state ports through either the TCDD or the Maritime Bank (DB), and private ports which are operated by a variety of groups; (iii) civil aviation through the Turkish Civil Aviation Authority (DHMI) and Turkish Airlines (THY); and (iv) posts, television and telecommunications through the Posts and Telecommunication (PTT) and the Turkish State Radio and Television. In all of these sub- sectors major civil and infrastructure works are undertaken by the Ministry of Public Works (MPW) either through contract or force account. In addition the MTC is responsible for fare and rate regulation of road transport and the Ministry of the Interior is responsible for the enforcement of these regulations. (b) Ministry of Public Works is divided into three main directorates: (i) the General Directorate of Highways (KGM) responsible for planning, construction and maintenance of State (primary) and  Provincial (secondary) roads; (ii) the General Directorate for the infrastructure of State Airports and Pipelines; and (iii) the General Directorate for the infrastructure of Ports and Railways. (c) Ministry of Village Affairs includes a General Directorate for Infrastructure (YSE) which is responsible for maintenance, improve- ment and construction of Village (tertiary) roads, in addition to other rural infrastructure. The individual municipalities are responsible for most of the urban road network a.id municipal bus services. Policies 1.09 Road transport is mainly privately operated and entry into the industry is not limited by operating permits. The only control (apart from vehicle standards and use regulations) relates to setting maximum and minimum freight and passenger tariffs. Trucking companies, although there are officially stated tariffs, will generally negotiate rates and the mission believes that they cover costs adequately. Bus operators have to publish and comply with officially approved tariffs (which vary according to operating conditions and service quality). 1.10 The TCDD which is a State Economic Enterprise (SEE), has experi- enced operating and financial difficulties in recent years resulting in a considerable drain on Governn,ent revenues and inadequate resources for main- tenance and investment. Following the Bank's Turkey Public Sector Invest- ment Review (TPSIR), decisions have been taken by Government to defer work on large parts of the investment program that appeared unjustified in many respects, and to concentrate on improving the existing system, taking into account recommendations of an operational study financed under the Bank's Railway Project (para. 1.17). TCDD is seeking external assistance to imple- ment the recommendations of this study; also tariff revisions to improve revenues were introduced in October 1981. It is too early to reach definite conclusions on the results of these actions and it is not yet clear whether management deficiencies are being corrected. However, preliminary estimates for 1982 traffic indicate that the decline in services may have been arrested. 1.11 Ports are operated by the TCDD, the DB and private owners. Road transporters are also investing in supporting services in public ports. The port system, whilst increasing its productivity especially since the assump- tion of power by the present Government, clearly requires increased capacity and modernization: this is being addressed by the Bank's Second Port Project (para. 1.17), which provides a component for the preparation of a Ports Master Plan. 1.12 The THY is state-owned and operates a network of domestic air services, which are essential for the proper functioning of the country's widely separated centers, and a limited network of international routes. The THY provides "no frills" services at relatively low costs (about 8 cents per pass/km) which has resulted in high load factors and year on year  - 6 - operating profits. The DHMI manages airports, provides air traffic control and generally supervises civil aviation: operations yield a profit which is adequate to finance most investments by the DHMI. 1.13 Turkish Maritime Lines operates both deep sea and coastal shipping which is supplemented by limited operation of small private owners and "own account" shipping operations such as the KGM which owns four bitumen tankers. Currently shipping capacity is adequate, although coastal shipping demand deserves to be kept under review (para. 1.17). 1.14 For the next two or three years, Government policy will have to focus on needs (e.g. transport of bulk commodities by road, and rehabilita- ting steam locomotives and highways) to provide immediate solutions to key problems. However, during this period the NTMP should seek solutions con- sistent with the longer-term needs and resources of the economy. Meantime, present short-term policies are reflected in the transport investment plan, where major new investments are being postponed and efforts are being con- centrated on the maintenance and rehabilitation of the existing transport system, and to raise operational efficiency. Planning and Coordination 1.15 In 1980, the Bank mission to prepare the TPSIR noted, as a major problem, the lack of an integrated view of the transport sector as well as the lack of coordination of transport planning both within the sector, and with other sectors. This was primarily because the TCA in the MTC, which was responsible for transport planning and coordination, had not had suffi- cient prestige nor been able to retain adequate and competent staff to carry out its intended functions. The Government noted these findings and in early 1981 set up a core of specialists in the State Planning Organization (SPO), which is responsible to the Prime Minister's Office, and entrusted them with the preparation by February 1982 of the NTMP taking account of the technical plans and inputs of the various agencies involved. An Interministerial Committee was also established to review the plan and related budget propos- als. The SPO is adequately and competently staffed for directing and coordinating transport planning and collaborates well with the agencies concerned (about 100 in number). It appears, therefore, that the transport planning system in Turkey into which the highway planning system in the proposed project will be integrated, (para. 3.08), is now developing to an appropriate level. 1.16 The present transport planning and coordination system should be allowed to continue, and its performance monitored. To ensure this monitor- ing, the Bank expects to have an opportunity to comment upon the NTMP. At negotiations, the Government confirmed that a copy of the summary report of the NTMP would be given to the Bank in May 1982 for its review and for follow-up during subsequent missions to Turkey. D. Bank Experience in the Transport Sector 1.17 The Bank has participated in three previous projects in the trans- port sector.  - 7 - (a) Railway Project, Loan 893-TU, 1973 This loan for US$46.7 million with an estimated total project cost of US$215.6 million (foreign exchange US$148.6 million) included track renewal, signalization and telecommunications, manufacture of rolling stock, modernization of workshops, training and technical assistance. It was scheduled for completion by September 1976 but due to slow progress was only completed in mid-1981. The slow execution of this proiect was due to bureaucratic delays, frequent changes of Government, laAk of qualified personnel and economic difficulties. Nonetheless, physi- cal targets were reached for improving the efficiency of freight operations, and for diesel locomotive maintenance, and a study of railway operations was completed. The results of this study are being taken into consideration in planning future strategy. Furthermore, although the financial position of the railway has not improved, and until recently loan covenants were not adhered to, a more pragmatic approach to investment and operations has recently emerged. The need for improvements in the railway sector is clear especially in view of severe constraints that may arisp in the transport of bulk commodities. (b) First Port Project, Loan 28-TU, 1950 This loan for US$12.5 million included: (a) extensions at several ports; (b) a new port at Samsun; (c) grain, ore and coal handling equipment; and (d) harbor cons- truction equipment for MPW. Following agreed project changes, a supplementary loan of US$3.8 million was made in 1954. Completion of this project, whilst achieving its objectives, was delayed from 1958 to 1962 (most of the physical works were completed by 1959). Procurement for a relatively small part of the project led to most of the delay. (c) Second Port Project, Loan 1741-TU, 1979 This loan for US$75.0 million, with an estimated total project cost of US$177.8 million, is aimed at the rehabilitation and improvement of the 10 main public ports and improvement of port institutions through; (a) modernization of equipment and floating craft; (b) improvement of storage and wharf areas; and (c) provision of technical assistance for training, tariff and management studies and port sector planning. The project is being implemented smoothly with only minor problems. Due to some delays in procurement, project completion is expected to be about one year later than originally scheduled. 1.18 The Bank's experience in the transport sector has been limited to two particularly complex sub-sectors. Physical implementation, although experiencing delays, has generally been satisfactory. Most of the problems have occurred in implementing policy decisions due to poor coordination in Turkey and to shortage of skilled staff. However, Government's administra- tive and coordinating arrangements have improved considerably since 1980, and with the basically simple nature of the physical works on the proposed highway rehabilitation project, it should not experience the same difficul- ties as the previous projects on ports and railways.  -8- II. THE HIGHWAY SUB-SECTOR A. The Network 2.01 The highway system is extensive and comprises about 233,000 km of roads (excluding municipal, agricultural and forestry roads) to give an overall density of about 30 km per 100 km2. Table 2.1 gives details of the 1980 network. Table 2.1: The Highway Network Paved Unpaved Bitumenous Surface Category Concrete Dressed Improvedl/Unimproved2/ Total ------------------------- km --- State (primary) 2,7073/ 18,250 10,900 350 32,207 Provincial (secondary) - 5,000 16,500 6,850 28,350 Village (tertiary) - 6,000 108,000 58,200 172,200 Total 2,707 29,250 135,400 65,400 232,757 1/ Stone block, crushed stone or selected gravel. 2/ Natural soil with or without drainage structures. 3/ Includes 215 km expressways and 167 km expressways under construction. Source: General Directorate of Highways and Ministry of Village Affairs The major part of this system was built in the 1950's and 60's, since when little improvement has been carried out. Consequently, a considerable part of the network, in particular about 3,200 km of the Trans-Turkey Highway (TTH), which is the country's main transport artery, is now in poor struc- tural condition and carrying traffic in excess of economic capacity. Improvements, especially geometric, are often difficult and expensive because of the rugged terrain and areas of soil instability. Despite very considerable and effective maintenance efforts, much of the State road system has deteriorated seriously, and requires strengthening or reconstruc- tion. The description of typical levels of deterioration are given in Annex I. 2.02 Apart from the TTH, no detailed inventory of road conditions has been carried out on either State or Provincial roads, although a sample survey carried out in 1980 indicated that roads carrying low traffic volumes are basically sound. A more detailed examination of the State network will be carried out during the course of the proposed project (para. 3.08). B. Traffic and Road Transport 2.03 A comprehensive traffic survey is carried out each year on State and Provincial roads and the results published, but due to economies,  - 9 - processing results has fallen behind and estimates of recent traffic growth have had to be made on the basis of sample counts. The majority of village roads probably carry less than 500 vehicles a day and many may only have seasonal traffic; traffic often consists almost entirely of agricultural tractors and trailers or animal-drawn vehicles. 2.04 Tra&fic on ti- state and provincial road sys,LeaL ihas grown histori- cally at a rate abou: 40% higher than the GDP, but following the economic crisis, the traffic growth rate has fallen since 1977 below the long-term 9%-10% growth rate predicted then, and is now probably about 5% (para. 4.06). An exception to this, is transit traffic, especially that stimulated by the Iran/Iraq conflict, which has increased rapidly on certain roads. However, despite the decline in traffic growth, traffic in many cases is already above the structural and geometric capacity of the network. For example, it is estimated that more than 5,000 km of the state road system, mainly 2 lane with a daily capacity of 8,000 passenger car units (pcu), are currently carrying the equivalent of at least 10,000 pcu's. 2.05 Axle load surveys have been carried out periodically in Turkey since 1974, and are now arranged on a regular basis. Axle loads increased considerably in the mid-seventies, but recent data show that in the heavily laden direction, loading appears to be stabilizing for the present over a wide range of primary routes at about 2.5 standard axles per commercial vehicle, whilst on the back-haul, the loading is much more variable, ranging up to about 1.7 standard axles/commercial vehicle. With high volumes of heavy vehicles, many of the state roads are estimated to be carrying at least 1 million standard axle repetitions annually in the heavily laden direction (para. 3.04), and this is more than most of the original pavement designs allowed. In the back-haul direction standard axle load repetitions vary on average from 400,000 to 700,000 annually. 2.06 Table 2.2 gives details of the vehicle population. Table 2.2: Registered Vehicles in Turkey 1977-80 ------- No. of Vehicles ------------- % Increase Vehicle Type 1977 1978 1979 1980 p.a. Large trucks 143,664 152,334 162,667 170,273 5.8 (more than 10 t) Small trucks 127,253 136,945 147,138 156,908 7.2 & pickups Large buses 26,261 27,666 29,313 31,100 5.8 Small buses 52,610 57,568 62,178 65,607 7.6 Cars and taxis 536,155 597,530 658,667 710,915 9.8 Total 885,943 972,043 1,059,963 1,134,803 8.6 Source: KGM, SPO and mission estimates.  - 10 - With a continued slow-down of economic activity in Europe, private car imports by returning migrant workers will decline or increase less rapidly than in the past. The fleet of larger trucks on the other hand, even in the case of a resolution of the Iran/Iraq conflict, will probably continue to grow at least at the present rate in order to meet structural changes in both domestic and transit traffic that cannot be met by alternative trans- port modes (para. 4.03). 2.07 Road transport, which is the major carrier of passengers and freight in the country, is largely in the hands of private operators and there is practically free entry into the industry. Even the state-owned oil company generally sub-contracts oil product deliveries to private transport firms. The main road transport services not in private hands are the large municipal bus services in towns such as Ankara and Istanbul. The structure of the industry includes many owner-driver operators, cooperatives (transport unions of several firms) and also very large operators, most of which are also engaged in international traffic. The largest grouping of truck operators is the International Transport Union, with 258 companies owning 38,000 trucks, of which 28,000 are regularly engaged in transit trade. All goods originating in Turkey or arriving at Turkish ports for trans-shipment by truck to other countries have to be carried in Turkish vehicles. Some local transport cooperatives now engage in international trade and, in some cases, have been reported as financing export oriented production and trading activities. Through traffic may be carried in foreign vehicles as also may goods originating in other countries and destined for Turkey; no transit charge is made on a quid pro quo basis with other trading partners or transit countries (para. 4.05). 2.08 Although official freight tariffs are set for particular routes and commodities by the MTC, it is common practice to negotiate rates with cus- tomers. Whilst actual contract rates are not made available, the charges indicated compare reasonably well with total vehicle operating costs. However, cost recovery from heavy vehicle operators for the damage their vehicles cause to the network is far from adequate, and this will be exam- ined in the proposed project (para. 3.11). Passenger rates vary according to the area of operation or road condition and the quality of sevice. Tariffs, which are published, are generally fixed after negotiation with local authorities and the MTC. 2.09 Apart from the important function played by road transport as a critical service in socio-economic activity, there are two other aspects of road transport in Turkey that need to be highlighted: (a) with the development of economic activity throughout the country, especially bulk freight generating operations, away from tradition- al industrial centers and into areas with limited rail access, the flexibility of road transport, either as trunk or feeder services, is rapidly leading to this sub-sector becoming a critical one in short-term development needs. However, in the longer-term, the most appropriate transport mode should be developed, bearing in mind the economic and operational advantages of each; and  - 11 - (b) the foreign exchange earnings of transit traffic carried between Turkish pcrts and other countries by Turkish truckers before the outbreak of Iran/Iraq hostilities amounted to about US$250 million a year gross which in 1980 was approximately 7% of total exports of goods and services. Since the start of the Iran/Iraq conflict, it is estimated that the earnings have risen annually to more than US$700 million gross or approximately 20% of total exports of goods and services. For Turkey, the net foreign exchange earnings would usually be about 40% of transport earnings; however, very cheap fuel is obtained in Iran and Iraq for this traffic, and the net earnings are probably higher. C. Administration, Acccinting and Auditing 2.10 The KGM organization is shown at Annexes II and III. It administers and is responsible for the planning, design, construction and maintenance of the highways and bridges which form the State and Provincial highway network. To carry out its work, it relies both on force account and contractors, and supervision is carried out by the KGM staff. The organization of the KGM both at its headquarters in Ankara and its seventeen Regional Divisions is appropriate for these purposes. 2.11 The KGM has a total staff of about 1,325 professional engineers, 600 sub-professionals, 32,600 non-professionals and, in normal times, a seasonal work force of 15,000. Though salaries are low, the quality of staff is generally high and availability of experienced personnel is not expected to be a constraint on project planning and implementation (paras. 3.08, 3.16 and 3.21). In fact, the size of the work force is much larger than necessary for the current volume of work that can be carried out with available funds, and a personnel reduction of about 50% would probably not reduce the KGM's effective capacity. While it is unrealistic to expect any sudden, large reduction in staff, the Government is seriously concerned over the problem and introduced in December 1981 an early retirement scheme which overall is expected to reduce state-employed personnel by about 40,000. This is a good start, and the situation should be watched in the next year or two, to see what effect it has on the KGM. 2.12 The main features of the Turkish budgetary system, as applicable to the proposed project are given in Annex IV. The capital budget generally comprises allocations to cover the annual cost of investments scheduled for implementation during the FY and agreed by the SP0. To facilitate the award and execution of multi-annual contracts, the 1972 law revising the estab- lishment of the KGM permanently authorized it to enter into contracts for periods up to five years and for amounts exceeding budgeted funds by 50%. Also, starting with the Financial Year 1982, the capital budget will include ab initio all funds required regardless of source, unlike previous years when Government borrowing for project finance was only included in the budget at the time of contract award and this naturally led to implementation delays. These arrangements, together with the provision for multi-annual contracts and a non-transferable budget for the project, are deemed adequate for the budgeting of the proposed project and were confirmed by the  - 12 - Government at negotiations. To ensure coordination between preparation of the budget and the financial needs of the proposed project, suitable arrange- ments between the Government and the Bank were agreed for annual budget and work program reviews (para. 3.23). 2.13 The accounting and auditing system of the KGM and the related internal and external control procedures are also described in Annex IV. They are considered adequate for the purposes of the proposed project and no change is recommended. Financial reporting and external audit requirements are discussed in para. 3.24. D. Planning 2.14 Planning in the highway sub-sector (excluding village roads) is the responsibility of the KGM, SPO and Ministry of Finance. The KGM prepares a basic program according to its technical and economic assessment of needs based on the structural condition of roads and on traffic volumes. The program is then reviewed by the SPO, for consistency with general planning objectives, resource constraints and transport demand, and also by the Ministry of Finance for financial constraints and conformity with fiscal policies. 2.15 The current program comprises a large number (over 400) of projects started previously, but following recent finance constraints, work has virtually ceased on many projects with annual budgets often being purely nominal. As part of the NTMP, the KGM, together with SPO, have carried out a review of the program to establish a practical list of economic priorities. This has been particularly necessary because of the rapid deterioration of many roads and the associated high cost of maintenance and emergency activi- ties. The review has resulted in the postponement of some large new projects, including the second Bosphorous bridge and the extension of the Tarsus-Pozanti motorway, and the diversion of resources to urgent strength- ening and rehabilitation of priority sections of the existing network. The Highway Investment Master Plan, which has been developed by the KGM as part of the NTMP, is expected to further improve this planning approach, and at negotiations the Government confirmed that in May 1982 it would provide the Bank with further details of this Plan. E. Financing and Expenditures 2.16 The maintenance, rehabilitation and new construction of the State and Provincial highways are financed by: (a) allocations from the general revenues of Government; (b) earmarked revenues from toll roads, bridges and tunnels; (c) duties on fuel sales; and (d) miscellaneous sources. These allocations are made against each year's agreed program but additional funds may be voted by Parliament during the course of the year. 2.17 The budget is sub-divided into two categories, mainzenance and investment, each of which includes its respective administra.ion costs (headquarter overheads, planning, and materials research). The maintenance budget only covers routine and emergency maintenance and also regraveling.  - 13 - Other periodic maintenance such as resealing, pavement strengthening and rehabilitation is included in the investment budget. The cost of maintain- ing the surplus labor force (largely for social reasons) is proviAed under the maintenance and investment budgets, and is estimated at about 30% of the budgeted amounts in 1981. To the extent that it might be feasible, it would be more appropriate to cover this cost under a separate budget item. Expend- itures, in current and constant 1976 prices, for the period 1976-1980, and estimates for 1981 are summarized in Table 2.3. Table 2.3; KGM Expenditures ------------- Turkish Lira (billion) -------------- 1976 1977 1978 1979 1980 1981(est)!/ Routine maintenance Current Prices 2.29 3.48 5.69 8.24 17.50 38.35 1976 Prices 2.29 2.81 3.35 3.04 3.22 5.23 Investment Current Prices 8.17 10.99 14.49 16.89 31.51 50.052/ 1976 Prices 8.17 8.88 8.54 6.23 5.80 6.83 Total Current Prices 10.46 14.47 20.17 25.13 49.01 88.40 1976 Prices 10.46 11.69 11.89 9.27 9.03 12.06 1/ Including an estimated TL 3.5 billion in current prices to finance the voluntary early retirement of part of the surplus labor force. 2/ Made up of about 8% new construction, 70% rehabilitation, strengthening and periodic maintenance, and 22% equipment, materials and bridges. Source: KGM and SPO Total annual KGM expenditures (at constant prices) over the three-year period 1976/78 were reasonable, and remained more or less constant before declining in the next two years. Over this five-year period, many roads were deteriorating rapidly and required more maintenance to avoid major pavement failures. The 1981 increase in the investment budget, arises from starting the program of highway rehabilitation. An appropriate balance between maintenance, strengthening, and rehabilitation programs and their related budget needs, will be examined during the highway planning study included in this project (para. 3.09). 2.18 It is difficult to accurately assess road user charges in Turkey because of the complex nature of taxation statistics. Road user charges have had to be estimated on the basis of physical quantities and on reported rates of taxes and duties. The estimates derived are, however, accurate enough for a comparison (Table 2.4) with road expenditures, and this shows  - 14 - that road user charges are, as a whole, sufficient to cover road expendi- tures. However, their incidence benefits heavy vehicles at the expense of lighter ones, and to review this imbalance, a component is included in the axle load study under this project to make recommendations on a scale of license fees for heavy vehicles to reflect the cost of the damage they cause to the highway network (para. 3.11). Table 2.4: Road User Revenues --------- TL billions ---------- Item 1978 1979 1980 1981 Fuel: Gasoline 14.6 10.8 11.7 27.2 Diesel 6.9 -3 .31/ 8.1 39.9 Net Revenue 21.5 7.5 19.8 67.1 Vehicle Duty and Tax 62.2 67.2 63.1 67.5 Vehicle Licenses 9.1 9.8 10.4 11.1 Other 0.7 0.8 1.1 1.1 Total 93.5 85.3 94.4 146.8 KGM expenditures 20.2 25.1 49.0 88.4 YSE expenditures 7.6 11.7 21.3 34.5 Total 27.8 36.8 70.3 122.9 Surplus 65.7 48.5 24.1 23.9 1/ Subsidized from the stabilization fund. Source: KGM, SPO, YSE and Ministry of Finance The figures for fuel tax revenues include a fuel stabilization levy, which has been used to subsidize prices (particularly diesel fuel) in times of quickly rising costs; the status of this levy can only be estimated, but over the last four years, it has shown a considerable surplus. The KGM and the YSE overall expenditures do not understate road needs overall, and there has been a surplus of revenue over expenditures for the period 1978-81. This surplus has been tending to decline due, in part, to the slump in fuel sales and a decline in the sale of new vehicles. 2.19 Following Bank recommendations at the end of 1980, the Government is making regular revisions of fuel prices and taxes to keep pace with inflation and to more realistically reflect world prices. In 1981 taxes on both gasoline and diesel have risen sharply, although November 1981 retail prices of approximately US$0.70 and US$0.52 per liter respectively are still about 30% lower than the lowest European prices, but are considerably above world market CIF prices. The price structure is summarized in Table 2.5, and shows that, allowing for growth in the vehicle fleet and inflation, gasoline consumption is price elastic whilst diesel consumption is relatively insensitive.  - 15 - Table 2.5: Fuel Price Data (Yearly Average) Estimated Retail Consumption/ CIF Distribution Taxesl/ Price Tons2/ - Rounded Turkish Lira/Ton -------- Gasoline: 1978 4,200 700 6,700 11,600 2,183,037 1979 14,000 1,900 6,000 21,900 1,791,724 1980 33,400 4,100 7,000 44,500 1,674,232 1981 43,800 5,700 16,500 66,000 1,650,000 Diesel: 1978 3,400 500 1,550 5,400 4,435,827 1979 9,200 1,200 (-920) 9,500 3,647,024 1980 21,500 2,500 2,000 26,000 4,050,944 1981 37,900 4,400 9,900 52,200 4,027,000 1/ Tax includes ordinary taxes and duties (comprising approximately 23 separate items) and the stabilization levy (subsidy) which in 1981 comprised about 75% of the tax element. 2/ Almost 100% of gasoline and 90% of diesel is used in the highway sector. The very sharp decline in the consumption of both gasoline and diesel in 1979 was probably caused to a great extent by physical shortages. The longer term decline of about 25% for gasoline is probably due to the fall in economic activity and the real increase in fuel prices. The three year decline of diesel consumption of about 10% indicates considerable insensitivity to price rises probably due to the possibility of passing on higher costs to transport users. Source: SPO, Ministry of Finance and Mission estimates. 2.20 Vehicle Licence Fees. The Table 2.6 gives the scale of annual vehicle licensing fees: Table 2.6: Vehicle Licence Fees Vehicle Type Annual Fee (TL) Motor-car (private) 10,080 Motor-car (taxi) 10,020 Truck (less than 5 tons) 21,000 Truck (more than 5 tons) 28,200 Source: Ministry of Finance  - 16 - Since these fees are unrelated to the damaging effect vehicles have on roads, the axle load study under the proposed project will, inter alia, seek to provide better data on which a revision of these fees may be based (para. 3.11). F. Engineering 2.21 Design standards are set by the KGM for State and Provincial highways, and by the YSE for village roads. The design standards of both the KGM and the YSE are satisfactory. Engineering is carried out by the agency responsible for the specific project, whilst highway research is carried out by the KGM. Most of the KGM's engineering is delegated to its seventeen divisional offices, with the central office exercising overall and supervisory control. The Research Department of the central office also carries out some pavement testing and provides all pavement designs. The KGM uses a well established deflection testing system for the design of overlays to strengthen existing pavements. Consultants are seldom used for engineering. G. Construction 2.22 Construction is carried out by either the KGM or the YSE dependent on the project. About 50% of the investment and major rehabilitation program of the KGM is carried out by contract; and the rest by force- account. The YSE carries out about 40% of its road investment program by local contract. Consultants are seldom required for supervising contract construction of highways because the divisional offices of the KGM and the YSE have the capacity to do so. To carry out the proposed rehabilitation works, the KGM will have to divert from its other works, a gradually increasing number of Resident Engineers for works control (para. 3.21), including some engineers now seconded to Turkish contractors abroad. 2.23 All KGM contract construction is carried out following competitive bidding open to prequalified contractors on the MPW's register. The register is reviewed periodically and systematically. The contracting industry is well established and comprehensive both in its coverage of expertise and the range of size of firms (from petty contractors to large internationally competitive firms). The capacity of the contracting industry in Turkey is considered adequate for this project. H. Maintenance 2.24 Highway maintenance in Turkey, including snow removal, is exten- sive, well organized and well executed, and it has been most effective in preserving many roads. However, since maintenance is not intended to increase pavement strengths, it is unable to prevent deterioration of the more heavily trafficked routes, many of which are failing drastically now. Maintenance also has some limitations when dealing with the extensive problems of frost and slope instabilities in certain parts of Turkey. To remedy these deficiencies, reconstruction to improved standards will be carried out under the proposed project (paras. 3.04 and 3.05).  - 17 - 2.25 Routine maintenance, excluding resealing, regravelling and pavement strengthening, is carried out by force-account, which is equipment-oriented and well organized. Responsibility for highway and equipment maintenance is delegated to the seventeen divisions throughout Turkey. The equipment fleet is large (nearly 19,000 items) and comprehensive, but much of it is old and until recently, there have been some difficulties in obtaining foreign exchange for the purchase of spare parts; this difficulty continues for the purchase of new foreign equipment. Dependent upon the outcome of the overall review on the appropriate balance between the maintenance and the rehabilitation and strengthening programs, any further studies required for equipment needs, could be carried out under the supplementary "uncommitted" studies provided for in the proposed project (para. 3.14). The YSE has a village road maintenance organization patterned on the KGM one, and also has a similar, but not so large, equipment fleet. I. Training 2.26 The Training Department of the KGM has a comprehensive and establi- shed program of training for its personnel (and those of related organiza- tions such as personnel concerned with traffic control and safety). The Training Department has adequate facilities and staff, both in Ankara and the Divisional Headquarters in various parts of Turkey. Training covers: (i) basic orientation for all staff from professionals to equipment operators; (ii) development courses on all technical aspects of KGM work (with an emphasis on training for mechanics and equipment operators); and (iii) intensive language courses in English and French. During 1980, about 6,000 KGM staff, or approximately 20% of its permanent work force underwent training (generally short courses), and the 1981 program plans for 8,600 personnel to receive similar training. Despite this large program, further courses are required to train medium to upper echelon staff in highway planning, road safety analysis, traffic engineering, works control, and in carrying out feasibility studies. The proposed project includes a component (para. 3.15) for fellowships abroad to study appropriate skills. J. Highway Safety 2.27 Turkey has for some years suffered from a severe road accident problem with approximately 5,000 fatalities each year. The authorities are acutely aware of this problem, which they plan to study so as to make improvements in highway safety matters. Initially this study and program of improvements will be limited to the main road system on a pilot basis con- centrating on identified "black-spots"1. Equipment for this program, which will be undertaken by the Planning and Traffic Departments of the KGM in cooperation with other agencies (para. 3.12), is included as a component of the proposed project.  - 18 - III. THE PROJECT A. Objectives 3.01 Both the Government's and the Bank's development objectives have been strongly influenced by the need to ameliorate Turkey's serious economic conditions characterized by high inflation, severe balance of payment problems and a large foreign debt. The Government has already begun to show some success in curtailing and streamlining the Public Investment Program. In the transport sector, the Government's investment program follows this pattern, and gives high priority to rehabilitation and strengthening of the main highways, and the provision of adequate transport for bulk commodities, especially those related to the production of energy. Specifically, in the highway sub-sector, Government investments in the short- and medium-term are aimed at protecting the existing network, rather than on constructing new sections of highways. 3.02 The objectives of the proposed project are: first, to improve, through rehabilitation and strengthening, priority and quick benefit yield- ing sections of the highway network, in particular those sections which play an important part directly and indirectly in export earnings; second, to promote improved planning and control systems; third, to support Government efforts to improve highway safety and to develop a suitable vehicle loading control system, and fourth, to provide training for highway staff. B. Description 3.03 The components of the proposed project are: (i) a three-year slice of the highway rehabilitation and strengthening program, for works to be started between 1982 and 1984 (about 775 km) and to be completed by the end of 1986; (ii) procurement of some priority specialized equipment for highway rehabilitation works; (iii) equipment and materials for: (a) the preparation of future programs of highway rehabili- tation; (b) a vehicle axle load monitoring and control system, and a program to evaluate pavement performance and related road user charges; and (c) a highway safety program; (iv) consultancy services for supplementary studies (as yet uncommitted but could include studies such as improvement to the highway plan- ning process, on aspects of road maintenance, and a follow-up on specific aspects of the NTMP like bulk transport needs); and (v) fellowships for training.  - 19 - Highway Rehabilitation Program 3.04 Many highways in Turkey do not have the bearing capacity to meet present traffic demands. Despite an extensive program of highway mainte- nance, the condition of these highways is deteriorating rapidly. To limit or arrest this deterioration, the Government proposes to step up its program of highway rehabilitation and strengthening for priority sections of the primary network, and it is a three-year slice (1982-1984) of this program that is included in the project. 3.05 According to an indicative program prepared by the KGM, this three- year slice is likely to comprise about 10 individual priority highway sections totalling about 775 km and estimated to cost about US$250 million equivalent. The actual length and number of sections will depend upon the justification of each section and the total cost. The overall extent of the program has been decided by the Government's financial constraints, and by planning and implementation constraints. At the time of appraisal, the KGM had completed detailed engineering and feasibility studies on the first year's slice (1982), covering three priority sections totalling 251 km (Annex XII), and at the time of loan negotiations, detailed engineering and feasibility studies on the next three priority sections totalling 214 km, had reached an advanced stage and were scheduled for completion by June 1982. 3.06 Traffic volumes on the three roads selected for the first three priority sections range from 2500 vpd to 5000 vpd with heavy vehicles ranging from 80% to 90% of the total flow. Traffic volumes are of the same order on the other roads in the indicative program where similar rehabilita- tion works can be expected. Each section in the three-year program is being selected on the basis of meeting acceptable engineering and economic criteria (Annex I). Feasibility studies of all highway sections in the program, irrespective of whether or not the Bank is financing them, will be submitted to the Bank and to co-financiers by the KGM for approval before construction bids are invited, or before force-account rehabilitation commences. These arrangements were confirmed with the Government at negotiations. Specialized Highway Paving and Quarrying Equipment 3.07 Most of the rehabilitation and strengthening works will be carried out by contract. However, KGM will prepare quarry stockpiles at various locations by force account and will also carry out small rehabilitation works by force account in remote and scattered areas. To assist the KGM in these force account works, the project includes a small component, US$5.9 million worth (Annex VII) for the procurement of specialized quarrying and paving equipment. This equipment will be sufficient to complement existing equipment for work at five separate quarry and highway rehabilitation sites. Equipment for the Planning and Engineering of Rehabilitation Programs 3.08 The KGM intends to adopt improved procedures, criteria and controls for planning, and will carry out a study to develop a planning system for  - 20 - highway rehabilitation and strengthening. An interim report on their pro- posed planning system was agreed with the Bank in March 1982 and is being implemented and progress will be reviewed in June 1982. KGM will carry out detailed planning and engineering itself for the second and third year rehabilitations in this project, and for the longer term rehabilitation program 1985-87 using this system. To assist the KGM carry out this detailed planning and engineering, the project includes a component, US$1.0 million worth (Annex VII), for the procurement of equipment. Pavement deflection measuring equipment is included in this component, and will be used to develop a pavement evaluation system and to monitor pavement performance throughout Turkey in relation to traffic loading and pavement types. 3.09 Also included in the KGM's planning study, is an overall review of the appropriate mix of the KGM's maintenance, strengthening and rehabilita- tion programs for the next five years, including an assessment of budget needs. If, following this review, a further detailed study of road mainte- nance and rehabilitation is required, it can be carried out under the supplementary studies component of the project. The Government has con- firmed that it would give the Bank an opportunity to review the programs for maintenance and rehabilitation during the annual reviews to be held not later than September 30 each year starting in 1982 (para. 3.23), and also to review the KGM's planning system by the date of the first of such annual reviews. The Government confirmed at negotiations that it will implement on a continuing basis, a planning process for the rehabilitation of highways in accordance with terms of reference agreed by the Bank. Equipment for a Vehicle Axle Load Monitoring and Control Program 3.10 The KGM intends to carry out a study itself to develop a program for implementing vehicle loading controls. To assist KGM develop, and subsequently implement this program, the project includes a component, US$0.9 million worth (Annex VII), for the procurement of equipment to monitor and control vehicle weights. Axle load legislation in Turkey was amended in 1980 to bring it more in line with European standards. The Government intends enforcing the new limit of 10 tonnes per single axle, 16 tonnes for a tandem axle, and a maximum gross vehicle weight of 38 tonnes and is currently preparing supplementary legislation and enforcement regula- tions. 3.11 Also included in the KGM's vehicle loading control study, is an analysis to determine appropriate user charges for heavy vehicles that reflect the cost of the damage they cause to the highways. The Government confirmed at negotiations that it will prepare its vehicle load control program in accordance with terms of reference agreed by the Bank by December 31, 1983 and thereafter, in consultation with the Bank, will implement such controls as may be recommended and will review with the Bank its proposals for road user charges.  - 21 - Equipment for a Highway Safety Program 3.12 The Government is concerned about road accident rates, and the KGM intends carrying out a highway safety study itself; (i) to identify accident "black-spots"; (ii) to determine an appropriate program of highway surface marking and signing; (iii) to determine the need and requirements for emer- gency after-accident services; and (iv) to assess the adequacy of existing traffic procedures, legislation and driver education. To assist the KGM prepare this study and implement the highway safety program, this project includes a component, US$3.6 million worth (Annex VII), for the procurement of highway safety materials and related equipment, including rescue trucks and road line painting machines. 3.13 Arising out of the highway safety study will be proposals for implementing safety measures to reduce the incidence and severity of accidents, and a program to monitor highway safety and evaluate the results of implementing highway safety measures. The Government confirmed at nego- tiations that it will prepare a traffic safety program by July 31, 1984 in accordance with terms of reference agreed by the Bank, and will implement the safety program in consultation with the Bank. Consultancy Services for Supplementary Studies 3.14 Following the preparation of the NTMP and the setting up of the KGM's proposed planning system, or during the preparation of the axle load control and highway safety programs, the need may arise for supplementary consultant studies on deficient areas o-f the planning process and of the KGM's operations. Since these studies cannot be identified at this stage, provision is being made to include a component (US$600,000 equivalent) in the project for about 80 man-months of consultant services to carry out such studies. The studies will be identified and implemented as the need for them is determined. Likely subjects could include: (a) traffic forecasting methods; (b) data collection, storage and retrieval; (c) vehicle operating costs; (d) follow-up studies on future budget requirements for road mainte- nance and rehabilitation, and the appropriate balance between maintenance and rehabilitation work; (e) follow-up studies on the NTMP in areas such as bulk transport; and (f) assessing measures to make more effective use of the KGM's redundant labor. Fellowships 3.15 To assist KGM in improving its planning and construction techniques and in the preparation of feasibility studies, a limited number of fellow- ships abroad (about 60 man-months, depending upon costs) are proposed for engineers and economists in transport economics, highway planning, contract evaluation and project supervision and control. The fellowships will be provided, probably in Western Europe, by agencies such as contractors, con- sultants, State Highway Departments and Universities, and will be arranged by the KGM Training Department directly with the agencies concerned. Detailed lists of proposed fellowships will be reviewed by the Bank ann-- - during the overall annual project reviews (pcra. 3.23>  - 22 - C. Engineering 3.16 The KGM, which has demonstrated a high level of technical compe- tence in the engineering of highways, is preparing the detailed engineering and economic evaluations for the three-year highway rehabilitation program. For the highway sections in the first year of the rehabilitation program, this work was completed in November 1981 and is scheduled to be completed in stages for the remaining years by September 1983 at the latest (465 km out of 775 km are likely to be completed by June 1982). Appraisal of the highway rehabilitation component of the project was based upon the 251 km of highway sections proposed for the first year of the program. The engineering and economic studies on these sections have been carried out in accordance with technical and economic criteria acceptable to the Bank. D. Cost Estimates 3.17 The estimated total cost of the proposed project (including about US$35 million of taxes and duties) is US$264 million, of which US$140 million are estimated to be foreign costs. Details of the cost estimate are shown in Table 3.1 (page 23). At negotiations, the Government and the Bank discussed and confirmed the cost estimate. 3.18 The costs of highway rehabilitation for the first year's time slice are based on quantities (including 5% physical contingencies) derived from the detailed engineering already done, and the KGM's December 1981 unit prices for contract works. These unit prices are comparable to those obtained from bidding on similar works in Turkey. Costs for the rehabilita- tion in subsequent years are based upon the costs of the first year's time- slice, together with an additional 5% allowance for physical contingencies. The foreign exchange component of pavement rehabilitation works is estimated at 51% overall, based upon the expectation that half the contracts will be won by local firms whose foreign exchange component is estimated at 46%, while that of foreign firms is 56%. The foreign exchange component of earthworks contracts associated with these rehabilitation works is estimated at 35% and is based on the expectation that local firms will win all of these contracts. The capital cost of equipment and materials are based upon estimates using 1981 CIF prices for imported goods (excluding import duties), and for local goods, the ex-factory costs net of taxes. For ex-factory equipment, local production, preparation and delivery costs are estimated at 40% of the equipment cost. All equipment costs include an allowance of 15% for purchase of spare parts. Equipment costs to prepare the long term program for highway rehabilitation and for the programs for vehicle axle load control and highway safety (estimated at US$5.5 million) are included in the project, though the KGM will carry out the associated studies with existing staff, and will meet all other related costs from their budget. Fellowships costs are based on current costs in Europe and North America of about US$3,000 per man-month. For consultancy services, a lump sum of US$600,000 at 1981 prices is included based on estimated costs of US$12,000 per man-month on an average for foreign consultants to include salary, costs,fees, international travel and subsistence, and US$6,000 equivalent  Table 3.1: Cost Estimate ------ Annual Base Costs ---------- ------------------------- Total Cost -------------------------- TL x 106 1/ TL x 106 us$ m 2/ I Foreign Item Description 1982 1983 1984 1985 1986 Foreign Local Total Foreign Local Total Cost l(a) Highway Rehabilitation 200 5.000 6,000 6,200 6,000 11,934 11,466 23,400 94.05 90.25 184.30 51 (Pavement Works) 1(b) Highway Rehabilitation 1,000 1,800 750 670 -- 1,473 2,747 4,220 11.60 21.40 33.00 35 (Earthworks) 2(a) Equipment for Highway 538 130 50 -- -- 687 31 718 5.40 0.25 5.65 95 Rehabilitation 2(b) Equipment and Materials 307 152 203 -- -- 633 29 662 5.00 0.25 5.25 95 for Planning and Highway Safety 3 Fellowship 2 8 8 8 -- 26 --- 26 0.20 --- 0.20 100 4 Consultant Services --- 53 26 --- -- 67 12 79 0.50 0.10 0.60 85 Total Base Costs3/ 2,047 7,143 7,037 6,878 6,000 14,820 14,285 29,105 116.75 112.25 729.00 51 5 Price Contingencies4/5/ 128 717 845 1,138 1,581 2,953 1,456 4,409 23.25 11.75 35.00 66 Total Project Costs 2,175 7,860 7,882 8,016 7,581 17,773 15,741 33,514 140.00 124.00 264.00 53 6. Front-End Fee 133 -- -- -- -- 133 -- 133 1.10 -- 1.10 100 Total financing required 2,308 7,860 7,882 8,016 7,581 17,906 15,741 33,647 141.10 124.00 265.10 53 1/ Base costs at December 1981 prices. 2/4/ Converted at TL 127 = US$1 and differences due to rounding. 3/ Including physical contingencies of 5% on first year's rehabilitation program, and 10% for all other components of the project. 5/ Both foreign and local price escalation at 8.5% in 1982 and 7.5% p.s. thereafter (the TL is expected to float to accommodate the difference between local and foreign inflation. Source: Appraisal estimate, November 1981 and March 1982. 0885D/P.17  - 24 - per man-month on an average for local consultants to include salary, costs, fees and subsistence. It is expected that some, if not all, of these services would be provided by Turkish experts. Depending upon the propor- tion of Turkish experts that might be provided, this lump sum would allow between 50 and 100 man-months of consultancy services. 3.19 The total length of highways to be rehabilitated may be more or less than the presently estimated 775 km, depending upon the average cost per km; also the quantity of highway safety materials may vary according to the extent of the safety program to be proposed. On the remaining project components, contingencies are estimated at 10% for quantity increases. Contingency allowances for price escalation, allowing for increases of 8.5% in 1982 and 7.5% p.a. thereafter have been estimated overall at 21% in US$ terms on the basis of the overall implementation schedule. E. Financing 3.20 The proposed Bank loan of US$7l.l million would provide about US$70 million to finance; (i) the foreign costs of contract construction of specific sub-projects which comprise slightly under half the highway rehabi- litation program; (ii) on a similar basis, half of the supplementary studies; and (iii) all the foreign costs of equipment, materials and overseas fellow- ships. In addition, the Bank loan would provide UStl,050,739 to finance the front-end fee. The remaining foreign costs of contract construction for highway rehabilitation, and half the foreign costs of the supplementary studies, estimated at USS70 million, are expected to be parallel co-financed by the Kuwait Fund for Arab Economic Development (KFAED). It was confirmed by the Government at negotiations and agreed by the Bank that, in view of the KFAED's appraisal requirements, the Bank would finance all (three) of the rehabilitation sub-projects in the first tranche (Annex XII) on the basis that the KFAED would make up the imbalance with larger shares of subsequent tranches. The Government confirmed at negotiations that it would request the KFAED to finance at least two of the three sections in the second tranche, and that it would confirm to both the KFAED and the Bank not later than April 30, 1982, its requested allocation for the third section. The supplementary studies are divided equally between the co-financiers because they both wish to participate in the studies. The proposed financ- ing plan is shown in Table 3.2 (page 25). KFAED financing is expected to be one loan made in two parts, the first in late 1982, and the second in 1983. The Government would finance the remaining project costs (including force account rehabilitation costs) estimated at US$124 million equivalent. Prior to negotiations, the KFAED confirmed to the Bank and the Government its intention to co-finance. The Government confirmed at negotiations that it would keep the Bank informed of progress in its arrangement for co-financing (including the allocation of the third rehabilitation sub-project in the second tranche), and that it will provide sufficient funds for the project. At negotiations the Bank and the Government agreed the cross-default provisions in the proposed Bank loan in relation to the KFAED loan.  Table 3.2: Financing Plan