Argentina - Highway Sector Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 3530b-AR STAFF APPRAISAL REPORT HIGHWAY SECTOR PROJECT ARGENTINA May 4, 1983 Projects Department Latin America and the Caribbean Regional Office jThis 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 US$1.00 - 1,328 Argentine Pesos ($a) in June 1979 - 1,850 Argentine Pesos ($a) in June 1980 - 4,200 Argentine Pesos ($a) in June 1981 - 39,000 Argentine Pesos ($a) in September 1982 - 54,000 Argentine Pesos ($a) in January 1983 Fiscal Year January 1 to December 31 Units of Weights and Measures: Metric 1 kilometer (km) - 0.62 mile (mi) 1 meter (m) - 3.28 feet (ft) 1 kilogram (kg) - 2.20 pounds (lb) 1 ton - 2,205 pounds Abbreviations AGP - General Administration for Ports CIF - Cost, Insurance and Freight DNPT - National Directorate for Transport Policies and Programing DNTT - National Directorate for Land Transport DNV - National Directorate for Highways DWT - Dead Weight Tons FA - Argentine Railways FDR - Regional Development Fund FONIT - National Fund for Transport Infrastructure GDP - Gross Domestic Product HDM - Highway Design and Maintenance Model NTP - National Transport Plan SEIM - Secretariat for Maritime Affairs UNDP - United Nations Development Program WPI - Wholesale Price Index  STAFF APPRAISAL REPORT FOR OFFICIAL USE ONLY HIGHWAY SECTOR PROJECT ARGENTINA TABLE OF CONTENTS Page No. I. THE TRANSPORT SECTOR ......................................... I A. General ............ 1 B. The Transport Network ................................... 1 C. Sector Planning, Coordination and Investment .... ........ 2 D. Major Issues in the Sector .............................. 3 E. Bank Participation in the Sector ........................ 5 II. THE HIGHWAY SUBSECTOR ....................................... 7 A. The Highway Network and its Development .... ............. 7 B. Traffic Growth .......................................... 7 C. Road Transport Industry - Freight Services .... .......... 8 D. Road Transport Industry - Passenger Services .... ........ 9 E. Road User Charges ....................................... 9 F. Traffic Safety .......................................... 11 G. Administration of the National Network .................. 12 H. Administration of the Provincial Networks .... ........... 13 III. THE DNV INVESTMENT PROGRAM .................................. 15 A. Global Investment Level ................................. 15 B. DNV's Rolling Four-Year Program (1983-1986) .... ......... 15 C. Maintenance Program ..................................... 16 D. Economic and Technical Basis of the DNV Program ... ...... 17 E. Financing and DNV's Budget .............................. 19 F. Engineering, Construction and the Road Construction Industry .............................................. 20 G. Provincial Road Investment Program ...................... 21 IV. BANK PARTICIPATION .......................................... 21 A. The Project ............................................. 21 B. Subproject Selection .................................... 24 C. Procurement .............. 24 D. Procedures for Provincial Subprojects ................... 25 E. Disbursements ........................................... 26 F. Special Account ......................................... 27 G. Semi-Annual Consultations and Project Monitoring ... ..... 28 H. Economic Viability and Assessment of Risk .... ........... 29 V. AGREEMENTS REACHED AND RECOMMENDATION ........................ 30 This report is based on the findings of an appraisal mission which visited Argentina in February 1981 comprising Messrs. A. van Dijck (Engineer), J. Gutman (Economist) and R. Mosse (Financial Analyst); and a post-appraisal mission in March 1983 comprising Messrs. van Dijck and Gutman. The report has been edited by Miss V. R. 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.  -ii - TABLE OF CONTENTS (Continued) Page No. TABLES 1.1 Modal Composition of Traffic ............................... 32 1.2 Historical Level of Public Transport Investment .... ........ 33 2.1 National and Provincial Highway Network ................... . 34 2.2 Indices of Sector Growth ................................... 35 2.3 Appraisal Estimates of Traffic Compared with Actual Counts per Third Highway Project (Loan 734-AR) .... .............. 36 2.4 Weights and Dimensions of Vehicles ................... 37 2.5 Composition of Fuel Prices - November 1982 ........... 38 2.6 Road-Related User Tax Revenues and Road Expenditures 1980 39 2.7 Contribution to Paved Highway Costs by Vehicle Type 1979 ... 40 2.8 Transfer of Road Sections between Provinces and DNV ........ 41 3.1 Highway Investment Program 1983-1986 ....................... 42 3.2 Estimated First-Year Benefits for Road Works to be Tendered in 1983 ......................................... 43 3.3 Pipeline of Project Preparation ............................ 44 4.1 DNV Tender Program 1983-1986 ............................... 45 4.2 Bank-Financed Program ...................................... 46 4.3 Estimated Schedule of Disbursements ........................ 47 ANNEXES 1. Program for Transfer of Technology to the Provinces ........ 48 2. Annual Report on Road Maintenance Operations .............. . 49 3. Economic Evaluation Guidelines for the Preparation of the Four-Year DNV Investment Program ..... .................... 51 4. Completion of Main Corridors for Country Integration ....... 56 5. DNV Procedures for Updating Four-Year Program ............ .. 57 6. List of Initial Candidate Projects on DNV Network .......... 59 7. Potential Uses of Technical Assistance Funds ............... 60 8. Summary Data Sheets for Candidate Subprojects .............. 61 9. Related Documents and Data Available in the Project Files 67 CHARTS 1. Institutional Structure for Transport (March 1983) ......... 68 2. Distribution of User Tax Receipts ........... .. ............. 69 3. Organization of the National Highway Authority ........... .. 70 MAP IBRD 3157R - Argentina Highway Sector Project  I. THE TRANSPORT SECTOR A. General 1.01 Over the last decade, Argentina has passed through a difficult period, with a series of economic and political crises, In the mid-1970s, a combination of domestic and international events undermined the country's economy, resulting in rising external debt, falling foreign exchange reserves and surging inflation. The Administration which came to power in 1976 moved to stabilize the economy, but, by late 1981, the Government was faced with a rapidly deteriorating balance of payments, heavy capital flight, reacceler- ating inflation, deepening industrial recession and growing fears of a whole- sale collapse of private financial institutions. The political confrontation in the South Atlantic put further pressure on the economy in 1982. 1.02 The transport sector, representing 6% of the Gross Domestic Product (GDP) and 18% of public sector investment, has been significantly affected by the economic crises. In the mid-1970s, traffic declined on much of the highway network. After 1976, traffic regained its early 1970s level and resumed regular growth at 4% to 6% per annum until 1981-1982 when the economic recession again affected it. Transport budgets have similarly fluctuated in accordance with the economy. 1.03 The Bank has been involved extensively in the transport sector during the past decade through the Second, Third and Fourth Highway Projects, two Railway Projects and the preparation of a Port Project. As a result, the Bank has played an important role during the difficult rebuilding years. Bank projects have supported improvement in sectoral planning, policy formu- lation and related institutional measures. The proposed Highway Sector Loan represents the logical culmination of the Bank's four highway loans to the National Directorate for Highways (DNV). Its format has been made possible by the relatively high operational standards attained by DNV and the planning and policy review efforts carried out under the Fourth Highway Project. The project is directed at implementing policies and procedures in the highway subsector in remaining areas of importance and provides for timely Bank cooperation on issues relating to the transport sector as a whole. B. The Transport Network 1.04 Argentina has developed a highly diverse and extensive transport network to integrate Its 2.8 million km2 of territory and to serve the needs of its population of 28 million. The network (Map IBRD 3157R) includes 100,800 km of national and provincial primary roads; 32,200 km of railways; 17,000 km of pipelines for crude oil, refined petroleum products and natural gas; over 100 ports and 90 commercial airports. Following the worldwide trend, highways increasingly represent the dominant mode. From 1965 to 1979, road transport's share of cargo traffic increased from 47% of total inter- urban ton-km to 52%, while rail's share declined from 18% to 9%. Similarly, in terms of passenger service, roads' share rose from 76% of inter-urban passenger-km to 88%, while rail declined from 22% to 7%, with air transport increasing its share from 2% to 5% (Table 1.1). For the next decade, no significant changes in modal distribution are expected.  -2- C. Sector Planning, Coordination and Investment 1.05 Within less than two years, the Government has gone through three organizational changes. At present, responsibility for the transport sector is divided mainly among the Ministry of Economy, in which the Secretariat of State of Maritime Affairs (SEIM) and its related agencies are located; and the Ministry of Public Works and Services, in which DNV and the Argentine Railways (FA) are located. Within the Ministries, sectoral responsibility is further diffused in such a way that DNV is overseen by the Secretariat of State for Public Works; and FA and the National Directorate for Land Transport (DNTT), which regulates road transport services, are overseen by the Subsecretariat for Transport. Air transport comes under the Air Force as well as the Subsecretariat for Transport, and pipelines are handled by the Subsecretariat of Energy within the Ministry of Public Works and Services (Chart 1). In addition, the provinces maintain separate highway directorates for their extensive networks and transport directorates for the regulation of bus and truck operations within their jurisdictions. The most significant effect of this organizational structure is the difficulty that it presents in establishing balanced investment and operational, pricing and regulatory policies for the sector. 1.06 Traditionally, the Ministry of Economy has established annual investment limits for each of the modes, giving the modal agencies flexibil- ity in determining priorities within those limits. Large projects require supporting economic evaluations to be reviewed by the Ministry of Economy. No multi-modal planning approach is applied by the Ministry. A detailed assessment of the transport sector, however, has been conducted under the National Transport Plan (NTP), which provides the Government with a more comprehensive and consistent development strategy for the transport sector to direct investment and policy planning. In 1977, the Government formed the National Directorate for Transport Policies and Programing (DNPT) with two objectives: to prepare the NTP and to establish a capacity for conducting planning and policy formulation for the transport sector on a continung basis. The Bank, under the Fourth Highway Loan (Loan 1384-AR), as well as the United Nations Development Program (UNDP), provided technical assistance and funding for the NTP. By March 1981, Phase I was completed; it included an analysis of the existing status of the sector and preliminary recommenda- tions on investment, operational efficiency, pricing and taxation and Government organization. Phase II is directed at refining the results of Phase I, conducting further analytical work and initiating actions to imple- ment the Plan's recommendations. Bank financing under Loan 1384-AR has been made available for Phase II (scheduled to end by January 1984). The proposed Project is designed to maintain a dialogue between the Bank and the Government on the important issues addressed in the NTP and would provide financing for internationally experienced consultants for further studies to be carried out by DNPT during the 1983-1986 period (para 4.07). 1.07 Public sector investment, especially in transport, has fluctuated considerably during the past decade following the rise and fall of the general economy. The "boom and bust" cycle of investment results in the modal agencies trying to catch up on deferred works postponed because of under-investment in earlier years. In transport, there was a considerable increase in investment from 1967 to 1972, which then steadily declined over  -3- the next three years, rose sharply in 1976 and has declined ever since (Table 1.2). The country's current economic difficulties will further restrict transport investment at least through 1983. In terms of modal distribution, while water and air transport shares have fluctuated from year to year, probably because of the lumpiness of investments in those subsectors, rail's share increased from 1977 to 1983 while roads' share declined. The NTP recommends an annual level of investment for the sector over the next decade equivalent to that of 1979 with 43% for federal roads, 30% for rail, 19% for air and 8% for ports. Provincial transport expendi- ture, almost totally in roads, is considerable, and, in 1979, total provin- cial road expenditures were about 40% higher than DNV expenditures. There are also major transport investments which are considered outside the levels set for the modal agencies. These investments include strategic projects, such as international bridges, and projects for which private concessionaires are being sought, such as toll roads. 1.08 While DNPT serves as the only transport planning unit with a sectorwide perspective, institutionally it is located within the Subsecretariat of Transport, which is formally responsible only for the railways and the regulation of road transport services. DNPT's influence on the rest of the sector is limited and depends on the extent to which it is called upon for advice by other Secretariats and/or Ministries. At the very least, DNPT should be responsible for annually reviewing, on behalf of the Ministry of Public Works and Services, the investment plans for ground transport, both road and rail. It was agreed during negotiations that the Ministry of Public Works and Services would establish mechanisms to ensure consistency in the preparation of rail and road investment plans. DNPT would report on this matter during the semi-annual reviews (para 4.25). D. Major Issues in the Sector 1.09 Among the issues confronting the sector, there are four which are, or will be, of considerable concern to the Government over the next five years: (a) Changing Role of the Federal Government; (b) Rationalization of the Railways; (c) Road User Charges; and (d) Limited Port Capacity. (i) Changing Role of the Federal Government 1.10 One response to the economic crises of the 1970s and the surge in spending by the Federal Government has been the decision to promote the rationalization of Government services, the "privatization" of those services which could be handled more efficiently by the private sector and the decen- tralization of selected Government activities to the provincial level. The Federal Government would maintain responsibility for those activities which cannot be delegated. Although the initial targets of the Government policies have been outside the transport sector -mainly in health, education and water works- there have been some important efforts in transport, and more are expected in the future. Rationalization of transport services has been applied mostly to the railways and has led, since 1976, to the closing of 19% of the network and the elimination of uneconomic passenger service, the reduction of freight service on another 35% of the system, and a 37%  -4- reduction in FA personnel. "Privatization" is being attempted in all the subsectors. The major effort in the sector has been the leasing of the Buenos Aires subway system, which is currently being negotiated. Other efforts include the leasing of railway shops and port facilities, the building and operation of toll roads by private firms and the contracting oi road maintenance (para 3.08). 1.11 In addition, decentralization has already moved ahead in the highway subsector, with the transfer, in 1980, of a substantial portion of the national network to the provincial system (para 2.01). Pressure is mounting to further decentralize and transfer DNV activities to the provinces (para 2.26). Other decentralization actions include the pending transfer of the Buenos Aires suburban passenger rail system from FA to the City and Province of Buenos Aires and the delegation to the provinces of responsibil-- ity for expanding and constructing river port facilities. 1.12 In carrying out this wide-ranging new policy in the transport sector, Government agencies will require assistance in designing plans of action, in strengthening provincial agencies which will receive increased responsibilities, and in monitoring the results of the actions taken. The Bank's Second Railway Project (Loan 1677-AR) is already providing assistance to FA and DNPT in developing and implementing an appropriate plan of action for the railways (paras 1.13-1.14). The proposed Highway Sector Project is directed at assisting DNV and provincial authorities with regard to decen- tralization (para 2.26) and privatization (para 3.09) in addition to making financing available to DNPT for technical assistance on these issues for the sector as a whole (para 4.07). (ii) Rationalization of the Railways 1.13 The Argentine railway problem stems from the combination of a change in the economic structure of the country, the extension and improve- ment of the highway network and the inefficiencies which result from decaying infrastructure, an "over-dimensioned" network and an excessive number of employees. While FA is an extensive railway with over 32,000 km of rail lines, the traffic density on those lines averages about 330,000 ton-km per km of line, which is about 35% of the traffic density on the Mexican system. About 80% of the traffic is hauled on 16,000 km of the network, and 95% of the tonnage hauled is handled at 27% of the stations. 1.14 Since 1976, the Government has made a substantial effort to redefine the role of the railways and to rationalize the system accordingly. The Second Railway Project is designed to assist in that process through investment and technical assistance. The staff of FA has been cut from 156,000 to 97,000, the network has been cut by 7,600 km and uneconomic services have been reduced. Operational efficiencies have been achieved with improved locomotive and wagon availability and increased loads per freight car. Traffic, which had declined from 16.1 to 9.7 billion ton-km from 1950 to 1978, rose to 10.7 billion ton-km in 1979, only to decline again to aboul: 9.5 billion in 1980 and 1981 and rise to 11.5 billion in 1982, mainly depend- ing on the grain harvest. The operating losses are substantial, with a working ratio of 207, since tariff increases have been limited in real terms. Thus, substantial work and difficult decisions remain before the railways can serve the country's economy efficiently.  -5- (iii) Road User Charges 1.15 The issue of road user charges is discussed in detail in paragraphs 2.10 to 2.12. Based on 1979 data, the NTP concluded that inter-urban truck operators have not been paying a share of road infrastructure costs commen- surate with their use of the road network. Since then, the situation has deteriorated further. The central issue is that diesel prices 1/,including road user taxes, are not sufficient to cover the opportunity cost of fuel plus providing an adequate contribution for road infrastructure. Resolution of the issue should be part of a strategy to implement a consistent pricing policy for all modes, and especially between rail and truck. (iv) Limited Port Capacity 1.16 The Argentine port subsector needs substantial investment to improve its handling of grain exports and containerized cargo. The major problem has been the shallow draft of the sea and river channel accesses to the ports. At the Port of Buenos Aires, the maximum draft is 30 feet, with a maximum of 27 feet upriver to Rosario and 22 feet to Santa Fe. Grain ships are restricted to 34,000 DWT compared to the typical ship in world grain traffic of 50-60,000 DWT. Even the smaller ships must follow the slow process of loading 10-18,000 tons upriver and "topping-off" at Buenos Aires or Bahia Blanca for a relatively low overall load factor. An initial solu- tion supported in the NTP would be the dredging of the approach channel to 45 feet to the ocean port of Bahia Blanca, expanding its port and improving storage facilities and inland grain transport. This is the objective of the proposed Bank port project (para 1.17), which has been delayed because of various technical and institutional difficulties. Another investment deci- sion which is being discussed is the construction of a new deepwater port at Punta Medanos, north of Mar del Plata. A review of the feasibility study suggests that such an expensive project (costing about US$1 billion for port infrastructure alone) would be premature and that other improvements such as Bahia Blanca and expanded river ports should be implemented first. E. Bank Participation in the Sector 1.17 As evidenced by the preceding discussion, the Bank has been involved extensively in the transport sector. Highway development has been promoted by four loans totaling US$228.5 million (Loan 288-AR, June 1961, US$31 million after cancellation; Loan 619-AR, June 1969, US$25 million; Loan 734-AR, May 1971, US$67.5 million; and Loan 1384-AR, May 1977, US$105 million). Two loans totaling US$152.5 million have been made to help improve the railway system (Loan 733-AR, May 1971, US$56.5 million after cancellation; and Loan 1677-AR, March 1977, US$96 million). A port project was appraised in August 1979, but negotiations have been delayed. All of the above projects have experienced serious delays and, in many cases, substantial cost overruns, mainly due to the economic crisis of the mid- 1970s. The First Railway Project was to assist the Argentine Government in renovation and improvement of the railway to make it viable within a 1/ In Argentina, diesel is called "gas-oil."  -6- modern competitive environment; by 1974, it was clear that no substantial progress was being made. Rather than renegotiation of the targets, the Government and FA chose cancellation of the uncommitted balance of the loan. The Second Railway Project experienced delays in becoming effective. 1.18 The First Highway Project in 1961 required a project redefinition and an extended closing date to December 1968. The original road sections, totaling 800 km, included for upgrading under the Second Highway Project were completed by mid-1973; the two sections (totaling 260 km) added in 1974 to utilize the loan balance were completed in June 1978. The final cost of the Project was 17% above the initial estimates, mainly because of the rapid inflation in the mid-1970s. The Third Highway Project, which straddled this difficult economic period, was not completed until 1980; it provided for upgrading 1,130 km of primary and secondary roads of the national network. Completion cost was 41% above the appraisal estimates. All road sections included in this project were ultimately completed. The ongoing Fourth Highway Project experienced initial delays when the DNV budget was scaled down and the backlog of projects already in execution had to be completed. Further delays have been caused by the financial failure of several contractors and subsequent contract rescissions. Although about 40 of the 48 sections should be completed by end-1983, the remaining retendered sections will not be completed until mid-1985. 1.19 The experience with past and current transport lending operations indicates that project implementation in Argentina can be difficult and time-consuming and that delays are the rule rather than the exception. Much depends upon the continuity of government and the state of the economy, both extremely difficult to factor into the implementation plan of a project. The sector format of the proposed loan should help to avoid many of the delays encountered in earlier loans. 1.20 Over the course of the four highway loans to DNV, the Bank has helped to finance the construction and improvement of 5,500 km or 14% of the national network. The current-Fourth Highway Project involves about 1,285 km of public works, of which about 75% were completed by January 1983. 1.21 In addition to the public works aspects of Bank lending to DNV, the four highway projects have contributed significantly to the institutional development of DNV, as confirmed in the respective Project Completion Reports (PCRs) for the Second and Third Highway Projects.2/ The most notable contributions have been in improving the planning practices of DNV through staff training, preparation of methodologies and financing of field surveys of the network and in improving organizational efficiency and management procedures of DNV through mission reviews and technical assistance. The resultant high operational standards of DNV and the established dialogue between DNV and the Bank have led to the proposed Highway Sector Project as an appropriate means for Bank involvement in the remaining areas of 2/ Second Highway Project - Loan 619-AR - PCR dated November 30, 1978 and PPAR 2556 dated June 25, 1979. Third Highway Project - Loan 734-AR - PCR dated January 30, 1981 updated and released with Highlights under M83-179 of March 3, 1983.  -7- importance. The bases for Bank involvement in those areas are the studies prepared under the Fourth Highway Project: (a) the National Transport Plan (para 1.06); (b) the Highway Needs Study (para 3.11); and (c) the Study on Traffic Safety (para 2.13). The implementation of the recommendations of these studies would be objectives of this proposed Sector Project. II. THE HIGHWAY SUBSECTOR A. The Highway Network and its Development 2.01 The basic road network in Argentina is in place, although not yet at required standards. As of 1981, it consisted of 38,500 km of national roads with 71% paved and 62,000 km of provincial primary roads with 28% paved (Table 2.1). The network is classified according to the type and level of traffic served; an inventory of the general characteristics of both the provincial primary and national network is maintained by DNV and updated continuously. In keeping with the Government's policy to rationalize the activities of Federal agencies and to delegate responsibility to provincial authorities, DNV, in late 1980, reviewed its classification of the road network, transferred 13,140 km of the national networks to the provinces and reclassified 3,230 km of provincial roads as belonging to the national system. 2.02 Substantial improvements were made on the national network between 1965 and 1975 with the paving of 9,355 km of roads. The restrictive DNV budgets of the mid-1970s left a backlog of major works to be completed, which took priority over strengthening and reconstruction during the rebuilding years of 1976-1980. As a result, the condition of the generally light pavements on older sections of the network deteriorated. The DNV Highway Needs Study 1980-1982 (para 3.11) found that 6,400 km, or 23% of the national trunk and primary network (27,500 km), are now in need of reconstruction. Over 50% of the DNV investment program for 1983 is thus directed at rehabilitation, strengthening and reconstruction. The condition of the provincial network is under study by DNV. B. Traffic Growth 2.03 Traffic growth on the nation's roads followed an erratic pattern from 1970 to 1980. Fuel consumption statistics (Table 2.2) illustrate how automobile travel declined in 1975 in response to the general economic problems of that period and to the 1974 OPEC price increase, but rose quickly between 1975 and 1980, with gasoline consumption increasing at an average annual rate of 7%. Diesel consumption, of which trucks represent about 46%, was apparently unaffected during this decade, growing at about 4.5% annually. It is too early to perceive the effects of the substantial increases in fuel prices in recent years and the current economic problems.  -8- 2.04 Traffic growth not only varied greatly from year to year, but also from region to region. The PCR for the Third Highway Project revealed that the earth and gravel roads which were improved, especially in the outlying less developed provinces, registered substantially higher traffic than expected, while the high traffic density road sections in major urbanized regions registered less than expected growth, if any (Table 2.3). Thus, the paving of the arterial Route 14 in the provinces of Entre Rios, Corrientes and Misiones had an average annual growth rate of from 8 to 15% between 1970 and 1980, while the sections which were repaved or converted to four-lane divided highways showed average annual increases of from 0 to 5%. These statistics illustrate the growing importance of inter- and intra-regional transport in areas outside the traditional radial traffic pattern between Buenos Aires and the provinces and are in accordance with population trends. 2.05 To monitor traffic development, DNV established, in 1971, a comprehensive traffic count system with technical assistance from the U.S. Federal Highway Administration and financing under the Second Highway Loan. The system included 122 permanent count stations and substantially more seasonal count stations. The system was neglected after 1974, and, although data were collected, no control over procedures and results was instituted. No statistical summaries were published until 1980, and much of the information was considered unreliable except for traffic counts made in conjunction with specific projects to be implemented with external financing. During the preparation of the proposed Sector Project, DNV prepared and implemented a Plan of Action for Traffic Counts and has improved the system through the introduction of new, specially trained field staff. Under the proposed Project, financing would be provided for the acquisition of 200 traffic counters to upgrade and expand the current system (para 4.05). C. Road Transport Industry - Freight Services 2.06 Road transport has continuously increased its share of freight movements since 1965 at the expense of rail and inland waterways (para 1.04). The trucking industry which has evolved is a dynamic one, not restricted by entry, capacity or tariff regulations. With 65% of the fleet in the hands of owner-operators, a healthy level of competition has been maintained, resulting in a wide range of tariffs and types of services offered. Of the remaining trucks, 20% are operated by transport companies and the remainder are for "private" or "own-account" hauls. The fleet grew at an average annual rate of 4.4% from 1975 to 1980 (Table 2.2). Trucks represent a comparatively high proportion of highway traffic, averaging 43% on the road sections included in the Third Highway Project (Table 2.3). Further analysis of the trucking industry was made by the Bank and is presented in ARGENTINA: Analysis of Road Freight Transport and Intermodal Alternatives (Cono Sur), March 1981. 2.07 Freight vehicles on the nation's highways are subject to regulations limiting the size and weight. The regulations are administered by DNV in accordance with the Transit Law of 1970. DNV has established maximum dimensions and weights per axle and per vehicle (Table 2.4). Enforcement of the regulations was originally conducted through the use of portable scales at alternate locations. After finding such scales to be inadequate for the 24-hour coverage which is considered necessary to control  -9- freight vehicles on heavily trafficked routes, DNV has initiated the installation of 44 permanent weighing stations for a control "belt" around Buenos Aires and near other major cities. One of the weighing stations being installed on Route 9, north of Buenos Aires, has a scale for weighing vehicles in motion. Recent legislation has attempted to standardize size and weight limits for all of the national and provincial networks as well as the fines to be imposed for non-compliance. Operation of vehicle weigh stations outside of the Province of Buenos Aires is expected to become the responsibility of the provinces under the new legislation, and some provinces are already operating stations. 2.08 In 1979, DNV introduced a minimum power-to-weight ratio, which is measured by the vehicle braking power related to the gross weight. The average ratio for trucks in Argentina is 3 HP/ton as compared with over 6.5 HP/ton in Europe. Many trucks in Argentina are "under-powered," resulting in lesser speeds and lack of acceleration, especially on steep grades, causing dangerous conditions and contributing to congestion. The DNV regulation raises the minimum power-to-weight ratio gradually from 3.5 in December 1981 to 5.0 by January 1986. DNPT assessed the impact of the regulation by identifying the affected fleet and estimating the increased cost of either reducing cargo loads on underpowered vehicles or purchasing more appropriate trucks. The results showed that the regulations would substantially affect the truck-trailer combinations with rear tandem axles which represent about 35% of the truck combinations on the highways. The regulation is now under review to determine if full implementation is warranted. D. Road Transport Industry - Passenger Services 2.09 In 1980, interurban buses accounted for 32% of all interurban passenger-km in the country. Over 180 companies with 2,900 vehicles are serving inter-provincial routes. This important industry, however, has been hindered by an inefficient regulatory structure, as pointed out in the NTP. Entry, capacity, tariffs, routes and schedules are regulated by the DNT for routes which cross provincial boundaries and by the provincial transport agencies for intra-provincial routes. Many companies are regulated at both levels because of the mix of routes which they serve and are subjected to conflicting or redundant reporting procedures, resulting in unnecessary added costs. The complexity of administrative procedures at DNTT has caused delays of over two years in deciding on applications for additional service. The Subsecretariat of Transport is preparing to review the situation, and technical assistance for this purpose would be made available under the proposed Project (para 4.07). E. Road User Charges 2.10 The Government has traditionally followed a policy that road users should pay for the utilization of road infrastructure through the imposition of specific ad valorem taxes, mainly on fuel (Table 2.5), lubricants and tires (61% of gross user tax receipts) and through registration fees and taxes on vehicle sales. The distribution of these taxes is illustrated in Chart 2. According to the NTP, gross receipts from user taxes in 1980 were more than the total expenditures for the construction and maintenance of the national, provincial and urban highway networks as well as for the regulation of freight and passenger transport on the networks (Table 2.6). While the  -10- gross receipts may be adequate, an analysis of the distribution of road taxes among types of users and the pricing of fuel, compared with its economic opportunity cost, raises the issue that certain road users, especially commercial heavy vehicles on the interurban highways, may not be paying an appropriate share of road costs. The general principle to be applied in determining a minimum equitable distribution of user taxes should be that users pay the full costs of owning and operating the vehicle and the attributable costs of operating, maintaining and reconstructing the roadway, which vary in accordance with the number and weight of the various types of vehicles. This would be generally equivalent to paying the medium term marginal cost of the roadway. In the case of Argentina, such criteria are not being fully met by diesel-powered vehicles. 2.11 One of the main questions is whether the pump price of fuel is sufficient if one takes into account the opportunity cost of fuel. Although substantial fuel price increases at the pump since 1979 had improved the situation so that, by February 1981, all fuel prices appeared to be well above their opportunity costs, the subsequent devaluations of the peso resulted in lower dollar equivalent prices per gallon, as shown below: FUEL PRICES PER GALLON SUPER REGULAR DIESEL ($A) (US$) ($A) (US$) ($A) (US$) June 1979 1,793 1.35 1,501 1.13 1,116 0.84 February 1981 5,867 2.65 4,807 2.17 3,520 1.59 June 1981 7,392 1.76 6,090 1.45 4,620 1.10 February 1982 15,709 1.43 13,060 1.19 10,031 0.91 February 1983 66,995 1.08 60,560 0.98 36,715 0.59 April 1983 77,214 1.19 69,644 1.07 42,014 0.65 These prices can be compared with an estimated international CIF price to Argentina of US$0.87 per gallon for regular and US$0.84 for diesel as of April 1983. The comparison reveals that the current pump price does not cover the opportunity cost of diesel and does not permit an adequate contribution, in economic terms, to cover road costs, especially in the case of commercial vehicles using diesel, which is discussed in the following paragraph. Argentina, however, is expected to raise its fuel prices by 3.2% per month in real terms through March 1984 in accordance with an agreement with the International Monetary Fund. This would mean that the diesel pump prices should reach international prices by the end of the year. 2.12 In addition to the issue of fuel prices is the question whether each type of road user is paying an equitable share of road costs. The NTP analysis of road user charges (based on 1979 data)3/ revealed two forms of cross-subsidization between road users. The first type in Argentina occurs between urban and inter-urban traffic, where urban traffic contributes 60% of 3/ Excluding the secondary costs of pollution and congestion.  -11- gross tax receipts but represents only 11% of total road-related operating and capital budgets (excluding congestion costs). This cross-subsidy is not considered to have caused major distortions in demand, and its resolution is not a priority issue. More serious is the finding that, for the paved inter-urban network, truck and bus operators were covering only 50-60% of medium term marginal costs attributable to their use of the road network, or 25-35% of average costs, while automobiles were paying 85% of average costs (Table 2.7). Again, with the substantial fuel price change since 1979, the situation, which apparently has deteriorated, needs to be reviewed based on an updating of the NTP analysis. At negotiations, the Government confirmed the following: (a) that it is the Government's policy that users of road infrastructure contribute, through related and specific road user charges, to cover at least the marginal cost of that infrastructure and that it recognizes that the operators of diesel-powered vehicles are not complying with this policy; (b) that, by July 31,1983, DNPT would update its user tax analysis, taking into account changes in fuel prices since mid-1979, and would formulate explicit policy recommendations and mechanisms for implementation; and (c) that, based on the Government's review of the above-mentioned user tax analysis for commercial diesel-powered vehicles and recommended changes in the taxation level, a plan of action would be proposed by December 1983 and adopted by June 1984, after consultation with the Bank. F. Traffic Safety 2.13 Traffic safety has been of increasing concern in Argentina. The number of deaths related to traffic accidents expressed in vehicle-kilometers traveled on the national road network was more than three times higher in 1975 than that in the U.S. and Canada. Under the Fourth Highway Project, DNV undertook a comprehensive study, executed by Argentine consultants, covering all aspects of traffic safety in Argentina. The study assessed, and made recommendations on, road design standards; road marking and signing; identification of, and recommendations for, improving dangerous road sections; traffic accident statistics; vehicle standards and inspection; driver licensing; insurance; police enforcement and education. The National Commission for Traffic and Highway Safety was established in 1980, headed by the Secretary of Transport and Public Works, with the participation of the various Government agencies and private organizations. The DNV study has served as a basic working document for the Commission, and initial efforts have been directed at a comprehensive educational program. 2.14 DNV has created a Division for Traffic Safety within its Planning Directorate. This Division is responsible for updating and implementing a traffic safety program including improved standards for geometric design, safety measures during execution of works and maintenance, and road marking and signing. The Division is developing a traffic accident register designed to identify the "black spots," dangerous road sections; it is also proposing  -12- education programs, preparing draft legislation on traffic safety and maintaining relations with federal and provincial police departments. 2.15 DNV has initiated an ambitious program to implement the recommendations of the traffic safety study. The proposed sector loan would: (a) monitor the implementation of the Safety Study recommendations; (b) provide financing for the road marking and signing program and for the improvement of dangerous road sections; and (c) provide technical assistance when and where required (para 4.06). G. Administration of the National Network (i) DNV's Organization and Staffing 2.16 Planning, programing, design, construction and maintenance for the national highway network are the responsibilities of DNV, a semi-autonomous organization under the supervisory authority of the Secretariat of Public Works 4in the Ministry of Public Works and Services. DNV's headquarters in Buenos Aires plans, controls the budget and coordinates development of the national highway network, while the supervision of construction, betterment and maintenance is carried out by DNV's 24 district offices, which report to headquarters through five regional offices. DNV is directed by an Administrator General, and the organizational structure is shown in Chart 3. 2.17 DNV's staff has been reduced from a level of about 17,000 in 1977 to 9,000, mainly because of the contracting of maintenance operations and the elimination of related laborers in the district offices. There are about 500 professionals, 2,200 technicians, 900 administrative personnel, 800 service personnel and 4,600 laborers. Salaries, especially for the higher functions, are low under the present economic conditions but apparently are sufficient to attract qualified staff from the private sector and from other Government agencies. 2.18 Within the General Directorate of Planning, a Department of Traffic has been created which includes a Division for Traffic Safety (para 2.14), a Division of Vehicle Weights and Dimensions (weight control, power-weight ratio, exemptions for special transports, tariffs for truck permits, etc) and a Division for Traffic Statistics. Also of great importance are the expanded tasks of the Directorate General of Control, which will have primary respon- sibility for auditing requirements, including the control and evaluation of the technical, administrative and financial management of DNV (para 2.20). Together, these changes will provide DNV with more centralized planning capability. (ii) Accounting and Auditing 2.19 DNV's accounting and financial functions are the responsibility of DNV's Administration Department and are carried out by competent professionals who enter the institution following a competitive selection  -13- process. The budgeting practices of DNV are sound. It is recognized that improved coordination between the Administration and Planning Departments is required for updating budget requirements so that financial needs are reliably projected well in advance. Revised procedures for updating the Investment Program (para 3.15 and Annex 5) should facilitate such coordin- ation and enable DNV's Administration Department to plan its liquidity requirements. 2.20 The Control Department for DNV has an internal audit function in the technical, administrative and financial management of DNV. The Department is responsible to the Administrator General, but also responds directly to requests from the national Management Control Department in the office of the President. An improved reporting system is being implemented in which physical progress of DNV works is related to accumulated budgetary expenditures and, also, better estimates are made of what funds, including cost escalation, are required to complete the works. The increased respon- sibility of the Control Department will resolve this issue. 2.21 On the project level, control of expenditures is carried out in many stages. For instance, the monthly certificate of a contractor is approved for physical and technical progress and budgetary, contractual and financial appropriateness by the consultant responsible for supervision and by DNV's Resident Engineer. Thereafter, the payment certificate has to be approved by DNV district and region, by the construction and accounting departments in DNV Headquarters and, finally, by the Administrator General or his representative. The payment certificate is then sent for payment to the Accounting Department of the Ministry of Economy. 2.22 The Ley Nacional de Contabilidad (National Accounting Law) is applicable to DNV. In the first quarter of each year, the balance sheet of DNV and a complete and detailed account of its financial transactions of the previous year are submitted through the Executive Office to the Contaduria General de la Nacion (National Accounting Office) for its examination and approval. The Contaduria General acts as the outside auditor required by the Ley de Contabilidad and is entitled to examine all documents which it considers necessary. It was agreed during negotiations that the Government would, commencing with the fiscal year ending December 31, 1983: (a) have the Special Account (para 4.23) and DNV's accounts and financing statements for each fiscal year audited, as well as accounts and financial statements related to the subprojects included in the Highway Sector Project, in accordance with sound auditing principles consistently applied by the Contaduria General de la Nacion; and (b) furnish to the Bank, as soon as available, but in any case not later than six months after the end of each such year, the report of such audits and such other information concerning its accounts and financial statements and the audit thereof as the Bank shall reasonably request from time to time. H. Administration of the Provincial Networks 2.23 Provincial Highway Authorities are in charge of the maintenance, reconstruction and construction of the provincial highway networks. In the context of the system of federal co-participation, DNV transfers 35% of its receipts of user taxes on fuel, lubricants and tires to the provinces for the construction and maintenance of provincial principal roads which are  -14- complementary to the national system. In addition, the provinces receive about an equal amount directly from the fuel taxes to be spent at their discretion. A major additional source of financing for provincial roads is the registration fee of vehicles (Chart 2). 2.24 Information provided by the NTP indicates that, in 1979, the provinces spent about 40% more on their 62,000-km primary network than DNV spent on its 38,000-km network. About 87% was directed at construction and the remainder at maintenance activities. The earmarked taxes mentioned above cover about 70% of the expenditures; the rest are financed from general revenues. 2.25 The capabilities of the provinces in highway matters vary widely, from the provinces of Buenos Aires, Cordoba, Santa Fe and others with highway organizations equivalent to DNV, to several provinces in the outlying regions with limited capacity. The ability of these latter provinces to administer the network adequately is of immediate concern because of the effect on these provinces of the recent transfer of sections of the national network. In the case of Salta, Catamarca and San Juan, the transferred sections represent from 63 to 79% of their primary network, placing a substantial new burden on these provinces (Table 2.8). While some funding of improvement, transfer of equipment and personnel adjoined the transfer in many instances, there is a need to monitor the condition of these roads in the near future. DNV should seek agreement with the provincial authorities to carry out such monitoring. 2.26 During the next five years, pressure will increase on DNV to decentralize its activites and transfer more responsibilities (and funds) to provincial authorities. The main voice for the provinces has been the Federal Highway Council (CVF) which includes representatives from each of the provinces as well as representatives of DNV. DNV, for its part, has taken a major step in this direction through the transfer of road sections. Also, DNV delegates bidding and supervision responsibilities to the provinces on an ad hoc basis for federally funded projects. The contract maintenance program is designed to facilitate the possible transfer of maintenance responsibil- ities to the provinces without substantial changes in provincial organiza- tions which could interrupt maintenance operations during transition. The realization that more must be done to help the provinces care for their own networks and prepare them for the transfer of responsibilities led to the signing of an agreement between DNV and CVF in March 1981 to conduct a transfer of technology program (outlined in Annex 1). Subsequent to that agreement, each of the provinces signed letters of intent with DNV, request- ing that funds from the Highway Sector Loan be applied to economically justified high priority provincial road works. This would help to ensure the carrying out of needed provincial subprojects during this period of budgetary restrictions and would enhance the transfer-of-technology program through the preparation of the specific subprojects and an overall investment program (para 3.24).  -15- III. THE DNV INVESTMENT PROGRAM A. Global Investment Level 3.01 The Ministry of Economy establishes investment levels for the national road network (para 1.06) which DNV is not allowed to exceed. The investment targets include all expenditures, with the exception of the administration of DNV, routine maintenance, transfers to provincial agencies, and debt service. Since 1977, this level has continually dropped in real terms, from US$580 million in 1977 to US$354 million in 1979 to about US$228 million in 1982. For 1983, the Government increased the level to US$320 million supported by increasing user tax revenues. 3.02 The National Transport Plan reviewed road transport needs and estimates that the appropriate average annual level of investment for DNV over the next ten years should be about US$350 million, equivalent to the level attained in 1979 and to the average projected levels in DNV's 1983 to 1986 financial forecast. Applying generalized technical and economic criteria to the road network and identifying the major feasible projects for the 1981 to 1990 period, the Plan concluded that, with appropriate investment levels sufficient to cover estimated highway needs, DNV could carry out the paving of 5,100 km of presently earth and gravel roads (45% of the unpaved national roads); the reconstruction and/or strengthening of about 19,500 km of pa^ved roads; and the construction of 1,200 km of freeways and urban bypasses. Although the physical condition of the network would gradually improve under this work program, the overall level of service might not change significantly because of traffic increases. B. DNV's Rolling Four-Year Program (1983-1986) 3.03 DNV annually prepares a Four-Year Program which lists the highway projects to be carried out within the budgetary limits set by the Ministry of Economy. Distinction is made between two main categories of civil works: (a) works: new construction, reconstruction and works related to agreements (Convenios) with provinces and the Regional Development Fund (FDR) (para 3.14); these projects are carried out by the Construction Department and usually have a construction period of more than one year; and (b) im- provements and other items: betterment and road safety items carried out by the Maintenance Department, and consultant contracts and various miscel- laneous works. These are usually one-year contracts. 3.04 Assuming that DNV will receive about US$320 million per year through 1986, the following observations can be made concerning the probable revised Four-Year Program (Table 3.1): - New construction projects will decrease and expenditures for reconstruction projects will increase markedly. This trend reflects the increased priority being placed on reconstruction and improvements; - Commitments in works in execution will be relatively heavy in 1983 and 1984, which leaves, after allowing for Inter-American Development Bank (IDB) projects still to be tendered, limited uncommitted funds for new construction and reconstruction works in these years; and  -16- The amounts set aside for various improvement works will be satisfactory, allowing sufficient road betterment and traffic- safety-related works to be carried out. 3.05 The Program as a whole is balanced and the individual subprojects already identified are well justified (paras 3.11-3.13). The investment program, together with the operational budget, provides for: (a) the neces- sary emphasis toward betterment and reconstruction of existing roads in order to prevent rapid deterioration of aged light pavements; (b) suppo rt for traffic-safety-oriented projects, such as road marking and signing and the illumination of a limited number of road sections; and (c) sufficient funds for road maintenance. While DNV's program includes substantial new construc- tion works in low density corridors, which are directed at better integrating outlying regions into the economy, the construction of freeways and beltways necessary to alleviate heavy congestion near and around urban centers has been deferred. Thus, although there is a need to improve programing practices for future updates (para 3.15), the current Program provides a satisfactory basis for initiating the Highway Sector Project. C. Maintenance Program 3.06 The Maintenance Directorate of DNV is responsible for routine and periodic maintenance of the national highway system. Although funding for maintenance was erratic during the 1970s, it is evident that the network is in an adequate state of repair. Much of the reconstruction which has been identified is to provide heavier pavements for increased traffic volumes, a task which could not have been avoided by better maintenance practices. DNV districts are divided into zones, the basic management unit for maintenance; zones cover 150 to 1,000 km of roads, with a 350-km average. 3.07 Periodic maintenance, including overlays and surface treatments, is carried out by contract. Limited funds were available in the 1977-1979 period, when attention was focused on the completion of the large number of construction projects dating back to the previous administration. Since 1980, the level of expenditures has been raised to a satisfactory US$150 million level, in 1982 values. 3.08 Until 1979, routine maintenance had been carried out directly by the DNV zones under force account. Late in 1979, in line with Government policies to foster private enterprise, DNV introduced contract maintenance for its routine maintenance operations, seeking to improve efficiency, minimize costs and reduce its equipment fleet, which was due to be renewed. Some 70% of the network was contracted, but 30% remained under force account to enable DNV to gauge contract prices, to retain a nucleus of maintenance activities, and to have DNV staff and equipment available for emergencies. The system proved not flexible enough in the face of uncertain future budget allocations, as well as too complex to supervise and manage. DNV's present approach is to contract specific maintenance tasks, when required, compatible with the financial constraints. This approach implies a more extensive force account operation, estimated at about 50%, rather than the 30% originally intended, and will require more staff and the procurement of maintenance equipment and tools, provided for in the draft investment budgets for 1983-1985.  -1 7- 3.09 Expenditures for routine maintenance are presently at the US$70 million level and are scheduled to increase gradually in the future; with 38,000 km in the national network, this figure represents an average expenditure of US$1,850/km, which, under the present restricted financial situation and given the adequate condition of the network, should be considered satisfactory. During negotiations, the Government confirmed that it would continue to maintain the national network adequately, and it was agreed that the Government would allocate the required funds, which would be at least at the 1983 level in real terms, unless otherwise agreed during consultations with the Bank. A formula was agreed during negotiations to adjust the amounts allocated in future years in line with increased input prices. The Highway Sector Project would support the maintenance operations and development toward contract maintenance by financing technical assistance to help solve management problems that may arise in DNV and to help assess the cost effectiveness of the approach (para 4.06 and Annex 7). To help monitor the progress of this effort, the Government agreed at negotiations that it would provide, by the end of March of each year, starting in 1984, an annual report on maintenance operations. The contents of that report are delineated in Annex 2. D. Economic and Technical Basis of the DNV Program 3.10 The updating of the rolling Program has been conducted in the past in a pragmatic manner, and new entries have been made on the basis of economic analysis, engineering judgment, political pressures and regional balance. Feasibility studies are made either by the Economic Studies Division of the Planning Directorate or by consultant firms in more complex cases. The evaluation methods are those which have been used and improved through the preparation and final evaluation of previous Bank loans to DNV. The economic justification for the investment program has been confirmed through three sources: (a) DNV Highway Needs Study for reconstruction projects; (b) National Transport Plan for new construction projects; and (c) Bank confirmation of feasibility of initial projects to be tendered. 3.11 The reconstruction projects in the Program generally coincide with the segments identified by the Highway Needs and Pavement Strengthening Study being carried out by DNV, with support under the Fourth Highway Project. The Needs Study is to be a continuous effort designed to identify, in a methodical manner, deficient road sections on the national network and to evaluate project alternatives in terms of design and timing. About 10,000 km of roads are being reviewed annually with regard to their general structural and geometric characteristics. Through the use of standard sufficiency ratings, the more deficient sections are selected for detailed study, includ- ing roughness measurements, deflection and test borings. Improvement alter- natives are then assessed through the use of the Bank's Highway Design and Maintenance Model (HDM) with modifications appropriate for Argentina. In 1982, of the 27,000 km of the national principal network which were surveyed, 6,400 km were identified for reconstruction. The estimated internal rates of return (IRR) for the projects identified, almost all of which have been included in the Four-Year Program, either as reconstruction or betterment, ranged from 10% to over 100%, with 85% of the projects having IRRs of over 25%.  -18- 3.12 The NTP has confirmed the economic feasibility of the major upgrading and freeway projects included in the DNV Program. The IRRs ranged from 11% to 45%, with 25 of the 34 projects having IRRs of 15% or more. Time savings, which comprise a substantial proportion of the benefits for freeway projects, were appropriately based on an analysis of income levels and are differentiated by trip purpose. The projects with the lower economic returns were for paving unpaved roads, for which diverted and generated traffic may not have been fully accounted, leading to a potential underestimation of benefits and returns. 3.13 In addition to the preceding, the Bank, with DNV's assistance, tested the general feasibility, through the estimation of First Year Benefits, of new construction and reconstruction projects included in the 1983 tender program. Assuming a weighted average savings per vehicle in vehicle operating costs, time and accidents, when applicable, by type of construction project, and using only the first-year traffic on the project road section, project benefits in the first year were approximated. With very few exceptions, the benefits were equivalent to over 10% of the investment cost, which indicates IRRs greater than the accepted opportunity cost of capital for Argentina, estimated at 10% (Table 3.2). More detailed feasibility calculations are being conducted for initial candidate projects for Bank financing, following the methods prescribed in Annex 3. Furthermore, future updates of DNV's Program should ensure optimum project selection and design as the recommended programing procedures and methods are fully incorporated into DNV's operations (para 3.15). 3.14 Also included in the investment program are road projects for which the primary justification is the integration of outlying regions with the national network. The major corridors which are the focus of this effort are described in Annex 4. Some of these projects are selected under a program called the Regional Development Fund (FDR), which is administered by the Ministry of Interior and executed by DNV with the combined financing of the Ministry of Interior, DNV and the affected province. In some instances, these projects have lower rates of return than the rest of the program, but have been given priority by the province and/or the Government because of the social or strategic considerations of the project. In such cases, a tech- nically adequate minimum cost solution should be pursued. An important corridor is Route 40 along the foothills of the Andes, many sections of which are still earth roads. At negotiations, it was agreed that DNV, by June 1985, would carry out a technical and economic feasibility study for the improvement of Route 40 and/or its alternatives from Catamarca to Santa Cruz and take into account the results in future updates of its investment program. 3.15 Although the existing system has not resulted in any apparent serious investment errors and the high priority projects are normally included in the Program, increasing political pressures, high inflation and limited budgets have raised the need to institute more systematic and tech- nically consistent procedures for the preparation of the Program. Such procedures would allow DNV to weigh the costs and benefits of alternative  -19- projects in order to properly estimate and justify its budgetary requirements and to select and design projects taking overall budgetary restrictions into consideration. Under the Highway Sector Project, DNV would implement a plan for revising its procedures for updating the Four-Year Investment Program. The revised procedures have been developed by DNV staff in consultation with the Bank and are summarized in Annex 5. The main features of the revised procedures are the formal incorporation of the results of the Highway Needs Study into the updating of the investment program and the application of a consistent economic methodology in the evaluation of all projects being considered for investment. At negotiations, it was agreed that DNV, starting in 1984, would institute the proposed procedures for the updating of the Four-Year Investment Program. 3.16 DNV is reviewing its staff requirements for the Planning Directorate and agreed at negotiations to provide sufficient resources to update the Four-Year Investment Program annually. E. Financing and DNV's Budget 3.17 The main sources of funds for DNV's investment and operating budgets are the earmarked portions of user taxes on the sale of fuels (5-7% of pump price), lubricants and tires, representing 73% of DNV's projected capital and operating expenditures in 1983 and on the sale of new and used motor vehicles, representing 28% of these expenditures. Other funding includes Federal Government contributions from the Transport Infrastructure Fund (FONIT), which is also based on fuel taxes and is distributed between the railways and DNV at the discretion of the Government (originally 50% each, but lately a much lower percentage is allocated to DNV and virtually no such funds will be assigned in 1983); the collection of tolls; and internally generated funds from the sale of used DNV equipment. The distribution of user tax receipts is shown on Chart 2. Existing loans from the World Bank (Fourth Highway Loan) and IDB (road reconstruction) represent about 12% of the 1983 to 1986 investment program. 3.18 A summary of DNV's budget for 1978, 1983 and projected 1986 is shown on the next page. Capital expenditures show a substantial decrease in time because of the gradual elimination of the large backlog of uncompleted works inherited from the previous administration and the lower levels of investment imposed by the Ministry of Economy since 1979. The higher levels of investment through 1978 required large direct Government allocations, especially in 1976 and 1977, a sizable contribution from FONIT in 1978, and large foreign and domestic borrowing in 1977 and 1978. However, because of the steady net increase of the earmarked taxes available to DNV (especially the large increase of the Motor Vehicle Expressway Fund derived from the increased sale of cars in 1979 and 1980), DNV has been able, with its investment level fixed, to reduce its debt notably, especially in 1980, notwithstanding the large reduction of allocations from the FONIT fund. Personnel costs have increased despite substantial staff reductions because of an increase, in real terms, in DNV's salaries and wages and because of the shift in DNV's personnel structure with the hiring of more professional staff.  -20- DNV's Budget Summary (in millions of Constant September 1982 US$) 1978 1983 1986 Capital Expenditures 484 80% 328 78% 353 78% Operating Expenditures 124 20% 93 22% 97 22% Total Expenditures 608 100% 421 100% 450 100% Net Taxes on Fuel, Lubs., Tires 240 40% 306 69% 324 68% Taxes on Sale of Vehicles 111 18% 116 26% 128 27% Other Sources 25 4% 24 5% 25 5% FONIT Allocation 77 13% 1 - - - Direct Government Allocation 24 4% - - - - Total Revenues 477 79% 447 106% 4 106% Surplus/Deficit -131 -21% 26 6% 27 6% Interest on Debt & Debt Repayment - 98 -77 -88 Financing Required 229 51 61 to be covered by additional taxes, direct Government allocations and loans from the Bank and IDB 3.19 DNV's financial structure is sound, with moderate debt leverage. DNV repaid almost all of its expensive domestic long term debt for the reasons mentioned, and by obtaining favorable foreign loans. The borrowing practices of DNV have been carried out strictly on a commercial basis. For the 1983-1986 period, it is estimated that DNV's debt service payments, in relation to tax revenues, would not exceed 28%, reflecting a rational finan- cial policy followed by DNV's management. In the semi-annual consultations, the financial status of DNV would be monitored (para 4.25). F. Engineering, Construction and the Road Construction Industry 3.20 The Design Department of DNV is responsible for the detailed engineering of road investment projects and prepares tender documentation and cost estimates up to the tender stage. The Department is well staffed and able to carry out design work in-house as well as to control and monitor design work executed by Argentine consultants. The professional standards of DNV and its consultants are at international levels. Table 3.3 indicates the progress made in project preparation. As of January 1, 1983, designs were completed for over 30 projects covering 950 km of roads and totaling US$230 million, and an additional 139 projects covering 4,000 km and totaling about US$400 million were in various stages of design preparation. 3.21 The Argentine road construction industry is well developed and can execute all types of works satisfactorily, including intricate expressways and major bridges. Highway construction is carried out under unit price contracts with adequate price adjustment formulas. No foreign contractors showed interest in the works tendered for the Fourth Highway Project. There is a possibility, however, that, because of scarcity of works in surrounding countries, notably Brazil, foreign interest may increase, although the competitive position of the local contractors will remain strong. Typical  -21- construction and reconstruction projects are in the US$2-5 million range, but there are regularly contracts of over US$10 million for expressways and beltways. Because of keen competition and a proficient contracting industry, road construction prices have traditionally been low in Argentina. 3.22 Contractor performance is generally good; work progress was, in the past, very much linked to DNV's ability to pay the monthly certificates on a timely basis. In the difficult years during the mid-1970s, works virtually came to a standstill, and many contracts had to be renegotiated when the new administration took office in 1976; these works have now all been completed. At present, DNV pays within the two-month period specified in its standard contract. Present performance of contractors is linked to their financial situation. Past experience illustrates how extreme fluctuations in the nation's economy can affect works in execution. 3.23 DNV's Construction Department is responsible for the tender process and the execution of construction and reconstruction works, presently at an annual level of over US$200 million. In accordance with Government policies to foster private enterprise and to diminish civil service staff, the inspec- tion of construction work is often carried out by consulting firms, whereas DNV monitors this inspection in the field. The quality of the consulting services is good. G. Provincial Road Investment Program 3.24 Few statistics are available in aggregate form for the provincial road investments. Through the financing of provincial road works, the Highway Sector Project would focus on developing rational planning practices and capabilities at the provincial level. At negotiations, it was agreed that all participating provinces would prepare, by December 31, 1984, and update annually thereafter, detailed four-year investment programs in coordination with DNV. To ensure that appropriate procedures are applied in the selection, evaluation, preparation and execution of works to be financed by the Bank, DNV would have significant responsibility, as outlined in para- graph 4.17. IV. BANK PARTICIPATION A. The Project 4.01 The proposed Highway Sector Project is directed at maintaining the Bank's presence in the subsector in order to promote and assist the effective implementation of a series of programs and plans of actions developed under the ongoing Fourth Highway Project. Through the financing of investment items in DNV's and the Provinces' Four-Year Program, 1983-1986, and the provision of technical assistance, the Sector Project would accomplish the following: (a) reorganization and strengthening of DNV's Planning Department and improvement of its operational procedures for updating the investment program (paras 3.15-3.16);  -22- (b) strengthening of provincial planning capabilities through the transfer of technology from DNV to the provincial authorities (para 2.26); (c) definition of appropriate road maintenance management system and budgetary requirements (para 3.09); (d) support to DNV's program for traffic safety (para 2.15); (e) maintenance of the dialogue between the Government and the Bank on sectorwide issues arising from the conclusions of the NTP, especially with regard to user charges and passenger transport regulation (paras 1.06, 2.09, and 2.12); and (f) establishment of the role of DNPT and strengthening of that agency (para 1.08). 4.02 Taking into account the Bank's long association with DNV and DNV's administrative capabilities, a sector loan format is proposed for this project. This flexible format, by which virtually any subproject within the investment program during the project period is a potential candidate for financing, should overcome the disbursement delays encountered in earlier projects (para 1.18). The Project Completion Report for the Third Highway Project concluded that, by being tied to specified projects, the Bank was unable to meet the immediate needs of DNV as fluctuations in the economy altered investment priorities and the initiation of Bank subprojects was postponed. Rather than being tied to specific projects at appraisal, the Sector Project would be directed at financing a "time slice" (1983 to 1986) of the investment program. 4.03 If investment levels are not reduced from the estimates provided in Table 3.1, DNV is expected to maintain a tender program for new construction, reconstruction and various road improvements, excluding subprojects included in the IDB loan, of about US$180 million in 1983 and reaching US$240 million by 1986 (in January 1983 prices) (Table 4.1). In addition, about US$90 mil-- lion is assumed as the total cost of provincial subprojects which could be proposed for financing. The Sector Project would help to finance the 1983- 1986 time slice of a large part of these uncommitted subprojects in the investment program, including new construction, reconstruction and improve- ments, as well as the provincial roads (Table 4.2). The total cost of these subprojects during this period is US$560 million including about US$56 mil- lion in value added taxes. The foreign exchange component of this investment during the 1983-1986 period represents about 45% of total cost (para 4.20) and is equivalent to US$250 million. The proposed US$100 million loan, of which US$1 million is for technical assistance, US$1 million for the procurement of traffic counters and US$1 million unallocated, would thus represent almost 17% of the cost of the potential subprojects for the 1983- 1986 period and would contribute about 8% to the total DNV investment program for the same period.  -23- 4.04 The distribution of the loan would be as follows: Civil Works - National Roads US$56.75 million - Provincial Roads US$40.00 million Procurement Traffic Counters US$ 1.00 million Technical Assistance - DNV US$ 0.50 million - DNPT US$ 0.50 million Front-end Fee US$ 0.25 million Unallocated US$ 1.00 million Total US$100.00 million 4.05 Among the civil works for the national highway system, the Bank would finance a variety of subprojects ranging from road marking and signing and betterment subprojects to reconstruction of existing road sections, new construction of roads and construction of urban beltways and access roads. The initial candidate projects are shown in Annex 6. The civil works for the provincial networks would include betterment and reconstruction subprojects, as well as selected construction works. At negotiations, DNV confirmed the status of project preparation and the tender and award schedules. Also, agreement was reached on the DNV updated four-year rolling program for the period 1983 to 1986 and on the administrative and maintenance budget for 1983. During semi-annual meetings, the Bank and DNV would discuss the annual updating of the program and the proposed subprojects (para 4.26). The project would also finance the procurement of traffic counters to replace outmoded existing equipment (para 2.05) 4.06 Technical assistance to DNV under the Project would be established as a global amount which would finance the contracting of individual experts with international experience for limited periods of time to provide high level assistance during the course of the project. As the need for specific consulting services arises, terms of reference and consultant selection would be prepared subject to Bank approval. Potential uses for this fund are listed in Annex 7. An amount of US$0.5 million has been provided. Loan funds would cover the full costs of the foreign experts estimated at an average fee of about US$9,000 per month plus a per diem of about US$3,000 per man-month and air travel averaging US$2,500 per visit. Local consultants with international experience would also be eligible for financing under this component at an average monthly fee of about US$4,000 and would represent about one-third of total man-months. The fund, then, represents about 45 man-months of assistance for DNV. It was agreed at negotiations that the Government would take all actions necessary to facilitate the contracting of foreign experts, including exemptions under current legislation. 4.07 In order to promote the implementation of the recommendations of the NTP (para 1.06), the proposed loan would provide financing for foreign technical assistance for studies to be carried out by DNPT during the 1983-1986 period. An amount of US$0.5 million has been reserved for these activities. The potential use of these funds has been listed in Annex 7; the cost per man-month is estimated to be the same as that given in paragraph 4.06. This part of the loan would be administered by the Subsecretariat of Transport through DNPT.  -24- B. Subproject Selection 4.08 Two important concepts to be considered are the individual sub- projects and the contract(s) associated with each subproject. The subproject is the unit considered for purposes of selection, preparation and evaluation, while contracts for the implementation of specific subprojects are the basis for disbursements. 4.09 Bank financing would be restricted to disbursements