Mexico - Highway Construction Project

R E S T R I C T E D Report No. TO-256a This report was prepared for use within the Bank. It may not be published nor may it 6e quoted as representing the Bank's views. The Bank accepts no responsibility for the accuracy or completeness of the contents of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT APPRAISAL OF THE HIGHWAY CONSTRUCTION PROJECT MEXICO October 6, 1960 Department of Technical Operations  CURRENCY EQUIVALENTS U.S. $1.00 = 12.49 Pesos 1 Peso = 8 U.S. cents I Million Pesos = U.S. $80, 000  KVIEXICO APPRAISAL OF T-HE HIGHWAY COilSTRIJCTION PROJECT Table of Contents Page SUIl 1ARY i I INTRODUCTION 1 II THE FEDERAL FIVE-YE.AR HIGHW,1AY P11OGRAI 1960 - 64 1 - 3 a. The Program 1 b. Financing 2 c. Road IIaintenance 2-3 III THlE PROJECT 3 -6 a. Description 3 b. Cost Estimates and Financing 3 - h c. Design Standards and Specifications 5 d. Administration and Execution 6 IV ECONOMIC JUS3IFICATION 6 - 8 V COWCLUSIONS 8 Appendices: A. Operating Cost for Tpical Ilotor Vehicles B. Economic Justification Lor Individual Roads Tables: 1. Highway Construction per year 2 Registered Vehicles 3. Gasoline Consumption 4. Prooosed Federal Expenditures for Federal, State, and Local Roads 1960 - 1964 5. Federal Expenditures for Federal, State, and Local Roads 1953 - 1959 6. Actual Revenues from Gasoline Taxes 1953 - 1959, and Forecast for 1960 - 1964 7. Cost Estimates for the Iroposed Bank financed Project 8. IWTork to be Executed during the Period 1961 - 1964 9. Design Standards for Roads Included in the Proposed Highway Project 10. Approximate Operating Cost per 100 km for 8-ton truck and 12-ton semitrailer on typical average roads Map  SUDtARY i. The Mexican Government has requested a Bank loan of USC 25.0 million to cover the foreign exchange cost of completing the construction or reconstruc- tion of 13 roads totalling about 3,200 km, all but one being under execution. Including 15 contingencies, the total estimated cost of the project is about US',68.6 million equivalent. ii. The project forms part of a much larger five-year orogram 1960-64 for improvement and extension of the Federal Highway System. This program in- cludes 95 different road construction projects totalling about 14,000 km, and its estimated cost is about US3216 million equivalent. Apart from the requestec Bank loan, the cost of the five-year program will be financed by annual appro- priations in the Federal budget. Since these exceed the requirements of the proposed Bank-financed project by a Tride margin, the local financing of the proposed project is not expected to present any problems. iii. The execution of the project will be the responsibility of the Fed- eral Highwgay Administration (FHA) of the hinistry of Public Works. The FHA organization, its functioning, and its staff are efficient and adequate. All Bank-financed contracts will be awarded on the basis of competitive bidding, the greater part (85% in value) by international tender in which all contract- ing firms registered in Mexico, whether local or foreign, may participate. The contracting industry in 1iexico is well developed and works both efficiently and at reasonable cost. iv. The design standards adopted for the different roads included in the project are adequate. Preliminary surveys have been made for each of the dif- ferent roads, and the cost estimates are reliable. The project is exDected to be completed by the end of 1964. v. The roads included in the project are representative of the five-year program as a whole. Their execution aims at eliminating some of the principal shortcomings of the Federal Hirhway System which have result;c1 fro-i the rapid economic development in l>Iexico over recent years, Individua lry the roads will yield benefits iuhioh are sufficient to justify their execution. vi. The project is considered suitable for a Bank loan of uS;,25.0 million. An appropriate term would be 19 years, including a 4 1/2 year period of grace.  MEXICO APPRAISAL OF THE HIGHWAY CONSTRUCTION PROJECT I. INTRODUCTION 1. The Mexican Government has requested a Bank loan of US$25.0 million to cover the foreign exchange cost of 13 road projects which form part of the Federal five-year highway program for 1960-64. The total cost of the 13 proj- ects is estimated at US$68.6 million equivalent. 2. This appraisal is based on preliminary studies made oy the Federal Highway Administration) and on findings of a Bank mission to Mexico in March- Aipril 1960. II. THE FEDERAL FIVE-YEAR HIGHWAY PROGRAM, 1960-64 a. The Program 3. The economic development of Mexico, which has been progressing at a rapid pace requires the reconstruction and expansion of its transportation systems, mainly of the highway network. Since 1946 each successive government of Mexico has further developed the country's highway system on the basis of well planned and executed programs. The road network has continuously expander and has now reached a total length of 45,000 km; the number of vehicles and the consumption of gasoline has more than doubled in the last ten years (see tables 1, 2 and 3). 4. In 1959 the present Government approved a five-year highway program for 1960-64, for improvement and extension of the Federal highway system. The program includes about 95 difierent projects, of which 70 are for improvement of existing roads, and 25 for construction of new roads. The total estimated cost of the program over the five-year period is about Ps. 2,700 million (US$216 million equivalent)g and the projected annual expenditures represent a continuatior of the trend established over recent years. 5. The principal aims of the program are threefold3 (i) to improve ex- isting roads to standards which conform with much increased volumes of traffic; (ii) to connect with the rest of the country some of the isolated areas which are already populated and developed, or areas which have potentials, mainly agricultural, which are presently unutilized; and (iii) to provide shorter and more direct routes between important commercial centers, densely populated areas, and principal ocean ports. 6. Although the Mission did not attempt to appraise the whole prograrn in detail, it is based on extensivereseareh, and appears well balanced and designed to meet the most urgent needs for improvement of the Federal highway system.  -2- b. Financing 7. The total estimated cost of construction in thae five-year program, Ps. 2,697.5 million (about US%216 million equivalent, Table 4) would be financed by the Federal budget. Adding the cost of maintenance of Federal highways, overhead expenses for the Federal Highwnay Administration, and the anticipated federal contributions for construction and improvement of state and local roads, the entire Federal outlays for roads over the five-year period are expected to be about Ps. 5,196.2 million (USj415.7 million equivalent, Table 4). 8. The total Federal appropriations for roads have been steadily increas- ing over recent years (Table 5). For example, the appropriations have risen from about Ps. 590 million in 1956 to about Ps. 920 million in 1960, an increase of 55% over the four-year period. The estimated total outlays in 1964 are about Ps. 1,150 million, a further increase over the next four years of 25%. 9. The total Federal appropriations for roads in 1960, Ps. 920 million, correspond to about 9% of total ex-penditures in the Federal budget. Federal taxes and fees wihich are paid by road users, automobile assembly plants, etc. are estimated to yield about 55% oL this amount, as indicated in the following table: Ps. million Federal revenues from gasoline taxes 303 Taxes on automobile assembly plants 150 Taxes on tire plants 35 Various other taxes 17 505 10. Over the last few years the local production and sales of gasoline have been steadily increasing. However, Government revenues from gasoline taxes (Table 6) have been somewuhat erratic due to shortfalls in payments by the Governmrent oTmed oil company Pemex, w.4hich has apoplied part of the funds for its expansion program. In a recent agreement between the Government and Pemex, these arrears have been canitalized as Government equity. The increase in gasoline taxes between 1959 and 1964 is estimated at 30%-, vhich appears a conservative anticipation. Revenues derived from automo- bile and tire plants are expected to incre2se at a faster rate. c. Road Maintenance 11. The lYaintenance Division of the FHA is responsible for the 17,000 kom of roads which oresently comprise the Federal Highway network. The Division is directed by a chief engineer who has a staff of about 84 engineers and techni- cians, 500 administrative employees, and about 12,000 skilled and unskilled laborers. There are 18 geographical districts, each headed by an engineer. The districts are adequately eouipoed wipth the necessary equipment, slops, ma- terials, communication facilities, and housing. E5quipment, materials and labor are properly controlled and used.  -3- 12. Roads inspected by the lTission were adequately maintained. 13. Traffic regulations have been introduced since 1951, including the control of weight and dimensions of vehicles. They have been well enforced by traffic nolice forces. III. THE PROJECT a. Description lV. The Government has reouested tha-t the Bank finance the foreign ex- change cost to cornplete 13 road projects excluding bridges over 15 meter span located in various parts of the country (Tahle 7 and 7ap). These projects form part of the Federal five-year highway programr, and have been chosen by the Government among projects which are considered to have the highest priority. 15. The execution of all roads but orne has already been started and the exoected status of construction on November 1, 1960 is shown in Table 8. Ex- penditures still to be made as of that date range between 24h, and 100o of the total estimated cost for individual roads (Table 7). For all projects combined about 28% of the total estimated expenditures will have been made by November 1, 196o. 16. Two of the projects are for reconstruction of existing roads, and the other eleven for construction of new roads. The total length of the roads in- volved is about 3,200 Im. b. Cost Estimates and Financing 17. The cost estimates for the various projects are considered reliable. They are based, on -reliminary surveys conducted by the iiinistry of Public Works, and on unit prices established for the various Darts of the country by the National Commission on Unit Prices, the chairman of w4hich is the Secretary of Pulblic Works. The prevailing unit prices are a result of long experience. 18. The Governnent has appropriated in the Federal Budget all the amolunts necessary for actual Dayments to be made in 1960, on its five-year road program. Payments for highway construction are made with an average delay of about two months after comnletion of the work and therefore the appropriation of funds in the Federal Budget was scheduled to finance all work completed until October 31, 1960. The Government has reouested that Bank financing be applied to payments to be made after January 1, 1961) wghich in practice would mean that the Bank would participate in the financing of the work carried out from November 1, 1960 on7rards when highway construction actively resumes after the rainy season. 19. The total cost of the 13 projects through 1961-64 has been estimated at Ps. 858.5 million, or US;D68.6 million equivalent, including 15, contingencies for unforeseen and possible price increases (see Table 7).  T~~~~~~ T -L 20. With a view to determining the foreign exchange cost of the project the Ministry of Public WiTorks has furnished an analysis for three representative projects executed recentlry in different parts of 1M1exico. A summary of the analysis shows the following average foreign exchange cost for the different types of w.ork, i.e. counting depreciation on all irported equiDment, and the cost of imnported materials; % cost % foreign exchange of total cost of total Cuts and fills 49.0 22.05 Subbase and base 19.0 7e64 Surfacing 14.0 4.93 Drainage structures and bridges 18e,0 1.78 l0Oo 36.h 219 On this basis the foreign exchange cost of the proposed project would be Ps. 312.5 million, or US$"25 million equivalent (Table 7) - wfhich is proposed for Bank financing. The local cost, about Ps. 546 million (US`43.6 million equivalent) wfould be financed by the Federal budget from the annual anpropria- tions for the Federal Program of road construction and imDrovement. These ap- propriatioris would orovide a wide margin above the reouirements of the oroject, and the Ministry of Public WTorks is orepared to defer other road works if t1hs should Drove necessary. Therefore the provision of local funds for the project should be assured. 22. The following table gives the annual breakdown between the estimated local currency and foreign exchange expenditures of the project: Total Local currency Foreign exchange Year expenditures expenditures expenditures Ps. (million) Ps. (million) Ps. (million) US=(million) equivalent equivalent 1961 2075) 132 75.5 6.1 1962 307.1 195.3 111.8 8.9 1963 2[9.7 158.8 90.9 7.3 1964 94.2 59.9 3h.3 2.7 Total 85805 5L6.0 312.5 25.0 23. The proposed Bank loan would be equivalent to about 10% of the total contem.plated Federal expenditures for road construction between 1961-64, ex- cluding road maintenance and administrative costs.  C. Design Standards and Snecifications 24. Three different types of' design standards (A, B and C, Table 9) are proposed for the various roads included in the project. In each case the standard has been chosen in conformance with the potential volumes of traffic and the tonograohic condi-tions. All three standards and their geometric de- signs are considered adequate. 25. Standard design and construction specifications worked out by the 1iinistry of Public Works are co-plete and regulate all phases of highway works with regard to rlght-of-way, sight distances, super elevations, transition tan- gents, materials, etc. All roads included in the project will have asphalt surfacing and the type of asphalt, as well as other materials, will be control- led by field laboratories in accordance with the prevailing specifications. d. Administration and Execution 26. The M11inistry of Public IWorks is responsible for the planning, con- struction and maintenance of federal highways in the country and shares with other public authorities in the responsibility for planning, financing, con- struction and supervision of all other roads. The Federal Highway Authority (FHA) is the organization within the Iiinistry in charge of all road work and will therefore be responsible for the planning, control and supervision of the project to be financed by the Bank. The FHIA is comoosed of four divisions, each resn-onsible for different functions, i.e. (i) Projects and Laboratories; (ii) Construction of Federal Highways; (iii) liaintenance of Federal Highways; and (iv) Highway Construction in cooperation with states and municipalities. The FHA is staffed Twith about 450 engireers and technicians, and about 1,400 administrative employees counting both the headquarters' staff in Miexico City and the field staff in the various states. There are clear lines of authority, and the FHA organization and the quality of its staff are efficient and adequa+t. Its laboratories, materials-testing and design sections are well equiopped, and the planning, design, execution and supervision of road works are good. 27. Since 1929 highway construction in Mexico has been carried out by local companies. The local road construction industry is now well developed. At present there are about 600 comoanies with total assets valued at -4R65 rmil- lion, 13 among these having assets of over US'J million each. It is estimated by the Government that the local road construction industry can handle about '360 million worth of construction a year. In general roads have been built efficiently and economically. Contracts are given on the basis of unit prices which are reasonable and lower than those --)revailing in Central Armerica or the U.S.A. The contractors also furnish adequate guarantees of performance on all contracts. In addition to the purely domestic comoanies there are some of mixed local and foreign canital and a few of entire foreign capital. 28. All Bank-financed work will be contracted by competitive bidding. Because work is noTw under way and to avoid delays, bidding on some 15% in value of T7!ork to be done will be restricted to 1`1exican contractors. The remaining 85% wqill be let on the basis of international bidding open to all qualified contracting firms, national or foreign, provided the latter become registered in liexico. The registration procedure will be facilited by the Government  - 6- after the contractor has been acknowledged to be qualified by the Tlinistry of Public WJorks. Complete plans and specifications wTould be made available to all prenualified contractors interested in biddin-. Furthermore the Ministry has agreed that for the execution of the project it would change its present practice of awarding contracts for one year's work and wJould award instead contracts to completion of the wpiork irresDective of duration. IV. ECOHONIC JUSTIFICATTON 29. Land transportation in IMexico faces difficult topography in many areas, and both highways and railways frequently cross high mountains and deep valleys. In particular, in central and northern Nexico the western Sierra rises and falls steeply to make the approach to the Pacific Ocean difficult, whereas the eastern Sierra hinders the access to the liexican Gulf. Therefore, the co.munication lines of minimunm resistance are directed north-south in these parts of the coun- try. Below the isthmus of Tehuantepec, the western Sierra rises to become the highest mountain range in Central America, thus impeding communication lines in southern Mexico. 30. Paved highway and railway networks totalling about 45,OOO Im and 23,000 ln respeccively, fulfill different purposes throughout the country. As a rule the railways carry long and medium distance traffic, specially bulk com- modities like minerals, wheat, and cotton, while road transportation is mainly used for short and medium distance traffic. 31. Of the roads included in the project one in particular will be in direct competition Twith a railway, i.e. the Arriaga-Tapachula road parallelinry the South-Eastern Railway. However, this is through a densely populated area which has reached a point of development where both road and rail services are justified, (Appendix B-2). 32. A few of the other roads included in the project may tend to eliminate roundabout hauls over some of the railway lines, and thus intensify the compe- tition from road transportation. On the other hand, some of the roads would also serve as feeder lines to the railways. It is not expected that any of the projects wTill cause significant change in the competitive position between rail- ways and roads. 33. Although the highway system in hexico is probably more advanced than in most or all other countries in Central and South America, there are still ir- portant deficiencies which have to be rnet. In particular there are many popU- lated areas which are riore or less inaccessible to modern surface transportation. Also, there are some areas of substantial agricultural potential which need to be opened. Furthermore, the rapid development of the TMexican economy over the last 10-15 years has rendered many highways obsolete relative to the volumes of traffic they noTwT carry. There are also situations which call for more direct a-nd fast lines of communication between principal commercial centers. 34. The oresent five-year program for the Federal Highway System is di- rected at eliminating some of these shortcomings, and comprises about 1l4,300 km of roads to be imiiproved or constructed. The roads included in the proposed Bank-financed project, about 3,200 Ian, are representative of the five-year program as a Twihole.  -7- 35. All areas in hicih the project road. are located, have been visited by Bank staff. 36. A separate justification for each of the thirteen roads included in the oroject is given in Appendix B of this renort. Of these, six roads will provide shorter and faster lines of cornmunication between importaint cities and areas of the country. On the basis of present traffic volumes and tiqe average operating cost for standarl vehicles (Annex A) savings in transport costs re- sultin- from reduced distances after the roads have been completed would pro- vide the followinr - ninimuii approximate annual rate of return on the investm,lent: Approximate minimuma rate Road No. Route annual return 1 Rio Verde - Valles Jj% xx 2 Arriaga - Tapachula 10% xx 5 Saltillo - Guadalajara 20;% xx 8 Amayuca - Izucar de hiatamoros 4OiJ x 9 San Luis Potosi - Torreon (Cuencame) 20,-o xx 10 Ciudad Victoria - -luisache 20i x-x 11 Villa Hermosa - Escarceia - Champoton 2O