Uganda - Fourth Highway Project

Dommnt of The World Bank FOR OMCIAL USE ONLY C6'. /S'Si Report No. 5938-UG STAFF APPRAISAL REPORT UGANDA FOURTH HIGHWAY PROJECT April 27, 1987 Transportation Division Eastern and Southern Africa Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CUREC EOUIVALENTS Currency Unit = Ugandan Shilling US$ 1.00 = U Sh. 1400 (JUNE 1986) U Sh. 1.00 - USSO.0007 WEIGHTS AND MEASURES 1 meter (m) - 3.28 feet (ft) 1 kilometer (km) 0.62 mile (mi) 1 sq. kilometer (km2) 0.386 square miles (sq mi) 1 hectare (ha) = 2.47 acres (ac) 1 metric ton (m ton) = 2,204 pounds (lbs) ABBREVIATIONS AfDB = African Development Bank EAC = East African Community EARC = East African Railways Corporation HIMOS = Highway Maintenance and Organization Study MLC = Ministry of Local Government HOT = Ministry of Transport 14OW Ministry of Works MPED = Ministry of Planning and Economic Development PTC People's Transport Company UAC = Uganda Airlines Corporation URC = Uganda Railwavs Corporation JTC = Uganda Transport Company UTCU = Uganda Transport Cooperative Union FISCAL YEAR July 1 - June 30  FOR OFFICIAL USE ONLY wa U IGWAY A, c STAFF APPRAISAL REORT Table of CDntents Page so CREDIT AND PROJECT S ....UIA......... .. ........... i I. TE TRAINSPORT SECTOR .................. ................. I A. Geographic and Economic Setting . ...............I B. The Transport System ........................................ 1 C. Transport Sector Management ............. ..........5 D. Transport Planning and Coordination ......................... 5 E. Transport Sector Investment ............................... 6 F. Transport Policy and Issues ......... ... . .8 G. Previous Bank Group Assistance in the Sector ................9 H. Rationale for Bank Group Involvement ....................... 10 rI. 7mE HIGrHAY SUBSECTOR ......................................... 11 A. The Network ......................-.---.-.......... -........ 11 B. Road Use .............. 12 C. The Road Transport Industry . . . ... ........ ........ 13 D. Traffic Regulations and Safety . .................... 15 E. Administration . . . ................................. 15 F. Staffing and Training . .... 16 G. Planning and Financing of Investments . . . 17 H. Engineering and Construction ............ .................... 18 I. Maintenance ................................................ 19 I II. THE PROGRAM .................................................. 20 A. Objectives..... .......... 20 B. Description ......................................... o ..... 20 C. Program Costs and Financing .. . 23 D. Economic Justification of the Program ...................... 25 IV. THE PROJECT ................................. o ................ 26 A. Project Composition and Costs ............. o ................ 26 B. Implementation and Procurement ..... . ...... .. 27 C. Disbursements .. ........................... o......28 D. Accounting, Auditing and Reporting Requirements ...........30 E. Environmental Aspects . ..... ....... 30 V. EC0NCIlC EVALUJTION OF EE PROMK ........................... 31 A. General ....................... o ........................... 31 B. Area of Influence of the Project, Benefits and Beneficiaries . ... 31 C. Economic Analysis o... .. ..... 32 D. Overall Evaluation and Sensitivity Test...................33 E. Risks ........................ o ... 33 VI. AGREJ T5 TO BE REACEMD AND 10 ...... 34 This document has a restricted distrbution and may be used by recipieots only in the performace of their official duties. Its contents may not otherwise be disclosed without World Bank authorizston.  -2- (Contents Cont'd) S 1. Proposed Investments in Transport (1985-89) 2. Action Taken on the 1983 Transport Sector Memorandum Recommendations 3. Composition of Motor Vehicle Fleet by Type 4. Vehicle Weights and Dimensions 5. Expenditures on Roads 6. Design Standards of Roads 7. Draft Terms of Reference for Technical Assistance 8. Draft Terms of Reference for Feasibility Study and Detailed Engineering 9. Progress Reporting Requirements 10. Traffic on Program Roads, 1983 11. Future Road Traffic, 1986-2005 12. Typical Vehicle Operating Costs 13. Cost and Benefits for Road Rehabilitation 14. Economic Returns and Sensitivity Tests 15. Related Documents and Data Available in Project File I. Organization of the Ministry of Works II. Project Implementation Schedule MAP Uganda, Highway Network (IBRD 19263) This report was prepared by S. L. Kathuria (Deputy Division Chief), B. Bostrom (Sr. Economist) and S. Demissie (Highway Engineer) who appraised the project in May 1985. In June/July 1986 the appraisal mission returned to Uganda to update and revise the report. Mrs. Hulda Hunter assisted in processing the report.  UGANDk FOURTH HIGHW PIOJECT Credit and Project Sumary Borrower: Republic of Uganda Amount: SDR 14.1 -Iillion (US$ 18 million equivalent) Terms: Standard Project Objectives and Description: The objectives of the proposed project are to: (a) protect capital investment and to increase the service life of essential roads serving local and transit traffic to other land-locked countries; (b) help improve maintenance planning and operations of rural/feeder roads serving agricultural areas; and (c) strengthen institutions responsible for project mplementation. The project would consist of: (a) rehabilitationlstrengthen ng section km 0-24 of the RAmpala-Jinja Road and the Nbarara-Ishaka Road, for which bids have been received, and related supervision; (b) a pilot rural road maintenance program; (c) technical assistance; and (d) feasibility study and, if feasible, detailed engineering of the Soroti- Lira Road. The project is part of a larger program to rehabilitate 279 km of Uganda's main roads based on studies financed under Credit 1077-UG. Other parts of the program vill be financed or are being considered for financing by AfDBIEEC. Benefits: Reduction of road transport costs due to reduced vehicle operating costs, deferred costly road construction and improved road safety. Risks: The main risk is the uncertain economic conditions in the country which may lead to a decline in the availability of local funds for the project. Also, the possibility exists that implementation is delayed due to MOW's lack of administrative capacity though road rehabilitation/strengthening works included in the project will be carried out by contractors.  Estimated Cost.: Local Foroig Total -U U mi I I I .on-_ Highway Rohabi I itation/Str.ngthening 2.6 11.4 13.9 Pilot Rural Road Maintenance Progra 0.2 0.8 1.9 Consultant Services 0.7 3.1 3.8 Base Cost 3.4 15.3 18.7 Physic l Contingencies 0.3 1.6 1.0 Price Contingencies 0.2 1.1 1.3 Total Project Cost'/ 8.9 17.9 21.3 ---= - JJ Total project cost exclusive of taxs and dutioe (US2 million) is USU19.8 million. Financing Plan: Local For ien Total -uss miion Proposed IDA Credit - 18.J 18 0 Government of Uganda 3.8 - 3.8 Total Financing 2.8 18.6 21.8 Est;iated Disbursemonts (SM Million): IDA Fiscal Year 198I 199 1990 1991 1992 1998 Annual 1.9 4.0 4.0 4.9 8.9 2.0 Cumulative 1.0 5.9 9.0 13.0 16.0 18.0 Economic Rate of Return of the Project: 47 percent Map. ID 19263  I. THE TRANSPORT SECTOR A. Geographic and Economic Setting 1.01 Uganda is a landlocked country in the upper basin of the White Nile bordering the Sudan to the north, Kenya to the east, Tanzania, Lake Victoria and Rwanda to the south and Zaire to the west. The total area of the co.untry is 236,000 km2, about the size of the United Kingdom, of which about one seventh is swamps and lakes, and most of the remainder is a plateau about 1,700 m above sea level. Rainfall averages 1,270 mm in the central and eastern parts of the country while the somewhat drier northern parts receive about 760 mm annually. Despite being close to the Equator, neither its temperate climate, nor its topography pose major impediments to transport. 1.02 The population, estimated at 14.3 million and growing at 3.2% per annum, is predominantely rural with roughly 93% living in the countryside. Population density averages 61 persons per km2 which is about twice that of neighboring Kenya. Uganda is essentially an agricultural economy with that sector contributing 58% of GDP and almost all of the country's experts. The share of coffee, the most important export crop, in export receipts declined to 144,000 tons in 1983 from 191,000 tons in 1970. Other export cash crops including cotton, tea, tobacco and sugar, which in the past provided up to 42% of export earnings, currently account for less than 10% of agricultural exports. 1.03 The production of foodcrops for domestic consumption, the most important activity of the agricultural sector, amounted to about 10.3 million tons in 1980 growing to 13.9 million tons in 1983. The main function of the transport system is the distribution of this production throughout the country. When food production, which currently is about half of that in the early 1970s, reverts to its past levels, the deteriorated transportation system will constitute a bottleneck. 1.04 During the last 14 years, the economy of Uganda has seen a reversal from growth to decline followed by rapid deterioration during the war of 1978179 and its aftermath. Real GDP in 1983 was only two-thirds of the 1971 level and per capita income fell by 52% in real terms to a level of US$220 over the same period. This has and continues to have an adverse impact on the transport sector and its operations -- foreign exchange to renew equipment and vehicles and to provide spare parts is scarce; staff morale in the public sector is low due to the harsh economic situation and the efficiency of maintenance works has suffered. The decline in the share of transport sector from about 7% of GDP in 1975 to about 5% in 1983 is explained by the very deteriorated state of Infrastructure and vehicles. B. The Transport System 1.05 Uganda's transport infrastructure comprises about 26,200 km of roads of which about 2,000 km are paved; a railway system totalling 1,350  -2- km; a port on Lake Victoria providing a rail-ferry link to Tanzania; one international airport at Entebbe and eleven domestic airfields. The coverage of the transport system is adequate; however, due to severe neglect over the last several years, the infrastructure has deteriorated and requires rehabilitation and maintenance. The proposed project will supplement the efforts begun under the ongoing Third Higbhay Project (Para.1.32) in stopping further deterioration of the road system. 1.06 The highway subsector is described in detail in Chapter II. Rai1lasg 1.07 The railway network consists of a 1,350 km metre-gauge system of two main lines branching off at Tororo on the eastern border with Kenya (Map IBRD 19263). Until 1977, the railways in Kenya, Tanzania and Uganda were organized as a single operating system within the East African Railways Corporation (EARC), although each country collected revenues for goods originating within its boundaries. Train and traffic control in all countries were centered at the Nairobi headquarters, which was also the heavy locomotive and wagon repair center in the system and the main training center. In 1977, when the Eastern African Community (EAC) broke up, the Uganda Railways Corporation (URC), a parastatal under the Ministry of Transport (MOT), was formed. 1.08 In general, the railway's infrastructure and its rolling stock would be adequate to play its role in the economy if they were rehabilitated and efficiently utilized; much of these have deteriorated due to the lack of adequate maintenance and replacement of capital. The URC*s efficiency had been constrained in the past by the lack of adequate operating relations with Kenya through which the bulk of Uganda's external trade transits. Uganda remansw virtually dependent on Kenya for its import/export traffic. Thus co-operation with Kenya is a key element in Uganda's overall tra-nport strategy. Considerable progress in this area has been made recently and there is now an operating agreement between Kenya Railways and URC which forms the basis for the exchange of rolling stock between the two countries. Nevertheless, present administrative practices and conditions still adversely affect transit time of international shipments, and the question of liability for goods in transit remains unresolved. The Northern Corridor Transit Agreement signed between Burundi, Kenya, Rwanda and Uganda in late 1984 will help resolve these problems. 1.09 The situation regarding rolling stock and locomotives has improved in recent years and Uganda will have sufficient rolling stock capacity now that Kenya has released Uganda's share of R&C wagons. The locomotive fleet is more than adequate for present traffic, although approximately one half of it is currently out of service due to the need  -3- for repair or lack of spare parts. The new workshop being built at Nalukolongo, just outside Kampala, with local financing is now almost complete after being under construction for several years due to limited funds. 1.10 With the breakup of the EAC, the number of passengers handled by the Ugandan rai.way system fell sharply. Freight traffic had begun to decline much earlier, and by 1984, the volume of goods had fallen to some 340,000 tons or 34Z of peak levels reached in the early 1970s. Although there has been some recovery, especially in passenger service during the past few years (3.4 million passengers in 1984), the railway is still underutilized. While this reflects in part the general decline in economic activity, it is also due to a diversion of traffic to road transport caused by the low efficiency of the railways; the low level of security of traffic, particularly for high value products such as coffee and fuel; and past coordination problems with Kenya Railways. In 1984 the major export commodity was coffee of which the railways carried about 65Z or some 86,000 tons. The railways is also now carrying maize exports to Tanzania using the rail ferry on Lake Victoria. For imports the railways carry only a small portion (9,500 tons or 5Z) of fuel. This should increase as URC now has more tank wagons under its own direct control. Another area of potential expansion is the movement of import goods in containers. 1.11 The breakup of the EAC also imposed completely new institutional requirements on Uganda. As all general services such as administration, procurement, finance, accounting, train control and heavy maintenance had been centralized in Nairobi, both Tanzania and Uganda were left without them. Thus URC has weak commercial and technical managemet and little experience in railway operations. Therefore, in addition to rehabilitation of infrastructure, URC needs a major staff training effort, a complete revies of personnel policies, and technical assistance to help the railways in management and operational tasks. 1.12 To assist the URC several long-term initiatives have been undertaken. With bilateral aid from Italy the feasibility of improving two railway lines has been studied and work is underway on a master plan for the railways. Under IDA financing (credit 1077-UG), a marnower survey for the transport sector has been completed and one of the conclusions of the survey is that the foreseen railway operations could be handled by less than the current establishment of some 6,500 permanent staff. On the other hand, a number of positions for skilled and experienced staff are not adequately filled. To provide a solution to this problem a proposal for staff training and technical assistance is being developed vhich could form part of a future transport project. Air Transport 1.13 The air transport infrastructure consists of an international airport at Entebbe and eleven domestic airfields. Entebbe Airport which was completed in the mid 1970. has runways capable of handling wide-body jet aircraft. Although the passenger terminal building is relatively new,  -4- it suffered extensive damage during the 1978-79 war and over the longer term vould need reconstruction. Other facilities at the airport which were destroyed, damaged, or stolen include navigational aids, meteorological and fire fighting equipment, and the control tower. These are gradually being improved or replaced. Upcountry airports have mostly grass or murram landing strips and small terminal structures which have not been maintained for lack of activity. Most have no grass cutting equipment, and navigational and safety aids remain unserviceable. Only one upcountry airfield, at Soroti, the site of a regional air training school, has a control tower. 1.14 Uganda Airlines Corporation (UAC) was formed in 1976 and became the sole national carrier with the collapse of East African Airlines in 1977. Since the war, Uganda Airlines replaced its two Boeing 707s and resumed limited international services. Domestic and regional services also were resumed using two Fokker Friendships and one Twin Otter. In 1985, UAC moved 19,000 passengers in international and regional services and 10,000 passengers in domestic services and a total of about 3700 tons of cargo. However, the company's financial position has been severely eroded by high fuel costs, service disruptions resulting from aircraft diversions for unscheduled purposes, and non-payment of bills, especially by public sector customers. The UAC operations and fleet replacement have been studied by a task force within the Government. With the present foreign exchange and staffing constraints efforts will have to be focused initially on improving existing aircraft operations, rather than expanding. Water Transport 1.15 In recent years, Uganda has increaingly looked to lake transport to provide an alternative transit route to the Indian Ocean by using Lake Victoria and services by rail through Tanzania. This reflects both political concern that Uganda should not be solely dependent on the Kenya rail/road route and economic concern regarding the Impact of congestion and clearance delays at Monobasa port. The alternative Tanzania route was utilized to a limited extent before the breakup of the EAC and was reopened imiediately after the 1978-79 war for transporting coffee exports. However, the Jinja-Mwanza ferry, owned by Tanzania, broke down in 1980. To reduce its dependence on a single route for international trade, Uganda ordered three new ferries in 1978 which were delivered in 1983-1985. These ferries provide services from Jinja to Mwanza which is connected by rail to the ports of Dar-es-Salaam and Tanga, and to Kisumu in Kenya. Under normal circumstances, the Tanzania route would not be as economic as the Kenya route for many types of cargo, and the Tanzanian rail system is not able to handle large volume of transit traffic. Cn economic grounds, top priority should therefore be given to reducing costs on the Kenya route. One way of doing this would be to expand the use of containers in rail traffic. Additional investments on the Tanzania route (for ferries, terminals and rail links) should, however, be limited to the minimum level considered compatible with Uganda's strategic concerns.  -5- C. Transport Sector Manatement 1.16 Two ministries share responsibility for the transport sector, the Ministry of Transport (MOT) and the Ministry of Works (HOW). Other ministries involved indirectly include: the Ministry of Commerce for transit traffic; the Ministry of Co-operatives and Marketing through its indirect influence over the Uganda Transport Cooperative Union (UTCU); the Ministry of Planning and Economic Development (MPED) for overall investment planning; and the Ministry of Finance for project financing and external aid. The MOT has a policy role in matters of road, rail, air and water transport and is responsible for transport regulation, coordination, control, tariffs, and road transport safety. It also oversees the operations of URC, UAC, the Uganda Transport Company (UTC) and People's Transport Company (PTC), the latter two being road passenger transport parastatals. Although MOT's organizational structure is adequate, it seriously lacks qualified staff to perform its functions and is in need of technical assistance in the short-term and recruitment and training in the long term. Some of the immediate requirements are being met by assistance under the on-going Third Highway Project (Para 1.32). The MOW is responsible for planning, constructing, and maintaining highways and for airport operations. Its operations are described in detail in Chapter II. D. Transport Planning and Coordination 1.17 Transport planning is the responsibility of MOT in cooperation with the MPED. Because of the lack of clearly defined objectives and manpower shortages, little has been done and most transport agencies and parastatals have, by default, taken on a high degree of autonomy without due regard jp economic or intermodal considerations. While the MPED should have the rore of overall economic planning, sectoral planning is the responsibility of the NOT. To adequately perform its role, the NOT should: (1) strengthen its staffing, and (2) systematize and intensify its sector knowledge through better data collection and analysis. Eventually MOT should assess Uganda's medium and longer term transport needs; prepare a comprehensive transport investment program; and develop a transport strategy and policy framework. During 1980-83, UNDP, with ILO as executing agency, provided some assistance to MOT in these areas. Renewed effort is being made to achieve these objectives through a proposed UNDP trasaport policy and development project, with the Bank as executing agency. 1.18 Until the breakup of the EAC, intermodal coordination was centrally handled from the Community's headquarters and operated relatively efficiently. HR'evAr, following the breakup of EAC and consequent initial collapse of transjo& interchange agreements, Uganda embarked on a series of investments designed to fill the void left in its transport system without adequate consideration for intermodal coordination. Present coordination primarily occurs during the preparation of annual budgets but even then the exchange of information and discussion of projects is inadequate. An efficient coordination mechanism is clearly needed. This will be addressed under the proposed UNDP project (Para 1.17).  -6- S. Transport Sector Investmnt 1.19 At independence in 1962, Uganda inherited a very good transport system. The system was further improved during the decade 1962-1972 to become one of the best in sub-saharan Africa. However, after years of neglect and ultimate destruction during the war in 1978/79, the transport system was left in disarray. The Government reacted quickly to the reduced transport capacity by investing simultaneously in all modes and purchased trucks, ferries, airplanes, railway locomotives and rolling stock. With assistance from a Commonwealth team of experts a Recovery Program was prepared which the Government has since updated. The main aim of the 1982- 84 initial Recovery Program and the subsequent investment plans in the transport sector has been to alleviate constraints in the movement, marketing and export of agricultural produce and to ensure that basic transport services would be available in all parts of Uganda. 1.20 Actual investment in transport infrastructure amounted to about US$14 million in 1982/83, US$55 million in 1983/84 and US$ 39 million in 1984/85. To some extent, this slow start was caused by the need to rebuild the institutions responsible for project implementation. In the road sub- sector, only the EEC-financed works on the Kampala-Masaka road, and some road sections close to the Zaire border (Equator and Lake Katwe roads), and FRG-financed road repair works on the Jinja-Tororo road are close to completion. The rail and aviation subsectors have been more successful in getting projects implemented mainly because equipment and rolling stock can be imported and installed faster than civil works can be carried out. Still, these subsectors and, in particular URC, have very serious institutional limitations with inadequately trained staff at all levels. This has clearly limited the favorable impact of the improved rolling stock. 1.21 Government's Investment Plan for 1985186 - 1988189 includes 26 projects for the transport sector with a total of US$210.2 million (see Annex 1). Of this, the major part (US$146.6 million) is for roads and road studies, US$53.6 million for rail, US$1.6 million for water transport and US$8.4 million for air transport infrastructure. This Plan relates well to the condition and importance of the different sub-sectors and is now being updated. The priority aim is to limit further deterioration of the main transport network, and in particular, the main trunk roads serving local and transit traffic to other land-locked countries. In recent years the transit traffic of about 400,000 tons yielded USS 5.7 million in foreign exchange through border tolls (Para. 2.24). Following the initial increase in traffic demand after 1982, overall traffic growth may now slow down to the level of some 4-62 per annum depending largely on future growth in the agriculture sector and, particularly, of agricultural exports. Passenger transport, however, has large potential for growth since most home-to-work trips currently entail walking. Private minibuses, Matatu's, despite expanding rapidly, can only meet part of the demand, since their costs and therefore tariff levels are high.  -7- 1.22 The condition of the railway, while generally adequate for present traffic levels, needs to be improved if potential demand is to be met. Although the track was not seriously damaged during the 1978-79 war, it is estimated that over 70S is now sub-standard, due to its age (more than 50 years in some cases) and inadequate maintenance. Many sections are too light and structurally unsound for modern locomotives and heavier wagon loads. While this is not considered a major problem at present, bottlenecks are likely to develop as traffic levels recover. The situaticn regarding rolling stock and locomotives has improved in recent years as a result of foreign financing of both rolling stock and spares. URC has received a considerable amount of rolling stock mainly as bilateral aid. With new acquisitions of 380 covered wagons, 20 livestock wagons and 20 passenger coaches, rolling stock has increased considerably. In addition, several hundred tank cars, and covered and open wagons were obtained in early 1984 as part of the division of EAC assets. Financing has also been arranged for 240 covered and 60 container wagons. If anything, Uganda presently has excess rolling stock capacity, except for passenger services and containers; container wagons are of the highest priority, and further purchases of covered wagons should wait completion of the ongoing railway master plan (Pars. 1.12). Similarly, major improvements to the permanent way, and improved :-ailway signalling are not needed in the near term. Rehabilitation of Lake Victoria ports including navigational aids and telecomunications has already been partly undertaken with funding by EEC. 1.23 UAC, whether continning as a carrier to Europe or only as regional airline, needs a change in its aircraft fleet. Because of noise restrictions in Europe, the present Boeing 707 aircraft may not be allowed in the future and these intercontinental-range aircraft are not suitable for short routes in East Africa. A short-term solution is the conversion of at least one aircraft with noise-suppressed engines at some US$2.8 million per aircraft. This does not alleviate the increasing maintenance expense for those relatively old B707 aircraft. The Government has therefore proposed their replacement with two, more modern, second-hand aircraft with similar capacity. The ideal solution would be pooling of traffic with other airlines, particularly on a regional basis. While reliance on foreign airlines would be the most cost-effective solution, it is recognized that this would not be readily acceptable for a landlocked country such as Uganda. The Entebbe Airport navigation services and telecoammnications rehabilitation have already been carried out. Further major investment in Entebbe Airport is difficult to justify on the basis of present traffic. In any event, there is room for generating increased revenue by raising air fares and by more timely payments by Government for services rendered. Both measures are essential to ensure the viability of UAC.  -8- P. Transport Policy and Issues 1.24 In addition to its role of planning and coordination for the sector, the MOT is also responsible for setting transport policy. Although no clear transport policy has been enunciated, a set of objectives can be derived from Government actions in the sector. Thus, for international transport, Government sees rail transport as the principal mode for long distance freight movement. Moreover, given the current difficulties experienced with Kenya in operating the corridor to Mombasa, it is seeking to strengthen an existing alternative route namely, the Lake Victoria - Tanzania (rail) corridor to Dar es Salaam. Domestic policy objectives are considerably less articulate. For example, the role of the parastatals vis-a-vis the private sector is not clearly defined. 1.25 A national transport policy needs to be developed on issues like the degree of government regulation, technical standards for vehicles, the role of public and private investment, the role of different transport modes, and levels of performance to be expected. Most of this work has not started because of limited personnel resources and lack of data. However, efforts have been made to coordinate policy with neighboring countries through the recently signed Northern Corridor Transit Agreement (Para 1.08) which regulates areas such as: the rights of transit, routes and facilities, coordination of frontier facilities and customs control, and documentation and procedures for transport. The development of transport policy will be assisted through a proposed UNDP project (Para. 1.17). 1.26 The financial situation of much of the sector is not encouraging. With the exception of the Uganda Transport Cooperative Union (UTCU), most parastatals are in financial difficulty. This is due, partly, to management limitations but mainly due to the low tariff structure. Clearly, a more active tariff-policy by the Government is important, with more frequent tariff revisions to cover at least shor-t-run marginal cost for all modes. 1.27 The recent improvement in transport services has been primarily due to new vehicles and better supplies of spare parts, financed through special exchange rate arrangements and earmarked multilateral and bilateral aid. The policy to try to move heavy traffic by rail rather than by road has obviously encouraged some shift of traffic to rail from road. More important, however, has been the URC's improved rolling stock situation which enabled the railway to move traffic where road transport has not had serviceable vehicles available. Some of this traffic will undoubtedly shift back to road as more private vehicles become available. 1.28 The recent recovery of the transport sector has been primarily due to specifically targeted investments. Policy change and the 'imited institutional development have so far not had any significant effects. The improvements in track conditions and handling facilities of URC, and the planned road rehabilitation and mainten-nce will take some time. The substantial increase in 1984 in Government salaries has had some positive  -9- effect on the transport sector by reducing absenteeism and loss of Government property. 1.29 A number of institutional issues were raised in the 1983 Transport Sector Memorandum (TSM) and several have been resolved either independently or in the context of the ongoing Third Highway Project (see Annex 2). The transport sector manpower survey which has just been completed is expected to lead to a technical assistance and training program, particularly for the URC (Para 1.12). A system of data gathering in the Ministry of Transpo-c is being establxshed with technical assistance under the on-going Third Highway project. The IDA reconstruction credits have provided almost US$10 million (US$5.4 million for RRP projects and US$4.6 million for equipment and spares). Better coordination between Uganda and Kenya has been ensured through the recently concluded Northern Corridor Transport Agreement (Para 1.25). Finally, Entebbe Airport has been brought back to ICAO safety standards. G. Previous Bank Group Assistance in the Sector 1.30 The Association has helped finance three highway projects in Uganda. The First Highrway Project (Credit 108-UG, US$5.0 million, 1967) provided for construction to paved standard of the Mbarara-Ishaka-Katunguru Road (122 km), construction of several smAll agricultural and feeder roads, and detailed engineering of 740 km of main and feeder roads. According to a Bank audit on this project (No. 1623 dated June 19, 1977) the main road construction was of a poor quality as a result of contractor's inefficient organization and workmanship and the actual rate of return on this investment was estimated at 8Z to llZ, alt'iough because of the lack of adequate maintenance, the returns may even be lower. 1.31 The Second Highway Project (Credit 164-UG, US$11.6 million, 1969), helped finance: (a) constructionlreconstruction of 665 km of primary, secondary and fee er roads engineered under the previous project; (b) a highway investment, maintenance and organization study; (c) feasibility studies and detailed engineering of about 400 km of roads selected from among those identified in (b) above; and (d) technical assistance to the MOW. The project was completed in 1980. Project implementation was hampered, especially after 1975, by a lack of qualified staff, and high prices of goods due to shortage of supplies. An audit has not been carried out due to the limited data available; a limited completion note was prepared (June 14, 1984). 1.32 The ongoing Third Highway Project (Credit 1445-UG, US$58.0 million, 1984) supports a 4-year program (1984-87) to improve maintenance of the classified road network and periodic maintenance of about 600 km of bitumen-surfaced roads and about 1,000 km of gravel roads. The project includes provision for road maintenance and workshop equipment, spare parts, tools, training aids, supply of fuel and bitumen, and improvements to the road maintenance training center and MOW workshops. Technical assistance to MOW and MOT, a pilot program for the development of the local construction industry and a study for the preparation of a future road  -10- maintenance program are other components of the project. After some initial delays, the project is now off to a good start. Bids for civil works and equipment have been received and evaluated; contracts are being awarded. Consultants for technical assistance and development of the local construction industry have been employed. 1.33 The 1972 highway investment, maintenance and organization study financed under Credit 164-UG (Para. 1.31) was updated in 1982-83 through a Highway Maintenance and Organization Study (HKOS) carried out with funds under the First Technical Assistance Credit (1077-UG). In addition, the transport sector has been assisted by other credits such as the Second Reconstruction Credit (1252-UG) which provided funds for equipment and spare parts for MOT and MOW, as well as for some of the parastatals in the transport sector to help meet urgent requirements of the transport sector. 1.34 The Bank has also made three loans totalling US$104.4 million to the now defunct EARC to modernize and develop railways in the comnmity (Kenya, Tanzania and Uganda). All three loans have been disbursed and a mediation exercise was completed recently to allocate assets and liabilities of EARC among member states. B. Rationale for Bank Group Involvement 1.35 The Government's objectives for the transport sector, as outlined ia its 1985186-1988/89 Investment Plan, are to alleviate constraints on the movement, marketing and export of agricultural produce and to ensure that basic transport services are available in the country by (a) restoration of trunk roads and in particular the main transit routes; (b) rehabilitation of Government's road maintenance capacity; and (c) rehabilitation of the railways, including permanent way, rolling stock and hendling facilities. The Association's lending strategy in support of Government's efforts is to (i) assist in stopping further deterioration of the country's road network by strengthening Government's road maintenance capacity (Third Highway Project, Credit 1445-UG); (ii) rehabilitate roads of key economic importance (proposed project) and (iii) support rehabilitation of the railway, where suitable and clearly more economical, and assist with sector-wide training (a proposed Transport Project, scheduled for FY90). The roads selected for rehabilitation/strengthening under the program (Para 3.02) consist of sections of the main trunk routes serving local and transit traffic (to Kenya, Rwanda, Burundi and Zaire) taking into consideration rehabilitation works already in progress with assistance from other donors.  -11- II. THE HIGBVt SUBSECTOR A. The Network 2.01 The highway system of Uganda is in the form of a semi-circle with Kampala as its center and the circumference broadly following the international boundaries of the country (Map IBRD 19263). The system is supported by a network of radials emanating from Kampala towards the circumference. Secondary and tertiary roads connect these radials with one another. The network totals some 26,200 km of which 7,800 km form the classified road network which is maintained by the MOW. The roads maintained by the MOW are classified into three categories: primary, secondary and tertiary. In general, primary roads are important national and international roads which connect administrative centers with one another and with neighboring countries. Secondary roads are either inter- district roads or roads linking the primary road network with other centers of economic activity. Tertiary roads serve local population centers and agricultural areas, and connect them with other roads in the network. The classified road network comprises 1,970 km of bitumen surfaced roads and some 5,849 km of gravel roads, a breakdown of which is shown below. Table 2.1 Road Network Primary Secondary Tertiary All Roads Roads Roads Roads Percentage Bitumen 1,672 127 171 1,970 25 Gravel 2.289 2.077 1.483 5.849 75 Total 3,961 2,204 1,654 7,819 100 ~~~~~-== === S=3 The remaining about 18,400 km of the road system constitutes the rural/ feeder network, consisting mostly of un-engineered earth/gravel roads, and is the responsibility of the Ministry of Local Governments (NiLG) through its district administrations. The maintenance of ruralifeeder roads is practically non-existent because district administrations lack the required skills and resources (Para. 3.09). The pilot rural road maintenance program included in the Program will assist in determining how maintenance planning and operations of the rural/feeder road system can be improved. 2.02 Although the coverage of the highway network is generally adequate, road conditions deteriorated substantially during the 1970s due to the lack of proper maintenance. The situation is particularly severe for trunk roads serving transit traffic (to Kenya, Rwanda, Burundi, Zaire and Sudan) where high volumes and heavy loads have caused structural damage and made roads difficult and dangerous for traffic. For the secondary road  -12- network the situation is somewhat better, due to the decline in vehicular traffic in recent years. Nevertheless, in many areas the secondary road surfaces have become uneven making travel slow, and on some isolated sections, the gravel has worn or washed off making roads impassable during the rainy season. This limits the production and marketing of perishable food, as well as inputs in certain areas. B. Road Use 2.03 The road vehicle fleet was severely depleted in the 1970s, falling from around 45,000 at the start of the 1970s to about 35,000 in 1978 and to about 24,000 in 1982. The reduction in the number of vehicles was most severe for cars and heavy commercial vehicles. In 1984 the number of vehicles increased to about 25,700, but declined again in 1985 to about 24,200. The composition of the vehicle fleet, excluding Government vehicles, is shown in Annex 3. While the number of passenger cars has declined since 1980, the condition and age of the vehicles has improved significantly, due in large part to foreign financing of spare parts and investment in new vehicles. Commercial road traffic has also grown substantially, as indicated by the increase in the import of diesel fuel from 46,700 tons in 1981 to 64,600 tons in 1985. This growth primarily reflects the increased internal cargo transport by truck and has been made possible by the improved availability of spare parts. 2.04 Up until 1972, the MOW maintained reliable traffic counts for all sections of the classified road network. Annual records were kept for over 240 road sections, including primary, secondary and tertiary roads. However, from 1973 to 1982 only a few scattered traffic counts were undertaken, and the records of these were lost during the 1978/79 war. In 1982, the MOW undertook a traffic counting program as a basis for the HHOS (Para. 1.33); it has recently made traffic counts on some of the trunk -cads around Kampala and is making arrangements to extend this to other areas. 2.05 Fuel prices for gasoline and diesel oil are set by the Government and are adjusted periodically to reflect any changes in the border prices of the various products. A breakdown of the retail price of gasoline and diesel fuel is shown in Table 2.2 below. Table 2.2 Fuel Prices U.Sh./litro SuR!r Casoijno Auto Diesel Dec. 1984' Jun- 1985l Oct. 19862 Dec. 1984 June 1985 Oct. 198s CIF Malabo 166.66 286.86 287.96 146.10 287.41 268.78 Local Transport 15.11 29.36 6.17 16.24 Landed Cost 17b17. iWi.7 33.30 55 Custom Duty 66.29 121.74 36.23 69.64 Company Margin 48.68 130.91 48.68 130.91 Sub-total 285.73 667.86 234.50 504.20 Sales Tax/Rebate (2.53) 51.33 (1.3 (35.02) Ex-depot price 283.20 619.18 233.20 469.18 Dealer Margin 16.80 80.82 16.80 30.82 Retail Price a3.50 550.00 1,10W.00 260.W0 5600. 53o.90 ]/ Based on an exchange rate of USS1.30 = U Sh. 500. ' Based on an exchange rate of US1.00 = U Sh. 1,400.  -13- As shown in the above table, the tax differential between diesel and gasoline fuels still reflects the Government's desire to use gasoline taxation as a source of general Government revenue. The fuel prices are adjusted with changes in exchange rates; the pump price for fuel has substantially exceeded the international price at the official exchar4e rates. However, the Government's revenue from duty and sales tax has declined due to the lack of corresponding increase in retail prices to rhe consumers (Para.2.24). C. The Road Transport Industry 2.06 Public transport services are mainly provided by private operators. Also, there are four parastatal bodies: Uganda Transport Company (UTC), People's Transport Company (PTC), Uganda Trensport Cooperative Union (UTCU) a-id Transocean Ltd. UTC and PTC provide passenger bus services, the former mostly in Kampala and also on some routes in western and southern Uganda, and the latter in the eastern and northern parts of Uganda. These together own some 60 buses of which 40 are in operating condition. Both UTC and PTC are loss-making operations. UTC is unable to meet the substantial demand for transport to and from work. Where little or no bus transportation is available there has been a sharp increase in the number of minibuses (matatus) in the country. In 1985 of a total licensed public service vehicles of 2,120, 1,632 were matatus. 2.07 In addition to the two passenger parastatals UTC and PTC, there are a number of private bus companies licensed to operate on specific routes. Many of these carriers compete directly with the two parastatals, but the private carriers charge two to three times the fares charged by UTC and FTC. Essentially, these are either operators of regular buses or of small minibuses, the latter charging the highest fares. There is a serious shortage of public passenger transport in Uganda, and in Kampala passengers often have to wait more than an hour for a bus. Thus the majority of workers in the central business district walk to work. 2.08 The major part of goods transport is provided by private operators or cooperatives at freely set rates. Interfreight, a private company, is the major operator for freight transport; it has a newly established container freight station just outside Kampala. UTCU, a fully autonomous cooperative under the umbrella of the Ministry of Cooperatives, is another major freight transporter in the country; it operates about 130 vehicles ranging in size from 8 to 18 tons in carrying capacity. The UTCU is currently owned by 30 regional co-op unions which are its shareholders. The regional co-ops in turn are owned by individual farmers set up as district unions. The UTCU wa set up mainly to provide transport for its members but it also acts as a for-hire carrier to others. Its members are provided transport at cost while others are provided at profit. UTCU's main role is to move coffee from the farms to the Coffee Marketing Board's central processing plant in Kampala but lately it has moved some coffee from Kampala to Mombasa. UTCU is building a new centralized maintenance workshop in Kampala.  -14- 2.09 Rehabilitation of Uganda's transport system is crucial to the country's economic recovery. The transport system has an important role to play in the import of needed commodities, particularly petroleum, and in exporting goods, mostly coffee, tea, cotton and tobacco. Road transport carries a major part of imports, including petroleum, and virtually all transit cargo, mostly from Kenya to Rwanda, Burundi, and Zaire. In 1983 the exports were about 184,000 tons, of which coffee comprised 144,000 tons (80,000 tons by rail) and maize 30,000 tons (all by rail and ferry across Lake Victoria). Petroleum imports were some 190,000 tons, carried overwhelmingly by road. Road transport also plays a vital role in the movement of most marketable production of food crops, such as cereals, plantains and beans. A yearly volume of some 1.2-1.5 million tons is moved by road to various urban areas with most of it to Kampala. 2.10 While there once existed a flourishing road transport industry in Uganda, the substantially reduced economic activity and the vehicle fleet decimation which followed the 1978179 war have severely reduced the number and size of carriers. After the war, the Government purchased about 600 trucks primarily to transport coffee. Most of these vehicles were sold to transport co-operatives. Part of the truck fleet originally purchased by Government was also sold to various marketing boards including the Coffee Marketing Board, the Cotton Marketing Board and the Produce Marketing Board. Tran sort Re"ulation 2.11 The Road Traffic and Safety Act of 1970 empowered the Government to regulate the road transport industry as necessary from an operational, economic and safety point of view. The HOT publishes tariffs as guidelines for carriers of passengers and freight. The transport of passengers is, however, more strictly regulated both in terms of routes and tariffs. Passenger carriers must apply to the Transport Licensing Board for permission to operate on a specific route. The applications are publicly announced and hearings are held. Carriers already providing service on the route in question can oppose the application and the Board decides whether or not public convenience and necessity dictates that a new carrier should be allowed to operate. New carriers do not experience any difficulty in getting such permission due to this regulation. The tariffs charged by UTC and PTC are regulated by the MOT, but private carriers are only provided with an indicative rate. Freight transport is free of tariff regulations. 2.12 Regulated rates charged by UTC and PTC are non-remunerative and barely cover out of pocket expenses. The allocation for equipment replacement is inadequate. As a result, the service levels have deteriorated substantially and the public suffers from reduced transport availability to the extent that UTC and PTC together provide only about 2Z of all road passenger transport. If the Government wishes to provide a subsidized public passenger service, the parastatal companies should be encouraged to restructure their operations on a commercial basis with Govermment providing a direct operating subsidy. These points were  -15- discussed with Government at the time of the Trsnsport Sector Review, and under the on-going Third Highway Project and it had been agreed with Government that it would establish passenger tariffs based on the reco_endations of the IDA financed parastatal accounting study. The study completed in 1985, however, did not include UTCIPTC. Meanwhile, Governmc.t has increased substantially the tariff levels for UTCIPTC. D. Traffic Regulations and Safety 2.13 Despite its power to do so the HOT did not have to regulate vehicle weight, dimensions, inspections, licensing and safety because until the breakup of the EAC in 1977 the control of toad vehicles was not a problem since most heavy traffic moved by rail. However, with the inefficiency of URC and the diversion of traffic to roads, the situation has changed drastically and the size and axle loadings of heavy vehicles is having a detrimental effect on roads. The NOT has prepared new traffic and safety legislation in line with the standards required by the member states of the