Chad - Transport Sector Adjustment - Investment Project

Docwnent of The World Bank FOR OFFICIAL USE ONLY &R0C7- c2> Report No. P-4977-CD REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT OF SDR 45.4 MILLION TO THE REPUBLIC OF CHAD FOR A TRANSPORT SECTOR ADJUSTMENT/INVESTMENT PROJECT MARCH-30, 1989 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Currency Equivalents Currency Unit CFA Franc US$ 1 CFAF 300 CFAF 1 US$ 0.003 CFAF 1 million - US$ 3.333 FISCAL YEAR January 1 - December 31 SYSTEM OF WEIGHTS AND MEASURES: METRIC 1 meter (m) - 3.28 feet (ft) 1 kilometer (km) m 0.62 mile (mi) 1 square kilometer (km2) = 0.39 square mile (mi2) 1 metric ton (t) - 2.205 pounds (lbs) ABBRFVIATIONS AND ACRONYMS AfDF African Development Fund BEAC Banque des Etats d'Afrique Centrale BDEAC Banque de Developpement des Etats de l'Afrique Centrale BNF Bureau National de Fret BTCD Banque Tchadienne de Credit et de Developpement CCCE Caisse Centrale de Cooperation Economique (French Aid Agency) CFAF Franc of the African Monetary Union COTONTCHAD Societe Cotonniare du Tchad CTT Cooperative des Transporteurs Tchadiens DAC Direction de l'Aviation Civile DEP/MTAC Direction des Etudes et de la Planification du MTAC DGTAC Direction Generale des Transports et de l'Aviation Civile DGTP Direction Generale des Travaux Publics DRTP Delegation Regionale des Travaux Publics DTP Direction des Travaux Publics DTS Direction des Transports de Surface EDF/FED European Development Fund/Fonds Europeen de Developpement FAC Fonds d'Aide et de Cooperation (French Aid Agency) FRC Financial Rehabilitation Credit KFW Kreditandstalt Fur Wiederaufbau (German Bilateral Aid Agency) LNBTP Laboratoire National du Batiment et des Travaux Publics MTP Ministere des Travaux Publics MTAC Ministere des Transports et de l'Aviation Civile OFNAR Office National des Routes RFA Republique Federsle d'Allemagne SONASUT Societe Nationale Sucriare STEE Societe Tchadienns d'Electricite UNDP United Nations Development Program USAID U.S. Agency for International Development  FOR OMCUL USE ONLY REPUBLIC OF CHAD TRANSPORT SECTOR ADJUSTMENTIINVESTMENT PROJECT TABLE OF CONTENTS Pase No. DOCUMENTS IN THE PROJECT FILE CREDIT AND PROGRAM SUMNARY I. THE ECONOMY AND THE ADJUSTHENT PROGRAM . . . . . . . . . . . . . 1 A. Background . . . . . . . .. . . . . . . . . . . . . . . . 1 B. Recent Economic Developments . . . . . . . . . . . . . . . 2 C. Macroeconomic Policy Issues * ......... . a.................. 4 D. Macroeconomic and Sectoral Adjustment Programs . . . . . . 5 II. MAIN ISSUES IN THE TRANSPORT SECTOF; . . . . . . . . . . . . . . 7 A. The Transport Sector ................... 7 B. High Transport Costs .......................... 9 C. High Transport Priceso8 * - * .. . . - . - v -- 10 III. THE TRANSPORT SECTOR ADJUSTHENTIINVESTErNT PROGRAM . . . . . . . 11 A. Rehabilitation of the Priority Road Network . . . . . . . . 12 B. Improved Resonrce Mobilization and Allocation in the Transport Sector .... .. .. .. . . . . . . . . . ... . . .. 13 C. Liberalization of the Road Transport Industry . . . . . . . 15 D. Ilcreased Role of the Private Sector in the Road Construction Industry ...... . .. . . . . . . . . . . 17 E. Improving the Public Management of the Transport Sector . . 18 F. The Transport Sector Adjustment/Investment Strategy in the Context of the Ongoing Macroeconomic Adjustment Program ... .. ... . . . o . . o . . . . ......... 20 IV. THE PROPOSED PROJECT .. . .. . . ... . .. ....... . ..... 22 A. Project Objectives .... .. .............. 22 B. Project Description .... . . . . ............ 22 C. The Road Maintenance and Rehabilitation Erogram .' ..... 23 D. Air Transport Infrastructure Rehabilitation . . . . . . . . 23 E. Institutional Strengthening . . . . . . . . .. . . . 23 F. Project Cost and Financing . ...... ......... 24 G. Project Implementation . ...... . . . . . . ...... 27 He Procurement .*. . . . . . ... . . . . . . .. . . . . .. . .. 28 I. Disbursements and Tranche Release . . . . . . . . . . . . . 31 J. Reporting ard Auditing . .............. .. . 33 K. Project Justification .................. . ....... . ..a.... 33 V. BANK GROUP OPERATIONS IN CHAD ................... ..a.......... 35 VI. COLLABORATIONWITH THEINF . . . . . . . . . . . . . . . . . . . 38 VII. AGREEMENTS REACHED AND RECOMMENDkTIONS . . . . . . . . . a. .. . 38 This document has a restrictod distribution and may be used by recipients only in the perfomance of their official duties. Its contents may not otherwise be disclosed without World Bank authoration.  Annex l:Key M croeconomic Indicators, Balance of Payments, Status of Bank Operations Anne" 2i Detailed Cost Kstimate Annex 3: Disbursement Schedule Annex 4s Project Implementation Schedule Annex 5a Statement of Transport Sector Policy (with attachments 5-1, 5-2, 5-3, 5-4) Annex 6sMatrix of Sector Policies, Issues and Actions to be Implemented Annex 7:Chad Road Construction Design Norms Chart 1tOrganigramme dii Ministere des Travaux Publics Chart 2: Organigrame du Ministere des Transports et de l'Aviation Civile Chart 3: Organigraue de la Direction Ginirale de l'OFNAR SiP IBRD 21338  REIUIIC Ot- CRAD DOCUMNTS I11 TU l!RlOJCT FILEC in ~ ~ ~ to Fll- UR Ret. No. beest Title slt_ I. Project Proceenas 1. Projoe d'Aju.temnt Sectoriel de- Transpor Correspoadence by dat. Mistson de Pr"valuatlon, Aldeb-Mmolre. Transport Stor Adjustmnt Credit, Initiating Memorandum, July 5, 1086. 2. Projet d'Ajustemsnt Seatoriel doe Transports, Corr._poadae by dat Atde-1Mmolre do la Mission d'E vtluatlon (14 tu 22 Novembre 198B). Appraisal Misslon, Back-to-Office Report, Decombr 6, 1t80. X. Sector C sakaround 1. Preparotion of Transport Sector Project, Preliminary 0-28568 Study of Rural Roads In the Southeast a Chad, ftnal rport, Coluenconsult GM. 2. Projet Sactoriel des Transports, Etude 0-28S 9 Pr6llminalre do Routes Rurloa dane Is Sud-EUt du Tohd, Etud Econemique. 8. Chad Strengthening Road Maintenano ProJoct, 0-2860 by USAI, June 24. 198. 4. Prormo do Rabilltatilon at d'Entretien Routior D-2801 (108601), Rapport 0Ara Is, SCEWO, AeSt 18$. 5. Program do Rbabi tiltation eb d'Entetlen 0-289 Routler (198641), Annexee, do rapport i-deslue, BCIt, AOt 1086. S. Note our lee Penn de Organlsation* Intern- D-28 tiontless PIW, PAM, CARE TCNAD, FAO. 7. tloglestic our I lndustrie, de Traporot Routiere 0-286M c*u Tohad, SEDES, Jul lot 1977. 8. Etude do Recouvremet de Coots d'Entr4tien Routler, 0-28505 Rapport d*ActIvItA, Louis Berger lntenationl, Inc., Jenwler 108. 9. RNunlon de Sulvl d lo Table Rondo de Cenave 0-285 do DOoebro 1985. Secteur dee Trensporte, Volume 1, Pr6sentatlon de le Strat6gle et do Progr_me do 06volopp_ment, FUrler 1986. 10. RAunlon do Sulvi do Is Table Rondo doe nwve 0-28969 do O6enbro 186. Secteur des Traneports, Volume 2, PrAcentation do la Strat,ie *t du Program do 06veopp_ent, Annexes, FPvrier 1068.  - ii. - Projecb File C.de/ Rot. No. Docuent Title auk DOceNent N. 11. O llun d l'Ot Tice do Carrires eb ConstItution 0-285 do Is Socl6t d'Exploitatton des Carrlros do Tkend, Rapport Provisoire, SECAT, More 1988. 12. Milstre de Transport. et do IA"iation Clvillo D-23698 Etud do I'Industri. doo Transports, Rapport Final, SCEOM, Avril 198. 18. Pr6valuxtion du Projet Sctoriel des Transport.. 0-28599 Prootion des Petite. ot Moyonne Entreprles do Travaux Routlern, Rapport do Mission, Hugues Casaing, Juin 1988. 14. Etude de R6organlsatlon de lOffice Natlonal D-28690 des Routes, Volume 1: Manuel d'Organlation do l'OFNAR, Louis Berger International Inc., Juillet 1988. 15. Etude do Rdorganisation do 'Office Notional D-28608 des Routes, Volume 2: Plan de Formation, Louis Berger International Inc., Juillet 1988. 16. Etude do R4organtstion do I"Off lce National D-2BB00 dos Routes, Volume 8: Plan do R6orgsniation, Louis Berger International, Inc., Juillet 1088. 17. R6orgsnisation du Systbm Comptable do I'Off lc 0-28691 National des Routes du Tchad, (OFNAR), Fiduclalre do to Tour, Juillot 1988. 18. Plan do Formtion, Volume 1, Rapport, BCEOM, 0-28002 Octobre 1988. 19. Plan do Formation, Volume 2, AnnexMs, BCEOJ, 0-2868J Oatobre 1998. 20. Etud d'Organieation du Ministhre des Travaux 0-23808 PubiIco, Volum 1, rapport, BCEON, Octobre 1988. 21. Etude d'Orgpntn tton do MinistAre des Travaux 0-28680 Pubi c, Volume 2, Annexes, BCEON, utobre 198. 22. Audit Financier do In CoopOrative des Transporteuru 0-23se4 Tchadiene, Fiducistre de le Tour, 0Dcembre 1988. 23. Mission D'Assistance Technique, Etud du Conset I D-28695 des Chargeurs du Tchnd et du Projt do Zone Tchadienno on Zone WEAC a Douanl, Louis Borger International, Inc., Janvier 1989 24. Cr6ation du Bureu National do Fr8t 0-24092 Rapport AFT du 10 f4vrier 1989. 25. grant agrement for the strengthening 0-23886 of the road maintenance project, USAID, June 28, 1985.  Rof.~~ ~ ~~~~~ No. Oco Ret. N.. ecsmu~~~~~~~t Title *gJgbFil Code/ ftf. me. oeemonat ritio OWk ~~~~~DOCusAMt NO. 26. Final roport on the *valuntion Studs: 0-2BMG strengthening road malnt nnc project in Chad (English & French, texts) Pnreons Brinch*rhoff, May 90. 27. Strengthening road maintenance 0-28068 projoct No. 677 Uz: project lmplemnntation letter No. 1? A Annexes, USAID, August 19, 18. 28. Annx No. 6: roads In N'Djamgne 0-28309 subdivision (proposal from outside design teem not yet accepted), USAID, 1908. 29. Evaluation Economique du Programm D-24688 Routler 1909-1998  - iv - TRANSPORT SECTOR ADJUSTKENTIINVESTMENT CREDIT CREDIT AND PROGRAM SUMMARY Borrower: Republic of Chad Beneficiaries: Ministry of Public Works Ministry of Transport and Civil Aviation Credit Amounts: (US$60.0 million equivalent) IDA SDR 45.4 million Termst Standard IDA terms with 40 years maturity Descriptions The proposed credit is a hybrid policy and Investment program intended to support within the transport sector the objectives of the ongoing macro-economic adjustment program. The principal objective of the project is to reduce both the cost and the price of transport in Chad. To do this, the proposed project would assist: (a) the rehabilitation of 1800 km of priority roads drawn from tho donor-supported Transport Sector Investment Plan 1988-93; (b) Improvements in resource mobilization and allocation in the transport sector In order to secure adequate maintenance of the rehabilitated network; (c) the abolition of the existing monopoly and administered tariffs in order to reduce the cost of trucklng operations, pass vehicle operating cost savings on to shippers and elicit a supply response from the productive sectors of the economy; (d) promotion of Increased competition and greater role of the private sector in the road construction industry; and (e) strengthening of the public administration of the transport sector. Benefits and Riskss The proposed Transport Sector Adjustment/Investment Program (TSAIP) would support the creation of a deregulated trucking industry operating on a rehabilitated and well-maintained road network which is expected to reduce significantly the cost and price of transport, to elicit a supply response from the productive sectors of the economy and, thus, to act as a stimulant to economic development. The TSAIP is also expected to considerably improve resource mobilization in the transport sector in order to met the cumulative needs of routine road maintenance for the period 1989- 93 and for each year thereafter. The most significant risk lies in a possible lack of sufficient political will to nplement some of the planned policy actions such as Government's commitment to liberalize tbe road transport  - v - industry and to abolish the current road trissport monopoly and adm.nistered tariffs. Another risk to a slower than planned strengthening of Government's Institutions which Vill slow down the implementation of the physical investments of the project.  - vt - Summsra Project tost Estimate and Flnancina Plan VNet of TOxs Oad Dutle) ----USS milIIon----- Project Components Forsin Loel Tots A. INVESTMENTS 1. Clvil Works a. SulIdings Rehabilitation & Construction of MTP/MTAC 4.2 0.2 4.4 Rehabilitation of DAC bulIding 0.8 0.0 O.8 b. Road rehabilitation by contract 45.7 1.9 47.6 e. Road rehabililtation by force eacount 11.8 0.2 11.5 d. Urban roads construction 8.0 0.4 6.4 *. Air transport lnfrastructures 11.6 0.8 11.7 f. Arlports equipant. 06.8 6.5 1.8 2. Ministry of Public Works *. T<ehnical assistance To MTP 2.9 2.9 To projoct manageent unit 1.5 1.5 To OPA 1.0. To ENTP *nd LNBTP 6.6 0.9 b. Training and scholarships to MTP and OFNAR 8.0 8.0 c. Studies, civil work, supervtilon A audits, general studies, road research and audit* 2.0 2.6 Road engineering studies 1.1 1.1 Civil works supervision 8.6 0.1 8.0 8. Ministry of Transport A Civil Aviation a. Technical assistance To UTAC, BNF & OPR 2.7 6.1 2.8 To AIR TCNAD 1.6 1.5 b. Training and scholarshtps 1.8 1.8 C. Studies A audits 0.8 0.6 4. Oneratina Costs a. SNF 0.8 0.1 0.4 b. Project management unit 0.4 0.1 6.5 6. Continoencle a. Physlcal contingencles 7.1 0.4 7.4 b. Price contingencl-o 12.0 6.5 18.1 B. SECL ADJUSTMENT Budget Support Related to Sectornl Adjustmen 2090 2060 C. ROUTINE MAINTENANCE 06.0 21.7 21.7 Total 158.8 20.2 18B.9  - vii - Financina Plan (US$ million equivalent) BDUC 10.6 CCCE 13.1 FAC 3.3 AfDF 11.3 EDP 4.8 IDA 60.0 OPEC 4.5 RFA 22.7 UNDP 0.5 USAID 23.0 Chad Government 26.2 Total 180.0 Estimated IDA Disbursements Bank Fiscal Year 1990 1991 1992 1993 1994 ---- (US$ million)------ I. Investments AnnIAl 8.3 16.6 11.3 1.8 2.0 Cumulative 8.3 24.9 36.2 38.0 40.0 II. Ad1ustment Tranche release 6.0 8.0 6.0 - Cumulative adjustment 6.0 14.0 20.0 20.0 20.0 Total Annual 14.3 24.6 17.3 1.8 2.0 Cumulative 14.3 38.9 56.2 58.0 60.0 Staff Appraisel Reports This Is a combined Staff Appraisal and President's Report Economic Rate of Return: Overall physical investment: 15S  INT,RNATIONAL DEVR .OPUIE ASSOCIAMTIO RENPORlrT ANDaI-T TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOHIENT CREDIT TO TM RIPUBLIC O COD TOR A RAnS SECTOR ADJUS NTNS . 1. I submit the following report and recommundation on a proposed development credit to the Republic of Chad in the amount of SDR 45.4 million (US$60.0 million equivalent) for approval. The proposed credit would bo on standard I)A terms with 40 years maturity and would help finance a transport sector adjustmentlinvestment project. Cofinancing for the project would include BDEAC (US$10.6 million equivalent), French CCCE (US$13.1 million equivalent) and FAC (US$3.3 million equivalent), AfD? (US$11.3 million equivalent), EDF (US$4.8 million equivalent), OPEC (US$4.5 million) RPA (US$22.7 million equivalent), UNDP (US$0.5 million), USAID (US$23.0 million) and the Chad Government (US$26.2 million equivalent). I. THE ICOOIMY AND TUB DJSENT PO 2. The following assessment of the Chadian economy Is based on the Country Economic Memorandum (Report 6785-CD) distributed to the Executive Directors In October 1987, on the President's Report on the Financial Rehabilitation Program (Report P-4806-CD) distributed to the Executive Directors in July 1988, and on missions that visitod Chad in 1988 to review progress of the macroeconomic adjustment program and prepare the proposed transport sector adjustment/investment project. Annex I contains economic Indicators. A. lackaround 3. With an estimated per capita income of US$150 in 1987, Chad Is one of the poorest countries in the world and ranks very low in torms of most welfare-related Indicators. Its economy is highly dependent on the agriculture and livestock sectors, which account for nearly half of Chad's GDP and provide a living for 902 of its population of 5.2 mlflion. Population growth is about 2.5Z p.a., and the ratio of population to arable land is quite favorable compared to other Sahellan countries. During periods of normal rainfall, Chad has been self-sufficient in cereals. Cotton and liv'-'tock are the main export products. Industry contributes about one-fifth of GDP and is dominated by a few enterprises producing, apart from cotton, consumer goods for the domestic market. 4. Chadts economic development has been hampered bys (a) variable climatic conditions, particularly fickle rainfall patterns, which bring about significant variations In agricultural and livestock production; (b) the lack of proven mineral resources, though petroleum reserves may hold some promise for t'Le future; (e) the great internal distances associated with Chad's vast territory; (d) Chad's position in the African continent, which results In long external distances to the nearest oeoan ports and which, coupled  - 2 - with administrative hindrances by neighboring countries' authorities, significantly increases the cost of International transport and weakens Chad's ability to compete in foreign markets; (e) more than two decades of political instability culminating in the 1979-82 war during which industries reduced or suspended operations, banks closed down, public administration ceased to function, and much of the country's infrastructure was destroyed or deteriorated due to lack of maintenance; during this period, GDP declined by 301; by 1987, real GDP had returned to about its 1977 level, but it had to be shared with about one million more people; (f) the severe drought of 1984, whose serious impact on the agriculture and livestock sectors disrupted the post-war economic recovery, though its immediate effects were alleviated by significant amounts of food aid; and (g) the 1985/86 sharp drop in, and subsequent wide fluctuations of, cotton world prices, which had dramatic repercussions on Chad's economy and financial system, since cotton is the single most important activity in Chad's cash economy and its major export. D. Recent Economic Developments 5. The performance of the Chadian economy during the last few years was deeply affected by the crisis of the cotton sector. Domestic cotton prices (in CFAF terms) fell by 671 from mid-1984 to mid-1986 due to a decline in US dollar-denominated world market prices and the depreciatioin of the US dollar vis-a-vis the French franc, to which the CFAF is pegged. During the same period, the expenditures of COTONTCHAD (the cotton parasta;.l) Increased sharply because of poor management. As a result, the company sustained huge losses and accumulated arrears of CFAF 43 billion to the banking system. Despite the downturn in the cotton industry, Chad's real GDP grew 30% in 1985 reflecting a remArkable rebound from the drought, including a doubling in cereal production. However, real GDP declined slightly in 1986/87 due to the continued effects of the cotton crisis and uneven rainfall. Preliminary estimates suggest that substantial real growth took place in 1987/88 (12- 141). 6. In response to the cotton crisis, the Government implemented a rigorous Emergency Program which aimed at reducing costs in the sector. The program covered the 1986187 and 1987/88 crop seasons and included the following measures: reducing input subsidies from 502 to zero over two years, limiting cotton production to 100,000 tons, closing redundant ginneries, exempting COTONTCHAD from payment of export taxes, and substantially reducing the staff of COTONTCHAD. The two-year Cotton Emergency Program achieved its objective: COTONTCHAD's costs were reduced form CFAF 913 per kg fiber in 1985186 to CFAF 495 per kg fiber in 1987188. Cotton fiber is now being produced at about the same cost as in 1983184, prior to the period of lax management of COTONTCHAD, when its costs were similar to those of other West African cotton companies. COTONTCHAD's operating losses have been reduced from CFAF 19 billion in 1985/86 to approximately CFAF 1.9 billion in 1987188.  - 3 - Further steps to control expenditures are expected to lower COTONTCHAD's cost to CFAF 447 per kg fiber in 1988189. In 1986, the Central Bank of the Central African Monetary Union, of which Chad is a member, agreed to reschedule COTONTCHAD's arrears over a period of 10 years with 5 years grace and a two-year moratorium on the payment of interest, and discussions are under way to reduce the debt-service burden resulting from this rescheduling. 7. Chad's already precarious public finances have been aggravated by the cotton crisis. The loss of export taxes on cotton, which was a major source of government revenue, contributed to a decline of nearly 20S in budgetary receipts in 1986. As a result, domestic resource mobilization through the government budget is low, about 82 of GDP in 1988. To partially offset the loss of cotton revenue, the Government increased various Jnsumer taxes. It also reduced current expenditures, which were alred. .y at a critically low level. Nevertheless, the fiscal deficit on current expenditures (commitment basis) increased from 1.62 of GDP in 1985 to 4.72 in 1987. The deficit was financed through budgetary aid and the accumulation of domestic and external arrears. The Government recognised the need to generate additional revenues through broadening the tax base and improving tax administration. In July 1987, as a first step, the cumbersome and complex system of taxing imports of petroleum products was replaced with A unitary consumption tax levied by the Customs services at entry points. Additional measures were taken in November 1987 to improve collection of the new tax, and its yields are increasing. Proposals for a comprehensive reform of the tax structure and its administration have been prepared by the IMF in December 1988. Public investment, estimated at 10-12S of GDP, is entirely financed through external assistance, as is a significant portion of the associated recurrent costs. 8. Chad's external current account deficit increased sharply due mainly to the decline of world cotton prices and the weakening of the US dollar. With export earnings declining by 402 between 1984 and 1986, Chad's current account deficit more than doubled to about 302 of GDP in 1986, but is provisionally estimated at about 162 for 1988. The deficit was financed by an increase of both capital grants and concessional lending. Over this period, the focus of aid also changed from emergency food aid to development assistance, which tripled between :985 and 1987. Budget support also increased in response to the impact of the cotton crisis on public finances. 9. Although, by conventional measures, Chad has a relatively small external debt and a low debt service ratio, it has experienced serious debt- servicing problems. The country's external debt was equivalent to 372 of GDP at end-1987, and is estimated to rise to 462 in 1988; most of it has been contracted by the public sector on concessional terms. In 1985 and 1986, Chad's scheduled debt service was only 72 of export earnings. Actual payments, however, covered only about half the debt service due, and arrears were accumulated which amounted to about US$80 million by end-1987. The Chadian Government repaid arrears to most multilateral creditors and rescheduled arrears to bilateral creditors through negotiations. Scheduled debt service in 1987 and 1988 is in the order of US$13 million. Debt servicing is constrained by inadequate public sector resource mobilization. In 1988, scheduled debt service by the public sector amounted to one-quarter  of budget revenues and, thus, represented a heavy burden for Chad's public finances. C. Macroeconomic Policy Issues 10. Chad's economic growth In the next few years will be hampered by a number of structural issues, which mostly result from the country's low level of development. Among the most important adjustment Issues ares (a) inefficiencies In public sector resource mobilization and expenditures as well as in public administration; (b) restoring the competitiveness of the cotton sector; (c) a pegged exchange rate which has increased the volatility of expt- earnings In local currency terms; (d) an Inefficlent public enterprise sector; and (e) the deterioration of the banking sector. 11. Public Finance. Chad's public finances suffer from weak domestic resource mobilization, insufficient current expenditures, inadequate administration, and a severe debt service problem. The share of government revenue in GDP, which already Was very small, has been further reduced by the cotton crisis. The challenge for the Goverament is to generate additional budgetary revenues and to raise civil administration expenditures to a level compatible with the requirements of the country's development strategy. In recent years, the Government has financed only current expenditures, with military spending and civil service salaries as the two biggest ittems operating expenditures of development-oriented ministries have been slashed to the point where they have been unable to carry out basic functions. Inadequacies exist in tax administration, and budget execution is characterized by unbalance reflected in the exceedingly small share devoted to non-personnel oporating expenditures. Due to low budget revenues, Chad's public sector debt service is too high to be sustainable over the medium term. 12. Future growth will require massive investment in Infrastructure and human capital development. The Government is completely reliant on concessional external financing for its public investment program, as well as for a large portion of the associated recurrent costs. In recent years, public fixed capital formation has equaled about 10-122 of GDP. Domestic savings are highly negative, and private foreign investment is very limited. To use the available external resources effectively, the Government needs to define sectoral strategies, while emphasizing domestic resource mobilization through cost recovery schemes as well. 13. Cotton Sector. The Chadian economy depends heavily on the cotton sector for export earnings, government revenues, and farmers' cash Income. Fundamental policy reforms, which began under the Cotton Emergency Program, are being deepened under the Cotton Restructuring Program (which is part of the Financial Rehabilitation Program). These reforms are expected to help the cotton sector restore its international competitiveness and reduce the financial risks that result from fluctuations in the world market price. COTONTCBAD9s performance already shows some encouraging signs, Including a sharper-than-anticipated reduction in expenditures. This, combined with improved world cotton prices In 1987188 has led to a significant reduction In COTONTCJAD's operating deficit. In addition, measures are being  - 5 - lmplemented to strengthen extension and research in the sector and to Improve productivity at the farm level. Pricing policy is being reformed and is expected to contribute to a restoration of the financial viability of the sector. Finally, the Government is also studying possibilities of diversifying production with a view to reducing the predominance of the cotton sector. 14. Exchante Rate. As a member of the Central African Monetary Union, Chad cannot unilaterally use the exchange rate to restore financial viability in the cotton sector and to iMprove the country's overall balance of payments position. The common currency of the Union, CFA franc, is fully convertible into French francs at the rate of CFAF 50 - PF 1, guaranteed by France. The Union also operates a common Central Bank (BEAC). In the last 15 years, US dollar exchange rate fluctuations vis-a-vis the French franc played a significant role in destabilizing Chad's export earnings. In the absence of a flexible exchange rate policy, the need to step up efforts to bmprove the efficiency of the cotton sector is even stronger. 15. Public Enterprise Sector. The Chadian Government's use of public enterprises and market regulations to control economic activities has been fairly limited in the past. Many of the country's 40 public enterprises are plagued with inefficient operations and investments and have poor financial and administrative management. The accumulation of cross-arrears, particularly between the Government and the public utilities, has also become a major problem. The Chadian Government has no clearly-defined policy, legal framework, or institutional mechanism for evaluating and monitoring public enterprises. In addition, the Government has established a number of monopolies, mostly for public enterprises, and price controls on local production and imports. They have proven largely ineffective given the permeability of Chad's border and the existence of large informal markets. To the extent that these de Sure controls do create distortions and inefficiencies, they will need to be progressively eliminated. 16. Deterioration of the Banking Sector. Since it resumed operations after the 1979-82 war, the banking sector has been constrained in its activities by two factors. First, a large share of bank assets have been frozen since 1983 under a r neral bank moratorium. The moratorium was the result of the forced clos8ng of the banking system In 1980 when the war prevented further operations. Second, more than half of domestic credit has been absorbed by COTONTCHAD and is In arrears. The banking system, thus, has been unable to revolve funds lent previously and, under the rules of the Monetary Union, is constrained in expanding credit. The moratorium was lifted at end 1988, and is not expected to lead to any major liquidity problem. More fundamental issues regarding the structure and operational efficiency of the banking system are being evaluated by the Government and aid donors. D. Macroeconomic and Sectoral Adiustment Proar _ 17. Objectives. In close cooperation with the Fund and the Bank, the Government prepared a Policy Framework Paper 1987-90 (SecM87-547), which the Executives Directors discussed on June 2, 1987. A second year PFP which  -6- covers the period 1989-91 is currently being prepared. The overall objective of Chad's adjustment program, as described in the PFP, Is to alleviate the economy's structural constraints on growth while containing the external and internal imbalances. The program aims at restoring modest economic growth and laying the foundation for more rapid growth in the 19909 by improving resource use in the public and private sectors through appropriate policy design and strengthened economic management. Policy improvements are needed in public finance, agriculture, livestock, the public enterprise sector, the banking system, and the industrial sector, to mention only the sectors that have the most immediate impact on growth. The principal quantitative targets of the adjustment program for the 1987-90 period are tot (a) achieve an average GDP growth of 2X p.a. in real terms; (b) keep the rate of inflation below 51; (c) contain the current account deficit (including grants) to 101 of GDP; and (d) limit the overall balance of payments deficit to an average of SDR 2 million per annum, i.e. 101 of the 1985-86 deficits. 18. The Ongoing Macroeconomic Adiustment Program. The PFP objectives in public finance have been translated into specific policy measures which has been supported through a first-year IMF Structural Adjustment Facility (July 1987-June 1988). The program included measures to: (a) increase revenues by introducing a new system for taxing petroleum consumption; (b) restrain the growth of expenditures through the application of strict budgetary controls, the integration of certain extra-budgetary revenues and expenditures into general Treasury accounting and limiting rocruitment of civil servants; (c) reduce domestic arrears and prevent the accumulation of new ones; and (d) improve external debt management with respect to both borrowing and debt service payment. The Government's financial operations were consolidated by incorporating, for the first time, both current and capital expenditures in the 1988 budget. The program also Includes measures aimed at the financial rehabilitation of COTONTCHAD, measures to contain the current account deficit, and measures to pursue cautious credit policies. A second-year IZFISAF program covering 1989 is currently being prepared. 19. The Financial Rehabilitation Program. Public sector resource management is one of the key tools for influencing economic activity in Chad. Increasing efficiency in the mobilization and use of public sector resources Is therefore a central component of the Financial Rehabilitation Program. To this end, the Government's program includes: (a) reforms of the tax system; (b) initial steps to restructure current expenditures; (c) a rationalization of the public investment program; and (d) the formulation of a public sector financing plan which reflects all these measures as well as the cotton sector reform program described below. This program aims at making more efficient use of public sector resources, thereby allowing the Government to extend the provision of basic services to the population. 20. The Financial Rehabilitation Program includes a comprehensive plan for restructuring the cotton sector and restoring its financial viability. Building on the achievements of the Cotton Emergency Program, which reduced costs and losses within the existing incentives system and institutional framework, the Cotton Restructuring Program (1988/89-1990/91) is introducing fundamental reforms in order to increase efficiency and reduce the financial risks of the cotton industry. As mentioned above, the plan has three  - 7 - componentst (a) a program to increase COTONRTCHAD's efficiency, (b) a cotton development program at the farm level, and (c) a reform of the producer pricing system. 21. Livestock Sector Ad1ustment Progrsm. In addition to reforms In public finance and in the cotton sector, the Governmont has also introduced policy reforms in two other important sectors, livestock and transport. In the livestock sector, a policy reform program has been adopted which aims at increasing the national livestock production on a sustainable basis and improving livestock marketing. The export regime is being reformed through the elimination of export quotas and of the export monopoly of a parastatal, SOTERA; cost recovery for veterinary services will be introduced, and the importation and distribution of veterinary products will be liberalized. 22. Transport Sector Adjustment Proaram. The Government has also formulated a transport sector adjustment/investment strategy, which would be supported by the proposed project. II. MAIN ISSUES IN THE TRANSPORT SECTOR A. The Transport Sector 23. Among the major characteristics of Chad's transport sector are ths predominance of the highway subsector, which accounts for the bulk of domestic and international traffic, and the limited volume of interurban passenger traffic, which was seriously disrupted by war and is still negligible. There is no railway, nor are there any feasible plans to build one. Seasonal inland water transport is possible on a few river sections and certain parts of Lake Chad, though navigability of wtterways has generally been affected in recent years by erratic rainfall patterns. Because of this, a meaningful strategy for Chad's transport sector must be focused on the highway network and the trucking industry. 24. Hithwav Subsector. Chad's highway network consists of about 7,300 km of classified roads (i.e. roads for whose maintenance the central or regional governments are formally responsible) and 24,000 km of unclassifled tracks in rural areas. After many years of inadequate or non-existing maintenance (particularly during the war), the highway network has deteriorated considerably: as an illustration, only 30 km of paved roads are still in good condition out of the 300 km that existed before the war. Rehabilitation or spot repairs are presently being carried out on about 2,000 km of the high priority network, and a capacity to maintain these roads has begun to materialize under projects financed by IDA (Cr. 1728-CD and Cr. 1901-CD) and USAID. The ongoing and proposed Road Rehabilitation and Maintenance Program (the ongoing 2,000 km Emergency Road Rehabilitation Program plus the proposed 1,800 km Road Rehabilitation Program) will re- establish communications between the country's principal cities and will facilitate the flow of goods and people which is essential for economic growth. 25. Present road traffic levels are low, less than 100 vehicles per day everywhere except in the immediate vicinity of the major urban centers, and less than 10 vehicles per day on much of the road network. At present,  domestic traffic between the northern and southern parts of the country has to pass through Cameroon over a distance of 440 km due to the lack of functional road connections between the main centers of these regions during the rainy season. 26. Domestic freight transport officially handles about 265,000 tons per yearl of this, 180,000 tons represents traffic internal to the relatively small cotton zone and 25,000 tons the distribution of petroleum products. Domestic food flows in a normal year are estimated at about 100,000 tons, though it is not reflected in official statistics. 27. Trucking Industry. Road freight transport activities are highly regulated: the Cooperative des Transporteurs Tchadiens (CTT), originally created as a private association of truckers, is now legally empowered to exercise monopoly control on freight allocation and transport, and has also been entrusted with the responsibility for collecting transport taxes on behalf of the Treasury. Road transport tariffs charged by CTT are fixed by the Government on the basis of cost data supplied by CTT itself. The combination of (a) high vehicle operating costs due to poor road conditions; (b) inefficiencies and monopoly price determination in the trucking industry; and (c) inefficiencies resulting from limited competition in the road construction industry have resulted in hith transport costs and prices, which are by far the most important issue in Chad's transport sector and constitute a major obstacle to economic development and economic integration. 28. Air Transport. There is one international airport in Chad, serving the capital city of N'Djsmen., and a handful of smaller airports, of which only those at Abeche, Sarh, Moundou, and Faya-Largeau are in acceptable working condition. The Government holds a majority interest in AIR TCHAD, the national airline, which runs domestic scheduled flights and international charter services. Commercial air traffic is relatively light, but international traffic has grown rapidly since 1982. In 1985, the N'Djamena airport handled about 2,000 international flights involving about 36,000 passengers and 6,500 tons of air freight. Regular domestic air service Is provided by AIR TCHAD between N'Djamens, Sahr, Moundou, Ab6cha, Mongo and, recently, Fays-Largesu. Demand for domestic air transport is highly seasonal (peaking during the rainy season when roads are impassable) and average load factors are quite low. 29. Institutional Framework. The transport sector's institutional framework includes the Ministry of Transport and Civil Aviation (MTAC), the Ministry of Public Works, (MTP) and the Office National des Routes (OPNAR). MTAC is responsible for overall transport sector planning and policy formulation, but has very limited staff and resources. Basic information systems are being established with assistance from the Association under the ongoing Highway Maintenance Project. MTAC consists of a Department of Surface Transport (DTS) and a Department of Civil Aviation (DAC). DTS is responsible for regulating road transport, though some of these functions have been delegated to CTT. DAC is formally responsible for controlling and developing air transport, including AIR TCHAD. Management of meor airports is contracted to ASECNA. MTP, through its Public Works DepartmeuLt, oversees the planning and execution of road works and is also responsible for traffic  - 9 - counts and the analysis of traffic flows. The Association and PAC are helping develop MTP's capacity for road planning, design and development, evaluation of pre-investment studies for highway and supervision of work performed by contractors. OFNAR, an autonomous public agency under the supervision of MTP, is responsible for the maintenance of the national network; it receives extensive assistance from the Association and USAID. 30. The Road Construction Industry. Chad's domestic construction industry is very limited in size and scope, and includes only about ten contractors with some experience mainly in building construction, although an additional number of small contractors carry out building repairs and other minor works. However, local firms with the requisite experience to undertake road rehabilitation or other major civil works are few and foreign- owned. Government agreed under the Road Reconstruction Project (Cr. 1901 CD) to make arrangements to privatize the quarry operation, which was under the responsibility of OFCA, a government-owned autonomous agency recently liquidated, but the bulk of road maintenance is carried out by OFNAR under force account which encourages inefficiency in resource use and high costs. B. High Traspsort Costs 31. Some determinants of high transport costs in Chad cannot be modified: (a) the long distances within Chad and between Chad and the nearest ocean ports; in particular, imports and exports have to be transported over 1,700 km between N'Djamena and the Atlantic Ocean; (b) the low density of population and economic activity, which generates relatively modest traffic levels and rules out lower- cost modes of overland freight transport (e.g., railway, whose justification can only be predicated on large traffic volumes); and (c) Chad's topography and climate do not allow the development of low- cost inland water transport. 32. Other determinants of the high cost of transport can be modified, and are addressed in the Transport Sector Adjustment/Investment Strategy: (a) Poor condition of the road network. Chad's road network, which has traditionally suffered from insufficient maintenance, seriously deteriorated during the war period 1979-82. The bulk of the 7300 km of classified roads fell into disrepair, and certain parts of the country are virtually inaccessible during the rainy season, with a detrimental effect to economic development. In addition, the poor condition of the road network leads to accelerated vehicle wear and tear and, hence, high transport operating costs. (b) Monopoly-Induced Inefficiencies in the Trucking Industry. The monopoly structure of the trucking industry encourages inefficiencies in the provision of transport services, hence high costs that are passed on to consumers in addition to the monopoly  - 10 - rent. Examples of these inefficiencies are inadequate Investment decisions (e.g., vehicle acquisition) that may lead to overcapacity, and mismatches in freight allocation that may result in less than optimum quality of service. (c) High cost of road rehabilitation and maintenance. Until recently, the typical cost of road rehabilitation (excluding taxes) has been about CFAF 20 million (US$67,000) per km of unpaved road, and about CFAF 96 million (US$320,000) per km of paved road. These high costs reflect a combination of factors: good-quality construction materials are costly because they are scarce, they have to be transported over long distances, and there is little scope for competition In the quarrying industry; the limited size and skills of the nascent local construction industry have led to excessive use of force account by Government agencies for road maintenance; and insufficient competition among foreign construction firms in connection with road rehabilitation. Id) Poor Transport Investment Plannint and Proiect Implementation Capacity. The three major institutions in the sector (MTAC, MTP and OFRAR), have received in recent years technical assistance from aid donors. While a measure of progress has already taken place, effective institutional strengthening will require more time. 4TAC still has very limited staff and resources with which to carry out sound investment planning and policy formulation; the lack of clear investment priorities has been partly responsible for lower-than- desirable maintenance expenditures. MTP and OFNAR are also constrained by lack of resources and, particularly, by cumbersome procurement procedures that result in delays in project Implementation. (e) Required Constraints on Traffic Movement. Technical considerations require that traffic on unpaved roads (i.e. the bulk of the highway network) be interrupted after each rainfall until the road surface has dried. This practice, which is required to reduce axle load damage, tends to increase the generalized cost of transport and contributes to higher demand for high-cost air travel during the rainy season. C. High Transnort Prices 33. The present structure of the trucking industry results in monopoly price determination and economic rent captured by truckers. Official road freight rates are sanctioned by the Ministry of Transport and Civil Aviation on the basis of cost data supplied by CTT. Available evidence suggests that Chad's regulated freight rates are significantly higher than those found in other landlocked, Sahelian countriest for instance, the freight rate applicable to transport on the paved or unpaved roads in the southern part of the country is CFAF 44 (about USC15) per ton-km in Chad, compared to CFAF 25 (about USd8) per ton-km in Mali and Niger. Chad's annual transport bill, i.e. the total amount truckers charge shippers, is estimated at about CFAF 9,000 million (about US$30 million), or 3.21 of GDP. The main determinants  - 11 - of the high price of road transport are: (a) the high cost of building and maintaining roads, which reflects in part the lack of competition in the road construction industry, (b) the high cost of transport operations, which reflects high vehicle operating costs and the inefficiencies allowed by CTT's monopoly powers; and (c) over and above all costs, the economic rent captured by truckers protected from competition under present regulations and expressed in Government-sanctioned freight rates. III. T=E TRANsPoRT SECTOR ADJUSTUENTIINVEST?ENT PROGRAM 34. Two IDA operations are currently under implementation in Chad's transport sector: the Highway Maintenance Project (Cr. 1728-CD, SDR 17.1 million, 1986) and the Road Reconstruction Project (Cr. 1901-CD, SDR 34.4 million, 1986). They have been designed to help the Government carry out its post-war reconstruction effort and strengthen its road rehabilitation and maintenance capability. While focused on short-term needs, they have provided a vehicle for dlalogue between the Government and the Association in connection with major policy issues and longer-term options. This dialogue gained momentum and breadth at the February 1988 meeting of Government officials and aid donors, during which the former presented, and the latter agreed in principle to support a comprebensive Transport Sector Adjustment/Investment Strategy 1/ consisting of a Transport Sector Investment Plan 1988-93 and a package of major policy reforms. The Association has played a significant role in coordinating foreign aid involvement in Chad's road rehabilitation effort, which has become the centerpiece of donor assistance in the transport sector. 35. In the medium to long term, Chad's economic growth will continue to depend essentially on agriculture and livestock (which together account for nearly half of GDP), with the possible exception of the development of petroleum reserves. The performance of the agriculture and livestoci- sectors depends largely on climatic conditions, the cost of production and the cost of distribution. The latter two are determined by several factors, among which the cost and price of transporting inputs and outputs are particularly important. Transport costs and prices in Chad are significantly higher than in neighboring countries because of (a) high vehicle operating costs due to poor road conditions; (b) inefficiencies and monopoly price determination in the trucking industry; and (c) inefficiencies resulting from limited competition in the road construction industry. 36. To reduce the cost and price of transport, the Government has formulated a Transport Sector Adiustment/Investment Strategv (TSAIS), which would be supported by the proposed project. The TSAIS consists of an integrated packave of major policy reforms and investments whose main objectives are: 1/ Republique du Tchad, Ministere du Plan et de la Cooperation, Reunion de Suivi de la Table Ronde de Geneve de Decembre 85, Secteur des Transports. Presentation de la Stratei$e et du Proaramme de Develo,vement, 2 vols, Fevrier 1988.  - 12 - (a) to rehabilitate the priority road network in order to reduce vehicle operating costs; (b) to improve resource mobilization and allocation in the transport sector in order to provide for the adpquate maintenance of the rehabilitated network; (c) to abolish the existing road transport monopoly and administered tariffs in order to reduce the cost of trucking operations, pass vehicle operating cost savinga on to shippers, and elicit a supply response from all the productive sectors that require transport inputs; (d) to increase competition and the role of the private sector in the provision of road construction materials and the road construction industry in order to reduce the cost of road rehabilitation and maintenance; and (e) to reorganize and improve the public administration of the transport sector, particularly in connection with policy formulation, investment planning and programming, supervision, and procurement. 37. The Transport Sector Adjustment/Investment Strategy outlined above is an integrated package since the investments and policy reforms included in it must be carried out concurrently in order to yield the full extent of potential benefits. Without investments in road rehabilitation and maintenance, vehicle operating costs would remain high. Without liberalization of the road transport industry, transport cost savings realized by truckers would be captured by them as an economic rent instead of being passed on to shippers and the economy at large. Without increased competition in road construction, there would not be any cost savings in road rehabilitation and maintenance and, as a result, more resources would be needed to provide a given quantum of transport infrastructure. Given Chad's landlocked situation, the reduction in the cost and price of transport supply has a greater developmental impact than in countries where the incidence of transport costs and prices is less pronounced. In particular, the creation of a deregulazed trucking industry, free from administered tariffs, operating on a rehabilitated and well-maintained road network is expected to reduce significantly the cost and price of transport, to elicit a supply response from the productive sectors of the economy and, thus, to act as a stimulant to economic development. A. Rehabilitation of the Priority Road Network 38. Chad's most important physical investment objective in the post- war era is the rehabilitation of its transport infrastructure, especially its 7300 km of classified roads. In view of existing resource constraints, this undertaking must be phased ovez a period of time. The Government's Transport Sector Investment Plan 1988-93 aims at completing, by 1993, the rehabilitation of a 3800-km priority road network. The priority road network  - 13 - has been defined as the smallest subset of classified roads providing adequate links between N'Djamena and major domestic centers of economic activity, and between Chad and neighboring countries. The Association and other aid donors actively support the rehabil'.itation of the priority road network, about 2000 km of which have been (or are being) rehabilitated. The remainder, or 1800 km, constitute the bulk of the physical investments under the proposed Transport Sector Adjustment/Investment Project. 39. The rehabilitation of the priority road network will be carried out on the basis of adequate road desif.n standards which, given soil conditions and traffic forecasts, should be consistent with the minimization of discounted capital and recurrent costs over the lifetime of the road, and should also take into account practical considerations such as the likelihood that timely resources will be available for future road maintenance. On the basis of a recent soil study and keeping in mind resource mobilization constraints, the Government has prudently adopted basic standards of road construction and maintenance that require a higher initial investment but reduce the need for future maintenance. B. Improved Resource Mobilization and Allocation in the Transport Sector 40. rhe second objective of the Transport Sector AdjustmentlInvestment Strategy is thue, once rehabilitated, priority roads should not fall back into disrepair. The large outlays required for the Road Rehabilitation Program are only justifiable on the assumption that rehabilitated roads will be adequately maintained during their lifetime. To attain this objective it is necessary to improve resource mobilisation and resource allocation in the transport sector, and to establish an effective road maintenance capacity in the private and public sectors. 41. Improved Resource Mobilization in the Trans2ort Sector. The main feature of Chad'a resource mobilization effort in the transport sector is the Unified Tax on petroleum products (established on July 31, 1987). As an interim measure, and awaiting the strengthening of the Ministry of Finance, the petroleum tax is collected by OFNAR. Although the tax rate is high (about 411 of official retail prices of gasoLine and diesel fuel), realized tax revenues have been relatively low On the one hand, a significant portion of Chad's demand for gasoline and diesel fuel is met by illegal imports which evade taxes and are unlikely to be brought under effective control in the near future. On the other hand, some of the large parastatals that consume legally-imported petroleum products (e.g. STEE, SONASUT and COTONTCHAD) as well as the oil companies that import them, are in arrears on their tax payments. As a result, of the CFAF 8.3 billion tax receivables (about US$27 million) in 1988, CFAF 5.7 billion (US$19 million) or 62X have been collected. 42. Currently, domestic resources mobilized by the Government for the sector and in particular for road maintenance are augmented with funds from the Association, USAID and FED under ongoing operations. In the medium term, however, funding will increasingly depend on the Government's improved resource mobilization effort, for which it has at its disposal three separate or combined alternatives:  - 14 - (a) to imorove getroleum tax collection performance by strengthening the central Goverment's authority vis-a-vis parastatals and oil companies currently in arrears, consistent with a broader ongoing effort to settle cross debts among Government agencies; (b) to Increase petroleum tax rates, though the room for maneuver is limited given that official retail prices of petroleum products in Chad are already among the highest in Africa (US$3.50 and 3.25 per gallon of gasoline and diesel fuel, respectively), and higher tax rates may simply result in larger amounts of illegal imports; and (e) to create new road user chartes that are as closely related to costs as possible and that are easy to administer. 43. It was agreed during appraisal that the Government will emphasize iWproved petrol-um tax colleetion to cover the needs of routine road maintenance for the rehabilitated priority road network. Government is committed to further improve collection performance and has assured IDA (as stated in the Statement of Sector Policy) that adequate amounts from petroleum tax will be made available to OFNAR to cover routine road maintenance expenditures over the 1989-93 period. 44. Given Chad$s overall domestic resource constraints, there are realistic lImits to how much can be mobilized domestically. It is expected that aid will continue to be required in the medium term to finance the equipment component of routine maintenance (about CFAF 2.4 billion or US$8 million in 1993) and the entire oudlay required for periodic maintenance (about CFAF 4.5 billion or US$15 million in 1993). 45. Imoroved Resource Allocation in the Tran_port Sector. At present, petroleum taxes account for about 18S of the Government's tax revenues, though they would amount to 30S If fully collected. The Ministry of Finance currently allocates 19.5% of taxes collected on gas and diesel fuel to OFNAR; the rest goes to the Caisse Autonome d'Amortissement, the Caisse de Retraites, and to the Treasury. Accordingly, OFNAR would have been entitled to about CFAF 590 million (about US$2 million) In 1987188. However, thanks to the Importance attached by the Government to road maintenance, OFPAR received about CFAF 790 million (about US$2.6 million), which is sufficient to fund its present road maintenance effort. In other words, the Government allocated to OFNAR some of the revenues that would have normally gone to the Treasury. 46. Over the next few years, OFNAR's resource requirements for routine road maintenance are expected to grow rapidly on account of the increasing length of the rehabilitated priority network. Annual routine maintenance needs (including taxes but excluding equipment) are expected to grow from about CFA? 700 million (about US$2.3 million) in 1988 to about CPAF 2.6 billion (about US$8.7 million) in 1993. The c.mulative funding required during the period 1989-93 is estimated at CFAF 6.5 billion (about US$21.7 million). Present resource mobilization and allocation mechanisms are inadequate to provide OFNAR with these funds from the petroleum taxes only.  - 1S - Under existing arrangements and without significant policy reform, OFNAR's cumulative resource gap would reach about CFAF 2.0 billion (about US$6.7 million) over the period 1989-93, which would need to be bridged with general revenues f-om the Treasury, as indicated below (in CFAF million)l Cumul. 1989 1990 1991 1992 1993 1989-93 Resources Required 833 705 936 1415 2608 6497 Expected Allocation without reforms 1/ 674 772 884 1012 1158 4500 Expected Gap without reforms 1/ 159 (67) 52 403 1450 1997 Expected Allocation with reforms 21 797 1053 1366 1564 1790 6570 1/ This assumes no improvement in collection performance (55X) and no increase in OFNAR's share of petroleum tax revenues (19.S2). 21 This assumes an increase in collection performance from the present 552 to 65% in 1989, 75% in 1990, and 852 in 1991-93. 47. Under the provisions of the Transport Sector Adjustment/Investment Strategy, the Government will improve resource mobilization and allocation mechanisms in the transport sector in orders (a) to fund OFNARs routine maintenance expenditures; and (b) to meet OFNAR's cumulative resource gap over the period 1989-1993, after which 0?NAR is expected to be self- sufficient in the sense that its needs would be met without resorting to the Government's general revenues. With assistance from the Association and the International Monetary Fund, the Government has begun efforts to iVprove its tax collection and its budgeting procedures 3nd practices. The Government has agreed that, until these procedures and practices are operational, funds allocated to road maintenance will be fed into a Road Fund administered by OFNAR, and will be shown as a memo item in the Government's budget. The IMF agrees with this proposal and has called for active monitoring of the execution of the Road Fund during project implementation, the details of which are covenanted in the Credit Agreement. C. Liberalization of the Road Transport Industr 48. The road transport industry is characterized by a high degree of regulation and lack of competition. The Coop rative des TrawWorteurs Tchadiens (CTT) is the cornerstone of this regulatory framework. In the years following independence, CTT was created to help organize small Chadian transporters to compete with Unitchadienne, a large foreign-owned transport company. Both entities operated under a system of international freight allocation that was increasingly favorable to CTT and eventually forced Unitchadienne to cease operations. In 1972, CTT assumed de facto control over the international frelght assigned to Chadian transporters under International Transit Agreements with neighboring countries. In 1976, CTT's monopoly attributions were legally extended to domestic transport, with the  - 16 - sole exception of companies --such as COTONTCHAD-- that could be authorized by the Government to transport their own freight. Over time, this loophole led to an increasing volume of freight transport outside the scope of CTT (particularly petroleum products and, to a lesser extent, cotton and sugar). In 1987, the Government passed legislation effectively closing the loophole and giving CTT an absolute monopoly over all freight transport, international and domestic. Also in 1987, the Government dissolved CTT's Board of Directors and established a Managing Committee whose members are appointed by the Government, effectively placing CTT directly under its control. 49. Since CTT is the road freight transport monopoly, it is legally entitled to centralize all relevant supply and demand. On the one hand, all truckers are required to become members of CTT and to indicate to CTT their availability. On the other hand, all shippers are required to indicate their transport needs to CTT. On the basis of information received by truckers and shippers, CTT matches freight transport demand and supply according to internal procedures that have been criticized by some CTT members (unhappy with the distribution of available freight) and by some shippers (disappointed with the quality of service). CTT charges freight rates established by the Ministry of Transport and Civil Aviation (on the basis of cost data supplied by CTT itself). It keeps a commission equivalent to 101 of invoiced amounts, which some members complain is too high for the services provided by CTT. CTT also collects transport taxes on behalf of the Government (performance on this is not clear) and has occasionally received significant subsidies from the Government for truck purchases. While some small shippers and truckers may (illegally) negotiate freight transport contracts outside the framework of the CTT, large shippers (including major parastatals such as COTONTCHAD) have no alternative to the CTT. The existence of a captive market encourages Inefficiency (and high costs), and the lack of competition among truckers allows them to capture an economic rent (thus high prices). The financial status of CTT was reviewed by an international auditor who produced a proforma statement for fiscal year 1988. Inadequate accounting and irregularities had so far hidden the extent of financial problems, and CTTvs current negative networth and its deficient earning capacity leaves no alternative to its liquidation. The Government took the first step in that direction by nominating a curator in March 1989 with a mandate to eventually close the company. 50. The third component of the Government's Transport Sector Adjustment/Investment Strategy aims at not only reducing transport costs but also passing the savings on to shippers and consumers of transported goods. In the absence of the latter, the developmental impact of a transport cost reduction vould be jeopardized. During negotiations, the Government agreed to implement a major policy reform package focusing on the liberalization of the road transport industry: (a) The abolition of CTT's monopolY attributes i.e., a return to free contract negotiation between shippers and truckers and CTT's liquidation. During negotiations, agreement was also reached that, before Board Presentation, the Government will enact legislation abolishing CTT*s monopoly power and will proceed to CTT's  - 17 - liquidation as a condition of first tranche release (consistent with (b) below). (b) The creation of a National Freight Bureau (BNF) operating under the overall supervision of MTAC as a non-profit clearinghouse making publicly available all demand and supply information provided by shippers and truckers. On the basis of this information, shippers and truckers will enter into freely-negotiated trsasport contracts, which will be recorded by BNF for statistical purposes. If required by the Government, BNF will collect road transport taxes on behalf of the Treasury. During negotations, agreement was reached that, before Board Presentation, the Government will enact legislation creating BNF with a mandate, resources and staffing satisfactory to the Association. The effective start-up of BNF will be a condition of first tranche release (consistent with (a) above). To accommodate the Government's concern to help the small truckers adjust to the freight transport liberalization, it was agreed that during a transitory perioo. of one year following the effective elimination of CTT's monopoly, 25Z of the road freight (in tlkm) would be negotiated by public advertising at BNF and on a first-come-first-serve basis. (c) A two-stage liberalization of freight tariffs over a period of one year. As a first step, obligatory fixed tariffs would be replaced by tariff floors and ceilings and, as a second step, all Government intervention in tariff determination ould be abolished. 51. On the basis of available data on the structure of Chad's road transport industry, it is expected that the proposed liberalization measures will result In significant reductions in the cost and price of road transport. D. Increased Role of the Private Sector in the Road Construction Industry 52. The fourth objective of the Transport Sector Adjustment/Investment Strategy is to reduce the cost of road construction and maintenance. To attain it, the Government has decided to promote private sector participation in road rehabilitation and maintenance and to liberalize the quarrying industry. 53. Promotion of the Private Sector in Road Rehabilitation and Maintenance. In response to the situation described in paragraph 30, NTP has agreed (a) to limit the growth of the public sector and encourage the private sector; (b) to promote more extensive international competitive bidding for road rehabilitation; (c) to adopt dated targets regarding an agreed proportion of road maintenance work to be carried out by private contractors; and (d) to implement a plan to assist small and medium-sized contractors in connection with organization, management, financing and training to. enable them to t