Mexico - Highway Rehabilitation and Traffic Safety Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 11720-ME STAFF APPRAISAL REPORT lMICO HIGHWAY REHABILITATION AND TRAFFIC SAFETY PROJECT MAY 18, 1993 Country Department II Infrastructure and Energy Operations Division Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Peso (Mex$) US$1.00 = Mex$3,095 (February 23, 1993) FISCAL YEAR January 1 to December 31 UNITS OF WEIGHTS AND MEASURES Metric British/US Equivalent 1 kilometer (kin) = 0.62 mile (mi) 1 meter (m) = 3.28 feet (ft) 1 gram (g) 0.0022 pound Ob) 1 kilogram (kg) = 2.20 pounds ab) 1 ton = 2,205 pounds 1 liter (lt) = 33.28 fluid once (fl. oz) ABBREVIATIONS AADT Annual Average Daily Traffic BANOBRAS National Bank for Public Works and Services (Banco Nacional de Obras y Servicios Piblicos) CAPUFE Federal Road and Bridge Toll Authority (Caminos y Puentes Federales de Ingresos y Servicios Conexos) CGP General Coordination for Planning (Coordinaci6n General de Planeaci6n) CVSA North-American Commercial Vehicle Safety Alliance DGCCOP General Directorate for Maintenance of Public Works (Direcci6n General de Construcci6n y Conservaci6n de Obras Ptblicas) of SCT DGCF General Directorate for Federal Highways (Direccion General de Carreteras Federales) of SCT DGCS General Directorate for Training (Direcci6n General de Capacitaci6n Sectorial) of SCT DGMPI General Directorate for Preventive Medicine in Transportation (Direcci6n General de Medicina Preventiva en el Transporte) of SCT DGP General Directorate for Planning (Direcci6n General de Planeaci6n) of SCT DGTT General Directorate for Land Transport (Direcci6n General de Transporte Terrestre) of SCT DPE Directorate for Programming and Evaluation (Direcci6n de Prograrnaci6n y Evaluaci6n) of DGCCOP EEC European Economic Commission ERR Economic Rate of Return FHN Federal Highway Network FNM Mexican Railways (Ferrocarriles Nacionales de Mexico) GDP Gross Domestic Product  FOR OMCIAL USE ONLY HDM Highway Design Model BRRM Highway Rehabilitation, Resurfacing and Maintenance ICB International Competitive Bidding IDB Interamerican Development Bank IEPS Special Tax on Production and Services (Impuesto Especial sobre Producci6n y Servicios) IMT Mexican Transport Institute (Instituto Mexicano de Transporte) INEGI National Institute of Statistics, Geography and Information (Instituto Nacional de Estadfsticas, Geograffa e Informaci6n) ISAN Tax on New Vehicles (Impuesto sobre Automoviles Nuevos) ISR Income Tax (Impuesto sobre la Renta) IVA Value Added Tax (Impuesto sobre Valor Agregado) KPH Kilometers per hour (Kil6metros por horas) LCB Local Competitive Bidding NAFTA North American Free Trade Agreement NBF Not Bank Financed NDP National Development Plan (Plan Nacional de Desarrollo) PFCP Federal Highway and Port Patrol (Policfa Federal de Caminos y Puertos) PM Mexican Ports Authority (Puertos Mexicanos) SAHOP Secretariat for Human Settlements and Public Works (Secretarfa de Asentamientos Humanos y Obras Piblicas) SCT Secretariat for Communications and Transport (Secretarfa de Comunicaciones y Transportes) SECOGEF General Secretariat of the Comptroller of the Federation (Secretarfa de la Contralorfa General de la Federaci6n) SEDESOL Secretariat for Social Development (Secretarfa de Desarrollo Social) SEDUE Secretariat for Urban Development and Ecology (Secretarfa de Desarrollo Urbano y Ecologfa) SHCP Secretariat for Finance and Public Credit (Secretarfa de Hacienda y Credito Piblico) SICC Highway Maintenance Management System SIMAP Mexican Model for Highway Project Analyses SIPUMEX Mexican Model for Bridge Management System SISTER Simulation Model of Highway Maintenance Strategies (Simulation de Strategies d'Entretien Routier) SPP Secretariat for Programming and Budgeting (Secretarfa de Programaci6n y Presupuesto) VOC Vehicle Operating Costs | 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.   MEXICO HIGHWAY REHABILITATION AND TRAMIC SAFETY PROJECT STAFF APPRAISAL REPORT CONTENTS rae No. ABBREVIATIONS LOAN AND PROJECT SUMMIARY ........................................ i I. THE TRANSPORT SECTOR ......................................... 1 A. Restructuring the Mexican Economy and the Transport Sector ..................................... I B. Institutional Framework and Sectoral Planning ..................... 3 iI. BANK EXPERIENCE AND LESSONS LEARNED .......................... . 4 A. Main Issues and Lessons in the Highway Sector ................... 4 B. Rationale for Bank Involvement .............................. 8 m. THE HIGHWAY SECTOR ............................. 8 A. Sector Issues .......................................... 8 B. The Highway Network ................................... 13 C. Administration of the Primary Highway Network .................. 15 D. Condition and Performance of Federal Highways ................... 17 E. Rehabilitation, Resurfacing and Maintenance of Federal Highways ... ..... 18 F. Highway Finance ...................................... 22 IV. THE PROJECT . ................................................ 24 A. Project Origin ........................................ 24 B. Project Objectives ...................................... 24 C. Project Description ..................................... 25 Institutional Strengthening Component ........................ 25 Highway Rehabilitation, Resurfacing and Maintenance Program .... .... 29 Traffic Safety Component.... ; ...... 32 D. Project Cost and Financing ..................... 32 The report is based on the findings of a World Bank appraisal mission which visited Mexico from Fbnaaoy 2 to 23, 1993. The mission was composed of Mr. Enrique PiniUa (Tsk ManW), Me. Eqaeuza Ordlan (LA21E); Mrs. Katherine Sierra, (LACVP); Mr. Ferene Molnar (LEGIA); and Meours. Hey Stinr and Manuel GarcIa (Consultants). Mrs. Alba M. Renero assisted in the production of the report. Mr. Edilberto Segura is the Country Department Director, and Mr. Ricardo Halperin is the responsible Division Chief. Messrs. William Matthey (LA41E) and Enn Vasur (EC2IN) acted as peer reviewers.  PafNo. V. PROJECr EXECMtION .......................................... 34 A. Subproject Selection, Preparation,and Evaluation .34 B. Conditions and Procedures for Procurement of Subprojects .36 C. Implementation and Monitoring .37 D. Accounts and Audits .40 E. Disbursements .40 F. Economic Justification .40 Highway Rehabilitation and Resurfacing .42 Bridge Rehabilitation and Improvement .42 Hazardous Road Locations Improvement .43 G. Project Environmental Aspects .43 H. Project Risks .43 VI. AGREEMENTS REACBED AND RECOMMENDATIONS ...... ............... 44 A. Agreements Reached During Negotiations ...... ................. 44 B. Condition for Loan Effectiveness ......... .................... 46 C. Events of Default ....................................... 46 D. Recommendations ...................................... 46 CHARTS Chart 1-1: Organization of the Secretariat for Communications and Transport . . 47 Chart 1-2: Organization of SCT's General Coordination of Planning .48 Chart 3-1: Highway Maintenance Organization .49 TABLES Table 3-1: Indicators of Highway Demand, 1970-1990 .14 Table 3-2: Classification of Highways .15 Table 3-3: Federal Highway Network Design Criteria and Standards .16 Table 3-4: Federal Highways Pavement Condition Inventory, 1991 (km) .18 Table 3-5: Condition of Priority Bridges, 1992 .19 Table 3-6: SCT's Highway Maintenance Staffing Pattern, 1986-1991 .20 Table 3-7: National Highway Program 1989-1994 .23 Table 4-1: Highway Rehabilitation and Maintenance Program 1993-1996 .31 Table 4-2: Project Component and Estimated Costs (Tentative) .33  hae No. Table 4-3 Summary of Project Cost and Financing Plan ..... .......... 34 Table 5-1: Procurement Arrangements ........ ................. 38 Table 5-2: Initial Allocation of Loan Proceeds ...... ............... 41 FIGURES Figure 2-1: Price Escalation of Civil Works, Consumer Price Index, (INPC) Exchange Rate and Minimum Salary (1980-1990) .... ...... 5 Figure 3-1: Development of the Road Network ...... .............. 13 Figure 3-2: Federal Highway Expenditures 1983-1991 (Billion Mexican Pesos of 1990) ............................... 18 Figure 3-3: Assessment of DGCCOP's Capabilities ...... ............ 21 Figure 3-4: Evaluation of Federal Highway System Investment .... ....... 22 Figure 4-1: Comparison of Strategy Results (1993-2007) ........ ....... 30 ANNEXES Annex A: Bank Experience and Lessons Learned ....... ............ 50 Annex B: Training Program .............................. 55 Annex C: Highway Maintenance Account Balance and Road User Charges ............... 64 Annex D: Road Traffic Safety ............... 70 Annex E: Institutional Modernization of SCT's Highway Maintenance Directorate ........................ 89 Annex F: Highway Maintenance and Rehabilitation Program .... ....... 94 Annex G: Highway Maintenance Policy Statement and Action Plans ...... 106 Annex H: Technical Assistance and Consulting Services .... ......... 115 Annex I: Schedule of Estimated Disbursements .................. 117 Annex J: Selected Documents Available in the Project File .... ....... 118 HAP: IBRD 23709   MEXICO EI[GHWAY REHABILIIATION AND TRAFFC SAFErY PtROIECT LOAN AND PROJECT SUMMARY Borrowver: Banco Nacional de Obras y Servicios Pdblicos, S.N.C. (BANOBRAS) Guarantor: United Mexican States EXcecutId= Secretarfa de Comunicaciones y Transportes (SCI), and Agendes and the users of the federal highway system. Benefidaries: Beneficiary: Secretarfa de Comunicaciones y Transportes (SCI) Amount: US$480 million equivalent. Tenns: Repayment in 15 years, including 5 years of grace, with interest at the Bank's standard variable rate. Onlending Loan proceeds to be relent to Government (for SCI) on the same terms and Tem: conditions as the Bank loan, with the Government bearing the foreign exchange and interest rate risks. roject The project aims to: (a) protect and enhance past investments in the federal Objectives: highway network through investments in rehabilitation and resurfacing of paved highways; (b) improve highway rehabilitation, resurfacing and maintenance (HRRM) planning by strengthening the institutional capacity of SCT's highway maintenance directorate, DGCCOP; (c) support measures to improve funding for HRRM; (d) reduce transport costs through improvements in traffic safety and more efficient traffic flow on the federal highways; and (e) support further policy improvements through (i) studies on road financing, (ii) development and implementation of a computerized data base for the transport sector, (iii) preparation of project planning and evaluation manuals, and (iv) improved consideration of environmental factors in highway maintenance. Project The project objectives would be achieved through the implementation of: Descril on: (a) an institutional strengthening component for improving transport sector planning and policies (US$7.27 million); (b) a comprehensive, four year HRRM program for the federal highway system (US$1,532.48 million); and (c) a road traffic safety program (US$20.25 million). The itutional s hen component would include specific measures and actions to improve: (a) sector planning and coordination, especially for HRRM; (O) HRRM funding and budget preparation; (c) sustainability through development of a coherent framework for road sector financing; (d) control of truck  ii overloading through the issuance of revised vehicle weight and size regulations and a program for their implementation; (e) specifications for HRRM works, to include quarry management and pollution control of construction equipment; (f) the system for truck driver education, testing and licensing; and (g) training of sector staff. The four-year federal HRRM program would include about 27,000 km of highway rehabilitation and resurfacing, improvement and rehabilitation of bridges and depots maintenance, replacement/rehabilitation of equipment, and consultancy services. The road traffic safety program would include improvement of some 350 hazardous road locations. This program would also finance the purchase of equipment for the new licensing and vehicle inspection system and for the preventive medical unit, road safety studies and information campaigns, a vehicle standards study and an international traffic safety seminar. Benefits: The project's main direct benefits would be to reduce road transport costs by protecting the condition of the federal highways and by reducing the rehabilitation backlog on the most trafficked highways. Given that about 60% of the highway network is in poor condition, rendering road transport expensive, the project would yield substantial returns (the ERR of most highway rehabilitation subprojects will be in excess of 25%). Indirect benefits, not easily quantifiable, include improved highway safety and better institutional performance. The strengthening of DGCCOP would ensure better management of limited public funds. Although the project is not a poverty- focused operation, its benefits would accrue to the whole population. Risl&: The main risks are of inadequate budget allocations and/or of resource misallocations in future years. To mitigate these risks, satisfactory funding agreements for 1993 were sought before appraisal. The proposed annual reviews would give the Bank an opportunity to verify if the future annual budgets are within the levels set forth in the highway maintenance strategy. The successful implementation of the highway maintenance strategy, of the pavement and bridge management systems, and of the proposed annual review of SCT's road investments would enable better-substantiated decisions, and SCT technical staff would have the tools to argue their case with decision makers regarding budget allocations. In addition, the expected improved macro-environment and fiscal situation would mitigate the above risks. There is also a risk of delays and changes in the institutional strengthening program in view of the change of administration in late 1994 and the inherent difticulties in getting an established institution such as SCT's Maintenance Directorate to adopt a planning and strategic role and to delegate the operational work to SCT's regional centers. To ensure commitment to objectives and minimize these risks, project preparation was accomplished with active participation of government officials and, to the extent possible, up-front actions.  iii Project Cost Summary: LOCAL FOREIGN TOTAL (In Million of U.S. Dollars) Highway Rehabilitation, Resurfacing and Maintenance 848.60 583.62 1432.22 Traffic Safety 9.90 8.98 18.88 Institutional Strengthening 3.81 2.98 6.79 Total Base Costs 862.31 595.58 1457.89 Price Contingencies 60.40 41.41 102.11 Total Project Costs 1/ 922.71 637.29 1560.00 Financing Plan: LOCAL FOREIGN TOTAL (In Million of U.S. Dollars) Government of Mexico 922.71 157.17 1079.88 IBRD - - 480.00 480.00 Bilateral programs (Sweden, U.K. and France) . 0.12 0.12 Total 922.71 637.29 1560.00 Estimated Bank Disbursemnent Bank FY 1994 19 19 1997 19 1999 2 (In Million of U.S. Dollars) Annual 78 W/ 66 77 39 76 77 67 Cumulative 78 144 221 260 336 413 480 a/ A special account would be opened in the Central Bank, with an initial deposit of up to US$25 million equivalent. Retroactive financing of up to US$30 million equivalent is proposed for expenditures incurred after November 1, 1992. Economic Rate of Return: The ERR of most of the highway rehabilitation works, the main project component will be in excess of 25 %, except for a number of subprojects for which the accumulated total investment does not exceed 10% of the budget for the year in which such subprojects are being considered; such portion of subprojects would require an ERR of at least 12% each. 1/ Physical contingencies of about 15% are included in the base cost. Identifiable taxes and duties are about US$127.42 million and the total project cost, net of taxes, is US$1,432.58 million equivalent.   MEXICO I. THE TRANSPORT SECTOR A. Restructuring the Mexican Economy and the Transport Sector 1.1 In the past few years, the Mexican economy has shifted from a protectionist pattern to greater reliance on market forces and on the private sector as the prime engine of growth. Fiscal and monetary stabilization, elimination or substantial reduction of trade barriers (often to levels below those required under GATT), privatization of many public enterprises, and the possibilty of a successful conclusion of a free trade agreement with the United States and Canada (NAFTA) have led to a sharp improvement in investor confidence. Long-term capital inflows, including capital repatriation, rose sharply to over US$20 billion on average in 1991-92, after being negative (on average) between 1985 and 1988. These remarkable achievements provide a good reason to expect that Mexico has set the basis for sustained economic growth. 1.2 Mexico's economy is much healthier today than it was in 1987, but the Government continues to be committed to fiscal restraint. As a result, the Government has curtailed public investment in infrastructure. However, it is encouraging private investment. Private sector participation in infrastructure development has ranged from asset sales to term concessions, with or without operational involvement. 1.3 Signs of a sustained recovery have appeared only since 1991. Between 1980 and 1990, the Mexican economy grew very little. Average annual GDP growth during the decade was 1.6%. By 1988, GDP was only 9% higher than in 1980. Slow growth occurred also in the transport sector, not surprisingly, since transport services are a derived demand. From 1980 to 1988, transport sector output grew only 4%. The greatest contribution to this growth came from road passenger transport, which increased by 22% between 1980 and 1989. 1.4 Although slow economic growth has had a major effect on the transport sector, the following policy developments have affected it even more: (a) deregulation of road transport; (b) privatization of toll road construction; (c) a new strategy for port development; and (d) a program to restructure the railway. The transport sector has been affected indirectly by restructuring of the industrial sector; positively, through the growth of non-traditional exports, and negatively through the contraction of some heavy industries such as steel. These developments have had different effects on the various transport modes, as analyzed below. The dynamics of the sector would be further affected if NAFTA is ratified. Under NAFTA the spatial development of industry is expected to extend away from the U.S. border, thus enhancing the need for efficient transport. 1.5 The Secretariat for Communications and Transport (SCT) is the main Government actor in the transport sector. Between 1982 and 1990, its investment in the sector declined at an average annual rate of 7.6%. By 1990, SCT's investments were only 53% of their 1982 level, expressed in constant pesos of 1989. All modes except aviation were affected. Investments in port facilities fell drastically due to termination of the Industrial Ports Program. Highway and railroad investments declined steadily, but highway investments continued to receive the largest share of funding. Although past overinvestment coupled with slow economic growth provided a temporary respite, reduced expenditures resulted in deterioration of capital stock. To increase the supply of funds for its investment program, SCT started in 1989 to grant concessions to the private sector  2 to build and operate the sector infrastructure, particularly highways (paras. 1.10 and 3.13). It expects to rely increasingly on the private sector for new construction and development, both for the highways and for the ports and railways. 1.6 According to Bank forecasts, economic growth is expected to recover to an average rate of 3-4% for the remainder of the 1990s. Partly because of the restructuring of the transport sector that is taking place, transport demand and investment requirements will not grow proportionally in the various modes. In the railways, aggregate traffic is not expected to grow, and investment is expected to stay at about the level of recent years, although its composition will change. The airline industry is now privatized, and thus will not receive any public sector investment, and airport development seems unlikely to be significant. The only significant new port development contemplated is increasing the cargo-handling capacity, particularly for containers, of the ports of Veracruz and Altamira. Even if such port investments prove feasible, major expenditure is unlikely to occur before 1994. Following the transfer of the Mexican Ports Authority (PM) from SCT to SHCP in September 1992 (with a view to P.M.'s dissolution), and decentralization and privatization of the ports, a large portion of future investments is likely to come from the private sector. 1.7 The Government has greatly reduced its direct intervention in sectoral price and operational control in recent years. Both trucking tariffs and interurban bus tariffs were deregulated in 1989. Port dues and wharfage charges are now uniform throughout the system, and cargo handling tariffs are determined at the local port level, although these still require authorization by SCT and SHCP. The Mexican National Railways (FNM) has been granted some freedom to set its own tariffs under the May 1991 tripartite agreement between FNM, the Government and railway user representatives. In 1992 FNM's discretionary powers to set tariffs were further broadened, and it is now free to adjust to market conditions. The Government recognizes the urgent need to restructure the railway and stop the drain it creates on fiscal resources. A program for restructuring and partially privatizing the railway provides the rationale for a proposed Railway Restructuring project under preparation. 1.8 The trucking regulations published on July 6, 1989 introduced a new, less regulated highway transport regime: route restrictions were lifted, entrance barriers removed, the obligation to use cargo consolidation centers was rescinded, as was the system of establishing fixed tariffs for different routes. The Bank supported these actions through the Road Transport and Telecommunications Sector Adjustment Project (Loan No. 3207-ME). Results have been remarkable to date; as a result of the trucking deregulation and the consequent competition, SCT has granted over 100,000 new operating permits since July 1989, and haulage charges have dropped considerably. Passenger transport (including tour bus operations) has also been deregulated, with equally felicitous results. 1.9 Intermodal transport, previously limited to one monopoly operator, has been freed of entry limitations that required the ownership of at least two different modes of transport, and 23 new operators are now offering competitive services, to the benefit of users. 1.10 SCT's 1990-1994 highway program provides for the construction, operation and maintenance of 4,000 km of toll highways, which would rely primarily on private concessionaires  3 and financing. So far, the concession program has been financed by Mexican investors but SCT is seeking to attract foreign capital through the refinancing of older concessions. The first refinancing was completed in 1992 with the participation of IFC. The operation was coordinated with the Bank and it is consistent with the Bank's overall road sector strategy for Mexico that encourages private sector participation where appropriate. Details of the concession program are discussed in greater detail in para. 3.13. Decisions on the size and distribution of future investment in the highway subsector should be based on the principle that greater resources should be devoted to HRRM than to new construction. However, some new construction is still needed, particularly to widen and strengthen some non-toll roads to meet demand created by Mexico's new export orientation, influenced by NAFTA expectations. The proposed project would support this strategy through the rehabilitation and resurfacing of federal highways as well as improved planning for maintenance. B. Institutional Framework and Sectoral Planning 1.11 SCT is responsible for the transport sector and its agencies (Chart 1-1). SCT's Subsecretariat for Infrastructure handles almost all public transport infrastructure development, and its Subsecretariat for Operations is responsible for operational, regulatory and tariff matters. The General Coordination for Planning (CGP) reports directly to the Secretary. SCT is administered by an Undersecretary-level official, the "Oficial Mayor", under whom there is a Directorate- General for Finances. 1.12 Responsibility for intermodal planning has been divided. SCT relies largely upon expertise within PM and FNM for technical assessments of port and railway projects, but performs highway assessments itself. Sector planning is carried out in close cooperation with relevant national and regional authorities, the private sector, and other interested parties. Sector commitments are detailed in a five-year National Program for Transport Modernization (Programna Nacional de Modernizacifn del Transporte: 1990-1994), which evolves directly from the National Development Plan (Plan Nacional de Desarrollo: 1989-1994). This overall plan determines the strategies, objectives, and priorities that direct the efforts of each of the sectors. An important feature of the National Highway Program is the priority allocated to maintenance. The main features of the Highway Program are dealt with in detail in Chapter III. 1.13 Public participation in the development of SCT's program is encouraged and, indeed, required by law. In March 1989, SCT called public meetings in a number of cities to discuss transport modernization. Participants were public servants from the federal, state, and local levels, as well as users of all modes of transportation, chambers of commerce, equipment and vehicle manufacturers, labor unions, and professional associations. The conclusions arrived at were incorporated into the formulation of the National Program for Transport Modernization. SCT periodically evaluates the results of its efforts, using the program as a guide. Based on this evaluation, SCT reports its progress to the Congress as required in the Planning Law. 1.14 Planning deficiencies in identifying, selecting and programming investments affect the entire transport sector. The institutional capacity to undertake analysis on an intermodal basis is particularly weak. In some cases, project analysis has been conducted after the fact to "justify" projects already selected for implementation. Frequently, overriding social considerations are used as an excuse. Though its ability to make economic evaluations has improved, SCT often fails to perform the analyses that should serve as a basis for its decisions. Often costs are underestimated,  4 and other alternatives, particularly lower-cost solutions, are not considered. To improve planning and programming, SCT must make a policy commitment to use technical analyses as the basis for all investment decisions. Coordination of planning is particularly important now that SCT's operational functions are being transferred to its regional offices and to the parastatals under the present administration's decentralization policy. 1.15 In early 1991, as part of project preparation, SCT decided to strengthen its planning unit and gave it a greater role in the analysis and selection of priorities. CGP was created to supervise all planning within SCT, including the General Directorate for Planning (DGP) and the Sector Planning Committee. Thus, planning has been brought closer to the decision maker. CGP's functions and responsibilities were revised to enhance its coordinating role and an Environmental Affairs Unit was established to oversee environmental affairs in the transport sector. Also in 1991, the Secretariat for Programming and Budgeting (SPP), later merged with SHCP, which approves the proposed sector investment and operating budgets, established an investment unit to review all major investments in the sector and to make modal planning more consistent. SCT has prepared an action plan to consolidate the above changes. The plan calls for a formal establishment and strengthening of CGP and training its staff. The action plan was agreed upon during project appraisal and confirmed at negotiations (paras. 4.7(a) and 6.1(b)). H. BANK EXPERIENCE AND LESSONS LEARNED A. Main Issues and Lessons in the Highway Sector 2.1 The Bank has been involved with the Mexican Highway Sector since 1960. It has made ten loans for the federal highway system, the first seven of which were regular project investments loans whereas the last three were sector investment loans. In addition, the Bank made a loan to improve the rural roads system in the state of Chiapas and a Road Transport and Telecommunications Sector Adjustment Project which supported, on the transport side, Mexico's policy of deregulating highway transport services. Annex A reviews the experiences of the ten loans to the federal road system and the road transport component of the Road Transport and Sector Adjustment Project. 2.2 Despite the time span of 27 years between the First Highway Project (Loan 268-ME) and the Highway Maintenance Project (Loan 2875-ME), and the diverse economic, inflationary and exchange rate experiences of the Mexican economy (Figure 2-1), there are common features in all the projects. The analysis below reviews these features up to and including the Highway Maintenance Project and examines some of the underlying factors. It also looks at the changes in approach that first appeared under the Seventh Highway Project and were built upon during the three sector investment loans. These changes would be further developed and consolidated in the proposed project.  5 Figure 2-1: Price Escalation of Civil Works (C.W.), Consumer Price Index (INPC) Exchage Rate and Minium SalaT (190-1990) 12,000 - ........ INPC (cPI) - EXCHANGE RATE 10,000 - . -** C.W. ADJUSTMENTS - . - MINIMUM SALARY zwj 8,000 - C., H 6,000 / z w 4,000 - 4 ooo // , ~~~~~~~~~~~~~~~~~~~~......! 2,000 - 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 NOTE: BASE YEAR = 1982 = 100 2.3 Physical Implementation of the Projects. Practically all projects were forecast to be completed in four years from appraisal. None achieved this objective and there was no indication of consistent improvement up to 1990. The First Highway Project was completed 3-1/2 years behind schedule and the Second Highway Sector Project ended three years late. The underlying causes were not the physical capability of the implementing agencies to undertake the work. The PCRs and Audit Reports consistently show that the implementation delays were caused by slow counterpart allocations and cost overruns due to insufficiently detailed engineing, changes in the scope of works, delays during construction and inflation. The main reason for the slow counterpart allocations was SCT's lack of incentives to use the Bahk loan proceeds. 2.4 In 1990 the new administration decided to link budgetary disbursements to the execution of Bank-financed projects. This decision speeded up the completion of the Second Highway Sector Project, which was then three years behind schedule. As a result, about 50% of the disbursements were made in the last two years of project implementation. The ongoing Highway Maintenance Project also had significant delays until the new disbursement policy was introduced. It is now expected to be completed according to schedule.  6 2.5 Among the seven project investment loans, only the Third Highway Project achieved some success in reducing cost overruns because the Bank insisted that detailed engineering had to be completed before loan negotiations. The Second Highway Sector and the Highway Maintenance Project drew on the experience of the First Sector Loan and earlier projects. Although delays and overruns persisted, about 80% of the subprojects financed under the Second Sector Project were completed within the loan disbursement period and the cost overruns of these subprojects were substantially less than in previous projects. 2.6 The main lessons drawn from the physical implementation of the projects show the need to ensure (a) an obligatory link between disbursements of Bank proceeds and execution of the agency budget; (b) adequate annual budgetary allocation of funds for ongoing and committed subprojects, before any agreement is made to include new subprojects for Bank financing; and (c) completion of detailed engineering of a substantial part of the project before loan negotiations. The proposed project design draws from these lessons by consolidating annual and mid-term consultations on SCT's Highway Rehabilitation, Resurfacing and Maintenance Program and budget (paras. 4.7(c) and 5.16). In addition, detailed engineering for highway rehabilitation and bridge works, included in the first year of project implementation, were substantially completed by loan negotiations (para. 5.1). 2.7 Institutional Strengthening. Although the Bank's sector reviews from 1964 to 1975 all emphasized institutional and regulatory problems, improvement in these areas was less than expected. The Bank tended to take a passive stance on lending and to focus rather narrowly on construction, and loan conditionality was mainly designed to deal with assurances about the implementation of civil works. However, within the framework of the Seventh Project, the Bank shifted its focus to transport sector planning and transport regulation. The Bank eventually adopted a sector approach to highway lending in Mexico and the corresponding loan conditionality stressed highway economic and planning issues. 2.8 Despite these achievements, the First Highway Sector Project, approved in 1979, failed to address wider sector issues or policy matters. However, planning was improved because yearly budget consultations were instituted to integrate the Bank into the planning process of the Secretariat for Human Settlements and Public Works (SAHOP) and to support improvements in budgetary coordination, program composition and project selection. The project was implemented in a flexible way, disbursements were made quickly, and fewer Bank staff were needed to supervise the project. 2.9 After 1982, with Government interest focused on stabilizing the economy, the Bank concentrated on improving institutional effectiveness. With the merger of SCT and SAHOP and the increased macroeconomic importance of the Bank loans during a long recession, institutional issues were stressed, and the new Mexican administration allocated more resources to improving operational efficiency in the transport sector. 2.10 Execution of the Second Highway Sector Project (Loan 2428-ME) approved in 1984 proceeded fairly smoothly, partly due to lessons learned and progress made under the first project. On the institutional side, both the second project and the Highway Maintenance Project under execution, provided the initial basis for: (i) discussion of the importance of increasing the ratio of highway maintenance expenditures to construction expenditures and of ensuring that adequate financing for the subprojects was provided during the annual budget cycle; (ii) encouraging the Government to improve works programming and preparation of multiannual budget projections;  7 (iii) revisions of SCT's procurement practices; and (iv) tying expenditures for extemally funded projects to budgetary disbursements of the implementing agency. 2.11 The 1987 Highway Maintenance Project ran into initial difficulties due to shortages of local funds and to the timing of the project, two years prior to a change in administration. Implementation is now proceeding smoothly, and the loan should be fully disbursed by the end of 1993. Much of the project was implemented simultaneously with the Second Highway Sector Project, and similar discussions were held on maintenance, planning and multiannual budgeting. The project has also been instrumental in (i) introducing the concept of highway maintenance and bridge management systems; (ii) providing for greater participation of the private sector through maintenance contracting and improvement of procurement practices; and (iii) involving the different branches of SHCP in the discussions regarding the need for additional allocations and better efficiency in the use of allocated resources. 2.12 The major deregulation measures implemented under the road transport component of the Sector Adjustment Project have helped to increase entry, diversify services and reduce road transport prices. Cost recovery has improved significantly also, and road maintenance expenditures have been increased. 2.13 The Bank's shift to sector investment loans provided greater flexibility and independence to the Borrower and gave the Bank greater influence over sector policies and economic management. The first two sector loans, however, may have been premature. We can argue with hindsight that the Borrower was not prepared to handle a sector loan in the way the Bank expected. The overruns, extensive delays and slow completion of several subprojects financed under the two sector loans indicate that at the time the respective authorities did not have enough management capacity to manage the project effectively. Thanks to close Bank supervision, the results of the Second Sector Loan were more encouraging, with more completions and few overruns for the subprojects initiated during the project period, although problems arose due to insufficient detailed engineering and changes in project scope. 2.14 The Bank has become progressively more effective in dealing with institutional matters. The experience with the three sector investment loans shows that institutional measures take a long time to implement and that up-front conditionality on important matters and intense participation of Government officials during the project preparation phase can speed up the process. 2.15 Worldwide, maintenance of road infrastructure has been a major target of Bank analyses, studies, sector work and lending for over 25 years. Over time, the Bank has gradually widened the scope, depth and complexity of maintenance remedies. Nowadays, the maintenance issue figures prominently in Bank decisions for road sector lending, and most sector operations aim to preserve road investments. Bank maintenance efforts were shaped by two policy papers, issued in 1979 and 1988 respectively. Among the guiding principles stressed in these papers are: recognition that costs of maintenance neglect can be extremely high, and need for national balancing of new road construction and road maintenance. Also, maintenance is now often part of the macro-economic dialogue, the ultimate and broadest platform for Government-Bank interaction. 2.16 However, despite Bank-wide attention to maintenance, overall results have been disappointing, causing increasing Bank concern that road repair bills of staggering proportions are building up in its client countries and that maintenance costs will remain high unless maintenance  8 attitudes, policies and actions are fundamentally changed. The proposed project design takes these findings into account and includes measures that would mitigate these risks. B. Rationale for Bank Involvement 2.17 The Bank's lending strategy supports private-sector-led growth and aims to strengthen Government institutions and policies in a climate of comprehensive reform. It also emphasizes environmental policies. The Bank's strategy for the transport sector seeks in particular to (a) consolidate the highway maintenance objectives and help catch up on delayed maintenance and rehabilitation of existing assets, which brings higher economic returns than new investment; (b) strengthen investment selection and prioritization to ensure that they are based on economic criteria; (c) support institutional and policy reforms and the use of sound economic analysis to ensure efficient traffic allocation between modes; (d) encourage decentralization and private sector participation where appropriate; and (e) promote thorough assessment of the environmental implications of transport investments and ensure that, when required, appropriate mitigation measures are taken. The Bank's sector lending program through FY95 would include the proposed Highway Rehabilitation and Traffic Safety Project and a Railway Restructuring Project. These will be supported by work to identify and address sectoral issues raised by the prospective establishment of NAFTA and to improve coordination within and between the various transport modes. 2.18 Although recent policy reforms such as trucking deregulation and concessions to the private sector for investments in toll roads evidence a strong Government commitment to reform, achievements in other areas, such as institutional strengthening, sector planning, investment optimization and prioritization, and highway maintenance improvement have been less than expected. The design of the proposed project draws from the lessons of past experience. The project would continue the efforts made in the Highway Maintenance Project and the Road Transport and Telecommunications Sector Adjustment Project to improve maintenance and traffic safety on the federal highways. It would seek to improve SCT's capacity for maintenance planning, to establish a systematic cost recovery methodology, and to address in a more focussed way than previously the adequacy of budget allocations for HRRM. It is likely that elimination of the HRRM backlog and achievement of all the project objectives will extend beyond. the disbursement period. A follow-up project may be required to complete implementation of the pavement and bridge management systems and to finance further reduction of the HRRM backlog. m. THE HIGHWAY SECTOR A. Sector Issues 3.1 To reduce transport costs and improve safety, it is essential to commit resources wisely to highway upkeep. This chapter will discuss the main highway sector issues that the proposed project would seek to resolve, in particular institutional strengthening, planning and budgeting, cost recovery, size and weight limits for trucks, highway traffic safety, and the environmental impact of HRRM projects. 3.2 Institutional Strengthening. As part of its decentralization program, the Government is strengthening the capacity of state governments to plan, finance, implement, operate and maintain basic public services. The aim is to make state agencies more responsible and accountable and thereby achieve more cost-effective delivery of the services essential to sustained economic growth.  9 One major state responsibility will be to administer the state and rural roads. The state governments must therefore develop the technical and organizational skills, and acquire the necessary resources, to manage and maintain these roads. For a number of reasons, highway decentralization has fallen behind schedule. Several states are requiring that roads be rehabilitated before they will accept responsibility for their administration. Most states lack an adequate highway agency. Also, it is unclear how the states will be financially compensated for their new responsibility. Because of these and other problems, decentralization of the highway system is likely to take some time. Steps are being taken to improve the implementation capacity of state road agencies in four states under the Bank financed Decentralization and Regional Development Project (Loan 3310-ME). Further support to road decentralization will be provided through a feeder roads project under consideration by the Interamerican Development Bank (1DB). 3.3 Proposed Strenedtening of DGCCOP. Maintenance planning for the federal highways must be improved. A unit of SCT's General Directorate for Maintenance of Public Works (DGCCOP) is responsible for identifying and proposing HRRM investments and for preparing and supervising the annual HRRM budget. This unit is technically weak and has organizational and staffing problems. Under the ongoing Bank-financed Highways Maintenance Project, DGCCOP is being reorganized. It will continue to be responsible for HRRM planning and budgeting, but SCT's regional centers will have operational responsibility for HRRM. DGCCOP needs to consolate the computerized HRRM management system that was introduced during project preparation. This system can be used to prepare, optimize and justify annual and multiyear budgets, taking into consideration SCT's limited budget resources. The reorganization of DGCCOP would be completed under the proposed project. The project would also provide appropriate management tools and training, (para. 4.7(b)). The need to strengthen DGCCOP's management to ensure better HRRM planning is discussed in greater detail in paras. 3.27-3.29. 3.4 Enhancement of SCT's HRRM Budget and Government Strategy. About 60% of the federal highway network is in poor condition (para. 3.23). The physical condition of the highway is mainly reflected in the condition of the pavement. The pavement degrades through normal use and weathering, but deteriorates faster when there is a high volume of traffic, and many large, heavy vehicles. Maintenance and capital spending on rehabilitation and resurfacing can help restore pavement condition. The highways that have received most attention and the bulk of the HRRM funding have been those included in the priority network (15,000 km). Nevertheless, even in this high priority category, most of the roads have not received the attention over the last few years that their age, condition, and traffic level would normally dictate. Many of those in fair conditions are deteriorating into poor condition and will soon require rehabilitation. The longer the delay, the higher the cost for rehabilitation. 3.5 To some extent, routine maintenance has managed to mask the true condition of the network to the road user. But further technical inspection and testing has revealed that it is becoming increasingly difficult to maintain the network in this manner. The HRRM budget has been increased in real terms since 1990 (para. 3.25), but there is a large backlog of rehabilitation and pavement overlay to attend to as a result of past neglect. A recent study by SCT, assisted by a French Consulting Company (BCEOM) estimates that the federal HRRM budget allocation of the 1990-1992 period is about one-third of the estimated need of about US$700 million per year. Based on this study, the Govermment updated its federal highway maintenance policy (Annex G), and prepared a HRRM program for 1993-96. The Government expects to use available resources more efficiently and to increase budget allocations to HRRM as macroeconomic conditions permit (para. 4.7(c). The 1993-96 Program (para. 4.8) would become a reference against which the Bank  10 and the Government would be able to assess the adequacy of the annual budget allocations for HRRM during the annual implementation reviews of the proposed project. The Government: (a) should pursue a minimum HRRM strategy based on annual average allocations of about US$360 million; (b) could as macroeconomic conditions permit, switch during project implementation to a strategy based on increased annual allocations; and (c) could assign any additional resources available to the highway sector, either through budgetary allocations or from extra-budgetary sources, such as those derived from voluntary contributions from users (para. 3.7), to HRRM and safety of the federal highways. 3.6 A further problem of the annual HRRM budget is the mismatch between the timing of civil works (these can only be easily undertaken during the dry season) and the flow of authorized funds during the year. The authorizations schedule is distributed unevenly, with a tendency to authorize disbursement of a large amount between September and December of the fiscal year. It is therefore almost impossible to complete the works within the fiscal year. Work must then be finished in the rainy season, with consequent delays and cost overruns. To help smooth out financial flows, the monthly availability of funds would need to be improved. In addition, SCT is starting the budgetary process earlier in the year, to ensure that all technical details are solved by the time the budget year begins, but needs SHCP authorization (Oficio de Secas) to initiate the construction process early in the year (para. 4.9(b)). 3.7 Highway Cost Recovery. If transportation is to be used in the most efficient manner, users should face charges that adequately reflect the true cost (including externalities) of the mode chosen. This is particularly important considering the open competition taking place between trucking and the railways as a result of deregulation. Charges to highway users, which include toll fees, fuel taxes, and licenses, are adequate to cover the sector expenditure needs and the policy letter should confirm the Govermnent's commitment to continue this cost recovery policy. However, there is an imbalance between automobiles and trucks. Heavier vehicles, which cause more damage to the road system, are not paying in full (through the various charges levied on them) for such damage. The Government has taken a number of steps to increase recovery of road costs from users, including raising gasoline (eaded and unleaded) prices beyond international levels and diesel fuel close to such levels. Tolls on the Federal toll network have increased substantially in real terms since 1988, with higher real increases levied on heavy vehicles. Furthermore, at the end of 1992, SCT negotiated with the trucking industry a "voluntary" user fee, which should provide additional modest funds for HRRM and safety programs. The Goveranment encouraged private construction and operation of toll roads in part to enhance recovery of costs associated with major new highways. However, high tolls on the privately managed roads have led to lower than expected traffic (para. 3.13). As heavy vehicles are still not contributing in proportion to the damage they cause, a more comprehensive look at highway financing strategies and assessment of the various options for resource mobilization is needed. 3.8 Given the structural changes which the sector has undergone, it was agreed at appraisal that a comprehensive review of highway financing strategies and an assessment of resource mobilization options would be carried out. The project would provide for a symposium to support dialogue on these issues between the public and private sectors and, based on a comprehensive study, the possible development and implementation of a related action plan. The study will include an initial possible approach toward defining ways to measure and recover indirect costs, such as those associated with accidents and the environment. An interagency technical group (cost recovery group), headed by SHCP, that was established during project preparation to take the lead on these issues, will serve as the locus for the work to be carried out under the project. At negotiations  11 agreement was reached that the study would be completed by December 31, 1994, and that if the Bank and the Government agree on the suitability of the study recommendations, action plan, acceptable to the Bank, would be prepared by June 30, 1995 and subsequently implemented (para. 4.7(d)). The cost recovery group will also prepare an annual report on the status of road use costs and road user charges and its results would be considered at the annual review. Annex C gives a detailed assessment of the highway maintenance accounts balance and road user charges. 3.9 Vehide Size and Weight Limits. Mexico's vehicle size and weight limits are among the highest in the world. The regulations were revised in 1980 based on consultations between the Government, the truck manufacturers and carriers. This may have reflected a realistic assessment of the Government's capabilities to monitor and enforce weights and measures at the time. However, the optimum size and weight of the vehicles given Mexico's economic, technical and administrative conditions have not been assessed. The issue has become more complex, as NAFTA will reduce barriers to vehicle movements to and from the United States and Canada and Mexico will need to coordinate policies with its northern neighbors. In addition, trucks increase costs to the road system through overloading, which damages highway pavements and bridges and increases the risk of severe accidents. 3.10 Revising existing size and weight limits to achieve a significant net positive benefit requires a relatively complex evaluation of a number of alternatives that take into consideration the vehicle operating cost, the road infrastructure and the cost of accidents. In 1991, SCT, with the assistance of the Mexican Transport Institute (IMT), carried out a survey to (a) determine the extent of overloading and the corridors where it is taking place most frequently; (b) determine the types of trucks being overloaded, the types of cargo they carry, and the frequency of overloading; and (c) collect dimensional data for trucks and determine which truck types do not comply with the regulation. The survey found that about 23 % of the trucks exceed the legal axle weight. To protect the pavements and bridges, and in response to concerns about harmonization of heavy truck sizes and weights with United States and Canada, SCT prepared a new size and weight regulation in 1992 and would start to enforce it in 1993. This is consistent with the proposed arrangement under NAFTA that requires implementation of a program for making the parties' vehicle standards, including size and weight standards, compatible with each other. The proposed project provides for enactment of the revised vehicle size and weights regulation before December 31, 1993, and its subsequent enforcement (para. 4.7(e)). At negotiations, this commitment was confirmed (para. 6.1(h)). 3.11 Traffic Safety. SCT's road safety policy, outlined in the 1990-1994 National Program for Transport Modernization, seeks to substantially reduce the number of trafflic fatalities and injuries. Although various agencies are working to improve road safety, coordination is weak and targets and policy objectives are not clearly defined. To improve road safety coordination, SCT's General Directorate for Preventive Medicine (DGMPT), which represents the sector on the National Safety Council, is working to increase road safety awareness. Also, in 1991, Mexico joined the North- American Commercial Vehicle Safety Alliance (CVSA), providing the basic framework for uniformity, compatibility and reciprocity of inspections and motorcarrier safety enforcement activities in North America. However, road accidents continue to be a major cause of death and injury in Mexico. Statistics published by the National Institute of Statistics, Geography, and Information (INEGI) show that road accidents account for about 3 % of all deaths recorded. Road fatalities are estimated at 15,000 persons per year (about 216 deaths per 100,000 vehicles), a large number compared to total fatalities in more industrialized countries. This represents an enormous loss to the Mexican society and economy. Highway transport regulation on the grounds of road  12 safety is justified, and this is the one area where regulatory measures are still needed. However, the causes of accidents generally lie in infrastructural, technical and behavioral parameters that cannot be fully compensated for by regulatory measures. Since the main cause is driver negligence (in 80% of all traffic accidents, some error on the part of the road user is involved), effective driver training programs are needed. A skills test, required for licensing commercial drivers (agreed as part of the NAFTA negotiations) has been implemented since April 1, 1992. The proposed project would support implementation of the system for driver testing and licensing through training of inspectors and examiners (para. 4.7(g)). It would also provide for research on road safety, information campaigns, and for a program to reduce hazardous highway locations. Under the project, DGMPT would prepare an annual report on the road traffic safety situation, which would be discussed with all agencies concerned so as to improve coordination. Required follow-up actions could be set forth in the action plan resulting from each project annual review (para. 4.7(g)). Annex D gives details of the road traffic accident situation and of the proposed road safety program. 3.12 Environmental Impact of Highway Projects. Article 27 of the Mexican Constitution establishes the Federal Government's obligation to conserve the nation's natural resources. The General Law on Ecological Balance and Protection of the Environment, enacted in March 1988, constitutes the present legal framework to deal with transport environmental issues. Under this law, the Government must: (a) establish federal environmental standards; (b) evaluate the environmental impact of major projects; (c) carry out environmental protection actions in areas under federal jurisdiction; and (d) create and manage federal natural protected areas. In addition, Article 13 of the 1985 Public Works Law and Article 12 of its 1990 regulation require that the environmental impact of public works be studied, and that environmental conditions be preserved wherever public works are carried out. Shortly after the General Ecology Law went into effect the Secretariat of Urban Development and Ecology, SEDUE (recently transformed into SEDESOL), published a regulation on environmental impact assessments, which defined specific conditions for mandatory SEDESOL review of an impact assessment, procedures for preparing and presenting impact assessments, and sanctions for failure to comply with the regulations. As formal environmental assessments of projects are recent in the highway sector, SCT must prepare for the workload imposed by SEDESOL requirements. SCT's new Environmental Affairs Unit (para. 1.15), will coordinate the execution of environmental impact assessments of transport projects with SEDESOL. The unit would be strengthened under a proposed Feeder Roads Project with IDB (para. 4.7(f)). 3.13 Toll Road Concessions. In 1989, the Govermnent began to grant concessions to private parties for the construction, maintenance and operation of highways, bridges and tunnels. By 1994, the Government expects to have 5,000 km of highways under concession, of which some 4,000 km would be private toll highways. Participation of the private sector in the financing of the concession program is expected to be about US$7.5 billion, of which some US$3.5 billion have been disbursed already. To date over 30 private concessions have been awarded covering some 3,250 km, of which about 1,400 km are in operation. Although Mexico's pace of new toll highway construction has been extraordinary and rivals the construction rates in the peak years of the French and Spanish toll highway programs, some problems have occurred in implementation. These include the inaccuracy of construction cost and traffic projections, high toll prices, short concession periods, serious underutilization of some roads, and the domination of the program by contractors rather than by facility operators. Errors in the traffic projections for these roads are blamed on the high tolls, which are dictated by the short concession period. This, in turn, leads to toll highway underutilization. The emphasis on short concessions, however, was to attract  13 private capital and to accommodate limited local long-term financing availability. The Government is reviewing the concession program and results of its review are being incorporated into new concession agreements. The review after a change in SCT's senior managers includes a thorough revision of the program implementation and financial experience. The Government is also studying the possibility of negotiating a reduction in toll rates with some of the existing concessionaires, in return for extensions of the concession if necessary. In this regard, a toll fare reduction of 50% has been agreed with the concessionaires to be applied on a trial basis in order to study the elasticity of traffic with respect to toll rate changes. At the end of the three-month trial period the concessionaires, the users and the Government would decide on a revised toll-fare strategy if necessary. Also, Mexico is beginning to attract new foreign capital with a scheme for privatizing existing toll roads under the Federal Road and Bridge Toll Authority (CAPUFE). The highway sector financing study (para. 3.8) would include a comprehensive review of the adequacy of highway financing in Mexico, including the application of tolls to the federal highways. B. The Highway Network 3.14 Road transport in Mexico Figure 3-1: Development of the Road Network is the major mode for both passengers and freight. In 1989, 99% of intercity passenger m. T movement and about 84% of 250- cargo movement by land between cities occurred on the highways. 200 Road trafflic generally grew by 10% per year in the 1970s and by 150 about 5% per year in the 1980s (Table 3-1). Traffic growth 100 occurred despite the economic recession and substantial real so price increases for road freight. The Federal Highway Network 1960 1965 1970 1975 1990 19BS 1990 (PHN) has evolved rapidly, as has Years the rest of Mexico's road system (Figure 3-1). In 1952, there were |TOTAL WPAVED only 27,000 km of roads, 16,000 km of which were paved. By 1991, the road system had grown to over 240,000 km, about 85,000 km of which were paved (including 6,000 km with four or more lanes). The system's annual rate of growth has slowed from 8.7% per year from 1952-1975 to 1.7% per year from 1975 to 1991, a sign that the network has reached relative maturity and that, except for a few areas, the primary network is in place. In the past ten years, road investment has shifted from extension of the trunk network to construction of rural access roads and, more recently, to maintaining and widening existing trunk roads in response to increased travel demand (para. 3.30).  14 Table 3-1: Indicators of Highway Demand, 197-1990 Averaze Annual Growth Rate (percent) 1970 1975 1980 1985 1990 1970/ 1975/ 19801 1985/ 1975 1980 1985 1990 Population (thousands) 50,690 60,150 69,655 77,938 86,150 3.5 4.0 2.3 2.0 GDP (billion 1980 2,340 3,171 4,470 4,920 5,236 6.3 7.1 1.9 1.3 pesos) Per capita GDP (pesos 46,162 52,718 64,173 63,127 60,778 2.7 4.0 -0.3 -0.8 of 1980) Vehicles in Circulation 1,792 3,340 5,828 6,932 9,741 13.3 11.8 3.5 7.0 (thousands) Automobiles (thousands) 1,234 2,401 4,255 4,921 6,754 14.2 12.1 3.0 6.5 Trucks (thousands) 525 888 1,489 1,917 2,893 11.1 10.9 5.2 8.6 Buses (thousands) 33 51 84 94 94 9.1 10.5 2.3 0 Gasoline Consumption by Road Vehicles 7,856 10,865 18,316 25,217 N.A. 6.7 11.0 6.6 N.A. (miflion liters) Diesel Consumption by Road Vehicles 3,599 5,499 8,215 12,922 N.A. 8.8 8.4 9.5 N.A. (million liters) Passenger Cars/ 24 40 63 63 78 10.1 8.4 0 6.7 1000 Inhabitants Road network (km) 71,520 186,218 212,626 224,255 239,235 21.0 2.7 1.0 1.5 Federal Highways (km) 29,358 38,292 42,521 44,359 45,743 5.4 2.2 0.8 0.6 Source: Asociaci6n Mexicana de la Industria Automotriz, 'La Industria Automotriz de Mexico en Cifras", SCT, SPP. November 1991 3.15 The 240,000 km of interurban roads in Mexico are classified as federal, toll, state and rural roads, in accordance with the source of funds for the various road programs. Nationwide, states have jurisdictional responsibility for some 61,000 km of road. The Government, through SCT, has primary responsibility for the 49,000 km of federal and toll highways. Control and responsibility for the approximately 132,000 km of rural roads is shared by local governments, the states and the federal government (Iable 3-2). As stated earlier (para. 3.2), the Government is transferring responsibility for rural roads to the states and local governments.  15 Table 3-2: Classification of Highways (Length in Km as of 1991) Jurisdiction Mexican Classification Approximate Function Federal State Local - Federal Highways Primary (arterials) 45,800* - - Toll Highways Primary (arterials) 3,200 - - State Highways Secondary (collectors) - 61,200 - Rural Roads Tertiary Oocal) 132,000 * About 15,000 km of these roads are in the priority network, 13,000 km in the basic network and 17,800 km are of low priority. Lengths are given in two-lane highway equivalent km. 3.16 The Primary Highway Network (PHN), consisting of the federal highways under the responsibility of SCT, the toll highways under CAPUFE, and roads managed by private sector concessionaires, is a connected paved interurban network of continuous routes that serves corridor movements having a trip length and travel density indicative of substantial statewide or interstate travel and that serves all, or virtually all, urban areas with populations greater than 50,000 (MAP - IBRD 23709). C. Administration of the Primary Highway Network 3.17 SCT's two Subsecretariats divide highway related tasks between them (Chart 1-1). The Subsecretariat for Infrastructure has jurisdiction over the General Directorate for Federal Roads, the General Directorate for Technical Services and the General Directorate for Maintenance of Public Works (DGCCOP). These three directorates have primary responsibility for the design, construction and maintenance of roads under federal jurisdiction. The Subsecretariat for Operations includes the General Directorates for Tariffs, Land Transport, and Preventive Medicine and the Federal Highway Patrol, which are responsible for transport services including vehicle regulation, safety and police functions. SCT also maintains a fully staffed and equipped unit (SCT Regional Center) in each state to carry out regional construction, maintenance and operations. 3.18 Before 1989, SCT constructed some 950 km of toll roads and 32 bridges. CAPUFE is responsible for their operation and maintenance. Since 1989, most new toll roads have been built by private sector companies, who will also operate and maintain them (para. 3.13). 3.19 SCT's General Directorate for Federal Highways (DGCF) has a large staff that designs most of the federal highways and bridges in the country employing modem techniques; the criteria and standards used (Table 3-3) are adequate. Most of the construction work is done by DGCF through contracting, but some modernization (widening) works are handled by DGCCOP using the same standards. There are several Mexican consulting firms engaged in highway and bridge design, and SCT is increasing the use of these consulting firms to prepare the engineering of major works.  16 Table 3-3: Federal Highway Design Criteria and Standards CLASS E D C B A. A4 AUS Les ITEM than 100 100-500 500-1500 1500-3000 3000-SOOO 5000-20000 5000-20000 AADI &/ AADT AAT AAJD1 AADT AADT k AAMm ]I/ Design Speed (KPH) Flat terrain 50-70 50-70 70-100 80-100 90-110 90-110 90-110 Rolling terrain 40-60 40-60 50-80 60-90 70-110 70-110 70-110 Mountainous terrain 30-40 30-40 40-60 50-70 60-80 60-40 60-80 Radius (M) Flat terrain 70-150 70-150 150-350 210-420 270-420 270-420 270-420 Rolling terrain 40-105 40-105 70-210 105-270 150-350 150-350 150-350 Mountainous terrain 20-40 20-40 40-105 70-150 105-210 105-210 105-210 Maximum Grade (*) Flat terrain 7.0 6.0 5.0 4.0 4.0 4.0 4.0 Rolling terrain 10.0 9.0 7.0 6.0 5.0 5.0 5.0 Mountainous terrain 13.0 12.0 8.0 7.0 6.0 6.0 6.0 Roadway Standards Roadway Width (M) 4.0 6.0 7.0 9.0 12.0 22.0 2 x 11.0 Pavement Width (M) 4.0 6.0 6.0 7.0 4.0 2 x 7.0 2 x 7.0 Shoulder Width (M) - - O.5 1.0 2.5 3.0 3.0 Superelevafion (M/M) 0.10 Max. Cross-slope (%) 3 3 2 2 2 2 2 Wdth of Median (M) - - - - - 1.0 t.0 Minimum Sikbt Distance (M) StODDing Flat terrain 55-95 55-95 95-155 115-175 135-175 135-175 135-175 Rolling terrain 40-75 40-75 55-115 75-135 95-155 95-155 95-155 Mountainous terrain 30-40 30-40 40-75 55-95 75-1 15 75-115 75-1 15 Pasin2 Flat terrain - 255-315 315-450 380-485 405-495 405-495 405-495 Rolling terrain 100-270 225-380 270-405 315-450 315-450 315-450 Mountainous terrain _ 135-100 180-270 225-315 270-380 27G-380 270-380 Bridee Desitn Standards HS20 (AASHTO) i_/ 1I AADT - Annual Average Daily Traffic. b/ Separmed Roadways. ci American Association of Stat Highway and Transportafion OfficialB. Note: Ranges shown are from Minimum' to wDesirable'. Source: SCT - April 1992  17 3.20 After over 30 years of sustained road construction in Mexico, many experienced and well equipped road construction contractors have emerged, and their relationship with SCT is well- defined. Domestic contracting firms must register annually, providing detailed data on their operations. There is a wide range of capacity among them, with the emphasis on medium-sized firms capable of undertaking typical highway contracts. Under the Second Highway Sector Project (Loan 2428-ME), completed in 1991, Mexican firms won all ICB contracts, discouraging foreign firms from bidding for highway contracts in Mexico. SCT personnel supervise the construction but increasing use of consultant services for this activity is being pursued. The Government has reduced its once-dominant role in implementing highway rehabilitation and resurfacing works through force account and the private sector's involvement in these activities is resulting in a more efficient implementation of the budget. During negotiations agreement was reached that at least 70% of the highway rehabilitation works would be carried out by contract (para. 6. 1(a)). D. Condition and Performance of Federal Highways 3.21 While highway condition refers mainly to the physical condition of the pavement and bridges, performance refers to the degree of mobility (evel of service) provided to traffic. Financing under the ongoing Highway Maintenance Project has helped to reduce the downward trend in physical condition that was evident in the 1980s and to increase pavement resurfacing and rehabilitation. The proposed project, by further reducing the rehabilitation bacldog, would support the Government's policy of preserving the condition of the federal highways. Current pavement conditions and forecasts of future highway travel demand are prime determinants of capital investment requirements including highway rehabilitation and resurfacing. The capital needs for adding capacity to improve system performance are being addressed mainly through the highway concession program. 3.22 Although there is much variance between regions, average conditions on SCT's federal highways appear to have worsened in the 1980s. The condition decline can be mainly attributed to the decline in real terms of the HRRM budgets, from about US$230 million in 1983 to US$120 million in 1989. Because it has had to operate with low budgets for several years, SCT has limited maintenance to emergency and repair works, but some rehabilitation and resurfacing is being carried out as part of the Highway Maintenance Project. Patching and asphalt surface treatments is all that many of the most trafficked highways are receiving, whether or not their foundations and structure are adequate. Surface treatment conceals the true condition of the network from road users. Conditions on the toll roads are better than on the federal highways. CAPUFE, which has higher financial resources per km, has been able to maintain its 953 km of toll roads in a very satisfactory manner. 3.23 In 1991, as part of the development of a pavement management system, DGCCOP made an objective pavement condition inventory of the federal highways to supplement its traditional subjective rating system. The inventory, which attempted to measure pavement roughness, confirmed the poor condition of the federal highway system (Fable 34 and Annex F). According to the inventory, 60% of the network is classified in poor condition, and 30% in fair condition. A more detailed review of the roads in fair and poor condition revealed that about 5,000 km require substantial strengthening beyond original design standards to accommodate today's axle loads and traffic. Another 15,000 km is affected by the accummulated bacldog of deferred resurfacing. Rehabilitation and resurfacing needs are increasing because of the high portion of pavements that have reached an accelerated rate of deterioration.  18 Table 3-4: Federal Highways Pavement Condition Inventory, 1991 (Ian) Trafflc Class Heavy vehiclek Good Fair Poor Very Total Percentase day/direct. Poor % 1 < 300 1,647 4,609 5,372 1,677 13,305 37 2 300 - 1000 1,073 3,838 6,830 2,590 14,331 40 3 1000 - 2000 768 1,793 2,838 1,064 6,463 18 4 2000- 6000 143 400 859 225 1,627 5 5 > 6000 0 28 8 28 64 0 Total 3,631 10,668 15,907 5,584 35,790 100 Percentage 10% 30% 44% 16% 100% 3.24 The situation with regard to bridges is similar. The Federal Highways include about 4,500 structures over 6 m in length which are classified as bridges. About 75% of these were built before 1950 and may be either structurally deficient or functionally obsolete. In 1992, with the assistance of the Danish Road Directorate, SCr started to develop a Bridge Management System (SIPUMEX) including a condition inventory. An emergency inspection of 821 bridges considered priority (Table 3-5) revealed that about 560 are deficient and require strengthening or extensive repairs. The main problem is overloading - the bridges are supporting traffic loads two to three times heavier than those for which they were designed. Some of the repair and reconstruction work is being carried out with Bank financing under the Highway Maintenance Project (Loan 2875- ME). The proposed project would continue support for this program (para. 4.11). Additional details concerning highway bridges are in the project files. E. Rehabilitation, Resurfacing and Maintenance of Federal Highways 3.25 Highway Rehabilitation, Figure 3-2: Federal Highway Expenditures 1983-1991 Resurfacing and Maintenance (Billion Mexican Pesos of 1990) HRRM) Expenditures. SCI's 1990 and 1991 HRRM budgets were doubled, in US Dollars, with respect to 1989 (Figure 3-2) 1 200 and the proportion of HRRM to 1 oo total highway expenditures increased from 51% in 1989 to 800 about 56% in 1991, stemming a continuous downward trend since 600 1984. However, more substantial increases will be required to 400 reduce the accumulated backlog 200 and meet normal annual HRRM requirements. Although the o budget allocation for 1993 of 83 s4 s5 us 87 9B B9 90 91 US$320 million is 82% of the Yeare budget for the highway sector (a *Corntrctlon & Modern. *MaTnten. & Rehabillt. 33% increase over the 1991  19 Table 3-5: Condition of Priority Bridges-1992 URGENCY OF REPAIRS Al Total Numb - STATE Numb. Inups. 0n 2 3 4 _ None __ _Alar AGUASCALIENTES 14 12 1 N 3 BAJA CALIFORNIA 66 25 13 9 3 BAJA CALIFORNIA SUR 23 23 4 6 11 2 CAMPECHE 38 18 1 7 8 2 COAHUILA 226 41 8 1 10 20 2 CH[APAS 214 27 17 10 CHIHUAHUA 325 18 8 7 3 DURANGO 254 41 3 13 18 7 GUANAJUATO 163 38 14 16 8 GUERRERO 256 40 2 13 17 4 4 HlDALGO 65 11 4 5 1 1 JAUSCO 222 57 12 27 9 5 4 MEXICO 74 14 5 3 5 1 MORELOS 282 33 5 15 7 3 3 MICHOACAN 63 7 3 2 2 NAYARIT 82 21 5 8 3 1 4 NUEVO LEON 180 14 5 5 2 1 1 OAXACA 313 39 1 13 20 5 PUEBLA 51 10 1 7 2 QUERETARO 64 24 6 4 9 2 3 QUINTANA ROO 6 5 1 2 1 1 SAN LUIS POTOSI 100 68 16 17 15 14 6 SINALOA 205 19 3 10 4 2 SONORA 415 46 2 27 14 3 TABASCO 61 34 1 10 12 11 TAMAULIPAS 251 48 7 18 16 3 4 TLAXCALA 106 6 1 1 1 2 1 VERACRUZ NORTE 192 29 6 6 9 4 4 VERACRUZ SUR 118 29 5 10 7 5 2 ZACATECAS 129 24 1 16 7 TOTAL 4558 821 _ 166 265 214 80 A/ 0-1 Isignificant damge, no repair nooded; 2 Repair when convenient, except for strengthening; 3 Repair needed soon; 4 Repairas soon as possible; and 5 Alarm.  20 HRRM budget), and shows the Government's commitment to fund maintenance in a period of macroeconomic constraints, it is still less than one half of the about US$700 million needed annually to eliminate the backlog of HRRM by the year 2001. If this amount is not increased significantly in subsequent years, the highway network condition will be only slightly better by the end of the project implementation period than it is now, due to the high pavement deterioration rate (para. 4.8). 3.26 To address the HRRM budget problem, SCT has agreed that cost-effective maintenance planning requires a "systems' approach by means of which reliable data are collected periodically and evaluations are performed using a decision-making scheme that, among other factors, considers road performance, user costs and budget constraints (para. 3.29 and 4.7(c)). 3.27 Changes in Maintenance Management. DGCCOP has been affected by SCT's policies on administrative decentralization and privatization. Under administrative decentralization (which was formalized by a ministerial directive of May 13, 1991), most operational and programming functions have been delegated to SCT's regional centers. DGCCOP still must manage and direct the maintenance program, and must focus on policy, budget, and technical issues at the national level. In practice, however, DGCCOP not only prepares the budget but also often intervenes in the operational work. Greater use of private contractors and consultant services has improved effectiveness of operations, and enabled the Government to reduce staff and payroll (rable 3-6). Table 3-6: SCT's Highway Maintenance Stafling Pattern, 1986-1991 Total Salary Expenditure Year Number of Employees Current Mex$ million US$ million 1986 22,885 28,765 50.34 1987 23,216 52,478 38.87 1988 18,963 89,727 40.36 1989 17,262 120,084 48.70 1990 15,640 117,822 41.8 1991 14,610 121,183 40.23 3.28 A 1991 internal appraisal of DGCCOP capabilities identified weaknesses in human resources, budgeting, planning and programming (Figure 3-3). As part of project preparation activities, DGCCOP contracted management consultants (McKinsey and Co., Mexico-United States) to investigate the problems and recommend improvements. Based on the consultant's recommendations, SCT decided to reorganize DGCCOP (para. 3.3). The new organization has 5 directorates responsible for 24 departments whose functions are in line with DGCCOP's headquarters normative role of planning and monitoring (see Chart 3-1). DGCCOP is streamlining its staff in accordance with its new functions and an experienced general director, selected from SCT's staff, has been appointed. The reorganization would be supported by the project through an action plan to complete it before July 1994, furnished in draft during appraisal and confirmed at negotiations (para. 4.7(b)). Progress in the implementation of the plan would be assessed during  21 the proposed annual reviews (para. 5.16. Also, the proposed project would provide technical assistance and training to strengthen DGCCOP's capacity (para. 4.7(h)). Figure 3-3: Assessment of DGCCOP's Capabilities INSTITIMONAL Legal Powers 66 Administration 44 Humn Resources 30 Budget (adequacy) 27 Financal Control 6S MANAGERIAL Inventory so Planning/Prog. 33 Budgeting (process) 30 Cost Control so Workshops/Equip. 2s Supplies 50 TECHNICAL Planning (criteria) 33 3 Malerils- 70 Quality Control 6s Condition Inv 5 S Field Monftorinl 34 Research/Inform,. 43_ 0 10 20 30 40 50 60 70 80 Good scores as percentage of total scores Source: DGCCOP - November 1991 3.29 DGCCOP is also improving its management systems (Annex E). A pavement management system, including a computer program to evaluate different maintenance strategies (SISTER-Mex) and the systematic collection and analysis of highway condition data has been developed with the assistance of consultants; it was used to develop the HRRM strategy that underpins the proposed program (para. 4.7(c)). It is now being fine-tuned. DGCCOP is also developing a new bridge management system (SIPUMEX) described in para. 3.24. Relevant information will be incorporated into a comprehensive Highway Maintenance Management System (SICC) which is expected to be in operation by mid-1995. The SICC would be used to rationalize DGCCOP's maintenance planning and to develop its HRRM budgets. It should provide the basis for more national decision making, and more completely documented allocations, and would provide SCT with stronger arguments that could be used to persuade Government decision-makers to increase budget allocations. The proposed project includes technical assistance to continue the development and implementation of SISTER-Mex and SIPUMEX. An agreement between SCT and the U.S.  22 Federal Highway Administration to create a peer review group to evaluate and monitor highway maintenance activities in both countries should further strengthen maintenance planning. F. Highway Finance 3.30 Highway Expenditures. Figure 3-4: Evaluation of Federal Highway Highway capital expenditures can System Investments' be differentiated on the basis of whether they add additional capacity or improve existing 2 scr physical conditions. Capacity *CAEPUFE improvements include 1 modernization with added lanes 1500 lhon Iex$ in l90 and major widening, as well as new construction on new right of -ooo way. Preservation improvements include rehabilitation and resurfacing works. Routine 500 maintenance, on the other hand, is a recurrent expenditure.'/ Preservation improvements and 0 91 e 91 B5 91 B5 91 B5 91 routine maintenance (HRRM) in N5o1 2591 H59 851 69 1991 accounted for 56% of Ce s ,rac. federal highway expenditure; for * Exclu Irwnents on rural roads and private Irvegnnt. 1993, the share is expected to be 82%. Figure 34 compares the investrnent composition of different highway programs for 1985 and 1991. In constant pesos, 1991 Government spending was comparable to that of 1985 when severe cuts in public investment started. The lowest point in highway spending (in constant pesos) was 1989. Since 1990, Government highway spending has increased modestly, and private sector financing has expanded dramatically (para. 3.13). Road investments in the last seven years have shifted from extension of the Primary Highway Network to its maintenance and modernization, including widening, rehabilitation and additional lanes. Key features of the National Highway Program and their status by end of 1992 are presented in Table 3-7. 11 Routine Maintenance refrs to local repair of roadway and pavement; grading of shoulders; regular maintenance of road drainage, side slopes, verges, traffic control devices, and furniture; roadside cleaning, dust and vogetation control, and maintaining rest areas and safety appurtenances. Resurfacing inchudes the placing of one or more now asphalt overlays on an existing paved road (with a thin asphalt overlay, a surface treatment, or a seal coat) to preserve its structural integrity and ride quality. Resurfacing is often called periodic maintenanco. Rehabilitation refers to selective repair, strengthening, and shape correction of pavement or roadway (inchlding minor drainage and shoulder improvements) to restore structural strength and ride quality.  23 Table 3-7: National Highway Program 1990-1994 Program and Objectives Status by End of 1992 o Hghway Maintenance: at least 40% of Although highway maintenance allocations SCT's budget will be allocated for have been greater than the 40% planned maintenance and elimination of the (naintenance allocation for 1993 represents maintenance backlog, with participation 82% of the highway budget), they have been by state governmet in maintaining insufficient to cope with the maintenance and feeder and rural roads. rehabilitation backlog. o New concession roads: 4,000 km of About 1,400 km have been placed in the nation's highway system, wil be operation and 1,800 are under construction. improved to access-controlled toll The program has been increased to 5,000 highways, to be financed and built by kn including about 1,000 km of highways the private sector. concessions to the states. o Modernization: 3,000 km of existing About 1,400 km of highways have been two-lane highways will undergo improved and another 1,000 kn would be inprovement and expansion which, with implemented through the highway the addition of concession roads and toll- concession program. froe highways, will boost the nation's inventory of four-lane highways from 4,100 km to ovor 10,000 kom by 1994. o Construction of trunk highway links: This program has been affected by 2,300 km of new highways will be budgetary constraints. Only 400 km of new constructed to complete a total of 4,100 highways have been constructed. km of interconnections of the trunk highway system, thereby improving the activities of population and economic centers. o Feeder and rural roads: 500 now The program is being carried out by the feeder roads will be constructed, at a states and municipalities with community total length of 10,000 kn, as will 12,500 participation. Participation of the federal km of now and 15,000 km of rebuilt goverrnent is boing channeled mainly rural roads, with private sector through the poverty-reduction National participation in maitnance. Solidarity Program (SOLIDARIDAD). 3.31 The most serious risk caused by the low budget appropriations is the accumulating backlog of deferred HRRM, as maintenance needs are not met and the aging network is strained by more and heavier vehicles than were originally anticipated (para. 3.22). Details of the proposed HRRM Program for the period 1993 to 1996 are evaluated in paras. 4.8 to 4.12. To manage the cash flow  24 for maintenance more efficiently, SCT would handle directly the funds resulting from the system of voluntary contributions from the trucking industry. The voluntary contribution introduced at the end of 1992 is expected to generate about N$130 million in 1993 (para. 3.7), these funds are additional to the budget appropriations that support the proposed program. During negotiations agreement was reached on annual consultations with the Bank on the expenditure program and adequate cash flow arrangement for HRRM expenditures (within the yearly budget allocations) (paras. 4.9(a) and 4.9(b)). 3.32 Revenue funds for highway programs come from a variety of sources including user charges, loans from international agencies such as the Bank, and from the private sector. At present, there are no dedicated taxes or trust funds for long-term capital programs. While overall road costs are being recovered, there are still cross-subsidies between automobiles and trucks (para. 3.7) The interagency technical group (para. 3.8), with Bank assistance, developed a methodology to allocate the costs and revenues among the users of Mexican highways. The project would provide for a formal annual Bank review of the cost recovery situation, for an in-depth assessment of the adequacy of road financing in Mexico, for possible submission to the Bank by mid-1995 of an action plan based on the study results and for its subsequent implementation (paras. 3.7, 3.8 and 4.7(d)). IV. THE PROJECT A. Project Origin 4.1 Preparation of the proposed project started in April 1991 following a request from SCT for continued Bank assistance in protecting past investments in the federal highway sector. In particular, the Government sought Bank cooperation in implementing ongoing measures started under the Highway Maintenance Project (Loan 2875-ME) related to institutional strengthening, cost recovery, and HRRM funding. The project's design and scope resulted from discussions between the Bank, SCT and SHCP during several project preparation missions to Mexico between April 1991 and June 1992. B. Project Objectives 4.2 The project aims to: (a) protect and enhance past investments in the federal highway sector, through investment in rehabilitation and resurfacing of paved highways; (b) improve HRRM planning by strengthening the institutional capacity of SCT's HRRM directorate; (c) support measures to improve funding for HRRM; (d) reduce transport costs through improvements in traffic safety and more efficient traffic flow on the federal highways; and (e) support further policy improvements through (i) studies on road financing; (ii) development and implementation of a data base system for the transport sector; (iii) preparation of project planning and evaluation manuals; and (iv) improved consideration of environmental factors in highway maintenance. 4.3 The project would seek to improve SCT's pavement management system and its sectoral and highway maintenance planning units. It would also seek to establish a systematic methodology to assess annually the status of highway cost recovery and would address the adequacy of budgetary allocations for HRRM. A follow-up project may be required to consolidate the objectives pursued  25 particularly in the further development and implementation of a comprehensive highway maintenance management system comprised of a compatible pavement management system and SIPUMEX for the administration of pavements and bridges and to further finance reduction of the HRRM backlog. C. Project Description 4.4 The project objectives would be achieved through the implementation of: (a) an institutional strengthening component for improving transport sector planning and policies (US$7.27 million); (b) a comprehensive, four-year HRRM program for the federal highway system (US$1,532.48 million); and (c) a road traffic safety program (US$20.25 million). The institutional strengthening component would include specific measures and actions to improve: (a) sector planning and coordination, especially for HRRM; (b) HRRM funding and budget preparation; (c) sustainability, through development of a coherent framework for road sector financing; (d) control of truck overloading through the issuance of revised vehicle weight and size regulations and a program for their implementation; (e) specifications for HRRM works, to include quarry management and pollution control of construction equipment; (f) the system for truck driver education, testing and licensing; and (g) training of sector staff. The four-year ERRM would include about 27,000 km of highway rehabilitation and resurfacing, improvement and rehabilitation of bridges and workshops and replacement/rehabilitation of equipment, and consultancy services. The road traffic safety program would include improvement of some 350 hazardous road locations. This program would also finance the purchase of equipment for the new licensing and vehicle inspection systems and for the preventive medical unit, as well as road safety studies and information campaigns, studies of vehicle standards and an international traffic safety seminar. Institutional Strengthening Component 4.5 The actions to be taken to strengthen sector institutions were discussed during the implementation of the Highway Maintenance Project and refined during the preparation of the proposed project. During project preparation, the Bank supported up-front actions to the extent possible. Therefore, several studies were carried out regarding highway maintenance institutional issues, and decisions on the studies' recommendations were sought before project appraisal. On this basis, the Government drafted an action program for strengthening highway sector administration. The program would: * strengthen the capacity of SCT's Planning Coordination Office * complete the reorganization of DGCCOP * develop and implement highway maintenance management systems * continue the work of the interagency technical group for highway cost recovery * implement the vehicle size and weight regulation * implement the training program, the HRRM Program and the Traffic Safety component. 4.6 Annex G details the implementation targets and schedule for the proposed project, including this action program. At negotiations, Government commitment to implementing the action program was confirmed (para. 6. 1(b)). The proposed annual reviews would provide a forum to assess the progress achieved and the need for further measures (para. 5.16). The proposed project would provide technical assistance, as necessary, to implement the action program. Annex H  26 details the proposed consultancy services included in the project. Draft terms of reference for the main studies and technical assistance are in the Project File. 4.7 The studies undertaken, the decisions taken and pending, and the actions proposed are as follows: (a) Sector Planning and Coordination. In 1991, a planning coordinator was appointed to supervise all planning within SCr, the functions and responsibilities of CGP were revised to enhance its coordination role, and an Environmental Affairs Unit was created (paras. 1.15 and 3.12). In addition, SCT decided to improve the cost-benefit analysis of highway projects by using the vehicle operating costs model (VOC-MEX) adapted from the Bank's HDM. To complement these decisions, SCT would: * before December 31, 1993, formally establish the Planning Coordination Office and outline its functions; * prepare project planning and evaluation manuals, which would include capital budgeting procedures; * develop and implement a database system for the transport sector; and * introduce and implement a model for the strategic planning of freight flow at the national or regional levels. The action program was reviewed during project appraisal and found satisfactory. It was confirmed during negotiations (para. 6. 1(b)). The proposed project would provide technical assistance to CGP, including related training for higher-level staff. The scope and terms of reference for consulting services for preparation of project evaluation manuals, and for the strategic planning model as well as the ongoing effort to develop and implement a transpor. database system were reviewed and agreed during appraisal. (b) Highway Maintenance Organization and Planning. The actions carried out during project preparation include a ministerial directive of May 13, 1991 formalizing the administrative decentralization of SCT, an internal appraisal of DGCCOP, preparation by consultants of a report on the modernization of DGCCOP, including its reorganization, and the adoption of management systems for the administration of bridges and pavements (paras. 3.27 - 3.29). Before project appraisal, SCT started to implement the reorganization of DGCCOP. The action program includes specific operations to (i) complete the reorganization of DGCCOP by mid-1994, (ii) implement the Highway Maintenance Management System (SICC) by mid-1995, and (iii) carry out the training program. During negotiations, the action program and arrangements for its implementation were confirmed (para. 6. 1(b)). The proposed project would provide technical assistance to DGCCOP, as necessary, to assist in implementing its reorganization and to strengthen its operational capacity in such areas as planning, programming, supervising, technical standards, and staff training. The project would continue supporting the technical assistance started under the Highway Maintenance Project to implement the pavement and bridge management systems.  27 (c) HRRM Funding and Budget Preparation. During project preparation, a computerized budget planning system (SISTER-Mex) was introduced (para. 4.8). SCr used this system to develop a HRRM strategy that would be compatible with present budget allocations. The Government's highway maintenance policy letter (see Annex G) and the 1993-96 HRRM Program were reviewed and agreed during negotiations (para. 6.1(c)). The policy letter states the Government's intention to substantially improve the highway network conditions through the increase in the allocation of financial resources to HRRM, and define the Government's highway maintenance strategy in terms of objectives, and institutional improvements. Also, the Government would continue its policy of giving priority to HRRM over other sector investments in the allocation of resources. During negotiations agreements were reached that: (i) the preparation of the annual program would be systematized and SISTER-Mex would be used in the program preparation and to obtain an adequate balance between rehabilitation, resurfacing and routine maintenance activities (para. 6.1(d)); and (ii) SCT would review with the Bank, by October 31 of each year, the HRRM budget proposals for the following financial year. Annual reviews, on January of each year, would assess the adequacy of the annual budget allocations. Also, agreement was reached that the Bank would not consider financing any new subprojects under the loan, for a given year, until it had been demonstrated that the budgetary allocations for HRRM are, for the year in question, reasonably within the levels set forth in the 1993- 96 HRRM Program and cover the completion of Bank approved subprojects commenced in a prior fiscal year (para. 6.1(e)). In addition the project would provide for implementation of the Government's action program (para. 4.6) and for the continuation of technical assistance to DGCCOP to further improve its planning and programming functions and implement SISTER-Mex as a standard tool for preparation of HRRM budgets. (d) Highway Cost Recovery Policies and Instruments. Under the proposed project, actions would be taken to ensure that the federal government has sound highway cost recovery policies and instruments, and that adequate monitoring systems are established to permit updating the charges. During project preparation, the interagency technical group developed a simple methodology to measure the costs involved and to systematize their calculation so that cost recovery information could be retrieved at any time. The current situation was reviewed to ensure that at least short-term marginal costs were being recovered. During negotiations, agreement was reached that the Government would continue to pursue and strengthen, as appropriate, its policy of ensuring adequate road user charges with different types of users contributing at a level sufficient to cover the cost that can be attributed to them (para. 6.1(f). It would submit to the Bank an annual report on the status of highway cost recovery and would exchange views with the Bank on its report. Furthermore, during negotiations, agreement was reached that the Govermnent would prepare under terms of reference satisfactory to the Bank, and furnish to the Bank, no later than December 31, 1994, a study on the road financing strategies and resource mobilization options available to the Government, if the Bank and the Government agree on the suitability of the study recommendations, prepare by June 30, 1995 an action plan satisfactory to the Bank with respect to strategies and measures to be adopted, and thereafter carry out the action plan (para. 6.1(g)). A satisfactory action program to continue the work of the interagency group was discussed and agreed during project appraisal and confirmed at negotiations (para. 6.1(b)).  28 (e) Control of Truck Overloading. This problem is being addressed, in a first stage, by a survey initiated under the Road Transport and Telecommunications Sector Adjustment Project (Loan 3207-ME). A report on the survey showing the statistical information on vehicle size and loadings was completed in May 1992. Also, SCT has revised its vehicle size and weight regulation and would start to enforce in 1993. The action program submitted by Government during project appraisal includes a detailed timetable for enacting the regulation and for its implementation (para. 3.10). During negotiations, agreement was reached that Government would enact the regulation before December 31, 1993 (para. 6.1(h)), the action program was reviewed and agreed (para. 6.1(b)), and its implementation would be monitored during the proposed annual reviews (para. 5.16). (f) Improvement in Environmental Control. SCT's Environmental Affairs Unit (para. 1.15) is to be strengthened under the IDB Rural Roads Project presently under preparation (para. 3.12). To comply with environmental requirements, SCT has revised its work specifications for HRRM works and improved those parts related to the coverage of cultural patrimony, the managing of quarries and pollution control of construction equipment. These revisions have been included in the bidding documents for construction of civil works and are adequate. (g) Road Trffic Safety. The project seeks to improve driver behavior and increase public road traffic safety awareness (Annex D). As of April 1, 1992, a new licensing system, including a truck driver's skill test, was introduced as part of the agreements for NAFTA (para. 3.11). During project preparation, DGTT prepared a training program for inspectors, supervisors and examiners (Annex B). The project would provide for continuing this training as well as for technical assistance related to research on road safety, information campaigns, preparation of programs to reduce hazardous highway locations, and vehicle safety standards. At negotiations, agreement was reached that DGMPT will prepare an annual report on the Road Traffic Safety situation and programs and that required follow-up actions would be set forth in the action plan resulting from each project annual review (paras. 3.11 and 6.1(i)). The outline of the report was reviewed and agreed during appraisal. (h) Staff Training. SCT has analyzed in detail its immediate and urgent technical training needs for DGCCOP, DGTT and CGP, the three directorates most involved in the project (Annex B). The proposed project would provide for continuation of the training program, emphasizing both technical, managerial and administrative training for the staff of the three directorates. It would include equipment, course support expenses, formal training courses, attendance at conferences and seminars, and study visits both in Mexico and abroad. At negotiations, the scope and implementation schedule for the training component was confirmed (para. 6.1 (b)). Highway Rehabilitation, Resurfacing and Maintenance Program. 4.8 The Loan would finance a slice of SCT's 1993-1996 HRRM Program. The program is based on the results of a series of simulations of various strategies of road maintenance rehabilitation and resurfacing for different budget appropriation levels using the SISTER-Mex budget preparation system (Figure 4-1). Development of these strategies was the central task of  29 project preparation. SCT, with consultants' assistance, developed several strategies to identify one that would be compatible with financial constraints, while preserving the highway network and yielding maximum economic returns. The selected strategy and the four-year program were reviewed during appraisal. Due to strict budgetary restrictions, imposed by the Government's macroeconomic policy to reduce inflation, the 1993 budgetary level for HRRM would be about US$320 million, it is expected to be increased to about US$415 million by 1996. This would be enough to prevent further deterioration of the network, but not enough to achieve any significant improvements. However, a greater use of private toll roads by heavy vehicles would alleviate the problem on roads close to the toll roads. Table 4.1 presents the main features of the HRRM Program, and provides physical and financial targets and impact indicators. The program envisions rehabilitation and resurfacing of about 27,000 km of highways, rehabilitation and improvement of 280 bridges, and routine network maintenance. Program details are presented in Annex F. The first-year work program and budget was fully appraised and found sufficient for a transition period between the existing planning and programming system and a more sophisticated system that includes the use of SISTER-Mex. The program would be financed from budgetary transfers, including those financed under the proposed loan proceeds. In order to promote sound financing practices for the sector, the Bank's loan would not finance routine maintenance. Also, to build gradually expenditures for rehabilitation and resurfacing works into the Government's budget financing for future years, Bank disbursements for road civil works would be made on a declining basis (para. 5.20). 4.9 During negotiations, the Government confirmed its proposed 1993-1996 HRRM Program (para. 6.10)), and timetable and implementation targets (para. 6.1(b)). To ensure smooth execution of the HRRM Program and appropriate balance among the different road activities, the detailed components of the program would be reviewed and adjusted annually by SCT to reflect funding expectations and implementation progress as part of the planning and budgeting process required by SHCP. During negotiations agreement was reached from the Government that: (a) SCT would furnish to the Bank, by December 31 of each year, a summary report to be prepared on the basis of Table 4-1 which would serve as the minimum criteria to assess progress of the HRRM Program implementation during the annual review meetings (paras 5.16 and 6.1(k)); (b) SCT would prepare and SHCP would approve and furnish to the Bank, by January 31 each year, the estimated monthly cash flow of HRRM expenditures for the year, which should ensure that the majority of the budgetary funds would be available during the first semester of the fiscal year, and that an authorization (Oficio de Secas) to allow for starting of works would be issued by SHCP (para. 6.1(1)); and (c) SCT would contract independent consultants to assist DGCCOP in the coordination of the program and to provide technical assistance to the civil work supervision teams (para. 6.1(m)). 4.10 The Loan would finance about 11,000 km of highway rehabilitation and pavement resurfacing works of SCT's 1993-1996 HRRM Program. The selection of individual road sections to be included under the program would be made using the selected highway maintenance strategy (para. 4.8) and individual feasibility studies. The minimum ERR requirements for the sections are explained in para. 5.3. The project would provide for consultant services for detailed engineering and supervision of the program subprojects, as required.  30 Figure 4-1: Comparison or Strategy Results (1993 - 2007) MANTENANCE AND VEHICLE OPERATING COST (undiscounted) SBEWflS8 AND COSTS FOR VARIOUS MArENANCE STRATEGIES NPV OF BENEFITS.. POOR CONDITlON 25/o IN 1992lo cl FAIR soge 60 *tr. 1 B GOOD,t 36 92% 6% 50 ;5 0o0 * 40 tt 30 o str. Io 2 hMAltirNANC