Nepal - Expenditures in the road sector

J Report No. 10988-NEP Nepal Expenditures in The Road Sector January 12, 1993 South Asia Country Department I Energy and Infrastructure Operations Division FOR OFFICIAL USE ONLY M ( 11X( C1GHE CuPY kepc,rt No .: 1 098 -NEP T'ype SEC U ~ ~~~~~~~Ti-tle: E X P EN D ITPU ES I N T HE ROADL S 1!-TU Author: (;AVI IA. J Ext. 825l74 Poorri:E9 75 Dept. :SA1F,I Document of the World Bank 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.  2M3ENKLQUIVALE;W US$ I = NRs 42.6 NEPALESlE FISCAL YEAR July 16 - July 15 Nepalese Fiscal Year Equivalent Calendar Year 203S/36 1978/79 1979 2036/37 1979/80 1980 2037/38 1980/81 1981 2038/39 1981/82 1982 2039/40 1982/83 1983 2040/41 1983/84 1984 2041/42 1984/85 1985 2042/43 1985/86 1986 2043/44 1986/87 1987 2044/45 1987/88 1988 2045/46 1988/89 1989 2046'47 1989/90 1990 2047/48 1990/91 1991 2048/49 1991/92 1992 2049/50 1992/93 1993 L- OFABEVTOS AMARNMUE ADB AJi;n Development Bank AADT Annual Averap Daiy Trffic AVA Agricultual Value Added BT Blck Top CEM Country Economic Memorandum DOR Departmnt of Roads DTO District Treury Officer EFYP Eighth Five Year Plan (1993-97) FCGO Financial Comptroler ieneral's Office FY Fiscd Year HMG/N His Majety's Govemmnent of Nqea IRR nternal Rab of Retun Km Kilometer XRUP ILam ing Ji Road Project MOF Minismy of Finance MOWTr Mitry of Work and Tnsport MRCU Matuiuace Rbabilitaion Coordination Unit NCCN Nationl CcemtruAion Company of Nepal NPC Natiol Planning Commission NRB Nepal Rastra Bnk NRa Nepalese Rupee. ODA Oveenas Development Administration PBPM Progamm Budgeting Project Monitonrg PMC Planning and Monitonng Cefl QATA Swiss Association for Technical Assisoance SDC Swiss Developumet Cooperntion SFYP Seventh Five Year Plan (1985-1990)  FOR OMCLAL USE ONLY TABLE OF CONTENTS rILOSSARY OF TERMS EXECUTrIVE SUrMMARY . ......................................... i I. INTRODUCTION .......................................... 1 H.BACKGROUND .................... ... .................... 3 A. Macro Economic Framnework .... ............ ............... 3 B. Transport System . .. .. .. .. ............................ S C. .mportance of Roads ................................... . 6 D. Road Network Length, Distribution and Development ............... 8 E. Road Condition ..... .. ... ............................. 11 F. Road Sector Organization .................................. 12 G. Road Network Use . .................................... 14 M. ROAD EXPENDNITRES ......................................... 1S A. Inter-sectoral Cornparison of the Level and Growth of Road Sector Expenditures ............................ .. 15 B. Level, Composition and Growth of Road Sector Expenditures ........ ... 17 C. Main Trends in Road Sector Expenditures ............... ..... O.. 26 IV. PUBUC EXPENDITrE DECISIONS . ........................ 28 A. Planning (Reource Allocation) ..... ..................... . 28 B. Planand Budgeting Pr ation . ...................... 31 C. Budget Execudon .. .. . . ........................ . 36 D. Performance and Planing Targets... ........... . ........ 38 V. RESOURCE MOBUIZAION AND FINANCIAL PERFORMANCE OF THE ROAD SECrOR ........................ ...... 39 A. Domestic Resource Mobffizaton ... .... ................ . 39 B. Foxig Fiknacn ............ ..... ............. 41 C. Rwvenue Outlook .......... .......................... 43 D. F`xmPeial PerffeSormneothRadScr ....................... 43 E. MainIssus .......... ... ................ 45 VI. MAINTENANCE OUTPUT AND PREVAILNG STANDARDS .... ... 47 A. Apparent Maintenance Outputs .4... ......... . ............ 47 B. Maintenance Opeaons and ...Mangement .. S0 C. EstmatedCoverageof Maintenance Activities . S1....... 51 D. Main Issues and Recommendations ........ ..... ......... 51 VI.INFRASTRUCTUREDEVELOPMENTSCENARIOS ..... ...... 54 A. Regional Development Considerations ......................... 54 B. Demand for Road Infiastructure Services .S.... .. ..... . 54 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.  -3- C. Road Mainnce Conderations .. .......... . .......... .... 57 D. Road Sectr Requirements ....... ............ ... .. 59 Vm. SECTOR STRATEGY AND RECOMMENDATIONS ...... 63 A. Planning, Financing and Budgedng . ......... . 63 B. Improve Operations and Management . .... 66 C. Institutional Refonm .... .. . ..........68 X. BBUOGRAPHY ..... 70 Tlb ma wa pupd by Mr. J1a Gaviia (Ctnspogt SpeciaLat) on the basis of *a umsu. In May 1M. Mour. Naayma D. Sham tosd Seetor Speciaist - Coalmah) and SW" P. Shbda (Fial Aalyst - Coamamt) aauud th data on budge allucadow ad expeadinaae and eva_lad a ampls of miaenane coetct. Mme upm was diacue with dke Governama of Nepal dudag Novsahr, 1992. Peer uviewe for th report wie A. Famz (Pincipal Highways Advisor ow Division adi- LAIIN), A. Uhandad (Highway Engn), mnd M. Dick CFmqson uoooem ). Mum. P. MiU*. F. Tenmis ad A. Ham an die L1ad Scon_t, Diviso Chif and Dimmer, t_pecvy of dtis ce wrck. II|_ doct b id dibutoan Wa m b O d b. upi ay ma din.p.- a111of5"ciAlidigu1ts omisrts Ia-a oiiiy 'not Othwias be dicl.ud "w W a u t  Annex 1. Suy Medtodology Annex 2. Rood Sector Expomditu Totel Expmacitures ad GDP Annex 3. Tnpon and Rood Budget Aloca and Exu&dis Annex 4. Tnaspot aon Road Sector Develwpt Aocato and Expediu Annex 5. Tranport and Road Sector Regular Dev.lopzut Allocos and Expendiuru Annex 6. Road Sctor Allocatos by Actvity Annex 7. Road Setor Allocato by Activty in urCumt d Cow tan Trnm Annex 8. Road Sor BxpE dtum by Acvity Annex 9. Road Sector DemOVm_ Budget ExpMudi sd Allocaua by Actvity Anex 10. Tanot and Road Seto D _epuat Allocatows by Fnacg Soorce Annex 11. Rod Scto D opmat Aom by Actvity ad Finaing Soure Annex 12. Periodic Mainteac Alkosioms kw FY 1992 Anex 13. Routn MaiNtma Allo_i for FY 1991 and FY 1992 Annex 14. Road COmuction PRisoW OhmFia the Lee rh Yoe Annex 15. T _not Secor Deelapmt Eh _dir by Budge Item Annex 16. Rankng of Selectod Rod Prtiocs by Eoomic Rat. of Rdun Annex 17. Cadtral, Regpa ad Ditiat Lewd Decisi-Mang ad [ nma Flow Cht Annex 18. Budgt Execton rs Annex 19. Periodic Mainse Unit Coo by Activty (Eily and Fla Tain) Annex 20. Routn Maint Unit Cods per KRiootw by Typo of Rod (Hlly nd Flat Tain) Annex 21. E _imuus of Road Co _ditin and maintean RPqui_e.t fr Sdoeld Maintna Stratge (1993-1997) Annex 22. rga DOR Annex 23. Map  Rowinc Mainteruam. Local repar of roaway and pavement; grading of unpaved surfa and shoulder; replar mainteaace of toad drinage, side slopes, verges, traffic conttol devices, and ur,nire; rodide cleanng, dust an vegetation control, and maintaining safety apputnancs. Typical costs in Nepa: ane from less than $400 a kilometer (earth roads) to more than $3,000 a iclomer (avel roads). Periodic Maintenance. Includes resurfacing and river taining works. Regraveling an unpaved road or resurfacing a paved road (with a thin asphalt overlay, a surface treatment, or a seal coat) to preserve its stucuural integrity and ride quality. A paved road normally needs resurfacig at the trasition from good to fair condition, provided the volume of traffic justifies retaining it in good condition. Rufacing and regraveling shoulder cost in Nepal can vary from les than S,00 a kilometer to more than $30,000 a Iilometwr. In addition, river trining cosu in Nepal can vary from les than $20,000 per kilometer to more than $80,000 per kilometer. RedhbiUiaior Selctive repair, stregthening, and shape correction of pavement or roadway (including minor dminage improvements) to restore structura stength and ride quality. The term strengthening" b sometimes used to describe a specific category of pavement rehabilitation involving the application of overlays. Costs of rehabilitation can vary from less th&a $30,000 a kllometer for unpaved roads to more tha $200,000 a kilometer for paved roads. The cost for paved roads, however, rise steeply as a pavement deteriorates from fair to poor condition. Reconsucdon. Renewig the road structure, genemaly using existi earthwors and road alignmena, to remedy the consequences of prolonged neglect or where rehabilitation is no longer posible. Costs in Nepal at present vary widely, rangg from about $45,000 a kilomwter to more than $360,000 a kllometer (e.g., IDA financed Naubie-Malekhu Road), with most roet road reconsruction cost of recent contrats towards the upper end. Resroradon. Major rehabilitation and reconstruction works considered togethe. Bewermen. Road improvements (or "upgradingn as labeled in the Eighth Five Year Plan) related to the width, aligonent, curvature, or gradient of road (including associad resurficing and rehabilitation works) to improve traffic speed, safety, or capcity. Betterment work are not considered mmdntenance activitie except for ancillry road rehabitation or resurfacing operabons. Costs can vary comidrably, dependig on the geometic improvements. New Consnucron. Consttng a paved, gravel, or earth road on a new alignment; upgrading a gravel or earth road to paved standards; providing additional lane capcity; or conostcting additional caniageways, frontage roads, pado-separated intechanges, or multi-lane divided highways. Cost of new consuction in the Eighth Five Year Plan wn etimatd to vary from lea than $S5,000 a kilometer for a grvel od to more than $400,000 per ldlometer for a two-ln road in mounainous (difficult) ternri. An acce- controlled divided highway betwoee Katmandu and Hetauda could coat about $3 million per kilometer. 2/ Adapted from Harral, C., 1988, "Road Deterioration in Devoloping Countries", The World Bank and, Sharma, N.D., 1992, "Maintenance Cost Study for Nepal.  Fw=flIWE SUMMARX Overview i. Nepal's economy relies heavily on a relatively recent but modest road network of only 7,400 kms. The road network's backbone is now in place and comprises the East- West Highway and the North-South road between the border with India and Katlimandu. The network has been expanding rapidly at she expense of rapid road deteriortion due to the lack of maintenance capabilities. In 1992, about 75 percent of the total network is estimated to be in poor to fair condition, a high percentage compared to other low-income countries where road networks have been recently developed. The network's poor condition, compounded by Nepal's difficult geography and weather, has resulted in high network operation costs whick are four to five times highar than if adequate maintenance were implemented. The resulting high transport costs are an importrnt constuaint to Nepal's economy. ii. Resource allocations have persistently favored low priority new construction over maintenance and economically justified upgrading and construction. Improvements in current service levels require improved road conditions and selected extensions and upgrading in support of economic growth and regional development. However, these multiple demands for better road access are being addressed on a project by project basis which results in an incremental approach without network-based prioritizatior.. Extenal resources are dedicated to a great extent for upgrding and rehabilitation while a large proportion of domestic resources are pledged for counterpart funding and for a myriad of construction undertakings. While some expansion to the road network is justifiable in economic and social trms, a review of Govemment funded construction projects shows that these projects' expected benefits are often not realized since they are periodically underfunded, suffer from unsatisfactory technical specifications and face increasingly complex environmental considerations as mora roads are being built in the mountain zones. ii. Total transport costs in Nepal could be substantially reduced through more efficient resource use and accountability in the road sector. The analyses of road sector expenditures in Nepal presented in the report highlight tha urgent need to address the maintenance crisis and recommends shifting resource allocation away from new construction telo basic mait c capabilities. Adopting a more sound maintenance strategy under absorptive capacity constmints would mean increasing the sectoral share for maintenance from a mere 20 percent to about 60 percent of available resources, in order to cover adequately the requirements of essential roads in good and fair condition (50 percent of the network) and minimum maintenance of the remaining roads to prevent closures. Given that resource avaibility for the EFYP remains tight, this shift could be done within the existing envelope of sector resources, by limiting and substantially reducing llocations lower priority new construction of North-South roads and developing a road manayement system capable of maintining a core economic road network. The core economic road network would be defined based on regional development trends and the demand for rural infrastruture, and could consist basically of essential highways (e.g., East-West Highway rather than new North-South roads), farm-to-market roads in the Terai, improved  - Li. - acsibility between Kathmandu and the Terai, and better al and suspension bridges. The speed and focus of the proposed reform program would require a common policy framework and suzagy for Govemment and donon. iv. The shortfall in maintenance expenditures results in a bleak financial performance for the sector as a whole. Analyses conducted in the report show that the net deficit of the road sector amounts to some US$44 million per year, which is high compared tototal road sector expenditures and also with respect to other developing countries. In order to improve the overall efficiency of expenditures in roads the report recommends to initiate a policy reform process, address the lack of mantenanc capabilities and dvo an ellakli and imely ystem to ce rd ntennc r (e.g., consideration might be given to setdng up a Road Maintance Fund dedicated to road maintenance and funded by a pre-assigned share of road user charges collected by Government). The report stresses the need to address the level, composition and transfer of road user charges as an integral part of improved road policies, and to establish specific annual targets for road maintenance funding and implementation as part of future sector planning. v. The problems with resource allocation to some extent reflect the weak institutional framework. Development and maintenance of all mads in Nepal, nral and urban, are threonsibility of the Department of Roads (DOR) of the Ministry of Works and Transport (MOWI). Given the road network's presnt conditon and importance, the DOR faces a formidable taLi However, the DOR lacks a clear sense of mission, is highly centralized, lacks autonomy, and is greaty affected by human resource and institutional constaints. titutional strengthening is an essenitial element of policy reform in the road sector. vi. The paper develops a stategy to implement a framework for policy reform to improve the efficincy of public expenditures in the road sector. The strategy focuses on three main areas: (a) Plning, Financing and Budgedng, (b) Operations and Management, and (c) Institutional Reform and Human Resource De-vlopment vii. The paper includes eight main sections including: sector background and key issues, analyses of road expenditures and public expenditre decisions, identification of the main constraints affEcting public expenditure decisions and resource mobilization, evaluation of road user revenues, assesment of the sector output, presentation of plausible infrastructure development scenarios, esimate of road sector requirements, and sector strategy. Road EjdituM vii. The eaminaudon of the level, growth and composition of road sector expenditures suggests that the project portfolio lacks focus or a clear sense of priorities.  - iii. - ix. During the perid analyzed (1980-1991), road sector expenditures decreased substandally as a proportion of total expenditures (from 13.6% to 6.6%) and increased only slightly in real terms to some NRs 1.6 billion in 1991. These trends were observed witWn generous allocatons which were substandally higher an actual expenditur. However, sectoral allocations have recently bee reduced in real terms, allowing for increased actual expenditures commensurate with the sector implementation capacity. x. The analyses conducted provide evidence of the complex and un-focused nature of the road sector portfolio. Road sector expenditures are ch td by a large number of construction projects (on-going and new undertakings) which are peri itently under-funded, as well as a series of maintenance projects with il-defined network objectives. Over time, road sector expenditures as a proportion of allocations have varied widely. Allocations have rarely reflected past sector performance measured at the central, regonal or project levels. Serious instiutional and human resource related constraints, common to die public sectr in Nepal, have limited actual implementation capacity. However, the gap between rmource allocations and expendiur has often been thf, largest among aU economic sectors. Xi. The distribution of resources between central and regional offices, as well as among regions, exhibits three major recent expenditure trends: (a) increasing district level expenditures, (b) regional dispeion of construction activities, and (c) shift of expenditures from construction to rebabiitation. Thews trends, compounded with the limited absorptive capacity at the central and regional levels, heightens concerns regarding the quality and composition of sector editure. xii. Under a tight budgeta constrint, HMG's policy has been to spend the sme insufficient amount every year, with a reduction in allocations in real terms for periodic and routine maintenance. This is exay the opposite of the practice recommended by the World Bank after extensive reearch on the economics of maintenance. The tight budgetary constraint, on the contrary, calls for revised policies, focusing on what can be done to maximize and optimize the use of available resources. xiii. The main issues aing from the analyses of road sector expenditure concern the need to re-focus expenditures to develop the capaity to maintain at least a serviceable arterial (core) road network, develop basic accountability for road development and regular budgets at the natonal and regonal levels, and improve and strengthen institutions to increase efficiency of resource use. Public Expenditure Decisions xiv. The planning and budgeting processes in the road setor are found to be grossly inadequate.  - iv - xv. Lack of NOWr dPlanning, With respect to planning, road sector resource allocations reveal an overwhelming emphasis on new construcdon at the expense of developing maintenance capabilities. The under-funding of maintenance budgets, further aggravated by the marked cost escalations in the recent past, has failed to safeguard past investments and resulted in fewer opportunities to secure resources for necessary network expansions. Politically mandated priorities rather than economic efficiency considerations cloud the rational allocation of resources. Under-funding of on-going and new construction projects reflects the absence of a planning approach which has further weakened past institution building efforts and reduced the value of investments. Past road sector plans have been very ambitious and unrealistic in the context of the limited institutional capabilities and resource availability. xvi. Resource allocation in the road sector needs to de-emphasize new construction and accord priority to safeguarding past investments and developing institutional capabilities to manage the road network. The Eighth Five Year Plan (EFYP) includes some positive developments in this direction. The sector objective in the future could be to minimize national transport costs over time (considering road expenditures plus vehicle operating costs to road users). Along these lines, the analyses of resource allocation identified the need for a sector framework or stategy to introduce these changes in the medium to long term. Such a strategy is absent in the EFYP. A sector stategy could better address development needs and define sector priorities over time including the extent and standards of maintenance activities and the indispensable network expansions. xvii. _ D& . Budget preparation for the road sector in Nepal lacks a program content. The Government expenditures are not defined and classified in terms of road projects' objectives or of inputs and outputs. The budget does not even differentiate emergency and recurrent maintenance within the routine maintenance budget. In fact, the budget format (project proforma) appears to be more detailed than necessary to secure approval and is used as a project work plan. xviii. With limited institutional capabilities, the lack of systemic data collection (i.e., road condition surveys, traffic counts and unit costs) and the strong influence of seasonality, maintenance budgeting process in Nepal remains haphazard. Regrding mutine and e_r~rglgLIfllaflM, there is no systematic budget exercise followed to estimate reqWrements. A dependable maintenance budgeting procedure is needed to estimate the needs for routne, recurrent and emergency maintenance, involving DOR engineers at the district, regional and headquarters level. Annual budget esdmates should be prWared based on condition surveys, network-bar - prorties, traffic volumes, road location and seasonal distribution of activities. A clear definition of responsibilities for routir-. recrnt and emergency mainenance budgeting needs a consensus on appropriate sta lards, average productivities, budget preparation methodology, and performance measures. Regarding periodic maintenance budgeting, it was found that it only amounts to an aggregation. of project mpecific requirements without adequate consideration of network-based requirements and much less of resource availability. Consequently, resource allocation for periodic  v maintenance has not been optimal. The budgeting of periodic maintenance activities needs to be completely trvamped. Adequate budgeting needs to be supported by a simple maintenance mangement system to set pAiodties, define levels of intervention (by type of road, traffic ievels and location), and set peiodic maintenance standards (i.e., technical standards and periodicity for each activity). Such a system would need to consider budgetary constraints and focus inidally rn asd c and within those selectd corridors on maintainable road sections. xix. In general, road budgeting needs to be simplified. Th' analyses presented by the paper suggest that urgent actions are needed to reduce the existing road budget formats from the existing 29 to a more practical format with just 4 meaningful documents. These could include: (a) project concepts and features, (b) details of activities, (c) details of inputs, and (d) details of expenditur for local and forcign cost components. XX. Isues in Bude Execution. Significant delays are resulting from procedural, regulatory and administrve constraints identified by the report. Improving the efficiency of road sector expenditures would require urgent corrective actions to improve, samline and ratonaize fund releases to guarantee that project benefits matrialize. A secor policy on disbursements should be developed to identify ways to remove the main botdenecks associated with budget execution delays and to ensure tha timely and sufficient resources are disbursed according to the yearly expenditure plan to guarantee efficient road operations. In order to improve disbursements, better monitoring and evaluation is needed tu identify the main causes for disbursement reated problems at headquar, regional and district levels. Finally, the recurrent shortfall of raoures at the beginning of each fiscal exrcise could be corrected with an adequate advance release of funds which should be guaranteed at least for those districts with better perfomance. xxi. Lack of rdarmau Bdguing. The paper stress the fact that there are no inkages between planning and budgeting exercises. Efficient and transparent budgeting procedures would require the estblihment of simple quantifiable objectives and quality control which could be reviewed periodically in order to assess each budgeting exercise and to provide feedback to the upooming planning process. Financial and technicai audits of rd operations are non-existent but are judged to be essential to develop sound planning and budgeting for the sector. The estzblishment of a disbursement monitoring unit is suggested to help identify the main problems related to fund releases. Finally, the establishment of a reliable performance budgeting system is also encouraged as a means to increase accountability and improve efficiency of resource use which would ultimately increase the likelihood of atacting higher levels of funding. Resource Mobilization and Financial Performance of the Road Sectr xxii. Road user revenues are an important but decreasing source of Government revenue amounting to some 6 percent of total revenues. The level and composition of road uger revenui in Nepal, i.e., fuel and vehicle related taxes, are not earmarked and have ncit  been addressed s part of re-d setor finance inititives. Recent trends, however, indicat: that even though the ratio e -. ad user revenues to 2I1 expenditures is very low compared to other counties in the region, they amounted to more than four times the actual maintenance expenditures during the period. Estmates show that road user revenues are sufficient to cover the esdimated short-run marginal costs of road networkl operation. In the medium term, the structure of road user revenues should be addressed to encourage efficient flee, composition and utilization, as well as to provide sufficient and iimely resources for road maintenance. Road sector revenues are now increasing at a pace commensurate with infladon, well below the real average growth rate of total Govemment revenues, and below expected marginal increases in road operations' costs. xxiii. The road sector has enjoyed continued support from external funding agencies. About one-third of the road network has been constructed with some foreign support. E-ven though the dependency on freign resources continues to be high, as a proportion of total expenditures foreign reources now amount to half of total road sector expenditures. A significant observation that the ratios of expenditures to allocations have been higher for HMG's own resources and foreign grants than for foreign loans. The main trend observed, however. is that HMG resources are being increasingly directed towards supporting new construction while foreign finance is increasingly for rehabilitation and development of maintenance capabilities. xxiv. Based on the estimated road user revcnues, the paWer assesses the road sector's recent financial performance. The main finding is that the sector's net losses have required large cash flows from the Government to the sector, representing about 8 percent of Government revenues between 1988 and 1991, because only a small share of road user revenues is reverted to the sector. Including the estimated shortfall of regular maintenance, the net loss as a share of total government revenue is very substantial, amounting to about 18 percent in 1990/91. In order to reverse the net flows from the Government to the sector, two main actions are advisable. First, the structure of road user revenues should be reviewed periodically to reflect network expansion, levels of service and usage. Such a review should include an assessment of the recently introduced road tolls, including the overal efficiency of the collection system, and of potsibio alternatives before expanding this practice to aU arterial roads. Second, the composition and quality of sector expenditures would need to be addressed, paying special attention to reducing the backlog in maintenance. Assessment of Road Seor Outpu xxv. Based on the data gathered on road sector inputs and outputs for the last four years and on a sample survey of maintenance contrcts, the paper analyses road sector output. The analyses conducted consider prevailing stndards, quality control and operational issues that affect the relatonship between inputs and outputs in the sector, with a view to assess the actual coverage of road mainteance oprations in Nepal.  - viL - xxvi. Ihc analyses estimate that the actual coverage of maintenance actvities is much more limited than the apparent coverage based on unit cost and expenditures. The actual coverage of periodic mainnance is estimated to be as low as 300 kms per year or 20 percent of the total road network. The actual coverage of routine maintenance might also be as low or even lower than 20 percent of the total road network, considering the present contractor field capacity and low efficiency of force account operations. No evidence was available on the extent to which the benefits of maintenance are actually realized in the areas covered. xxvii. Lack of tenance g and Budgetig. At present, maintenance planning and budgetng are given little importance and are very deficient in the Department of Roads. The lack of adequate proritization has rsulted in wate of resources. For instance, the overlays provided under periodic maintenance progams sometimes fail very soon after application because they have not been supported by adequate investigations and poor quality work. Some roads considered for resealing have been found to be in such a state of disrepair that only rehabilitation appears feasible. Without adequate maintenance planning, the allocation of resources between rehabilitation or periodic maintenance is not done on a sound basis. xxviii. The report states that an accurate assessment of maintenance needs would only be posLble in Nepal once maintenance policies are articulated, needs defined, and costing analyses done based on unit costs (in a similar fashion to those presented in the report). Annual maintenance budgets lack an assesment of road conditions and realistic unit costs. The absence of maintenance of side and cross-rainage and of bridges is alarming. Tht report stresses the need to complement on-going efforts to strengthen road surface maintenance efforts with bddge and drainage maintenance programs. The report also stresses the need for a monitoing system to provide feedback into the maintenance planning system. Such a system should provide proper infortonn to modify current maintenance planning practices. xxix. Efforts have been initiated to improve maintenance planning and budgeting with the development of a road maintenance management system as part of the Maintenance and Rehabilitation Coordination Unit (MRCU). The program, supported by two bilaterl donors, is expeced to provide the framework to assss road conditions, identify maintenance needs, prioritize and allocate maintenance funds. I"he implementaton of nation-wide maintenance planning and budgeting with local staff, however, is estmated to need the combined efforts of all donors involved in the sector. xxx. Inefficnt sandIl. The survey of maintenance practices shows thmaintenance opations and management are very costly and inefficient. The salient features of the existing maintenance operations and management are: (a) the lack of a unified set of standards for the country, (b) the absence of quality controi in a large proportfon of locally funded operations, (c) weak documentation and reporting, (d) inefficient  - vill - force account system of routine maintenance, (e) lack of adequate super sion of road maintenance contracts, and (f) lack of equipment to supplement small contractor capacities. xxxi. The main recommendations are to develop a set of Road Standards, provide adequate laboratory facilities and quality control guidelines, review maintenance documentation and reporting, revamp the existing routine maintenance system, develop a system of incentives for improved supervision, and prepare the way for the consolidation of existing public-owned equipment in commercial plant pools for hire. xxxii. Need for Development of Institutional Capacity for Maintenance. Since maintenance is unpopular with most engineers, it does not attract the experienced and qualified staff appointed to new construction projects. As a result, resource use is not always optimal as little experience is handed over from construction to maintenance activities. Improved motivation and promotion schemes should be developed to attract engineers to perform maintenance functions, at least during limited periods. There is a clear lack of interest from the top-down. It is imperative that policy makers, external funding agencies and senior officials participate in policy action processes designed to reform maintenance practices given their economic importance. xxxiii. The report suggests that appropriate re-twaining of all engineers in DOR is required, including on-the-job training with staff from neighboring countries to share experiences in road maintenance. The training areas to be emphaszed should include: road network assessment, identification of needs, contract management and monitoring, and quality control. xxxiv. Based on the analyses of road maintenance operations, the report recommends that the regional structure needs to be revised to give greater weight to decentralized administration of road maintenance. Regional offices require greater autonomy to plan, implement and monitor maintenance programs according to each region's needs. For instance, one maintenance supervisory unit could be made responsible for 5 to 7 districts to optimize the allocation of resources, compared to one unit per district which appears uneconomic. Infrastructure lament Scnmaros xxxv. Based on the background papers for the Infrastructure Development Strategy for Nepal (IDS) under preparation, the paper develops a demand driven scenario which is contrasted with the supply driven scenario provided by the Eighth Five Year Plan (EFYP). In addition to addressing the limits of absorptive capacity, the demand driven scenario emphasizes the need for construction of economically justifiable farm-to-market roads in the agriculturally productive areas of the Terai, improving accessibility between the Kathmandu Valley and the Termi, developing efficient maintenance operations, and continuing the developlnent of tails and suspension bridges. Alternative maintenance strategies are considered based on estimates of road condition, unit costs and maintenance requirements.  i x - RQaScr ments xxxvi. Considering the limits on absorptive capacity, the resources available and contrasting the possible infrastructure development scenarios, total secr requirements for the period 1993-97 are estimated. Assuming a substantial reduction in new construction of North-South links to one-third of cunrent levels (i.e., mostly to complete economically justified, on-going projects, aimed at construction or upgrading to fair-weather road standard), the sector is estimated to require about NRs 12.4 billion. Even though the total sector requirements are commensurate with the resources available, the proposed distribution of allocations within the sector should be revised, placing gater emphasis on: (a) improved efficiency of new investments, and (b) renewed emphasis on maintenance and overaHl sustainability of expenditures. Sector Strategy and Recommendations xxxvii. As stated above, total transport costs could be reduced by shifting resource allocation away from low priority new construction (i.e., mainly North-South local access roads), and increasing allocations to address the maintenance bacldog (i.e., rehabilitation and maintenance of essential roads with the highest traffic densities), and for priority investments in economically justified upgradings and expansions of the trunk road network. This stategy would require defining a core economic road network (bascd on regional development trends and the demand for nral infrastuu), setting up a Road Maintenace Fund dedicated to road maintenance and funded by a pre-asigned share of road user charges collected by the Govemment such as fuel taxes and other levies, initiating an institutional strengthening progam to remove human resource and institutional constraints, and supporting the development of the local contractor industry. The speed and focus of the proposed program of reform would require a common policy framework or strategy for Government and donors. xxxviii. The strategy presented to develop a road policy reform framework addresses mainly issues that affect the efficiency of public resource expendiures in the road sector. The strategy focuses on three main areas: (1) Planning, Financing and Budgeting, (2) Operations and Management, and (3) Institutional Reform and Human Resource Development. The sector sttegy identifie the following main areas of action to be implemented by the Government with support frtm the extemal funding agencies: (1) an B_ =_S_ Network-Based PLaning (a) HMG to define a policy for road sector investments that weighs and compares various expenditure options (e.g., Priority Investment Plan);  -x- (b) HMO and extemal aid agencies to define a policy for Road Maintenance adaptable to the conditions of the mountain, hill and terai ecological zones, with special emphasis on improving cross and side drainage; (c) HMG/DOR to conduct a baseline survey of road conditions and traffic counts to assess present requirements; (d) HMG to upgrade and strengthen DOR's planing capabilities by establishing a unit with clearly defined -'oonsibilities for planning and programming using simplified tools; (e) MOF and DOR to rec! ssify expenditures; and (f) DOR to establish tectnical and financial norms and standards for road construction and maintenance, based on road condition, ecological zone and technology (labor-based vs. capital intensive). Collecting and Disbursing Funds (a) MOF to establsh a Road Maintenance Fund to have adequate, regular and dependable res)urces for road maintenance; (b) MOF and MOWT/DOR to study the level and composition of road user taxes to develop a fair and efficient cost recovery mechanism that covers at least the road network's marginal costs of operation; (c) MOWTI/DOR to develop procedures and to consider establishing a Disbursement Monitoring Unit to monitor and evaluate disbursement problems and to propose ways to remove major disbursement related problems; and (d) MOF to evalte ineasng the advance release of funds at the begnning of the fiscal year to tho districts with better performance to allow for maintenance activities to take place during the first trimester which coincides with the monsoon period. PenDmm Budg* (a) MOF and MOWr/DOR to introduce performance budgeting on a gradual basis; and (b) MOF to mplify road budget formats. (2) 1Ufa1 _f Mlainto=neMn^jDp (a) DOR to develop Nepal Road Standards for construction and mantemCe; (b) DOR to implement a system of quality control; (c) DOR to develop unified criteria to measure contactor's performance on construction and maintenanc activities; and (d) DOR to develop road surface maintenanc and bridge maintenance information systems.  - xi - (a) DOR to identify the present constraints affecting the road contractor industry and to prepare a progam of transition to increased contracting for periodic, routine and emergency repair; and (b) DOR to as the possibilities to facilitate the provision of equipment through plant pools for hire and leasing facilities. (3) lut RK (a) DOR and extenal funding agencies to define a policy for road sector reform including an institutional development component; (b) DOR to define an organizational structure and procedures to make services more accountable; (c) MOF and MOWr to set up an inter-ministerial committee for road maintenance; and (d) DOR to decentralize procedures to facilitate the administration of the road network; in the case of rual roads, local government authorities (District Development Committees) need to develop the technical and financial capacity to effectively maintain their road networks. xxxix. With respect to institutional reform, the repot has stressed the need for insfitutional stengthening of the DOR. Although there is no fixed formula for the administration of road operations, based on a review of experiences elsewhere, there is a broad framework for tie implementation of interventions supporting institutional development in the road sector. This framework, which must be adapted to local dciumstances, calls for institutional strengthening in a series of steps: (1) review of the road sector mission, (2) developing commitment to the need for reform, (3) developing a reform policy, (4) implementing strategic reform, (5) strengthening management and incentives, (6) inproving resource availability, (7) res u the oaniztion, and (8) developing manageial systems and procedures. Institutonal ngtheing in Nepal would require interventions at all levels in a manner compatible with the specific environment affecting the DOR and MOWr. In the short term, it could be realistic to expect that DOR and HMG under a review of the road sector mission and performance (addressed partally in this report), and to start developing commitment for the need for reform. Futur projects would need to focus on developing the reform policy and implemenng strategic reform. xl. The policy reform process could be driven by a nation-wide task force or initiative which targets a limited number of the important policy issues outlined in this report including, e.g., road sector finance and institutional sengthening. Donor coordination and support during the reform process are considered fundamental. The policy reform process requires a coherent framework agreed by govemment and donors with the main objectives of reducing transport costs and increaing efficiency of resource use.  PUBLIC EXPENDIUR IN MROAR SECTOR 1.1 Nepal's road sector is at a critical juncture. Despite the fact that during 40 years the Government has allocated a considerable amount of resources for new road construction, the overwhelming emphasis on network development without a coherent policy framework has been at the expense of institution building and the development of sustainable maintenance capabilities. Thinly spreading insufficient resources allocated for maintenance has resulted in inefficient operadons and inadequate maintenance standards. 1.2 Road tansport has become the predominant mode of transport in Nepal and is based on a recently developed road netwodrk which includes some 7,400 knis. The backbone of the road netwo*t is the East-West Highway in the Tenr (plains) and the North-South link to Katmandu from the border with India which suppors the core of agncultural production and economic exchanges. Even in the Terai road densities remain low, when compared to those observed in neighborng countries. 1.3 At a time when emphasis is being placed on improving macroeconomic and sectorul policies and better management of limited public resoucea in Nepal, improving the condition of roads is an essenial requirement for the modenizaion ad growth of the economy. In an agricultouray-based environment, the importance of roads is mainly due to the reduction of transport coss which often expand the frontiers of agricultural production by modifying the reatve returns to labor and capitd, incsing access to markets and making inputs available. In addition, Nepal's sensible aspiration to caure new niche export markets requires the development of efficient road trasport to make exports competitive. 1.4 lhe current Government's sector strategy, stted in the Eighth Five Year Plan (EFYP) currently under prepation for the 1992-1997 period, still focuses on new road construction, even though it starts to recognize the need for some atteion to maintenance. The overall emphasis placed on providing access to some 22 additionl ditrict headquaters has been at the expense of providing little maintenance to the exising rads. The lack of maintenance, compounded by weather and geographical constraints, is threatening the sus_nabilty of past investments. At a time when the Government has launched major policy reform initiatives to accelemate economic growth and meet basic needs, road sector policy refonn is needed to support a adonal reallocation of sector resources to safeguard past investments while ensunng increased access to productive areas.  1.5 WIthn ths famework, the pwcipal objdctives of this review of pubUc expenditurs In to toad sectot we to: * study the level and composition of sectoral, rogional and activity specific expenditures; * assess the procedures and effectiveness of expenditure decisions in the road sector; * identify sector priorities, prepar a road sector investment stategy, propose ways to improve programming ad budgetng pocedur to promote tranpcy and aountabiity, ed sugest mecanisms to build istitutional capacity and enhaced capbilitis to cary out prograng ed budgeing excrcisea, * esdmate road sector resoure requirements to implement the suggested strategy; and * recommend ways to addrcss the main constraint of resource mobilization related to planning, human resources and insttutional development, and technical considerations. 1.6 The study's pproach (Annex 1) staued by assing the level, composition and quality of sctort expdu and overall trends in resource allocation. Based on available data on network condition and use, it then esdmated resoure requirements by activity based on the forecto of road sector demad included in the background papers for the Inflatructure Developoent Strtegy for Nepal which is cuenty under preparation (draft expected later in 1992 ).Y A sector strategy was then proposed and compared to the proposed sector allocations under the Eighth Five Year Plan (EFYP). The study was not Ionteded to substitute for a detailed Priortization Investment Plan (Road Netwoik Master Plan) which is currently under consideration by the Department of Roads. 1.7 The proposed strategy is itnded to help rationalize sector expenditures, addrss the main onstas relatod to resource mobilization ad estima an envelope of neessary resource. The sector strategy, global in chaacter, suggests sector priorities but does not develop toad specific analyses. Given th we_bs of institutional capacity in the road sector, the sratogy focuses specifically on: (1) ways to improve rrent procedures for road sector planng, pro ing d budgedng in order to promote trasperey and cu bi, ed (2) mc sms to build institutionl capvoity and enanced cabilities to cany out pl , pgig ad budgeing exeries. 1.8 Mme pper includes eiht mnn scdons: sctor background cd key issues analyses of road expenditures and public expenditures decisiou, identification of the main constaints affecting public expenditure decision and esoure mobization, evaluation of toad use revenues, assement of the sector output, prentaion of plausible scenados, estimate of toad sector r eents, ad sector _aty. 11 Sinha, R., 1992, Background Paper on Infrastructure in Nepal, SLMo.  3 11. BACKGRQUN 2.1 Nepal is located in the foothills of the Himalyas and ies between the Northern border of India and the Southem border of China. At present, the country has a population of 18.9 million, 90 percent of whom lve in ral aes. The Kingdom's difficult topography, lack of tansport Unks and pressure on agriculturi land in the hill areas have prompted a steady migration into the Terai (plainsw which is the country's prmary gricultuwl resource and now accounts for over 46 percent of the populationY Rapid population growth (2.6 percent per year), tong migrawry trends, widespread poverty (US$170 GNP per capita in 1990) and the lack of basic social services (e.g., schools, and health centers) in many areas have resulted in more than 9 million persons living below the poverty line. A. Mao Eonomic Framework 2.2 Nepal is one of the poorest countries in the world, and historically the Nepalese economy has performed poody in terWm of both economic growth and stability. During the 1980's and after years of economic sagnation, Nepal pursued economic growth through a substantial increase in public expenditures financed mainly by domestic bank borrowing. Although GDP growth improved, this strategy, compounded by the country's very limited resource endowment and serious structural weaknesses of the economy, proved unsustainable. Starting in 1986, the Government initiated an adjustment progam which made progress in restoring macroeconomic stability and lid the foundation for necessary economic reforms based on policy reform in the trade, industry and financil setors. The momentum of rcform was relaxed in 1989 when Nepal faced the impat of the twade and transit impasse with India and internal politir.l strife which led to a democtic Government being installed in 1991. The result was a weakened economy with slower economic growth and a sharply deteriorated fiscal situaon accentuated by a deceleration of revenue growth. 2.3 The new Government which has been in place since May 1991 has a daunting challenge and has reoognized the need to focus on developmental activities. A series of measute have alreaty been take to introduce economic reforms. These include a devaluation of the currency in 1991 to maintain panty with India, raisig tanffs of public utlties, starting a pilot public entepse reform initiative, and setting an Administrative Reform Commission. The current objctives of the Eighth Five Year Plan (EFYP) higight the Goverment's in sing awarenes about the need to maintain an emphasis on efforts that would promote structu change and economic reform. The approach paper to the EFYP states that a reallocation i setodl investment and efficiency in resource use accompanied by policies that promote economic liberalizadon would promote the tbree main objectives of the plan, namey: (a) sustaied economic growth, (b) poverty alleviation, and (c) nrul development and regional balance. V1 Por the purposoe of spatial disaggregation the country in divided into 5 development regions (Bastern, Central, Western, Kid-Western and Far Western). also each region iz sub-divided lnto three ecological zones (e - , mountain, hill and torai) of which the mountain in the northernmost and the terai is the southernmost. A/ According to the preliminary results of the 1991 Population Census. It World Bank, 1992, Public Resource Manaagment in * Resource Scarce Bconamy, Country Operations, Indu3try and Finance Division.  -4- 2.4 Growth Rat . The EFYP sugges an esimated gowth te of S.I percent per year during the plan peiod (1992-97), which is somewhat higher that the rate of growth of 4.5 pacent per year es_mated by Bank staff for the Policy Framework Paper (PFP). Within the tight resource outlook, the esdmated gowth rates in both cases would require: reallocating expenditures among and within sectors to increase productivity, improving project implementation efficiency to capture the potential of on-going investments, increasing revenues and controlling wage payments and public employment, stimulating private savings, and promoting an active role of the private sector. 2.5 Moreover, in addition to sectoral reallocation of resources, the Country Economic Memorandum (CEM) states that Nepal's prospects for sustainable economic growth and development over the medium term would depend ult!mately on the development of light industrial activities oriented towards the Indian market, niche markets in third countries, and services including tourism.Y A priority oet by the approach paper to the EFYP to achieve the above was to promote th developmet oftbasic infrastucture including roads and other forms of transportation to mral communities and market center to enhance the rate of commercialization of agriculture, facilitate the provision of inputs and improve marketg. SIEUrAICO.PIC Sectoral Allocations Seventh and Eiqhth Plan Periods 40 30 n j 25- 1 20- LI. 15 l, | I t 10 Social sir,. o" adI. Aqricultw, Trap. & Cor Trod* Seth Plan C5-gO go eiqh Pln 93-97 World Bank, 1992.  2.6 5rl All . In ordet to ahieve the expected rte of growth, the approah paper to the EFYP cal for private and public investments predominantly focused on agriculte (26.2% of total investment), finance & real estate (19.6%), electricity (15.7%) and transport and communications (13.7%), in that order. The sectoral allocations and changes proposed for the public sector development expeaditure as part of the EFYP are shown in (Fig. 1). Public sector allocations follow similar inter- sectoral allocations as those obsorved dudng the SFYP with a slight increae Social Services, Electricity and Transport & Communications. 2.7 onal Context. Strong migratory movements from the hill and mountain areas to the teni have been sustained during the last 20 years. At present, the terai accounts for about 45 percent of total population (two-thirds in Central and Eastern Terai), with an equal share observed in the hil ares (two-thirds in Central and Western Hills). Urban areas only account for about 9 percet of total population, 70 perent of which is located in the Central Hills and Central and eastern tenu. 2.8 Production in Nepal is relatvey dispersed. However, indicators for 1984/85 suggest that about 60 percent of national output came in roughly equal shares from just three of the country's fifteen geographic zones, including the hills in central region and the terai in the central and eastern regions.' Other zones of importance include the wester terai with 8.7%, the western hills (7.4%), the eastern hills (6.4%) and the midwest terai (5.2%). While the terai accounted for about 60% of total output, substantially more than the hills with 37%, both accounted at the time for roughly the same population. 2.9 As in the case of total production, about 60 percent of agricultural production (which accounts for over 60 percent of total output and provides about 90 percent of total employment) iu concentrated in the Central and Eastern regions. While there are important inter-regional flows of agdcultura commodities, the Cental and Eastern region have traditionally accounted for surplus production of rice which is the main traded staple. 2.10 Per capita incomes are generally higher in the terai compared to the hiUls. The main exception to this pattern is the hill area in Centml region, which includes Kathmandu valley. The difference in per capita incomes has been often cited as a determinant factor of the important migration from the hiUls to the terai. B. Tranm ort Svstem 2.11 Nepal's tansport system relies heavily on a relatively recent and concise road network encompassing 7,400 km which is the trasport system's backbone. The road network has two main axes that are almost completed and compdse the East-West Highway in the Terai and the North-South road connecting Kmandu with the Indian border in the south and the Chinese border in the north. Road access in nual ares is complemented by a number of airports and short take-off and landing (STOL) fields, as well as a network of non-motorable tracks and trails (about 20,000 kms, of which 7,000 Icms are main trails mostly in the Mid-Wastern and Far Western regions) and suspension bridges (2,500 bridges, of which 400 are modern bridges) which feed into the system of arterial roads. Other modes of transport, including railways, ropeways and waterways, play minor roles in Nepal's transport system. 2.12 Nepal's difficult topography, compounded by the multiple streams and river crossings which rise considerably during the monsoon (June-October), make road construction and maintenance 11 World Bank, 1992, Infrastructure and the Develo2ment Proceos in Neual, sector report.  -6- difficult and expenive. In addition, Nepal's landlocked condition and Its dependence on tsit routs through India have made external trade exponsve. In order to reduce the costs of truanit ad tnanport associated with export and Import flows, IDA has been considering the prepartion of a project that would support the development of a multimodal tasport corridor. Such a corridor would facilitate multimodal trusport of export and import cago flows between Calcutta port and Nepal through three main bordwr points including Birgunj, Bhairawa and Biktnagar. C. *mprtance of Roads 2.13 Roads in Nepal are Important to al aspocts of economic and social development. lhe most important lnkages are between roads and agricltulal production, ronsl exchges and import flows. In parcular, given that prodr tion in Nepal is retively dipes and considering the high dependency on impors, economic exchanges between the main production and consumption ares are heavily dependent on road asport. 2.14 In the case of coUector and local access roads, the main inkage of low-volume roa improvement are the expected increasos in asricultural orduction. Successful agriculural development is highly dependent on access to markeb and timely provision of inputs. The importance of adequte roads to .griculturl development has boee often cited as a crucial element to incse aggregate agricultual production. 2.15 Recent studies in India and Bangladesh sugest that roads are an essential requiement Do the modernization and growth of agricultre in South Asian economies. Binswnger (1989)W developed a study for Ind which substantiated the overwhelming impact of road inrsructur on aggrepte crop output. The study analyzed the impact of price-policy vadables and of ro on agricultud development and concluded that road infstucture d irrigation were much more important than price policy vanables in explaining changes in aggate output, crop yield and area, &ad demand for modem ioputs to agriculture. The estimates presented by Binmwanger show that the direct contribution of roads to agcultural growth during one decade was 7 percent of total growth, esdmat at 24 percewt. The study aso suggested that the impact of roads on private investment is not, at least initially, via their impact on private agricultural investment but rather on marketog or-rtonities and reduced transaction costs. In a similar str y in Bangladesh, Ahmed (1990) showed that oductive units in more accesible areas had about 32 percet higher productivity than comparable units in inaccessible ateas, due to better market and price incdves and larger adoption of new techoologies. 2.16 Studies in Nepal confirm that road access reduces tansport costs and acilitates the agricultural modernization. An impac study of the road between Katumandu-Pokhama-Butwal conducted in 1977 established that road development reultod in increased production of commercial crops, even A/ Binswanger, H, *t al., 1989, Th- Imoact of Infrastructure and Financial institutions on Agricultural Outout and rnyestment in India, The World Bank, WPS 163. 2/ Awhmed, R, and M. Hossain, 1990, Dey2 mo2ntal imoact of Rural Roads in Bangladesh, Research Report No. 83, International Food PolLcy Research Institute, Washington.  -7- though the sam reults were not oberved for food crops.1P In bat, this study strengthened the cas for better screoning of projcts Involving road constuction and Improvements given that In areas with low to medium arculural potential, there ae long gestation periods between the investment period nd th. due when agriculturpl benefits ar realized. A more recent Impact study in the hill ares of the Coenrl region1'i confirmed also the laUed trponse, but found that road improvements subsialy lowered transport costs. 2.17 In the case of areia roads, with higher lovels of trffic (i.e., above 100 vehicle per day), the main linkage between road Improvement and economic development is the reduction in vehicle pggeradn C08tS. Recent ctvimates prepared by the consultant supervising the reconstruction of the Naubise-Malekhu indicate out that saving of up to 25 percent of vehicle operating cost could be achieved. Considering that Nepal's artial road netwo (over 2,500 kms) account for about 90 perent of totd vehicle-kdometers ad that vehicle usage factors are low on average, amounting some 40,000 kilometers per year, it would not be disproportionate to esdmate that there are an esdmated 1,600 miion vehicle-kldometers every year. Based on this tough and imperfect assessment, the benfits resulting from improvements to 50 percont of the arterial network (i.e., roads in poor condition) could amount to some US$25 million per year. 2.18 The benefits stemming from road mai can be calculated as net savings in public expenditures as a result of safeguarding past investments. Aegeer, t al. (1988P$ estimated that the annualized operation costs of the road network in Nepal could be reduced by a factor of 6 with the development and implementation of proper maintenance systems and by a factor of 2 only with minimum maintenance capabilities (i.e., routine minnance). In absolute terms, the study esmated that safeguarding past investments through the implementation of a routine maintenance system or a proper mainenance system could save some US$115 million or US175 million per year, respectively. 2.19 The benefits from road consmtluc in areas with development potential are dso associated with the reduction in transport costs which often expand the frontiers of production processes by modifying the relative returns to labor and capitd, increasing access to markets and maling inputs available. Due to vadations in each region's potential, geogrphical constaints, distance from the main markets, availability of complementary infr, and nature of the products, the rates of retum would vary widely from case to case. 2.20 Finally, an additional aspect of the importne of roads is that construction ad mten activities through labor-based methods could provide stable alternative sougs of employment in rural areas. The participation of men ad women in construction and maintenane activities has the proven potential to transfer scills, support the development of small contractors and dissemn;ate road technology at the local level which is esential for the sustainability of road infraucture. Q/ SBlaikie, P., 1977, The Effects of Roads in West Central Nocal, University of West Anglia. II/ Lamosangu-Jiri Road Study prepared by tho Swiss Development Cooperation, 1991. ,12d Aegerter A., and 0. Bosohardt, 1988, Maintenance of th- Transoort Infrastructure in Renal, Swiss Development Cooperation,  z S -~-8 D. Road Network length. OMtrh 2.21 In 1991 Nepal had 7,400 km of roads. 'hese included about 2,200 tn of utria- roads, 1,800 km of coletr roads, 2,300 km of local access roa, and 1,100 km of urban rwads (table 1). About 60 peent of the road network is located in the ToaW, which also ccounted for 60 percen of GDP in 1984/85) Ihe distribution among regions indicate. a disict emphasis of road development activities in the Central (37%), Eastem (25%), and Western (19%) regions (Table 2). TeMse same the regons accounted for over 82 percent of agrcultural production, 78 percent of agricultural employmen and 85 pcent of GDP in a survey of regional producnon in 1984185 (NPC, 1989). Moreover, the dependence of the urban centers in the Kathmandu valley on the ports in nobighboring India, through the border post of Birgunj, have resulted in a high concentraion of paved rads in Cental oion, with more than 4S peroc of all paved rads in the ceuntry. Table 1. Road Network Length ClAssificatiou (in kms) Road Classificaton Tin. J__Artedal CoUector LOcal Acos_ Urban Total Paved 1,756 480 241 485 2,962 Grave 226 481 672 300 1,679 Earth 200 861 1,386 313 2,760 Total 2,182 -1,822 2,299 1,098 7,401 _u_c_-_ -i -oad rtastics mi 2.22 About 40 perwent of the roads wer origially built with a paved surface, and 20 percent with a gravel surface. The proportion of paved roads is large considering the relatively recent nature of road development activities in Nepal and the high unit costs of construction and maintenance. Most of the remainng roads provide limited access during the dry season, given that they can be traversed only with four-wheel drive vehicles. 2.23 Development of the network proceeds at an ever growing pace. During the Seventh Five Year Plan period (SFYP 1985/6-1990/1), at lawst 878 kms of new all-weather rads (paved and grvaled JJ For the purpose of this study, the road classification system adopted for the Bighth Plan was adopted in general including: Arterial Roads t includes national highways also known as Rajmarg, Collector Roads s includes roads labeled as feeder roads, connecting district and zonal headquarters to arterial roads, Local Accgss Roads s includes roads labeled as district roads, whlch are excluded from the above categories and urban roads. I1 DRegional share frog 'Basic Features of the National Development Master Plan (1990-2000)", National Planning Commission, 1989.  -9- surfaic) were consucted, out of a tget of 1,O10 kms (Table 3).Il The anual te of newrk expansion ment th some 175 kms of all-weatheT roads and 75 kms of earth (fair-weather only) rats wern added to dh network very year. Table 2. Road Distdbudon by Region (in kIns) Region Arterial Collector_ Lc Access__. Utban Total | aster . 415 420 711 280 1,826 25 Ceatral 700 517 1,007 491 2,715 37 Westen 538 323 326 244 1,431 19 Mid-Western 308 373 116 55 852 12 Far Western 221 189 139 28 577 8 Total 2,182 1,822 2,299 1,098 7,401 100 Source: Esdmates from Nl Ros d Statistics 1 2.24 The priorities set for the SFYP period included completion of the East-West Highway, namely of the Kohalpur-Mahakali section in the Mid-Western and Far Western regions (under the Third Elighway Project - Cr. 1515-NEP) scheduled for substanial oompleion on lune 1993, ad the construction of three main uorth-south corridors including: (a) Charali-.lam-Taplejung in EAster region (68 kms remaining), (b) Nepalgunj-Surkhet in Mid-West region, and (c) Dhangadi-Dadeldhura-Darchula in Far Wester region (47 kins remaining). 2.25 The existing road network connects over 53 district centers (out of 75) which include the ars with highest productive potential and account for over 85 percent of the population. Still, however, there are many isolated areas with low pop Ia'ti densities and difficult terrain which remain inaccessible, and where the only reliable tnsportation is based on seasonal trails. 21/ Approximately 80 percent of the arterial and feeder roads in the program were constructed. However, the Seventh Five Year Plan (SVYP) also included a target of 692 kms of earth (fair-weather only) roads out of which only 233 kan were constructed. Therefore, the total construction achievements during the SFYP were l,ill kma out of a target of 1,792 kmm planned, or 70%.  - 10- Tab4e 3. Seventh Plan (1985/86 - 1989/90) Road Consuction Taqrgt and Progress Percent of Addidon 1teim Ilnterim 7th Plan Progress Target Since 6th Period Period Type of Target 7th Plan % mml 1990/91 1991/92 Road kms kms kms km kms Paved 442 214.5 48.5 175 117 97 Gravel 6S8 764.8 116.2 703 34 68 Eath 692 278.0 40.2 233 214 46 Total 1792 12S7.3 70.2 _1111 365 211 Source: EFYP Draft 2.26 On-gOing Fhipcs. At the end of 1991/92 fisc year, whe were about 950 km of artial and collector wads included in on-going construction and constuction projec (Table 4). Most roads under reconstuction were not fit for periodic maintenance duo to polonged nlect of road maintenace. It should be pointed out, however, tht road reconsruction often results in costs 4 to S times hig' -r than when appropriate m is implemented. The curnt pace of road projects is expected to iease the road network during the Eighth Five Year Plan period at least by 10 percent. The Eighth Five Year Plan projects the completion of the 950 km of on-going projects plus 6SO kms of new roads (excluding about 900 km of local aocess roads), which would add 320 kllometer of new atedal and colector roads (plus 180 kms of local acces ads for ffr-weadier use only) to the maintenance program every year. 2.27 P ro . The EFYP propoee ta undertake the following activities: * periodic maintenance of 1,450 au, * upgrading 1,129 kms (from eark tu gravel, or gravel to paved), * constuction of new roads linking istrict headquartes and rrl link roads connet villages to existing hig> -"%ys (650 kms), * constuction of local acces roads peopl's participaton (900 kms), * completion of on-going project imc,wing remaining parts of national highways (95O km), * consruction of access roads to sites f t dority projects, and * constrction of 955 kms of mule-traiL, motorable trk ad tractor trails.  - 11 - Tabl 4. Eight Plan: New Road Construction and Reconstruction (in kIms) Road Classification Surtce d. ___ mm AracCollector Local Access Total Paved 305 7 N/A 312 Gavel 141 20 34 195 Earth 195 23 232 450 Total 641 0 266 957 _~ - 2.28 The overwhelming emphasis on new construction is illustated by the taget proposed by the EFYP which in addition to the completion of on-going projet, includes starting about 650 km of noew arteal and coUector roads. Moat of the new projets are related to roads connecing district headquarters. Most of the 22 disrict headquarte which remain isolated from the road network are located in the hiU or mountainous ars.11 (see Map 1) The EFYP draft proposes that at least 13 of these distict headquarters be conncted with artrial roads, which would alone require some 900 kms of mosdy north-south roads. Due to the inherent and obvious p-oblems of ftnding, enoteness, landslides ad limited growth potential in some of V'e mounious areas affected by these roads, the EFYP is prposing to construct roads of least possible cost to 'meet minimum standards without adversely affecting the environment". 'vowever, even with minimum standards, the proposed north-south acces roads to these 13 disticts raise serious economic and environmental conern which cast serious doubts of the sustainability of the proposed network extension appoach. E. Road Condition 2.29 The prolonged neglect and defenrmet of road maintenance has resulted in road deterioration which has attenuated the utility of the subtantial efforts made in the past to extend the read network. Esimates prepared for this report (Table 5), based on very limited and imperfct information, hi/ Including 5 districts in Eastern region (i.e., Solukhumbu, Sankhuwasabha, Okhaldunga, Rhotang, and Bhojpur), Ramechap diLtrict in Central region 4 districts in Western region (i.e., mustang, Manang, Myagdi, and Lamjung), 8 districts in Mid-Western region (i.e., Humla, Mugu, Jumla, Dolpa, Kalikot, Dailekha, Jajarkot, and Rukum), and 4 districts ln Far Western region (.e.., Bajhang, Darchula, Bajura, and Acham).  -12- idicate that at lest 75 percent of a roads are in poor to fair12 condition (i.e., 50 and 25 peret in poor and fair condition, respectively). Table S. Road Condition Estimates (in kms) Road Classification Su f. TVPO Arterial Collector __Local Access Total Percent Poor 1,150 850 1,150 3,150 SO Fair 800 400 300 1,S00 24 Good L........8250 600 S00 1,650 26 ik I.- ' fi T1-b0 2,250 6,300 1OO Source: Autb=r's Esma F. Road Sector Ornizatlon 2.30 The overall responsibility for the adminiion of roads and road transport rests with the Ministry of Works and Transport (MOWT), within which the Department of Roads (DOR) is responsible for the panning, design, conction and mantene of roads, and the Department of Transport (10) for road transport regulations and policies. 2.31 The DOR faces a daunting task in a difficult environment. Sveral organization and management studies have identified the urgent need for instutionl and human resource development in the sector. Basic institutional development requires a careful assessment of sector priorities and a clear definition of the sene of mission of DOR which is absent at present. The development of indigenous efforts to strengthen DOR and enhance the basic organizatonal sklls needed to ianage and further develop the road network would in any case require extenal asistace in the short term. Some of the main issurs are addressed below. 2.32 Or n. The DOR has inheited structur, procedures and systems which reflect the requirements of the system before democracy was established in 1991. DOR's organization was reviewed in 1989, but it remains a argely cenrlized road agency with an ill defined scnse of mission. DZ/ For the purposes of this report: Good Condition refers to paved roads substantially free of defects and requiring only routine maintenance, and unpaved roads needing only routine grading and spot repairs, Fair Condit$on. refers to paved roads having significant defects and requiring resurfacing or strengthening, and unpaved roads needing reshaping or resurfacing (regravoling) and spot repair of drainage, Poor Condition refers to paved roads with extensive defects and requiring immediate rehabilitation or reconstruction, and unpaved roads needing reconstruction and major drainage works.  - 13 - DOR remains an oprational branch with little impact on sector policy given its reliance and dependeney on other Government and external funding agencies which determine to a lrge extent the focus, scale and composition of road activities. 2.33 DOR is headed by a Director General, who oversees a structure with six Deputy Director Generals, a Project Implementation Group (engineers seconded to projects), a computer and documentation center and an administration and manpower section (see Annex 22). The structure represented in Annex 22 was approved only in 1989, has many vacancies and is not fully functionalA DOR has about 2,000 established staff positions including, about 600 professionals (including about 264 engineers in permanent service) and 485 overseers. Of the established positions, about 12 percent are assigned to planning, design and administration, while the remaining staff are dedicated to field activities (85 percent for civil works and maintenance and 15 percent for equipment operation and maintenance). 2.34 Institutonal Developmont Issues. The early findings of the on-going organization and management study indicate the need to address: (a) the lack of capacity of DOR to formulate and implement road sector policies, (b) the lack of networt-based planning, (c) the lack of capacity to prepare a sound operational plan every year, (d) the lack of an adeqate management onvironment and appropriate skdlls of management to execute efficient road management, and (d) the lack of capacity to introduce effective institutional reform programs. 2.35 The key to institutional development in the road sector would be to develop policy, planning, supervision and monitoring capabilities commensurate with the management and operation needs of a rapidly growing network in support of the country's economic development progams. Institutional development might be facilitated if the current emphasis on operations through private sector contractors is continued rather than increasing its force account capabilities. With the exception of emergency repair and routine maintenance, DOR executes most road construction and par of its road maintenance program through domestic and international contractors. The progressive reduction of the role of the Government in the provision of improved and maintained roads would require in any case higher quality investments, development of necessary mainteane supervision capabilities at all levels (i.e., regional, district and headquarters), development of plant pools for hire, and development of a core local contrctor industry for arterial, collector and local access roads. 2.36 In the short term, institutional development rlaed actions need to clearly define the strcwture of DOR (considering the human snuce limitations), establish a sensible delegation of powen giving staff greater responsibility, and deve'- I a progrm to support deenlizon of road management and operations for selected programs (e.g., maintenance increasingly managed at the regional and district levels based on pilot progms). 2.37 Ir. the long term, a program of institutional reform could follow the above institutional development initiatives. Based on the experience in neighboring countries and elsewhere, a separate and autonomous road authority could be developed if necessary to fulffll the management and operaion functions described above. 2.38 Human Resource Developmeot Issues. DOR employs over 10 percent of the engineers in Nepal. Out of 2,865 engineers in 1992 'OR employed 346 engineers (including temporary staff). }Afi/ Overseas Projecta Corporation of Victoria, 1992, *Road Administration Development", Part A of Road Transport Institutional Development Project.  -14- However, then are few inenves in place to awact, retainad motivat experience staff to join both DOR and DOT. One of the few ways to retain the most expq ienced eagiee available to DOR is to assign them as sonded stff to patcipate in donor-fended projecs. 2.39 The main problems bced by DOR to rea expeience staff are relatd to: (a) lack of on- the-job development and motivation, O) lack of staff accountabiity, (c) lack of application of previously learned skills, stgnation and waste of expv education d trainin, (d) low levels of staff productivity, and (e) loss of staff to the private sector. Most of these problems result from lack of appropriate and flexible employment policies affecting the public sector. In other countries, the advantae of autonomous agencies has been that they can avoid becoming financially overbrdened with unneeded staff and promote staff bued on merit ad remove son-performers.W In the short term, experience elsewhere points to the advantages of craUng a pazonel unit, enhan line manager.' capabilities, giving aster repoto ff, establishing poductivity bonuses, sting standards, and developing regional taning sttures. G. Road Network Uso 2.40 Data on traffic and vehicle fleet in Nepal i vry inadequate. In general, available data indicates that: (a) low trffic volumes re provaleat in Nepal's road network at levels commensurate with the present levels of economic activity in Nepal, and (b) taffic has grown at about 7 percent per yewr according to observed increass in ectd strches of road, i ses in motor vehicle registrations and ineases in motor fuel and diesel sales between 1981 and 1991. 2.41 The most heavUy used arterial routes in the network serve an anual average daily traffic (AADT) of about 1,600 vehicles, but many m alo claified in the artal category have AADT of less than 200. Traffic dat coUected in 1991 confirms tht tho pripal corridor in terns of traffic include the route between Katmavt nd the Indian border (i.e., Kahmundu-Naubise-Mugling- Narayanghat-Hetauda-Birgunj) with AADT of about 1,600 in the road sections off Hetauda an Katumandu, and AADT of about 900-1,000 in the other road sections. Trfic levels in sections of the Eat-West Highway (other th Htuda-Namyaughat included in the Kathmandu-Indian Border (Birgunj) road) had AADT which varied betwe 1,200 vehicles in the Wecs and Eastern rion, and as low as 300 vehicles in Mid-Wsten region. 2.42 The vehicle fleet in 1991 accounted for about 50,200 vehicles, including over 55 percent of private vehicles, 25 peet of commercial vehicles, 20 percent of Govmet ad _Ipaat vehicles. The prevaloet type of vehicle is te motor-cycle or thwee-wheler which accounted for 40 pecent of the fleet, while private cus ccount for 34 perent and trucks for 12 percent. The growth observed in anual vehicle registrations has been on avepe about 7 peret per year, with much higher rate of growth for private vehicles (11%) ad mor-cycles. .12/ CarapetLe, S., *t al., 1991, The Road Maintenanc- lnitiAtiv, The World Bank.  - 15 - m. ROAD EXPENDrl UR 3.1 The rapid rise in public expenditures in Nepal has mised ample concerns among Nepalese and external funding agencies regarding the level, quality and composition of public expendiures, perceived effectiveness in promoting social and economic development, and rising leves of det servicing. The same concerns are pertent when analyzing expenditures in the road sector which account for some 10 percent of total development expenditures. 3.2 Road sector expenditures bav traditionally accounted for a large proportion of total development expenditures. However, road sector expenditure have declined sharply as a proportion of total development expenditu during the lst decade, decreasing from 19 pecet to 9 peacent between 1981 and 1991. This declino is compounded by the fact that an analyais of recent budget performance indicates a wider gap between allocations and actual expenditures than observed in other sectors. Still, however, the road sector accounts for a very important share of the public gross fixed capital investment in Nepal. Moreover, considering the importance of roads in economic development and the substantial capital investments made in the past to develop the existing road network, it is indispensable to examine carefully the level, composition and recent trends of road sector expenditures. lhe examination of road sector expenditures provides the backgound to assess the sustainability of past investments, analyze public expenditure decisions in the sector and suggest a strategy for futur sectoal allocations. 3.3 This chapter analyses the level, composition and growth of road sector expenditures. The analyses are conducted at the sector, region and activity-specific level. An outine is presented of the levd and growth of sector expenditures. The analyses presented below suggest tat the program of road sector expenditures has lacked focus or a clear sens of prioities, at a time when the overal growth of public expenditures has been formidable. A.Iner-sectoral Comearison of the Level and Growi f RoadSector Expedituresl 3.4 Public expenditures in Nepal have been growing very rapidly. As stated in the 1992 CEM for Nepal, this is one of the most striking feaure of fiscal developments in Nepal over the past decade and a half. The rapid rise in public expenditu supported expansion in Goverment activiies (regular budget expenditures), maily in economic serice progms (development epndure including, e.g., agriculture, irrigation, land refrm, forest, ihdstry and mining, communication, tansporation, and electricity sectors), particularly those finaned by the Government's own reources. However, a explained below, the rapid rise in public expenditures was not accompanied by a coe e increase in road expenditure. 3.5 EjendtuM as Prwrtion of GDP. The CEM identified three disict phses in public expenditurendds between 1981 and 1991: (a) a rapid expansion of Goverment expenditures to provide basic inftuct between 1981-1983 when the Govemment expendiu to GDP ratio grew from 15 percent to 20 percent, (b) stabilizaton with modat incrses in expendit levels betwen 1983 and 1988, maintaining the expenditur/GDP rtio at about 20 percent, and (c) maintenance of macro-economic stability against a background of unsettled domestic conditions between 1989 and 1991, when total Government expenditures as a ratio of GDP emained at 23 to 24 perot. lhe same geneal trends are observed for Govermnent expenditurei on economic sevices. 3.6 Overall, Government expenditues u a share of GDP increased from IS percent in 1980 to 23 percent in 1991, although the period witnessed consideable fluctuadons (Fig. 2). On avenge, the  - 16 - Government Expenditures (% of GDP) Total. Economi Serces and Roads 0.25 _ 0.24 0.22 0.2 A- 0.11 0.16 | 0.14 _ 0.12 IL 0.1 0.06 0.06 0.04 0.02 *CC- - _ _ * _ C * 0 19dO/BI | 1912/ 3 i l984/I5 | 1916/e7 i 19dd/d9 I 1990/91 1981/12 1983/84 1985/16 1987/Il 1299/90 0 Road ExA.nditura + Cceomn Ua,cl e Total Ex*endlturs FWsO 2. raio of public expenditure to GDP betwoee 1986-89 wu 21 percent which was higher than that of neighboring India and Asia in genral (18% and 19%, respctively) for the same period. 3.7 The trend observed for rwd expenditures as a proportion of GDP is the opposite to that observed for total public expeoditure. Bdween 1981 and 1991, the share of GDP for ads decreased fom 2 percent to 1.6 percent. Such decrease in sector expenditures (in relative terms) occurred at a time when the Government focused on expanding the road network. Unfounely, fte focus on oew constraction left few resoures to develop necessary mmsigement and technical capabilities to manage the growing capital stock. 3.8 ZZodijura. Ju Rates. The annual growth rtes for constant road sector expenditures during the three phases idenified for the period 1980-1991, are also disctively lower than those observed for expe_ditue in ecooomic services or total expenditu (Table 6). Tabl 6. Emtes of Annual Growth Rate in Expenditures (i Consnt NRs) by Type Exediture _ _ _ _ Period_ _ _ _ (Regular and Developme) _ FY81-FY83 FY83-FY8S FY8F-PY91 Total Government 17.9 6.0 10.0 Economic Services 7 12.8 | 6.3 9.2 Road Sector 1.8 1.4 2.6  - 17 - 3.9 iusues Arisinff from the Inter-Sectoral Comvarison. The sharp contast between the recent trends of public epeditures and those observed for the road sector indicate that the road sub-sector's relative priority has declined, even though the road netwois is still incomplete and maintenance is vastly inadequiate. 3.10 Two plausible circumstances have lead to the present situation. First, after decades of relatively high allocation shares when the basic road network was being developed, the backbone of the network has now been developed, and consequently sector expentitures, relative to total expenditures and GDP, are stabilizing at the levels observed during the last decade. Second, the lower leaels of expenditures in relative terms, st! a time when the Government has attached the highest priority to building new roads, could also indicate a serious absorptive capacity constraint. 3.11 The decrease in sector expenditures could also be explained in part by the fact that other Ministries already share a notion that the quality and effectiveness of the sector investment portfolio is not optimal. Once the basic road network has been developed it becomes more difficult to convince different constituencies to maintain a high level of allocations to fund maintenance requirements. However, even after the network growth is slowed, maintenance requires expenditures to grow at a pace commensurate with the use and condition of the network in order to safeguard past investments. 3.12 Recent trends of aggregate sector expenditures and the inter-sectoral comparisons presented above, provide an indicator of the broad ranges for aggregate levels and growth which could be expected in the short term as well as a proxy for absorptive capacity. B. Level. Comnoultion and Growth of Road Sector Expenditures 3.13 This section analyzes the share of total trasport sector expenditures dedicated to roads, compares allocations and expenditures in the sector, and analyzes the distribution of road sector expenditure among regions and activities. 3.14 Predominance of Road Expenditures Amogn TransuorLSector Ex2enditures. Transport sector expenditures, including roads, bridges, civil aviation and urban transport, accounted for over 20 percent of totals' Government expeaditures between 1956 and 1975. Since 1975, the traosport sector's share of total expenditures has been reduced to just over 7 percent, reflecting substantial reductions in road expenditures. Road expenditur account for over 80 percent of transport sector expenditures. 3.15 The overwhelming emphasis on road expenditures among traport sector activities and the relatively high share of expenditures dedicated to roads during the last 40 years ilustrate the predomiance of road transport among transport modes and the importance attached to developing a basic road network by the Goverment. 3.16 Decrasinf Sctor Alocation Share. Between 1956 and 1980, which includes the first five development pln periods, the Government dedicated more than 20 percent of public resources for the road sector. Such high levels are typical of early stages of road network development. As the basic network has developed, the share of resources allocated for road sector activities has decreased to an 2W/ Total allocations or expenditures in this report refer to development and regular items combined.  - 18 - aveng of about NRa 2.2 biUlio (of 1992 or US$ 50 million equivalent) per year betwen FY 19892, accoundi on averg for over 9.5 peen of total allocatons. Road Sector Allocations & Expenditures Ourrwnt R 2.6 2.5- 2.6- 2.3- 2.2- 2.1- 42 3-- :12 3.17 In1 the fut, the BEYP expecx furthor decreass inl dioe shmof totl (i.e., private and pulic) dwelopment expen_u for the ogut t cd IomI miox otor * wbolb. The expoetW reecon is from 15.4 paeceat inl the SFYP to 13.7 percent in tho EPYP. Ihe slght decline has been just brset on the expoctdowu dt: (a) better smetooing would iprove theo quility of die scoot pottolo, and improved monitodo would eab-ne de effiic of pnxject i _ ;(b) long gestton periods associated withi tguport sector projocb do not *vdf Impo imea in sector isv_shu; ad (c) icsmig reace on communit.v putcipRos which is expeczed to comploment public fixod copitbl investents at the local levd. 3.18 Ahlyzing the ppoed composition of oubli dvopn expenditure, however, the EFYPb eqm a slgt ineue ill the share of dovelopmet expadtu for do we soctr. RecogniZ th weod for iMved hspOrt an communications ifrfihuM dldt a peio of shculrfor, the lEYP iocudos an mcew s Mwbli davelopmeat expendituuo for transOrt an comiaio from 15.7 peret (achiaete in the SFYP) to 17 pworol durin te E7YP. 3.19 Total allocations during the EPYP for tNalpoft mdCmlllCiI would mount some NRs 16.1 billia (USS380 million equivalent). This would include about NRs 12.3 billion (USS289 milion equiv.) for thle ma sector, compared to road expe_dtu that totsiled NRs 7.7 billion during te Sevent Pla period (m IM9 prices). In prnaciple, therefote, the EE7YP deias about 13.8 perewt of tota development expenditure for roads up firom 12.6 in the SFYP.  - 19 - Road Sector Expenditures as Percent of Total 25%- 20%- 15%/ 10,%- ~~- -ass<Fs, 0% _ 80/81 81/82 82/83 83/84 84/85 85/85 88/87 87/88 88/89 89/90 90/91 Expenditures Source: DOR -Development + Regular FsgWe 4. 3.20 Trends in R_a Sectog Exgedit 1980-1991. Road sector expenditures have been much lower than the above mentioned alcatons, as shown in Fig. 3 (se Annex 2). As a whole, road seor expenditures in FY 1991 amounted to less 6.6 perent of totl expenditurs (compaed to allocations of 9.4 percent), reflectig to some extet the limited impenation capabilities (soe Annex 2). The share of total expenditur dedicaed to roads ha been declinig steadily, particuladry becuse of the decline in the share of development eqeditu (Fig. 4). 3.21 E d in rea ms have imasd on averp only at 1 perco per year betwoee 1980-1991 (Figue 5). This bnoming tend ha occurred widin an envelope of dcean allocaions (relative to total alocaions and in ra tem). n rea ms (conta NRs, 1990/91-100), road expendius sarted the 1980's e at about NRs 1.35 billion, declined to NRs 1.07 durag FYs 1985 and 1986, ad ascended to tdo pret level of about NRs 1.6 billion (US$38 million equivalent) achieved .in FY 1991 (Annes 3,4 and 5). During die diree phass Ideifid in Table 6, the annual gowth rae observed in road sector expe_dit wu lower thde aonaul rte of rad network expasion durng the same perod which ws at Idst 3 to 4 pcet per yea. 3.22 Totl expenditu in he ad sector a a share of GDP have fluctuated along the lines observed above for total public expenditue (Fig. 6). Strtn at an avea of 2.0 percen between FY8I-83, the ratio was sharply reduced to 1.5 percen between FY 1983-88, and slighdy incrased to 1.7 prcent between FY1988-91 (An 2). The oveall reduction w due mainly to a deem in the share of development expenditures deed for roads (which docrased from an averge 1.9% betwoen FY1980-83 to 1.6% between FY1988-91). Regula budget expeditur for the ad sector waen maintained at about 0.1 pemeat of GDP.  - 20 - Expenditures in the Road Sector Constant NRs million (1990/91 - 100) 2500- 2000 1500 Source: DOR 3.23 Distribution of Expenditures Among Central and Rerional Levels. An examination of road allocations and expenditures at the regional level indicate important disparities between centra and district level allocations. 3.24 Centra level transfers to the districts for new road construction and periodic maintenance have increased sharply in the lIs 5 years. In 1991 district level roads received about 9 percent of development expendits, up from le than 4 percent in (Annex 8). Even though central level dlocatons sti occupy an overwhelming proportion of total road sector resources, the upward trend in district level allocations would undoubtedly result i a wider spread of road construction and maintnance activities. 3.25 Retiona Disbution of Road Sector Expenditures. The disparities observed in regional distribution of road sector resources in Nepal have, to certain extent, mirrored the higher concentrations of population and economic activities in the hills of the Central region and in *he Tersi of the Western, Centmal and Easten rgions. As shown in Table 7, the resulting road networt densities are rlatively higher in these sme regions.  - 21 - Road Expenditures as Percent of GDP Source: DOR 2.4% 2.2% 2.0% 1 .8% - 1.4% 1.2% 1.0% - 80/81 81/82 82/83 83/4 U845 85/8.6 8W87 87/88 88/89 89IQ0 90/91 Table 7. Road Dnity by Ecological and Administrative Region Kilometers of Road per 100 Square Kilometes of Area or 1000 persons Ecological | Density 1 Far i wes Central Md Tota Region Unit West West kim/lOOkm2 __5.67 0.23 0.73 Mountainl - Mountain khn/1000 pop 0.75 0.07 0.26 km/lOOkm2 2.16 1.97 3.52 10.75 3.42 4.48 En_____k_ Ikm/1000 pop 0.22 0.22 0.27 0.47 0.29 0.32 kmn/lOOkm2 8.34 7.57 12.64 10.20 18.12 11.44 onl/lOOO pop 0.60 0.60 0.50 0.31 0.51 0.45 km/lOOkm2 2.81 1 1.95 4.45 9.40 6.17 4.78 kInm/lOO pop 0.33 0.34 0.3S 0.42 0.40 0.38 SoreSinha (1lw5""""' 3.26 An examination of road sector investments over time indicates that the predominance of investments in Centrai and Eastern region has been prevalent since the First Five Year Plan, as shown in  - 22 - Table 8. Only during the Seventh Plan peoiod wa an effort made to connet the Far West reoon with the aorial road netwok in the ret of the country, with the compledon of the East-Wet Higway. Table 8. Road Network Length After Vadous Plan Periods by Region Region First Plan Thrd Plan Fifth Plan Seventh Plan Eastern 48 705 1,052 1,775 Centrl 450 1,162 1,905 2,671 Western 120 493 946 1,450 Mid West 6 370 1,037 861 FarWest | oO | O644j Total 624 2,730 4,940 7,401 -source: t~tr 3.27 As a complement to the traditional concentration of road expenditures in the ls of the Centl region and the Tetai in the Western, Central and Eastern regions, expenditures in other aeas have traditionally included fair-weather district level roads and tracks, tails and suspension brdges. The latter are usually the only access to the 21 districts without all-weather roads, in addition to air services. Table 9. Distnbution of Developmet Budget Proposd for EFYP (1993-1997) (NRa millions) Re'gion |Progam | Ea8t |mww C^ West | Mid- PFar- Total West West Periodic Maint. 47 47 0 Mountain Rehab./Upg co_______ n 663 119 435 1,217 Periodic Maint. 394 461 855 Hills Rehab./Upgrading 479 523 224 17 441 1,684 Consuciwon 805 1,088 497 1,193 565 4,148 Periodic Maint. 281 38 77 396 Rdhab./Upgrading 578 299 _ 69 13 959 Contuction 205 157 41 89 674 1,1;66 Bridge Construcon | 235 122 42 | 72 | S7 476 Rural Transportation Development 190 191 228 240 209 1,058 Miscelaneous _1 541 104 1 541_ 541 54 320 Total | 3,209 3,206 I 1,704 | 1,811| 2,396 12,326 Source: EFYP (to be reviewed) Notsa: Constu tion includes on-go Ng projects.  - 23 - 3.28 As monioed aov, during the proposed Eghth Five Year Plan period (1993-1997), road sector resours would be ded_ated for erebablitaton of the road network in to Tra and il aes and expaion of the network (through compledon of on-going new constncton or undertaking new projects) in the HIll ad Mountain ares (Table 9). During the EFYP, one-third of all development reources would be dediad for network extensions and completion of on-going project in the Hill ares of E1an, Wesen and Mid-Wester tgions, following network development ted initiated during earlier yewu. The EEYP also increas allocations for periodic maintenance for Hill and Temai alrs in the Central region and makes substandal allocations (almost one-fourth) for upgrading and rehabilitation in the Hill and Tera areas of Eastern and Cental regions. Table 10. Expenditr in Cotan Terms (199/91 - 100) and ___ _Epdteas a Paecot of Allocatons 1988 r 1989 1 1991 Type of -R Of NR- R R Exignditure |Budget - Development 1,400.7 75.0 1,797.3 78.5 1,278.2 56.6 1,513.7 83.7 Regular 95.4 96.4 105.1 93.0 105.8 88.8 86.4 92.1 Total 1,228.8 76.2 1,471.51 79.2 1,141.71 58.0 1,600.1 84.1 Source: Annx Z (wich includ cormions for direct paymentsFfromis) Annexes 6,7 and S.  - 24 - 3.29 In smmary, the above analyses show that traditionally, road sector expeur have been concentrad on finding road construcdon in the Hills of the Cetal reion and in the Tend of the East, Westem and Cental regions. However, this emphasis appears to be shifing. The proposed EFYP proposes a program which s attention to rehabilitation of roads in the aras with a reively developed network and expansion into other areas. This shift is to be accompanied by increased finding to disticts which would iease the number of wodk fronts and spread available resoures thinly into hill and mountain regions where population densities and levels of economic activity often do not warrant substantial road investments. 3.30 Distribution Between Regular and Deve&o2ment Exgenditures. Between 1988 and 1992, an average of 95 percnt of total road sector allocations wore for development budget expenditures (i.e., new construction, rehabilitation, periodic maintenance, bridges, equipment, traing, road surveys, land acquidtion and other miscellaneous). Durng the same period, development expenditures fluctated only sUghtly strting at 92.2 percent (1988), decrasing to 90.7 percent (1990) and ieasing steadily to 94.6 percent (1991). 3.31 In real terms (NRs 1991/92=100) the data shows that development expenditure in roads decreased substntially in 1990 after the peak achieved in 1989 and rcperated somewhat during 1991 (Table 10). The delays in project implementation resulting from the trade and transit impasse between India and Nepal in 1989/90 and the political changes during 1990 explain the reduction observed in development expenditures during 1990. Regular expenditures rmaion constant but decreased in real terms during 1991, especially affecting routine mainwawce expenditures at a time when the network is expnding. 3.32 The budget performance data shows that the development expenditures as a proportion of allocations were as low as 56.6 percent during 1990 and only climbed to 83.7 percent in 1991. These figures are particulady distressing considering the large number of projects for which annual allocations amounted to less than 10 percent of total cost (as analyzed later). 3.33 Expenditurus by Activity. Road sector expenditure data are not adequately classified in terms of activity, region and type of road affected. Rather, the development budget has trsditionally been a list of projects without clear distinction among: (a) on-going or new projects, (b) construction, rehabilitation, periodic maintenance, or bridge construction/repair activities, (c) type of road (i.e., arterial, collector or local access), and (d) development region or area affected. Since the project list does not lend itsdf to substantive analysis, effors were made to classify road sector expenditura into the above categories. An encounaeng development is that the Transport Sector secdon in the proposed EFYP already incorporates some of the above classification feaures. Still, however, emphasis is needed to develop a classification of expnditur. The main findings resulting from the classification of development expenditures are p _sene below. 3.34 The main devlopment expenditures include new constuction, rehabilitation, periodic maintenance, bridges, equipmeat, taining, road surveys, land acquisition ad other miscellaneous. Between 1988 and 1990, new constuton accounted on avenage for two-thirds of totWal expenditures, but fel to 36 percent in 1991 when rehabilitation expenditures increased from an average 7 percent (1988- 1990) to 42 percent (Annex 8). The ma issues affecting expenditu for each acivity are highlighted below:  - 25 - New Road Construction. Expenditues uder this Item include construction of on-going projects and new projects including arterial roads (highways), collector roads (feeder) and local accss roads (district). The share of expenditures for arterial and collector roads decreased during the period from an average of 37 and 22 pement, respectively, between 1988 and 1990 to 21 and 7 percent in 1991. At the same time, expenditures for local access roads increased ftom 3 percent in 1988 to 13 and 8 pereent of total expenditures in 1990 and 1991. The larger commitments for local access roads coincided with the political changes which effectively increas demands for road improvements at the local level. Expenditures as a percent of allocations slowed down for all new construction from 70 percent in 1988 to 61 in 1991, with an important difference among types of road construction expenditures: while arterial and coUector road expenditures accounted for 65 and 50 percent of allocations, respectively, expenditures for local access roads averaged 90 percent of allocations (Annex 8). This substanual difference in budget performance between main roads and local access roads reflects the fact that local access road projects are geographicaly dispersed, lack quality control and adequate supervision, and have been systematically underfunded. The higher than avenge budgetary performance observed in the case of local access roads has often resulted in roads of poor quality, inadequate standards and high unit costs. An analysis of new road construction expenditure indicates that there is a large number of HMG financed construction projects (on-going and new) which suffer from serious under-funding. During FY 1991/92 allocations were made for 11 HMG funded projects which have dragged for more than a decade and require at least another 10 years to be completed at the present rate of funding (Annex 14). Also during FY 1991/92, 22 addidonal construction projects funded by HMG received insufficient allocadons which were as low as 4 percent of the budget requirement and are estimated to need 26 addidonal years to be completed at the present rate of funding. These start-up activitdes could very weUl serve to heighten IHMG's presence in otherwise isolated areas, but result in very inefficient expenditure, discourage DOR staff and demoralize the affected populatons. 2. Rehabilitation. Since 1988, expenditures on rehabilitation have increased by a factor of 20 in real terms due to the increased allocations for the Road Flood Rehabilitation (IDA) and Reseling (ADB) Projects. In 1991, rehabilitation accounted for 42 percent of total expenditures. Due to substantial project implementaion delays, the record for rehabilitation expenditures as a percent of allocations wa very poor between 1988 and 1990, when on average only 21.5 percent was executed. In 1991 this turned around, with expenditures accounting for more than 128.9 percent of aUlocations. 3. eridie Maintenae. While in current terms 1991 expenditures increased substantially due to intensificadon of periodic maintenance actvities in the East-West Highway, in real terms periodic maintnnce allocations have decreased since 1988 (Annex 8). As a percent of total expenditures, periodic maineace has also declined steadily from 11.8 in 1988 to 9.1 in 1991. The expenditures as a percent of allocations for this category have decreased from 91.3 in 1988 to 79.4 in 1991. be declining trend is compounded by the fact that periodic maintenance funds are often diverted to carry-out routine maintenance activities (including spot surface improvements) because of the inadequacy of routine maintenance funds.  - 26 - 4. datComDastru d MagIgnM. On aversge, ths Item accounted for 5.8 perent of total expnditur an ha rmnd constant in real terms at the level observod in 1988. Expenditura a percent of allocations have improved from 48.8 in 1988 to 76 percet. S. . On average, 2 pent of total allocations have baen assigned to this category. Expenditures for equipment and aining have rem;ned at the same lovels observed in 1988, with other expenditures having reased slightly. Expeaditure as a percent of allocadons for equipmeat between 1988 and 19