RETURN TO REPORTS DESK RESTRICTED WITHIN Re ONE WEEK WH1 55 Vol. 2 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION AN APPRAISAL OF THE 1966-1967 PUBLIC ]NVESTMENT PROGRAM OF PERU (in seven volumes) VOLUME II TRANSPORTATION December 28, 1965 Western Hemisphere Department CURRENCY EQUIVALENTS 1 US $ = 26. 8Z Soles 1 Sol (S/.) = 3.7 US cents 1 million Soles = US $37, 286 TABLE OF CONTENTS Page No. IPrefatory Note I. INTRODUCTION 1 II. COORDINATION OF TRANSPORT INVESTMENT AND OPERATION 2 A. Regulation of Transport Industries 3 B. Competition Between Road and Rail 5 C. The Government's Road Costs and User Charges 8 III. ROADS 10 A. The Pattern of Investment in Roads 10 B. Road Traffic and Design Standards 13 C. Administration of Road Construction and Maintenance 14 D. The Road Program 16 E. Evaluation of the Program 17 F. Financing of the Program 26 IV. THE STATE RAILWAYS 27 A. The Railway Systems 27 B. The Investment Program and Its Evaluation 29 V. PORTS AND MERCHANT MARIIE 31 A. Main Problems of Port Investment 31 B. Administration of Ports 32 C. The Port Investment Program 35 D. Evaluation of the Program 37 E. Merchant Marine 40 VI. CIVIL AVIATION AND AIRPORTS 41 A. General h1 B. Government Organization and Regulation 41 C. The Physical and Operating Conditions of Airports and Air Navigational Aids 42 D. Operations of Commercial Airlines 43 E. The Government's Investment Program and an Evaluation of Investment Needs 44 ANNEX 1 Calculation of Comparative Road and Rail Transport Costs ANNEX 2 Estimates of Road Costs and Road-User Taxes for 1964 ANNEX 3 Detailed Description of Peruvian Ports Statistical Annex (with charts and maps) PREFATORY NOTE The focal point of reference in this report is the investment program prepared in early 1965 by the National Planning Institute (INP) as a proposed basis for the Government's investment outlays for 1966. Subsequently, the Government's Budget proposals of August 1965 introduced changes in the INP prepared program. WThile it has not been possible to revise this report to take account of these changes and comment on them, certain comments are made and some new information included in the main report (particularly Chapter II and supporting tables). The main aspects of the analysis and policy conclusions in the present report are still applicable in broad terms, and many of the details provide useful reference material. TILANSPORTATION SECTOR I. INTRODUCTION 1. Peru preemts a peculiar set of geographical, economic and domo- graphic conditions which affect the particularly vital function of trans- port in its economic development. First, the country is very large - Peru is nearly as large as Western Germany, France and Spain combined. Secondly, the country is divided into three regions of distinctly different terrain, economic patterns and potentials. Along the Pacific seaboard, there is a narrow coastal plain - mostly desert, but with fertile land in the river valleys and where irrigation exists - out of which the mountain chain of Andes rises abruptly. Despite the huge size of its territory, the nation's economic activities are concentrated mainly in this limited area along the sea. coast. The Sierra region, where there is a heavy concentration of population engaged in primitive agriculture, is faced with acute problems of over-population and under-employment. There are, however, rich mineral deposits in the Sierra. The Selva region, beginning from the eastern foothills of the Andes mountain range down to the river basins of the upstreams of the Amazon system, is very sparsely populated and the large areas of potentially productive land have as yet been scarcely scratched because of the difficulties of providing adequate transportation. 2. The Government considers that a major task of development is to build and improve road communications between the three paralleling regions. It believes that the investment in roads would bring about: a closer socio- politico-economic integration of the different parts of the country; a fuller exploitation of the mineral resources of the Sierra region and emingration of its surplus agricultural population to more productive low- lands in the eastern foothills of the Andes; and the development of food production in the new land in the Selva to alleviate the nation's food shortage. 3. These views of the Government are reflected in the proposals of the National Planning Institute (INP) for the 1966 public investment budget (formulated in May 1965). The INP, the Government's planning agency, envisaged an investment of a little over SI. 1 billion in the transportation sector in 1966, of which more than 80 percent was allocated to roads - and most of this for penetration roads into the relatively isolated areas in the Sierra and the Selva. Most of the remaining transport investment in 1966 was to be for completion of two existing port projects and a small amount (a little over two percent) for the State Railways. No investment was planned for airports and air navigational aid facilities. 4.. As a result of its review of the INP 1966 investment program, the mission concluded that several changes would be desirable. The mission believes that, in addition to completion of the current port projects, one or two new port projects should be undertaken during 1966, and also that, finances permitting, some of the airports for domestic flights and air navigational facilities should be improved. On the other hand, the - 2 - mission considers that the overall level of road investment should be brought down to a somewhat lower level and its composition, in terms of individual projects, changed to some extent. This last problem is more fully explained in the road section of this report. Finally, the mission believes that new railway construction by the Government should be elim- inated from the program, since the justification of these outlays cannot clearly be demonstrated. 5. In summary, the INP's program for 1966 and the mission's recom- mended program for 1966-67 are as follows: Transportation Investment Program (ST. million) INP Mission Recommendation 19 _1966 1967 Total Roads: Highway Department 751 664 783 1447 Other Agencies 87 44 52 96 U37 7-0 3 1533 State Railways 22 9 5 1 Ports 159 213 209 422 Merchant Marine 70 70 - 20 Airports and Air Navigational Aids - 76 100 176 1089 1076 1149 2225 6. In the mission's recommended program, the 1966 level of investment in roads represents over 65 percent of the total and for 1967 the proportion is increased to over 70 percent. Although the mission agrees with the Govern- ment that road investment could bring about many of the beneficial results the Government expects, it believes, however, that not all the expectations would be realized merely by building roads to virgin lands, and that the realizable results could be achieved with less investment than that planned by the Government. II. COORDINATION OF TRANSPORT INVESTMENT AND OPERATION 7., The Peruvian Government does not appear to have a well developed and fully consistent policy for transport investment and regulation. Investment decisions are made usually on an ad hoc basis. Individual projects are not given an adequate review in terms of relative priority, and there is inadequate consideration of the effects of investment in one mode of transportation on another. Due to inadequate communication and coordination between agencies responsible for transportation, invest- ment programming is often at cross purposes. Projects are frequently carried out to meet inadequately tested "needs" of the economy or merely to satisfy regional claimants on the central treasury's resources. In suim, far more needs to be done to identify the true national interests in transport planning. 8. The main problem of transport coordination concerns overland transport. Because of the urgent need for major improvement here, the discussion of coordination below is limited to this aspect of transport. The railways are severely, but not rationally regulated. Although a large part of the country's railways belong to private enterprise, they are expected by the Government to realize the conflicting objectives of providing both low cost transportation and maximum employment at high wages. In contrast, the road transport industry is almost completely un- regulated. IMoreover, it is greatly subsidized because fiscal charges on road users are far below what it costs to compensate the Government to provide road facilities; this drain not only contributes to the strains on the Government's budget but also puts in jeopardy a sound and economical operation of the railways. A. Regulation of Transport Industries 9. Responsibilities for transport regulation are diffused among several governmental agencies, principally the ILinistry of Finance, Ministry of Interior, Iiinistry of Development and Public Works, and the newTly created Economic Commission for Transport Regulation (CRET). Other agencies, such as the Niinistry of Labor and local municipal authorities, directly and indirectly affect transport policy and operation by means of arbitration of wage disputes or administration of licensing for transport services. Little coordination exists among these agencies in their action affecting transport. 10. For road transport, the Government in 1959 published interurban tariff schedules for both passenger and freight transport, but no adjust- ment has been made since. According to an estimate made by a relatively large trucking firm, the cost increase between 1959 and 1964 is no less than 75 percent (as compared with the increase of 45 percent in the cost of living during the same period). The published rates (Table 1) appear to be very lowi even for 1959 prices. The truck freight tariff per ton/km in the Sierra region was set in a range of SI. 0.h5 to SI. 0.50. The mission's estimates, discussed in detail later, indicate that, on the basis of a 70 percent load factor, the present cost per ton/km in the Sierra region is in the range of S/. 0.96 and S/. 1.60 depending on the kinds of cargo hauled and types of roads on which trucks operate. In adldition to cost increases, another reason for the difference between the Government-set tariffs and the cost estimate above is that the mission's cost figures contain an estimate of a reasonable capital cost for the roads, while the Government tariff schedules did not take into account such cost elements. 11. However, the appropriateness of the tariff schedules is somewhat academic because the tariffs are not enforced and many road transporters do not even know what rates are prescribed by the Government. Actual trucking charges are usually set by individual bargains and are frequently lower than even the Government's 1959 tariff schedules, particularly in regions where road transport competes with railways. CRET, which is now - h - in charge of setting tariffs, is studying revision of the road tariff schedules to reflect more closely the real costs of transportation. How- ever, tariff regulation as a means of fostering an orderly development of the trucking industry is likely to encounter difficult problems of enforcement. 1'. Control of vehicle weights and axle loads by the national police has started only recently and effective enforcement has not yet been achieved. Inspection and licensing of road transport vehicles are under the jurisdiction of municipalities other than the municipal licenses, no aclditional permit is required to engage in interurban or interprovincial transport services. Unless a new uniform administrative system is set up, an effective coordination of road transport operations is not practical. 13. In case of the railways, any changes in the tariff rates are subject to approval of CRET after a detailed examination of applications and consultations with the Government Departments concerned, such as the Ministries of Finance, and of Development and Public Wbrks. Action on an application for an increase in rail rates usually takes a long time - and in the meantime, the costs of railway operations continue to rise. In contrast to CRET, the Ministry of Labor is relatively prompt in approving wage increases to railway workers. As a result, during the past decade the wages and salary levels of railway workers have increased at a rate roughly of 15 percent per annum, which is 6.5 percent per annum higher than the increase in the cost of living. In comparison, the average annual increase in railway rates and fares has been of the order of only five percent. The labor costs of private railways at present represent over 60 percent of the total operating costs (including depre- ciation) compared with about 40 percent five years ago. While data on this aspect of operations of the State Railways is incomplete, the pro- portion is believed to be not substantially lower. The important point iEs that rail rate increases and revenues have not caught up with rising costs. 14. A law to set up a Ministry of Transport and Communications has been drafted and sent to Parliament for its approval. The proposed Ministry would be responsible for administration of mail, telecommunications, ports, state railways and airports and for regulation of inland and inter- national transport services. There may be a conflict in regard to regulation of inland and international transport, in that it is now under the juris- diction of CRET, and the draft law does not spell out clearly the division of responsibilities between -the two agencies except to say that the new Ministry would "maintain functional and administrative relation with CRET". 15. The draft law does not invest the proposed Ministry with the responsibility for planning transport investment. As there is a close relation between transport investment (in new facilities or in expansion and improvement of existing facilities) on the one hand, and regulation of transport services on the other, the proposed Ministry's responsibility should include participation in the investment planning process. -5- B. Competition Between Road and Rail 16. In recent decades, there has been a strong and growing tendency for road transport to eat into the traffic of the railways. Road trans- port, which formerly was concentrated in the coastal areas, has increas- ingly expended its operation into the Sierra region where most of the country's railway lines are located. The expansion of road transport appeared to have been directly influenced by the Government's road investment activities during the past 10 to 15 years. The total length of asphalted and graveled roads has grown from 7,000 km. in 1950 to nearly 11,000 km. in 1964 or by almost 60 percent, and gravel roads alone by 35 percent. A regional breakdown of road statistics is not available for the earlier years; a similar comparison could not be made for the Sierra region. But considering that today nearly 70 percent of the country's gravel roads are in the Sierra, the total growth figure seems to suggest that there has been a considerable expansion in the improved road network in the Sierra. 17. The railway's ability to compete with road transport is limited by their lack of integration. These two principal railway lines are with- out inter-connection - one being located in central Peru and the other in the south of the country. The remainder of the country's railways con- sists of fragmental short lines belonging to the Government or private concerns. Where inter-connections exist they usually involve railways with different gauges, which require transshipment. 18. Partly due to these unfavorable physical conditions, railway competition with road transport has taken a course different from what might ordinarily have been expected. In ordinary cases, road and rail competition arises as the economy becomes more diversified and, con- sequently, producers and merchants look for more flexible transportation services better adapted to their particular requirements. The result of such competition is to force railways to improve their services and devise various measures attractive to shippers to retain their service. In the process, there usually arises a broad division of freight trans- port between road and rail - the former taking traffic of diversified merchandises for short to medium haul and the latter retaining bulky cargoes for longer distance transport. None of these usual patterns has developed in Peru. 19. The growth of road transport in Peru was not necessarily spurred by industrial and other developments in the economy and there does not appear to be even a broad division of freights between road and rail baSed on the nature of cargo and the distance of transport. Trucks handle not only general merchandises but also bulky cargo such as cement, mineral ores and timber for both short and long hauls. Other than the investments for improvement of equipment and facilities, such as the dieselization program recently carried out by the Peruvian Corporation, the largest railway operation in Peru, the railwiays did little to counteract the competition waged by the road. - 6 - 20. The fundamental question studied by the mission is to what extent the diversion of traffic toward road transport has been economic or un- economic. The mission approached this question in terms of the relatively few routes served by both railways and highways. 21. Estimates of costs of road and rail transport have been made on the only basis possible - a theoretical computation of economic costs (ex- cluding all taxes) as set forth in Annex 1. According to this exercise, the present costs of transport are as follows: Road and Rail Average Transport Costs (Centavos * per ton/km.) Road 6-ton Truck on paved roads: 96 Railway Central Railway Carload (with no collection or delivery by road vehicle): 72 Carload (with handling by road vehicle at one end of haul): 92 Less-than-carload (with no collection or delivery by road vehicLe): 201 Southern Railway Carload (with no collection or delivery by road vehicle): 69 Carload (with handling by road vehicle at one end of haul): 76 Less-than-carload (with no collection or delivery by road vehicle): 135 *One centavo equals about 1/27 US cent. 22. The above figures indicate that truck transport is far more economical than the less-than-carload traffic of railways. But for car- load traffic, the cost advantage is on the railway side whether or not the shipment involves collection or delivery by road vehicles at one end of the haul. However, traffic figures of the Peruvian Corporation (pro- prietor of the two railways cited) show an average haulage distance of 153 km. for the Central Railway and of 425 km. for the Southern Railway. As may be expected, when the distance of transport is relatively short, the railway unit cost becomes higher. This is illustrated in Table 2, where costs of rail carload transport of various categories of cargoes for dif- ferent distances are compared with truck transport cost. It is clear that carload traffic carried a distance of less than 100 km., with use of road vehicle at one end of the haul, costs more than road transport for all cargoes in the case of the Central and for 8 out of 11 different freights of the Southern. As the distance of haul increases to 200 km., the number of uneconomical categories of cargoes decreases. For 300 km. hauls, all except two items of the Central and one of the Southern freight are transported more cheaply by railways. 22a. The increased use of large size trucks in road transport could change this picture. It is estimated that a 20-ton truck cost 70 centavos per ton/km. on paved roads as compared with 96 centavos for 6-ton trucks. At present, few large-size trucks are in operation outside the Pan American Highway along the Pacific coast. But with improvements of the road system, the introduction of some larger size trucks to the Sierra region may be expected. Should this occur, all carload traffic of hauling distances of less than 300 km. with use of road vehicle for collection or delivery, as well as certain categories of freights without use of road vehicle, may be transported more economically by such large-size trucks. However, the introduction of larger-size trucks would be limited to such roads as the Lima-Pucallpa Highway, which is now being reconstructed. Due to the steep grades and sharp curves dictated by the difficult terrain in the Sierra, operation of large vehicles on many other roads would remain impractical for a long time to come. 23. These cost comparisons are based on trucks operating on paved roads. But at present several roads which compete with railways are un- paved gravel roads where costs of truck operation are higher. The ton/km. transport costs on one of the partly paved, partly graveled roads paralleling the Central Railway are as follows: Lima-La Oroya, 187 km. (133 km. paved and 54 km. graveled) 108 centavos; Lima-Huancayo, 312 km. (200 km. paved 112 km. graveled) 111 centavos. The actual costs on the existing roads indicate that at present, a large part of the railway's carload traffic, with or without use of terminal vehicles, is more economical than road transport, while the railway costs on less-than- carload traffic would still be higher than truck transport even for the Southern which has a substantially lower cost than the Central (see Table 2). 24. The railway costs could become lower as the traffic volume in- creases, assuming that wages and other expenses remain unchanged or did not increase faster than in road transport. For example, should traffic grow at three percent a year, a simple calculation suggests that carload transportation cost on the Central Railway would be lowered from 72 centavos per ton/km. to 68 centavos, after a period of five years. 25. On the basis of these cost data, it may be stated, with one qualification which will be discussed shortly, that diversion of freight from railways to road beyond the limits that the cost comparisons seem to dictate would represent an uneconomic diversion and, therefore, a loss to the economy. The freight; diversion from rail to road does go beyond these limits because of low charges made by truckers. 26. This conclusion, however, does not take into account the usual qualitative differences in service between the railroad and the road transport regarding in particular the savings in time and in decreased spoilage experienced with truck transportation. - 8 - 27. The low charges by the truckers, which frequently are even lower than the Government-set rate of 45 to 50 centavos per ton/km., are due partly to low actual costs to the truckers and partly to the conmmon ignorance of the true costs of vehicle operations. Low motor fuel taxes, and the widespread overloading practices are the main factors contributing to the low apparent actual costs. The true costs of truck operation, including an adequate provision for equipment depreciation, are not well appreciated by truckers. From its interviews, the mission is under the impression that not only the small truck operators but also the relatively large undertakings concentrate their attention mainly on the out-of-pocket costs in calculating their revenue requirements. The observation commonly made that trucking enterprises frequently do not derive adequate revenues to cover the equipment depreciation as well as the out-of-pocket costs appears to be confirmed by the widely reported high rate of failures among driver-owned undertakings. Many of those who stay in business do so because they combine trucking with merchandise trading the loss in the fonner being covered by profits from the latter. 28. One qualification to the uneconomic diversion of freight from rail to roads is in order. Some lumber producers in areas served by railways have acquired their own fleets of trucks because of the convenience and flexibility inherent in road transport, and with full appreciation of the higher cost of truck transport. 29. Traffic that moves over roads despite the higher costs concerned would be difficult to divert to the railways by Government regulations and higher taxes on road transport. Product shippers have been unable to schedule their production so as to utilize economical, but inflexible railway transport, and the railways have failed to improve their services in order to better meet the requirements of these shippers. While changes in production patterns cannot be expected to take place quickly, improve- m!nts in the railway services can and should be attempted. Granted that the railways are operating under various unfavorable physical as well as institutional conditions, it appears that there still are areas where some initiatives on the part of the railways to meet the challenge of the road transport would contribute toward maintaining or even strengthening their competitive positions. 30. It has been suggested that roads paralleling or serving similar areas as rail-ays should not be built or ir.proved to protect the railway operation in Peru. While investJ.rmients in roads which wo;:..d affect railway operation mist be decided on the basis of a careful and balanced review of their economic effects--they may in fact help feed as well as partly divert railway traffic in many cases--it therefore does not appear to be a sound policy to preclude all investments in roads that serve similar areas as railways. The proposal is not an adequate substitute to a proper coordination of land transportaMion. C. The Governmernen-; Rzil Cos ,- arid TTi-;er c;')Ies 3:L. It was stated earlier that one of the importart reasons why road transport, which in many categories of trarnsport services represents a higher cost operation than the railways, competes successfully with the latter is that the Government gives an indirect subsidy to road transport in the form of low road-user taxes, particularly motor fuel taxes. 32. To appraise the extent of subsidies by the Government to road transport, the mission attempted to estimate the annual costs of the road system to the Government and the revenues from taxes and fees collected by the Government from users of the roads. Calculations of the Government's costs and revenues are shown in Annex 2. They are intended to establish the order of magnitude rather than to obtain a precise estimate. 33. As explained in the Annex, taking only the public expenditures on the improved roads, the estimated cost to the Government in 1964 was S/. 1450 million, divided as follows: SI. million Annual depreciation of road system 785 Interest on invested capital 395 Maintenance of roads 200 Administrative costs 70 1450 34. Total revenues coLLected from road-users in 1964 are estimated to be as follows: SI. million Gasoline tax 310 Import duties on vehicles and parts 4h8 Luxury tax on passenger vehicles 120 License fees 59 937 35. A decree was published in May 1965 raising the license fees, but it is not yet effective pending issuance of a regulation by the Government. The increase was mainly on passenger car license fees which were about doubled while those on trucks and buses were relatively unchanged. Passenger cars account for more than 80 percent of the total receipt of license fees. On the basis of the new rates, the annual receipts of license fees are estimated to increase by nearly 100 percent above the present level. 36. A large part of revenues from road-users taxes comes from vehicles which mainly use city streets. As the estimates of road costs to the Government did not include the costs of city streets, it is necessary, in order to make a meaningful comparison between the Government's road ex- penditure and road-user tax receipts, to deduct the part of taxes related to the use of city streets. lWhile the division of vehicle traffic between city streets and interurban highways is not knonm, it appears reasonable to assume that about 70 percent of the gasoline tax and 50 percent of other - 10 - collections are related to the use of the interurban highway system. A lower percentage is assumed for taxes other than on gasoline because the larger part of these tax receipts comes from passenger cars, which are concentrated in urban districts rather than on interurban highways. 37. Based on these assuimptions and further assuming that the new higher rates of license fees were in effect in 1965, the Government's tax receipts from the use of the interurban highways would be about S/. 553 million as follows: SI. million Gasoline tax 217 Import duties, luxury taxes and license fees 336 553 The estimated road-user contribution of S/. 553 million is less than 40 percent of the Government's annual road costs of SI. 1450 million; on this basis, interurban road-users are subsidized annually by the Government to the extent of S/. 900 million. 38. The current levels of gasoline tax--S/. 0.90 and S/. 1.25 per gallo n of regular and extra-grade gasoline, respectively--represent only about 30 percent of the ex-plant cost of gasoline. There is no tax on diesel oil. It is important that Peru take steps as early as possible towards increasing progressively the taxes on gasoline and imposing a tax on diesel oil. Also, adjustments should be made in other charges, such as registration fees based on horse power and weight of vehicles, to assure a more adequate contribution by road-users towards the Government's annual road costs, and to ensure fair competition between the two modes of overland transport. The mission recommends that the Government should initiate promptly a study of the desirable level and structure of motor fuel and other road-user taxes, and also formulate measures to implement the findings of the study. Moreover, the Government should take urgent steps to enforce existing vehicle axle load regulations. III. ROADS A. The Pattern of Investment in Roads 39. An inventory of Peru's road network has recently been completed, providing accurate and invaluable information which was not available before. The following table shows the lengths of the different types of roads by regions. Peruvian Road System (kmn) Total Including Regions Asphalt Gravel Earth Total Trails Trails Costa 3,831 1,415 3,862 9,088 6,088 15,196 Si rra 368 4,570 10,090 15,028 8,816 23,844 Selva 7 795 1,,145 1,947 472 2,419 Total 4,207 6,780 15,097 26,083 15,376 41,459 % Distri- bution 16 26 58 100 4(. Of the total of about 41,500 kilometers of roads and trails in all Peru, less than 11,000 kilometers have asphalt or gravel surface and the remainder, or almost three-quarters of all roads, are earth roads and trails of varying characteristics. 41. Nearly 90 percent of the asphalted roads are on the coast. The 2,750 kilometer Pan American Highway, for the most part paved, accounts for nearly 80 percent of thet asphalted roads in the Costa region, and about 70 percent of all the asphalted roads in the country. The highway runs along the country's entire Pacific coast from the Ecuadorian border in the north to the Chilean and Bolivian borders in the south; it is the most important road in the country and carries the heaviest volume of traffic. 42. During the past ten to fifteen years, Government expenditure on roads has been increasing at a rapid rate (see Table 17). The estimated 1964 expenditure on road construction is S/. 348.3 million. This is over ten times the 1950 expenditure of S/. 33.5 million. It is slightly higher than the total amount spent on construction between 1929 and 1949 (S/. 335.3 million), and even allowing for cost increases over the period, the comparison is still striking. Unfortunately the available information on physical construction is of no use for purposes of historical comparison.l/ Over the past decade, however, it is known that most of the construction funds were spent on up-grading the Pan American Highway to asphalt paved standards and on construction and improvement of a number of major penetra- tion roads into the Sierra region. l' For instance, according to the Government's records, there were 11,500 kilometers of gravelled roads in Peru in 1960, but in the new road inventory mentioned before, due to the different method of classification used, the total length of gravelled roads in 1964 is only 6,780 kilometers, apparently 4,720 kilometers less than before. - 12 - 43. The Government has also laid great emphasis on providing more and better east-west connections from the Costa to the Sierra and thence to the Selva. Construction of such roads must overcome great natural obstacles, the Andes Mountain range running north to south and the tropical rain forest in the Selva. The most important existing east-west connection is the Central Highway from Lima to La Oroya, Cerro de Pasco, Tingo Maria and Pucallpa on the upper reaches of the Amazon River system. The region around La Oroya and Cerro de Pasco is an important mining area; Tingo Maria is one of the more important administrative and economic centers bordering the Selva region. At present the road is thle only serviceable overland connection between the Pacific coast and the Selva region in the eastern part of Peru. The section from Lima to La Oroya has been under reconstruction for the last five years to bring it up to modern standards with a paved surface. The work is now nearly completed. From La Oroya to Aguaytia, the gravel road is in very deteriorated condition. The road is narrow and there are many sharp curves and steep grades. A new Bank loan (signed in September 1965) will help finance the upgrading of this section to modern standards. The last section, Aguaytia-Pucallpa, until recently a poor earth road passable only during the dry season, is now under reconstruction, financed by Bank Loan 271-PE. The project is expected to be completed by about the end of 1966. 44. In the north, a penetration road east of Olmos via Bagua to Maranon is under construction by the Peruvian Army. The purpose of the road is to connect population centers such as Bagua, Tarapoto and Yurimaguas with the coastal region. Although towns like Tarapoto and Yurimaguas have no road connection presently with the coastal zone, they are already fairly well developed and their products are transported to export ports by air. Ttlere is a low class road between Olmos and Bagua with a spur towards Chachapoyas. A US AID loan has recently been negotiated for the financing of a road east from Bagua to Tarapoto. Work is expected to start soon, but because of difficult terrain, its completion will take six to seven years. From Tarapoto to Yurimaguas, a trail road was recently completed. h!7. In the south, there are two main east-west roads. One originates from the Pan American Highway near Ica, connecting Paracas on the coast and Ayacucho in the Sierra, and continuing northeast via Tambo to the town of Teresita on the Apurimac River. This road connects the central Sierra, where there are long established population centers such as Cuzco, with the Selva region. Road condition is extremely poor, especially in the eastern part. The other east-west road is the Nazca-Abancay-Cuzco-Urcos Road, which also is in generally unsatisfactory condition. 46. In the Sierra region, a key road is the north-south connection running from La Oroya to the Bolivian border and connecting the important towns of Huancayo, Ayacucho,, Abancay, Cuzco, Puno and Desaguadero. Other important roads within the Sierra are the Pativilca-Huaraz-Caraz Road, rrnning in north-south direction and the east-west connection between Cuzco and Quincem1. - 13 - 47. Ilany of the existing roads need improvements to carry rapidly increasing traffic volumes at reasonable cost. The up-grading of existing roads constitutes a large part of the National Highway Program as drawn up by the Peruvian Government. B. Road Traffic and Design Standards 48. Systematic traffic counting began only two years ago. An overall indication of past traffic growth, however, can be obtained by studying the increase in the number of vehicles registered each year. As shown in Table 18, between 1956 and 1963 the number of vehicles registered has nearly doubled; over the past ten years, the annual rate of increase was nearly eight percent. Thus it can be safely said that road traffic has developed very rapidly during the past years (and especially in the coastal area). 49. Systematic traffic counts on all roads under maintenance was undertaken 1/ as part of the reorganization of the maintenance operations, in connection with Bank Loan 271-PE. From June 1963 to June 196h, traffic cowits were undertaken following a master plan covering the whole country: the counts will be repeated between June 1965 and June 1966. The results of the systematic traffic counts provide a better basis for future traffic forecasts, of course, and the Government's road development program is in part based on the traffic counts already completed. The counts showed that, on an average, 80 percent of traffic consists of trucks and buses and only 20 percent passenger cars. On some sections of the Pan American Highway, however, especially near more important towns, 40 percent of the vehicle traffic is trucks and buses and 60 percent cars. The heaviest concentrations are found around Lima. 50. To control overloading of vehicles, the Highway Department has installed six permanent weighing stations, four near Lima, and in addition the Department operates fourteen mobile units. A road police force under the jurisdiction of the Ilinistry of Interior now enforces traffic regulations. Close co-operation has been established between the road police and the Highway Department but enforcement of traffic regulations and vehicle load re!gulations are not yet fully satisfactory. More effective enforcement is essential to reduce maintenance costs and prevent damage to the reconstructed and improved road. 51. The design standards to which all previous roads have been con- structed (shown in Table 19), and which are still in use, are divided into seven categories according to the average daily traffic, the recommended standards for new roads are based on the highest estimated traffic expected during a period of 15 to 20 years (as discussed below in section E). Al- though it is sound practice to base design standards on expected traffic volume, the mission believes that the principle was carried too far by the Government in setting seven different design standards. The three basic types of road standards would seem to be more appropriate in Peruvian circum- stances--primary (or trunk roads), secondary roads, and rural roads. The 1/ Using 26 automatic traffic counters which were moved from time to time according to plan. - 14 - choice of standards for a specific road should be based on long-term pros- pects for development of the area traversed by the road and the consequent generation of traffic. The basic geometric design elements (such as ruling gradient, right-of-way, bridge loading, etc.) should be selected from the beginning and remain the same for a given class of road, while other less basic features, (such as types and widths of base and surfacing, width of shoulders, etc.) could be improved by stage construction within the same basic design standards and in accordance with a short-term outlook of traffic development. 52. The mission, therefore, suggests the revised design standards shown in Table 20 based on two different classes for the main road system composed of primary and secondary roads, and a special class for rural roads. 53. Regarding the quality of surfacing, primary roads would receive an asphalt surfacing which may be only a double (or triple) surface treat- ment for a daily traffic of 400-600 VHD, and a five inch hot ashhalt carpet (or thicker) for a higher traffic. On secondary roads the traffic may develop more gradually between, say, 50 VHD at the opening of the road up to say,6co VHD after 10 years or more. This would require various types of surfacing from gravel surface (up to about 200 VHD) to double or even triple surface treatment. However, there may be steep places (in the Sierra or Selva) where a surface treatment, which is not fully water-proof, would not withstand wash-outs of the surface during heavy rain falls. In such cases, it may be necessary--even if the traffic does not require it--to put a light hot asphalt carpet to assure proper water run-off and prevent penetration of water through the surface, which would weaken the base and gradually break up the pavement. 54. Gravel standards for rural roads should be sufficient. Should the traffic later increase, the gravel road could receive a single surface treatment as a next step of stage construction. Gravel construction for a road with traffic of between 10 and 50 vehicles per day (4.00 meters total width), would make it an all-weather road open to traffic even during the rainy season in the Sierra and Selva and thus permit uninterrupted traffic. For traffic up to ten vehicles per day, an earth road would suffice, which however, would most probably be closed for traffic during the wet season. C. Administration of Road Construction and Maintenance Road Construction T=.__ The Highway Department of the Ministry of Development and Public Works is the principal agency responsible for construction and maintenance of the national road net work. Two other organizations also participate in the construction of roads: (a) National Fund for Economic Development (Fondo Nacional de Desarrollo Economico, or FNDE), and the (b) Cooperacion Popular Program. 56. The FNDE was created by law in 1956 to carry out public works projects primarily of local interest to the various departments of the - 15 - country. The Government's budgetary allocations, as well as certain ear- marked taxes, provide funds for FNDE's operation. The executive agents of the FNDE are the Public Works Boards in several departments which draw up the plans and carry out the projects. Of a total FNDE staff of 105 engineers, 36 work on road construction projects. The FNDE has accomplished most of its road program with the help of the Highway Department which, when requested, is required to cooperate with the FNDE. By the end of 1964, roads costing about S/. 200 million had been completed by the Hiighway Department on behalf of the FIDE. 57. The Cooperacion Popular Program was created in August 1963 by the President of the Republic with a broad aim to help the country's com- munities in their efforts to undertake development projects at community levels. The Cooperacion Popular Program is mainly interested in construction of secondary roads, schools, wells, irrigation canals, etc. and is based on the principle of self-help or community works. It has a program of invest- ment of an equivalent of S/. 3,000 million for the period 1964-1968, with a construction goal of 11,000 Icilometers of secondary roads. This target is ambitious and may be difficult to accomplish. The Highway Department 53. The Highway Department has its main office in Lima; there are nine technical and administrative divisions within the main office, each operated by a division chief. The country is divided into 23 districts each headed by a district engineer who is responsible for daily operations. The districts are grouped into six zones, and controlled by zone inspectors, who report directly to the general inspector in Lima. 59. The Highway Department faces a difficult task in dealing effectively with the increased work load, such as survey, design and supervision in the field, resulting from the sharp increase in the road development program. Of the 1,005 employees on the Department's payroll, only 250 are engineers or technicians. Table 21 shows the number of engineers in the headquarters and the district offices. If the road program recommended by the mission were to be executed on schedule to the end of 1967, district offices will have to supervise new construction of about 1,100 kilometers; the present organization is not staffed to carry out this task satisfactorily. Although there has been a remarkable improvement in the organization of the Highway Department, such as the recent creation of a new division for programming and soil investigation, it is still not in a position to handle effectively the increased work load of final engineering of roads to be included in the new program. About 15 survey teams are required for an adequate preparation of a highway development program, but there are only five available. Be- cause of shortage of experienced personnel, the Construction Division cannot cope efficiently wfith the increased demand for engineering. It is now fully occupied with design work only on those roads which do not receive foreign financing. 60. The technical personnel of the Highway Department must be ex- panded and strengthened if major difficulties are to be avoided in the - 16 - execution of the road development program. Moreover, the duties of the consultants now advising the Department on maintenance operations should be expanded to include advisory service to the Department on matters con- cerning construction and planning of roads; this expansion of the role of consultants can be effected :in the extension of current contract with the Governmrent to take place shortly. The mission recommends that consulting engineers be engaged as soon as practicable to prepare at least those roads for which the Government hopes to secure financing of foreign and international institutions and to supervise their construction. The High- way Department has been rece:iving in recent years very substantial technical assistance financed by the Bank and other foreign sources. The consultants cooperated with the Government effectively and the results so far have been very gratifying. 61. The maintenance of Peru's road network has been improved notably during the last few years as a result of the concerted efforts of the staff of the Highway Department and the consulting engineers. The consultants were engaged to assist the Highway Department in reorganizing the maintenance division and gradually mechanizing the maintenance operation. Equipment was procured and repair shops were gradually erected in the different districts. Two maintenance loans from the Bank, one in 1955 and another in 1961, helped finance the Government's maintenance program. In recent years the allocations of maintenance funds from the budget has been substantially increased (see Table 17). 62. The road inventory completed early this year provides the High- way Department with a good basis for organizing a well balanced maintenance program for the 20,000 kilometers now under maintenance. The inventory is also useful in preparing cost estimates for improvement projects of the existing roads. 63. Although there has been substantial progress in the maintenance program, the organization of the Maintenance Division ought to be further strengthened and its operations, particularly in the field, further improved in order to meet the increasing requirements for good maintenance. Thes 1964 maintenance budget of S/. 233.6 million provided an average per ki:Lometer maintenance expenditure of a little less than S/. 12,000 (or about US $h50). This average appears to be fairly adequate for present needs; but with the expansion of the road system and the increase in the traffic volumes, the maintenance budget will need to be increased in the years ahead. The agreement to confirm the existing contract with the consulting firm to advise on maintenance has been extended for a further two-year period; this helps to assure further improvement of maintenance operations. D. The Road Program 6h. When the mission was in Peru in April-May 1965, the Government's program for road investment was still being formulated. The Highway Depart- ment's ten-year program, prepared with the assistance of consultants, calls for a total of S/. 10.7 billion to be invested during the ten-year - 17 - period, 1966-1976. About S/. 1.3 billion outlay is planned for each of the first two years, 1966 ani 1967. The Highway Department Program, regrouped into five different categories by the mission, is shown in Table 22, Under each category, roads are again divided between Group A and Group B following the Highway Department's designation of high and low priorities for each individual road. 65. The Highway Department's priority rating of each road is not always based on economic considerations alone; it is also based on political, social and other considerations. Many of the roads in Group A are in- cluded because the Government is obliged to invest by specific statute. Methodical investigations of the economic merits of these roads, if ever made, have not been published. These roads, however, comprise the larger part of the total program, accounting for about 6,500 kilometers and S/. 7.7 bill-ion out of the program total of about 11,500 kilometers and S/. 10.7 billion. Of the total Group A, only about 1,150 kilometers of roads, or about 10 percent of the total program, represent roads on which some systematic economic studies were carried out. It does not follow that all roads included in the program without systematic economic studies are unjustified; it is essential, however, that the economic aspects of each of these roads should be considered in determining its place in the program. 66. The INP first reduced the 1966 investment target of the Highway Department by more than 40 percent to S/. 751 million but the number of projects was reduced only by ten from 43 to 33. In effect the greater part of this cut in the expenditure was made by reducing, frequently by half, the annual expenditure on most of those program roads for 1966, thereby in effect prolonging the construction period of most roads. The INP was in agreement, however, with the mission's view that the nearly proportional reduction on most of the program roads without regard to the relative priority should be reconsidered to avoid dilution of construction effort. ThIe first INP program is shown in Table 23 along with a detailed breakdown of the Highway Department program. 67. In addition to the road construction program of the Highway Department, the INP included in the proposed 1966 budget S/. 87 million for construction of some 400 kilometers of roads throughout the country under the auspices of the FNDE. No concrete projects have been pre- pared by FNDE and little economic review of the possible projects were carried out either by INP or FNDE. E., Evaluation of the Program General 6137 The mission agrees with the Government's emphasis on road con- s-truction and improvements as a predominant part of the transportation inavestment plan. The roads included in the plan are prerequisites both to exploitation of the resources in the underdeveloped areas in the Sierra ajnd the Selva and a further economic growth of the more developed coastal - 18 - regions. The country needs more and better east-west transversal roads, penetration roads, and north-south linkage roads in the Sierra (Altiplano ancd the Ceja de Montana) and the Selva. These investments are necessary to bring about a closer integration of the nation and to develop the re- sources in those isolated areas. 69. The mission believes, however, that because of the limitation of both physical, organizational and financial resources available to the Govrernment, not all the projects can be initiated within the next few years. The component projects of the 10-year program proposed by the Highway Department should be re-evaluated by the Government in the light of un- certainties regarding administrative capacity to execute the programs. Based on such a review, a smaller number of high priority projects should be selected for execution in the next few years. 70, The mission feels that the Government, in reviewing its road program, should attempt to strengthen three important aspects. They are: (i) economic evaluation of individual projects, (ii) appropriate design- ing and (iii) economical allocation of limited investment funds among priority projects. (i) The need for more adequate economic evaluation. A major source of difficulty in road planning is the practice of the Government to classify certain groups of roads as economically justified without making any analysis of pertinent economic data. For example, of the 85 individual road projects included in the Highway Departmentts ten-year program, 43 are roads for which the Government regards the justification to be "lself-evident". They include nearly all of the major penetration roads, sections of the proposed Marginal Highway (Carretera Marginal de la Selva) which would run along the eastern slope of the Andes mountain ranges, and those roads designated as "other roads". Of the 43 roads, Numbers 1 to 29 are called "self-sufficient ancd complementary roads' implying that these roads have sufficient justi- fication by themselves or are complementary to other roads so that their priority need not be questioned. Other roads (Numbers 30 to 43) are included in the plan because the Government is required to allocate annually for their construction by specific legislative action of the Parliament. The INP and the Highway Department have relatively little leeway to do any meaningful planning insofar as these roads are concerned. Nevertheless, the mission urges that, insofar as possible, allocations of investment funds should be determined by uniform investment criteria; the best practice would be to test the justification of all projects by such criteria. (ii) Over-designing. The determination of design standards for the roads progranmmed was based on the highest estimated traffic volume on each road during their 15 to 20-year economic life rather than the current traffic volume and its possible growth in a near future. This has resulted in over-designing on mo3t of the program roads. Admittedly, design standards of roads to be newly constructed in areas where there have been no roads, and therefore no traffic, would have to be determined on the basis of future - 19 - traffic. But even in such cases, it is not necessary or economical to build a road with a capacit;y which will not be fully utilized before 15 or 20 years. The Government's reason appears to be that to upgrade a road later would cost more money than to build a high standard road at the beginning. However a higher cost in the future does not necessarily mean a higher real cost. The relative economy of the alternative choices can be determined mainly by comparing the present value of the alternative cost required to build the road to high standards at the outset and the present value of the cost of building it at lower standards and of up- grading it after a number of years. The mission believes that the design standards now established for each road to be built should be carefully reviewed by the Government with the new basic standards suggested in Table 20 before undertaking construction works. It is roughly estimated that adoption of more realistic standards would help save al; least 25 percent of the program cost. However the mission feels that the construction costs are generally underestimated and contingency allowances are not adequate. Thus no adjustment in the cDst estimate appears necessary for the purpose of the present analysis assuming that the reduced standards are adopted. (iii) The need to concentrate efforts in a smaller number of Erojects. The mission considers that the Government program requires the starting of construction on too many projects at once. Given the existing limitations of financial resources, organizational and supervisory capacity, all the projects tested for starting soon can be initiated only because the annual expenditure on many of them is reduced. The inevitable result is to lengthen their construction period. Economic losses result because the long period of construction work unduly interferes with movements of traffic over the roads and the capital investment in the project fails to yield its benefits for a longer period than necessary. It is therefore far more economical to select a smaller number of higher priority roads and to carry out the works on these within the shortest period technically possible. 71. The mission reviewed the Highway Department rod program for 1966 and 1967 with the Highway Department and also discussed it with INP. There is substantial agreement between the Government and the mission as to the size and composition of the program recommended by the mission. A detailed tabulation of the mission recommended road program of the High- way Department is given in Tables 23 and 24. No details are available on the FNDE. road program, and therefore, the mission recommendations concern orly the total magnitude with project break-down. A summary of the mission recommendation is as follows: - 20 - (SI. million) 1966 1967 Total Highway Department: Pan American Highway 63 80 143 Feeders to Pan American Highway 59 46 105 Major transversal and penetration roads 363 500 863 Marginal Highway 90 60 150 Other roads 89 97 186 661 783 IQ- FNDE Road Program Total 708 835 1543 72. Beyond the two-year period under review, as can be seen in Table 24, the total annual level of investment would fall in 1969 below the level of 1967 if no new projects are added to the program. Although the mission did not attempt to appraise the technical and economic aspects of those further projects whose engineering preparation would become ready for con- strLction before 1968 or 1969, it appears there is a sufficient number of projects from which to choose additional projects for execution at the end of the two-year period to maintain a high rate of road construction if overall financial resources so permit. An illustrative list of those potential projects is given in Table 25. Pan American Highway 73. The Highway Department program for 1966-1967 envisages improve- ment of seven sections of thie highway with a total length of 768 kilometers. In addition, it proposes to build a number of by-passes of a total length of about 50 kilometers around large cities and towns on the present itinerary of the highway. The Department scheduled commencement of works on three sections of roads as well as construction of some by-passes in 1966 and the rest for 1967. 74. For 1966, the INP eliminated two of four projects, retaining the 127--kilometer section between Puente Fiscal and Moquegua and the 56-kilo- meter section between Lima and Pucusana. The mission generally agrees with INP on the choice of roads, but it feels that in view of the relatively large traffic, the 20-kilometer section between Garita-Desvio-Talara should be improved in 1966. 75. The Pasamayo section which carries a heavy traffic (over 2,000 vehicles a day) has a serious problem of sand-slides which impedes a smooth flow of traffic. No funds are allocated to this section because of engineer- ing problems which are not yet solved; the mission believes the Government should be prepared to coummnce works on this section as soon as the engineer- ing solutions are given. These are now under study by consultants financed by the Bank. The Atico-Ocona section where traffic volume is about 300 - 21 - vehicles a day also has serious sand-slide conditions but these do not create the same difficult engineering problem as in the Pasamayo section. It is desirable that the work be carried out in this section in the course of 1967. In view of the heavy traffic conditions now existing, the mission considers that the cut made by INP on the Lima-Pucusana section should be restored to the original figure proposed by the Highway Department. Feeders to Pan American Highway 76. For the most part, these are short roads feeding the Pan American Highway from the agricultural valleys and some mining areas in the Sierra. There are many of these roads and they are generally serviceable for the relatively low volumes of traffic over them. The mission agrees with the INP on the selection of roads for 1966 except for the Sullana-Paita road which is now being studied by consultants financed by the Bank. 77. The Sullana-Paita road would connect Sullana, the most important industrial and cormercial city in the Piura Department, and the port of Paita, where a new four berth port is being built with Bank financing. It is expected that when the new port is completed, the traffic between Paita and Sullana would grow rapidly. Therefore, the need for a good road facility between the two towns is beyond question. However, the traffic between the two towns is currently moving via Piura, that is, from Sullana to Piura over the Pan American Highway and between Piura and Paita over an existing road which is included in the program recommended by the mission and the Government for 1966. There is, therefore, a good road connection between the two towns, albeit somewhat roundabout. The distance of the present connection is 94 kil-ometers whereas the proposed direct route would by 36 kilometers shorter. Wfhether this reduction of distance could justify the proposed investment depends on the potential traffic volume on the new road, including diverted ancd new traffic. The consultantstestimate of the future traffic volume of about 150 vehicles a day was not based on a survey of origins and destinations of current traffic between Sullana-Piura-Paita. It is, therefore, desirable to withhold a decision on this road until the study is completed. If the study is positive, some adjustments in the road program may be necessary to include this road for execution perhaps in 1967. Major Penetration Roads 78. For 1966 the Ministry of Public Works considers all but one (Santa Inez-Pilpichaca road) of the twelve roads in this category to have a self- evident justification. The investment proposal for the eleven roads would amount to about S/. 4,000 million from 1966, a major portion of the Govern- ment intended program. In view of the size of investment required, how- ever, and the importance of assuring greatest developmental benefits from the proper choice of roads and areas to be served, the mission is strongly against the acceptance of self-evident justification. Rather, a detailed examination of the relevant economic data concerning the projects and the areas is needed to provide a sound economic basis for the choice of roads. The mission tried to evaluate the economic importance of each road in this group within the time and information available. Although its conclusion is only preliminary due to the summary nature of its investigation, the - 22 - mission is reasonably convinced that only seven road sections, as indicated in Table 22, are justified for immediate construction. The last road of the seven, Nazca-Abancay-Cuzco-Urcos, which connects the port of Pisco via the Pan American Highway with the Sierra region, might be improved starting in 1967 with engineering preparation completed during 1966. This is one of the biggest projects in the road program, estimated to cost more than S/I. 1100 million. 79. The mission would riot include the very important Carretera Central from Lima to Oroya in the program for 1966 and 1967 since its condition is fairly adequate to serve the traffic, except in the approximately 60-kilo- meter section between Casapalca and Oroya, which is under engineering study. If this study is ready well before the end of 1967, it should be possible to add the Casapalca-Oroya section to the program with some adjustment in other roads. 80. The Government has obtained financing from a Japanese source for construction and improvement of the 155-kilometer Pilpichaca-Ayacucho section of the Empalme Ruta :L - Ayacucho road. This road connects Pisco port with the mining region in the Sierra. But it appears that the Empalme 1 and Puente Paracas section does not have high priority because the daily traific on this section is only about 50 vehicles except in the vicinity of the Pan American Highway. 81. The next section between Puente Paracas and Pilpichaca is a round-about road over an extremely difficult terrain, where it may be dif- ficult to build a serviceable road at a reasonable cost. The Government is now considering whether a short-cut between Puente Paracas and Pilpichaca, by-passing the present alignment and therefore the difficult terrain, should be built. No decision has yet been made on this question of by-pass con- stnrction. It is, therefore, desirable that only the Pilpichaca-Ayacucho section be improved now to relatively lower standards to serve the intra- Sierra traffic. The construction of a connection with the port of Pisco may have to be decided on the basis of a further investigation of traffic potentials and engineering feasibility. 82. In summary, for major penetration roads the mission would allocate S/. 363 million for 1966 as compared with INP's S/. 357 million, but con- centrate the expenditure on seven roads rather than ten as planned by INP in order to complete construction and obtain the benefits of the seven roads sooner. The Marginal Highway (Carretera Marginal de la Selva) 83. The Marginal Highway is an international road link proposed by Bolivia, Ecuador, Colombia and Peru at the initiative of the President of Peru. At the Colombian end of the highway, it would be linked with the existing Venezuelan highway network and at the Bolivian end, it would be connected with the Paraguayan and Brazilian road systems. A reconnaissance study, prepared by consultants, sponsored by a committee of the Ministers of Public Works of the four countries and financed by the Inter-American Development Bank, was made public in April, 1965. According to the study, - 23 - the Peruvian part of the highway will run from the Ecuadorian border near San Ignacio to the Bolivian border near Puerto Maldonado, a distance of 2,h60 kilometers. Some existing road sections (894 km.) and some others currently under construction or under study (503 knm.) will form part of the highway. The total additional length of roads to be constructed (in- cluding those under construction or being studied), would be 1,565 kilo- meters estimated to cost about US $172 million. In addition, the cost of the area deve:Lopment, including construction of agricultural feeder roads is estimated in the study at about US $55 million. The consultants en- visage 1978 as the target year for completion of construction. 84. The alignment of the Marginal Highway in Peru would be for the most part through the eastern foothills (Piedmont) of the Andes mountain range - a region known as the "Ceja de la Montana" - where the agricultural and forestry potentials of substantial areas within the influence of the proposed road are considered rich if properly managed. According to the consultants' report, the land area to be immediately affected by the con- struction of the highway would be no less than two million hectares and the number of new population to be eventually settled in the area is over half a million. The consultants consider that this highway project is justified over its entire lerngth both by broad general economic develop- merit benefits and by estimated increases in agricultural and forest pro- duction. The estimates presented in the report, however, show that the average annual net increments to production of agriculture, forestry and other activities would be rather low; they would not be even sufficient to equal the cost of debt service for the road construction itself if the project were to be financed on conventional terms by international agencies. 85,, The Government considers this highway construction as an instru- ment to reorient the outlook of Peru's economic development by inducing immigration of people - especially from the Sierra region - and agricultural capital to the undeveloped interior Selva region. The expected development of the jungle region would help to alleviate the population pressure in the Sierra region and provide a basis for agricultural expans:ion of annual and plantation crops. To exploit them will require new roadE- and eotablishment of adequate agricultural extension service which may weil require more funds than the US $55 million estimated by the consultants. 86. The mission considers that the basic idea of providing road facilities to the area is a gocd. one. Howcve7, pe:;dingr mGre d!. ailed studies of various road sections, particularly their econcz.uic jtificoation, it could not conclude that all the proposed hi,rlway so -tions sho-uld be built and if so when. From an econod.c^ poirt of view, there will be need for careful and deliberate feasibility and engineering studies of its several sections and evaluation of these before decisions are taken to commit scarce resources. 87. For some time to come, the role of the Marginal Highway as a through highway is likely to be of secondary economic importance. However, there appear to be reasonable prospects of success for a few road sections in the project which open up potential agricultural areas for colonization. 24 - Even for this objective, the best course to follow appears to be to con- centrate resources and efforts at first in a few selected areas, without dispersing them widely. These first sections should be tied in with the rest of the road system of the country and should be built to relatively low standards, just sufficient to serve the initial traffic from these areas, which is not expected to be large. 88. So far as the 1966 program for the Marginal Highway is concerned, the mission agrees with the INP that the program should be concentrated on construction of two sect:ions only. Both the Tarapoto-Juanjui and Thulumayo-La Morada sections appear to show considerable agricultural po- tentials. The work on the former section would involve completion by the end of 1966 of the low standard road now being financed by US-AID. The Highway Department plan cal:Ls for up-grading the standards of the new road at a cost of about SI. 250 million, starting in 1968. The mission believes that it is yet too early to plan any up-grading; such plans may be taken up when a reasonable volume of traffic is built up on the road. 89. The mission recommends that no work on other sections be started in 1966 and 1967 and the Government should concentrate only on completing the Tulumayo-La Morada section. The Government should also prepare plans to construct feeder roads (caminos vecinales) to this section of the Marginal Highway to assure a fuller utilization of the highway. Although the engineering of another section of the highway, the Via Central-Satipo- Puerto Ocopa road, being carried out with the Bank's financial assistance, might be ready by the latter part of 1967, it does not seem likely that financing could be secured and construction work started before sometime in 1968. 90., The mission considers that the design standards already adopted for certain sections and being considered by the Government for the rest of the Marginal Highway (8-meter platform and 6-meter double asphalt pave- ment) are too high in relation to the probable economic development of the area it would traverse. Unless there is a clear possibility on some sections for generation of large volumes of traffic in the near future, the road standards should be set at a much more modest level, adequate to permit establishment of colonial settlements. The section, Tulumayo-La Morada, has already been contracted for construction to high standards. The mission realizes the difficulty of changing standards on such sections, but con- siders that the Government should review the justification for the standards adopted where they can be changed and explore the possibility of modifying decisions made. Other Roads 91. Nearly all the roads under this category are those to which the Government is obliged by law, or Parliamentary designation, to allocate f'unds for project execution. The cost of these roads, (S/. 1800 million) is over 20 percent of the total cost of the Highway Department's 10-year program. These are the so-called "untouchable" projects which have had, and so far continue to have - with some possibility of discretion by the Highway Department - a first claim on the Government's resources. Other projects which have demonstrated their economic justification are allocated the remaining funds. Legislative action on highways committing the Govern- mentts investment resources does not appear to have been based on careful studies of economic needs of the area served by the roads and while economic consideration may have been a factor in some cases, frequently non-economic political considerations were the motivating force for their approval. 92. The mission urges a halt to this procedure and a shift to an orderly programming of road projects based on economic considerations. If a rational allocation of resources is to be the guiding principle of develop- ment programming in Peru, the Congress and the Administration must be willing tc let these projects be subject to a critical review of their economic merits. 93. The mission recommends that, before an economic review of project roads are carried out, works on the following six roads only should be carried out: Identification Cost Number Name of Roads Km. SI. million 33 Caminos de la Convencion 200 162 34 Atalaya-Itahuania-Nianu 60 127 35 Sandia-Tambopata-Valle Grande 100 101 36 Carreteras a capitales de provincias 200 213 43 Balzas-Leimabamba 83 26 52 Urcos-La Raya-Puno 339 242 982 871 94t. Peru has been building some low class penetration roads to isolated areas by using the army engineering battalions. The mission considers this an effective practice, provided the selection of roads is good and the standards applied are appropriate. Several such roads (33 through 35) are included in the recommended list. However, four such roads (numbers 30 through 33, Table 23), being or to be constructed by Army battalions, are suggested for elimination from the program pending a review of their economic justification by the Government. 95. The INP includes the construction of roads to the provincial capitals (identification number 36) in the 1966 program. The mission considers that, in view of the need for funds for other equally or more important projects, the construction of the roads should be carried out in two years rather than one. 96. The Urcos-La Raya-Puno road is included in the mission's recom- mendation; however, the 1967 level of investment is put at one-half of the amount proposed by the Highway Department; the mission believes that the southern half of the road requires only minor improvement and with adequate maintenance will suffice to carry the traffic. The northern half only - 26 - should be reconstructed. The maintenance of the whole length of the road is in need of improvement. 97. The other roads which the mission proposes to exclude from the program for 1966-1967 do not; have clear justification at this time and their execution should be postponed. In the meantime it would be desirable for the Highway Department to collect information adequate for an economic review of additional roads not now recommended by the mission. Roads to be Built by FNDE 98. Due to the lack of information, it was not possible to review in detail the roads planned to be built by the FNDE. The roads are generally low standard farm-to-market roads to be built at an average cost of a little over S/. 20,000 (US $8,000) per kilometer. How well these roads will fit into the national road network will not be known until plans are finalized. The mission, however, believes that in principle the construction of low cost roads to connect isolated villages with population centers is desirable; if properly planned and executed, these roads could prove to be a sound investment. As the proposecd expenditure would have to be reviewed by the Government and only those justifiable projects are to be selected for execution, the mission considers that for 1966 only about half of the planned expenditure should be allocated to FNDE. Such expenditure for 1966 would be SI. 44 million; it might be increased somewhat in 1967 to about SI. 52 million. F. Financing of the Program 99. Both the Highway Department and the FNDE finance their road construction programs from the Governmentts budgetary appropriations (including earmarked taxes) and foreign loans. The FNDE receives S/. 10 million annually from the Government's gasoline tax revenues and the balance of these taxes (approximate:Ly S/. 300 million at present) is available for the Highway Department road expenditures. In the event that no foreign source of finance can be arranged, it appears to be the Governmentts in- tention to finance the FNDE program by making additional budgetary appro- priations (over and above S/. 10 million annual receipts from gasoline taxes), in 1966 and 1967 of S/. 34 million and S/. 42 million, respectively. 100. The foreign cost of a large part of the Highway Department road program outlay for 1966-1967 is either already secured from foreign agencies or is being negotiated. Some foreign financing covers not only the foreign costs but also a part of the local cost component. At present state, 13 out of a total 23 projects have participations of foreign agencies or such participations are being negotiated (see Table 24). These 13 projects account for almost about 75 percent of the total length of roads to be built or improved, and nearly 90 percent of the total cost of the program. The mission estimates that if the foreign financing arrangements on all those roads under negotiation are successfully completed and the foreign lenders finance on an average 60 percent of the project costs, or the total foreign cost component, whichever is higher, the proceeds from the foreign loans in 1966 and 1967 would be, respectively, S/. 431 and S/. 480 million. - 27 - 1(1. The sources and disposition of the Highway Department funds are shown in Table 26. The total of the earmarked gasoline and stamp taxes and the proceeds of the foreign loans would be more than the construction program costs in both years. But the Highway Department has to meet, in addition to the road program costs, other annual expenditures such as road maintenance, administration costs and service of existing debts. In Peru the Highway Department assumes the responsibility for debt service out of its own earmarked revenues on certain selected loans contracted to finance road projects. The total financial requirements of the Department would, therefore, produce short-fa]ls of SI. 374 million and SI. 454 million in 1966 and 1967, respectively. The shortage of funds could be fed by the Government's budgetary appropriations, including increased gasoline taxes and other road user charges. IV, THE STATE RAILWAYS A. The Railway Systems 1022. The State Railways form a minor part of Peru's railway system; its 750 km. accounts for less than 30 percent of the country's total rail- way system. The largest part (about 1400 km.) is owned and operated by the Peruvian Corporation, a Canadian limited liability company, consisting of the Central (350 km.) and Southern (862 km.) Railways and two other short lines (See locations in Map 2). The Corporation has recently under- taken a major capital investment program ($21.3 million equivalent) for modernization and rehabilitation of track and workshops and diezelization of traction. The project is being financed in part by a Bank loan (334-PE) of US $13.25 million equivalent. The remaining 450 km. of railway lines in Peru belong to private companies transporting primarily their specialized private cargoes; they are also obliged to serve passenger traffic as well as public freights offered them. In summary, the ownership of the railway Lines is as follows: Route Km. Track Km. State Railways 744 859 Privately owned Railway 1849 2409 Peruvian Corporation (1393) (1737) Cerro de Pasco Mining Company (212) (333) Others (244) (339) Total 2593 3268 103. The State Railways comprise eight short lines located in various parts of the country; three of these are operated by the General Directorate of Railways (a bureau in the Ministry of Development and Public Works), two by the Peruvian Corporation, and the remaining three have ceased their oper- ation within the past few years. The following tabulation lists the eight lines: -28 - Line Name Gauge Length Operated (meters) (Km.) by In operation 1. Huancayo-Huancavelica .914 1h7.5 Government 2. Cuzco-Santa Ana .914 131.3 Government 3. Tacna-Arica 1.435 62.0 Government 4. Matarani-La Joya 1.435 62.6 Peruvian Corp. 5. Ancon-Polvorin a/ 1.435 6.0 Peruvian Corp. Sub-total 409.4 Not in operation 6. Noroeste del Peru .914 197.3 7. Ilo-Moquegua 1.435 98.0 8. Lima-Lurin .914 45.2 Sub-total 34o.5 Total 74h9.9 a/ This line being a short; service line for the port of Ancon, the 6 km. length was included in the track length rather than route length in the previous table. 104. The three government operated rail lines together handled about 680,000 passengers and 137,000 tons of cargo in 1964. Freight is composed of sundry cargoes which are difficult to classify: down-traffic is mainly agricultural products and up-traffic principally consumer goods. The com- bined traffic volume has been increasing during the past five years - passen- gers by about five percent per annum and freight by about 5.5 percent. The costs of operation of the State Railways have far exceeded their operat- ing revenues virtually in every year of their existence. In 1964, the operating revenue was about SI. 24.6 million against the operating costs of S/. 36.7 million, leaving a cash deficit of S/. 12.1 million which was absorbed by the Government. The available statistics relating to their traffic, revenues and costs are shown in Table 27. Maintenance of tracks and rolling stock is inadequate. 10!;. The narrow gauge line between Huancayo and Huancavelica in the Sierra region of central Peru is an extension of the Peruvian Corporation's Central Railway which terminates at Huancayo. Due to the difference in gauge between the two railways, passengers and freights have to be trans- shipped at Huancayo. 106. The Cuzco-Santa Ana is a narrow gauge line serving predominantly t,ourist traffic to Macchu Picchu as well as the agricultural area in and around Convencion Valley along the Urubamba River where presently no trans- portation facility is available except this railway. There is transshipment - 29 - of traffic in Cuzco to the broad gauge Peruvian Corporation's Southern Railway; this is handled by road vehicles. 107. The Tacna-Arica line serves a small and decreasing traffic be- tween the Chilean port of Arica and the agricultural area around Tacna in Peru. It was built in the middle of the 19th century when Arica and the surrounding region was part of Peruvian territory. l1)8. The mission did ncot attempt to make an analysis of the operating and financial conditions of the State Railways. It is evident, however, that the present administration of railway operations by a government bureau is not conducive to the sound management of a railway enterprise. The State Railways operate under a number of unfavorable conditions, such as the scattered distribution of rail lines in various distant parts of the country, the short distance of lines and the different gauges between connecting lines. If, despite the financial deficits, the railway operation has to be continued for reasons other than the immediate financial con- siderations, a more "business-oriented" policy by the organization could help reduce the annual deficits. However, given the small number of lines and small volume of traffic involved, it would seem inadvisable to push ahead with creation of a new autonomous agency for the State Railways operation, "Empresa Nacional de Ferrocarriles del Estado", an idea which recently received legislative approval. The costs of creating, staffing and operating such a new agency might well exceed any benefits derived. B. The Investment Program and its Evaluation 109. The INP's 1966 investment plan includes the completion of the rehabilitation work on the Cuzco-Santa Ana line and construction of the Tambo del Sol-Pucallpa railway. The plan is as follows: Total Invested Budgeted Investment Plan Costs of until for For After Project 1964 1965 1966 1966 /--- S. million ---------------- 1. Rehabilitation of Cuzco- Santa Ana lines 46.0 5.6 26.3 9.2 .9 2. Constnmction of Tambo del Sol-Pucallpa Railway 1,800.0 162.1 12.0 12.0 1,613.9 110. A large part of the rehabilitation work on the Cuzco-Santa Ana line will have been completed by the end of 1965, leaving only a small portion to be executed in 1966 and 1967. The work is mainly replacement of sleepers, ballasting and extension of switchbacks on steep grades. A US-AID loan of S/. 15 million was made for purchase of materials and con- struction equipment of which S/. 14 million will be disbursed during 1965 and the remaining S/. 1 million in 1966. - 30 - 111l. The railway presently is the only transportation facility for people in the agriculturally-important Convencion Valley where a government sponsored agricultural colonization project is being carried out. Pro- vision of adequate transportation to tourists visiting Macchu Picchu is also an important part of the justification of the rehabilitation project. The mission agrees that the project should be carried out to its completion by 1967 as planned by the Government. 1:L2. The purpose of building the Tambo del Sol-Pucallpa Railway was to connect the port of Pucallpa on the Ucayali river and the Sierra region at Tambo del Sol, near Cerro de Pasco, where the proposed railway will be connected with the Cerro de Pasco Railway. When the construction of the railway began about 1950, there was no plan for construction of a road from the Sierra region to the Selva. However, road construction from Picallpa to Aguaytia is almost completed, and the work in the section from Aguaytia to Oroya in the Sierra will be undertaken soon. This road, serving the general area which the proposed railway would serve, causes the railway project to lose much of its economic significance. 113. Up to 1964 some 50 km. of embankment, tunnels and 200 km. of supply roads were built between Tambo and Oxapampa. The Government feels no urgency to construct the railway, but has been doing so because it is obliged by law to appropriate S/. 12 million a year for the work. Total cost is estimated at S/. 1.8 billion of which less than ten percent has been spent in the last 15 years. At the present rate of annual expenditure, the project will take much more than a century to complete. The mission gained the impression that the railway embankment being constructed is intended to be used eventually as a highway base rather than for a railway track. llt. The mission understood that the General Directorate of Railways had proposed to the INP to undertake a feasibility study of the project to determine whether, in view of the recent road construction, the railway is economically justified. However the study has not been made, apparently because of the Government being under obligation by a legislative directive to carry on the project. If Congress were to free the Government from the obligation to allocate funds for the railway project, then the Govern- ment could proceed with the feasibility study, so that it could determine whether the project should be completed. Pending the execution of the feasibility study, the mission hopes that it will be possible to withhold the 1966 investment planned by the INP, and also that for 1967. 115. If the Government's intention in carrying out the current con- struction work is to provide a highway base rather than a railway embank- ment, responsibility for the project should be transferred to the Highway Department which then should review its justification within the framework of the road development program. - 31 - V. FORTS AND MERCHANT MARINE A. Main Problems of Port Investment 116. The port facilities of Peru consist of 17 public ocean ports, irLcluding the Callao port, four main river ports on the Amazon River system in the eastern part of the country and several private ocean ports (Map 3). Almost all its foreign trade is carried by ships. The details of cargo statistics are shown in Tables 28 through 31, which are summarized as follows: (In million tons) Coastal Exports Imports Trade Total Port of Callao 1.3 3.3 0.1 4.7 Government administered ports 1.9 .5 1.4 3.7 Private ports 7.0 .3 2.9 10.2 10.2 4.1 4.4 18.6 117. The port of Callao, located near Lima, is managed by an autonomous authority. All other public ports are under the control of the Direccion de Administracion Portuaria (DAP), a department of the Ministry of Finance and Commerce. Only tlo of its 16 ports are deep-water ports, the remainder being lighterage ports with old and obsolete equipment and facilities. A detailed description of physical facilities and cargo movements of the Peruvian ports is given in Annex 3. 118. The numerous smaller ocean ports along the coastline were developed from mere loading points to lighterage ports mostly during the nineteenth century. The dispersion of shipping activities to so many small ports was necessitated by the difficult natural conditions along the Peruvian coast. The 2,000 kilometers Peruvian coast is mostly rocky with stretches of shallow, sandy beaches, with few natural harbors where berths can be con- structed without breakwaters. The Humbolt current flows along the coast creating considerable littoral (sand) drift and consequent siltation problems. Swells are heavy and operations of small ports are frequently closed down during the winter months. 1:9. Today, with the well developed overland transport facilities along the Pacific coast, the small ports represent an inefficient way of meeting the economy's shipping requirements. The development of the economy and the consequent changes in the nature of traffic requires more modern shipping facilities than the rudimentary installation to be found in those small ports. A question that faces the Government at present, therefore, is whether all these ports should be improved and maintained or only a few selected ports built and equipped with modern facilities and the shipping activities concentrated to these few ports. 120. Until recently, the Government pursued a policy of maintaining most of these small ports with major capital outlays on them for improve- - 32 - ment and expansion. The present port development of the DAP, however, seems to suggest a change in the Government's policy toward concentration of investments in a few selected ports. B. Administration of Ports Callao Port Authority 121. The Port Authority of Callao was created by the Supreme Decree of July 17, 1952 as a quasi-autonomous agency responsible for administering, operating and maintaining the port of Callao. The Authority has a Board of Directors consisting of five members each representing the Government, private businesses, and shipping organizations. The management is headed by a Technical Director who is responsible for carrying out the resolutions and regulations issued by the Authority, and for the management and operation of the port in accordance with rules and regulations. The organization of the Authority is shown in Chart 2. 122. The Authority is responsible to the Minister of Finance and Com- merce. Under the provisions of the law, the Authority is empowered to fix its own charges, but shall transfer to the Government surplus earnings re- maining after provision of renewals, social insurance and debt service, including amortization. The Authority may issue bonds and other debentures and may enter into all kinds of contracts with the authorization of the Executive Power. The Authority is responsible for the execution of the port projects included in the Bank loans Nos. 57-PE and 208-PE. To assist in the execution of the project under loan No. 208-PE, a technical adviser as well as consultants have been employed. Direccion de Administracion Portuaria (DAP) 123. The DAP organization is shown in Chart 3. The Director is re- sponsible to the Ministry of Finance and Commerce. He is assisted by technical and legal advisers. DAP has four departments, namely, (i) tech- nical, (ii) administration, (iii) accounting, and (iv) statistics. The technical department has two branches composed of civil engineers and mechanical engineers responsible for the study of projects, maintenance of wharf and equipment needed for the port operations. The administration department is responsible for personnel matters, supplies and general provision. The accounting department has a variety of functions including financial as well as auditing duties. The statistics department is re- sponsible for cost studies and data collection. Each port has a port manager who is directly and solely responsible to the Director of DAP. DAP staff handles lighterage and cargo movement across the wharf. 124. DAP is aware of the need to strengthen its staff. It has had the wisdom to engage consultants, whose services are included in the Paita project, which is financed by the Bank. But DAP has to recruit additional staff of its own. At least five new engineers are needed in the technical department to carry out its port development program. Salaries have to be higher in order to attract able personnel. - 33 -- 125. DAP does not have financial autonomy. All the receipts from charges on ships and cargo at DAP's ports are paid to the Government (Caja de Depositos). The operating expenses of DAP and its ports are met from periodic drawings from DAP's account with the Caja. Port construction, improvement, and maintenance are financed by the proceeds of specific and ad valorem charges on export and import goods. 126. The tariffs for port user charges are established by law and are deemed to be charges for services rendered. They can be fixed from time to time by a Ministerial resolution issued by the Minister of Finance and Commerce. DAP has two sources of income, (a) earnings from the regular, or ordinary, port rates and charges, and (b) the special construction fund created through separate charges approved by law and levied on port users. The funds received from the regular charges appear as income in the national budget listed separately under the name of the port from which the funds are received. This source of income is intended to cover administrative expenditures, wages, supplies, and other necessities for port operations. The amount of annual revenue turned over to the Government is usually less than the expenditures, and the deficiency is met by budgetary appropriations (See Table 32). 127. The rates and charges at DAP ports are generally low compared with those charged at similar ports in Latin America and elsewhere. The Government agreed with the Bank during the Paita loan negotiations that it would review the present charges on ships and cargo at the public ports in order to modify them, if necessary, so as to yield larger revenue. As new deep-water facilities are constructed and put into operation, the rates and charges should be related to the costs of the services rendered. This would require cost studies to establish suitable tariff structure. Larger revenues are needed because, (i) the Government intends to construct, enlarge, and improve various public ports in the coming years, (ii) main- tenance and operating costs will increase, and (iii) the Government may decide to establish a self-supporting national port authority, responsible for construction, operation, and maintenance of all ports in Peru. Recent Proposals for Organizational Changes 1293. Recently, two proposals have been made for a change in the ad- ministrative set-up of Peru's public ports, one by the management of the Callao Port Authority and the other by the DAP. 129. The management of the Callao Port Authority suggested establish- ment of a national council of ports called "Consejo Superior de Puertos" and an autonomous port authority for each of the commercial ports in Peru. I'he main points of the Callao proposal can be summarized as follows: (a) The National Institute of Planning should prepare a study of the transport industry and, based on the study, a new law governing the country's ports should be promulgated which would establish jurisdictions, duties, powers, and functions of the proposed national council of ports and individual port authorities. The Government should designate a number of selected ports most suitable to serve different geographical areas of the country. It was suggested in the proposal that these ports should be Paita, Salaverry, Chimbote, Callao, Pisco and Matarani on the Pacific, and Iquitos, Pucallpa and Yurimaguas on the Amazon system. Each port should have an autonomous authority with a board of directors consisting of seven members representing the areas they serve. The chairman should represent the Government. The authorities should be responsible for operation, port development and financial planning. (b) The Ilational Council of Forts should have its headquarters in Lima and its main responsibility should be the formulation of a national port policy and unifying port planning and operations. It should not interfere in local matters, but advise on operation, labor and tariff policies, as well as the development and ex- pansion of the ports. 130. The DAP proposed the establishment of an independent national port authority under the name of Corporacion Nacional Portuaria (CNP) to administer and operate all commercial ports in the country. CNP would have complete jurisdiction in the port zones and financial and operational autonomy. Its borrowing ability would be limited to three billion soles or its equivalent in foreign currency. CIOP would have headquarters in Lima, and it is understood that the Callao Port Authority would form part of CNP as soon as the foreign loans granted to it are fully repaid. The Board would be composed of nine members as follows: two representatives of the Ministry of Finance and Commerce, the Director of Customs, the General Manager of CNP and one representative each of the Chamber of Com- merce, the Merchant Marine Association, the National Fisheries Association, the Manufacturerst Association and the National Agrarian Association. 131. The General Manager of the Corporation would be its chief executive officer. The various commercial organizations in Peru would elect their respective members for a two-year period, but they would be eligible for re-election. The General MFianager would be elected by the Board. CNP would be subject to the financial supervision of the Superintendency of Banks and would prepare yearly financial statements to be approved by the Govern- ment. 132. The two proposals differ in principle although both contain some sound recommendations. DAP's proposal seems to be better suited to the present state of Peru's political, managerial and economic development. In Peru, managerial, technical and economic resources are scarce, and the establishment of an autonomous port authority in each port is not likely tc be conducive to effective management and administration of the ports. A national port authority, would make for a more effective organization, and it would provide a channel for receiving and co-ordinating the technical and financial assistance needed to carry out the port development program. - 35 - C. The Port Investment Progpram 133. The INP included in its 1966 investment program only the completion of the existing projects in Callao and Paita. The mission understood, how- ever, that the Callao Port Authority has already undertaken certain modifi- cations as well as some additional works on the existing port expansion project. Also, the DAP has just completed preparation of an eleven-year investment program for 1965-1976. The mission, therefore, reviewed these aidditional programs under consideration by the two port agencies, as well as the INP program. A brief description of these programs is given in the following. Callao Port Authority 134. The expansion project, which is being financed by a Bank loan (208-PE), is planned to be completed by about 1968. The project includes an oil pier capable of berthing two big tankers simultaneously, two general cargo berths and a mineral berth, provision of a dredger and a tugboat, and dredging of the harbor area to a depth of 35 to 40 feet. In addition to the original Bank financed project, the Port Authority has extended Darsena Pier with two berths and presently constructing one more on the same pier ancd intends to build three more berths at Pier 5. 135. The INP program for 1966 of S/. 92.3 million is nearly identical with that of the Callao Port Authority, but the similarity is only coinci- dental and limited to 1966. As can be seen in Table 33, the INP program includes a considerably smaller volume of works than in the Port Authority's program. The two programs, are summarized as follows: I NP Port Authority Original Additional Original Additional Project Works Total Project Works Total (S/. million) 1964 165.2 2.1 167.3 217.4 36.9 254.3 1965 90.8 1.1 91.9 95.4 6.9 102.3 1.966 91.2 1.1 92.3 91.1 1.1 92.2 1967 39.8 1.1 40.9 57.7 26.0 83.7 1968 and after - - - 22.2 48.0 70.2 Total Cost Invest- ment 387.0 5.4 392.4 483.8 118.9 602.7 Direccion de Administracion Portuaria 136. The Paita port project, which is also financed by a Bank loan (373-PE), and expected to be completed by 1966, is the only item the INP has for DAP in its 1966 program. In addition, the DAP is presently carrying out a minor improvement project on the river port of Yurimaguas on the Rio Huallaga in the Selva. This project, for reasons unknown, is not in- cluded in the INP program. The construction schedule of these projects umder execution is as follows: - 36 - DAP's Projects Under Execution (SI. million) Paita Yurimaguas Total 1964 .1 3.0 7.1 1965 66.8 5.0 71.8 1966 66.8 8.0 74.8 137.7 16.0 153.7 137. Besides these two projects under execution, the DAP plans to make investments in various ports under its jurisdiction during the next eleven years. DAP's eleven-year investment for 1965-1976, as shown in Table 34, would cost more than S/. 1.7 billion. For the period 1965-1967, the invest- ment out-lays would be as follows: DAP's 11-year Program Projects to be Undertaken in 1965-1967 (Si. million) Total After Cost 1965 1966 1967 1967 Construction Works Matarani 48.2 16.4 31.8 - - Ilo 80.0 - 11.2 42.4 26.4 Pisco 235.0 47.0 110.5 77.5 - River Ports 32.0 - 10.2 14.4 7.4 Chimbote 208.8 - - 4.2 204.6 Equipment Purchase Yurimaguas 3.0 - 3.0 - - Pisco 10.0 - - 10.0 - latarani 25.4 - 12.5 12.5 - Technical Studies 46.4 6.5 13.4 12.5 14.0 688.4 69.9 192.6 173.5 252.4 138. The mission found that co-ordination was not well maintained be- tween the INP and DAP insofar as the plans for execution of this eleven-year investment program are concerned. While the DAP regarded the program as its official investment program and proceeded with financial arrangements both internally and externally, the INP has not yet reviewed the invest- ment program. As will be indicated in the following section some of the projects in the eleven-year investment program deserve serious consideration, and those found to be economically justified and technically sound should be included in the INP program. - 37 - 139. If the DAP carries out all those projects both under construction and programmed in its eleven-year investment program, the annual expenditure in 1966 and 1967 would be SI. 267.4 million and SV. 173.5 million, respec- tively. D. Evaluation of the Program Callao Port Authority Program 140. The justification of the original part of the current project is well established and therefore an early completion of the project works should be the first order of business for the Port Authority. The construc- tion work was started in 1959 and is now planned to be completed by 1968. But, as of now, only 40 percent of the works is complete. The main reason for the delay was administrative rather than financial or technical. The planned completion of the project by 1968 is not likely to materialize; 1969 would be a more realistic goal. 141. The additional works to be undertaken by the Port Authority are needed due to the increase in traffic and are technically necessary items for an efficient operation of the port. The mission recommends that the additional works on the Callao port project should be approved by the IMP and made a part of the Government's official investment program. The schedule of execution recommended by the mission compares with that of the Port Authority as follows: Schedule of Works to be Carried out 1965-1969 (S/. million) Port Authority MYission Recommendation Total Cost Total Cost Foreign Cost Local Cost 1965 102.3 72.0 16.1 55.9 1966 92.2 68.0 21.4 46.6 1967 83.7 70.0 18.0 52.0 1968 70.2 70.0 21.4 48.6 1969 68.4 15.3 53.1 348.4 348.4 92.2 256.2 142. According to a review of the financial forecast of the Port Authority, assuming that the net operating revenue would increase by an annual average of 4 - !, percent, based on the present traffic trend, and if no financial contribution would be required from the Port Authority by the Government during the remaining construction period 1965-1969, the Port Authority may be able, if necessary, to finance the local currency cost as well as the foreign cost of the additional works of S/. 23.4 million, which was not included in the original Bank project (See Table 35). - 38 - Thie DAP Program 13_. The current DAP program appears to represent a considerable improvement over the previous eleven-year program for 1962-1972, in that it concentrates its program expenditures on a smaller number of ports with a view to providing one efficient port and the accompanying facilities to each of a few major tributary areas of the country. Yet, the mission feels that the program is still too ambitious and, probably, to some extent re- presents a wasteful use of resources. 144. The DAP program for improvement, expansion and new construction of the coastal, as well as river, ports calls for an investment of nearly SI. 1.9 billion (including the existing projects). This would, if adopted, represent a public investment of major proportions but the preparation of the program does not appear to have been based on a critical examination oi the merits of individual components. 145. The DAP officials state that the fast growth of the port traffic, particularly in the ocean ports, makes an early execution of its port invest- ment program urgent. There certainly has been a rather rapid increase in cargo shipment in certain ports during the past few years, mainly due to the spectacular growth of the fishmeal industry; but the present and future cargo volumes of all DAP ports are not likely to be large enough to warrant the sizeable investment planned. Even if the present level of dry cargo volume of all DAP ports of 2.7 million tons doubles in ten years, which is not likely, the total volume of DAP port cargo in 1975-1976 would be only a little larger than the 19664 cargo volume of 4.7 million tons handled by the Callao port alone. 146. The mission believes that, while some of the projects in the program appear to have demonstrated justification, the DAP should carry out, preferably in co-operation with the INP, a more detailed evaluation of both the total magnitudes as well as the individual components of the projects before the proposed program is to be regarded as the Government's official port investment program. It is also desirable to consider whether a given amount of investment funds can be better spent by further con- centrating expenditures on a still smaller number of selected ports rather than seven coastal ports, as envisaged by the proposed program. Pending such a review of the whole eleven-year program by the Government, the mission limited its own review to those projects proposed to be under- taken during 1965-1967. 147. The mission's review of the technical capacity of the DAP (both for construction and subsequent operation of expanded ports) seems to in- dicate that relatively little additional works can be undertaken before 1966, until which time its major efforts should be concentrated in com- pleting the Paita port construction. Only the construction of the Pisco port, minor expansion of the Matarani port, and improvements of the river ports should be undertaken during 1965-1967. - 39 - 148. The Chimbote port project would have to be carefully studied before an investment decision can be made. It is suggested, therefore, that a study on the Chimbote project be included in the 1965-1967 program. As in many other Peruvian ports, the congestion in the Chimbote port is due to the fast growth of fishmeal shipments. The justification for the investment therefore depends on the future prospects of the fishmeal industry. Moreover, there is a possibility of concentrating fishmeal facilities in a new fishinzg port either near Chimbote or Callao now being considered by the Government. Should this happen, the fishmeal shipments through the Chimbote port would be materially reduced. 149. The proposed two-berth finger pier at Ilo has uncertain justifi- cation at this time. The project is proposed mainly to provide an alterna- tive ocean outlet for the Bolivian shippers in place of both the Chilean port of Arica and the Peruvian port of Matarani. It is not certain whether the Bolivian shippers would switch their cargo from Arica to Ilo if the latter is built. Switching Matarani cargo to Ilo is not economically justified, since Matarani has sufficient and satisfactory facilities for the annual cargo volume of less than 100,000 tons to and from Bolivia which is served by the Southern Railway. It is argued that the trans- portation of the Bolivian cargo by railway involves the costly and time- consuming ferry crossing on Lake Titicaca, which could be avoided if the Ilo port is expanded and if the road Ilo-Moquegua-Desaguadero-La Paz is constructed and improved. This means that the justification for the Ilo port is dependent upon provision of overland transport facilities between Ilo and La Paz; but there is no firm plan on the part of the Government to build this road and no reasonable justification for the road project can be established on the basis of the known traffic prospects. 150. The technical studies for the Chimbote port and the river ports are not completed and it is unrealistic to expect much progress during 1965. The mission, therefore, moved the expenditure for study from 1965 to 1966. In the case of river ports whose justification appears sound, the construction should commence after the technical studies are ready, that is, in 1967 rather than in 1966, as planned in the DAP investment program. 151. The investments recommended for 1966 and 1967 in new projects are S/. 70.5 million and S/. 139 million, respectively. The details are shown in Table 36, which may be summarized as follows: DAP Port Investment Recommended by the Mission (S/. million) 1965 1966 1967 Total Existing projects 71.8 74.8 - 146.6 New Projects 16.0 70.5 139.0 225.5 87.8 145.3 139.0 372.1 - 40 - 152. The foreign exchange costs of the existing projects are being financed by foreign and international institutions. The Government assumes that the foreign costs of the new projects would likewise be financed by outside institutions. The cost breakdown between foreign and local components, shown in Table 37, indicates that over S/. 200 million ($7.5 million) in foreign exchange would be needed for expenditures during the period 1965- 1967. In order to finance the projects to their completion a total of about S/. 333 million ($12.5 million) of foreign loans would have to be secured. The mission considers that, subject to completion of necessary studies and project appraisal, the new ports appear suitable for foreign financial assistance. 153. The local cost of the program for 1965-1967 of about SI. 79 million can be financed from the DAP's special account receipts which are composed of various surcharges to ships and cargoes using its ports and retained by DAP for capital expenditures on its ports. The Government's projection shows the receipts to grow from S/. 110 million in 1965 to S/. 121 million in 1967, which is conservative in the light of the recent trend. 154. After meeting those prior claims of the existing projects, debt service, etc., the balance of the special account receipts would be available for financing local currency costs of the new projects. The calculations are shown in Table 38. With the exception of a small deficit (S/. 3.6 million) in 1965, there would be ample funds available during the period under review. Actually, there would be a net cumulative surplus of S/. 77.7 million by the end of 1967. E. Merchant Marine 155. The mission was not equipped to make a comprehensive investi- gation of the present situation of Peru's merchant marine and what efforts it has made have not been successful in obtaining adequate and useful data for an overall review and assessment of the future needs. For this reason, the present section will be largely limited to a general description of Peru's merchant marine. 156. Almost all of Peru's foreign trade is carried by sea and about 90) percent of the trade is carried by foreign ships. The coastal and river shipping is mostly handled by small private ship owners. The Government- owned shipping company, Corporacion Peruana de Vapores (CPV) also carries coastal cargo as well as some international freights. The CPV's fleet consists of one small, 30 year old cargo vessel, two Liberty-type ships and six Victory-type ships, with a total tonnage of about 64,000 tons (DWT). 157. Two private companies operate one 10,000-ton class cargo vessel each. The Peruvian Navy has a tanker of 6,000 tons engaged in transport of oil products between Peru and the West coast of the United States. 158. The Peruvian Navy has a shipyard at Callao for the construction and repair of vessels up to 12,000 tons. So far, only one vessel, a 6,000- ton tanker, has been built at this yard. The construction cost was high - 41 - because alL materials and machinery had to be imported and construction time was 2-1/2 years. The Navy yard is well equipped and can take all types of repair works. There are two docldng facilities. The larger one is able to accommodate vessels of a length up to 600 feet. 159. The cost of docking and ship repairs is lower in Peru than in the United States. However, most of the CPV vessels are drydocked in the United States because the docks at Callao give priority to vessels of the Peruvian Niavy and drydocking in Peru requires more time than in the United States. In addition to the Navy shipyard, four privately-owned smaller yards are located in the Callao area. There are also five maintenance and repair shops able to service fishing vessels. 160. Although, at one time, the Government had considered a rather ambitious plan to expand the CPV facilities, at present it does not have plans to make a major investment in merchant marine facilities. Should it ever do so, a decision should not be made without a careful study of technical and economic aspects. On the face of it, conditions are not favorable for the creation of a large shipping industry in Peru. A large investment would be required in the face of a highly competitive shipping market, and it is not apparent that Peru has the necessary experience and trained manpower to compete in this market. 161. The INP's program includes SI. 70 million for renovation of ships owned by CPV (S/. 10 million) and by a Government-owned fertilizer company (W/. 60 million). While these investments appear prima facie necessary to maintain the existing vessels in working condition, it would be advisable for the Government before proceeding to consider them in the light of further study of the operation of CPV by competent experts on shipping operation and management. VI. CIVIL AVIATION AND AIRPORTS A. General 162. Due to the difficult geographical conditions of the country, air transportation plays an important role in the development of the Peruvian economy and will continue to do so even with the Government's large program for road construction and improvement. At present, air transport is the only transport medium for various areas of the country. Planes carry cotton, tobacco, coffee and lumber from small airports in the Selva to the Pacific Coast and general merchandise equipment and foodstuffs from the Coast to the Selva. B. Government Organization and Regulation 163. Civil aviation activ,dties are regulated and control'ed by the Direccion General de Aeronautica Civil (DGAC), a depar';m
Groupe de la Banque mondiale · Pre-2003 Economic or Sector Report
Peru - Public investment program 1966-1967 (Vol. 2 of 7) : Transportation
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Groupe de la Banque mondiale
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Pre-2003 Economic or Sector Report
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Pérou
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Banque mondiale