Mexico - Federal Roads Modernization Project

Document of THE WORLD BANK Report No. 15448-ME STAFF APPRAISAL REPORT MEXICO FEDERAL ROADS MODERNIZATION PROJECT June 6, 1997 Mexico Country Department Sector Leadership Group Latin America and the Caribbean Region  CURRFNCY EQUIVALENTS Currency 11nit - New Peso (NS) US$1.00 N$7.9 (May 27. 1997) FISCAL YEAR January I to December 31 UTNITS OF WEIGHTS AND] MEASURES Metric Bitish/US Equivalent 1 kilometer (kmi) 0.62 mile (mi) I meter (m) 3.28 feet (ft) I gram (g) 0.0022 pound (lb) I kilogram (kg) 2.20 pounds (lb) I ton 2,205 pounds ABBREVIATIONS AADT Annual Average Daily Traffic BANOBRAS National Bank for P'ublic Works and Services (Banco Nacional de Obras y Servicios Ptblicos) CAPUFE Federal Road and Bnidge Toll Authonity (Caminos y Puentes Federales de Ingresos y Servicios Conexos) CGP General Coordination for Planning (Coordinacion General de Planeaci6n) CVSA North-American Commercial Vehicle Safety Alliance DGCC Generai Directorate for Maintenance (Dirccci6n General de Construccion y Conscrvaci6n) of scr DGCF General Directorate for Federal Elighways (Direccion General de Carreteras Federales) of SCT DGCS General Directorate for Training (Direccion General de Capacitacion Sectorial) of SCT DGMNPT General Directorate for Preventive Medicine in Transportation (Direcci6n General de Medicina Preventiva en el Transporte) of SCT DGP General Directorate for Ports (Direcci6n General de Puertos) DGPI General l>irectorate for Planning (Direcci6n General de Planeaci6n) of SCT DGTR General Directorate of Toll Roads DGTT General Directorate for Land Transport (Direccion General de Transporte Terrestre) of SCT DPE Directorate for Programming and Evaluation (Direcci6n de Programaci6n y Evaluaci6n) of DGCCOP ERR Economic Rate of Return FHN Federal Highway Network FNM Mexican Railways (Ferrocarriles Nacionales de Mexico) GDP Gross D)omeastic Product GDTR General Directorate of Toll Roads HDM : Highway Design Model HRR-M Highway Rehabilitation, Resurfacing and Maintenance ICB Intemational Competitivc Bidding IDB Interamerican Development Bank UNIT Mexican Transport Institute (Instituto Mexicano de Transporte) KPH Kilometers per hour (Kilometros por horas) NAFTA North American Free Trade Agreement NCB National Contpetitive Bidding NBF Not Bank Financed PFCP Federal Hlighway and Port Patrol (Policia Federal de Caminos y Puertos) SCT Secretanat for Communications and Transport (Secretaria de Comunicaciones y Transportes) SECOGEF General Secretanat of the Comptroller of the Federation (Seeretaria de la Contraloria General de la Federacion) SEDESOL Secretariat for Social l)evelopment (Secretaria de Desarrollo Social) SEDUE Secretariat for Urban Development and Ecology (Secretaria de Desarrollo Urbano y Ecologia) SHCP Secretariat for Finanze and Public Credit (Secretaria de Hacienda y Credito Publico) SICC Highway Maintenance Management System SIMAP Mexican Model for Highway Project Analyses SIPUMEX : Mexican Model for Bridge Management Systeni SISTER Simulation Model of Highway Maintenance Strategies (Simulation de Strategies d'Entretien Routier) SPP Secretariat for Programming and Budgeting (Secretaria de Programaci6n y Presupuesto I VOC Vehicle Operating Costs Regaional Vice! President - Javed Husain Burki Country Director - Olivier Lafourcade Acting Sector Leader - Richard Clifford Task Manauzer - Peter Gyamfi  MEXICO FEDERAL ROADS MODERNIZATION PROJECT Loan and Project Summary Borrower: Banco de Obras y Servicios Publicos (BANOBRAS). Guarantor: United Mexican States. Executing Agency: Secretaria de Comunicaciones y Transportes (SCT). Beneficiary: Not Applicable. Poverty Category: Not Applicable. Amount: US$475 million. Terms: Libor-based single currency loan (US Dollars) with repayment in 15 years, including 5 years of grace. Commitment Fee: 0.75% on undisbursed loan balances, beginning 60 days after signing, less any waiver. Financing Plan: See para. 15. Net Present Value and Economic Returns: NPV is US$983 million equivalent discounted at 12% and ERR is 18.9% for the whole road program. Staff Appraisal Report: Report No. 15448, dated May 27, 1997 Map: IBRD No. 28418   MEXICO FEDERAL ROADS MODERNIZATION PROJECT Appraisal Report TABLE OF CONTENTS Page 1. THE TRANSPORT SECTOR .....................................................1 A. The Economy and the Transport Sector .....................................................1 B. Institutional Framework and Sectoral Planning .....................................................2 C. Government's Transport Sector Policy ...................... ...............................3 D. The Bank's Experience and Lessons Learned in the Sector .................... ....................4 E. Rationale for Bank Involvement .....................................................6 2. THE HIGHWAY SECTOR ........7.............................................7 A. The Highway Network ......................................................7 B. Administration of the Primary Highway Network ....................................................9 C. Highway Maintenance ..........1........................................... 1 D. Sector Issues ..................................................... 11 3. THE PROJECT ..................................................... 16 A. Project Origin ..................................................... 16 B. Project Objectives ..................................................... 16 C. Project Description ..................................................... 16 D. Project Cost and Financing ..................................................... 22 E. Sustainability ..................................................... 22 4. PROJECT IMPLEMENTATION ..................................................... 25 A. Sub-project Selection, Preparation and Evaluation ................................................. 25 B. Conditions and Procedures for Procurement of Sub-projects ..................................... 25 C. Implementation and Monitoring ..................................................... 27 D. Accounts and Audits ..................................................... 30 E. Disbursements ..................................................... 30 F. Economic Evaluation ..................................................... 32 G. Environmental AND SOCIAL aspects ..................................................... 32 H. Project Objective Category ..................................................... 33 I. Project Benefits ..................................................... 33 J. Project Risks ..................................................... 34 This report is based on the findings of an appraisal mission that visited Mexico from February 7 to 21, 1996. The mission members were Messrs. Peter Gyamfi (Task Manager), Gustavo Unda (Transport Engineer) and Rodrigo Archondo-Callao (System Specialist). Mr. Gordon Bodley and Mrs. Monica DuQuesnay (Consultants) assisted in the financial and economic analysis of the project. Messrs. Olivier Lafourcade, Richard Clifford and Martin Stabb assited in the quality enhancement and control of the project preparation and appraisal. Mr. Juan Carlos Mendoza assisted in the production of this report.  5. AGREEMENTS TO BE REACHED AND RECOMMENDATIONS ............ ....................... 35 Annexes Annex A Rehabilitation and Maintenance of the Federal Road Network ......... ................. 36 Annex B Training Program ......................................................... 41 Annex C Performance Monitoring Indicators ......................................................... 43 Annex D Economic and Financial Analysis of the Project Roads ............ ....................... 46 ITEMS IN THE PROJECT FILE 1. PROGRAMA DE DESARROLLO DEL SECTOR COMUNICACIONES Y TRANSPORTE (1995-2000) 2. PROGRAMA DE TRABAJO EN EL SECTOR COMUNICACIONES Y TRANSPORTES (1996) 3. INFRAESTRUCTURA CARRETERA: DIAGN6STICO, OBJETIVOS Y LiNEAS DE AccION 4. PROGRAMA DE MODERNIZACI6N DE LA RED CARRETERA (1996-2002) 5. PROGRAMA NACIONAL DE CONSERVACI6N DE CARRETERAS (1996) 6. RED CARRETERA FEDERAL: ESTRATEGIAS DE CONSERVACI6N (1996) 7. AUTOPISTA SAN Luis PoTosi - SALTILLO: ANALISIS DE ALTERNATIVAS 8. MODERNIZACION DE LA CARRETERA TAMPICO - LINARES 9. APLICACION EN LA SCT DEL MODELO DE EVALUACI6N DE IMPACTO AMBIENTAL 10. SisTEMA DE SIMuLAcI6N A DIFERENTES ESCENARIOS PARA LA MATRIZ DE ESTADO DE IMPACTO AMBIENTAL  MEXICO FEDERAL ROADS MODERNIZATION PROJECT THE TRANSPORT SECTOR A. THE ECONOMY AND THE TRANSPORT SECTOR 1.1 Mexico restored economic growth by substantially restructuring its economy in the mid 1980s, including privatizing a large number of state-owned enterprises, opening the economy to foreign competition, expanding the role of market forces in resource allocation and adhering to a policy of fiscal restraint. This growth has been interrupted by a large current account deficit which resulted in a major devaluation at the end of 1994, from which the country is still recovering. In order to restore trust in the economy, the Government launched an economic austerity program in March 1995 aimed at: (a) achieving a budget surplus of 4.4% of Gross Domestic Product (GDP) in 1995; (b) limiting net domestic credit creation to a maximum of N$10 billion for 1995; (c) achieving equilibrium in the balance of payments; and (d) restructuring N$65 billion of outstanding debt of the private sector. The Government's medium to long term objective, however, remains restructuring of the economy. 1.2 Fiscal restraint has meant a drastic decline in public sector investments, including the transport sector (an average decline of about 7.5% per year), during the first half of the 1990s. To increase funding to the transport sector, the Government has been encouraging increased private sector participation in the provision of facilities and services. Most of the Government's success in this area has occurred in (a) the highways sub-sector, where about 5,000 km of high standard federal roads have been built by private concessions at a cost of more that US$10 billion; and (b) the ports sub-sector, where over 80 port terminal concessions have been granted, mostly to the sole users of specialized terminals. 1.3 The transport sector in Mexico accounts for about 6 % of the government's capital expenditures, a figure which has been declining in recent years due mainly to the increased relative importance of private investment. In terms of GDP, the transport sector in Mexico accounts for almost 10%, up from just over 7% in 1986, reflecting the growth in transport activity as a result of the Government's new economic policy. Mexico's economic growth depends critically on the development of its external trade and, for growth in this area to be sustained, transport infrastructure and services are crucial. 1.4 An expected impact of the North America Free Trade Agreement (NAFTA) on Mexico's transport sector is an increase in the annual growth rate in trade between the U.S. and Mexico from the current 10% per annum to about 15% per annum, by about the next two years. The impact on transport demand in ton-km will be even greater as the advantages of "maquiladora" industries locating near the border are eliminated and new growth occurs in the industrial centers of Mexico at longer distances from the US. The increased trade and associated high traffic growth will require significant modernization of Mexico's transport infrastructure along the trade corridors, inter-modal facilities such as  2 storage facilities, services such as cargo identification and documentation and electronic data interchange systems. The Government's transport policy is aimed at encouraging the private sector to supply these facilities and services and for the Government to provide only those, which though economically justifiable, are not financially attractive to the private sector under a concession scheme. The proposed project would help to modernize federal roads which fall into the latter category. B. INSTITUTIONAL FRAMEWORK AND SECTORAL PLANNING 1.5 The Secretaria de Comunicaciones y Transportes (SCT) is responsible for managing the transport sector and its agencies through its Sub-secretariat for Infrastructure, which handles almost all public road transport infrastructure development, and its Sub-secretariat for Transport which is responsible for operational, regulatory and tariff matters. The biggest challenge currently facing SCT is the need to adapt to its changing role: (a) from a builder, operator and provider of services to a manager, promoter and regulator of the sector; and (b) from an agency with jurisdiction over almost all roads in the country to one that is decentralizing and that has transferred considerable responsibilities for road construction and maintenance to the state governments. SCT is already undertaking the first steps in this transformation process, but the path for future ones and the details of how the new institutions will function remain to be defined. The proposed project would provide technical assistance to SCT in the highway sub-sector to help it move further in the desired direction. In the case of airports and railways, the Bank- financed Infrastructure Privatization Technical Assistance Project (Loan 3937-ME, FY96) provides assistance, inter alia, to study suitable organizational structures for managing the concessions and for regulating the sub-sectors. 1.6 Responsibility for planning in the transport sector has been divided among the modal agencies upon whose expertise SCT largely relies for the technical assessment of projects: the Direcci6n General de Puertos (DGP) for ports, the Ferrocarriles Nacionales de Mexico (FNM) for railways and the Direcci6n General de Servicios Tecnicos for roads. The General Directorate for Planning (DGPI), within SCT, is responsible for coordinating and formulating the modal plans into an overall sector plan. Sector planning is carried out in close cooperation with relevant national and regional authorities, the private sector and other interested parties. In addition to strengthening project evaluation and planning capacity, for which the DGPI is receiving assistance under the ongoing Highways Rehabilitation and Traffic Safety Project (HRTS; Loan 3628-ME, FY93), DGPI needs to develop a comprehensive highway resources allocation model to help in efficiently distributing SCT's limited road budget among competing road activities. The proposed project would provide for the development of such a model. 1.7 Public participation in the development of SCT's program is required by law. The SCT has been calling public meetings in a number of cities to discuss transport modernization. Participants, totaling over 8,000, have included public servants from the federal, state, and local levels, as well as users of all modes of transportation, chambers of commerce, equipment and vehicle manufacturers, labor unions, and professional  3 associations. The conclusions of the meetings and over 6,000 proposals submitted by participants and interested groups have been reflected, to the extent possible, in the formulation of the National Program for Transport Modernization. SCT periodically evaluates the results of its efforts, using the program as a guide. Based on this evaluation, SCT reports its progress to the Congress as required in the Planning Law. 1.8 The SCT is gradually addressing planning deficiencies related to identifying, selecting and programming investments. In early 1991, SCT started to strengthen its planning unit and gave it a greater role in the analysis and selection of priorities. The General Coordination for Planning (CGP) was created to supervise all planning within SCT, including the DGPl and the Sector Planning Committee. CGP's functions and responsibilities were revised to enhance its coordinating role and an Environmental Affairs Unit was established to oversee environmental affairs in the transport sector and to factor environmental impact and its mitigation at the planning stage. Also in 1991, the Secretariat for Programming and Budgeting (SPP), which approves the proposed sector investment and operating budgets, established an investment unit to review all major investments in the sector and to make modal planning more consistent. These functions are now being carried out by the Secretariat of Finance and Public Credit (SHCP). One of the most beneficial effects of these efforts is that planning transport facilities is being looked at increasingly from an inter-modal and transport corridor basis. C. GOVERNMENT'S TRANSPORT SECTOR POLICY 1.9 The Government's transport policy, outlined in its Plan Nacional de Modernizaci6n del Sector Transporte, emphasizes: (a) increased private sector participation in the provision, operation and maintenance of transport facilities; (b) deregulation of the transport sector; (c) public provision of those facilities and services which, though economically justified, are not financially attractive to private investors; (d) SCT's changing role in the sector from operational to normative and promotional functions; (e) changes in the organizational and legal structure of the sector; and (f) the transfer of road responsibilities to the state governments. The Government is steadily, but cautiously implementing this policy. About 5,000 km of high standard roads have been built by concession and facilities at some 80 ports have been concessioned. The Government has also called for bids for cargo handling on the four most important ports: Veracruz and Tampico on the Atlantic/Gulf Coast and Manzanillo and Lazaro Cardenas on the Pacific Coast. In the aviation sub-sector, the airline deregulation of 1989 has permitted direct service between the US and many Mexican tourist destinations and now the Government is seriously considering concessioning the airports. In the case of railways, the Government is undertaking a major restructuring program aimed at both reducing the high annual deficits of the FNM and also laying the ground for increased private sector participation. The program includes dividing the railways into three regions, and concessioning their operations to the private sector. The Bank is supporting all these activities through the Infrastructure Privatization Technical Assistance Project (Loan 3937-ME, FY96) approved in August 1995.  4 1.10 As part of its economic restructuring program and to attract private sector participation, the Government has also substantially deregulated the transport sector and significantly reduced the Government's direct involvement in operating facilities and in controlling pricing. Both trucking and inter-urban bus tariffs were deregulated in 1989, while wharfage and cargo handling charges are increasingly being determined at the level of the individual ports. FNM has been granted considerable freedom in setting its own tariffs and in adjusting them to reflect market conditions. Lastly, entry restrictions to the inter-modal transport industry, previously limited to one monopoly operator, have been removed with the effect that there are now more than 30 firms competing to the benefit of users. 1.11 The areas of policy reform in which further changes and progress are required include: (a) establishing a regulatory framework for managing competition; (b) completing the restructuring and privatization of the railway, ports and airports; (c) stimulating multi- modal transport; and (d) establishing institutional responsibilities in the SCT that reflect the changed role of Government. D. THE BANK'S EXPERIENCE AND LESSONS LEARNED IN THE SECTOR 1 .12 General. The Bank has been involved with the Mexican Highway Sector since 1960 with twelve loans for the federal highway system, the first seven of which were regular project investment loans whereas the last four were sector investment loans. In addition, the Bank made a loan to improve the rural roads system in the state of Chiapas and a Road Transport and Telecommunications Sector Adjustment Project which supported, on the transport side, Mexico's policy of deregulating highway transport services. 1.13 Although the projects were implemented under diverse economic, inflationary and exchange rate conditions, they all shared common implementation results: they achieved their physical goals, albeit with considerable time and cost overruns, but had rather modest impact on institutional strengthening, except for the two most recent projects. The lessons learned from this implementation experience have been increasingly incorporated in the last two road projects as well as the proposed one. 1.14 Physical Implementation of the Projects. Practically all the projects were designed to be completed in four years from loan signature. None achieved this objective and there was no indication of consistent improvement up to 1990. The First Highway Project was completed 3-1/2 years behind schedule and the Second Highway Sector Project ended three years late. The PCRs and Audit Reports have consistently attributed the implementation delays to slow counterpart allocations and the cost overruns to insufficient detailed engineering, changes in the scope of works, delays during construction and unexpectedly-high inflation. 1.15 With regards to the implementation delays, these were significantly reduced when the new administration decided in 1990 to condition budgetary allocations to the SCT on the progress in the execution of Bank-financed projects. This decision resulted in the last  5 50% of the disbursement under the Second Highway Sector Project, which was then three years behind schedule, being made in the last two years of project implementation and the Highway Maintenance Project, which also had significant delays when the new disbursement policy was introduced, being completed according to schedule. 1.16 With regards to cost overruns, the Third Highway Project was the only one of the seven investment loans that achieved some success in reducing cost overruns because the Bank insisted that detailed engineering had to be completed before loan negotiations. The Second Highway Sector, the Highway Maintenance Project and the ongoing Highway Rehabilitation and Traffic Safety Project (HRTS) drew on this experience, with the result that the cost overruns of these were substantially less than in previous projects. 1.17 The main lessons drawn from the physical implementation of the projects show the need for: (a) the Government to continue to give SCT an incentive to speed up implementation by linking the disbursements of the Bank loan proceeds and the execution of the SCT's budget; (b) the Bank and the Government holding annual meetings on SCT's road budget to ensure adequate provision of funds for ongoing projects; and (c) ensuring that detailed engineering of a substantial part of the project is completed before loan negotiations. The proposed project design draws from these lessons by incorporating the actions under (a) through (c) above in the project design and implementation. 1.18 Institutional Strengthening and Policy Reforms. Although the Bank's sector reviews from 1964 to 1974 all emphasized institutional and regulatory problems, the Bank's lending for the first six road projects focused rather narrowly on construction; loan conditionality was mainly designed to deal with assurances about the implementation of civil works. Improvement in institutional strengthening therefore was minimal. Starting with the Seventh Project, the Bank corrected this shortcoming by shifting its focus to transport sector economics, planning and transport regulatory issues. Success in achieving institutional strengthening and policy reform objectives have been mixed, as outlined below. The lessons to be learned from these projects are that: (a) institutional strengthening and policy reforms take a long time and steady effort to accomplish; (b) the Government's sense of ownership is indispensable to success and therefore Government officials should be closely involved in choosing the measures to be included under the projects and in designing their implementation; and (c) clear up-front loan conditionality on the important measures should be included under the projects. 1.19 The main institutional strengthening and policy reform achievements from the Bank's lending to the sector include: (a) improving planning and budgetary coordination (the First Highway Sector Loan); (b) initiating an increase in highway maintenance expenditures at the expense of construction, encouraging the SCT to improve work programming and preparation of multi-annual budgets, revising and introducing more efficient procurement practices and tying SCT's budgetary disbursements on the progress in implementing externally-funded projects (the Second Highway Sector Project); (c) introducing the concepts of highway and bridge maintenance systems, providing for greater participation of the private sector in carrying out maintenance and introducing better allocation of road funds to all of SCT's road activities (the Highway Maintenance  6 Project); and (d) deregulating the road transport industry (the Sector Adjustment Project). The deregulation of trucking had arguably the greatest positive impact of all these reforms: more than 44,000 new truckers entered the industry within the first two years of deregulation, tariffs for trucking services fell by about 25% and services improved markedly. E. RATIONALE FOR BANK INVOLVEMENT 1.20 The Bank's current Country Assistance Strategy (CAS) for Mexico, discussed at the Board on December 17, 1996 stresses: (a) growth with stability by supporting sound macro-economic management througii enhanced monitoring and closer dialogue, especially on structural and micro underpinnings of macro policy, and ensuring sound financial and capital marked development; (b) social development through improving the efficiency and quality of social sector spending and making a dent in regional concentrations of poverty through the planned Southern States Initiative; (c) modernization of the State through improving the regulatory framework to facilitate private enterprise and to foster competition and supporting an orderly and efficient process of fiscal and administrative decentralization. The proposed project fits into the above strategy by: (a) reducing existing and potential constraints to economnic growth caused by inefficient and costly transportation in Mexico; and (b) facilitating the orderly and efficient decentralization of the administration of about half of the federal network to the states by strengthening the state road agencies. 1.21 The Bank has been extensively involved in Mexico's highway sector since 1960 with 12 loans. After 10 highway investment loans, the Bank has focused the two most recent loans, the Highway Maintenance Project, Loan 2876-ME, and the BRTS, Loan 3628-ME, on addressing the need for maintenance and rehabilitation of the federal network. The proposed project, which would address the need for additional capacity, is therefore a logical follow-up and complement to the maintenance and rehabilitation projects and the highway concession program. Modernizing road transport on the federal network also requires improving SCT's road management systems and procedures, multi- modal transport operations, vehicle weight and dimension enforcement, road safety as well as environmental impact assessment and mitigation. The Government accords high priority to further improvement in these matters which, together with the physical improvements mentioned above, would greatly reduce the cost of transport and thereby enhance its competitive position vis a vis its NAFTA partners. The Bank is providing assistance to improve these areas under the ongoing HRTS; the proposed project would deepen and expand that assistance.  7 THE HIGHWAY SECTOR A. THE HIGHWAY NETWORK 2.1 Road transport in Mexico is the major mode for both passengers and freight, accounting for about 99% of intercity passenger movement and about 89% of cargo movement by land. Road traffic generally grew by 10% per annum in the 1970s and by about 5% per annum in the 1980s (Table 2-1). Traffic growth occurred despite the economic recession and substantial real price increases for road freight. Within the context of NAFTA, traffic growth on the major road corridors, currently estimated at about 10% annually, is expected to increase to about 15% per annum starting in 1998. 2.2 The 302,000 km of interurban roads in Mexico, of which about 93,000 km are paved, are classified as federal, toll, state and rural roads in accordance with the source of funds for the various road programs. The states have jurisdictional responsibility for some 83,000 km of roads. The Government, through SCT, has primary responsibility for the 49,000 km of federal and toll highways. Control and responsibility for the approximately 170,000 km of rural roads is shared by local governments, the states and the federal government (Table 2-2). The Government is transferring responsibility for rural roads to the states and local governments. The Federal Highway Network (FHN) has evolved rapidly, as has the rest of Mexico's road system. In 1952, there were only 27,000 km of roads, 16,000 km of which were paved. By 1995, the road system had grown to over 302,000 km, about 93,000 km of which were paved (including 6,000 km with four or more lanes). The system's annual rate of growth has slowed from 8.7% per year from 1952-1975 to 1.7% per year from 1975 to 1991, a sign that the network has reached relative maturity and that, except for a few areas, the primary network is in place. In the past ten years, road investment has shifted from extension of the trunk network to construction of rural access roads and, more recently, to maintaining and widening existing trunk roads in response to increased travel demand. 2.3 The recently-concluded inventory of the federal road network shows that about 50% of the network is in poor condition, 35% in fair condition and the remaining 15% in good condition. Although there is much variance between regions, average conditions on SCT's federal highways appear to have worsened in the 1980s due mainly to the decline in real terms of the highway rehabilitation and road maintenance budgets (HRRM) budgets, from about US$230 million in 1983 to US$120 million in 1989. Because it has had to operate with low budgets for several years, SCT generally limited maintenance to emergency and repair works. Conditions on the toll roads are better than on the federal highways. The Federal Toll Roads and Bridges Authority (CAPUFE), which has higher financial resources per km, has been able to maintain its toll roads in a very satisfactory manner. The condition of the federal network is being improved significantly through the HRTS Project which is addressing the budget problems and increasing SCT's efficiency in using available maintenance funds through staff training and the introduction of modern maintenance management systems.  8 Table 2-1: Indicators of Highway Demand Average Annual Growt Growth Rate (Percent) 1975 1980 1985 1990 1975- 1980- 1985- 1980 1985 1990 Population (thousands) 60,150 69,655 77,938 86,150 4.0 2.3 2.0 GDP (Billion 1980 3,171 4,470 4,920 5,236 7.1 1.9 1.3 pesos) PerCapitaGDP 52,718 64,173 63,127 60,778 4.0 -0.3 -0.8 (1980 pesos) Vehicles in Circulation 3,340 5,828 6,932 9,741 11.8 3.5 7.0 (thousands) Automobiles 2,401 4,255 4,921 6,754 12.1 3.0 6.5 (thousands) Trucks (thousands) 888 1,489 1,917 2,893 10.9 5.2 8.6 Buses (thousands) 51 84 94 94 10.5 2.3 0.0 Gasoline Consumption 10,865 18,316 25,217 N.A. 11.0 6.6 N.A by Road Vehicles (million liters) Diesel Consumption 5,499 8,215 12,922 N.A. 8.4 9.5 N.A by Road Vehicles (million liters) Passenger Cars/ 40 63 63 78 8.4 0.0 6.7 1000 Inhabitants Road Network (km) 186,218 212,626 224,255 239,235 2.7 1.0 1.5 Federal Highways (km) 38,292 42,521 44,359 45,743 2.2 0.8 0.6 Source: Asociaci6n Mexicana de la Industria Automotriz, "La Industria Automotriz de Mexico en Cifras", SCT, SPP. November 1991  9 Table 2-2: Classification of Highways (Length in Km as of 1996) Jurisdiction Mexican Classification Approximate Function Federal State Local - Federal Highways Primary (arterials) 42,000* - Toll Highways Primary (arterials) 6,200 - State Highways Secondary (collectors) - 83,000 - Rural Roads Tertiary (local) 170,000 * tAbout 15,000 km of these roads are in the priority network, 13,000 km in the basic network and 17,800 km are of low priority. Lengths are given in two-lane highway equivalent km B. ADMINISTRATION OF THE PRIMARY HIGHWAY NETWORK 2.4 SCT's two Sub-secretariats divide highway related tasks between them. The Sub- secretariat for Infrastructure has jurisdiction over the General Directorate for Federal Roads, the General Directorate of Toll Roads (GDTR), the General Directorate for Technical Services, and the General Directorate for Maintenance (DGCC). These four directorates have primary responsibility for the planning/design, toll roads management, construction and maintenance respectively of roads under federal jurisdiction. The Sub- secretariat for Transport includes the General Directorates for Tariffs, Land Transport, and Preventive Medicine in Transportation and the Federal Highway Patrol, which are responsible for transport services including vehicle regulation, safety and police functions. SCT also maintains a fully staffed and equipped unit (SCT Regional Center) in each state to carry out regional construction, maintenance and operations. 2.5 Before 1989, SCT constructed some 950 km of toll roads and 32 bridges. CAPUFE is responsible for their operation and maintenance. Since 1989, most new toll roads have been built by private sector companies, which also operate and maintain them (para. 2.13). 2.6 SCT's General Directorate for Federal Highways (DGCF) designs most of the federal highways and bridges in house, employing modern techniques; the criteria and standards used (Table 2-3) are adequate. Most of the construction work is done by DGCF through contracting, but some modernization (widening) works are handled by DGCC using the same standards. There are several Mexican consulting firms engaged in highway and bridge design, and SCT is increasingly using them to prepare the engineering of major works.  10 Table 2-3: Federal Highway Design Criteria and Standards CLASS E D C B A2 A4 A4S Less ITEM than 100 100-500 500-1500 1500-3000 3000-5000 5000-20000 5000-20000 AADT a/ AADT AADT AADT AADT AADT b/ AADT b/ Design Speed (KPH) Flat terrain 50-70 50-70 70-100 80-100 90-110 90-110 90-110 Rolling terrain 40-60 40-60 50-80 60-90 70-110 70-110 70-110 Mountainous terrain 30-40 30-40 40-60 50-70 60-80 60-80 60-80 Radius (M) Flat terrain 70-150 70-150 150-350 210-420 270-420 270-420 270-420 Rolling terrain 40-105 40-105 70-210 105-270 150-350 150-350 150-350 Mountainous terrain 20-40 20-40 40-105 70-150 105-210 105-210 105-210 Maximum Grade (%) Flat terrain 7.0 .0 5.0 4.0 4.0 4.0 4.0 Rolling terrain I0.0 9.0 7.0 6.0 5.0 5.0 5.0 Mountainous terrain 13.0 12.0 8.0 7.0 6.0 6.0 6.0 Roadway Standards Roadway Width (M) 4.0 6.0 7.0 9.0 12.0 22.0 2 x 11.0 Pavement Width (M) 4.0 6.0 6.0 7.0 8.0 2 x 7.0 2 x 7.0 Shoulder Width (M) - - 0.5 1.0 2.5 3.0 3.0 Super-elevation (MIM) - - -0.10 Max. Cross-slope (%) 3 3 2 2 2 2 2 Width of Median (M) - - - - - 1.0 8.0 Minimum Sight Distance (M) Stopping Flat terrain 55-95 55-95 95-155 115-175 135-175 135-175 135-175 Rolling terrain 40-75 40-75 55-115 75-135 95-155 95-155 95-155 Mountainous terrain 30-40 30-40 40-75 55-95 75-115 75-115 75-115 Passing Flat terrain - 255-315 315-450 380-485 405-495 405-495 405-495 Rolling terrain - 100-270 225-380 270-405 315-450 315-450 315-450 Mountainous terrain - 135-100 180-270 225-315 270-380 270-380 270-380 Bridge Design Standards - HS20 (AASHTO) c/ a/ AADT = Annual Average Daily Traffic. b/ Separated Roadways. c/ American Association of State Highway and Transportation Officials. Note: Ranges shown are from "Minimum" to "Desirable". Source: SCT - Dec. 1995  I1 2.7 After over 30 years of road construction in Mexico, many experienced and well equipped road construction contractors have emerged. Domestic firms must register annually, providing detailed data on their operations. There is a wide range of capacity among them, with emphasis on medium-sized firms able to undertake typical highway contracts. Mexican firms win most international competitive bidding (ICB) contracts. SCT personnel supervise construction but private consultants are increasingly being used for this activity. The Government has reduced its once-dominant role in implementing highway rehabilitation and resurfacing works and the private sector's involvement in these activities is resulting in a more efficient implementation of the budget. About 70% of SCT's highway rehabilitation works is being carried out by contract. C. HIGHWAY MAINTENANCE 2.8 SCT, through DGCC, is responsible for maintaining the 42,182 km of the toll-free portion of the federal network. CAPUFE, private concessionaires and the state governments maintain about 1,420 km, 3,167 km and 1,096 km of expressways respectively on concession with SCT. The toll roads are adequately maintained. DGCC has also significantly improved its maintenance over the past three years under its Highway Rehabilitation, Resurfacing and Maintenance Program (HRRM), being financed under the HRTS, by: (a) introducing modern road and bridges maintenance management systems; (b) contracting about 70% of its maintenance to the private sector; (c) training staff; and (d) increasing significantly its spending on maintenance. SCT's spending on maintenance and rehabilitation accounts for over 60% of its road budget. The result is that during the past three years, DGCC has rehabilitated about 5,060 km, resurfaced about 18,700 km and annually maintained about 44,000 km. These achievements exceed the HRRM's program targets by over 20%. 2.9 The Government's impact objective with the HRRM: is to bring the condition of at least 50% of the federal road network to "good" condition and the rest to at least a "fair" condition by the year 2007. To ensure that the modernization program does not shift funds from road maintenance and compromise this objective, the Government committed itself, during the mid-term review of the HRTS in March 1996, to: (a) spend at least US$300 million annually, in real terms, on rehabilitating and maintaining the federal road network under SCT's responsibility in order to achieve the program's goals, and (b) present to the Bank, by October 31 of each year during project implementation starting in 1997, its draft road program for the subsequent fiscal year and, by April 30 each year starting in 1998, its actual road program as updated to fully use the budget approved by the Legislature. Annex A presents the objectives, progress and future direction of the HRRM. D. SECTOR ISSUES 2.10 This section discusses the main issues in the highway sub-sector and how they are being and would be resolved by the ongoing HRTS Project and the proposed project. The issues cover SCT's future role in the highway sub-sector and the organizational changes it needs, its institutional capacity, the toll road system, highway sector planning and  12 financing, truck size and weight limits, traffic safety and procedures for managing environmental impact assessment. 2.11 SCT's Role and Organization. The Government needs to review SCT's evolving role and organization to reflect two confluent developments: (a) the increasing participation of the private sector in building and operating toll roads and in carrying out road maintenance and (b) the Government's ongoing decentralization of road administration to the states and its plans to transfer about half of the federal road network to the states. Over the past five years, the private sector has helped to build about 5,000 km of high-standard federal roads which it is operating as toll roads and is considering another 1,400 km over the next five years. Also, almost 70% of the maintenance of federal roads is now being executed by private contractors. These developments, combined with the rapidly-increasing use of consultants in all phases of project planning, design and construction supervision, are moving SCT progressively into a role of manager rather than operator in the sub-sector. This would require training of the remaining staff to play the management role. Decentralization of road administration has been going on for some time now in the SCT, but the emphasis so far has been on shifting responsibilities and associated accountability from headquarters to SCT's centers in the states. The planned transfer of road administration of about half of the federal network would require: (a) a further review of the role, function, organization and size of the SCT centers and (b) a review of the technical, administrative and financial capacity of each receiving state in order to implement a realistic schedule of transfer and provide the necessary funds for the transferred roads for a realistic time period. The proposed project includes a study on SCT's future organization, staffing and a training program for staff (para. 3.7 (b)). 2.12 SCT's Institutional Capacity. Modernization of the physical infrastructure of the federal road system alone would be insufficient to achieve the transport efficiency aimed at by SCT. SCT needs to increase its institutional capacity. The Government, through the ongoing HRTS Project is implementing an extensive institutional strengthening program, comprising: (a) strengthening the capacity of SCT's Planning Coordination Office; (b) completing the reorganization of the road maintenance directorate; (c) developing and implementing highway maintenance management systems; (d) continuing the review of highway cost recovery; (e) implementing revised vehicle size and weight regulations; (f) implementing a detailed staff training program and (g) strengthening the administration of traffic safety. Satisfactory progress has been made on items (b) and (c), but the rest of the program has been slowed down due mostly to delays in hiring consultants or, in the case of the training component, instructors. Moreover, past experience in Mexico has demonstrated that effective institutional strengthening in the areas being covered under the HRTS would require more time and effort than can be covered under the ongoing project. The proposed project would therefore include resources for continuing and deepening the institutional strengthening of the SCT (para 3.7). 2.13 The Private Toll Road Concession Program. An issue with which the toll road concession program has had to grapple with is the high tolls the concessionaires have had to charge to recuperate both their investment and operating costs. This has led to most potential users preferring to use alternative, unimproved, but toll-free roads, causing  13 concessionaires to raise their tolls even higher. The need to charge high tolls arises from the fact that the original concession proposals were evaluated on the basis of how fast the roads would revert to Government's ownership (i.e., the length of the concession contract). Consequently, bidders had an incentive to offer unrealistically short concession periods. The problem was further exacerbated by the high initial construction costs due to concessionaires being restricted to a set design by SCT. Over the past two years, SCT has being working with the concessionaires on pilot reduced tolls to stimulate traffic and therefore overall incomes to the concessionaires. The experiment has proved successful and the concessionaires have agreed to reduce their toll levels by an average of 60% from January 1, 1996. To avoid the same problems for the 1,400 km of toll concessions expected to be awarded from 1996 to 2000, the SCT has revised and improved the conditions under which the concessions are evaluated and granted. The changes include: (a) using the lowest required toll, with a pre-determined concession period, as the criterion to award concessions; (b) leaving the detailed designs to the bidder, with SCT only stipulating the design parameters; (c) eliminating the arrangement of a guaranteed financial rate of return; and (d) increasing the concessionaires equity contribution, thereby reducing the debt component to acceptable levels. 2.14 Planning of Federal Road Activities. Planning of activities on the federal road network is dispersed among various entities of the SCT. Planning at the project concept and feasibility stage for construction is done within the Directorate General of Toll Roads using an HDM-type life-cycle analysis model. Planning of maintenance and rehabilitation works is carried out by the Direccion de Conservaci6n using a "more user-friendly" version of the HDM III model known as SISTER. The Direcci6n General de Carreteras Federales also has its own model for conducting economic analysis. The Direccion General de Planeaci6n integrates the results of these activities into the federal highway program. The system, in practice, has two significant drawbacks: (a) the lack of coordination among the various directorates which leads to a duplication of efforts on data collection and analysis and (b) the absence of an overall priority ranking of all the individual activities so that they can compete for the scarce resources. The proposed project would provide technical assistance to review current road planning processes within the SCT and modify them to ensure efficient sharing of results from the different agencies and establish integrated planning procedures (para. 3.7 (a)). 2.15 Highway Financing and Cost Recovery. The Government needs to establish a financing mechanism to ensure adequate and timely financing of the federal network. In spite of a major contribution from the private sector (an estimated US$7 billion to build high-standard toll roads), financing for the federal road network still falls below needs to restore, maintain and expand it. The Government has been spending about US$300 million annually on maintenance and rehabilitation to restore the network to an acceptable standard by the year 2008. An increase in spending of US$400 annually would achieve that goal in the year 2003. Moreover, the modernization of the existing network would require an additional US$240 million a year of public funds over the next five years, in addition to an expected private sector contribution of about US$4 billion from the private sector for more toll roads. Under the ongoing HRTS, the Government is undertaking a study of various alternative financing mechanisms for the highway sector to ensure its  14 adequate funding. The HRTS is also providing technical assistance to the Government to implement the study's recommendations on establishing an adequate and reliable mechanism. 2.16 The bulk of federal highway expenditures over the past five years has been mostly for road rehabilitation and maintenance (about 60% of the total US$520 million annual outlays). With the start of the modernization program, there is going to be a strong competition between maintenance and improvement for scarce resources. The comprehensive planning model mentioned in para 3.7 would help in allocating available funds efficiently to SCT's various road activities. In addition, at negotiations the Government agreed to present to the dank during the joint annual project implementation review meetings for the proposed project and for the HRTS Project its financing plan for SCT's road activities for that year. This would enable adjusting the allocations to ensure that the maintenance commitments are met. 2.17 Revenues to the highway sector come from road-user fees, private-sector financing of toll road concessions, voluntary contributions from the trucking industry and loans from international agencies. Road-user fees, mostly fuel taxes, license fees and tolls, estimated at about US$2,300 million annually, cover adequately the sector's needs. However, automobiles subsidize heavy vehicles. The Government has undertaken studies to determine the exact imbalance between automobile and truck charges with a view to reduce it. 2.18 Vehicle Weights and Dimensions. The Government issued revised regulations on vehicle weights and dimensions in January 1994 to meet agreed standards under NAFTA. Consultants, hired under the ongoing Highway Rehabilitation and Traffic Safety Project have submitted their recommendations to SCT on the type and location of the weigh bridges to be purchased and implementation is expected to start during the second half of this year. The SCT is reviewing the pros and cons of the private sector playing a role in operating the system either as a concession or a management contract. 2.19 Traffic Safety. SCT is now implementing its road safety program very vigorously. The program has been included as an important objective of both SCT's 1990- 1994 and 1995-2000 National Programs for Transport Modernization. Very significant progress has been made in improving vehicle inspection, driver training and licensing and in the removal of hazardous locations. As a member of the North American Commercial Vehicle Safety Alliance (CVSA), Mexico is under pressure to improve its traffic safety measures. The proposed project would provide for additional resources to continue the improvement of road safety. 2.20 Environmental Impact of Highway Projects. Existing Mexican laws provide for adequate safeguards against adverse environmental impacts from road activities. The SCT also has the necessary organizational set-up to comply with the laws and has developed tools which should help to better coordinate the collection and use of data during the different stages of project development, and internal communication on environmental issues. Article 27 of the Mexican Constitution establishes the Federal  15 Government's obligation to conserve the nation's natural resources. The General Law on Ecological Balance and Protection of the Environment, enacted in March 1988, constitutes the present legal framework to deal with transport environmental issues. Under this law, the Government must (a) establish federal environmental standards; (b) evaluate the environmental impact of major projects; (c) carry out environmental protection actions in areas under federal jurisdiction; and (d) create and manage federal natural protected areas. In addition, Articles 19 and 20 of the 1993 Procurement and Public Works Law and Article 12 of its regulation require that the environmental impact of public works be studied, and that environmental conditions be preserved wherever public works are carried out. Shortly after the General Ecology Law went into effect the Secretariat of Urban Development and Ecology, SEDUE (recently transformed into SEDESOL), published a regulation on environmental impact assessments, which defined specific conditions for mandatory SEDESOL review of an impact assessment, procedures for preparing and presenting impact assessments, and sanctions for failure to comply with the regulations. In order to coordinate the execution of environmental impact assessment of transport projects with SEDESOL, SCT's Environmental Affairs Unit (EAU) within the General Coordination of Planning has been strengthened to six full-time staff and is receiving technical assistance under the HRTS Project to introduce models to facilitate environmental assessments. The project would provide for improved coordination among EAU and other SCT directorates which are also independently carrying out their own environmental assessments, with consultants assistance, and to disseminate the results of EAU's results in improving environmental assessments.   16 THE PROJECT A. PROJECT ORIGIN 3.1 Preparation of the proposed project started in August 1995 following a request from the Government for Bank assistance in modernizing the federal highway network. The project's design and scope resulted from discussions between the Bank, SCT, BANOBRAS and SHCP during several project preparation missions to Mexico between August and December 1995. The project was appraised in February 1996 and negotiations started in Washington in May 1996. Negotiations were suspended because the Bank and the Government failed to reach agreement on the framework for the resettlement documents to be prepared for the road modernization sub-projects. Following protracted discussions, negotiations were resumed on May 15, 1997 and completed on May 29, 1997. The Government has submitted a Project Implementation Plan, outlining the project's objectives, scope and composition, estimated costs and financing plan and the arrangements for project implementation. B. PROJECT OBJECTIVES 3.2 The project would have two broad objectives. The first would be to help meet the expected traffic growth on the federal road network and to reduce road transport system costs. This would be achieved by: (a) improving the capacity and thereby the service quality of the federal road network and (b) farther improving the safety on the network. The second objective would be to improve the institutional capacity to manage the road network by: (a) strengthening SCT's capacity to formulate work programs, efficiently allocate highway funds among road activities and to manage environmental impact assessment and mitigation and (b) increasing the capacity of selected states to manage their road networks. C. PROJECT DESCRIPTION 3.3 The project, which would finance a time slice (1998 to 2002) of SCT's Federal Roads Modernization Program (FRMP), would consist of: (1) civil works to increase the capacity and traffic safety of the federal network (about US$800 million equivalent), including providing additional lanes on some road sections, building climbing lanes on others, improving horizontal and vertical alignments, providing adequate road shoulders and curbs and removing hazardous spots; (2) institutional strengthening (US$61 million) directed at SCT and selected state highway organizations for improving management systems and procedures, training staff and reviewing the role and needs of the SCT centers in the states; (3) further support to SCT to implement actions on road sector financing, to improve multi-modal transport operations, to continue improving road safety and environmental impact assessment and mitigation measures in the planning, construction and operation of transport facilities (US$2 million).  17 Federal Highway Modernization Program 3.4 SCT's FRMP is based on the results of a series of analyses conducted by the SCT covering: (a) road surface conditions, (b) pavement bearing capacity for current and future traffic, (c) levels of service; (d) safety, and (e) the attractiveness of proposed improvements to potential private concessionaires. SCT selected about 2,016 km of the highest priority roads for modernization over the period 1996 to 2002 using public funds. The roads selected for 1996, about 158 km, have been modernized by SCT using its own funds; those for 1997, about 122 km, have been contracted out and will be financed retroactively by the Bank. The selected road sections for the indicative program have high economic returns, serve important export/import corridors and/or regional integration, are close to saturation, have poor safety and would not be attractive to potential private investors. In addition, the project would provide for the improvement of about 200 hazardous road locations (mostly intersections and sharp curves). SCT's findings and conclusions from these analyses are presented in a report entitled "Programa de Modernizaci6n de la Red Carretera 1996-2002" which is included in the Project File. The indicative list of roads, with the current and planned future design standards, is presented in Table 3.1. 3.5 The SCT also selected two road stretches totaling about 324 km to make up the 1997 and 1998 program (Table 3.2). The Bank has reviewed the feasibility studies, detailed engineering, environmental impact assessments and socio-economic studies carried out with consultants' assistance for these roads, and found them acceptable. The 1997 and 1998 road sections were selected using the same criteria to be used for the remaining project roads during implementation (para.4. 1). During negotiations, the Government confirmed the composition and scope of the 1997 and 1998 program. 3.6 The works under the program, which are aimed at increasing capacity and improving safety, would include: (a) eliminating bottlenecks such as narrow bridges and dangerous intersections; (b) widening and/or adding lanes, building climbing lanes, improving horizontal and vertical alignment and adding road shoulders; (c) expanding some of the most saturated lanes from two to four lanes; (d) upgrading and modernizing road signalization and; (e) removing hazardous spots.  18 Table 3-1: Indicative Modernization Program and Characteristics - Civil Works Subproject Section Length Upgrading Beginning at Ending at (km) From To San Luis Potosi - Puerto Mexico 236 Huizache Matehuala 34 A2 A4 Matehuala San Roberto 129 A2 A4 San Roberto Pto. Mexico 73 B2 A4 Tampico - Linares 198 Cuauhtemoc Est.Manuel 18 B2 A2 Est.Goni..alez Est.Zaragoza 61 B2 A2 Barretal Tomasenio 39 B2 A2 Escobedo Linares 62 B2 A2 Fresnillo-Torreon-Cuencame 148 Rio Grande Cuencame 148 C A2 Tampico-Veracruz 328 Cardel Gpe. Victoria 131 B2 A2 Tuxpan Tampico 197 B2 A2 Villahermosa-Merida 490 Villahermosa Cd. del Carmen 168 A2 A4 Cd. del Carmen Champoton 149 A2 A4 Camipeche Bord. 110 A2 A4 Camp. /Yuc. Border Camp./Yuc. Merida 65 A2 A4 Saltillo-Monclova 21 Ramal La Muralla Toward P. Negras 10 Realigmnent Castaiios La Gloria 11 A2 A4  19 Table 3-2: Project Data and Status of Preparation for 1997 and 1998 Roads LENGTH BASIC FINAL RIGHT OF ENVIRONMENTAL SOCIOLOGIC FEDERAL ROAD ROAD SUBPROJECT STUDIES DESIGN WAY () IMPACT (*) STUDY(.) KMS. (%) (%) (%) (%) (%) PROGRAM FOR 1997 SAN LUIS POTOSI - SALTILLO HUIZACHE - MATEHUALA 83 100 100 100 100 100 TAMPICO - LINARES BARRETAL - TOMASENO 39 100 100 100 100 100 PROGRAM FOR 1998 SAN LUIS POTOSI-SALTILLO MATEHUALA-SAN ROBERTO 129 100 100 100 100 100 SAN ROBERTO-PTO. MEXICO 73 100 100 100 100 100 TOTAL KILOMETERS TO BE 324 MODERNIZED IN1997 AND 1998 () Existing right of way, except in the case of new by-passes () To be prepared by environmetal experts (-) To be prepared by a sociologist  20 Institutional Strengthening Component 3.7 The institutional strengthening component would continue, reinforce and expand actions being undertaken under the ongoing Highway Rehabilitation and Traffic Safety Project. Specific areas to be covered, proposed by SCT at the start of project preparation, include the following: Highway Sub-sector Planning and Resource Allocation. Under the HRTS, the SCT's Planning Coordination Office has been established and is being provided technical assistance to prepare project planning and evaluation manuals. In addition, SCT needs a comprehensive highway planning resource allocation model to efficiently distribute its limited budget among competing highway activities. The proposed project would provide technical assistance to CGP to develop the model and train higher-level staff to use it. The scope and terms of reference for consulting services for preparing the model were reviewed and agreed during project preparation. The agreement was confirmed during negotiations; Review of SCT's Role and Organization. SCT's ongoing decentralization of road administration and its increasing normative role requires reviewing its role in the road sector and re-organizing it accordingly. The project would provide for technical assistance to carry out the review and to assist in implementing the recommendations. The project would also provide for assistance to the road agencies in selected states to improve their organizations and train staff Terms of reference for the consultants services were confirmed at negotiations; Road Traffic Safety. The HRTS is improving road safety through: (a) improving driver behavior and increasing public road traffic safety awareness, (b) training inspectors, supervisors and examiners of truck drivers, and (c) providing technical assistance for research on road safety, conducting information campaigns, preparing programs to eliminate about 300 hazardous highway locations, and updating vehicle safety standards. The proposed project would continue the technical assistance for road safety, especially preparing programs for removing additional hazardous spots. Improvement in Environmental Control. SCT's Environmental Affairs Unit (EAU) is being strengthened under the HRTS. To comply with environmental requirements, SCT has revised its work specifications for HRRM works and improved those parts related to the coverage of cultural patrimony, the managing of quarries and pollution control of construction equipment. These revisions have been included in the bidding documents for construction of civil works and are adequate. EAU has developed and is calibrating a simulation model for assessing environmental impacts of transport facilities throughout Mexico. EAU is currently working in relative isolation from SCT's other directorates involved in road planning,  21 construction and maintenance. The proposed project would provide technical assistance to SCT to review its procedures for managing environmental impact assessments in order to avoid duplication of efforts and lack of coordination; and. Facilitation and Improvement of Inter-Modal Transport. The project would provide consulting services to review and analyze inter-modal transport in Mexico, including the regulatory framework thereof and recommend actions for its improvement. Consultancy Services 3.8 The project would provide for consultant services for assisting: the general directorate of Toll Roads (GDTR) in the preparation of the traffic and economic and financial feasibility studies required to identify and select sub-projects to be included in the program (para. 4.8 (a)); and DGCF in the preparation of environmental, social and engineering studies, supervision of construction; and the coordination of the program (para. 4.8 3.9 The project would provide for the improvement of about 200 hazardous road locations (mostly intersections and sharp curves). These would be in addition to those included in the works under the 950 km of road sections and the locations being improved under the HRTS. The works would be undertaken by contract. These improvements would be based on a master list of hazardous road sections prepared from a combination of accident statistics developed by DGTT and the Federal Highway Patrol, and from field visits. Each year, SCT , with consultants assistance, would select the locations it plans to improve and submit a report to the Bank justifying each improvement, both technically and economically. The project would also provide for consultant services for detailed preparation of the program and for supervision of the works. 3.10 Staff Training. The ongoing HRTS includes a sizable staff training program for the SCT (Annex B). The proposed project provides for deepening the training to SCT in areas such as bidding and contract administration, budgetary and resource allocation among road activities and project evaluation techniques and assessment of environmental impacts and designing mitigation plans. The project would also include training for new areas such as inter-modal transport and electronic data interchange systems, transport corridor analysis and planning and highway financing. Lastly, the project would provide for a parallel training program to the ongoing one under the HRTS for four selected states in Mexico. Training to be included in the project would also address the highway sector entities at states' level. At negotiations, the scope for the training component was agreed.  22 D. PROJECT COST AND FINANCING 3.11 The total cost of the project is estimated at about US$ 865 million equivalent with a foreign exchange component of about US$375 million based on March 1996 prices and including physical and price contingencies. Identifiable taxes and duties are about US$120 million and the total project cost, net of taxes, is US$743 million equivalent. The cost estimates for the civil works are based upon detailed estimates prepared by the Direcci6n General de Carreteras Federales (DGCF), with the assistance of consultants, and are similar to those obtained in recent contracts. The costs of the highway safety training and technical assistance components were estimated in accordance with prevailing costs of materials and services. The estimated man-month rate for local consultants varies between US$4,000 and US$7,000 and for expatriate consultants, between US$10,000 and US$15,000. The proposed loan of US$475 million would finance 55% of the total project cost. The Government would finance the remaining US$388 million equivalent. SCT's budget for 1997 provides a sufficient amount to cover the project's first year program up to December 31, 1997, the end of Mexico's fiscal year. A summary of project cost estimates and financing plan is presented in Tables 3.3 and 3.4. E. SUSTAINABILITY 3.12 The sustainability of the project would be determined by: (a) adequate maintenance of the project roads after their improvement; (b) better traffic management to ensure that the expected levels of service are attained; (c) improvement in traffic policing, as a complement to removing physical road hazards, in order to ensure the expected improvement in traffic safety; and (d) the ability of SCT to more efficiently allocate available highway funds among activities on the federal road network. The implementation of the maintenance management system, developed under the HRTS, and the adoption of a proposed road maintenance fund being addressed under the HRTS, financed from road-user charges would help to insure a stable source of funding for road maintenance. The proposed project would further help to improve highway signs, introduce measures to reduce roadside friction and improve the capacity of the Federal Highway Police to remove incapacitated vehicles. Assistance for highway safety, being covered under the ongoing HRTS, would be continued and strengthened under the proposed project. Lastly, efficient systems of allocating highway funds among different road activities, already introduced successfully in other countries with the Bank's assistance, would be introduced in SCT to help ensure that available funds are spent on the highest priority activities.  23 Table 3-3: Summary of Project Cost and Financing Plan (US$ Million) A. Estimated Project Costs: Local Foreign Total a/ (US$ Million) FRM Program 408.2 272.2 680.4 Consultants Services 6.8 45.5 52.3 Training 0.1 0.9 1.0 Total Base Costs 415.2 318.5 733.7 Contingencies Physical 41.5 31.9 73.4 Price 31.7 24.4 56.1 Total Contingencies 73.3 56.2 129.5 Total Project Costs 488.5 374.7 863.2 B. Financing Plan: Government of Mexico 388.2 ---- 388.2 IBRD (multiple currency) 100.3 374.7 475.0 Total Financing 488.5 374.7 863.2 a/ Totals may not add up due to rounding  24 Table 3-4: Project Costs and Annual Expenditures (US$ Million) PROJECT COMPONENT ANNUAL EXPENDITURES ()--- --- TOTAL() 1998 1999 2000 2001 2002 A.CIVIL WORKS (Indicative) HUIZACHE-MATEHUALA 21.56 21.56 43.13 MATEHUALA-SAN ROBERTO 43.13 28.75 71.88 SAN ROBERTO-PTO. MEXICO 28.75 28.75 57.50 LA MURALLA 8.34 8.34 CASTANOS-LA GLORIA 3.59 3.59 CUENCAME-RIO GRANDE 20.41 20.41 40.83 VILLAHERMOSA-CD. DEL CARMEN 24.15 24.15 48.30 BORD STATES CAMP./YUC.-MERIDA 18.69 18.69 CUAUHTEMOC-EST. MANUEL 7.91 7.91 GONZALEZ-ZARAGOZA 17.25 17.25 BARRETAL-TOMASENO 10.78 10.78 ESCOBEDO-LINARES 12.22 12.22 CARDEL-GUADALUPE VICTORIA 32.99 32.99 65.98 CAMPECHE-LIM.EDOS.CAMP.NYUC 21.08 10.54 31.63 CD. DEL CARMEN-CHAMPOTON 21.28 21.28 42.55 EST. MANUEL-MATAMOROS 32.58 16.29 48.88 SOTO LA MARINA-MATAMOROS 50.3125 50.31 50.31 150.94 SUBTOTAL: A 157.41 145.91 141.26 141.95 93.84 680.37 B. CONSULTANTS SERVICES (a) INSTITUTIONAL STRENGTHENING BUDGET ALLOCATION IMPROV. 0.21 0.21 0.42 NATIONAL AND STATE PLANNING 0.50 0.50 0.25 1.25 HIGHWAY DECENTRALIZATION 0.52 0.50 0.50 1.52 INTERMODAL TRANSPORT 0.22 0.22 HIGHWAY MAINTENANCE FINANCING 0.21 0.21 0.42 (b) STUDIES AND SUPERVISION STUDIES (*-..) 4.38 4.24 4.26 1.58 14.45 SUPERVISION 7.87 7.30 7.06 7.10 4.69 34.02 SUBTOTAL: B 8.89 13.31 12.47 11.36 6.27 52.30 C. TRAINING 0.25 0.25 0.25 0.25 1.00 SUBTOTAL: C 0.25 0.25 0.25 0.25 1.00 TOTAL COSTO BASE 166.30 159.47 153.98 153.56 100.36 733.67 D. CONTINGENCIES PHYSICAL (10%) 16.63 15.95 15.40 15.36 10.04 73.37 PRICE (---) 4.39 8.52 12.49 16.81 13.90 56.11 SUBTOTAL: D 21.02 24.47 27.89 32.16 23.94 129.48 TOTAL: PROJECT COST 187.32 183.94 181.87 185.72 124.30 863.14 Cost estimates include taxes amounting to 15% Based on the project implementation schedule ) 2.4% per year from 1998 onwards (**) Final engineering studies for the 1998 program have been completed   25 PROJECT IMPLEMENTATION A. SUB-PROJECT SELECTION, PREPARATION AND EVALUATION 4.1 The investment sub-projects to be implemented during 1997 and 1998 were selected during appraisal and agreed at negotiations. The sub-projects to be executed each year thereafter would be selected and submitted to the Bank for its review by October 31 of the year preceding the year of implementation. The submissions would be supported by detailed reports on the economic, financial, environmental, social and technical studies for the selected sub-projects. These studies would be carried out by consultants/experts acceptable to the Bank. Each investment sub-project will meet the following criteria: have a positive NPV and an ERR, calculated in accordance with a method satisfactory to the Bank, of at least 12%;- have a detailed financial analysis of each sub-project demonstrating that they are not attractive for private concession; not involve negative environmental impacts for which satisfactory mitigation measures have not been clearly defined through acceptable environmental assessment;, have resettlement documents acceptable to the Bank for projects involving resettlement; have a structural design life, in the case of roads, of at least 20 years (unless a technical study demonstrates that a shorter design life is appropriate). The above procedures and criteria were confirmed at negotiations. 4.2 For studies, technical assistance and training, the following would be required to be submitted to the Bank before the annual review: for studies and technical assistance, detailed terms of reference, manpower requirements, cost estimates and implementation schedule; and for training courses, seminars and workshops, the specific objectives, trainers' CVs and fees, number of participants by agency, duration and detailed cost estimates. The above requirements were confirmed at negotiations. B. CONDITIONS AND PROCEDURES FOR PROCUREMENT OF SUB-PROJECTS 4.3 The Bank loan would help to finance only contracts related to project components selected according to the criteria outlined in para. 4.1 and that the tendering is in accordance with procedures and design standards agreed with the Bank. SCT would be  26 directly responsible for the procurement of items under the project. SCT has the capacity to carry out the procurement program under the project. 4.4 All project components financed under the proposed Bank loan would be procured in accordance with the Bank's Guidelines for Procurement (January 1995). Procurement procedures would be as follows: a) to the extent practicable, contracts for works shall be grouped into bid packages estimated to cost the equivalent of US$10 million or more each and would be awarded through international competitive bidding (ICB) and prequalification procedures, using standard documents agreed with the Bank. Civil works valued at less than US$10 million equivalent, up to an aggregate of US$200.1 million, would be procured through national competitive bidding procedures (NCB), using standard documents agreed with the Bank, and where foreign bidders would have the opportunity to compete. All bidding documents would include specifications to safeguard the environment during construction. It is not foreseen that there would be any procurement of goods in this project. b) Consultants for studies, supervision, and technical assistance would be selected and engaged following the Bank's Guidelines for the Use of Consultants (August 1981). The cost of these services are expected to aggregate to US$61.5 million. For complex time-based assignments, Bank-issued standard forms of contract would be used. Where no relevant standard contract documents have been issued by the Bank, other standard forms acceptable to the Bank shall be used. 4.5 All contracts for civil works estimated to cost US$10 million equivalent or more would be subject to the Bank's prior review of the procurement documentation (advertising, bidding documents, bid evaluation, and contract award). The total value of these contracts would be US$600.3 million and would represent about 75% of all Bank- financed civil works. Prior review would also be required for the first two contracts for civil works to be awarded under NCB procedure, and for all contracts for consulting services valued at US$100,000 equivalent or more for consulting firms, and of more than US$50,000 equivalent for individuals. The provisions of the Guidelines requiring prior Bank review or approval of budgets, short lists selection procedures, letters of invitation, proposals, evaluation reports and contract, would not apply to contracts for the employment of consulting firms valued at less than US$100,000 equivalent each, and to contracts for the employment of individuals estimated to cost less than US$50,000 equivalent each. However, said exceptions to Bank prior review would not be applicable to: (i) the terms of reference for such contracts, (ii) single-source selection of consulting firms; (iii) assignments of critical nature as reasonably determined by the Bank; (iv) amendments to contracts for the employment of consulting firms raising the contract value to US$100,000 equivalent or more; and (v) amendments to contracts for the employment of individual consultants raising the value of the contract to US$50,000 equivalent or more. The financing for training would be based on a detailed program to be submitted to the Bank for approval.  27 4.6 Project cost breakdown by procurement method is presented in Table 4-1; the amounts in parenthesis show allocations of loan proceeds. Procurement arrangements were confirmed at negotiations. C. IMPLEMENTATION AND MONITORING 4.7 BANOBRAS will be the Borrower and will on-lend the loan proceeds to the Government (for SCT) under the same terms and conditions as the Bank loan, with Government bearing the foreign exchange and interest rate risks. It will be a condition of loan effectiveness that Borrower and the Guarantor enter into contractual arrangements satisfactory to the Bank for the transfer of loan funds. 4.8 SCT would be responsible for the preparation/execution of most of the project components through its various Directorates, as follows: DGTR for identifying the sub-projects for the annual programs and canrying out the feasibility, social and financial studies and for technology transfer to the states; DGPI for preparing the annual highway budget and for transferring highway planning capabilities to the states road agencies and for organizing and making operational the entity that would administer the funds generated through the road users' charges; DGCF for preparing the final engineering and environmental and social impact assessments for the sub-projects to be included in the annual program, for managing the execution of the civil works and for implementing the resettlement documents; DGMPT for implementing the assistance for traffic safety; and DGTT for implementing the staff training components of the project, including supporting the training of the states highway staff. The social impact analysis to determine the need for involuntary resettlement and to design the resettlement documents will be carried out by qualified social scientists under terms of reference satisfactory to the Bank. SCT will be responsible for implementing resettlement actions arising from the project. SCT has been using both state and municipal level entities to assist it in carrying out resettlement actions depending upon each particular case. SCT will use mechanisms acceptable to the Bank to carry out resettlement cases under the proposed project. During negotiations it was agreed that institutional measures acceptable to the Bank for carrying out remedial measures in accordance with the resettlement framework shall be in place and to be fully operational prior to the time that any such remedial measures are required and, in any event, that they shall be in place and operational not later than one year after the date of the Loan Agreement.  28 4.9 Project supervision is expected to take place at least three times during the first year of project implementation and at least twice a year to monitor progress of the proposed project. Supervision missions at the appropriate point of the annual budget cycle would seek assurance of the adequacy of the funding required for the annual modernization programs. Because of the country-wide nature of the project, supervision requirements are expected to be about 20 staff weeks per year. Table 4-1: Procurement Methods and Disbursements (US$ Million) I. Procurement Procurement Method ITEM DESCRIPTION ICB NCB Other a/ TOTAL Civil Works Highway Modernization Contracts over US$ 10 million 600.3 600.3 (Bank financing) (315.3) (315.3) Contracts under US$ 10 million 200.1 200.1 (Bank financing) (105.1) (105.1) Subtotal: Civil Works 600.3 200.1 800.4 (Bank financing) (315.3) (105.1) (420.5) Consultants Services (a) Institutional Strengthening 4.5 4.5 (Bank financing) (3.9) (3.9) (b) Other Consultants Services 57.0 57.0 (Bank financing) (49.6) (49.6) Subtotal: Consultants Services 61.5 61.5 (Bank financing) (53.5) (53.5) Training Courses and Seminars 1.2 1.2 (Bank financing) (1.0) (1.0) Subtotal:Training 1.2 1.2 (Bank financing) (1.0) (1.0) TOTAL (*) 600.3 200.1 62.7 863.1 (Bank financing) (315.3) (105.1) (54.5) (475.0) (*) Totals include taxes and duties and may not add up due to rounding al "Other" includes direct contracting, and the Bank's consultants selection procedures Figures in parenthesis are the respective amnounts financed by the Bank loan and include contingencies  29 II. Disbursements % of net Amounts Expenditures Category To be Financed (1) Civil Works 357.4 53% (3) Services 45.5 100% (4) Training 0.9 100% (5) Unallocated 71.2 Total 475.0 FY1 998 FY1999 FY2000 FY2001 FY2002 FY2003 FY2004 Annual 80.0 80.0 80.0 90.0 75.0 50.0 20.0 Cummulative 80.0 160.0 240.0 330.0 405.0 455.0 475.0 a/ "Other" includes direct contracting and the Bank's consultant selection procedures. 4.10 Semestral reviews, in April and October of each year, and coinciding with those of the ongoing HRTS project, would be held to review the progress in project implementation and to agree on the program for the current year. The reviews would focus on: (a) the progress against the previous annual project implementation schedule; (b) the level and composition of SCT's road budget for the fiscal year in which the review takes place; (c) the performance against the project monitoring indicators; and (d) the finalization of the selection of sub-projects for the current year, taking into consideration the balance in SCT's road budget. SCT would provide a report on progress of each component of the project, at least one month before the date fixed for the annual review. 4.11 In April 2000, the Government and the Bank would conduct a mid-term review of progress in project implementation, which in addition to items covered in the annual reviews, would focus on: the adequacy of funding for activities in the federal road network, including that for the ongoing project; the progress made on the institutional aspects being supported under the loan; the implementation road improvements included in the project;  30 the progress in the commitments and disbursements of loan funds, to be assessed on the basis of the summary expenditures and on the physical progress of all eligible sub-projects; the progress in the training program, including the number of staff successfully trained and the impact of the training on SCT's capacity; the progress made in bringing the federal network to good condition; and the future direction of the project, including any necessary changes in objectives and scope. 4.12 In addition to the above, during negotiations, agreement was reached with the Government that the SCT would provide: (a) every six months, progress reports to the Bank for monitoring purposes, on the basis of a format and methodology acceptable to the Bank; and (b) within six months of the closing date, an input to the Project Implementation Completion Report. D. ACCOUNTS AND AUDITS 4.13 Agreement was reached during negotiations that BANOBRAS will: (i) maintain and cause to be maintained the records and accounts adequate to reflect its operations and financial position; and (ii) have the records of the project accounts audited in line with the standing arrangements between BANOBRAS and the Bank and that the use of statement of expenditures and the special account (para. 4.16) would be subject to a separate opinion in the audit report. E. DISBURSEMENTS 4.14 Standard disbursements profiles prepared by the Bank for the LAC region, and in particular for Mexico, indicate that a seven year period is required to obtain full disbursements for this type of project. The disbursement period has accordingly been estimated at seven years and the closing date on June 30, 2004 (Table 4-2). However, if SCT decides to accelerate project execution and SHCP agrees to provide the funds required to match the loan funds necessary, the project could be completed in about four years. The initial allocations of loan proceeds and the corresponding percentage to be disbursed by category are shown in Table 4-1. Disbursement would be made on the following basis: (a) 53% of the expenditures on civil works; (b) 100% of total expenditures on consultant services; and (c) 100% of total expenditures on training. 4.15 Disbursements under the project will be made against full documentation of expenditures except for the following items, for which disbursement would be on the basis of statement of expenditures (SOEs): (a) civil contracts costing less than US$10 million equivalent; (b) consultant contracts with firms estimated to cost less than US$100,000 equivalent and with individuals costing less than US$50,000 equivalent; and (c) training.  31 SOE records will be made available to Bank staff as required for inspection during supervision. 4.16 To expedite project execution, a Special Account would be opened in the Central Bank, with an authorized allocation of US$25 million equivalent. The first advances from this account will be limited to US$15 million equivalent until the aggregate amount of withdrawals from the loan account plus the total amount of all outstanding special commitments have reached US$75 million equivalent. Retroactive financing of US$ 30 million equivalent (about 6% of the loan) was agreed at negotiations for expenditures incurred on works and consulting services initiated between June 30, 1996 and the loan signature date. These arrangements were confirmed at negotiations. Table 4-2 SCHEDULE OF ESTIMATED DISBURSEMENTS (US$ Million) IBRD Fiscal Year Disbursements Cummulative Cummulative per quarter Disbursement Percentage 1998 September 30, 1997 35.0 December 31, 1997 15.0 50.0 March 31, 1998 15.0 June 30, 1998 15.0 80.0 16.8% 1999 September 30, 1998 20.0 December 31, 1998 20.0 120.0 March 31, 1999 20.0 June 30, 1999 20.0 160.0 33.7% 2000 September 30, 1999 20.0 December 31, 1999 20.0 200.0 March 31, 2000 20.0 June 30, 2000 20.0 240.0 50.5% 2001 September 30, 2000 20.0 December 31, 2000 20.0 280.0 March 31, 2001 25.0 June 30, 2001 25.0 330.0 69.5% 2002 September 30, 2001 20.0 December 31, 2001 20.0 370.0 March 31, 2002 20.0 June 30, 2002 15.0 405.0 85.3% 2003 September 30, 2002 15.0 December 31, 2002 15.0 435.0 March 31, 2003 10.0 June 30, 2003 10.0 455.0 95.8% 2004 September 30, 2003 10.0 December 31, 2003 10.0 475.0 100.0% Assumptions: Loan Signing Date: July, 1997 Loan Effectiveness: September, 1997 Project Completion: December 31, 2003 Loan Closing Date: June 30, 2004  32 F. ECONOMIC EVALUATION 4.17 The economic analysis has been carried out for the physical component of the project, except the removal of hazardous spots for which an economic analysis would be carried out as the spots are studied and selected during project implementation. The activities captured by the analysis cover about 90% of total project base cost. The economic benefits from improving SCT and the state road agencies' capacity, even though expected to be substantial, are not quantified. The estimated combined economic rates of return (ERR) for the indicative federal road program for 1997 to 2002 is about 18.9%, with a net present value discounted at 12% of US$983 million. 4.18 In addition to the ERRs, the selection of the individual road sections to be included in the highway modernization program took into consideration the importance of the roads in the external trade transport and in regional integration and accident reduction. For the economic analysis of the selected roads, a modified version of the Bank's HDM III model, the HDM-Q, which takes into consideration road congestion and capacity constraints as well as roadside friction, was used. The model predicts the life-cycle cost of different modernization and subsequent pavement management options and selects the combination with the minimum life-cycle costs, including the cost to road users and the SCT. The life-cycle costs of road modernization include: road construction and maintenance costs, vehicle operating costs, cost of time and accident costs. The accident costs were put in the model as an exogenous variable. The traffic on the project roads ranges between 2,100 and 31,000 vehicles per day. The value oftime used in the analysis is based on only work-related trips and estimated as the frill value of the salary of heavy vehicle drivers and 50% of the value of earnings for those traveling in private cars. Annex D outlines the economic analysis for a typical road section, the San Roberto - Puerto Mexico road (80 km). The full analysis is included in the Project File. 4.19 A sensitivity test of the variation in the ERRs against possible 20% changes in construction costs and benefits as well as excluding the savings in time shows that all project roads still yield ERRs of at least 12% and positive NPVs. An analysis performed to test the effects (risk) of postponing the modernization of the typical road, San Roberto - Puerto Mexico, shows that the net benefits are reduced if the investment is postponed by two or three years. This postponement would, however, not make the modernization economically non-feasible. G. ENVIRONMENTAL AND SOCIAL ASPECTS 4.20 The road improvement activities under the project might, in some cases, result in negative environmental impacts. All road improvement would, therefore, be subjected to an environmental impact assessment (EIA). For all sub-components identified for implementation during the first year, EIAs have been carried out, reviewed by the Bank and found satisfactory. For the remaining components, which would be selected in subsequent years, the EIAs would be carried out before the approval of the sub- component for inclusion in that year's program. SCT's environmental affairs unit (EAU) is being strengthened under the HRTS. Moreover, to comply with environmental  33 requirements, SCT has revised its work specifications and improved those parts related to the coverage of cultural patrimony, the management of quarries and borrow pits, pollution control of construction equipment and work crews and disposal of waste materials. These revisions are included in the bidding documents for civil works construction and are adequate. SCT is also taking steps to improve the coordination among EAU and other directorates of SCT carrying out their own environmental assessment in order to eliminate duplication. 4.21 Since the proposed project is a time-slice operation and the social impacts, including involuntary resettlement, of the civil works sub-projects to be carried out beyond 1998 are not yet known, agreement was reached at negotiations on a framework for preparing resettlement documents, should they be necessary. The roads being modernized in 1997 and those selected for 1998 were studied by a qualified sociologist and found not to cause any need for involuntary resettlement. In order to ensure that any involuntary resettlement caused by modernization of other roads or complementary works, such as by- passes and junctions, which may not be part of the project, but connected with the project roads, are adequately handled, it was agreed at negotiations that such complementary works would also be subject to the resettlement framework mentioned above. In the event of the need for involuntary resettlement in either of the above cases, it was agreed at negotiations that the Borrower shall: (a) prepare and furnish to the Bank satisfactory resettlement documents for such affected persons or families not later than the date on which it submits the road sections or complementary works for the Bank's review and approval; and (b) thereafter carry out the actions recommended by the resettlement documents in accordance with their terms. H. PROGRAM OBJECTIVE CATEGORY 4.22 The applicable categories for this project are Environmentally Sustainable Development (80%) and Economic Management (20%). I. PROJECT BENEFITS 4.23 The project would increase transport efficiency and reduce costs on the federal road network, particularly along the major export transport corridors, and enhance the country's competitive advantage in its external trade. It would help in accommodating the rapid road traffic growth, estimated at about 10% per annum, on the major corridors which will result from the NAFTA agreement. Given the free competition in Mexico's trucking industry, the savings in vehicle operating costs would be passed on eventually to consumers and the general population including the low income sector. Significant, but non-quantifiable benefits would also accrue from the institutional strengthening and training components. The improvement in allocating funds to highway activities would ensure that benefits are maximized. Strengthening SCT and its regional centers would help increase implementation efficiency and reduce delays. Finally, the improvement in environmental and social awareness and the capacity to incorporate environmental and social factors into road planning and the execution of road projects would prevent damage  34 to the country's natural resources and would adequately compensate persons adversely affected by the projects. J. PROJECT RISKS 4.24 The main project risks include: (a) Reduction of Maintenance Efforts on Road Network. For the last several years, the Government, with the Bank's assistance, has concentrated its efforts on rehabilitating and maintaining the federal road network. This strategy has worked well. However, the country has reached a point where it now needs to expand road capacity as well. It must do this in a balanced way so as not to jeopardize what has been gained in terms of maintaining the existing system. There is, however, the risk that with the modernization program, insufficient resources will be allocated to road maintenance. The risk would be significantly reduced by SCT's ongoing effort to redefine the federal road program to make it about half of its current size. Also, the introduction of the proposed road maintenance fund and more efficient systems for allocating funds among all road activities should help to ensure that economic priorities are reflected in SCT's use of funds. Lastly, the pace of implementation of the modernization program would be tailored to the availability of funds to implement a balanced road budget for the STC. (b) Delays in Complementary Action to Modernize the Federal Road System. SCT recognizes that modernizing the federal road network also includes complementary actions to improve safety, traffic flow management, policing and vehicle weight and dimension control. SCT's achievements on these would be discussed at annual review meetings which would also agree on the composition and size of the annual programs. (c) Environmental and Social Risks. Possible negative environmental and social impacts from the project would be mitigated through the environmental safeguards built into SCT's bidding documents, the strict requirements for environmental impact assessment in the project and close monitoring of resettlement and their implementation of the resettlement documents.  35 AGREEMENTS REACHED AND RECOMMENDATIONS 5.1 During negotiations, agreement was reached on the following: as a condition of loan effectiveness, the Guarantor and the Borrower would enter into contractual agreements, satisfactory to the Bank, for the transfer of the loan funds (para. 4.1); SCT would present to the Bank, by October 31 each year during project implementation starting in 1998, its draft road program on the federal network for the subse(cuent fiscal year and by April 30, each year starting in 1998, its actual road program as updated to use fully the budget approved by the Legislature (para. 2.9); the composition and scope of the first and second year road programs (para. 3.5); the scope and terms of reference of the technical assistance and implementation schedules for: (i) reviewing the role and organization of the SCT; (ii) developing the comprehensive road planning model and (iii) reviewing inter-modal transport (para. 3.7); the scope of the staff training program (para. 3.10); the arrangements, eligibility, criteria and documentation for sub-project selection (paras. 4.1 and 4.2); procurement procedures (paras. 4.4 - 4.6); the scope and content of the semestral and mid-term project implementation reviews (paras. 4.9 - 4. 10); performance and impact monitoring indicators for the project (para. 4.10) the auditing of the project account would be in line with standing arrangements between BANOBRAS and the Bank, and that the use of statement of expenditures and the special account would be subject to a separate opinion in the audit reports (para. 4.13); procedures for environmental reviews and a framework for preparing resettlement documents for subprojects (paras. 4.20-4.21); and the loan disbursement arrangements, including the establishment of a Special Account (paras. 4.14-4.16). 5.2 With the above agreements, the project is suitable for a Bank Libor-based single currency loan of US$475 million for a period of 15 years, including five years of grace.  36 Table A-1: Highway Rehabilitation, Resurfacing, and Maintenance Program 1993-1996 DGCC Budget Requirements, Physical Targets and Accomplishements 1993 1994 1995 1996 Total 93 - 96 | Target Actual Target Actual Target Actual Actual Target (T) Actual (A) A/T I. Financial Targets (1993 Mexican N$ Million) Total 1000.2 1330.5 1065.0 1086.7 1125.9 765.5 1298.0 3191.1 3182.8 99.7 (a) Pavements 833.2 1156.4 866.4 953.0 941.2 712.7 1118.2 2640.8 2822.1 106.9 Rehabilitation 284.0 407.6 444.6 344.1 608.3 224.3 729.5 1336.9 976.0 73.0 Resurfacing 1/ 341.7 158.9 246.0 320.9 165.8 209.7 201.9 753.5 689.5 91.5 Routine Maintenance & Equipm. If 207.5 589.9 175.8 288.0 167.1 278.7 186.8 550.4 1156.6 210.1 (b) Bridges Rehabilitation/Improvement 50.0 70.9 69.5 56.4 68.4 49.6 69.3 187.9 176.9 94.1 (c) Miscellaneous 117.0 103.2 129.1 77.3 116.3 3.3 110.5 362.4 183.8 50.7 II. Physical Targets (a) Pavements Rehabilitation KM. 4/ 722.0 2375.0 1151.0 1097.2 1745.0 1590.5 1625.0 3618.0 5062.7 139.9 Resurfacing KM. 4/ 7661.0 5863.0 5543.0 7580.0 4187.0 5245.6 4463.0 17391.0 18688.6 107.5 Routine Maintenance KM. 4J 33600.0 46000.0 35790.0 46183.7 35790.0 41774.0 35790.0 105180.0 133957.7 127.4 (b) Bridges Rehabilitation/lImprovement UNITS 76.0 120.0 45.0 102.0 85.0 102.0 74.0 206.0 324.0 157.3 i1. Impact Indicators (a) Highway Pavements: % of Highway length in fair to good condition Strategy 88 (basic strategy) 40.0 27.0 36.0 43.0 35.0 50.0 39.0 Strategy 87 39.0 27.0 41.0 43.0 40.0 50.0 44.0 Strategy 13 38.0 27.0 44.0 43.0 52.0 50.0 50.0 (b) Bridges: units in need of repair 2/ Alarm 66.0 80.0 32.0 60.0 0.0 30.0 0.0 Urgent 214.0 213.0 181.0 245.0 168.0 260.0 83.0 Less urgent 265.0 316.0 256.0 620.0 256.0 920.0 256.0 14- Noviembre - 1995 11 Fuente: Reporte de las Residencias Generales en Metas Financiadas Actuales 2/ Las Metas del Programa Presupuesto fueron estimadas en base a Inspecci6n de 821 Puentes: sin embargo durante 1994 y 1995 se complemento la inspeccion de los 6346 Puentes existentes en la red federal 3/ Estimado 4/ Las Cantidades fisicas mostradas como actuales (Realizados) provienen de los informes de la Residencia General y en muchos casos incluye obra realizada con un partida presupuestal diferente  37 Annex A Table A-2 Table A-2: Highway Rehabilitation, Resurfacing and Maintenance Program Estimated DGCC Budget Needs and Physical Targets (1996 - 2000) 1996 1997 1998 1999 2000 Target Target Target Target Target 1. Financial Targets 1996 Mexican N$ Million Total 2,143.5 3,000.0 2,878.0 3,170.0 3,151.0 (a) Pavements 1,790.1 2,585.2 2,443.1 2,782.1 2,815.2 Rehabilitation 907.8 1,723.1 1,801.1 2,159.1 2,165.1 Resurfacing 406.9 415.1 156.0 152.0 155.1 Routine Maintenance & 475.4 447.0 486.0 471.0 495.0 Equipm. (b) Bridges Rehabilitation/Improvement 113.3 145.0 150.0 138.0 135.0 (c) Miscellaneous 240.0 270.0 285.0 250.0 201.0 11. Physical Targets (a) Pavements Rehabilitation km 1,549.1 2,655.1 2,642 3,287.1 3,643.1 Periodic Maintenance km 3,714.2 5,691.1 2,159.1 1,762.0 2,114.0 Routine Maintenance km 42,085.0 38,139.0 38,870.0 38,224.0 39,091.0 (b) Bridges Rehabilitation/Improvement 127 132 137 126 123 units   Figure 1: Projected Plhysical Conditioni of the Federal Road Network (Assuming Expenditures of US$ 300 Million per Year) 40000 . _ ...... 37500 35000 - - ---- 32500 - 30000 - - 27500 - 25000 _ ; E 22500 -, 20000 . . .: ; 17500- : : : : : X 15000 - - ---- 12500 - :. 10000 -....... 7500 -.. 5000 2500 O ------,- ,|, ,,I'I' 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 IEn Good Fair El Bad g V. Bad | Year   39 Annex A MEXICO FEDERAL ROADS MODERNIZATION PROJECT Rehabilitation and Maintenance of the Federal Road Network A. Institutional Arrangements 1. The Secretarfa de Comunicaciones y Transporte (SCT), through its Direcci6n General de Conservaci6n de Carreteras (DGCC), is responsible for maintaining the un- tolled portion of the federal road network, about 42,182 km. CAPUFE, private concessionaires and the state governments are responsible for 1,420 km, 3,167 km and 1,096 km respectively on concession with SCT. Since the beginning of 1997, SCT has been negotiating with the states to take over about half the federal road network. 2. Maintenance of the expressways by CAPUFE, the private concessionaires and the states, financed out of the tolls collected by these entities, is adequate. DGCC has over the past three years significantly improved its maintenance performance through: (a) introducing modern road and bridge maintenance management systems; (b) contracting about 70% of of its maintenance to the private sector; (c) training its staff; and (d) increasing significantly its spending on maintenance and rehabilitation, which accounts for over 60% of SCT's road budget. B. Government's Objectives with HRRM 4. To restore the federal network, the Government embarked on a Highway Rehabilitation, Resurfacing and Maintenance Program (HRRM). The Government's objective under the program, being financed with the Bank's assistance under the HRTS, was to bring the condition of all SCT-maintained roads in the federal network (about 42,833 km) to at least a "fair" classification and no highways in poor condition by the year 2008. C. Program Implementation 5. The program's physical and institutional strengthening performance has been fairly good; each year about 44,000 km have received routine maintenance, about 6,200 km resurfacing and about 1,700 km rehabilitation or reconstruction under the program. On the institutional side, an operational, modern maintenance management system has been put in place in DGCC with the assistance of consultants (BCEOM, France). The system has permitted more rational selection, budgeting and monitoring of rehabilitation and maintenance activities as well as the revision of the program to reflect changing road conditions and availability of funds. 6. The Government's performance in meeting the program's financial requirements and its commitments under the HRTS project has been satisfactory on the  40 Annex A average: spending was above commitments for 1993 and 1994 and below for 1995. The total spending for the first 3 years of the program have been equal to the commitments undertaken under the HRTS (see Table A-1). These commitments were, however, themselves only about 70% of the sums required to implement an optimum maintenance program, i.e. one that would maximize the net present value to society. They were considered acceptable to the Bank, however, in view of the difficult financial situation the Government was going through then. 7. An analysis of the physical work done since the start of the program in 1993 shows that the rhythm is acceptable. All roads in the federal network which are not slated for resurfacing, rehabilitation or periodic maintenance receive adequate routine maintenance each year. At the rate of 7,900 km of rehabilitation and periodic maintenance per year, all roads in the network would be covered by these operations within the next six years, compared to the cycle of 6 to 8 years traditionally considered adequate, depending on traffic volumes. D. Revised Program Objectives. 8. DGC has carried out an analysis of condition of the federal network based upon more recent, detailed and reliable road condition inventory and assuming different alternative levels of financing, using its maintenance management system, SISTER. The results, presented in Figure 1, show that, should the annual allocation in real terms be retained at US$300 million equivalent, the 1996 level, at least 50% of the network would be brought to "good" condition and the remaining 50% to "fair" condition, the original program objective, in the year 2008 compared to 2007. On the other hand, funding the program at N$3.0 billion or US$400 million equivalent would accomplish that goal in the year 2003. 9. During the Mid-Term Review of Implementation of the HRTS in 1996, the Government agreed to increase the funding for the HRTS to at least US$300 million equivalent per year starting January 1997. The 1997 maintenance budget was actually slightly higher than US$300 million and, if maintained, would permit achieving the original program's goals by the year 2008. Should the Government's financial situation improve, the Government undertook to increase the annual expenditures to attain the goal in the year 2003. The revised financial and physical targets for the program are presented in Table A-2. 10. A detailed presentation of alternative funding scenarios and the corresponding network conditions is included in the Project File.  41 Annex B MEXICO FEDERAL ROADS MODERNIZATION PROJECT TRAINING PROGRAM A Introduction SCT HAS EMBARKED ON A VERY SIGNIFICANT STAFF TRAINING PROGRAM UNDER THE ONGOING HIGHWAY REHABILITATION AND TRAFFIC SSAFETY PROJECT (HRTS). HRTS' TRAINING PROGRAM AIMS AT: (a) strengthening SCT, both at headquarters and in the regional units (Centros, SCT), in all areas of highway rehabilitation and maintenance; (b) improving SCT's performance in all areas of transport planning, contract administration, works supervision and quality control; (c) strengthening SCT in administering driver licensing, and vehicle inspection; and (d) equipping the training centers at SCT's regional centers with basic training facilities. 2. The detailed list of training areas and the number of staff expected to benefit are included in Table B-i. Progress in implementing the program has been considerably delayed due to delays in recruiting instructors. It is now estimated that the program would be completed by the year 1999 to 2000, instead of the original completion date of 1996. It was therefore decided that the training program under the proposed Federal Roads Modernization Program (FRM) be kept to a minimum in order not to overload SCT. B. The Training Program under the FRM Project. 3. The FRM would provide for deepening the above training in areas such as: (a) bidding and contract administration (beneficiary, DGCF); (b) budgetary and resource allocation among road activities(beneficiary, Oficiria Mayor); (c) project evaluation techniques (beneficiary, DGP); and (d) the assessment of environmental social and economic impacts and designing mitigation/compensation plans (beneficiaries, DGCF, DGST and CGP). The training would also finance training in new areas such as: (a) inter-modal transport and electronic data interchange systems (beneficiary, DGTT); (b) transport corridor analysis and planning (beneficiary, DGP); and (c) highway financing (beneficiary, DGP). Lastly, the project would provide for a parallel training program to the ongoing one under the HRTS for four selected states in Mexico. 4 The proposed program under the project, to be carried from 1998 to 2001, would reach about 780 participants over the 4-year period as shown in the table below. A more in-depth training program would be developed following the re-organization study for the SCT.  42 Annex B Table B-1 Training Program (1998-2001) Number of Participants and Estimated Costs Beneficiarie 1998 1999 2000 2001 Total Total s (1998- (U$ 2001) Thous.) DGCF 80 120 120 80 400 500 DGP 10 20 20 10 60 100 DGTT 10 20 20 10 60 100 DGE 40 50 50 40 180 100 DGST 20 20 20 20 80 200 Totals 160 230 230 160 780 1,000  43 Annex C MEXICO FEDERAL ROADS MODERNIZATION PROJECT Performance Monitoring Indicators A. Indicators 1. The indicators to be monitored for measuring the project's performance are grouped into five: (a) input indicators, which measure the efficiency in the delivery of inputs to the project; (b) output indicators, which measure the efficiency of the implementing agency in executing the project; (c) outcome indicators, which provide an indication of the sucess in achieving the project's objectives; (d) impact indicators, which measure the degree of attainment of the project's broad objectives; and (e) sustainability impact, which indicates the degree to which the main factors/conditions needed for the project's sustainability are being ffilled. A list of these indicators and the agreed benchmarks are presented in Table C-1. B. Organizational Arrangements for Monitoring 2. SCT would be responsible for measuring the project's performance. SCT would be assisted by the Instituto Mexicano de Transporte (IMT) and consultants, as necessary, with financing under the project. To permit a "before" and "after" project comparison, benchmark measurements would be made, for those outcome and impact indicators to which they are applicable, before project implementation starts. The results of the performance monitoring would be discussed during the annual review of project implementation and would be an important input into the project Implementation Report after loan closure.  44 Annex C Table C-1: Performance Monitoring Indicators Indicators Benchmark 1998 1999 20004 2001 2002 Input Indicators Counterpart Funds US$ m 25.0 65.9 112.4 107.0 89.7 Bank Loan Funds US$ m 25.0 65.9 112.4 107.0 89.7 Output Indicators Km of Highways 160 265 255 195 70 Modernized % of Contracts Completed 60 70 80 85 90 on Time No. of Staff Receiving 160 230 230 160 Training _ _ : Outcome Indicators % of Completed Roads with 100 100 100 100 100 targeted improved capacity Ratio of actual and projected 90 90 90 90 90 time savings for completed roads Ratio of Actual and 80 80 80 80 80 Projected Vehicle Operation Cost Savings for Completed Roads Impact Indicators % Decrease in Transport 20 20 20 20 20 Costs on Completed Roads % Reduction in Serious 10 15 20 20 20 Accidents %:Reduction in No. of All 5 10 10 15 15 Accidents on Completed Roads Sustainability Indicators  45 Annex C Km of Federal Roads 2110 2264 2745 3096 1633 Rehab./Recons. Km of Federal Roads 1764 2275 995 1000 1000 Receiving Periodic Maintenance Km of Federal Roads 39277 39277 39277 39277 39277 Receiving Routine Maintenance Funds Spent on Maintenance 3170 3151 3200 3321 3450 (N$ Million) I I I I I   46 Annex D MEXICO FEDERAL ROADS MODERNIZATION PROJECT Economic and Financial Analysis of the Project Roads l. Economic Analysis A. Methodology 1. SCT used economic tests, Net Present Value and Economic Rates of Return, to pre- select the roads to be included in its federal roads modernization program. SCT then prepared in-depth economic analysis on about 2016 km of roads to be modernized in years 1997-2002 using the HDM -Q model. The model measures the benefits from the road investments in the form of vehicle operating cost savings and time savings to the economy against the cost of the investments and subsequent maintenance of the road over the 25-year life of the investments.The HDM-Q is the modified form of the HDM III model which can take into consideration congestion effects. The model predicts the life-cycle costs of different modernization and subsequent pavement management options and selects the combination with the minimum life-cycle costs to society, including the cost to road users and the SCT. The model computes, for a given road and traffic, first the free-flow speeds and then adjusts these speeds to take into account the congestion level. The resulting speeds are then used to compute the vehicle operating and travel time savings. Although accident savings are expected to be considerable, it is difficult to quantify them to any reliable degree. The estimates for these savings are therefore not included in the best estimate analysis of the roads, but have only been added to the benefits in the case of the sensitivity analysis. A sample of the economic analysis, using the San Roberto - Puerto Mexico Road (80 km), one of the first-year roads is presented below. Traffic 2. The San Roberto - Puerto Mexico (SR-PM) road section forms part of the most important road axis in Mexico, the Mexico - Nuevo Laredo road which carries over 9,000 vehicles per day (vpd) of which more than 60 % are trucks. The SR-PM road section carries about 7,958 vpd of which 46% are passenger vehicles, 2% buses and 52% heavy vehicles. Based on historic traffic growth and future projects of economic growth, the rate of growth of traffic has been estimated at a modest 2% per year for all vehicle types. This a conservative assumption since the current average annual growth is between 5 % to 7 %. Therefore, in the sensitivity analysis an average annual growth of 5% has also been tested. Because a financial analysis of toll alternatives to the proposed investments has shown them financially unattractive, it has been assumed that there will be no traffic diversion from the project road. Vehicle Operating Costs (voc) 3. The vocs used in the model are those incorporated in the HDM model modified to reflect unit costs in Mexico. The benefits from reduced vehicle operating costs arise from both the better riding surface after modernization and the reduction in roadside friction from increased road capacity. The initial roughness has been measured at 5.3 IRI (international roughness index) and the final, after the road investment, estimated at 2.1 from experience in Mexico with similar works. The vocs with and without the project are shown in Table D-1.  47 Annex D Time Savings 4. The time savings from the investments represent the differential in average travel times between the existing nearly congested roads and those on the improved roads which would permit a level of service of at least "B". The HDM Q model estimates these time savings automatically based on traffic levels and composition and the geometrical design standards of the existing and improved roads. 5. The value of time is quantified separately for truck and bus drivers and their mates - for whom the average full value of wages and compensation is used - and for private car drivers and their passengers - for whom the value of time is discounted. Investment Costs 6. The modernization of the road, which comprises road widening and provision of wider shoulders as well as overlaying the surface, is estimated to occur in 1998 with an overlay in the year 2016. Annual routine maintenance and resealing, when the damaged area reaches 50%, would be carried out each both in the 'with"and "without"project cases, but, in the without case, there would also be an overlay in the year 2007. The investment costs used in the analysis are estimates based on unit prices in recently received bids for similar works. The economic costs for both benefits and agency costs have been calculated as total costs minus taxes. No shadow prices have been used since the valuation of cost and benefit inputs is undistorted market prices. B. Summary Results 7. The costs and benefit streams during the life-cycle of the San Roberto - Puerto Mexico Road, and the results of the economic analysis are shown in Tables D-1 and D-2. The proposed modernization of the San Roberto - Puerto Mexico road section would yield a Net Present Value of US$40.9 million, discounted at 12%. The corresponding economic rate of return would be 25.2%. The 1997-2002 indicative program would yield an NPV of about US$983 million and an economic rate of return of 18.9%. C. Sensitivity Analysis 8. A sensitivity analysis, assuming reasonably likely variations in costs and benefits, shows for the SR-PM road section that, with a combined increase of 20% and a decrease in benefits of 20%, the ERR falls to 21.5 % (Table E-3). The IRR increases to 28.5% if a traffic growth rate of 5% p.a. is assumed. For all the project's civil works combined, the NPV discounted at 12% would be US$920 million, and the economic rate of return 19.4%. These figures are, however, only indicative -since the current list of roads in the program is very tentative. For the whole project, a 20% increase in investment costs would reduce the ERR to 14.9% while a decrease in benefits of 20% would reduce it to 14.3% The NPV would still be positive in all cases. II. Financial Analysis 9. The financial analysis of the Tampico - Linares road, one of the roads in the second year program, is presented here as an illustration of the analysis to determine if an alternative  48 Annex D road financed by the private sector and operated as a toll road would be attractive to the private sector under reasonable assumptions of toll levels and length of concession period. The objective is to ensure that public funds are not substituted for would-be private funds in improving public infrastructure. Using private funds would release public funds for other uses and would lead to more efficient use of resources since, in the toll road case, the public would be given the option to pay tolls for an improved level of service over a long period of time. On the other hand, the private sector would only undertake to finance the alternative roads if the potential return on capital exceeds that from available opportunities in Mexico. A. The Analysis 10. The existing road in the modernization program is made up as follows (see Figure 1): Tampico - Altamira Altamira - Est. Manuel Est. Manuel - Gonzalez. Gonzalez - Llera de Canales Llera de Canales - Cd. Victoria Cd. Victoria - Barretal Barretal - Lim. Edos. Tam/Nuevo Leon 11. The sections of the road with inadequate capacity and therefore requiring urgent attention are: Entronque Llera - Ciudad Victoria - 58.0 km, ADT 4,350 with 15% trucks; and; El Barretal - Linares -116.0 km, ADT 2,858, with 16% trucks. Economic rates of return for the two sections, calculated using the same methodology as the San Luis Potosi - Huizache road above, yield economic returns of 17.8% and 14.8% respectively. 12. The tolled alternative would consist of: Alt. A: Cuauhtemoc - Ciudad Victoria - 156 km, ADT 1,416; and Ciudad Victoria - Linares 153 km, ADT 2,448. 13. Under the alternative of a toll road, the existing road would need to be maintained in a reasonable shape to provide a free alternative to users, as required by Mexican Law. The main variables used in the toll alternative analysis are as discussed below. Traffic 14. The traffic data, collected by consultants in their feasibility studies, gave the following results: (a) Base year daily volumes are cars 1,416 and 2,448 respectively, as shown above;  49 Annex D (b) A uniform growth of 2.5% was predicted by the consultants, except in the initial years of the toll operation. It was assumed that there would be a drop of 10% in traffic immediately following the introduction of tolls. This would be followed by a period of growth so that, by the 10th year, the traffic would be equal to that predicted originally assuming the 2.5% annual growth. Traffic beyond year 10 is projected to continue its 2.5% annual growth. Construction Costs 15. The construction costs of the toll road alternative are estimated at US$282 million or US$912,223 per km, based upon the experience of SCT. Overlays, at a cost of US$129,809 per km are expected to be applied to the road every - years. Routine maintenance has been estimated at US$1,481 per km per year. A physical contingency of 20% has been applied to all costs. Financing Conditions 16. Based on the results of SCT's studies, the concessionaire can obtain financing for 40% of the initial outlays, with the remaining 60% coming from reserves or a call on shareholders capital. The loan conditions would be as follows: (a) A loan of 40% of initial construction cost would be obtained with a two-year grace period. During construction, interest is added to the loan principal. Amortization of capital and principal would be over 7 years with equal annual installments. Interest is calculated over the outstanding balance at the end of each year; and (b) The interest rate would be 11 % per year. The corresponding interest payments are included as an operating cost to be offset against revenue since the loan is intended to lever up the return on shareholders capital. Toll Administration Costs 17. The cost of collecting tolls and administering the system are estimated to be 10% of gross revenue. Concession Life 18. To avoid the problems which have plagued the private toll roads program due to the short concession period, SCT intends to grant the concessionaires a period of 30 years for the new concessions. Toll Rates 19. The toll rates are estimated as 85% of the expected reduction in costs to road users in the fifth year following the inauguration of the new road. These rates which compare reasonably with CAPUFE's rates are: US cents 1.72 for cars, US cents 3.44 for buses and US cents 5.16 for trucks.  50 Annex D II. Results 20. The flows of revenue and costs are shown in Table D-3. The estimated rate of return on share capital would be -6.9% which is unattractive to the private sector.  51 Annex D Table D-1: Economic Analysis of San Roberto - Puerto Mexico Road Cost and Benefit Streams (US$ millions) Road Length = 80 km Without Project With Project Year Traffic Type of Work ERI Agency Vehicle Op. Accident Total Traffic Type of IRI Agency Vehicle Op. Accident Total (ADT) mm/m Costs Costs Costs Costs (ADT) Work mm/m Costs Costs Costs' Costs (VOC) 1998 6353 Overlay 3.6 5.26 98.6S 0.00 103.94 6353 Modern. 3.6 49.90 98.68 0.00 148.58 1999 6511 3.7 0.10 89.11 0.38 89.59 6511 Conaerv. 2.1 0.10 81.39 0.00 81.49 2000 6674 3.9 0.10 92.17 0.46 92.73 6674 2.2 0.10 83.48 0.00 83.58 2001 6841 4.0 0.10 95.39 0.54 96.03 6841 2.3 0.10 85.61 0.00 85.71 2002 7012 4.2 0.10 98.76 0.6 99.46 7012 2.3 0.10 87.79 0.00 87.89 2003 7187 4.3 0.10 102.49 0.64 103.23 7187 2.5 0.10 90.03 0.00 90.13 2004 7367 4.5 0.10 106.54 0.ou 107.32 7367 2.5 0.10 92.34 0.00 92.44 2005 7551 4.7 0.10 111.03 0.71 11-1,84 7551 2.6 0.10 94.71 0.00 94.81 2006 7740 5.0 0.10 115.52 0.74 116.36 7740 2.7 0.10 97.16 0.00 97.26 2007 7934 Overlay 2.9 5.25 120.86 0.76 126.87 7934 2.8 0.10 99.69 0.00 99.79 2008 8132 3.0 0.10 113.68 0.76 114.54 8132 3.0 0.10 102.31 0.00 102.41 2009 8335 3.1 0.10 118.48 0.76 119.34 8335 3.2 0.10 105.38 0.00 105.48 2010 8544 3.3 0.10 122.37 0.76 123.23 8544 3.4 0.11 109.01 0.00 109.12 2011 8757 3.4 0.10 126.44 0.76 127.3 8757 3.6 0.12 112.93 0.00 113.05 2012 8976 3.5 0.10 130.73 0.76 131.59 8976 3.8 0.12 116.94 0.00 117.06 2013 9201 3.7 0.10 135.28 0.76 136.14 9201 4.0 0.12 121.04 0.00 121.16 2014 9431 3.8 0.10 140.16 0.76 141.02 9431 4.2 0.12 125.24 0.00 125.36 2015 9667 4.0 0.10 145.43 0.76 146.29 9667 4.4 0.12 129.52 0.00 129.64 Avg. 3.4 3.2 Economic Comparisons Without Accident Savings Without Accident Savings Year Decreased Decreased Net Decreased Decreased Accident Net Agency User Benefits Agenry User Cost Savings Benefits Costs Costa Costa Costs 1998 -44.64 0.00 -44.64 -44.64 0.00 0.00 -44.64 1999 0.00 7.72 7.72 0.00 7.72 0.38 8.10 2000 0.00 8.69 8.69 0.00 8.69 0.46 9.15 2001 0.00 9.78 9.78 0.00 9.78 0.54 10.32 2002 0.00 10.97 10.97 0.00 10.97 0.60 11.57 2003 0.00 12.46 12.46 0.00 12.46 0.64 13.10 2004 0.00 14.20 14.20 0.00 14.20 0.68 14.88 2005 0.00 16.32 16.32 0.00 16.32 0.71 17.03 2006 0.00 18.36 18.36 0.00 18.36 0.74 19.10 2007 5.15 21.17 26.32 5.15 21.17 0.76 27.08 2008 0.00 11.37 11.37 0.00 11.37 0.76 12.13 2009 0.00 13.10 13.10 0.00 13.10 0.76 13.86 2010 -0.01 13.36 13.35 -0.01 13.36 0.76 14.11 2011 -0.02 13.51 13.49 -0.02 13.51 0.76 14.25 2012 -0.02 13.79 13.77 -0.02 13.79 0.76 14.53 2013 -0.02 14.24 14.22 -0.02 14.24 0.76 14.98 2014 -0.02 14.92 14.90 -0.02 14.92 0.76 15.66 2015 -0.02 15.91 15.89 -0.02 15.91 0.76 16.65 ERR= 25.2% ERR =26.3% NPV = 40.9 NPV = 44.8  52 Annex D Table D-2: Economic Analysis of Roads Sensitivity Analysis Results (US$ millions) Sensitivity Analysis Results Scenarios San Roberto - Whole Pto. Mexico Project 1. Base Case 25.2 19.4 2. Cost Increased by 20% 26.1 14.1 3. Benefits Decreased by 20% 26.6 14.3 4. Excluding Accident Benefits 25.7 15.5 5. Costs Decreased by 20% 21.5 12.3 and Benefits Decreased by 20%  53 Annex D Table D-3: Financial Analysis of Tampico - Linares Road Estimation of Financial Returns (US$) Estimate of Financial Returns 1 2 3 4 5 6 7 8 9 10 Revenues -7,974,366 -32,456,587 -30,794,934 -25,518,468 -20,241,271 -1,541,667 -9,686,101 -4,952,074 -4,430,648 -4,382,883 Depreciation and Amortization 1,346,090 5,476,963 5,957,098 5,957,098 5,957,098 5,957,098 5,957,098 5,957,098 6,244,212 465,193,807 Investments 92,185,933 Available Credit 63,398,368 Debt Service 5,283,197 10,566,395 10,566,395 10,566,395 10,566,395 10,566,395 5,283,197 Cash Flow -35,415,841 -32,262,822 -35,404,231 -30,127,765 -24,850,568 -19,573,782 -14,295,398 -4,278,173 1,813,564 1,861,329 Accum. Cash Flow -35,415,841 -67,678,663 -103,082,893 -133,210,658 -158,061,226 -177,635,008 -191,930,406 -196,208,579 -194,395,014 -192,533,685 11 12 13 14 15 16 17 18 19 20 Revenues -3,659,847 -2,937,086 -2,886,946 -2,834,432 -2,779,909 -3,262,483 -3,206,271 -3,149,190 -3,089,598 -3,030,143 Depreciation and Amortization 5,570,311 4,896,411 4,896,411 4,896,411 4,896,411 5,433,189 5,433,189 5,433,189 5,433,189 543,319 Investments Available Credit Debt Service Cash Flow 1,910,464 1,959,325 2,009,465 2,061,979 2,116,502 2,170,706 2,226,919 2,283,999 2,343,591 2,403,046 Accum. Cash Flow -190,623,221 -188,663,896 -186,654,431 -184,592,452 -182,475,950 -180,305,245 -178,078,326 -175,794,327 -173,450,736 -171,047,690 21 22 23 24 25 26 27 28 29 30 Revenues -2,776,807 1,703,772 2,129,716 2,658,128 2,725,118 2,795,030 2,866,814 2,938,873 3,014,447 3,089,794 Depreciation and Amortization 5,241,135 823,893 461,879 Investments Available Credit Debt Service Cash Flow 2,464,328 2,527,665 2,591,595 2,658,128 2,725,118 2,795,030 2,866,814 2,938,873 3,014,447 3,089,794 Accum. Cash Flow -168,583,361 -166,055,697 -163,464,102 -160,805,974 -158,080,857 -155,285,827 -152,419,012 -149,480,140 -146,465,692 -143,375,899 Return on Capital = -6.9%  MAP SECTION   IBRD 28418 Tij..o. 10 '~~~~~~~~~~~' a Cs S O { N O ( R A j C\H I H A H U A FEDERAL ROAD 1g - H rmosills _ [ < \ < .. / Cd. Acufio M E X I C O~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ E IC 1 ~~~ ~~0 ->h. ( S gOuhoL.p