Argentina - National Highways Rehabilitation and Maintenance Project

Document of The World Bank ReportNo: 17195-AR PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$450 MILLION TO THE ARGENTINE REPUBLIC FOR A NATIONAL HIGHWAYS REHABILITATION AND MAINTENANCE PROJECT FEBRUARY 20, 1998 Finance, Private Sector, and Infrastructure Department Department for Argentina, Chile, and Uruguay Latin America and the Caribbean Regional Office  -11- CURRENCY EQUIVALENTS (Exchange Rate Effective December 1, 1997) Currency Unit = Argentine Peso (A$) A$1.0O = US$1.00 FISCAL YEAR January I - December 31 ABBREVIATIONS AND ACRONYMS AC ... . Asphalt Concrete Overlay BOT .... Build, Operate, and Transfer GAS .... Country Assistance Strategy CEDEX .... Center of Public Works' Experimentation (Spain) COT .... Construir, Operar, y Transferir (a rehabilitation/maintenance program precursor to CREMA where the contract period is 10 years -not to be confused with BOT) CREMA .... Contrato de Recuperacion y Mantenimiento (Rehabilitation and Maintenance Contract) DNV .. ... Direccion Nacional de Vialidad (National Highways Directorate) DPV .... Direcci6n Provincial de Vialidad (Provincial Highways Directorate) EA .... Environmental Assessment EIB .... European Investment Bank FHWA .. .. Federal Highways Administration (United States) HDM .... Highway Design and Maintenance Standards Model IDB .... Inter-American Development Bank IERR .... Internal Economic Rate of Return IRI .... International Roughness Index Kms .... Kilometers NPV .. .. Net Present Value PCU .... Project Coordination Unit TOR .... Terms of Refernece VOC .... Vehicle Operating Cost WDR .... World Development Report Vice President: Shahid Javed Burki CMU Director: Myrna Alexander Acting SMU Director: Krishna Challa Task Managers: M Mekan/A. Kapur  -i.i- Argentina National Highways Rehabilitation and Maintenance Project CONTENTS A. Project Development Objective 1. Project development objective and key performance indicators .....................................3 B. Strategic Context 1. Sector-related CAS goal supported by the project ........................................................3 2. Main sector issues and Govemment strategy ......................................................... 3 3. Sector issues to be addressed by the project and strategic choices ................................4 C. Project Description Summary 1. Project components .........................................................6 2. Key policy and institutional reforms supported by the project ......................................6 3. Benefits and target population .........................................................6 4. Institutional and implementation arrangements .........................................................7 D. Project Rationale 1. Project alternatives considered and reasons for rejection ..............................................7 2. Major related projects financed by the Bank and/or other development agencies ...........8 3. Lessons learned and reflected in proposed project design ..............................................8 4. Indications of borrower commitment and ownership ....................................................9 5. Value added of Bank support in this project ......................................................... 9 E. Summary Project Analyses 1. Economic ........................................................ 10 2. Financial ........................................................ 10 3. Technical ........................................................ 10 4. Institutional ........................................................ 11 5. Social .... I 11 6. Environmental assessment ..................... 11 7. Participatory approach ..................... 12 F. Sustainability and Risks 1. Sustainability ..................... 12 2. Critical risks ..................... 13 3. Possible controversial aspects ..................... 14  -Iv- Argentina National Highways Rehabilitation and Maintenance Project CONTENTS G. Main Loan Conditions 1. Effectiveness conditions .................. ... . . . 14 2. Other .14 H. Readiness for Implementation .14 I. Compliance with Bank Policies ............................................ ; 14 Annexes Annex 1. Project Design Summay .15 Annex 2. Detailed Project Description .18 Annex 3. Estimated Project Costs .22 Annex 4. Cost-Benefit Analysis Summary .23 Annex 5. Financial Summary .27 Annex 6. Procurement and Disbursement Arrangements ...................................... 28 Table A. Project Costs by Procurement Arrangements .29 Table Al Consultant Selection Arrangements .29 Table B. Thresholds for Procurement Methods and Prior Review .31 Table C. Allocation of Loan Proceeds .32 Annex 7. Project Processing Budget and Schedule .33 Annex 8. Documents in Project File .34 Annex 9. Statement of Loans and Credits .35 Annex 10. Country at a Glance ..39 Annex 11. Description of CREMA Program . .41 Annex 12. National Highway Network ..44 Map No.s 29287, 29288, 29289, 29290, 29291, 29292, 29293  Argentina National Highways Rehabilitation and Maintenance Project Project Appraisal Document Latin America and the Caribbean Regional Office Country Department 7 Date: February 20, 1998 Task Managers: Moazzam A. MU=an lAnil Kapur CMU Director: Myrna Alexander Acting SMU Director: Krishna Challa Project ID: AR-PE-52590 Sector: Transportation Program Objective Category: Economic Management Lending Instrument: Sector Investment and Maint. Loan Program of Targeted Intervention: [I Yes 3 No Project Financing Data Z Loan El Credit 0 Guarantee O Other [Specifyl For Loans/Credits/Others: Amount (US$m/SDRm): IBRD Loan of US$450 million Proposed Terms: El Multicurrency 0 Single currency Grace period (years): 3 0 Standard Variable El Fixed 0 LIBOR-based Years to maturity: 15 Commitment fee: 3/4 % Service charge: 0 % Financing plan (US$m): 929 million US$ Million .. " " "" ' ''' ' ' .' .. ....... .. -'... Sorce Local oeg oa Government 263 216 479 Cofinanciers IBRD 248 202 450 IDB _ Others (specify) _ __I__ 511 418 929 Borrower: Argentine Republic Guarantor: Responsible agency (ies): National Highways Department (Direcci6n Nacional de Vialidad) -DNV Esiae Disburement (B- F-,-Mj) 19 199 200 200 200 2003 Annual 177.75 83.62 71.17 70.28 43.08 4.10 Cumulative 177.75 261.37 332.54 402.82 445.90 450.00 OSD PAD Form: July 30, 1997  Projed Appraisal Document Pag 2 Argentina- National Highways Rehabilitation and Maintenance Proje For Guarantees: [ Partial Credit 0 Partial Risk Proposed coverage: Project sponsors: Nature of underlying financing: Terms of financing: Principal arnount (US$m): Final maturity: Amortization profile: Financing available without guarantee: fJ Yes O No If yes, estimated cost or maturity: Estimated financing cost or maturity with guarantee: Project Implementation Period: Expected Effectiveness Date: Expected Closing Date: S'A Years July 1, 1998 December 31, 2003  Project Apptaisa Document Pap 3 ArgeDtina - National Highways Rehabilitation and Maintenance Project A: Project Development Objective 1. Project development objective and key performance indicators (see Annex 1J) The project would have the overall objective of preserving the Argentine national road network. The proposed project builds on the achievement of the ongoing Bank-assisted Road Maintenance and Rehabilitation Sector Project (361 1-AR). The project has the following specific objectives: * Stabilize the physical condition, arrest the further deterioration of the non-concessioned national road network, and reduce the long-run economic costs for the rehabilitation and maintenance of the national road network in order to achieve financial sustainability; * Increase the participation of the private sector in road rehabilitation and maintenance activities; and * Adapt its role and further strengthen the Direccion Nacional de Vialidad's (DNV's) capabilities for planning, contracting, and efficient supervision of rehabilitation, maintenance, and concession programs. The key performnance indicators are: (a) the roughness of the non-concessioned paved network will not exceed an international roughness index (IRI) of 3.5; while roads in poor condition will not exceed 6%; (b) at least 90% of the non-concessioned paved network will be contracted to the private sector; and (c) DNV will have effectively decentralized its operations to the regional offices. B: Strategic Context . Sector-related Country Assistance Strategy (CAS) goal supported by the project (see Annex 1): CAS document number: 16505-AR Date of latest CAS discussion: May 15, 1997 Other Reports: Argentina Transport Privatization and Regulation: The Next Wave of Challenges (Report 14469- AR), June 6, 1996 Staff Appraisal Report for Argentina: Road Maintenance and Rehabilitation Sector Project (Report 11413-), May 10, 1993 The proposed project (titled: National Highways Rehabilitation and Maintenance II) is part of the Bank's assistance strategy and supports the objectives to rebuild and upgrade the road infrastructure, enhance public infrastructure in the provinces, and promote private sector investment in transport. The project provides a follow-up to an on-going Bank loan (361 1-AR), eliminates the rehabilitation backlog, and generates wider private sector participation in maintenance operations. 2* Main sector issues and Government strategy: For decades, fiscal crises and poor management have led to under-funding and deterioration of Argentina's infrastructure. According to the 1994 WDR, in tenns of quality and quantity, Argentina was one of the lowest performers among upper-middle income countries. In 1990, Argentina had the lowest share of paved roads in good condition among these countries. In response to the deterioration of the road network and the gradual decline in public funds for road maintenance, the Governnent embarked, beginning in 1990, on a major reform program that increased private sector participation in the rehabilitation and maintenance of the national roads network and redefined DNV's institutional structure. DNV concessioned the operation and maintenance of 9,800 kn of high traffic highways (>2,000 vehicles/day), out-sourced road rehabilitation and maintenance activities to the private sector, transferred to the provinces the maintenance of a major part of the unpaved national network, and decentralized to the regional offices, including the maintenance of a residual 2,500 kms. of the unpaved national road network by force-account. OSD PAD Form: July 30, 1997  Projed Appraisal Document Page 4 Argentina - National Highways Rehabilitation and Maintenance Project These reforms have resulted in a major transformation of the highway sector in Argentina. One of the most impressive results achieved by these policy reforms has been the improvements in road conditions. The proportion of paved roads in poor condition decreased from 30% in 1989 to 25% in 1993 and is further expected to drop to 10% by the end of 1998. This improvement in road maintenance was achieved in face of a tight fiscal situation, which resulted in a decrease of DNV's operating budget in real terms. Furthermore, DNV has shed operational responsibility for as much of the network as possible and has been left with a residual paved network which does not carry enough traffic to permit concessioning without public support. For the remaining network, DNV has devised a two-pronged strategy: (a) cut costs and improve efficiency by contracting to the private sector rehabilitation and maintenance activities under CREMA (Contratos de Recuperaci6n y Mantenimiento) mechanism; and (b) strengthen DNV's regional offices to facilitate the decentralization of decision-making and contract management. The Government and the DNY have also initiated a broad-based reform program to address other important sector issues such as restructuring of highway organization in view of newly-emerging needs, management of the provincial road networks, bridge maintenance, control of axles loads, improving highway safety. The main challenge ahead for the Government is to ensure the economic, financial, social and environmental sustainability of these reformns. This in turn will require continuous fine-tuning of the reform agenda in order to adapt to the changing political and financial circumstances. This includes: (i) the need to monitor the long-term economic and financial viability of the highway concessioning program while allowing for system expansion and modernization; to- date, these trends are encouraging; (ii) the restructuring of road user charges so that road users pay their fair share of the cost of road infrastructure as well as the externalities associated with road use such as congestion, air and noise pollution, and road accidents (study financed under the Provincial Roads Project); (iii) the attention to road safety as a public health issue in view of the rising incidence of injuries and fatalities from road accidents; (iv) the need to address urban traffic congestion through market-based instruments such as electronic road pricing and proactive transport demand management; and (v) the need to develop adequate medium-term planning to ensure that the highway system capacity keeps pace with and is responsive to the demands associated with a rapidly-expanding open economy and the rapid growth in regional (MERCOSUR) and international trade. The above issues are part of the continuing sector dialogue between the Bank and the Government, including the Ministry of Economy and Public Works and DNV. These programs are being supported by the ongoing Bank loan (3611-AR), Provincial Roads (4093-AR), and several IDB projects 3. Sector issues to be addressed by the project and strategic choices: The focus of this project are to ensure the long-tenn sustainability of the non-concessioned national paved road network and adapt DNVs organization and staffing levels to be more efficient and responsive to the changing environment. Three actions are being addressed under the proposed project: (i) Alternative Road Financing: Before 1990, the financing of all road expenditures relied on eannarked taxes distributed between DNV and DPVs (Provincial Highway Departmnents - Direcciones Provinciales de Vialidad). Then, 10% of fuel taxes, 57% of tire taxes, 50% of lubricant taxes and 100% of taxes on vehicle registration and sales went to DNV; the revenues from the same taxes received by the DPVs were 9, 29, 27, and 0% respectively. After 1990, earnarked revenue assignment to DNV was eliminated. This decision was intended first to restore the flexibility needed in the macroeconomic managemnent of the economy at a time of structural adjustment, and secondly to ensure that all public expenditures are subject to the same scrutiny and priority-setting in the context of the consolidated government budget. As part of the economic reform policy initiated in 1990, tax revenues from taxes on tires and lubricants were transferred directly to the Treasury and the earmarking of tax revenues derived from taxes on vehicle registration fees and sales was eliminated. While in 1990, earmarked taxes represented 70% of DNV's financial resources and only 2%  Project Appraisal Documcnt Par 5 Argentina - National Highways Rehabilitation and Maintenance Project was provided by the Treasury. In 1992, there was no revenues from earmarked taxes and 97% of DNV's financial resources was provided by the Treasury. To assist DNV adapt to this new financial environment, the project will help to further improve DNV's road maintenance planning and programming capabilities (a process started during project preparation) to help cut costs and improve efficicency within the overall constraints of the budget framework. (ii) Rehabilitation and Maintenance Backlog: A major component of the steady state strategy is to eliminate the rehabilitation and maintenance backlog by financing existing CREMA contracts and by maximizing their extension to the rest of the network. Under this scheme, the contractors first rehabilitate the road (if needed) and then maintain it for a total period of five years. The CREMA requires the contractor to rehabilitate and maintain a network of 200 kms. for each conract on a fixed price basis. The payment scheme ensures that the contractor maintains the network on a performance basis. The CREMA projects were pioneered under the ongoing Bank project (3611-AR), and have been successful. For the network which cannot be easily put under CREMA (e.g., disjointed segments of roads), the proposed project also includes financial support for minimal rehabilitation/maintenance work based on the traditional unit ratelkm scheme. At project completion, it is expected that the national highway network would have reached a steady state with respect to its physical condition, requiring a relatively uniform, and reduced flow of public expenditures to provide a respectable level of service. (iii) Institutional Development and Coordination:. In concert with the road concessioning and CREMA policy, DNV needs to be transformed into a planning, coordinating, and regulatory agency which will undertake the technical and financial supervision of road concessions and performance-based maintenance contracts. In this context, the interaction between DNV headquarters and its regional centers needs to be strengthened. The regional centers are expected to gradually become responsible for managing the contracted works on the sections of the national road network located in their areas, while the headquarters will concentrate on medium-term planning, program design and monitoring, development and supervision of contract plans, and oversight and regulations over contract concessions. DNV intends to undertake a comprehensive organizational study under IDB financing to define its future mandate and functions and the supporting organizational and staffing structure Additionally, strong emphasis will be placed on the continuing use of the Bank's Highway Design and Maintenance Standards Model (HDM HII) to define and prioritize the optimal strategy for DNV's road expenditures under budget constraints. The project also includes support for knowledge-based programs to strengthen DNV's planning role. These programs are intended to support DNV in its transformation into a lean, responsive, efficient, and well-trained organization to meet the technological and institutional challenges of the next millennium, while providing world class service to its primary clients- the road users.  Project Appraisal Document Pag 6 Argentina -National Highways Rehabilitation and Maintenance Project C: Project Description Summary 1. Project components (see Annex 2for a detailed description and Annex 3for a cost breakdown): TotalM Co totl (SM) mn Phase I CREMA: contracts let under the ongoing Bank loan 3611-AR and covering: . 4,026 km of rehabilitation; and Physical 544 58% 370 68% * 11,815 km of maintenance Phase ll CREMA: new contracts covering an additional: * 1,459 km of rehabilitation; and Physical 130 14% 65 50% * 2,581 km of maintenance Rehabilitation and maintenance of the remaining network: * 2,379 km of rehabilitation; and Physical 240 26% 0 0% * 5,106 km of maintenance Institutional and consultant support: * Strengthening DNV's organization . Supervision of CREMA EUnit Cost Study Institutional 15 2% 15 100