Philippines - First National Roads Improvement and Management Project

Document of The World Bank Report No: 19754-PH PROJECT APPRAISAL DOCUMENT ON A PROPOSED LOAN IN THE AMOUNT OF US$150 MILLION TO THE REPUPLIC OF THE PHILIPPINES FOR THE FIRST NATL ROADS IMPROV./MGNT. PROJECT PHASE I OF THE NATIONAL ROADS IMPROVEMENT AND MANAGEMENT PROGRAM JANUARY 21, 2000 Transport Sector Unit East Asia and Pacific Region  CURRENCY EQUIVALENTS (Exchange Rate Effective October 1999) Currency Unit = Peso P 1= US$ 0.025 US$1 =P40 FISCAL YEAR January 1 to December 31 ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank BIIP Business Improvement Implementation Project BoM Bureau of Maintenance BRP Better Roads Philippines Study CAS Country Assistance Strategy CI Congressional Initiatives DENR Department of Environment and Natural Resources DoF Department of Finance DOTC Department of Transportation and Communications DPWH Department of Public Works and Highways EIA Enviromnental Impact Assessment EIA-PO Environmental Impact Assessment Project Office EMK Equivalent Maintenance Kilometer ESSO Environment and Social Services Office FMS Financial Management System GAA General Appropriation Act HvP Highway Management Project HR Human Resources ICB International Competitive Bidding LGU Local Government Unit LTPBMC Long-Term, Performance-Based Maintenance Contracts MTDP Medium-Term Development Plan NCB National Competitive Bidding NEDA National Economic Development Authority NRMIP National Roads Improvement and Management Program NRS National Roads System PPT Project Preparation Team RAP Resettlement Action Plan RIMSS Road Information Management Support System RMA Road Maintenance Authority TSASN Transport Sector Assistance Strategy Note Vice President: Jean-Michel Severino Country Director: Vinay K. Bhargava Sector Director: Jitendra N. Bajpai Task Team Leader: Denis Robitaille  PHILIPPINES FIRST NATL ROADS IMPROV./MGNT. PROJECT CONTENTS A. Program Purpose and Project Development Objective Page 1. Program purpose and program phasing 3 2. Project development objective 3 3. Key performance indicators 4 B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 5 2. Main sector issues and Government strategy 5 3. Sector issues to be addressed by the project and strategic choices 7 4. Program description and performance triggers for subsequent loans 8 C. Program and Project Description Summary 1. Project components 9 2. Key policy and institutional reforms supported by the project 13 3. Benefits and target population 13 4. Institutional and implementation arrangements 13 D. Project Rationale 1. Project alternatives considered and reasons for rejection 15 2. Major related projects financed by the Bank and other development agencies 15 3. Lessons learned and reflected in proposed project design 16 4. Indications of borrower commitrnent and ownership 16 5. Value added of Bank support in this project 17 E. Summary Project Analysis 1. Economic 17 2. Financial 18 3. Technical 19 4. Institutional 19 5. Social 20 6. Environmental assessment 20 7. Participatory approach 21 F. Sustainability and Risks 1. Sustainability 22  2. Critical risks 22 3. Possible controversial aspects 23 G. Main loan Conditions 1. Effectiveness Condition 24 2. Other 24 H. Readiness for Implementation 25 I. Compliance with Bank Policies 26 Annexes Annex 1: Project Design Summary 27 Annex 2: Project Description 33 Annex 3: Estimated Project Costs 53 Annex 4: Cost Benefit Analysis Summary and Cost-Effectiveness Analysis Summary 58 Annex 5: Financial Summary 68 Annex 6: Procurement and Disbursement Arrangements 73 Annex 7: Project Processing Schedule 85 Annex 8: Documents in the Project File 86 Annex 9: Statement of Loans and Credits 88 Annex 10: Country at a Glance 90 Annex 11: Social and Environmental Assessment Summary 92 Annex 12: Reforms in Management and Financing of Roads - The Better Roads 99 Philippines Vision Annex 13: Letter of Development Program 107 MAP(S) IBRD 30623--January 2000 114  PHILIPPINES FIRST NATL ROADS IMPROV.IMGNT. PROJECT Project Appraisal Document East Asia and Pacific Region EASTR Date: January 21, 2000 Team Leader: Denis Robitaille Country Manager/Director: Vinay K. Bhargava Sector Manager/Director: Jitendra N. Bajpai Project ID: P039019 Sector(s): TH - Highways Lending Instrument: Adaptable Program Loan (APL) Theme(s): TRANSPORT Poverty Targeted Intervention: N A"PL - n-.catie - ; . IBRD Others Total Commitment Closing US$ m % US$ m US$ m Date Date APL 1 150.00 49.1 155.42 305.42 05/01/2000 12/31/2003 Government of the Philippines Loan! Credit APL 2 300.00 42.9 400.00 700.00 01/01/2004 12/31/2006 Government of the Philippines Loan/ C redit ___________________________ APL 3 400.00 40.2 594.58 994.58 01/01/2007 12/31/2009 Govermment of the Philippines Loan/ Credit Loan __reitO_ratO_uaanee OOter_____ APL 4 Loan/ C redit__ _ _ _ ___ _ _ _ _ _ _ _ _ _ _ _ _ Total 1850.00 1 1150.00 2000.00 _______________ Project Financing Data M Loan [I Credit FEl Grant El Gua-rantee El Other (Specify) $150 million For Loans/Credits/Others: Amount (US$m): 150 Proposed Terms: Fixed-Spread Loan (FSL) Grace period (years): 7.5 Years to maturity: 20 Commitment fee: 0.85% the first 4 years; 0.75% thereafter Front end fee on Bank loan: 1.00% FfnancingPin So irce Sp -;-;:-_-- Government 139.10 16.32 155.42 IBRD 0.00 150.00 150.00 IDA Total: 139.10 166.32 305.42 Borrower: DEPARTMENT OF FINANCE (DOF)  Responsible agency: DEPARTMENT OF PUBLIC WORKS AND HIGHWAYS (DPWH) Address: Bonifacio Drive, Port Area Manila, Philippines Contact Person: Mr. Teodoro T. Encamacion Undersecretary for Technical Services Tel: (63-2) 527 4808 Fax: (63-2) 527 4105 Email: Estimated disbursements l Bank FYIUS$M): j~~~ 2 Annual 1.0 22.0 50.0 50.0 I 27.0 Cumulative 1.0 23.0 1 73.0 123.0 | 150.0 0 Project implementation period: 3.7 years Expected effectiveness date: 05/01/2000 Expected closing date: 06/30/2004 OCS APL PAD Fcrm: Oddb.B, ISM -2-  A. Program Purpose and Project Development Objective 1. Program purpose and program phasing: The purpose of NRIMP is to set up management systems that will ensure the preservation of an improved national roads system (NRS) in an environmentally, socially and financially sustainable manner. NRIMP will include three phases: design (NRIMP- 1), initiation (NRIMP-2) and operation (NRIMP-3). NRIMP-l will: (a) prepare detailed designs and phased implementation plan for new organizational structures including an independent organization such as a road maintenance authority (RMA) or equivalent for the national road system (NRS), allowing them to be managed in a commercial fashion; (b) establish a sustainable financing mechanism, such as a road fund or equivalent, dedicated to preserving the national roads, to be funded from road user charges and based on actual level of maintenance needs and road usage; (c) undertake the development and establishment of key business processes and system renewals within the Department of Public Works and Highways (DPVH) and proposed RMA; and (d) upgrade and maintain sections of the NRS at good standards. NRIMP-2 will: (a) create and launch improved and/or new organizational structures including and independent organization such as a RMA or equivalent to commercialize (i.e. manage in business like manner) the management of the national roads and separate policy and planning functions in government from service delivery that would be largely privatized; (b) increase revenues from road users in order to cover 90% of NRS maintenance needs; (c) continue the development and improvement of key business processes and renewals within DPWH and the newly created RMA or its equivalent; and (d) continue to upgrade and maintain sections of the NRS to good standards. NRIMP-3 will: (a) complete all facets of the institutional reorganization ensuring that the policy and planning functions are separate from road services that would be largely privatized; (b) raise revenues from road users to cover 100% of NRS maintenance needs; (c) complete the development and establishment of key business processes and system renewals within DPWH and the RMA or its equivalent; and (d) continue to upgrade and maintain sections of the NRS to good standards. 2. Project development objective: (see Annex 1) NRIMP-I would meet some of these goals by: a) Upgrading of the NRS where needed b) Establishing a well-functioning preventive maintenance program c) Testing long-term performance-based maintenance contracts d) Re-designing the DPWH road management program so as to improve/create the following: Investment planning Financing capacity Contract/project/procurement capacity Human resource capacity Information technology support capacity Monitoring capacity Environmental/social assessment capacity Electronic communication networks e) Designing overall policy and institutional reforms: Organizational structures, including possible RMA, will be designed A communications program will be created (to support the reforms) Local consulting and contracting industries will be strengthened (to support the reforms) -3 -  3. Key performance indicators: (see Annex 1) The main stakeholders, who attended a workshop in Manila, in 1998, developed performance indicators that were further refined during project preparation (see Table 1). Key performance indicators for NRIMP-1 outcomes/impacts are as follows: a) Organizational improvements * Policy, planning and service roles with respect to managing the NRS will be defined and assigned to appropriate new or improved organizations, including a road maintenance authority (RMA), which will be established under NRIMP-2 and -3. b) Business improvements * Planning road investments. By mid-2002, the economic value of the assessed part of the investment program will have a net present value (NPV) that is greater than 1.2 per unit cost. * Managing finances. The time needed to pay contractors is reduced from 6+ months to 2 months by 2003. * Procuring works. By 2003, the time needed to procure foreign-assisted works will be reduced from 300 days to 225. * Training staff. By 2003, central office personnel and one staff person from each region and district should be able to prepare training programs. * Introducing information technology. By 2003, a satisfactory system supported by IT help desks is operating smoothly. * Improving communications. By mid-2003, data within and between central, regional and pilot districts is transmitted in 5 minutes (instead of 5 days). * Institutionalizing environmental and social concerns. People affected by the project will be compensated according to land acquisition, resettlement and rehabilitation policy satisfactory to the Bank. Also, measures to improve the environment are routinely carried out by contractors working on road maintenance and upgrading. Table 1: Key Indicators End of End of End of NRIMP-1 NRIMP-2 NRIMP-3 Management effectiveness 40% 75% 95% Performance standards for key NRS management systems (called Business Improvements Implementation Projects, BIIPs) will be achieved at least by: Financial sustainability Finances needed to maintain the NRS will be obtained through a sustainable 60% 90% 100% mechanism, such as a road fund, raised through user charges, by at least: Physical conditions--client satisfaction 3% 8% 15% NRS average road roughness (the Intemational Roughness Index will used as a measure of client satisfaction) is reduced by: Environmental and social conditions These issues will be integrated in all phases (preparation, implementation and 50% 80% 100% operations) of road upgrading and maintenance projects. Percentage of regional EIA staff who can carry out such functions will be: -4 -  B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: R99-55(IFC/R99-46) Date of latest CAS discussion: 05/04/99 The main goal of the May 1999 CAS is to reduce poverty by: a) Promoting economic recovery in the wake of the Asian crisis and El Nino; b) Enhancing human development and social services for the poor; c) Accelerating environmentally sustainable rural development; d) Promoting sustainable urban development; e) Developing infrastructure, particularly in the provinces, to support stronger growth; f) Enabling the private sector to expand and generate jobs for the growing labor force; g) Improving governance of the development agenda and combating corruption. The CAS notes that the NRIMP will promote items a, e and g (above) by commercializing the road sector and upgrading/maintaining the NRS. 2. Main sector issues and Government strategy: Overview. Three major development constraints are infrastructure bottlenecks, inconsistent macroeconomic management and weak implementation of road investments and maintenance. Because the country is in the shape of an archipelago, transport is crucial to the national economy. The transport system is based on roads and inter-island shipping, as the two account for almost all freight and passenger traffic. The DPWH is responsible for national roads while local government units (LGUs) handle provincial, barangay and municipal roads. The Department of Transportation and Communication (DOTC) is responsible for the overall sector, including railways, ports and shipping, and civil aviation. Roads. The road network is not well defned nor consistently classified. In 1993, an Asian Development Bank (ADB) project recommended and developed a new classification system, but it was not approved. One controversial recommendation was to reduce the roads classified as national by about 6,000 km (from the present 28,162 km), since provincial authorities were unwilling to assume responsibility for them. The size of the current network (about 199,950 km), which includes national, provincial, municipal, city and barangay roads, has not changed much over the past decade (see Table 2). In terms of the length of the road network, it compares favorably with other East Asian countries and is considered adequate for current needs. However, road construction standards, conditions and the quality of maintenance are inadequate: Only about 20% are paved, while the rest are gravel or earth. Thus, except in Metropolitan Manila and other rapidly growing urban areas where new roads must be constructed, the main activities needed are upgrading, rehabilitation and improved maintenance. Table 2: Philippines Road Network by Type and Jurisdiction Category Length Percentage Length Paved All Weather (Kin) (%) (%) (%) National 28,162 14.1 61 84 (Arterial) (16,035) (8.0) (71) (90) (Secondary) (12,127) (6.1) (47) (77) Provincial 28,503 14.2 20 58 City 5,767 2.9 60 94 Municipal 15,816 7.9 34 66 Barangay 121,702 60.9 7 46 Total 199,950 100.0 39,562 39,562 Source: DPWH Planning Services (as of August 1999) - 5-  Except for a few private road concessions in Metro-Manila, roads are financed through the GOP budget. Investments for national roads are funded through the DPWH capital outlay budget, while annual routine maintenance is covered separately through an established formula. Investment and maintenance for provincial and barangay roads are funded by LGUs through a mix of tax revenues and Government grants. Although the annual road budget steadily rose from 1993-1998, the amounts are not nearly enough to cover road construction and maintenance. The FY99 budget of about P38 billion mainly covers operating and recurrent costs (P9 billion) and foreign-assisted initiatives for highways (P13 billion), leaving P16 billion to upgrade the national network. While the MTDP goal is to complete the upgrading, this will alone require P34 billion a year (above operating and recurrent maintenance costs). Indeed, the budget to complete the national roads classified arterial is estimated at P140 billion or about US$3.5 billion (P84b to pave 4,650 km at PI 8mnkm + P56b to upgrade 5,600 km at PlOm/km). The GOP allocation for routine road maintenance calculated with a formula called "equivalent maintenance kilometer" (EMK), has more than doubled in the past five years (from P35,000 in 1994 to P70,500 in 1998) and is basically adequate. However, the FY99 budget for preventive maintenance covered only about 30% of total needs. Moreover, the accumulated financial backlog for road maintenance, which consists largely of preventive measures, is estitnated at about P26 billion (US$0.75 billion). Over 80% of the roads are controlled and maintained by provinces and LGUs. This devolution of responsibility to provincial, city, municipal and barangay roads started in the early 1 990s and is still underway. Although DPWH mandate was revised to focus on the national network, DPWH is still being asked each year to improve local roads through "congressional initiatives" (CI), as a separate item in its budget: In 1997, this amounted to P18.8 billion. DPWH's regular highway budget for this period was P22.7 billion (which also included about P2 billion for local roads). Issues. The main problems affecting the road sector are: 1) External pressure. External intervention occasionally undermines progress. First, DPWH cannot follow its mandate to focus on national roads because it is being asked to carry out activities for local roads, as mentioned above. Second, in the past, the administration hesitated to propose needed adjustments: For example, in 1993, it did not propose a new road classification system, as the funding for some roads would have been reduced (if they no longer were considered national roads) and would have created chorus of disapproval. Third, Congress changes the amount of private sector participation allowed: In 1995, it limited the participation in road maintenance to 50% of activities and fixed the annual increase of the maintenance budget to just 5.5%. Then, in 1999, it allowed participation of up to 70%. Fourth, resettlement plans are often hampered. Last, some inefficient consultants and contractors have been protected. 2) Institutional weaknesses. The public institutions involved in the road sector need to be improved. DPWH is over-staffed and its skill levels have declined noticeably; bright, young professionals have moved to the private sector, which offers better conditions and challenges. Thus, skill and experience are increasingly concentrated at the top level, while there are fewer technically competent support staff. Also, the agency does not have modern analytical and information tools which would allow its resources to be managed efficiently. Even more troubling, provincial governments and other LGUs lack financial, physical and human resources and management support systems. Further, because overall planning is inadequate, transport services have been poorly integrated. 3) Insufficient funding. Affected by the regional financial turmoil, the Government budget has been severely constrained: In FY98, cuts of 25% were applied. Thus, DPWH was able to fnance only few investment projects and most of its funds were allocate to recurrent costs and counterpart funds for foreign-assisted projects. As for preventive maintenance, the financing backlog will continue to increase, since recent budgets have covered only about 30% of the needs. Further, private sector investments have also slowed. 4) Legal problems. Due to legal constraints, the Government has had a difficult time acquiring land and implementing construction: For example, the ongoing Bank-financed Highway Management Project -6 -  faced several injunctions when authorities tried to cancel contracts--when contractors did not meet their obligations. Indeed, under the existing system, it is difficult to enforce contracts and impossible to collect performance bonds. However, a recent Supreme Court ruling now prohibits injunctions of any kind in projects financed by external donors and multilateral banks. Thus, it is hoped the ruling will help DPWH carry out its mandate. Another problem involves the acquisition of right-of-way for infrastructure. Often, road construction or upgrading requires resettling residents and procedures (for both squatters and legal residents) are extremely cumbersome. Also, Government agencies do not have enough resources to relocate and compensate them properly. Further, it is difficult to prevent new squatters from entering potential urban construction sites. To tackle this problem, DPWH has designed during project preparation an adequate resettlement policy that will apply to all acquisition for all types of assets and compensation/relocation for sub-projects financed under NRIMP (ref.: Annex 11). 5) Technical obstacles. Local consulting and contracting firms that work in the road sector do not have a good performance record, mainly because: (a) procurement activities are managed poorly, especially pre-qualification; (b) licensing is lax, so inefficient firms are allowed to operate; (c) unit costs are kept artificially low and contractors cannot perforrn adequately; (d) payments are delayed; and (e) quality control, supervision, contract enforcement and financial management are ineffectual. . 6) Environmental abuses. Although substantial progress has been made in managing the environment (ref.: Annex 11), the regulations are not fully enforced, especially for locally-funded projects, and sustainable development cannot be ensured. Government strategy. DPWH has prepared an MTDP and Long-Term Highway Development Plan (1997-2026) in which the GOP role would be sharply limited to investing only in core infrastructure, establishing safety regulations and halting monopoly practices. It would also promote sustainability, commercialization, private sector investment in operations and infrastructure, competition in the transport markets, and responsiveness to users. DPWH's airns for the MTDP (1999-2004) are to: a) Ensure that the national roads are maintained; b) Upgrade to all-weather standards the national arterial road network (on 6,000-8,000 km); c) Commercialize the road sector (creating a Road Authority and Highway Fund); d) Separate policy making and regulation from operations through institutional reforms; e) Complete turning over responsibility for provincial/local roads to local authorities. 3. Sector issues to be addressed by the project and strategic choices: Overall strategy. The NRIMP, developed around the Government reform agenda, will focus on (a) addressing the issues listed above that relate to effectively managing and financing the national roads and (b) helping upgrade the national roads to all-weather standards and maintaining the national road network, in general, in good operating conditions. As emphasized in the Bank's Transport Sector Assistance Strategy Note, June 1998 (TSASN), the strategy would be to develop a sustainable management program for the national network. Although donors have made this a priority in the past, the task is far from complete. The MTDP agenda indicates the Government recognizes the problems and wants to address them. DPWH has announced that institutional reforms and process re-engineering are its main priorities and are being supported under the ongoing HMP (Loan 3430-PH): For example, the GOP obtained funds from HMP to develop a comprehensive Road Information Management Support System (RIMSS) that will replace the current fragmented system with readily accessible, relevant and valid information on roads that can support decision-making; it will also provide modern analytical tools and information technology. The HMP is also helping finance the Better Roads Philippines (BRP) study that was proposed during the May 1997 Bank-sponsored workshop on commercializing maintenance activities, attended by public and private stakeholders. The recently completed fist phase recommends different institutional and financing arrangements for the national roads. The aims are to: (a) involve road users in managing the roads as well as administering the funds they contribute and (b) manage the roads in a commercial fashion, rather than as a social service. In this context, an -7 -  independent organization such a road maintenance authority (RMA) and dedicated road maintenance fund (RMF) or equivalent, with representatives from the private sector and user-groups, are proposed to be set up under NRIMP (see Annex 12 for details). These NRIMP-supported efforts will continue to require consensus building among government agencies and all major stakeholders. Road fund Vs consolidated budget. As a top priority, the GOP and DPWH intend to seriously focus on maintaining existing roads. The Government recognizes that the traditional approach to financing maintenance, which relies on the general budget, is not working, because the funding is erratic (due to difficult fiscal conditions and competing demands from other sectors). Thus, the road maintenance fund (RMF) will offer a sufficient and stable source of finances, since roads users will cover the costs and help manage the RMF. Changed business practices. Stakeholders involved in the project design debated whether to initiate the business renewal practices (see the BIIP component, Section C) before designing and introducing structural changes in the road sector; it was decided that the two should proceed simultaneously. Changes expected in DPWH through the business renewal process will be consistent with the new and/or improved organizational structures promoted by the NRIMP. These include: (a) separating DPWH's road reiated from its non-road activities will allow it to focus more on road user needs; (b) separating road maintenance and construction activities. While this is neither normal nor desirable in the long term, it is necessary in the short term to get users involved in maintaining roads, even if on a limited basis. In due course, road management should include both activities, in order to aim for minimum whole life costs; and (c) re-allocating DPWH service functions to contractors and others so as to avoid potential conflicts of interests. For example, DPWH no longer does construction in-house and this project will encourage DPWH to contract out its management and maintenance activities, as well, to the private sector and/or semi-autonomous agencies. Business practices and systems renewal implementation sequence. Most of the business changes (60%) will occur under NRIMP- 1: 60% will involve equipment and 40% services. It appears the demands on DPWH staff will be less than the high cost might indicate, due to the large amount of equipment and systems. The reasons for making most of the changes under NRIMP-1 are that: (a) since it has already begun, and the design is ready, it would not make sense to delay; (b) the changes will be completed sooner in the project and (c) it will achieve a uniform standard of technology, integration and inter-dependency of the processes and systems at an earlier stage in the NRIMP. Then, with most of the new processes already introduced, the next phases can concentrate on institutionalizing and optimizing them, to ensure maximum sustainability. However, DPWH will need a highly effective program and continued strong leadership to manage the initial changes--some of which are profoundly different than current practices. 4. Program description and performance triggers for subsequent loans: NRIMP-2, the second phase, will be appraised when DPWH achieves the following objectives: a) A sustainable financing mechanism is designed and established, such as a road fund or equivalent, dedicated to preserving the NRS; it will funded by road user charges and based on the actual level of maintenance needs and road use. b) Legislation satisfactory to the Bank will be submitted to Congress that would: (1) introduce a fuel levy as an added source of revenue to maintain the national roads and introduce adjustment mechanisms which will ensure full cost recovery from road users within five years; (2) establish an independent body, including representatives of road users, that would have spending authority and accountability, to strengthen the administration of the maintenance funds; and (3) establish improved and/or new organizational structures, including an independent body such as a road maintenance authority, to commercialize the management of national roads and separate policy and planning functions in government from service delivery that would be largely privatized. These structures would be introduced according to a staged transition plan. c) A financial management system applied to DPWH key operations at the central, regional and district levels will be designed and operating. d) The DPWH EIA-PO will be converted into a permanent office for environmental and social services. e) 60% of the NRIMP- 1 loan will be disbursed, according to the loan requirements - 8 -  NRIMP-3, the third and last phase, will begin when DPWH achieves the following: a) Increased revenues from road user charges will meet 90% of NRS maintenance requirements. b) The financing mechanism established under NRIMP- 1 is managed by an independent body, including representatives of road users that would have spending authority and accountability c) The first phase of the improved or new organizational structures, which will be designed under NRIMP-1, will be implemented in a manner satisfactory to the Bank. d) The DPWH investment program for national roads will be based on the network planning and programming system which will be developed in NRIMP- 1. e) 60% of the NRIMP-2 loan will be disbursed, according to the loan requirements. C. Program and Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown): A-CIVIL WORKS. NRIMP will bring the NRS up to good standards through the following three components: a) Road Upgrading. Over nine and half years, NRIMP, through the IBRD-Project Management Office (IBRD-PMO), will finance the rehabilitation and upgrading of about 2,200 km of national roads using international competitive bidding (ICB) procedures; the program will also include consultant services for preparation and supervision. Rehabilitation is estimated at US$1 billion (P40 billion), including contingencies. NRIMP-2 and 3 will finance DPWH's overall investment program, instead of individual road projects (which is the usual course). Preparation and implementation will follow the usual processes (which include a feasibility study, selection criteria, detailed engineering designs, environmental studies, resettlement plans, procurement and supervision) to be developed and agreed upon during NRIMP-1. Under NRIMP-1, specific road projects will be financed individually: Nine such projects, totaling 528 kIn, will cost about US$120 million (P4.8 billion) including contingencies and consultant services for preparation and supervision. The program approach (described in the above paragraph), which will be applied under NRIMP-2 and 3, will not be used in NRIMP-1 since DPWH does not have an investment program designed according to the Bank's preparation requirements. The project will also attempt to strengthen the implementing agency's capacity to prepare and execute the project. Consultant services for about US$1.6 million (P64 million) will be provided to assist and train DPWH staff so that engineering designs and supervision of road upgrading projects meet minimum quality standards. b) Preventive Maintenance. NRIMP will finance the annual preventive maintenance of the NRS, which will be implemented by the Bureau of Maintenance (BoM). IBRD will finance a slice of the program which will be procured through NCB arrangements. The works will mainly consist of asphalt concrete overlays, bituminous resealing and various associated pavement repairs (drainage, shoulders, potholes, etc.) totaling under 20% of overall contract costs. Funds from the loan will be disbursed on a quality output basis (e.g.: if selection, preparation and execution meet minimum pre-defmed quality standards and if DPWH has paid the contractors). An independent technical auditor will review the quality at each step (detailed designs, procurement processes and construction) and based on a scoring system, will recommend which contracts should be reimbursed from the loan. The maintenance programs will also be reviewed annually by the Bank. To ensure a high rate of compliance, the preparation and execution of the program will follow a Quality Assurance System defined during project preparation. To help prepare and implement the program, consultant services will be provided; however, such assistance will be reduced as NRIMP progresses and BoM engineers become familiar with preparation and supervision tasks. Under NRIMP- 1, about 900 kms of the NRS will receive preventive maintenance for about US$112.3 million (P4.5 billion), including contingencies and consultant services. -9-  c) Long-Term, Performance-Based Maintenance (LTPBM). This component aims to test the performance of multi-year contracts including routine, periodic and preventive maintenance activities. Payments under LTPBM contracts will be based on outcomes: whatever task the contractor is expected to perform must meet the established standard (minimum service level). This will replace the traditional method, which measures the quantities of physical works performed. Under NRIMP-1, two contracts for 231 km of national roads in Laguna and Quezon provinces will be tested for an estimated US$9.9 million (P960 million), including contingencies and consultant services that will help contractors prepare bids and BoM supervise the contracts. If successful, this initiative will be expanded to other provinces under later NRIMP phases. B-INSTITUTIONAL STRENGTHENING. NRIMP will help the country strengthen its institutions and reform the road sector through a phased approach (over nine and half years), thereby ensuring the improvements are sustainable. The program has two main thrusts: (a) the Business Improvement component, which aims to improve the quality and delivery of DPWH services through a major business process re-engineering effort that will focus on customer needs, improved efficiency and effectiveness, and use of technology; and (b) a policy and institutional reforms component that will improve the institutions' capacity to manage and finance the road sector, introduce business principles, recover costs, sustain finances, involve stakeholders and users in overseeing the assets, create organizations for independent and decentralized operations, and allow the private sector to participate through increasing its capacity, quality and competitiveness. a) Business Improvements Implementation Projects (BIIPs) component. A total of 43 BlIPs were designed in order to irnprove DPVH business practices, as well as those of the proposed road maintenance authority. They will be supported by an integrated information system managing public works, including finances, physical and human resources, information, procurement and institutional strategy. The BlIPs are estimated to cost about US$60 million (P2.4 billion) and will be completed by the end of the NRIMP: 35 will be financed under the project, four (4) by a parallel Asian Development Bank project, and four (4) under the ongoing WB-financed HMP. EXPECTED BIIP EXPECTED RESULTS UNDER NRIMP BUSINESS NRIMP-1 NRIMP-2 NRIMP-3 AREA 2000-2003 2003-2006 2006-2009 Planning Planning and asset management All maintenance and some Maintenance and development tools will be installed. investment programs will be programs will be optimized and Asset monitoring will be regularly appraised and prioritized. form the economic basis for the operational. next 6-year plan Building A project management system will The quality of outsourced services Reviews will be enhanced and be installed to improve time and including design and supervision specification tools introduced. quality control. will be improved. Environmental and social capacity management capacity and land acquisition process are strengthened. Financial Financial management & Cost forecasts and control will be Management accounting systems will be improved, audits enhanced, cash installed, flows improved and budget tools Billing & payment times will be upgraded. improved Human Resources IT training will be introduced at HQ Staff performance appraisal will be Employee selection & satisfaction Management and regions. Management capacity enhanced. will be improved. HR planning will will be improved and HR training be upgraded. upgraded. - 10 -  Information All regions will be in the All districts will be in the network. An IT culture will be established in Management communications network, data Information will be managed DPWH operations and public coverage & quality will be electronically, internally consistent relations. improved. & available to the public. Decisions will be made more rapidly and correspondence will occur in a timely fashion. Procurement New & standard documents will be All new or improved documents and Management used, tighter procedures & procedures developed will be computerized processing will be applied to DPWH operations. applied. Contractor performance will be linked to monitoring and audits. Strategic Reforms and new systems will be Reforms, new systems and Strategic planning and public Management integrated. management changes will continue relations will be improved. Performance indicators will be to be monitored. Quality assurance established to monitor DPWH systems will be operating. Strategic activities. policies and procedures will be established. Sixteen (16) of the 43 BIIPs--those with the highest priority--will be carried out under NRIMP-1; they will cost about US$34 million (P 1.4 billion) including contingencies and consultant services. The 16 are grouped into seven business areas (see the table below). ADB's four (4) BlIPs will be carried out simultaneously in its 6th Road Improvement Project, from 1999-2001, and cover the management of bridge, pavements, maintenance and road safety. 16 BlIPs under NRIMP-1 Business Area BIIP Expected Results Planning 1. Establish network planning and multi-year programming systems. 2. Establish a system to collect information about road and bridge assets and conditions. 3. Improve the collection, processing and management of traffic data. Building 4. Develop a system to manage projects & contracts. 5. Strengthen environmental and social management capacity and improve the process for land acquisition. land. Financial Management 6. Develop and establish a system to manage finances. 7. Streamline contractor and consultant billing processes. 8. Eliminate outstanding account balances and enhance internal audit procedures. Human Resources Management 9. Strengthen internal capacity to develop human resources. Information Management 10. Establish an automated communication network. 11. Provide informnation technology equipment. 12. Establish an information technology support system. Procurement Management 13. Streamline the preparation of contracts and complete the standardization of procurement documents. 14. Enhance bidding and award processes. Institutional Strategy 15. Develop performance indicators. 16. Coordinate the development and implementation of BlIPs (including the three financed by ADB). The number and phasing of the improvements were carefully structured to meet (a) the technical priorities identified by the executive committee, (b) DPWH's capacity for change, (c) the window of opportunity for implementing IT changes at the same timne (which is efficient with respect to technology), and (d) the finances budgeted by NEDA. - 11 -  b) Policy and Institutional Reforms. The key elements of the program, approved by NEDA in April, 1999 and developed with DPWH, the Department of Finance (DoF) and NEDA, involve: 1) NRIMP-1. Creating a road fund from user charges to maintain the national roads, relating revenues to maintenance needs, and involving road users to oversee NRS management and funding; also, designing and reviewing an independent organization such as a road maintenance authority (RMA) and remaining DPWH functions (and those of DOTC, if required), taking account of the regional structure, decentralization, scope of networks, and DPWH's other infrastructure obligations; 2) NRIMP-2. Increasing road fund revenues to meet all road maintenance requirements and introducing the new organizational structures, including the RMA or its equivalent; 3) NRIMP-3. Fully implementing the RMA or its equivalent so as to commercialize the management of services for the national roads, separating Government policy and planning functions from service delivery activities which would be largely privatized, and improving road sector policy. c) Support to Commercialization (refer to Annex 12 for details). NRIMP-1 will attempt to improve road financing, support an independent road fund planned to be created in 2000. With respect to road finances, legislation currently being discussed in the Senate under House Bill No. 6863 is expected to raise annual vehicle registration charges and establish a Special Road Support Fund to maintain roads. The bill's provisions agree with some recommendations from the Better Roads Philippines study (from the ongoing WB-financed HMP), whose aim was to identify effective road administration and financing arrangements. The study, whose first phase was completed in April 1999, recommended that a road maintenance fund (RMF) be created (similar to the Special Road Support Fund in the Bill described above), for national roads; it would be financed by road users and managed mainly by them, as well. Most of its revenue would come from vehicle registration charges, a fuel levy and GOP funds allocated under the General Appropriations Act for a specified number of years. The study also recommended that an independent organization such as a road authority be created in the medium-term to manage the national roads, leaving DPWH with policy-making functions; again, this is consistent with fndings in the DoF-AGILE study, which was designed to rationalize road users charges (fmanced by USAID). If the road fund, proposed under bill No. 6863, is approved by the Congress, NRIMP-1 will define the implementing rules and regulations, and the fund's initial operations. However, it is expected that key provisions such as the structure of user charges--between fuel taxes, license charges, excise taxes and adjustment mechanisms, etc.--will require further legislation that could be introduced after the mid-term election in late 2001. NRIMP- I will also include a study to determine the features of a road maintenance authority (RMA), addressing DPWH's highly decentralized structure, its future form (if it retains responsibility for roads and other infrastructure such as flood control under its administration), and possible roles for DOTC. The output would be draft legislation and implementing rules and regulations to be submitted to Congress in 2003 (trigger for NRIMP-2, ref.: Section B.4). Since the proposals for an RMA and modified road fund are likely to spark political debate, a flexible approach is being taken to adopt the recommendations at the executive and political levels. If legislative decisions are reached more quickly, the adaptable feature of the loan would help establish the new mechanisms. In addition, NRIMP will try to strengthen the industries that will be affected. At first, NRIMP- I will help develop a common vision between DPWH and the industries and identify a shared strategy for strengthening them; this will be implemented under NRIMP-2 and NRIMP-3. Because some of the institutional reforms will be controversial, NRIMP-1 will also develop and implement a communications strategy to win stakeholder support. - 12 -  Project Cost Table - Summary Road Upgrading Highways 143.26 46.9 57.06 38.0 Preventive Maintenance Highways 112.29 36.8 56.15 37.4 Long-Term Performance Based Highways 9.96 3.3 7.96 5.3 Maintenance Business Improvement Highways 36.95 12.1 25.86 17.2 Implementation Projects (BIIP) Policy and Institutional Reforms Highways 1.47 0.5 1.47 1.0 Total Project Costs 303.93 99.5 148.50 99.0 Front-end fee 1.50 0.5 1.50 1.0 Total Financing Required 305.43 100.0 150.00 100.0 2. Key policy and institutional reforms supported by the project: As noted earlier, NRIMP will help the GOP commercialize the road sector and separate the designing of policies/regulations from operations. The GOP announced these reforms, whose details were inspired by the ongoing RIMSS, BRP and AGILE initiatives. The main outcomes expected are new/improved organizational structures, such as an RMA and Road Fund, dedicated to maintaining the NRS. 3. Benefits and target population: At present, the road network in the Philippines has hampered economic development and NRIMP is being launched to address the problems. As stated in Annex 1, its main goal is to support sustainable economic growth and benefit the whole population. It will achieve this though enhancing access and the reliability of transport to poor areas of the NRS, and primarily aims to increase economic efficiency, generate revenues and save road users' time (with better roads). Further, human and financial resources will be used more efficiently through the BLIPs, which will promote trade and the production of goods. In addition, NRIMP will help develop the contracting and consulting industries. 4. Institutional and implementation arrangements: DPWH will implement the NRIMP in a manner designed to maximize capacity-building through the use of existing internal resources. Four DPWH units (referred to as implementing units--IUs) will be responsible for managing and executing the main components of NRIMP- 1. The road upgrading component will be handled by the Project Management Office-IBRD (PMO-IBRD) with help from the Planning Service, Bureau of Design, Bureau of Construction and regional offices. The two maintenance components will be managed by the Bureau of Maintenance (BoM), supported by regional and district offices. The BIIP component will be managed and implemented through the RIMSS-Project Office (RIMSS-PO). The Environmental Impact Assessment Project Office (EIA-PO), which is to become a permanent Environmental and Social Service Office (ESSO) under NRIMP-1, will coordinate with the RIMSS-PO, to manage the specific BIIP sub-component for "Environmental Strengthening and Social Policy Development and Strengthening of Land Acquisition." The lUs will be assisted by three program support units (PSUs). The Project Management Office-Feasibility Studies (PMO-FS) will carry out economic evaluations and coordinate procurement and preparations for NRIMP-2 and -3. The PMO-IBRD Project Reporting Coordination Unit (PRCU) will monitor the - 13 -  project and coordinate the various reports (on the different components). The Controllership and Financial Management Services (CFMS) will process payments and carry out related tasks (accounting, reporting and auditing). The lUs will report to the Undersecretary or Assistant Secretary-in-charge of the region concerned. The Undersecretary for Technical Services will handle policy issues and conflicts not resolved by the lUs and PSUs and will be responsible for the overall NRIMP operations. Because the BlIPs are complex, the implementation arrangements were prepared with great care. Also, it was decided that the RIMSS-PO, headed by a full-time director, will work under the leadership team composed of top DPWH officials. Each BIIP will be under the director from the associated business area (such as planning, finance, etc.), and a staff person will be assigned full time to help with implementation. For the overall effort, a consultant (called an "integrator") will help RIMSS-PO (a) coordinate the implementation of the BIIPs; (b) ensure the processes and computerized applications are integrated; (c) ensure compliance with the data and applications' procedures, as well as the overall conceptual design; and (d) ensure that the hardware/software is consistent with the computer technology purchased under the program. To achieve continuity and ensure that the new systems are integrated, the consultant firm involved with the RIMSS will be hired (sole-sourced). Each BIIP package will be implemented by a different consultant, selected on a competitive basis. To design, implement and promote the reforms, DPWH formed a group guided by the DPWH leadership team and headed by the Undersecretary for Technical Services. When necessary, it will use external specialists. To facilitate procurement, two evaluation comniit.ees were created: one for consultants (called PEAC) and another for works and goods (called PBAC). Both will have at least one member-observer from the private sector, preferably from a road user group, and/or from a general business/industrial group, such as the Chamber of Commerce. Additional details about the implementation, including roles and responsibilities, are described in the Project Implementation Plan (PIP). Supervision Resources. In the first years, NRIMP will require exceptional supervision resources from the Bank so that the business processes and new/improved organizational structures are developed properly. After the first operation, less supervision will be needed. Financial Accounting and Reporting Systems. One BIIP is to develop and establish an integrated Financial Management System (FMS) for all DPWH key activities (see Annex 2, Component B. 1.3.1). However, since it is not expected to be operating before January 2002, an interim FMS only for NRIMP- I activities is being formed, based on current Bank guidelines and as a condition of project effectiveness. Assisted by an independent consultant, it is being created within DPWH's Controllership and Financial Management Services (CFMS) and each IU. The CFMS will be responsible for overall project financial accounting, auditing and reporting. The FMS will be used for: (a) the internal control system, (b) computerized accounting system, (c) project fmancial management and related staffing, (d) financial reporting system, (e) project financial management indicators and (f) audit arrangements acceptable to the Bank. An action plan to establish the interim unit was developed and is being implemented (see Annex 6). As it is not expected that the interim FMS will fully support a disbursement-based project management system (based on LACI requirements) at the beginning of the NRIMP- I, the traditional SOE method of disbursement will be applied. However, within 18 months after project effectiveness, the disbursement-based system should be operating. The Commission on Audit and Project Financial Statements will provide audit reports, which will include financial statements, use of SOEs, special accounts and the PMRs. - 14 -  D. Project Rationale 1. Project alternatives considered and reasons for rejection: The preparation team considered a sector adjustment loan because it would have provided more flexibility than an APL. However, it was rejected, first, because it would have required more time to launch the proposed reforms and management systems than a quick-disbursing operation (such as the proposed APL). Second, the former does not offer integrated investment and institutional support for major institutional reforms. Third, a nine-year APL will satisfy the GOP's need for quick and long-term assistance and assist the road sector over a longer period with even more flexibility, since some specific reforms have not yet been completely designed. In addition, an APL with a shorter horizon was rejected because the upgrading of 2,200 kms of national roads and proposed reforms will require the nine years of the entire program. A shorter duration for the first operation was considered; however, it was recognized that more time was needed to build consensus for the politically complex reforms. The team also considered including local roads in the loan but rejected the idea since the issues surrounding the national roads are often different. In addition, this would have complicated and compromised the program, as more agencies would have been involved and each often has conflicting objectives. Thus, the Transport Sector Assistance Strategy Note (TSASN) suggests that the local roads be dealt with under a separate operation in say, 2-3 years, to allow time for background studies and preparations. For example, during FY 2000, a Bank-managed study will be conducted to recommend institutional improvements for managing local roads. 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned).6 . .- -Latest Supervision Sector Issue Project (P$R) Ratings _____________________________ ._____.____-____.______ (Bank-financed projects only) Implementation Development Bank-financed Progress (IP) Objective (DO) Improve the quality of arterial roads to Highway Management S S reduce transport costs and increase the Loan: 3430-PH country's competitiveness. The project Loan Amount: $150 M includes the RIMSS and BRP Approval Date: Dec. 20/91 initiatives, which are the basis of the NRIMP-assisted reformn agenda for the NRS. Attract private investors to Subic Bay. Subic Bay Freeport Project S S Loan: 3745-PH Loan Amount: $40 M Approval Date: June 2/94 Continue strengthening the Subic Bay Second Subic Bay Freeport U S Management Authority's capacity to Loan: 4111-PH regulate and manage the growth of a Loan Amount: $60 M free trade area and support further Approval Date: Nov. 26/96 development, including SBMA's initial venture into partnerships with the private sector. -15 -  Other development agencies Asian Development Bank 4th Road Improvement Project Improve 712 km of national roads. (June 1988-November 1997). Overseas Economic Cooperation Fund 2nd Mandaue-Mactan Bridge Project (Contract Package I) y , Rosario-Pugo-Baguio Road Rehabilitation Project IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) 3. Lessons learned and reflected in the project design: According to the March 1998 OED-Country Assistance Review for the Philippines (Report No. 17417), seven transport projects--including one structural adjustment operation with a substantial transport reform component-- were implemented from 1985 to the present (five were completed and two are ongoing). They focused on removing the financial, institutional and policy constraints through deregulation, private sector participation, institution building and higher O&M expenditures. For the investment components, OED assessed the projects as satisfactory overall, both for the Bank and Borrower efforts and for the outcome of Bank assistance. However, previous and ongoing Bank-financed transport projects were hampered by slow and difficult procurement, and scant planning. For the proposed project, the implementing agency and the Bank paid close attention to preparing contracts and procurement; and, almost all procurement activities were designed to ensure quick disbursement at an early stage. Also, it is expected that the newly-appointed procurement staff in the Bank's office in Manila will help improve procurement. Further, high priority Business Improvement Implementation Projects (BIIPs) under the RIMSS, which will be introduced under NRIMP, are expected to improve the performance of DPWH investment and maintenance programs: For example, one BIIP will establish a contract preparation system to standardize contract documents. However, OED noted that the institutional and policy reforms were not satisfactory: Although the Bank pushed hard in this area, officials were reluctant to introduce them. Further, the Bank's sector work did not have much impact. It could be that (a) the proposed reforms were too ambitious or (b) the Bank financial assistance offered under each operation was not large enough to motivate major reforms. In addition, it seems the Bank did not obtain enough Government commitment before including the reforms in its projects and thus had little leverage. For this reason, strong GOP ownership must be secured for future operations. To achieve this, the team involved GOP representatives in all phases of the planning process (see para. 4 below). As a result, the main players (NEDA, DBM and DPWH) designed and announced the reform agenda. 4. Indications of borrower commitment and ownership: Reform agenda. The DPWH and GOP included their reform agenda for the road sector in the proposed project; it is described in DPWH's MTDP and Long-Term Highway Development Plan (1997-2026). The reforms cover the main items the Bank has proposed in recent years. At a March 1998 Transport Sector Consultative meeting in Manila, senior staff from GOP agencies broadly endorsed the Bank's proposed transport sector assistant strategy, including the NRIMP. GOP endorsement was renewed a year later at the June 1999 Transport Sector Coordinating Meeting in Manila (other development agencies at the meeting supported the NRIMP, as well). However, the best indication of Borrower commitment was NEDA's early approval of the project concept, although the NRIMP includes about US$60 million of institutional strengthening activities and NEDA tends to limit GOP borrowing to physical investments. - 16 -  Project design and preparation. The GOP has been closely involved in all phases of preparation. Immediately after the project was identified in May 1998, DPWI established a project preparation team (PPT) that prepared a project preparation plan (PPP) soon after and held a 2-day workshop in October 1998 with all the main stakeholders to determine the objectives, scope, reforms, performance indicators and operations triggers, risks and mitigation measures. In addition, the team successfully managed a PHRD Grant of nearly US$1 million to prepare specific components and the Project Implementation Plan (PIP). The reforms are based on the outcomes of the RIMSS and BRP studies, in which the main stakeholders were heavily involved. The RIMSS involved a transparent and broad consultation process that continued for over a year. The first step, the "As Is Analysis," identified existing problems; for the second, the "To Be Analysis," DPWH managers and staff issued a vision statement and prioritized business practices that had to be improved. All along, their participation was exceptional. The BRP study obtained an even broader level of participation that included a task force composed of members from the DPWH, DOF, DOTC as well as transport, operators and motoring associations, the Chamber of Commerce and industries; the GOP created this group by an administrative order after the May 1997 Workshop on Commercialization of Road Maintenance Activities, sponsored by the Bank, to monitor the study and launch its recomnmendations. Under the study, two consultative workshops were held to select management and funding options for the NRS. 5. Value added of Bank support in this project: The OED-Country Assistance Review recommends that the Bank, with its considerable experience, should remain active in the transport sector because it has strategic importance, weak institutions and needs public investment. Also, having had a part in formulating the transport strategy, the Bank is well prepared to help implement it. E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (supported by Annex 4): o Cost benefit NPV=US$ million; ERR= % o Cost effectiveness 3 Other (specify) Both cost-benefit analysis and cost-effectiveness analysis have been used. A conventional highway cost-benefit analysis was applied to the road upgrading and preventive maintenance components. A combination of "break-even point" and benefit-cost ratio methods was used to evaluate the BlIPs (i.e. the Business Improvements Implementation Projects) component. Together, the three components constitute 96% of project costs. The others were not subject to economic analysis, mainly because the investment is small. The following summarizes the results. Upgrading National Roads. The economic evaluation of the individual upgrading projects quantifies road benefits mainly from savings in vehicle operating costs and travel time costs. The ERR for the nine roads to be upgraded under NRIMP-l ranges from 17.7%-31%. Road works in NRIMP-2 and NRIMP-3 will be based on DPWH's "Criteria for the Selection and Prioritization of Road and Bridge Projects. " All roads selected for financing will meet the minimum 12% ERR. Rates below this level for some segments will be acceptable if the ERR for the entire road project is over 12%. It was agreed that the same or similar cost-benefit analysis--with improved sensitivity analysis--be used for screening and prioritizing roads for NRIMP-2 and -3. - 17 -  Preventive Maintenance. The economic analysis for this component applied the WB-endorsed HDM-3 model: It sets minimum traffic thresholds (for AC and PCC roads, respectively) at which several typical types of preventive maintenance can be economically justified at an ERR of 12%. Since about 14,000 km of national roads will need preventive maintenance in the next five years and NRIMP- 1 will finance only about 900 km, it will not be difficult to select roads with traffic thresholds over the minimum level. Priority will be given to roads with the highest traffic levels. Business Improvement Implementation Projects (BIIPs). The economic viability of this component was assessed by estimating the break-even points and, where applicable, benefit/cost ratios when explicit benefits could be identified and quantified. Individual BlIPs were categorized into 10 areas where costs and benefits could be specifically assigned, and into joint costs that were applied proportionally to all business areas. To assess the benefits, the business areas were further separated into: (a) support processes that affect DPWH operations mainly through the efficiency and cost of service delivery, and (b) core processes (such as planning, pavement and bridge management, and quality) that affect the value of infrastructure assets and external items such as road user costs. Both break-even points and benefits were based on annual expenses in order to assess administrative costs and asset value improvements in a common framework. The analysis showed that all specific improvement areas were well justified on the conservative estimates of benefits, with break-even points (BEP) ranging from 0.1%-9%, and benefit/cost ratios (BCR) from 2.5-150. The strongest benefits derive from improving the core processes (BCR 56, BEP 0.45%). Improvements of support processes such as financial, inforrnation, procurement and communications have BCR of 8 and BEP of 0.24%. Despite annualized costs of PHP 450 million (US$11.8 million), the component has an overall BCR of 37 and BEP of 0.28%, reflecting strong benefits of PHP 17.2 billion annually. The analysis also cautions that while the BlIPs could bring high benefits, their implementation faces risks; the measures designed to mitigate or avoid them are addressed in the final RIMS S design and form the basis for some project conditionalities. 2. Financial (see Annex 5): NPV=US$ million; FRR= % As NRIMP does not involve a revenue-earning entity, it financial soundness was determined by evaluating the fiscal sustainability of the proposed project. For example, one of NRIMP's key goals is to make the NRS financially sustainable which will be pursued at two levels. First, the proposed road maintenance fund (RMF) dedicated to maintenance will handle operations and maintenance. In doing so, it should ensure that at least 60% of NRS maintenance funds be met and recovered from road users by the end of NRIMP-1, 90% by the end of NRIMP-2 and 100% by the end of NRIMP-3. Second, the creation of a commerical-style independent organization such as a road maintenance authority should make operations efficient and ensure that maintenance is crucial. Fiscal Impact: Except for a few private concessions in Metro-Manila, roads are fnanced through the GOP budget. The investment program for NRS is funded through the DPWH capital outlay budget, while the annual maintenance program is separate, using a set formula based on equivalent maintenance kilometers (EMK). Investment and maintenance for provincial and barangay roads are funded by local governments through tax revenues and GOP grants. For the last 15 years, IBRD funding has been less than 20% of DPWH's annual road and bridge investment program expenditures, and has averaged 17% a year. NRIMP-l would amount to US$305.4 million (P 12.2 billion), averaging about P3.3 billion of spending per year for 3.7 years and --or 8.7% of the current (1999) annual DPWH road and bridge expenditure of P38 billion, and less than 30% of DPWH external financing. Thus, NRIMP- I will have minimal impact on DPWH fnances. At present, the GOP faces severe budget constraints due to the regional financial turmoil. Thus, DPWH budgets for the next few years may have to be reduced, despite a current backlog of about P26 billion needed for road maintenance. While the extent of the cutback is unknown, the budget is expected to at least cover operating and recurrent costs and foreign-assisted initiatives for highways. - 18 -  Because the projects promote maintenance, the share of DPWH budget for recurrent expenditures is expected to increase. However, the fiscal impact will be mitigated since recurrent expenditures will be fnanced incrementally through road user charges (i.e. off the budget): The creation of a special fund for road maintenance (RMF) with new sources of revenues (a motor vehicle fuel levy) is expected to raise an added P2 billion and gradually increase to PI 0 billion, which represents the NRS estimated annual maintenance requirements. Meantime, the strategy is to eliminate the maintenance backlog through budget allocations from the consolidated GOP fund. 3. Technical: Upgrading National Roads. All road upgrading investments under NRIMP-I were evaluated by the DPWH-PMO feasibility studies carried out by qualified personnel with extensive experience; the studies were reviewed by Bank staff and judged satisfactory. Detailed engineering designs of all road upgrading contracts were prepared by experienced international consultants in conjunction with local firms. As part of the Quality Assurance System, DPWH will hire two advisors to review the designs as well as the supervision. Construction will also be supervised by international experienced consultants together with local firms. And, as noted under Sections 5 and 6 below, environmental and social issues are being integrated in project designs and execution. Preventive Maintenance. During project preparation, DPWH hired an experienced consultant to help design the component (standard bidding documents, selection criteria, implementation arrangements, financial plans, etc.). Together, they established guidelines on how to select, design, procure and execute the contracts, International consultants will be hired to help BOM prepare and supervise the contract and an independent technical auditor will determine if the completed works are acceptable, and eligible to be reimbursed (from the loan). Business Improvements Implementation Projects (BHIP). The BIIP preparation, dorie by RIMSS-PO, was excellent. BIIP procurement packages were established in a way that would: (a) provide for high-level oversight, (b) promote competition, (c) promote economies of scale, (d) minimize oversight problems; and (e) separate less complex services such as data collection, from systems development. International experienced consultants will be hired to help DPWH implement and coordinate the various BIlPs (ref.: Section C.4). 4. Institutional: a. Executing agencies: NRIMP addresses a series of important reforms which were described in previous sections. These include: (a) DPWH institutional capacity for change in both processes and technology, and the pace at which the change can be accommodated; (b) the way a Road Maintenance Authority will change DPWH's mandate and the need to identify priorities and different scenarios; (c) impacts on the remaining network and associated decentralization process; (d) consensus with other donors. b. Project management: The Undersecretary for Technical Services will be responsible for NRIMP, overall. Four separate implementation units (IUs) supported by three project supporting units (PSUs) will be responsible for its activities (see Section C.4 and the PIP). -19 -  5. Social: Land Acquisition, Resettlement and Rehabilitation. DPWH prepared a comprehensive "Land Acquisition, Resettlement and Rehabilitation" policy satisfactory to the World Bank guidelines, called the" Resettlement Policy, " to govern activities related to land acquisition, compensation, resettlement and rehabilitation of individuals and communities affected by road projects. It contains grievance mechanisms and provisions for internal and external monitoring. Its goal is to ensure that (a) all affected share the benefits, (b) adverse impacts are mitigated, and (c) all affected are compensated for losses and helped to improve, or at least maintain their pre-project living standards, income earning capacity and production levels. The Resettlement Policy also defnes the circumstances under which a separate Social Impact Assessment (SIA) will be undertaken including the preparation of an Indigenous People's Plan (IPP) if warranted. In addition, DPWH has developed a policy for" Public Participation and Consultation" to ensure those affected are consulted effectively (Section E.6). Under NRIMP- 1, of the nine roads, only two, CP- I "Halsema Highway"and CP-2 "Zamboaga-Pagadian Road", will be ready for imnplementation soon after project effectiveness. Resettlement action plans (RAPs) were produced for these two roads based on the Resettlement Policy and World Bank guidelines. According to the census of people affected by these two sub-projects, it will not be necessary to prepare Indigenous People's Plan because there are no special impacts of theses two sub-projects on indigenous peoples. For the other seven sub-projects under NRIMP- 1, social impact assessments (SIA) and resettlement action plans (RAPs) will be prepared where needed during the first year of NRIMP- 1, when engineering designs will be devised or updated, the need for which will be dictated by the Resettlement Policy. The SIA will indicate whether an Indigenous Peoples Plan (IPP) is needed and if so, the IPP will be carried out in line with the provisions of the Resettlement Policy. The World Bank will review and approve the RAPs, which must then be fully implemented, before any civil works can occur. It is hoped the Resettlement Policy will govern projects funded by other donors and the GOP budget (see Section E.6 and Annex 11 for details on social-enviromnental issues). 6. Environmental assessment: Environment Category: A Refer to Annex 11 for details. Institutional Arrangements. NRIMP will consolidate progress made under the ongoing WB-financed Highway Management Project in strengthening the Enviromnental Impact Assessment-Project Office (EIA-PO) within DPWH by adding staff, equipment, training and TA to address social and indigenous people's issues. To ensure the unit's sustainability, credibility and full integration in the project, it will be upgraded and renamed the Environmental and Social Services Office (ESSO), have its own director, and be within the jurisdiction of the Undersecretary for Technical Support Services. A main goal will be to forge stronger links between EA teams and those preparing resettlement action plans (RAPs) under the project. Environmental Assessments. For programmatic initiatives such as NRIMP, sub-projects need to be screened to identify environmental impacts. During project preparation (in May 1999), DPWH and the Department of Environment and Natural Resources (DENR) signed an MoA defining roles, procedures, criteria to be evaluated and screening processes. The MoA is consistent with the criteria and procedures in Bank's OP/BP 4.01 including the provisions applicable to Bank sector loans/FILs. It was agreed with the World Bank that all sub-projects under NRIMP- 1 will apply the methods and processes defined within the MoA. The MoA requires that an initial envirornmental examination (IEE) be carried out for all sub-projects. Based on the findings of the IEE, a full EA are required where projects are located in enviromnentally critical areas and/or where the projects are expected to have significant impact (rated 5 or above in accordance with the methods developed collaboratively and described in the MoA). All the road upgrading subprojects to be financed under NRIMP- 1 have all already been identified. Identified impacts are for upgrading of existing roads and are incremental in nature. The impacts have to do with the construction, and specific guidelines were developed to deal with these impacts. For one sub-project, the Halsema Highway, DPWH has prepared a formal EA satisfactory to the Bank following the provisions of the MoA. -20 -  NRIMP will support a close working relationship between the DPWH and the DENR, the lead agency overseeing the domestic EIA process. Public Consultation and Disclosure. Social and environmental acceptability is one of the GOP's most important criteria. To help the project achieve this objective, all sub-projects will hold public hearings to identify concerns of local stakeholders. EA/RAP documents will be made available to the public and were sent to all affected barangay offices and other concerned governmental regional offices. The documents' availability will be announced in at least one local and one national newspaper and the public will be able to review them at these offices. Each sub-project will also conduct at least two public meetings for stakeholders and affected individuals. The documents (EA, EIA, EMP and RAP) will be disclosed in accordance with applicable Bank's disclosure policies. To guide these activities, DPWH prepared a policy for public participation and consultation. Conditions in Construction Contracts. To ensure that contractors meet performance standards, all contracts will contain clauses that define the environmental requirements to be met during road construction. These clauses were prepared by an independent, experienced environmental specialist. Environmental Guidelines for Preventive Maintenance. Guidelines for EAs for preventive maintenance were prepared and will be followed by DPWH during implementation. They provide the procedures, including project screening, calculating ECA values, determining if a project is environmentally critical, an outline for the environmental management plan and recommendations for corrective measures (see Appendix F of the final report, "Preventive Maintenance Component Study," for detailed guidelines). 7. Participatory Approach (key stakeholders, how involved, and what they have influenced or may influence; if participatory approach not used, describe why not applicable): a. Primary beneficiaries and other affected groups: NRIMP will benefit the whole population. (1) Road users will reduce the time and money they spend on transport. (2) Better roads will increase access to social services, reduce the cost of products and facilitate commercialization. (3) Efficiency gains (pursued with DPWH) and the new road fund should remove pressure on the budget and contribute to reducing general taxes. (4) Better technology should increase DPWH staff satisfaction and credibility. The main stakeholders participated during NRIMP's preparation and Government representatives have been closely involved in designing the program, mainly through workshops. DPWH also issued a policy for public consultation and participation to allow stakeholders to voice their concerns, particularly those affected by upgrading projects. The reforms, supported by NRIMP, were defined through the RIMSS and BRP initiatives. Under the RIMSS, DPWVH staff identified the BlIPs and their priorities. Under the BRP, road users were represented by the Confederation of Land Transportation Operators of the Philippines (COLTOP), Transportation Management Association of the Philippines (TRANSMAP), Philippines Motoring Association (PMA), and the Philippine Chamber of Commerce and Industry (PCCI). b. Other key stakeholders: Others main donors to the road sector such as ADB and OECF were and will be kept informed of the program. Both confirmed their support at a June 1999 transport sector meeting in Manila. Co-financing with OECF will be explored for NRIMP-2 and -3. - 21 -  F. Sustainability and Risks 1. Sustainability: NRIMP intends to create management and financial systems to ensure the NRS sustainability, which will be achieved by: a) Promoting full participation of main stakeholders in project design, implementation and operations to ensure ownership; b) Pursuing realistic reforms so as to maintain constructive policy dialogues with officials and other key stakeholders; c) Improving DPWH practices (through the BWIPs); d) Only promoting road projects that are economically, technically, financially and environmentally viable; e) Assessing social impacts in project design and implementation; f) Promoting road users' participation in managing and fnancing arrangements; g) Commercializing road construction and maintenance. 2. Critical Risks (reflecting assumptions in the fourth column of Annex 1): 00 f;u00 Risk Riskaing RikMiiizti3nMesure From Outputs to Objective DPWH management/staff do not maintain S Continue dialogue with oversight agencies support for the project goals. (DBM, DOF, NEDA); involve staff in project design and implementation; launch an information campaign (web site, newsletter, etc.); encourage road users to request reforms. DPWH capacity to implement BlIPs and M Keep implementation pace and design flexible to reforms is weak. adjust to capacity; create clear arrangements with appropriate TA; prepare and carry out training programs; give trainees opportunities to apply new skills. Budget allocations are too low to launch S Estimate financial needs carefully and secure and maintain BlIPs. financial support from agencies involved (DPWH, DOF, DBM). From Components to Outputs Counterpart funding is not available in a M Review annual budget requirements carefully; timely manner. work closely with Department of Budget and Management to strengthen the payment process. Acquiring road right of way (RROW) is H Follow resettlement policy to avoid problems; slow. provide human and financial resources to implementing agencies to carry out the RAPs; create clear implementation plans; clarify roles and responsibilities; involve local governments units. Peace and order are difficult to sustain. M Keep project design flexible so resources can be re-allocated to areas with less risk. - 22 -  -7;;;~I T;;;; , I k -Mi- ;iz: t;on M evr. Natural disasters delay or increase the M Adapt design to accommodate floods (for roads) cost of road works. and earthquakes (for bridges). Contractors and consultants perform M Introduce tight prequalification and supervision poorly, processes; assess performance soon after the work has begun and require corrective measures. If not successful, cancel contracts. Procurement and disbursement are slow. S Establish a financial management system; provide training for budget officers; technical support should be offered through the resident mission and easy to access; create a tight procurement plan and monitoring system; try to reduce the number of approval layers. Project processes lack transparency. M Closely supervise the procurement process; create a financial management system. Human resources are inadequate, both in M Commit available resources in advance. number and quality. Bank supervision is inadequate. M Allocate budget according to actual needs. Lack of stakeholder and private sector S Launch an information campaign. interest and support. Overall Risk Rating S Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk) 3. Possible Controversial Aspects: There are two potential areas of controversy: a) The public may disapprove the proposed road maintenance fund (RMF), financed by new user charges. Thus, road users need to understand the reasons and benefits associated with it. To accomplish this, road users' representatives will help manage the RMF and an information campaign will be launched. -23 -  b) DPWH managernent and staff may object to the new business processes and structures (BIIPs) designed to commercialize road activities, since they may feel their jobs or authority threatened. Thus, while the organizational structures are being designed early in the NRIMP- I, this issue will be followed closely. If necessary, an attrition/retirement plan will be prepared and implemented in later phases. Also, arrangements with private local industries could be made to absorb good staff who become redundant. Lastly, an internal information strategy should be launched to prevent rumors from circulating and staff becoming unnecessarily worried. G. Main Loan Conditions 1. Effectiveness Condition Conditions for negotiations are: a) DPWH and DOF endorse the Letter of Development Program. b) DPWH approves a Resettlement Policy for land acquisition, resettlement and rehabilitation, satisfactory to the Bank, to be applied to all NRIMP road upgrading and preventive maintenance. c) DPWH endorses a Resettlement Actions Plans for the Halsema Highway and Zamboanga Road, satisfactory to the Bank. d) DPWH issues a Departmental Order (DO) providing staffing, equipment, budget and authority to EIA-PO to carry out enviromnental and social tasks. e) DPWH-DO creates only one committee for procuring consultants (PEAC) and one for procuring works and goods (PBAC), which apply to all NRIMP activities. f) DPWH issues a DO on contractual management of road upgrading and maintenance contracts (see Annex 2). g) DPWH-DO confirms implementation arrangements. h) DPWH-DO creates a policy team to manage and promote the reforms. Conditions of Board presentation: N/A Conditions of effectiveness: a) A financial management system for project operations, satisfactory to the Bank, is operational. b) DPWH appoints consultants to supervise road upgrading and preventive maintenance contracts as well as integrate the BIlPs. 2. Other [classify according to covenant types used in the Legal Agreements.] Before upgrading the roads, DPWH will: a) Acquire all necessary land and other property, as well as compensate and resettle those affected according to the principles and institutional procedures established in the Resettlement Policy; b) Ensure that those affected be compensated, resettled and rehabilitated according to the Resettlement Policy; c) For each road to be upgraded, where there are more than 200 persons affected, submit a detailed Resettlement Action Plan acceptable to the Bank, documenting the arrangements, including compensation, relocation and rehabilitation; - 24 -  d) Complete the resettlement in a manner satisfactory to the Bank; e) For each road to be upgraded, submit an Environmental Management Plan, satisfactory to the Bank, and implement it accordingly. f) For each road to be upgraded, where there a more than ten households in a "purok" or "sitio" comprising indigenous persons, submit a separate Social Impact Assessment, and an Indigenous People's Plan to take into full consideration the preferences of indigenous persons for mitigating and avoiding adverse effects on such indigenous persons, satisfactory to the Bank, and implement accordingly. With respect to other aspects of the project, DPWH will: a) Maintain the implementing units (IBRD-PMO, BoM, RIMSS-PMO, EIA-PO) headed by project directors, with qualifications and terms of reference satisfactory to the Bank and assisted by competent staff in adequate numbers; b) Maintain consultants to coordinate the BIIPs; c) While implementing each BIIP, designate and at all times maintain a process counterpart satisfactory to the Bank (see Annex 2); d) Within three months of effectiveness, appoint consultants to prepare and carry out an information campaign, addressing the Bank's comments, according to a schedule satisfactory to the Bank. e) By December 31, 2000, prepare a strategy for strengthening the contracting and consulting industries in collaboration with the Department of Trade and Industry, and promptly implement it according to a schedule satisfactory to the Bank. t After creating the road fund (proposed under House Bill No.6363), promptly promulgate the implementing rules and regulations, satisfactory to the Bank, including those for its task force (Board). g) Make an annual report on the Preventive Maintenance Technical Audit available to the public; h) Furnish the Bank with the preventive maintenance works programs to be carried out in FY200 1 2002 and 2003 no later than April 30, 2000, April 30, 2001 and April 30, 2002, respectively; i) Ensure that road sections selected for preventive maintenance meet minimum traffic thresholds, satisfactory to the Bank; After the establishment of the proposed road fund or other mechanism to be funded from road user charges, DOF shall propose to Congress annual budget allocations for the preservation of national roads to cover, together with the resources of the road fund, at least of routine, periodic and preventive financial requirements. H. Readiness for Implementation 2 1. a) The engineering design documents for the first year's activities are complete and ready for the start of project implementation. C 1. b) Not applicable. 0 2. The procurement documents for the first year's activities are complete and ready for the start of project implementation. 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactory quality. D 4. The following items are lacking and are discussed under loan conditions (Section G): -25 -  1. Compliance with Bank Policies ig 1. This project complies with all applicable Bank policies. O 2. The following exceptions to Bank policies are recommended for approval. The project complies with all other applicable Bank policies. Denmsobitaille Jitendra N. Bajpai Vinay K. Bhargava Team Leader Sector ManagerlDirector Country Manager/Director - 26 -  Annex 1: Project Design Summary PHILIPPINES: FIRST NATL ROADS IMPROV.IMGNT. PROJECT Key Periance - farfck Of Pbjep . In4icstors . -M6nitoD*ng &AW__AX 4 rItI Sector-related CAS Goal: Sector Indicators: Sector! country reports: (from Goal to Bank Mission) NRIMPs' main goal is to promote GNP annual growth in line with NEDA and Central Bank annual Other environmental/social/ economic recovery, develop CAS targets. reports. economic conditions remains infrastructure and improve favorable. governance. Sector Goal: To develop a multi-modal safe, Average transport cost on NRS is DPWH road management GOP remains committed to integrated, sustainable, reduced by at least 10%. information reports. identified reforms. environmentally sound and competitively priced transport system. Program Purpose: End-of-Program Indicators: Program reports: (from Purpose to Goal) Management system ensuring the Management Effectiveness Road management information Other programs/projects in the preservation of an improved Goals for performance standards report and WB supervision transport sector develop national roads system (NRS) in for all key NRS management reports. successfully. an environmentally, socially, and systems (BlIPs) are achieved at financially sustainable manner is least by 40%, 75% and 95% by Strong GOP commitment to established. EOP-1,-2, -3, respectively. implement institutional reforms in the transport sector. NRIMP-1 (2000-2002) Financial Sustainability Idem Sustained economic growth. DESIGN PHASE: Funds for maintaining the NRS NRIMP 2 and 3 are developed I) A detailed design and are available and fully recovered successfully. phased implementation planof from road users by at least 60%, phased implementalton plan of 90% and 100% by EOP-I, -2, -3, Effective coordination among new organizational structures respectively. ~~~~~donors on institutional reform. including an independant body respectively. such as a RMA for E a Idem Continued GOP support to commercialized management of . . NRIMP. NRS are prepared; Social and environmental ,RS are prepared; considerations are integrated in No major natural disasters affect 2) Establish a sustainable the preparation, implementation DPWH appropriations for financing mechanism, such as a and operation of road upgrading priorities. road fund or equivalent, and maintenance projects. EIA Continued WB commitment to dedicated to preserving the regional staff will be able to ntmPt national roads, to be funded from execute functions independently road user charges and based on by at least 50%, 80% and 100% Congressional support for actual level of maintenance needs by the EOP-1, -2, -3 respectively. enabling legislation. and road usage; 3) DPWH carries out business improvement implementation projects (BIIPs). I .I_I - 27 -  IN1RIMP-2 (2003-2005) Physical (client satisfaction) IMPLEMENTATION PHASE: Average road roughness I) An idepeden (International Roughness Index) organization such as an RMA is and 1 5% by EOP-l, -2, -3 created and introduced; respectively. Roughness is used 2) Revenues from road users as a measure of client increase to meet 90% of NRS satisfaction. maintenance needs; 3) BliPs in DPWH and proposed RMA are implemented. NRIMP-3 (2006-2009) OPERATION PHASE: 1) An independent body such as an RMA that clearly separates policy, planning, management and service functions between RMA and DPWH is created and operating; 2) Road fund revenues, fully recovered from road users, meet 100% of NRS ;maintenance costs; 3) BlIPs in DPWH and RMA are completed . Project Development Outcome / Impact Project reports: (from Objective to Purpose) Objective: Indicators: NRIMP-1 Purpose End of Phase I Indicators DESIGN PHASE Organizational Improvements DPWH executive system reports Other programs/projects in the The NRIMP-I development Policy, planning and service and WB supervision reports. transport sector develop objective is to achieve part of delivery roles for managing the successfully. NRIMP's long-term goal of PRS are defined and assigned to Strong GOP commitment creating environmentally, socially appropriate new/improved continues, so as to implement and financially sustainable organizations, including a Road transport sector institutional management systems for an Maintenance Authority, to be reforms. improved NRS. established under NRIMP-2 and -3. Sustained economic growth. Funding Issues Phases 2 and 3 of NRIMP ate NRS funding for maintenance is DPWH executive system reports developed successfully. available and recovered through a and WB supervision mission Donors coordinate efforts on sustainable financing mechanism reports. nstitutional reform. such as a road fund or equivalent to be funded from road users GOP continues support for charges, by at least 60% NRIMP. (estmated at PlOb). No major natural disaster affects Business Improvements DPWH road management DPWH priority appropriations. I) Road investment planning, information reports and WB Continued WB commitment to Economic value of the evaluated supervision missions reports. NRIMP. part of program is greater than 1.2 NPV per unit cost by 2002. Congress passes enabling 2) Financial management. Idem legislation. Contractor payment time reduced from 6+ months to 2 months by 2003. - 28 -  3) Project procurement. Idem Procurement of foreign-assisted road upgrading projects reduced from 300 to 225 days by 2003. 4) HR training. Idem and staff survey. Central office HR personnel and one staff from each region and district can prepare training programs by 2003. 5) Information technology. Idem and staff survey. By 2003, staff gets solid support from IT help desks. 6) Agency performance Idem and interview with monitoring system. management. Managers regularly use monitoring systems. 7) Communications system. Idem Transmission of data within and between central, regional and pilot districts is reduced from an average of 5 days to 5 minutes by 2003. 8) Environmental and social Idem issues. Those affected are compensated according to the policy on land acquisition, resettlement and rehabilitation. Environmental mitigation measures are carried out by contractors under NRIMP-1 road maintenance and upgrading contracts. Output from each Output Indicators: Project reports: (from Outputs to Objective) component: NRIMP PHASE 1 A. I NRS upgraded. At least 280 km of national roads IBRD-PMO Project progress DPWH management and staff are upgraded to paved standard Reports. remain committed to the project by 2003. objectives. Feasibility studies are carried out on at least 1,000 km of national roads by 2003. Road upgrading detailed engineering designs are carried out for 750 km of roads by 2003. Approval time for contract variation orders is reduced from an average of 6 months to 1.5 months by 2003. -29 -  A.2 Improved NRS preventive At least 900 km of paved national BOM Project Progress Reports. DPWH capacity to implement maintenance program operational. roads are restored to good new business processes and A.3 Long-term performance condition. reforms is sufficient. based maintenance contracts Two long-term performance BOM/Districts Project progress provides comparison analysis maintenance contracts totaling reports and Consultant's final with traditional maintenance 231 km are awarded in two pilots reports analysis. method used. provinces and cost-benefit analyses are completed by 2003. B. I Road Management The high priority BIlPs are DPWH Executive system Reports Adequate budget allocations to Improvement Program operational: and WB Supervision Mission launch new business management Implemented. 1) Road investment planning Reports. systems. 50% of network evaluated by 2003. 15% of maintenance budget subject to economic evaluation. 50% of construction budget is subject to economic evaluation. 2) Financial management (FIMS) is operating in central, regional and district offices by 2003. 3) Contract, project procurement. Standard contract documents are developed and used. 4) HR training program New procedures are created in formal policy statement by 2002. HR training program system operates in central office by 2003. 5) Information technology New procedures established in formal policy statement by 2001. IT help desks in central, regional and district offices operate by 2003. 6) Agency performance monitoring system Performance measures established in formal policy statement by 2002. 7) Communications system Voice and data communications network operates in all regions and pilot districts by 2003. - 30 -  8) Environmental and social Idem plus EIA unit progress issues reports Resettlement actions plans prepared and launched for road upgrading projects consisting of 800-1,000 km of roads, according to the policy for land acquisition, resettlement and rehabilitation. At least 50% of EIA regional office staff are trained to execute delegated EIA functions. B.2 Policy and institutional New/improved organizational WB Supervision Missions reforms designed. structures and phased Reports. implementation plans, including the Road Maintenance Authority, are designed and approved at the executive level by 2002. Development program for local WB Supervision Missions construction and consulting Reports. industry formulated by 2003. Public information campaign about policy and institutional DPWH executive system reports reforms affecting the NRS is and WB supervision mission designed by 2001 and launched in reports. 2001 and 2002. NRIMP-2 designed. Deliverables, indicators, PPP, PIP and PAD. activities, risk analysis for phase 2 established before the end of NRIMP-I and triggers for NRIMP-3 are established. - 31 -  Project Components / Inputs: (budget for each Project reports: (from Components to Sub-components: component) Outputs) A) CIVIL WORKS A.1 Road Upgrading US$143.26 Physical and financial monitoring Counterparts funds are available A. 1. I Upgrade national road and reports, and Bank in timely manner. network (9 roads under 8 contract supervision. Road right-of-way (RROW) is packages). available in a timely manner. A.l .2 Supervise road upgrading contracts. A. 1.3 Acquire land for projects under NRIMP-I and -2. A. 1.4 Implement detailed engineering and feasibility studies for road upgrading projects under NRIMP-2. A. 1.5 Ensure quality of contract preparation and implementation. A.2 Preventive Maintenance US$112.29 Bank supervision. Peace and order maintained. A.2.1 Carry out preventive Natural calamities do not delay or maintenance for about 900 kms of increase cost of road works. national roads. A.2.2 Prepare contracts and supervise construction. A.2.3 Conduct a technical audit. A.3 Pilot Long-Term US$9.96 Contractors and consultants Performance Based perform according to TOR. Maintenance Contract (LTPBMC) No delays in procurement and disbursement. A.3.1 LTPBMC on 231 km. A.3.2 Prepare and supervise maintenance. - 32 -  B) INSTITUTIONAL S TRENGTHENING B.1 Business Improvement Implementation Projects BIlPs US$36.95 Transparency in project B. 1. I Improve planning processing increases. B. 1.1I Improve planning capacity. Needed human resources are available, both in number and B. 1.2 Improve the construction quality. process. B. 1.3 Establish financial management systems for all DPWH activities. B. 1.4 Improve human resources management. B. 1.5 Improve information management. B. 1.6 Set up the management of procurement. B. 1.7 Support institutional development. B.2 Policy and Institutional US$1.47 WB resources are available for Reforms supervision and there is B.2.1 Design and implement a continuity of staff. communications program. B.2.2 Support the commercialization scheme. B.2.3 Design and implement a strategy for strengthening local consulting and contracting industries. B.2.4 Carry out training, workshops, conferences, study tours, etc. Front-end fee USS1.50 TOTAL US$305.42 - 33 -  Annex 2: Project Description PHILIPPINES: FIRST NATL ROADS IMPROV./MGNT. PROJECT By Component: Project Component I - US$143.26 million A.1 Road Upgrading. Over its nine-year life, NRIMP will finance the rehabilitation and upgrading of about 2,200 km of national roads using WB-ICB procurement procedures, as well as consultant services for preparation and supervision. Rehabilitation is estimated at P70 billion (US$1.75 billion), including contingencies. NRIMP- I will finance specific road projects and lay the groundwork for NRIMP 2 and 3. These next two phases will finance a slice of DPWH's overall investment program, instead of individual road projects (which is the usual course). The preparation and implementation would follow acceptable processes (feasibility study, selection criteria, detailed engineering designs, environmental studies, resettlement plans, procurement and supervision) to be developed and agreed upon during NRIMP- 1. NRIMP-1. Under NRIMP-l, road projects will be financed individually: Nine, totaling 528 kin, will cost about P4.8 billion (US$120 million) including contingencies and consultant services for preparation and supervision (see table below). NRIMP-1 Road Upgrading Projects Length Pavement Carriageway and Contract Package Road Region (kin) Surface Width (M) CP-I Halsema Highway Road Luzon 8 5 PCC 6 (La Trinidad-Mt. Data) 2 x 0.5-1.0 CP-2 Zamboanga-Pagadian Road Mindanao 43 PCC 6.7 (Buug-Kabasalan) 2 x 1.5 CP-3 Davao-Bukidnon Road (Calinna-Buda) Mindanao 46 AC 7.0 2 x2.0 CP-4 Surigao-Davao Coastal Road (Divers sections) Mindanao 142 PCC 6.7 2 x 1.5 CP-5 Malalag-Jose Abad Santos Road Mindanao 46 AC 6.1 (Sulop-Malita section) 2 x 1.5 CP-6A Kabankalan-Basay Road (Ninibaan-Basay Negros Occidental & 39 AC 6.7 section) Oriental 2 x 1.5-2.0 CP-6B San Enrique-Vallerhermoso Road Negros Occidental 26 AC 6.7 (La Castellellana-Negros 0.) 2 x 1.5 CP-7 Maramag-Kibawe Road Mindanao 46 AC 6.7 2 x 1.5-2.0 CP-8 Davao-Bukidnon Road (Buda-Maramag) Mindanao 59 AC 7.0 2 x 2.0 PCC: Portland Cement Concrete AC: Asphalt Concrete The following briefly describes each contract. Additional information is available in the project files. CP-1 Halsema Highway, La Trinidad-Mount Data Road. This 85 km road section is located in the Cordillera, Luzon region. Opened in the 1930s, the road provides the only access to the productive agricultural highlands of Benguet and Mountain Provinces; it was heavily damaged in 1990 by a major earthquake and two typhoons. The road will be upgraded to a 6-meter Portland cement concrete (PCC) pavement standard. The project will include extensive slope protection and stabilization works. The feasibility study, detailed engineering designs and environmental impact assessment (EIA) were prepared by an international consultant firm financed under the - 34 -  ongoing WB-financed Highway Management Project (HMP). A resettlement action plan (RAP) was prepared to compensate 123 households affected by the project (full implementation of the RAP will be a condition of disbursement). Procurement of the contract under WB-ICB rules has already begun and works should start immediately after project effectiveness. CP-2 Zamboanga-Pagadian Road. This sub-project will resurface and upgrade an existing road section between Buug and Kabasalan in Zamboanga del Sur in Mindanao. The section was originally part of an ADB sixth highway project. Later, it was included in the HMP. Finally, in October 1998, it was included under the NRIMP- 1. The work will involve PCC surfacing of the existing alignment, repairing 17 bridges and improving drainage systems. An initial environmental examination (IEE) was made by the EIA-PO of DPWH, with technical assistance from an international consultant firm, and was completed in March 1999. In addition, DPWH-EIA-PO, with help from an international consultant firm, carried out a satisfactory EIA which notes that many of the direct and indirect impacts from the road alignment have already occurred. The incremental impact of the proposed project is therefore considered negligible. Mitigation measures to reduce environmental damage were included in the bidding documents. There will be no major realignment. Also, because the 30 m road-right-of way (RROW) was acquired by DPWH some time ago, no new land will be needed. However, there are illegal residents within the RROW, totaling about 106 households (with about 500 people), two community-based cooperative stores and four government infrastructure facilities (such as buildings). A RAP, satisfactory to the Bank, will be fully implemented before the work begins; it will identify the mitigation measures and the compensation at replacement costs for affected land and assets as well as rehabilitation measures and transitional subsidies. Detailed engineering and bidding documents were prepared by an international consultant firm, and procurement is ongoing. Works will start immediately after project effectiveness. CP-3 Davao-Bukidnon Road. This sub-project, located between Calinan and Buda in the province of Bukidnon on Mindanao Island, will restore an existing alignment. Activities will include providing an asphalt concrete pavement surface, rehabilitating the 150 m Suawan Bridge, and providing drainage facilities and road safety measures. The construction of this 48 km road section was originally included under the HMP. However, due to the contractor's poor performance, DPWH canceled the contract and proposed completing the road under NRIMP-1. An Environmental Compliance Certificate for this project was issued by the DENR in April 1995. The EA report associated with it identified various potential adverse impacts. As with other rehabilitation projects, the main ones were associated with construction activities and are expected to be brief. Mitigation measures will control run-off, the waste produced, noise, dust and other air pollution problems. An Environmental Management Plan (EMP) will be completed before the work begins. A social impact assessment and RAP, if needed, will be prepared according to resettlement and public consultation policies. Detailed engineering designs and bidding documents are being revised. Procurement has also begun, with bid opening scheduled for February 2000. Work should begin immediately after project effectiveness. CP-4 Surigao-Davao Coastal Road. This sub-project will improve and rehabilitate 142 km (out of a 593 km gravel coastal road) to Portland cement pavement standard and replace deteriorating bridges on the most important sections. The 142 km includes seven sections: 12 km from Bacuag Bdry-Claver, 27.3 km from Claver-Surigao Del Sur, 39 km from Marihatag-San Augustin, 12.9 km from Liangga-Barobo, 4.3 km from San Fransisco-Barobo, 23.1 km from Manay-Tarragona, and 23.5 km from Taragona-Mati. The road will affect the provinces of Surigao del Norte, Surigao del Sur, Agusan del Sure and Davao Oriental, which have about I million residents. Agriculture, fishing, forestry and mining are the main economic activities. A draft EMP was completed and does not identify any significant environmental problems such as impacts on mangroves, agricultural or forested areas. The EMP will be finalized according to DPWH-DENR, MOA and Bank requirements. A social impact assessment and RAP, if needed, will be prepared according to resettlement - 35 -  and public consultation policies during the first year of NRIMP- 1, when engineering designs will be started and/or updated. Civil works will not begin until the RAP, if needed, is approved by the Project Office and the World Bank. CP-5 Malalag-Jose Abad Santos Road. This sub-project will upgrade the gravel road alignment joining Malalag, Santa Maria and Malita in the province of Davao del Sur in Mindanao. The road section will be improved to asphalt concrete pavement standard, the gradeline in flooded sections raised, concrete bridges constructed to replace deteriorated ones, concrete box culverts built and blind curves in mountainous sections of the road improved. Detailed engineering designs will be started in April 2000. Construction is expected to begin during the second year of NRIMP- 1. A draft environmental management plan was prepared which describes project activities, possible impacts, the area affected, mitigation and enhancement measures, monitoring requirements and institutional responsibility for implementation. The EMP will be finalized according to DPWH-DENR, MOA and Bank requirements. A social impact assessment and RAP, if needed, will be prepared according to resettlement and public consultation policies during the first year of NRIMP- 1, at the time when engineering designs will be prepared and/or updated. Civil works will not start until a RAP is approved by the Project Office and World Bank. CP-6A Kabansalan-Basay Road. This sub-project will improve 39 km of the road between Hinoban and Basay in the southern part of Negros island. It is the remaining link of the ring coastal road to be upgraded. The work will include surfacing the gravel road with asphalt concrete, raising the grade-line in flooded sections, constructing new bridges to replace deteriorated ones, building concrete box culverts to replace existing structures and improving hairpin turns in mountainous areas. Most of the section follows the coast, which may affect coastal resources if precautions are not taken. Detailed engineering designs will be started in April 2000. Construction is expected to begin during the second year of NRIMP- 1. A draft EMP was completed which did not identify any significant environmental problems such as impacts on mangroves, agricultural or forested areas. However, because the road follows the coast, runoff from erosion will have to be controlled to avoid damage to marine ecosystems such as coral reefs. The EMP will be finalized according to DPWH-DENR, MOA and Bank requirements. A social impact assessment and RAP, if needed, will be prepared according to resettlement and public consultation policies the first year of NRIMP-1, when engineering designs will be started and/or updated. Civil works will not start until the RAP, if needed, is approved by the Project Office and the Bank. CP-6B San Enrique-Vallerhermoso Road. The San-Enrique road is a 77 km stretch that crosses Negros Isaland. The road serves a population of about 150,000, and agriculture is the main economic activity. This sub-project will upgrade the remaining 26 km gravel section between the Negros Oriental provincial border and La Castellana in the province of Negros Occidental. The project will resurface the gravel road with Portland cement concrete and improve drainage. Detailed engineering designs will be started in April 2000 and construction is expected to begin during the second year of NRIMP- 1. The EMP will be finalized according to DPWH-DENR, MOA and Bank requirements. A social impact assessment and RAP, if needed, will be prepared according to resettlement and public consultation policies during the first year of NRIMP-I, when engineering designs will be started and/or updated. Civil works will not begin until the RAP, if needed, is approved by the Project Office and the Bank. CP-7 Maramag-Kibawe Road. The Calinan-Buda 46 km section of this road is located in Davao del Norte and Bukidnon in Mindanao Island. Its improvement to asphalt concrete pavement standard is currently under contract, financed and approved under the HMP. However, as the contract started in June 1999 and will not be completed by the project closing date of June 30, 2000, it will continue to be financed under NRIMP- 1. An Enviromnental Compliance Certificate (ECC) was issued for this contract. Minor resettlement activities were carried out according to existing laws. However, at the Bank's request, EIA-PO will complete a social assessment and carry out appropriate actions to comply with the proposed resettlement policy. - 36 -  CP-8 Davao-Bukidnon Road. This 59 km road section is located between Maramag and Buda in Bukidnon Province on Mindanao Island and is the continuation of the Miramag-Kibawe Road. Its improvement to asphalt concrete pavement standard is also under contract, financed and approved under the WB Highway Management Project. However, as the contract also started in June 1999 and will not be completed by the project closing date of June 30, 2000, it will continue to be financed, under NRiMP-1 . An Environmental Compliance Certificate (ECC) was issued for this contract. Minor resettlement activities were carried out according to existing laws. However, at the Bank's request, EIAPO will complete a social assessment and carry out appropriate actions to comply with the requirements of the proposed resettlement policy. Procurement packaging. All contract packages (CPs) will be procured individually under ICB procedures. CP-6A and 6B will be packaged together under CP-6. The PIP provides the procurement status of all CPs. Implementation arrangements. In addition to its overall coordination and reporting roles for the entire project, the IBRD Project Management Office will implement the road upgrading component. The PMO was established many years ago and has a good understanding of WB-fmanced projects. The PIP details the PMO's responsibilities. All CPs will be supervised by an experienced road engineering consultant firm. Because the work in CP- 1 is technically complex (extensive slope protection and stabilization works), the consultant firm which prepared the detailed engineering and bidding documents will be the one chosen to supervise the works, since it has in-depth knowledge of the design. This will ensure continued professional liability and the technical approach. Only one firm will be hired to supervise all the other contracts. To improve the management of the contract, DPWH will endorse the following: * The approved agency engineer estimate (AAEE) by the Secretary will be based on the consultant's cost estimates; * The variation order (VO) will not be necessary for works below 15% of the original amount or if they do not represent more than 0.05% of the contract price; * Power to authorize VOs up to an aggregate amount of 10% of the contract price will be delegated to the PMO for upgrading contracts and BOM for maintenance contracts; - The as-staked drawing requirements will be eliminated and the engineer will be responsible for adjusting the design, when needed; - An unconditional bank guarantee of a letter of credit will be required for a performance security; * Contracts will only be awarded if contractors provide an acceptable critical-path work program. Implementation schedule. The CPs not completed within the three-year life of NRIMP- 1 will be financed under NRIMP-2. If NRIMP-2 does not become effective, the Government will finance all incomplete CPs itself. Quality assurance initiatives. To support the PMO in implementing NRIMP activities, a road upgrading contract advisor (RUCA) will be hired. Besides advising the PMO on contractual matters, the RUCA will ensure that supervision and especially quality control is done properly. Provisions will be made under the contract to allow random soil and material testing by an independent laboratory. Also, since about 1,000 km of roads will be studied and designed under NRIMP-1, DPWH will hire a road design advisor (RDA) to review feasibility studies, the quality of surveys and detailed road engineering designs, and audit safety measures. The RDA will work closely with the PMO-FS. Both advisors will be hired under a single contract and managed by the PMO. Services are estimated tp cost about $1.6 million (P64m) including contingencies. Feasibility Studies and detailed Engineering Designs. This sub-component inludes the provisions of consultant services to carry out feasibility studies and detailed engineering designs for road sections which upgrading could be financed under NRIMP-2. Services are estimated to cost about $9.3 million (P372m) including contingencies. Safety measures. Safety audits will be carried out on each detailed engineering design. Also, current standards with regard to guardrail systems will be upgraded. - 37 -  Project Component 2 - US$112.29 million A.2 Preventive Maintenance. NRIMP will finance the annual preventive maintenance on the NRS, which comprises resurfacing and strengthening works. The component will be implemented by the Bureau of Maintenance (BOM). IBRD will finance a slice of the annual programs procured through NCB contract arrangements. The works will mainly consist of asphalt concrete overlays, bituminous resealing, and various associated pavement repairs (drainage, shoulders, potholes, etc., amounting to less than 20% of overall contract costs). Funds from the loan will be disbursed on a quality output basis--that is, if selection, preparation and execution meet minimum pre-defined quality standards and if DPWH has paid the contractor. An independent technical auditor will review the quality at each step (designs, procurement and construction) and based on a scoring system, will recommend contracts to be reimbursed from the loan. Also, the Bank will review and approve the maintenance programs each year. To ensure a high rate of compliance, preparation and execution will follow a Quality Assurance System defined during project preparation. To help prepare and implement the program, consultant services will be provided; however, these will be reduced as NRIMP progresses and BOM engineers become familiar with preparation and supervision tasks. Table 1 describes the proposed FY 2000 PM contracts. FY 2000 PREVENTIVE MAINTENANCE SUB-PROJECT Name Of Road Section Location Station Limit Length Traffic Estimated (Km) (AADT ,000) Cost (P m) 1. Manila North La Union 273 - 284 6.0 6.0 35 2. Manila North La Union 286 - 292 6.0 6.0 35 3. Manila North Bulacan I 28.8 - 32.8 4.0 15.3 20 4. Daang Maharlika Bulacan II 52.8 - 64.0 7.0 23.6 40 5. Manila North Tarlac 105 - 108 3.0 20.4 20 6. CamarinesSur-Tiwi-Legaspi Albay 551.3 - 556.8 5,5 5.9 30 7. Bacolod South-Kabankalan Negros Occ. II 10.4 - 17.9 7.5 6.7 40 8. N. Bacalso Avenue Cebu South 8.55 - 21.0 6.0 2.0 35 9. Rizal Bdry.-Famy-Quezon Quezon 66.7-79.2+ 7.0 5.0 40 108-111 7.5 6.2 35 10. Tejero-G.Trias-Magahan-Tagatay Cavite 32.0 -45.0 8.0 7.2 30 11. Daraga-Legaspi-St. Domingo Bdry Albay 524.7 - 531 8.0 5.9 30 12. Ligao-Tabaco Albay 503 - 511 5.5 5.0 20 13. Concepcion-Magalang Tarlac 115 - 120.5 9.0 3.8 40 14. Manila South R. Camarines 257.4 - 266.4 90.0 450 Norte TOTAL The total budget for CY200 1 is P 1.6 billion, which includes civil works at P 1.523 billion, consultant services at P45 million and operating expenses (regional and central) at P32 million. The estimated amount of the project is based on an approximate value of overlay at P3.50 M/km at a pavement width of 6.10 meters and asphalt overlay thickness of 0.50 mm. Project lengths may change depending on variables such as pavement width, volume of shoulder materials, drainage if warranted, and resealing of pavement prior to overlay, among other factors. - 38 -  Implementation arrangements. The preventive maintenance sub-component will be implemented through BOM's Preventive Maintenance (PM) Unit, which will be assisted by a consultant team for sub-project selection, preparation, procurement and implementation. However, the assistance will be reduced as the project progresses and DPWH engineers become familiar with the process. The prequalification and bidding processes will be handled by BOM and PBAC respectively, using documents and designs that will be prepared by an experienced consultant with input from the regional office (RO) and district engineers office (DEO). . Contracts will be supervised by BOM headquarters staff consisting of a resident engineer, material engineer and a field inspector; assistance will be provided by an engineer of the RO and a consultant team, which will include a leader/maintenance specialist, two area maintenance specialists, and one sealing specialist. Detailed arrangements and roles are described in the PIP. Acceptance criteria for reimbursement. An independent technical audit specialist will be hired to establish whether: * Designs for preventative maintenance are appropriate; * The procurement process selected experienced and capable contractors; * Work completed meets minimum standards stated in the specifications. The auditor will recommend if the work should be reimbursed from the loan. To help the auditor evaluate whether individual contracts are eligible, a model will be used that includes four main elements weighted for their importance. The elements and the sub-elements, together with the point system and weighting, are summarized in the table below. Acceptance Criteria Model for Preventive Maintenance Works Element ~~~~~~~~~~Minimums for Criteria Eement Sub-elements Sub-element Weight 1- 2000 (%) (%) 2- 2001 3- 2002 and 2003 Design and 20 Evaluation design data 40 1- 15 treatment Treatment selection/design 30 2- 16 selection Specification 30 3- 16 Prequalification 10 Prequalification documentation 40 1- 7 Prequalification process 20 2- 8 PQ evaluation report (& 40 3- 8 approved list) Bidding 10 Bidding documents 20 1-7 Bid evaluation and contractor 80 2- 8 selection 3- 8 Construction 60 Supervision reporting and 5 1- 50 documentation 15 2- 51 Quality control testing 5 3- 52 Quantity measurements 70 Evaluation of completed works (Note 1) - pavement works - shoulders - side drainage others Note: The weighting used to apportion importance to the items listed under Evaluation of Completed Works will bbased on the percentage each represents in the total bid price, less mobilization. The acceptance criteria for full reimbursement (i.e. 50% of fmal contract cost) for the year 2000 preventive maintenance program will be an overall rating of 80% combined with individual ratings for each sub-criteria over the minimum indicated in the table. The acceptance criteria in 2001, 2002 and 2003 will be an - 39 -  overall rating of 85% (for 2001) and 90% (for 2002 and 2003) combined with individual ratings for each sub-criteria over the minimums indicated in the table. Project Component 3 - US$ 9.96 million A.3 Long-Term, Performance-Based Maintenance (LTPBM). This component aims to test the performance of multi-year routine, periodic and preventive maintenance contracts. Payments under the LTPBM component will be based on outcomes; that is, whatever task the contractor is expected to perform must meet the established standard (minimum service level), and not simply have completed a certain quantity of physical work. Under NRIMP- 1, two pilot contracts for 231 km of national roads in Laguna and Quezon provinces will be issued for an estimated P375 million, including contingencies and consultant services, that will help contractors prepare bids and BOM supervise the contracts. The component will be implemented in two contracts, each over three years beginning right after project effectiveness. The first contract involves the 97.1 km Famy Infanta Road and Pagsanjan -Luisiana-Lucban-Tayabas Road and will cost an estimated P137 million. The second involves Daan-Maharlika Highway, Tiaong-Lucena Junction and the Pagbilao to Camarines Norte Boundary sections of approximately 134.3 km, and will cost an estimated P166 million. Each contract includes three major maintenance components--for preventive work, catch-up routine work and performance (routine and periodic work). Preventive maintenance is designed to irnprove the roads' structural condition. Catch-up routine maintenance is designed to reduce the present maintenance backlog, particularly with respect to shoulders and drainage. Some minor improvements may be included such as additional drainage structures, slope protection, guard rails, road signs, markings and reconstruction of short sections. After preventive and catch-up routine maintenance are completed, performance maintenance will begin. The preventive and catch-up routine maintenance contracts will be executed and paid for in the usual manner (based on the quantity of work completed). The performance maintenance, however, will be executed according to minimum standards set in the contract. If contractors fail to maintain them, the monthly lump sum payment will be reduced, according to the penalties for non-compliance delineated in the contract. NRIMP-2 and-3. If successful, this initiative will be expanded to other provinces under future NRIMP phases. Because NRIMP-I is a limited pilot in one sub-region of the country, further pilots will probably be needed to incorporate a broader range of physical, social and economic conditions: NRIMP-II will be designed to address them. Under NRIMP-III, the LTPBM sub-component may be expanded throughout the country on a small scale to serve as a training ground for this type of maintenance program. Growth from then on will reflect the readiness of DPWH and market conditions. Implementation arrangements. The BOM, which will be responsible for managing the project, will supervise the LTPBM contract. The regional office will coordinate with the districts and provide specialists (for controlling quality and surveying quantities). The BOM-assigned engineer, along with the district offices, will be responsible for supervising the contracts daily, which will cover work in progress and monitoring compliance with performance criteria. DPWH will be assisted with an international consultant who will work with the LTPBM team. The PIP provides further details on implementation arrangements. Project Component 4 - US$38.41 million B.1 Business Improvements Implementation Projects (BIIPs). NRIMP will finance the implementation of a wide-ranging program of Business Improvements in DPWH, including a major investment in information technology for improved communications and support to decision-making and monitoring. This Business Improvement program was developed and evaluated in detail under the RIMSS component of the ongoing Highway Management Project. The implementation is planned to extend over the three phases of the NRIM Program with the highest concentration of high priority improvements being implemented under NRIMP- I and NRIMP-2, and some under ADB Road Improvement VI. -40 -  Background. During moves in 1994-95 to improve the management of the National Road network and the allocation of funds by upgrading the road information systems, DPWH also recognized that it faced institutional and operational challenges to make the delivery of works and services more efficient, and to provide better service to road users. Thus DPWH set goals to: * Emphasize client needs * Focus on re-engineering the most important processes * Identify and prioritize opportunities to reduce costs and improve efficiency and effectiveness * Adopt technology to enable these steps to be taken Consequently DPWH launched a business process re-engineering effort to determine new ways to perform its activities, stressing the support of new information systems. This process was assisted by the Road Information Management Support System component of the ongoing HMP in a highly consultative and participatory process. In 1997, over 100 DPWH employees (meeting in workshops) and over 30 external individuals or organizations analyzed nine areas within DPWH's processes for managing roads - the As-Is analysis. The areas were broken down into core, support and strategic functions. CORE * Planning * Building (design and construction) * Operations (maintenance) SUPPORT (management processes) * Financial * Physical resources * Human resources * Information * Procurement STRATEGIC * Institutional strategy New processes were identified and then analyzed to see how they could be introduced. Workshop participants recommended 154 changes which were regrouped into the Business Improvement Implementation Projects (BIIPs). The program's priorities were combined with those of managers to reflect links among the various high priority areas. This was based on the issues, opportunities and effects from the As-Is analysis, along with the recommendations and benefits from the To-Be analysis. DPWH then labeled 37 as having high priority and 23 with medium priority. Most BIIPs given high priority will be introduced under the NRIMP program. Once the priorities were ranked, the project team reviewed the links and suggested slight adjustments. Figure 1 "DPWH Enterprise Model" summarizes the BlIPs within each of the nine business areas, and the Projects under which they will be implemented, e.g., NRIMP or other projects (the HMP and ADB-fmanced Sixth Road Project). Figure 2 describes the BIIP implementation plan over the life of the NRIMP. Overall, the business improvement process will need considerable time, effort, resources and commitment. For example, a legislative mandate will be needed on new funding mechanisms. Also, with few exceptions, advanced technology will be bought or developed, or existing systems upgraded. Further, a comprehensive communications plan must be developed and staff capacity improved. - 41 -   FigLie 1: DPVVH Enbprise Model N T EP CaGbod . a G * BigeMa * Land AxuM * HighNavCadi6aoTal Dic R e * Asesmentand * Cost Estfreion Feasblily . &voe9s -Pst Evaluation - Paveret M enrt DesWi Tcos u A~~Ah .S's~~~~ F nei --i N NNRMP 1 MB and P 1s BT* ee Saabs * Hw Ina Dat * Bid and Awad E * FIP2 * Payroll * Enooyee Sdi * Inbrnab Ten&ob