Peru - Sixth Road Project

FILE COPY DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. 302a-PE PERU APPRAISAL OF A SIXTH ROAD PROJECT April 11, 1974 Latin America and the Caribbean Projects Department This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. Currency Equivalents Currency Units = Sol de Oro (S/.) Uq$1 = S/. 38.7 USl million = S/. 38,700,000 S/. 1 million = US$25,840 Fiscal Year Biennial Periods January 1 - December 31 System of Weights and Measures Metric British/US Equivalent 1 meter (m) = 3.28 feet (ft) 1 kilometer (km) = 0.62 mile (mi) 1 square kilometer (sq. km) = 0.386 square mile (sq. mi) 1 metric ton (m ton) = 0.98 long ton (1g ton) = 1.1 US short ton (sh ton) Abbreviations and Acronyms ADT - Average Daily Traffic ALALC - Latin America Free Trade Association ECLA - Economic Commission for Latin America ER - Economic Return FYB - First Year Benefits GDLT - General Directorate of Land Transport GNP - Gross National Product INP - National Planning Institute MLTC - Ministry of Transport and Communications ORDEZA - Organismo Regional para el Desarrollo de la Zona Afectada ORETT - Transport Tariffs Regulatory Commission PC - Peruvian Corporation SEM - Mechanical Equipment Service SPO - Sectoral Planning Office UNDP - United Nations Development Programme USAID - United States Agency for International Development PERU APPRAISAL OF A SIXTH ROAD PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS ........................... i-it 1. INTRODUCTION .............................. . . . 1 2. THE TRANSPORT SECTOR ....................... 3 A. The Country and Its Economy .................. 3 B. The Transport System ......................... 4 C. Transport Policy and Coordination ............ 6 3. THE HIGHWAY SUBSECTOR ................... * ......... 8 A. The Highway Network ................... .. ....... 8 B. Road Transport ............................ .. 8 C. Highway Planning and Financing ............... 9 D. Highway Administration ....................... 10 E. Highway Engineering ...... ............ 10 F. Highway Construction ......................... 11 G. Highway Maintenance .......................... 12 4. THE PROJECT ........ 0...... .. . .......... ... .. 13 A. General Description .......................... 13 B. Cost Estimates and Financing ................. 16 C. Disbursements ........... ..... ... & ....... . 18 1'. Execution .............. .. ..... .......o.... . 18 5. ECONOMIC EVALUATION ........o................ 19 A. General .... . . . . . . . . . . ...........ob o o oo o f oo - o o 19 B. Construction and Improvement of the Huanuco-Aguaytia Road ............ . 20 C. Improvement of Feeder Roads ................. 22 D. Road Maintenance Program . ..... ...............23 E. Pre-Investment Study ......................... 23 6. AGREEMENTS REACHED AND RECOMMENDATION . o......... 24 This Appraisal Report has been prepared by Messrs. A. van Dijck (Engineer) and A. Soto (economist) and has been edited by Miss V. Foster. TABLE OF CONTENTS (Cont'd.) TABLES 1. Composition of Highway Network 2. Vehicle Registration 3. Motor Fuel Consumption 4. Highway Expenditures and Road User Contributions 5. Design Standards for the Huanuco-Aguaytia Road 6. Traffic Flows on the Huanuco-Aguaytia Road 7. Construction Cost Huanuco-Aguaytia Road 8. Summary of Vehicle Operating Costs 9. Economic Evaluation Results - Huanuco-Aguaytia Road 10. Economic Data - Huanuco-Aguaytia Road, Total Phases I and II ANNEX 1. Estimated Schedule of Disbursements MAP Sixth Road Project - IBRD 10610 PERU APPRAISAL OF A SIXTH ROAD PROJECT SUMMARY AND CONCLUSIONS i. The Andes, ranking among the world's highest mountain ranges, divide Peru into three markedly different physical regions. The economic development of the country has been influenced considerably by this division and by the existence of rich mineral deposits in the Andes. With the excep- tion of mining, the major part of the economic activity is centered along the narrow coastal region and, in particular, around the Lima-Callao metropolitan area. Transport facilities reflect the existing economic and demographic dis- tribution. The Pan-American Highway, running the entire length of the country near the coast, provides the main transport system. Major secondary roads and two railway lines link the most important coastal cities and the main ports with large towns and mining centers in the Andes. ii. The road network comprises about 50,000 km of roads, of which only some 5,000 km are paved; although road transport is the prime traffic mode, the system is in a generally rudimentary condition, resulting in high trans- port costs, very long travel times, and considerable damage and spoilage of cargo. There are 35 ports, 11 of which handle most of Peru's international trade. Water transport is important, not only along the coast, but also for the sparsely populated upper Amazon river plains, where 10,000 km of navigable rivers constitute practically the only means of transportation. Peru has 2,200 km of railways divided into several separate systems; the main lines, the Central and Southern Railways, have recently been purchased by the Government. At present, the Government owns about two-thirds of the total railway length in the country. For a country with the size and rugged topography of Peru, air transport is essential. In spite of the efforts made during recent years to improve existing facilities and services to meet the rapidly increasing demand, there is still need for further improvement in this field. iii. The Peruvian Government has prepared a 1971-1975 Investment Plan, which aims, inter alia, at increasing production in the agricultural, fishing, industrial and mining sectors, while stimulating economic development in regions outside the Lima-Callao area. Practically all the major transport projects re- quired to meet such objectives have been presented by the Government at the June 1973 Consultative Group Meeting for Peru in Paris. A Bank transport sector mission, which visited the country in September-October 1972, reviewed the list of projects and found them generally adequate in the context of the Plan's objectives, with some exceptions. Moreover, the mission helped to determine the priorities for investment in the sector, priorities which served as a basis for the preparation of the proposed project. iv. The main element of the proposed project consists of the construc- tion and improvement of the 219-km Huanuco-Aguaytia section of the 800-km Lima-Pucallpa road, linking the metropolitan area of Lima-Callao with Pucallpa on the headwaters of the Amazon river system. Loan 425-PE of September 1965 was intended to help.finance the entire construction of the 450-km La Oroya- Aguaytia road, but, because of extensive cost overruns brought about by ex- tremely difficult geological, soil and climatic conditions, it was necessary - ii - to divide the works into two phases and to apply Loan 425-PE to the financing of the first phase only. The proposed project includes additional drainage, slope and river erosion protection works in the most critical section left for the second phase of the La Oroya-Aguaytia road, i.e., the Huanuco-Aguaytia section, as well as paving of three-fourths of the section; the paving of the most difficult mountainous stretches, totaling 55 km of highly unstable terrain, will be deferred until further geotechnical studies included in the project are carried out. Purchase of maintenance equipment for a maintenance program of the La Oroya-Pucallpa road, as well as a double surface treatment for the 61-km section starting in Pucallpa, are also included in the project. The feasibiLity study and the detailed engineering were carried out by the Italian consultants SAUTI with financing provided under Loan 425-PE. v. The project additionally provides for the construction and improve- ment of about 200 km of feeder roads which lead into the project road. Also proposed is the financing of consulting services for construction supervision, the preparation of feasibility studies and detailed engineering of transport facilities which could form the basis of future projects, and a study of marginal costs of road transport in Peru. vi. Execution of the project is expected to take about four years and will be the responsibility of the General Directorate of Land Transport (GDLT) in the Ministry of Transport and Communications. Consultants contracted under terms and conditions acceptable to the Bank will carry out the studies, will assist in the evaluation of bids and will supervise construction. Construc- tion contracts for the main road will be awarded on a unit price basis after international competitive bidding in accordance with normal Bank Group proce- dures. Because of the nature, location and size of the feeder road program, the Government will have the option of carrying out these works by force account under the responsibility of the GDLT. vii. Major development benefits will accrue from the completion of the Huanuco-Aguaytia road by improving the access to existing and potentially rich forest, cattle and agricultural areas around Tingo Maria, Pucallpa and Iquitos. Benefits from the construction elements of the project will include savings in vehicle operating, maintenance and time costs. The economic return from the proposed second phase works on the La Oroya-Aguaytia road is 29%. The economic return of the total investment, counting costs and benefits of the two phases together, is about 19%. viii. Total cost of the presently proposed project is estimated at US$40.0 million, with an estimated foreign exchange component of US$21.1 mil- lion (53%); the loan would finance US$26 million, thus including US$4.9 mil- lion in local currency financing. The remainder of the local costs, amounting to US$14.0 million, would be provided by the Government. ix. The project provides a suitable basis for a Bank loan of US$26 million for a term of 25 years, including a five-year grace period. PERU APPRAISAL OF A SIXTH ROAD PROJECT 1. INTRODUCTION 1.01 The Republic of Peru has requested Bank assistance to help in the financing of a road project comprising: (a) completion of construction and improvement of the Huanuco-Aguaytia road (219 km); (b) construction and improve- ment of feeder roads (200 km); (c) procurement of maintenance equipment and resealing of a 61-km section between Neshuya and Pucallpa; and (d) consulting services for construction supervision, geotechnic, road user charges, and transport pre-investment studies. The total cost of the proposed project is estimated at about US$40.0 million equivalent and the estimated foreign ex- change component is US$21.1 million. In order to make a suitable contribution to Peru's development program, the proposed loan would finance 65% of project costs (US$26 million equivalent), thus implying local currency financing of US$4.9 million; the balance in local costs, US$14.0 million equivalent, would be provided by the Government. 1.02 This would be the sixth road project financed by the Bank in Peru, including the road reconstruction project after the 1970 earthquake, and the twelfth in the transport sector (there have been four port projects and two railway projects). The Bank is also acting as Executing Agency for a UNDP- financed technical assistance project in transport planning, and it has launched, in collaboration with ECLA (Economic Commission for Latin America), a transport information program known as the Sector File Project (paras 2.15 and 2.16). 1.03 Two of the loans have been made with road maintenance as their main objective (127-PE and 300-PE) in 1955 and 1961, totaling US$5 million and US$10 million, respectively. Although the first road maintenance project ran into several difficulties, the maintenance effort was continued and ex- panded under the second maintenance project with considerable success. Moreover, the road reconstruction loan (706-PE) of 1970 (para. 1.06) also in- cludes the provision of technical assistance to the Ministry of Transport and Communications (MTC) to improve maintenance and betterment operations in the country. 1.04 The two highway improvement projects, both for the La Oroya-Pucallpa road, have been plagued by difficulties from the outset. The first one (271- PE; US$5.5 million) helped finance reconstruction and paving of about 166 km of the Aguaytia-Pucallpa road, the most eastern section of the 800-km road linking Lima on the coast with Pucallpa on the Ucayali river, in the upper Amazon river system. Because of extremely difficult soils and climatic condi- tions and lack of experience, the road was only 80% completed when loan funds were exhausted in 1967; at that time, the Government was unable to raise funds to continue the works. Extensive failures have occurred in the work done, and up to US$10 million has been estimated for the cost of repaving and completing the road. In May 1969, a ministerial committee was appointed to investigate the history, work quality and condition of the project. On the strength of the committee's report, the Government initiated legal proceedings against the consultants (Brown and Root, US) and contractors (Zachry, US, and associated - 2 - contractors In Peru), claiming that the failures were due to unsatisfactory and inadequate construction methods. In February 1974, the matter was settled out of court. 1.05 The second construction loan was for the La Oroya-Aguaytia section of the Lima-Pucallpa road (Loan 425-PE; US$33 million). This loan, signed in September 1965, was intended to finance 60% of the entire road construction costs. in November 1969, the Government and the Bank agreed, after large cost overruns had occurred (para. 4.02), to reduce the scope of the project in order to match the available funds; consequeatly, the remaining works were postponed to a second phase (and a portion is, in fact, included in the pro- posed project). The scaled-down project was completed by January 1973, 18 months after the original Closing Date. 1.06 The most recent loan for a road project (Loan 706-PE; US$30 million) was sioned in September 1970; it helps in financing the cost of consultants for the feasibility studies and detailed engineering and 67% of the cost of re- constructing the access roads to, and within, the Callejon de Huaylas, the area struck by a violent earthquake in May 1970. The project had only been identified at the time the loan was made, and a preliminary study of alter- native routes for the access road, a feasibility study, and detailed engineering still had to be carried out. The time required for this process was under- estimated at the time of appraisal, and a number of difficulties have developed with the consultants engaged to prepare the studies; the rate of disbursement has, therefore, been much slower than forecast. The project, however, is expected to proceed satisfactorily, and completion of construction is now scheduled for the end of 1976, 15 months after the original Closing Date. 1.07 Loans of US$2.5 million and US$6.575 million (57-PE and 208-PE) were made in 1952 and 1958, respectively, for expansion of the port of Callao. Although delays were encountered because of difficulties with contractors, the projects produced good port facilities. A sum of US$3.1 million (373-PE) was lent in 1964 for the port of Paita and US$9.1 million (446-PE) was lent in 1966 for the port of Pisco; both projects have been completed successfully. Since January 1970, all ports have been managed by a Port Authority created along the lines agreed with the Bank. 1.08 Two loans (190-PE and 334-PE), totaling US$28. 5 million, were made in 1958 and 1963 to the Peruvian Corporation (PC), a private company which owned and operated the country's most important railways. The first loan, however, was canceled by mutual agreement before it became effective; the second, for US$13.25 million, was successful both from physical and economic points of view, but the PC ran into financial difficulties. As a result, the Government has, since 1967, serviced the Bank loan in accordance with the Guarantee Agreement. In 1972, the Government purchased the*PC's assets in Peru and created a new agency to manage the state railways (para. 2.08). 1.09 A Bank transport sector mission visited Peru in September-October 1972 to update Information on the sector and to review the Government's strategy for the dyeLveoet of che transport s ystem, as reflected in the 1971-1975 Investment Plan, in lie biennial inveEtment budgets and in the list of proj- ects which the 1vernment hac prepared for the Consultative Group. The findinlg of ti mission. contributed to the preparation of the proposed !,-OJ o-C t, -3- 1.10 The proposed project will continue the works initiated with the help of Loan 425-PE. It will contribute to the establishment of the first all- weather link between the coast at Lima with the Sierra and the headwaters of the Amazon river. Also, some feeder roads leading into fertile valleys in the zone of influence of the main road will be improved under the project. Moreover, the consulting services included in the project will provide the preinvestment studies necessary for additional and important highway invest- ments in the Sierra and the jungle areas. 1.11 The appraisal of the project was based on economic and technical studies prepared by consultants SAUTI (Italy); on information provided by the Government; and on the findings of the 1972 transport sector mission and of an appraisal mission, comprising Messrs. A. van Dijck (engineer) and A. Soto (economist), which visited Peru in March and May 1973. The report has been edited by Miss V. Foster. 2. THE TRANSPORT SECTOR A. The Country and its Economy 2.01 Peru, with an area of 1.3 million km 2 , is the fourth largest country in Latin America. Its population has been growing at about 3% per annum over the last 10 years, reaching 14.1 million in 1972. The Andes, which closely parallel the Pacific coastline of Peru over its entire length, divide the country into a narrow coastal region (Costa), the mountains (Sierra) and the eastern plains (Selva). The Costa, most of which is desert or arid wasteland, has more than two-fifths of the country's population and six of the ten larg- est urban centers, including Lima, the country's capital, with a metropolitan population of 3.3 million. Almost one-half of the population lives on the inhospitable high Sierra, while the remaining 10% inhabits the vast eastern tropical jungles. 2.02 The Gross National Product (GNP) grew in real terms at 6.4% yearly during 1961-1966. Between 1967 and 1969, the growth dropped considerably, coming to a complete standstill in 1968; with the change of government in October 1968, however, the economic situation recovered and the growth in GNP reached 6.5% yearly during 1970-1972. Although GNP per capita was US$480 in 1971, it is poorly distributed, with a very low per capita income for the major part of the large rural population. The Government has been promoting a change in this situation, particularly through an active program of agrarian reform, which is being assisted by a recently signed US$25 million Bank loan for agricultural credit. 2.03 Significant economic development has taken place along the Costa and at some isolated mining enclaves in the Sierra, but limited development has occurred elsewhere. The country's rugged topography and difficult climate make transport very difficult and costly, thereby limiting the effect which development at one place has had upon the rest of the country. Inadequate transportation facilities and high transport costs have long been recognized as two of the main obstacles to development in Peru. .4- B. The Transport System (i) General 2.04 The backbone of the Peruvian road network is the Pan-American Highway, an all-weather asphalt road 2,750 km long, located between the Andes and the coast and running the entire length of the country (see Map). Major secondary roads link several of the most important coastal urban centers with large towns in the Sierra. A few roads leading into the Selva have been under construction for several years, most of them with the assistance of foreign financing agencies. However, with the exception of the Lima-La Oroya-Aguaytia road, there is still not even a semi-permanent road connecting the Costa, the Sierra and the Selva. 2.05 There are 35 ports, 11 of which handle most of Peru's international trade. There are also 2,200 km of railways divided into several separate networks with different gauges and characteristics. The main networks, the Central and the Southern, link important towns and mining centers in the Sierra with ports on the Pacific coast. Civil aviation plays an important role because of the size and topographic conditions of Peru, and there are some 48 airports and two domestic air carriers: the privately owned FAUCETT and the recently created Government airline, AEROPERU. The transport sector includes a considerable length of waterways, and coastal shipping is important among a number of the country's Pacific ports. About 10,000 km of navigable rivers exist in the upper Amazon river basin, and lake transport takes place between Peru and Bolivia over Lake Titicaca. 2.06 In 1970, the transport system carried a total of about 9.8 billion ton-km and 28 billion passenger-km. Of the ton-km, road transport carried about 55%, coastal shipping 33%, railways 8%, river transport 4% and lake and air transport about 0.4%. In passenger traffic, road transport is by far the most important mode with 98% of the total, while air transport and railways shared the remaining 2% in almost equal amounts. (ii) Highways 2.07 The highway system and its administration are described in Chapter 3. (iii) Railways 2.08 Several separate private railways have been built from the Costa to the Sierra since the 19th century as part of the development of rich mineral ore deposits in the Andes. Until 1972, the Government owned only four small lines, adding up to less than one-fifth of the total length. In 1972, the Government purchased from the Peruvian Corporation the Central and Southern Railways, the most important lines in Peru, with a total length of 1,200 km. It also created a new agency, Empresa Nacional de Ferrocarriles (ENAFER) to manage the state railways. The Central Railway links the mineral producing area of Huancayo and La Oroya with the port of Callao. It is the highest standard gauge railway in the world (up to 4,829 m) and one of the most difficult to operate. The Southern Railway connects the port of Mollendo -5- with Puno and Cuzco on the Sierra and, over Lake Titicaca, with the Bolivian ports of Chaguaya and Guaqui, whence a railway line continues to La Paz. The Southern Railway moves mainly Bolivian mineral export and general import traffic and provides for the exchange of Peruvian products between the Sierra and the Costa. There are, besides, about 500 kan of private lines used primarily for shipping minerals. Freight traffic during the last two decades reached a maximum of 4.3 million tons in 1965 and has been steadily decreasing in recent years; in 1971, it totaled about 3.1 million tons. Passenger traffic, which decreased rapidly after 1964, has become stable in recent years at around 2.5 million passengers per year. (iv) Ports and Waterways 2.09 Some 97.6% of the tonnage of Peru's imports and 99.8% of exports are transported by sea. A further 1.5% of imports and a small quantity of exports are transported by river. Ports are therefore a crucial link in Peru's international trade, and they constitute, in general, the most efficient and developed of the country's transport modes. Callao, Chimbote, Salaverry, Pisco and Matarani are the main deep water public sea ports (the private iron ore port of San Nicolas moves the largest tonnage), while Iquitos and Pucallpa are the main river ports, giving access to the Amazon system. The total traffic through Peruvian ports increased from 15 to 23 million tons between 1961 and 1971, mostly due to increased exports of minerals (principally iron ore) and fish meal, and increased coastal traffic of petroleum products. 2.10 The distance by ship along the Peruvian coast is about 1,700 km. Goods are moved fairly long distances, averaging over 1,000 km. Petroleum and iron ore account for some 97% of the total tonnages of coastal shipping; the latter is moved from San Nicolas to Chimbote, while crude oil and petroleum products are shipped from Talara to the other ports. Domestic river traffic is still very small; 224,000 tons of dry cargo and 21,000 tons of petroleum products were transported by river during 1971. Lake transport originated about 30 million ton-km in 1970, mainly for the import-export trade of Bolivia, represented by minerals outbound and capital goods and general cargo inbound. 2.11 Three feasibility studies have recently been completed for port projects in Peru: the Amazon River Ports Study, financed under Bank Loan 446-PE, which recommends investments in the ports of Iquitos, Yurimagua3 and Pucallpa; and feasibility studies for the improvement of the port of Chimbote and for the construction of a new deep water port at Norte Chico to replace three existing lighterage ports (Chancay, Huacho and Supe). These studies might form the basis for a Bank-financed port improvement project. (v) Air Transport 2.12 Aviation infrastructure 1 ludes one international airport serving the Lima-Callao area, sever more azlc to handle twin-jet aircraft, and about 40 additional ones used by smaller commercial carriers. Six airports had more than 50,000 passenger movemnents in 1971; Lima's international airport, by far the most important, had4 a total of 1.3 million passenger movements (about two-thirds of the country's total). Domestic air passenger service - 6 - grew at a high annual rate of 9.6% during 1960-1971, reaching about 600,000 passengers in 1971. Pass-km have increased even faster, at a rate of 10.3% annually in the same period, amounting to 387 million pass-km in 1971. Air cargo, on the other hand, declined by 3.4% during 1960-1971, probably as a result of road transport competition; in 1971, 15,500 tons of domestic cargo were moved by air transport. C. Transport Policy and Coordination 2.13 Before the present Government came to power in 1968, development of the transport sector, particularly construction of highways in the Sierra and Selva, had top priority, after a long per iod of little activity. Since then, Government has increased public investment considerably, while raising the level of investment in the sector only moderately, so that the share of the transport sector in total public investment decreased sharply from more than 30% during 1960-1967 to 16% in the 1971-1975 Five-Year Investment Plan. 2.'4 Nevertheless, the Government is aware of the early stage of devel- opment of the transport sector, particularly the road sector, and has included a number of transport projects in the 1971-1975 Investment Plan. The policy contained in this Plan aims, inter alia, at increasing production in the agricultural, fishing, industrial and mining sectors, while stimulating eco- nomic development in regions outside the Lima-Callao area. The Plan states the need for developing a transport system able to support such objectives. The Bank transport sector mission, which visited Peru in 1972, reviewed the list of projects in the Plan and found it generally adequate in the context of the Plan's objectives. However, in view of the vast needs of the country and the very limited resources available, the mission concluded that a stricter ad- herence to high priority projects in the transport sector was required, as well as a stronger attempt than previously to limit the extent and specifica- tions of betterment and construction works in order to reduce costs and optimize investment. The Bank transport sector mission also concluded that, although, in the short term, the Plan's objectives could be met with rela- tively minor investments in the transport sector, in the medium to long term, substantially larger investment in transport may be required to support an adequate rate of growth of the economy and to help solve the serious social problems in rural areas,*which also command top priority in the Government's policy. 2.15 Transport administration and coordination improved after 1969 with the creation of the Ministry of Transport and Communications (MTC), which unified a number of Government agencies previously under the jurisdiction of various ministries. Budget preparation, and formulation of transport policy and planning within the new organization, are the responsibilities of the Sectoral Planning Office (SPO) in the MTC. In conducting its work, the SPO also follows the general guidelines and directives of the National Plan- ning Institute (INP). The SPO has been active in preparing the 1973/74 biennial budget and in revising the 1971-1975 Investment Plan for the sector. Nevertheless, there are several areas, particularly in project preparation, selection of priorities for investment, and pricing policy, in which the SPO has so far been ineffective. In view of the need to strengthen the SPO, the - 7 - Peruvian Government requested a program of technical assistance from the UNDP. A 100 man-month technical assistance project for transport planning has thus been launched, beginning in August 1973, with the Bank acting as Executing Agency. The consultants financed under this program will help the SPO prepare a five-year rolling development program for the sector. 2.16 A problem hampering the formulation of transport policy has been the inadequacy of information. Therefore, at the request of the Government, the Bank, in combination with the Economic Commission for Latin America (ECLA), has undertaken a program of technical assistance on data gathering and process- ing to strengthen the planning capacity of the SP0. Unfortunately, repeated changes of SPO's staff assigned to this program have delayed its execution. The UNDP-financed technical assistance program, however, will strengthen and continue such assistance and will integrate it with the planning process of the SP0. 2.17 Modal competition exists along a few major transport corridors. Although transport tariffs and changes do not reflect costs in all cases, the extent of uneconomic transport of goods is, in the judgment of the Bank transport sector mission, limited, because of the nature of the commodities hauled and the characteristics of the competing modes. Rail and road transport compete along the Central and Southern Railway routes, while coastal shipping and road transport compete along the coastal corridor. Most of the traffic presently carried by rail or water transport is bulk-type cargo, such as mineral ore and petroleum products, for which road transport is hardly competitive. The only exception pertains to the Southern Railway corridor, where the freight moved by this railway is largely composed of general cargo and agricultural products, making it much more vulnerable to highway competi- tion. Civil aviation also competes, mainly with road transport, for passenger traffic along the coastal corridor. 2.18 Where competition is possible between modes, there is no regulation of traffic; users are free to select the transport mode best suited for their needs. Entry into the road transport industry is also unrestricted. Tariffs in all transport modes, on the other hand, are regulated (para. 2.19). Importation of road motor vehicles is restricted in order to protect the domestic vehicle assembling industry. 2.19 The Organismo Regulador de Tarifas de Transporte (ORETT) is the agency within the MTC responsible for reviewing and proposing modifications in the tariff structure of rail and water transport and the various taxes and charges affecting road transport. ORETT has established a tariff ceiling for the transport, by road, of various commodities over different types of road surfaces and for the three main regions of the country; the tariffs also differentiate by travel distance. Although enforcement of the tariffs is relatively loose, the very few available data and a number of spot checks have shown a fair amount of adherence to such tariffs, especially along the coast, while fares on the Sierra and Selva tend to be higher than ORETT's corresponding tariffs. Transport fares of up to 13 US4 per ton-km, which are high, are being charged between the eastern Andes piedmont (known in Peru as the Ceja de Selva) and Lima for the transport by road of agricultural products. - 8 - 3. THE HIGHWAY SUBSECTOR A. The Highway Network 3.01 The highway system consists of about 50,000 km of road, of which less than 5,000 are paved, 10,000 are gravel and the remaining 35,000 are tracks and improved earth roads (Table 1). The highway system is still in a very early stage of development; not even the 2,750 km long Pan-American Highway along the coast is a satisfactory road. The roads connecting the Costa with the Sierra and the Selva (except Lina"La Oroya) are rudimentary, the roads in the Sierra are at best passable, and the roads in the eastern piedmont and in the Selva are still mainly dry-weather roads. Because of this large backlog, and because of the high cost of road construction and of emergency and maintenance operations, large resources would be required to raise the standards of the road network to levels comparable with those of Latin American countries hav- ing similar GNP. These financial requirements vastly exceed those available domestically and those that might be expected from financing agencies in the near future. Consequently, general upgrading of the system can be regarded only as a long-term objective. The highway network was never sufficiently upgraded, and it is probable that its present condition, in relation to the traffic it carries, is worse than ever. B. Road Transport 3.02 There are no accurate current figures on the vehicle fleet in Peru. The 1971 vehicle fleet has been estimated at around 320,000 vehicles, of which 67% were automobiles, 28% trucks, pickups and vans, and 5% buses; the annual rate of growth has been over 8% in the last decades (Table 2). Of this fleet, 75% is registered in the Lima/Callao metropolitan area. In 1971, 15,700 vehicles were added to the fleet, of which 14,500 were assembled in Peru and 1,200 were imported. 3.03 In spite of the high concentration of vehicles in the Lima area, all indications are that the Costa is being served properly by a diversified fleet of trucks and that there is no produce from the Sierra and Selva which cannot be transported because of lack of trucks. What often happens, however, is that goods cannot be transported due to damage and interruptions in the road network. Nevertheless, this, as well as other road transport data, must be studied in more detail in the future. The technical assistance for transport planning (para. 2.15) and for data gathering and processing (para. 2.16) should improve the level of information on road transport. 3.04 Gasoline and diesel fuel consumption increased by about 7% per annum over the last decade (Table 3), while traffic levels also increased by about 7% yearly in that period, the growth on paved roads being on average about 8% and, on gravel and earth roads, about 5%. Traffic levels are gen- erally low in Peru. Only 1,100 km of road carried more than 2,000 vehicles per day in 1970, all of them situated near Lima, along the Pan-American High- way, and on spurs to the main ports. The MTC estimated that, of the vehicle- km on rural roads in Peru (6.4 million/day), 77% are on the Pan-American High- wv and the port roads, and 23% on the remainder of the network, of which about -9- half are on the Lima-Oroya-Pucallpa road and on the Central Highway through Tarma and San Ramon. C. Highway Planning and Financing 3.05 The highway investment program is prepared by the General Directorate of Land Transport (GDLT) in the MTC, and reviewed and coordinated with those of other subsectors by the SPO. Biennial budget programs are thereafter sub- mitted for approval to the INP and the Ministry of Economy and Finance. Rightly convinced of the need to reach decisions and to select investment priorities on the basis of adequate technical and economic studies, the GDLT has strengthened its department of studies by increasing its staff, and has included in its in- vestment program an important amount for studies. Technical assistance is, however, still required to familiarize both the GDLT and the SPO staff with modern evaluation techniques and to review present procedures and responsibil- ities in these offices. The UNDP-financed technical assistance program (para. 2.15) should help fill this need. 3.06 Highway expenditures are financed mainly from tax revenues. Road user-related revenues have exceeded highway expenditures since 1968 (Table 4). Traditionally, road maintenance investment has been unduly low in Peru; however, even allowing for an adequate increase in road maintenance and for the fact that some of the revenue from road users is utilized for urban transport purposes, the remainder would still cover the total of highway maintenance and administration expenditure for the rural network. 3.07 Since 1968 however, revenues from road users have not been earmarked for roads, and the MTC has had some difficulty in finding funds for adequate road maintenance and for the relatively modest highway investment program of recent years. Although the level of road-user charges is considered acceptable from the point of view of promoting efficient use of transport facilities, further consideration may be given to increasing these charges, taking into account the country's fiscal problems. However, in order to minimize the possible distorting effects of higher taxes, to correct the presently inade- quate structure 6f road user charges (para. 3.08), and to avoid discouraging the development of the generally poor rural areas, first priority should be given to establishing a diesel tax, and to raising existing road user charges in the Lima-Callao metropolitan area, where private vehicles used for urban transport are not covering the social costs which they generate. 3.08 Road-user charges originate mainly in gasoline taxes (about 70% of the total) and import duties (15%); excise taxes, road use (rodaje), tolls and a few other taxes make up the remaining 15% (Table 4). The price is uniform for any given type of gasoline for the Costa and the Sierra, but varies for the Selva region, depending on location. Taxes on gasoline vary from a high of about 17 USJ per gallon for high octane gasoline on the Costa to an ex- tremely low level of less than 1 USJ per gallon for medium and low-octane gasoline in some places on the Sierra and most of the Selva. There is an element of progressive taxation in this tax structure, since the region with the highest income--and also the largest vehicle densities and traffic volumes (paras. 3.02 and 3.04)--is the most heavily taxed. Neither diesel oil nor lubricants are taxed in Peru; nevertheless, for all types of fuel, there is - 10 - an element of hidden taxation in the retention amount included in the retail price, which seems to be more important in the case of diesel. The retention benefits the Governm!nt petroleum agency PETROPERU. Although no adequate studies are available, all indications are that truckers are not paying their share of road use; at the same time, they are contributing, partly through overloading (para. 3.18), to the rapid deterioration of the road network. Consequently, the Government will carry out a study, partly financed under the proposed project, to establish the basis for formulating a sound pricing policy. During loan negotiations, the Government agreed that such a study will be carried out, that the Bank will be offered an opportunity to comment on the terms of :-eference and the results of the study, and that the results of the study will be used as an input for revising road-user charges. D. Highway Administration 3.09 Planning, construction and maintenance of the national road network is the responsibility of the GDLT in the MTC; GDLT is also responsible for the State Railways. Following a reorganization in January 1973, the GDLT is divided into six directorates: (a) studies and designs; (b) construction; (c) traffic (road maintenance, road inventory, vehicle road inventory and road safety); (d) special studies (soils, geology, photogrammetry, traffic counts, etc.); (e) operations (railways, passenger and freight transport); and (f) urban transport. In accordance with decentralization policies of the Government, seven regions were established in the new organization, each consisting of several provinces. Each regional engineer is responsible for all MTC's operations in his region, including road maintenance and road construction. He reports, however, to the Director Superior (Vice-Minister) of the MTC and coordinates his work with the General Director of the GDLT. 3.10 It is doubtful whether the new organization will have a beneficial effect on the MTC's organization and management. Before the reorganization, lengthy, often unnecessary procedures delayed the activities of the Ministry considerably. Making and implementing decisions took more time than necessary, and there was not enough delegation of authority and responsibility. In the new organization, with legal, financial and technical advisors at more levels than previously (the level of the Directorates, the Director-General and the Director-Superior) - one cannot but expect an increase of the delays. The UNDP technical assistance project, for which the Bank is the executing agency, will also provide recommendations on organizational matters; these conclusions should be awaited, but with a reorganization effected only recently, changes may take some time. E. Highway Engineering 3.11 Designing roads in each region in Peru has its particular difficulties. Road construction in the Costa is relatively simple and cheap. However, rare torrential rains may cause flooding, with consequent damage to pavement structures. It is therefore necessary to determine the extent to which these rare heavy rains should be considered for design purposes. Also, heavy traffic on the lightly constructed Pan-American Highway causes existing pave- ments to deteriorate; moreover, increasing congestion near the big cities - 11 - makes the construction of bypasses or sections of expressway necessary. The need for strengthening (or replacing) existing pavement must be determined, as well as the optimum timing for such strengthening and for constructio, >f bypasses and sections of expressways. 3.12 The Sierra imposes great difficulties in road design. For the roads linking the Costa with the highland plateau (generally over Andean passes which are more than 4,200 m high), it is relatively easy to find alignments with a gradient not exceeding 6%, but a satisfactory horizontal alignment and suf- ficient road width are difficult to arrange; cuts and fills and retaining walls are ixpensive and each interference with existing slopes may introduce landslides. The horizontal alignment and road width must be adequate to accommodate existing traffic and allow for future traffic growth, without incurring too high initial costs, while avoiding landslides as much as pos- sible. The roads on the highland plateau are relatively easy to construct. The roads on the east side of the Andes, however, are the most difficult in the country. Rainfall is extremely heavy, slopes are unstable, soils are unsuited for road construction, and adequate road building materials are difficult to find. In designing, extreme care has to be taken to avoid landslides, to the extent possible, by following the curves of the terrain and by limiting road widths. In the Selva, the terrain is flat, rainfall heavy, drainage difficult and road building materials scarce. Generally, a dry season track is all that is necessary, unless a regional development plan is carried out in conjunction with road improvements. 3.13 Peru's official geometric design standards do not take the above mentioned considerations sufficiently into account; roads in difficult terrain have generally been overdesigned, and roads have often been underdesigned in easy sections with high traffic levels. In this respect, experience with foreign and local consultants has frequently been disappointing. However, the Directorate of Studies is now staffed with engineers and economists who realize the necessity of optimizing designs, and there is hope that this trend, streng- thened by the results of the UNDP planning assistance, will bear fruit in adequate designs and moderate construction costs. F. Highway Construction 3.14 In highway construction, experiences in Peru have been dismal. After under-estimation of the difficulties in the design stage, contractors not familiar with this type of terrain often quoted prices which were too low for the difficulties they were to encounter. Virtually all works carried out with foreign financing have run into major difficulties. The Government concluded that foreign contractors and consultants had not been working in the country's interest, and, in two cases, even legal proceedings were entered (against the consultants and contractors of the Aguaytia-Pucallpa road (loan 271-PE) and the USAID/ Eximbank-financed Nieva-Tarapoto road). With time, however, the Government has moderated its attitude, and local and foreign consultants and contractors have gained experience and again are being given an opportunity to contribute to the country's development effort. 3.15 The fairly well developed local construction industry has traditionally shown more interest in urban civil works (expressways, buildings) than in - 12 - the construction of rural roads. Nevertheless, there seems to be a change in that interest, and an important number of local contractors are now register-I in the GDLT, of which about 8-12 are capable of executing highway works in the US$3 to 5 million range annually. Recently, local firms have been awarded contracts for road construction, through international competitive bidding, for works financed under loan 706-PE (para. 1.06). G. Highway Maintenance 3.16 With a still underdeveloped highway network, highway maintenance is of the utmost importance to bring the roads to, or keep them in, at least a minimum tolerable condition. Funds allocated for maintenance have been tradi- tionally insufficient, especially with respect to repair and seal coating of asphalt roads. In 1961, the Bank made a highway maintenance loan (Loan 300-PE) for US$10 million to provide technical assistance (Renaudet-SAUTI, Italy) and to finance the purchase of equipment and the reconstruction of obsolete bridges. In the period up to 1966, the tasks set forth were accomplished, the main- tenance budget was also increased gradually, and 22,000 km of roads were maintained. However, thereafter, because of a shortage of funds, maintenance efforts declined. The Government is now placing considerable emphasis on road maintenance and has increased budget allocations for this purpose con- siderably. From a low of S/. 144 million (US$5.5 million) in 1967, the main- tenance budget for the two-year period 1973-1974 is established at S/. 800 million (US$20 million). This is still insufficient to maintain the entire network adequately, but a doubling of the maintenance allocation has been programmed for 1975/76. Even this may prove less than the maintenance needs of the system, estimated roughly at around US$25 to 30 million per year. Nevertheless, as the financial constraint is removed, other limitations, mainly organizational, and the lack of sufficient qualified staff may prove to be more pressing. 3.17 The maintenance problem is compounded by the inadequate operations of the Servicio de Equipo Mecanico (SEM), a new Government agency within the MTC, which charges for supplying maintenance and construction equipment to all users (public as well as private) on a commercial basis. Although the idea is sound, operations are inadequate. The GDLT has first priority in the distribution of available equipment, but poor coordination, insufficient and poorly maintained equipment and deficient management of SEM hamper efficient road maintenance operations. 3.18 Overloading of trucks is also a severe problem in Peru. Five per- manent weighing stations were installed under Loan 300-PE, and the records show that trucks are often overloaded (especially single rear-axle trucks). There is no evidence that fines are sufficiently high or regulations properly enforced. The Ministry is fully aware of the implications and intends to take remedial action. 3.19 A program of technical assistance and training in highway maintenance started in March 1974, financed under Loan 706-PE. This program will help the Government to establish a sound basis for revising present maintenance organiza- tion and procedures and will review the investment program and operations of SE1. - 13 - 3.20 During negotiations, the Government agreed, on the basis of the recommendations of the consultants providing the technical assistance financed under loan 706-PE (para. 3.19), to provide sufficient funds to maintain its road network adequately and to strictly enforce the regulations regarding the weight of vehicles. 4. THE PROJECT A. General Description 4.01 The proposed project consists of: (a) Construction and improvement of the road from Huanuco to Aguaytia, totaling about 219 km; (b) Construction and improvement of feeder roads, totaling about 200 km; (c) Procurement of maintenance equipment for the La Oroya-Pucallpa road; (d) Resealing of a 61-km stretch of the road from Neshuya to Pucallpa; (e) Consulting services for: (i) Construction supervision of (a) and (b); (ii) Geotechnical studies; (iii) Marginal costs of road transport study; and (iv) Transport preinvestment studies. (i) Construction and Improvement of the Huanuco-Aguaytia Road 4.02 In September 1965, the Bank made a loan (425-PE; US$33 million) for the improvement of the La Oroya-Aguaytia section. The extraordinarily diffi- cult geological, soils and climatic conditions of the region, however, had been vastly underestimated in the design and cost estimates of the original studies, as well as in the bid prices of the contractors; this factor, together with inflation and the Government's inability to pay contractors for extended periods, led to large time and cost overruns. In November 1969, the Borrower and the Bank agreed to reduce the scope of the project in order to match the then available loan funds; consequently, the remaining works were postponed for a second phase. A portion of these works, corresponding to the most critical Huanuco-Aguaytia section (219 km), are now included in the proposed project. 4.03 The Huanuco-Aguaytia road can be divided into the following main sections: - 14 - (a) The 139-km road section from Huanuco to the Tarapoto Fork, 15 km beyond Tingo Maria, crosses the Carpish mountain range through a tunnel at an altitude of 2,700 m and reaches Tingo Maria at a 650 m elevation. An adequate alignment and road width were provided during the first phase, and the additional works now to be carried out call for retaining walls, slope protection and additional provisions in unstable areas; 1975 traffic is estimated at an average 500 vehicles per day (of which 70% are trucks). An asphalt pavement is included in the project, except in the difficult section between the Carpish tunnel and the Caracol area (9 ka). (b) The 80-km road section from the Tarapoto Fork to Aguaytia crosses a mountain range (1,650 m), passes through the 2-km gorge of Padre Abad and reaches Aguaytia in relatively flat terrain, 300 m above sea level. This section is the most unstable and difficult area of the whole road; during the first phase works, the road embankment was only partially completed, and extensive drainage and protection works are still required; even so, the instability of the mountain slopes in a 60-km section is such that the goal under the proposed project will be solely to provide for an adequate gravel road with a reduced chance of interruption to traffic because of landslides or embankment failures. Under the proposed project, in-depth geotechnical studies will be carried out, on which future works, aiming at providing a permanent solution, will be based. Traffic in 1975 is estimated at 300 vehicles per day; 75% are trucks. The 34-km road sectiovs without stability problems are proposed to be paved with asphalt. The standards to which the road has been designed (Table 5) are satisfactory; the consultants, SAUTI (Italy), at the request of the MTC and the Bank, have optimized the design of each section and reduced cost wherever possible (para. 4.11). The nature of the terrain and the type of work to be executed are such that labor-intensive techniques would generally not be appropriate; nevertheless, parts of the work, such as slope protection, lining of ditches and river erosion protection, are labor-intensive. During negotiations, the design standards of the road were confirmed. (ii) Improvement of Feeder Roads 4.04 Although the main function of the project road is that of a trunk route linking Lima and Huanuco with Tingo Maria, the Huallaga Valley (Tarapoto) and Pucallpa, its usefulness would be greatly enhanced if feeder roads lead- ing into it were also improved. The CDLT has selected three roads, totaling 200 km, for which minimum improvements are proposed in the project, such as the construction of bridges and culverts and the provision of a minimum neces- sary width (generally 4 meters) and a gravel surface (para. 5.14). Costs are estimated at US$2.5 million on the basis of preliminary calculations. Simplified detailed engineering for these works will be prepared by the GDLT and approved by the Bank prior to starting construction. - 15 - (iii) Road Maintenance 4.05 Because of the field investigations pursuant to the legal proceedings concerning the construction of the Aguaytia-Pucallpa road (para. 1.04), the MTC was legally impeded from maintaining the road adequately. Now that the legal problem has been settled, the MIC is faced with an urgent need to reseal the 61-km section leading into Pucallpa, which was paved during execution of Loan 271-PE in 1967-1968; if not protected soon, the present traffic (around 300 vehicles per day, of which 75% are heavy vehicles) could seriously damage the pavement. A double surface treatment, estimated to cost US$0.7 million on the basis of recent similar works in Peru, has been included in the proposed project. 4.06 There is a tradeoff between construction costs on the one hand and maintenance and vehicle operating costs on the other. The consultants endea- vored to establish a minimum total cost solution; as a result, construction costs were reduced somewhat, and, consequently, maintenance costs will be higher than they would have been at a higher construction cost level. The necessary maintenance equipment for the proposed road, and that required for efficient maintenance of the La Oroya-Ruanuco and the Aguaytia-Pucallpa sections, has been estimated by Government, with the consultants' assistance, at about US$2.2 million and has been included in the proposed project; it will also help guarantee a satisfactory maintenance level on the road, once completed. During negotiations, agreement was reached with the Government that a maintenance program for the La Oroya-Pucallpa road will be carried out, as recommended by the consultants employed by the NIC; the new maintenance equipment and sufficient funds for its operation will be included in that program. (iv) Consulting Services 4.07 The proposed project provides for the financing of consulting services to assist in the evaluation of bids for the road works and in the procurement of maintenance equipment and to supervise the construction and improvement works. The Ministry has invited proposals from several consulting firms, including SAUTI (Italy), which was already in charge of the supervision for the first phase works and the feasibility study and detailed engineering for the second phase works. During negotiations, agreement was reached that consultants will be contracted for construction and improvement supervision on terms and conditions satisfactory to the Bank. 4.08 Also included in the proposed project are in-depth geotechnical studies (para. 4.03(b)). The assistance of a specialized firm or a group of experts will be obtained with the objective of studying a permanent solution for the unstable stretches of road, as well as devising guidelines for road construction in similar difficult areas in the Andes. During negotiations, agreement was reached with the GDLT on the contracting of experts and consult- ants for these studies on terms and conditions satisfactory to the Bank. 4.09 In addition, the proposed loan provides US$1.1 million for the financing of a study to provide recommendations regarding road user charges (para. 3.08), as well as for the feasibility study and detailed engineering - 16 - of the required improvements to the road between Tarma and Oxapampa, the access road from La Oroya and Lima to a number of productive eastern valleys. Both studies will be carried out under terms of reference acceptable to the Bank, by experts or consultants satisfactory to the Bank. B. Cost Estimates and Financing 4.10 The total cost of the project includes contingency allowances and is estimated at US$40.0 million; the foreign exchange cmaponent is US$21.1 million equivalent; the proposed Bank participation is US$26 million, thus implying US$4.9 million of local cost financing (para. 4.14). A summary of the project cost is given on page 17. 4.11 The estimates of the construction costs of the Huanuco-Aguaytia road are based on completed detailed engineering and have been updated to reflect costs at probable time of bidding (mid-1974). At the request of the Bank and the MTC, the consultants have studied to what extent cost of the works on this road could be decreased without sacrificing the basic objec- tives; this has led to a cost reduction of about 12%, which is reflected in the cost estimates. During negotiations, the construction cost estimates were confirmed. 4.12 The cost estimate for the improvement of feeder roads is based on calculations by the GDLT after an identification mission and subsequent evalua- tion. The cost estimate for the maintenance equipment was made by the con- sultants and is satisfactory (para. 4.06). The cost for the consulting serv- ices has been estimated by the mission on the basis of costs for similar services carried out in Peru. 4.13 A contingency allowance of 15% of the construction costs has been included for increases in quantities. A further contingency has been in- cluded for price escalation, from the time of opening of bids until completion of construction, estimated to be four years later, equivalent to about 22% of the project's basic cost estimate. It results from the use of annual escalation rates for foreign costs ranging from 10% to 5%, depending on the year and the item being procured, and a constant annual rate of 10% for local currency costs. These contingency allowances contemplate the effects of recent increases in world and domestic inflation trends and are considered adequate. 4.14 The consultants' estimate of the foreign exchange component for the civil works, as adjusted by Bank staff, is about 50%, assuming that half the works would be carried out by foreign contractors and half by Peruvian contractors. A Bank participation of 65% has been adopted on country grounds for construction work; this would imply financing of local currency expendi- tures of US$3.6 million. The foreign exchange component for consulting ser- vices has been estimated at 60% on the basis that the services will be pro- vided by foreign firms in joint venture with Peruvian firms. For the contin- gencies item, a Bank participation of 60% has been assumed, implying a local currency financing of US$1.2 million. - 17 - SUMMARY OF PROJECT COSTS US$ Bank Parti- Soles Million Million Equivalent cipation Local Foreign Total Local Foreign Total US$ % A. Civil Works (i) Construction and Improvement of Huanuco- Aguaytia Road 395 398 793 10.2 10.3 20.5 13.3 65 (ii) Improvement of Feeder Roads 58 39 97 1.5 1.0 2.5 1.6 65 Sub-Total 453 437 890 11.7 11.3 23.0 14.9 65 B. Consulting Services (i) Construction Supervision 35 54 89 0.9 1.4 2.3 1.4 60 (ii) Additional Geo- technic Studies 12 15 27 0.3 0.4 0.7 0.4 60 (iii) Road User Charges and Pre-Investment Studies 15 27 42 0.4 0.7 1.1 0.7 60 Sub-Total 62 96 158 1.6 2.5 4.1 2.5 60 C. Road Maintenance (i) Equipment - 85 85 - 2.2 2.2 2.2 100 (ii) Resealing of Neshuya-Pucallpa 15 12 27 0.4 0.3 0.7 0.4 65 Sub-Total 15 97 112 0.4 2.5 2.9 2.6 90 Basic Cost Estimate 530 630 1,160 13.7 16.3 30.0 20.0 67 D. Contingencies (i) Physical (15% of A and C(ii)) 70 66 136 1.8 1.7 3.5 2.1 60 (ii) Price Escalation (22% of Basic Cost Estimate) 131 120 251 3.4 3.1 6.5 3.9 60 Sub-Total 201 186 387 5.2 4.8 10.0 6.0 60 TOTAL 731 816 1,547 18.9 21.1 40.0 26.0 65 - 18 - 4.15 Under the foregoing assumptions, the proposed loan would thus finance US$26 million, including US$4.9 million in local currency financing. The remaining local costs will be met by the Government from budgetary allocations. The two-year 1973-1974 budget excludes local costs of those projects which are expected to be financed by foreign agencies, but on which no final commitment has been made by these agencies; the purpose is to avoid "freezing" local funds, while awaiting external financing to materialize. During negotiations, the Government confirmed that the necessary allocation for the remainder of the two-year 1973-1974 budget period will be made promptly as needed and assured that subsequent allocations for future two-year periods will also be made. C. Disbursements 4.16 Disbursements will be made on the following basis: (a) 65% of total expenditures for civil works contracts; (b) 60% of total expenditures for con- sulting services and (c) 100% of foreign exchange costs of maintenance equip- ment. Based on this and on the proposed project execution schedule, an esti- mated schedule of disbursements has been prepared (Annex 1). Surplus funds remaining in the loan account on completion of the project would be cancelled. D. Execution 4.17 Execution of the project will be the responsibility of the GDLT in the MTC. Consulting services under the project will be provided by consult- ants or experts on terms satisfactory to the Bank. 4.18 For the construction and improvement of the Huanuco-Aguaytia road, and the resealing of a section between Neshuya and Pucallpa, there will be international competitive bidding in accordance with the Bank's guidelines. The work has been divided into six bidding sections, five between Huanuco and Aguaytia, and the remaining one for the resealing works. Contractors would be able to bid on either section or a combination of sections, which would be attractive to local contractors, foreign contractors and joint ventures; the value of the sections varies between US$3-5 million, except for the resealing (US$0.7 million). The bidding and contracting procedures were agreed during negotiations. In order to gain time, the Government started selection of consultants and bidding procedures for construction works following negotiations; award of contracts is expected around September 1974 and construction would begin toward the end of 1974. 4.19 For executing the improvement and construction of feeder roads, the Government has proposed two alternatives. Under the first, the Ministry would carry out the works by force account; it would supply the minimum equipment necessary and general management, and labor would be provided by the surrounding villages. Because the work consists mainly of selected repairs and improvements dispersed along the feeder roads, with a considerable input of local labor, it is deemed more efficient to carry them out by force account. The second alternative would be to carry out these works by normal unit price contracts. Accordingly, the Bank has agreed that these civil works could be executed, at the Government's option, by force account or through locally advertised international competitive bidding, provided, - 19 - however, that the works are supervised by consultants selected by the Govern- ment and acceptable to the Bank (para. 4.07). The Bank will finance 65% of the total cost of improving the feeder roads. However, In order to keep the administration simple, it was agreed that the Bank would disburse 65% of total cost as estimated by the MTC and confirmed by consultants; progress and work quality would be vouched for by consultants. 4.20 Procurement of maintenance equipment will be on the basis of inter- national competitive bidding with due regard to a domestic preference of 15% of the c.i.f. price of imported goods or the prevailing duty applicable to non-exempt importers, whichever is lower. At present, major construction and maintenance equipment are not produced in Peru. Since the MTC is not liable to pay tariffs on imported equipment, the question of regional preference does not apply. The procurement procedures were discussed and agreed during negotiations. 4.21 Civil works are expected to start by the end of the fourth quarter of 1974 and to be completed by the second quarter of 1978. 5. ECONOMIC EVALUATION A. General 5.01 Peru's development history is dominated by two main features: great wealth is produced by only a small portion of the population, and the resulting ecDnomic development takes place along the Costa and at some isolated mining enclaves in the Andes. This pattern of development has proved capable of achieving a respectable rate of overall economic growth, but it has also led to wide disparities in productivity, employment opportunities and income levels between the coast and the rest of the country, as well as between the urban and rural population. Development of transport systems along the Costa is generally easy and relatively inexpensive, while the rugged topography and severe climatic conditions elsewhere in the country make transportation very difficult and costly. This physical environment, coupled with traditionally insufficient investment in construction and maintenance of transport facilities, has had the effect of increasing the attractiveness of the Costa for other productive investments, thus reinforcing the geographical concentration of economic activity. 5.02 The primary policy objective of the present Government has been to pursue a fundamental transformation of the pattern of development in the country, while promoting as rapid an economic growth as would be compatible with that structural transformation. The main objectives of the transforma- tion include changing the very unequal distribution of wealth and income and generating a sincere popular participation in the development process. To achieve these goals, the Government has carried out, inter alia, an agrar- ian reform entailing substantial changes in land ownership and farm organ- ization and management, and is stimulating economic development in regions outside the Lima-Callao area, with particular emphasis on the Eastern Region (the eastern Andes piedmont and the Selva). Agricultural production--which - 20 - is being assisted by a recent Bank Agricultural Credit Project-has not de- creased due to the agrarian reform; on the contrary, it has increased in a number of cases. Nevertheless, during the last two decades, agricultural production grew less than 2% annually as compared to 5% economic growth and 3% population growth. Because the domestic demand for foodstuff is increas- ing faster than supply, there has been a steady deterioration in the agricul- tural balance of trade. Two of the main factors hampering a faster growth of agricultural production outside the coastal region have been the high transport costs and the inadequacy of the road system. To achieve the Gov- ernment's objectives mentioned above, and to support a continued and more balanced growth of the agricultural sector and the overall economy, consider- able Improvement of the transport system, particularly the road network, is required. 5.03 Based on this strategy, the proposed project includes (a) the improvement of the country's main transversal road (Lima-Oroya-Pucallpa) and of a number of tertiary roads feeding into this highway and (b) the execution of studies aiming at preparing further projects which could be the object of future Bank operations. B. Construction and Improvement of the Huanuco-Aguaytia Road 5.04 For more than two decades, the improvement and paving of the highway leading from Lima through La Oroya, Cerro de Pasco, Huanuco, Tingo Maria, and Aguaytia to the headwaters of the Amazon river at Pucallpa have been considered of high priority. Large investments have already been made on improvement, and, although major difficulties have been encountered, the economic effect of the works so far carried out has been profound. The present road is much better than the trails which existed in the early 1960's, and, as a consequence, the growth of the economy in the zone of influence has been extensive. Pucallpa, a township of 26,000 inhabitants in 1961, grew to 70,000 inhabitants in 1971, and Tingo Maria increased from 8,000 to more than 20,000 inhabitants in the same period. Traffic over the road roughly doubled between 1964 and 1972, reflecting a sizable growth of the economy in its zone of influence (Table 6). 5.05 The project road provides the only land connection of the Costa with Pucallpa and from there by river with Iquitos. Traffic through the port of Pucallpa increased from 24,000 tons in 1962 to 81,000 tons in 1971, an annual growth of about 14%. 5.06 The project road also gives access, in the neighborhood of Tingo Maria, to the fertile valley of the Huallaga river, where a road to La Morada, partly financed by the Inter-American Development Bank, has been under con- struction for a number of years, and a road connection is expected to be established with Tarapoto. Triggered by the road development, spontaneous settlements of peasants from the Sierra have taken place along this valley with Government assistance. - 21 - 5.07 In 1972, traffic over the 219-km road from Huanuco to Aguaytia varied from 350 vehicles per day between Huanuco and Tingo Maria to about 200-250 vehicles per day beyond Tingo Maria. Due to local traffic, however, these volumes Increased in the neighborhoods of both Huanuco and Tingo Maria to about 700 vehicles per day. 5.08 Only direct user benefits involving reductions in vehicle operating costs, and driver and passenger time costs were evaluated. Other benefits which have not been included are reduction of traffic accidents, reduced breakage and spoilage of cargo and reduced inventory costs for goods in transit; to the extent that the road improvement will produce such benefits, net benefits have been understated. In addition to road user savings, changes which are expected to occur in maintenance cost as a result of the proposed improvements, including the provision of additional maintenance equipment for the Huanuco- Aguaytia section, were included in the evaluation. A separate economic analysis of the maintenance program -equipment provided under the project and recur- rent yearly expenditures financed by the Government-- for the remainder of the La Oroya-Pucallpa road was also carried out (para. 5.15). The combined effect of the reduction in vehicle operating costs and the competitive nature of the Peruvian trucking industry will probably be to reduce prices --or avoid increases--to consumers of agricultural and forestry products, in the main markets for these products, particularly Lima-Callao. Because present domestic supply of agricultural products is insufficient to meet existing demand, demand for these products will increase, leading to a development effect in the production areas with widespread benefits to their population. These effects have already been observed as a result of the Phase I improvements. 5.09 As a basis for computing benefits, SAUTI developed estimates of vehicle operating costs for conditions in Peru based on De Weille 1/ and using Peruvian input prices. These estimates, which are satisfactory, are shown in Table 8; vehicle operating costs were evaluated for cars, medium trucks and buses, on paved, gravel and earth roads, with pavement conditions ranging from good through fair to poor; also, the influences of rolling and mountainous terrain, as well as of road curvature, were established. Consult- ants estimated traffic growth ranging between 6% and 9% per annum, which is acceptable, taking into account the development impact of investments in the different sections. To simplify the economic analysis, however, an annual rate of growth of 7% for all sections was used, and a sensitivity analysis with annual rates of 5% and 9% was carried out. 5.10 The consultants divided the road into 20 subsections and calculated the benefits with and without time savings for each of them. A summary of the . benefits, the First Year Benefits (FYB) and the Economic Returns (ER) is de- tailed in Table 9. The proposed project is well justified, with an economic return of 24% without time savings and 29% with time savings. Section 6 in the most difficult terrain shows the lowest economic values, although still satisfactory (FYB 10.5% and ER 17%). 1, Quantification of Road User Savings, World Bank Occasional Paper Number Two, 1968. - 22 - 5.11 A sensitivity analysis of the proposed works (with time savings) shows that, in case construction costs would increase by 15% or benefits would be 25% lower, the proposed project would have an ER of 25% and 24%, respectively, compared to a best estimate of 29%. In case traffic growth would be 5% on average, instead of 7%, the ER would be 28%. The proposed portion of the Phase II works is thus well justified. 5.12 Because of rapid and substantial increases of petroleum prices in the world market during the final stages of preparation of this project, and the prospects for prices to remain at a high level in the future, an attempt has been made to assess their probable effects on the project. A preliminary analysis indicates that these effects are not likely to be significant. The economic effect on construction costs and benefits, assuming a reasonable domestic shadow price for fuel 1/, is likely to be small because of the nature of the works -largely providing structures and pavement, with little earth- work remaining in Phase II- and because the project is energy-saving, since road vehicles will be riding at speeds and under conditions (road surface) for which the fuel consumption will be less than without the proposed improve- ments. Much more difficult to forecast is the effect of the overall high level of fuel prices on future transport demand. It is probable, however, that, given the shortage of agricultural products in Peru and the high world prices for most of the cattle, agricultural and forestry goods being transported on the project roads from eastern Peru, traffic growth rates will not decrease in the future and might even increase beyond what has been conservatively estimated in the economic analysis (7% annual rate of growth). Moreover, the sensitivity analysis mentioned above has shown that the project is acceptable within the likely range of variation of traffic growth in the future. 5.13 If the construction costs already incurred in Phase I are added to the estimates for Phase II, and if it is conservatively assumed that the benefits already obtained from Phase I works are only 50% of the benefits of the Phase II works (i.e., that the combined benefits for Phases I and II are 150% of those estimated for Phase II alone) the economic evaluation of the entire project yields an economic return of 19% (Tables 7 and 10). C. Improvement of Feeder Roads 5.14 The GDLT selected three feeder roads leading into the La Oroya- Pucallpa road for inclusion in the proposed project; the selection of the roads and the level of improvements proposed are satisfactory. These roads are the following: 1/ Peru is a net importer of petroleum products, but potentially rich deposits are being explored. - 23 - (a) Rancho Bridge-Panao (70 km). Cost US$0.50 million; the area produces 14,000 tons, mainly of potatoes, and has 60,000 heads of cattle. The trail is passable only part of the year, and vehicle operating costs for about 20 trucks per day are high. Improvement to gravel standards and 4 m width would yield a return of 18% on existing traffic, without counting the considerable development effect which the improvements would generate. (b) Prado Bridge-Manzon (68 km). Cost US$0.60 million; the existing bridge over the Huallaga River needs to be replaced and the existing trail improved. The area produces coffee, cacao and fruits. Twenty thousand ha are exploited. Traffic amounts to 25 vehicles per day. Based solely on existing traffic, an economic return of 18% has been cal- culated. Additional development may be expected in this fertile zone of the piedmont area near Tingo Maria. (c) Road to Tournavista (62 km). Two experimental colonization schemes are in execution in this area, with 18,000 ha in ex- ploitation and 5,000 heads of cattle so far. Improvement to gravel standards and 4 m width in the most critical sections and construction or improvement of bridges and culverts are included in the proposed project at a cost of US$1.40 million. With 21 vehicles per day, a return of 20% is expected without counting the development effects. D. Road Maintenance Program 5.15 A road maintenance program for the entire 620-km La Oroya-Pucallpa road is included in the project. Under the project, the Bank will finance the foreign costs of the necessary maintenance equipment and 65% of the total costs of resealing the last 61 km before Pucallpa. The economic evaluation of the portion of the maintenance program applying to the Huanuco-Aguaytia section has been included in the overall analysis for the improvements in this section (para. 5.08). Benefits of the improved maintenance of the remain- ing portions of the road, consisting of savings in vehicle operating costs and deferment of pavement reconstruction costs, have been estimated, using the data provided in the consultants' feasibility study. On the basis of a traffic growth of 7% annually for all sections and an economic life of seven years for the maintenance equipment and five years for the double surface treatment, the proposed investment (both capital and annual recurrent costs) * yields rates of return in excess of 30% in both cases, which are acceptable. E. Pre-Investment Study 5.16 The economic feasibility and detailed engineering study of the San Ramon-Oxapampa road aims at removing an obvious bottleneck in the link between the main markets in the Sierra and Lima and several rich valleys to the north, south and east of Oxapampa, some of which have been under cultiva- tion for several years. The benefits,from this project will lie mainly in - 24 - reducing presently excessive transport costs as well as in generating further development in the production areas. Accordingly, the study has a prima facie case to justify its execution. 6. AGREEMENTS REACHED AND RECOMMENDATION 6.01 During negotiations, the design standards and the construction cost estimates were confirmed (paras. 4.03 and 4.11); the division in sections for bidding purposes was also agreed (para. 4.18); and the procurement pro- cedures discussed and agreed upon (para. 4.20). 6.02 During negotiations, agreement was reached with the Government on the following principal points: (a) Government will carry out, with assistance of experts or consultants acceptable to the Bank, a study to establish the basis for formulating a sound pricing policy; the Bank will be offered an opportunity to comment on the terms of reference and the results of the study; and the results of the study will be used as an input for revising road-user charges (para. 3.08). (b) Sufficient funds will be provided by Government to maintain its road network adequately, on the basis of the recommenda- tions of consultants providing technical assistance in road maintenance, and regulations regarding the weight of vehicles will be strictly enforced (para. 3.20). (c) A maintenance program for the La Oroya-Pucallpa road will be carried out, as recommended by the consultants employed by the MTC; the new maintenance equipment, and sufficient funds for its operation will be included (para. 4.06). (d) MTC will contract consultants satisfactory to the Bank, on terms and conditions satisfactory to the Bank, to assist in the evaluation of bids for the road works and in the procurement of maintenance equipment and for construction and improvement supervision (para. 4.07). (e) MTC will contract consultants satisfactory to the Bank, on terms and conditions satisfactory to the Bank, for in-depth geotechnical studies (para. 4.08) and for pre-investment studies (para. 4.09). (f) The necessary budgetary allocation for the remainder of the two-year 1973-1974 budget period will be made promptly and subsequent allocations for future two-year periods will also be made (para. 4.15). - 25 - (g) The bidding and contracting procedures for the improvement of the Huanuco-Aguaytia road and the resealing of a section between Neshuya and Pucallpa will follow international competi- tive bidding procedures (para. 4.18). (h) The improvement of feeder roads will be carried out by force account, under the general responsibility of the MTC, or by locally advertised international competitive bidding, at the option of the Government; the works will be supervised by the consultants mentioned in paragraph 6.02 (d) above (para. 4.19). (i) The procurement of maintenance equipment will be on the basis of international competitive bidding, with due regard to domestic preference (para. 4.20). 6.03. The project constitutes a suitable basis for a Bank loan of US$26 million equivalent for a term of 25 years, including a five-year grace period. April 11, 1974  Table 1 PERU SIXTH HIGHWAY PROJECT Composition of Hihway Network (Kilometers) YEAR PAVED GRAVEL IMPROVED UNIMPROVED TOTAL 165 ,334 6,449 11,645 20,389 42,817 1966 4,57 7,114 13,290 20,598 45,549 1967 4.,683 7,860 13,430 21,21 47,184 1968 4,869 8,391 13,923 22,501 49,684 1969 n.a. 1970 4,858 8,654 13,90 22,889 50,306 1971 4,873 10,022 14,168 21,177 50,240 Sonce: MTC September 1972 TABLE 2 PERU SIXTH HIGHWAY PROJECT Vehicle Registration YEAR AUTOMOBILES TRUCKS BUSES TOTAL 1950 31,984 24,030 1,453 57,467 1955 54,415 43,616 5,530 103,561 1960 79,431 58,118 7,050 144,599 1965 137,690 77,007 6,899 221,596- 1966 159,2901/ 89,607 7,299 256,1961/ 1966 149,90 7,2992 1967 16,965 52,268 10,311 209,544: 2/ 1968 156,673 64,692 12,762 234,127- 1969 187,962 91,278 17,664 296,901W 1970 194,268 91,278 17,664 303,2109/ 1971 - - - 354,600-! Annual Rate of Growth (1950-1971): 8.6% Source: 1950-1963: Report No. WH-155a, Volume II, Transportation. December 1965. 1964 and 1967-1969: Planning Qffice, Land Transport Directorate, MTC, citing as original source the Direccion de Seguridad Vial. 1965-1966: Peru, Bank Economic Mission of 1970. Transportation, Volume II. 1/ Probably includes motorcycles. These have been excluded from 1967-1970 data. 2/ These figures differ from other sources and must be used with reservations. - The 1971 figure probably includes about 34,000 motoryales; excluding these, the vehicle fleet in that year would have amounted to aroud 320,000 vehicles. September 1973 TABLE 3 PEMJ SIXTH HIGHWAY PROJECT Motor Fuel Consumption (000 Cubic Meters) YEAR GASOLINE DIESEL FUEL 1959 867.1 566.6 1960 886.4 568.2 1961 930.3 567.0 1962 -1,025.0 690.7 1963 1,060.1 755.5 1964 1,182.2 869.4 1965 1,305.1 824.9 1966 1,446.7 899.1 1967 1,562.1 937.2 1968 1,508.8 999.5 Source: MTC February 1973 TABLE 4 PERU SIXTH HIGHWAY PROJECT Highway Expenditures and Road User Contributions (Millions of current Soles) 1966 1967 1968 1969 197 1971 1972 A. Highway Expenditures Administration 99.5 147.3 156.7 151.2 200.0 230.6 268.0 Studies 41.2 37.1 23.1 13.6 30.0 28.7 28.0 Construction 1585.9 2116.6 837.7 668.2 873.8 1027.0 980.0 Maintenance 156.7 159.6 168.5 127.5 310.6 428.3 556.9 Eclaipment 466.8 370.8 6.3 - 74.8 - 20.0 Studies of urban trans- port & traffic 10.1 18.0 20.4 ORDEZA - --. 100.0 2350.1 2831.4 1192.3 960.5 1499.3 1773.1 1973.3 B. Road User Contributions Excise Taxes 19.0 37.0 42.4 67.2 57.7 55.0 Import Duties 940*3 466*3 672*9 368.9 702.2 561.1 Gasoline Taxes 447.2 1122.5 1152.9 1168.4 2293.6 2370.8 Vehicle Registration, Licensing, Road Use, etc. 100.2 124.4 152.7 181.0 139.5 183.2 Tolls 16.8 19.0 22.8 3M 57.0 73.0 1523.5 1769.2 203.7 1825.4 3250.0 3243.1 1/ For lack of better statistics for this year, the above figures, representing estimates of the Bank economic mission which visited Peru in April-May 1970, were used (Ref: Report WH-206a). 2/ 1972 Transport Sector Mission estimates. / Includes the Ministry of Transport and Communications, ORDEZA and the Maintenance Equip- ment Agency (SEM). It excludes feeder roads.financed by the National Fund of Economic Development (FNDE) and SINAMOS, and expenditures of the road transport regulation agency (ORETT). / Comite de Reconstruccion y Rehabilitacion de la Zona Afectada. This agency invested mainly in feasibility studies and road construction, but the detailed breakdown is unknown. Sources: Bank Economic Mission Report, Transport Sector Review (Draft); June 8, 1970; Volume II, Table 2.10. Bank Economic Report W-206a, March 31, 1971; Table 5.13 Ministries of Economy and Finance, and Transport Communications, Peru. March 1973 TABLE 5 PERU SIXTH HIGHWAY PROJECT Design Standards for the Huanuoo-Aguaytia Road Type of Terrain Design Elements Unit Mountainous Rolling Flat Design Speed kmh 602/ 80 100 Maximum grade % 8% 6% 4% Minimum radius of curvature m 60- 150 300 Platform width m 8.401/ 8.40 8.40 Pavement width m 6.00 6.00 6.oc Shoulder width m 1.20 1.20 1.20 1/ Reduced in special cases Source: Consultants December 1972 PERU SIXTH HIGHWAY PROJECT Traffic Flows on the Bhanuco-Aguaytia Road Lengh Traffic AADT Traffic 1975 (est.) Annual Growth (%) 5) 1964 1 Total Cars Buses Trucks 196-1972 1972-1994 1. Huanuco-Tingo Maria 124 - Huanuco-Panao road 24 350 700 830 390 60 380 9 7 - Section over Carpish Pass 61 150 350 450 100 30 320 11 7 - Section through Tingo Maria 39 - 660 800 390 60 350 - 7 2. Tingo Maria-Aguaytia 95 - Section to Tarapoto Fork 15 150 250 310 90 20 200 7 7 - Remainder to Aguaytia 80 125 200 250 30 20 200 6 7 Source: Feasibility Study SAUTI March 1974 PERU SIXTH HIGHWAY PROJECT Construction Cost Huanueo-Aguaytia Road Section Length Construction Cost (Financial) km Phase I US$/km Phase II US$/km Phases I & II US$/km (US$ million) (US$ million) (US$ million) Huanuco-Caracol 69 14.1 205,000 6.5 95,000 20.6 300,000 Caracol-Tarapoto Fork 70 10.2 145,000 5.3 75,000 15.5 220,000 Tarapoto Fork-Aguaytia 80 12.8 160,000 8.7 110,000 21.5 270,000 219 37.1 170,000 20.5 94,000 57.6 263,000 Source: Feasibility Study SAUTI and Appraisal Mission's Estimates March 1974 PERU TABLE 8 SIXTH HIGHWAY PROJECT Summa-ry of Vehicle Operatins Costs (Sol*es/; economic oost) Paved Gravel Earth CAR Pavement Condition Good 1.06 1.38 1.76 Fair 1.22 1.57 2.00 Poor 1.38 1.76 2.24 Increment for rolling terrain 0.05 0.09 0.15 Increment for mountainous terrain 0.23 0.36 0.48 Increment for winding road 0.02 0.01 - Increment for very winding road 0.13 0.10 0.03 MEDIUM TRUCK Pavement Condition Good 3.33 5.14 8.37 Fair 4.24 6.76 1;l.00 Poor 5.14 8.37 13.63 Increment for rolling terrain 0.24 0.32 0.52 Increment for mountainous terrain 0.71 0.99 1.75 Increment for winding road 0.04 - Increment for very winding road 0.22 0.06 - BUS Pavement Condition Good 3.76 5.65 9.84 Fair 4.71 7.74 13.47 Poor 5.65 9.84 17.11 Increment for rolling terrain 0.33 0.38 0.76 Increment for mountainous terrain 1.00 1.38 2.37 Increment for winding road 0.05 - - Increment for very winding road 0.27 0.07 Source: Feasibility Study SAUTI (Italy) February,, 1973 SIXTH HIGHWAY PROJECT Economic Evaluation Results - Huanuco-Aguaytia Road Sensitivi Eoonomic baluation LbAnalysis Based on best Jfatimatea - Section l th Financial Cost1 Economic Cost Without tie With time o (Silion) (S/million) benefits benefitsl. Z. 8 /9 11 0 FIB ER FIB ER ER ER ER ER Huanuco-Caracol 69 309 216 20 26 30 36 30 29 34 37 Caracol-Tarapoto Fork 70 254 178 21 28 26 32 27 26 30 34 T.Fork-Aguaytia 80 409 286 15 2 16 23 20 18 21 25 TOTAL 219 972 680 18 24 23 29 25 24 28 31 1/ Including direct construction costs, 15% physical contingencies and construction supervision. 2/ Financial costs net of taxes, / Basis for best estimates: (i)anual traffic growth rate, 7%; (ii) base year for analysis, 1974, (iii)construction period, three years (1974-1977); (iv) economic life of project, 20 years (1977-1996). Savings in vehicle operating costs and.road maintenance costs. Time benefits due to reductions in stopping time (mainly delays due to road closures) and travel time. Based on best estimates with time benefits. / Construction .cost overrun of 15% and benefits slipped according to the cost overrun. 8/ Benefits decreased by 25%. 2/ Annual traffic growth rate decreased to 5%. 10/ Annual traffic growth rate increased to 9%. Sourcet SAUTI's feasibility study, modified by the appraisal mission. March 1974 TABLE 10 PERU SIXTH HIGHWAY PROJECT Economic Data Huanuco-Aguaytia Road Total.Phases I and II Section Economic Costl/ Benefits in 19 - ER1/ ((US$ million) Huanuco-Caracol 15.2 3.0 20 Caracol-Tarapoto Fork 11.6 2.1 19 Tarapoto Fork-Aguaytia 15.9 2.1 1 TOTAL 42.7 7.2 19 11/ Total arithmetic sum of economic construction costs between 1966 (beginning of Phase I) and 1977 (estimated end of construction of Phase II). The costs represent actual expenditures through 1973 and estimates thereafter; construction supervision for both phases and 15,% physical contingencies for Phase II are also included. 2/ Based on the assumption that the combined benefits of Phases I and II amount to 150% of the benefits estimated for Phase II alone (including time benefits; see Table 9). Given the very rudimentary condition of the road before 1966, this is a very conservative assumption. The base year for economic analysis was taken as 1974; therefore, no benefits were assumed before this year. 3/ Assuming annual rate of growth of traffic of 7% and 20 years economic life. Source: Appraisal Mission's estimates Aarch 1974 ANNEX 1 PERU SIXTH HIGHWAY PROJECT Estimated Schedule of Disbursements IBRD FISCAL YEAR Cumulative Disbursements at and Quarter Ending End of Quarter (US$ thousands) FY 1975 September 30, 2974 100 December 31, 1974 2,200 March 31, 1975 2,500 June 30, 1975 4,100 FY 1976 September 30, 1975 6,000 December 31, 1975 8,000 March 31, 1976 10,100 June 30, 1976 12,300 FY 1977 September 30, 1976 14,600 December 31, 1976 16,700 March 31, 1977 18,600 June 30, 1977 20,300 FY 1978 September 30, 1977 21,900 December 31, 1977 23,400 March 31, 1978 24,800 June 30, 1978 26,000 Assumptions for main component: HuAnuco-Aguaytia Loan Effective: July 1974 Contracts Bidding: May 1974-August 1974 Start of Construction: September 1974-December 1974 13ource: Appraisal Mission April 1974  --I . l-.* . I *' -rI * -Ila . ,- - -- I - I - . l * - -- -- i Q i ii . I _II I i iiI. . SiXT HiGWAYPROJCI -4-C