Mexico - Seventh Highway Project

FILE COpy DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. 2 7 8a-ME MEXICO APPRAISAL OF A SEVENTH HIGHWAY PROJECT January 21, 1974 Latin America and the Ca-ribbean 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 It may not be published, quoted or cited without Bank Group authorization.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 Unit = Peso (Ps) US$1.O0 = Ps 12.5 Ps 1 = US$0.08 Ps 1 million = US$80,000 Fiscal Year 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 (km2) = 0.386 square mile (sq mi) 1 metric ton (m ton) = 2,204 pounds (lb) Abbreviations and Acronyms ADT - Average Daily Traffic AU - Animal Units GNP - Gross National Product IDB - Inter-American Development Bank SCT - Secretaria de Comunicaciones y Transportes SOP - Secretaria de Obras Publicas vpd - Vehicles per day  MEXICO APPRAISAL OF A SEVENTH HICHWAY PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS ........ ...................... i - ii 1. INTRODUCTION .................... ..................... 2. TiE TRANSPORT SECTOR ............................... 2 A. General ......................................... 2 B. The Transport Modes ............................. 2 C. Transport Policy and Coordination ............ ... 5 3. THE HIGHWAYS .......................................... 6 A. Highway Network ...... ........................... 6 B. Characteristics and Growth of Road Traffic ...... 7 C. Highway Planning and Financing .................. 8 D. Highway Administration ..... ..................... 10 E. Highway Engineering ..... ........................ 11 F. Highway Construction ..... ....................... 11 G. Highway Maintenance ..... ........................ 12 4 . THE PROJECT .......................................... 13 A. General Description ............ .. ............... 13 B. Cost Estimates, Financing and Disbursement ...... 13 C. Execution ....................................... 16 5. ECONOMIC EVALUATION .............. .. .................. 18 A. General ......................................... 18 B. Widening of Four Roads from Two to Four Lanes ... 19 C. Construction of New Links between Important Areas 20 D. Agricultural Development Roads .... .............. 23 E. Sensitivity Analysis ............................ 26 6. AGREEMENTS REACHED AND RECOMMENDATION ................ 26 This appraisal report has been prepared by Messrs. J. Bazo (Agriculturist), B. Chatelin (Economist) and R. Paraud (Engineer) and has been edited by Ms. V. Foster.  TABLE OF CONTENTS (Cont'd) TABLES 1. Railway Statistics 1960-1972 2. Air Traffic-Passenger Kilometers 1960-1972 3. Transport Investments 1965-1972 4. Length of Highways 1960-1972 5. Densities of the Highway Network 1972 6. Number of Motor Vehicles Registered 1960-1972 7. Consumption of Gasoline and Diesel.1960-1972 8. Highway Expenditures 1960-1972 9. Road User Charges 1969-1972 10. Design Standards 11. Project Highways: Length, Type and Surface 12. Cost Estimate of Project Highways 13. Analysis of Construction Cost Estimates by Items; Costs per km 14. Schedule of Individual Contracts or Packages of Contracts 15. Traffic Forecasts 16. Vehicle Operating Cost - Paved Road 17. Vehicle Operating Cost - Earth Road 18. Roads Justified on Agricultural Development - Agricultural Investments - Phasing, Type and Source of Financing 19. Economic Return (Sensitivity Analysis) ANNEXES 1. Bank's Participation in the Transportation Sector 2. The Project Roads 3. Schedule of Disbursements 4. Economic Benefits from Roads Justified on Agricultural Development CHARTS I Organization Chart of the Secretariat of Public Works II Organization Chart of the General Directorate for Federal Highways MAPS lbZ' t 0549R - Main Highway Network IBRD 10621 - Playa Azul-Coahuayana Road - Area of Influence IBRD 10623 - Sayula-Rlo IJapanapa Road - Area of Influence IBRD 10622 - Pochutla-Salina Cruz Road - Area of Influence IBRD 10620 - Guerrero-Nuevo Laredo Road - Area of Influence  MEXICO APPRAISAL OF A SEVENTH HIGHWAY PROJECT SUMARY AND CONCLUSIONS i. The various mountain ranges that cross Mexico, creating deep valleys and high Dlateaus, have fostered an uneven location of population and a need for the development of transport means to connect population centers with the ports of entry and with the capital of the country, Mexico City. Highways have played an important role in this development, and the length of the road network has been steadily increasing from about 44,900 km in 1960 to about 124,400 kcn in 1972. The road network, however, should be extended to open up new areas for production and should be improved and expanded to keep up with growing traffic needs. The proposed project will help in obtaining the two abovementioned objectives. The railways have also contributed to the develop- ment of the country with a total present track length of about 24,500 km serving the most important production centers. Due to the rugged topography of the country, its impressive area (about two million square kilometers) and the scattered location of the population centers, aviation has become increasingly important for passenger transport. ii. The proposed project is aimed toward improving or further expand- ing the Federal highway system. It comprises the widening of four heavily trafficked roads (about 200 km) from two to four lanes and the construction of 12 roads (about 1,670 km), eight of which will reduce distance or connect existing routes or will fill missing links within the Federal highway system; the remaining four roads will open new areas for agricultural development. The estimated cost of the project is US$241.4 million equivalent, including contingencies and supervision of construction. The Bank loan of US$90.0 mil- lion equivalent will finance the foreign exchange component of the project; the Government will finance the balance of US$151.4 million equivalent out of its budget. iii. The main benefits from the four roads to be widened and eight of the roads to be constructed will be road user savings from improved riding surfaces and shorter routes, while major developmental benefits will accrue from the construction of the four agricultural roads by facilitating access to potentially rich agricultural areas. The economic returns of the proposed roads range from 10% to 41% with a weighted average of 23%. iv. This will be the seventh Bank loan for highways in Mtexico. From 1960 to 1970, four loans totaling US$114.3 million were made for Federal highways (Loans 268-ME, 354-ME, 528-ME and 695-ME), including US$8.5 mil- lion for the purchase of maintenance equipment; in 1962 and 1963, two loans (317-ME and 401-ME) totaling US$62.5 were made for toll facilities includ- ing the purchase of a ferry boat. The quality of works executed was satis- factory, but cost increases and delays were encountered (except for Loan  528-ME), mainly because of insufficient engineering preparation at the time of appraisal. For Loan 528-ME, the engineering was well advanced for ap- praisal, and cost increases and delays have been minimized; likewise, for Loan 695-ME, progress, so far, is sarisractory. However, due to the Govern- ment's urgent need to continue its highway development program, the project was appraised prior to finalization of detailed engineering, which has been completed for ten project roads only and is at various stages of progress for the remaining roads. To minimize the problems encountered in previous projects, the Bank will review the cost estimates upon completion of the engineering, and disbursements will be conditional upon confirmation of eco- nomic justification based on cost estimates resulting from completed detailed engineering; if the economic justification is not confirmed, the Government will be permitted to propose other roads for inclusion in the project. v. Execution of the project is expected to take four years (mid-1974 to mid-1978) and will be the responsibility of the Secretaria de Obras Publicas (SOP). Construction will be performed under contracts awarded on the basis of international competitive bidding, in accordance with the Bank's guidelines; however, for some bridges and minor or specialized works, totaling about 10% of project costs, contracts may be awarded through locally advertised competitive bidding. Construction will be supervised by SOP staff, as in previous projects. vi. The project provides a suitable basis for a Bank loan of US$90.0 million equivalent; a term of 25 years, including a grace period of five years, would be appropriate.  iIEXICO APPRAISAL OF A SEVENTH IIIGHWAY PROJECT 1. INTRODUCTION 1.01 The Government of Mexico has requested the Bank to help finance a project consisting of (a) widening and paving of four roads totaling 201 km; and (b) the construction, including paving, of 12 roads totaling 1,674 km. 1.02 This will be the seventh Bank higlhway project in Mexico and the fifth of the seven for the improvement and extension of the Federal highway system. Annex 1 gives details of the previous six highway projects as well as of other Bank projects in the transportation sector (railways and ports); the total amount of the loans is US$332.8 million. The Inter-American Devel- opment Bank (IDB) has also assisted in the development of the Mexican trans- portation system through eight loans totaling US$181.0 million: five for feeder roads (US$101.0 million), one for Federal highways (US$33.5), one for purchase of maintenance equipment (US$25.0 million) and one for construction of an airport as part of a tourism project (US$21.5 million). 1.03 The total Bank participation of about US$177.0 million for the devel- opment of the Mexican highway network has had a great impact on the improve- ment of the transportation system; out of a total length of about 35,200 km of Federal and toll highways, the Bank has assisted, or is assisting, in the improvement or construction of about 13,100 km, approximately 37% of the total length. Although the quality of works executed is satisfactory, cost increases and construction delays were encountered on works under Loans 268-ME, 317-ME, 354-ME and 401-ME. Problems developed, mainly because of insufficient engin- eering preparation, which led to design changes and increased quantities. 1.04 Consequently, starting with Project 528-ME, the Bank insisted on having the engineering fully or substantially completed for appraisal. This showed satisfactory results, and cost increases and delays for works under Loan 528-ME have been minimized; the same results are expected for works under Loan 695-ME. For the proposed project, progress of completion of the detailed engineering is expected to be 80% for roads and 60% for bridges before Board presentation; however, the disbursement for roads on which detailed engineer- ing will not be completed at that time will be conditional upon confirmation of economic justification, based on cost estimates resulting from completed detailed engineering. If the economic justification is not confirmed, the Government will be permitted to propose other roads for inclusion in the project, and such roads will be subject to the same evaluation criteria (para. 4.11). 1.05 The proposed project is a followup of the previous highway projects and will further expand the Bank's role in the extension and improvement of the Mexican highway network. Some of the project roads are extensions of  -2- Bank-financed roads; they will fill missing links within the system or will provide cross connections among existing trunk routes. 1.06 The appraisal of the present project is based on the technical and economic studies prepared by the Secretariat of Public Works (SOP) and on the findings of the appraisal mission, comprising Messrs. Bazo (Agriculturist), Paraud (Engineer), and Chatelin (Economist), which visited Mexico in May-June 1973. Ms. V. Foster edited the appraisal report. 2. THE TRANSPORT SECTOR A. General 2.01 Mexico covers an area of nearly two million square kilometers. Much of the country is sparsely populated because of its difficult topography and inad- equate rainfall, and, although extensive schemes for agricultural development have increased the areas under irrigation, the population is urbanizing rapidly. Close to 60% of the population of 54 million is now urban; this proportion was 52% in 1960 and 43% in 1950. In 1972, about 18% of Mexico's population lived in the Federal district centered on Mexico City. 2.02 Although overall population growth has been 3.5% per annum since 1960 - one of the highest rates in the world - urban population growth was higher than 5% per annum, while rural growth was only about 1.5% per annum. 2.03 Since 1960, the growth rate of the Mexican gross national product (GNP) has been about 6.7% per annum, one of the highest in Latin America. GNP per capita was estimated to be US$744 for 1972. B. The Transport Modes 2.04 The Mexican transport sector in its inception was designed primarily to link, by road and rail, the major ports with the industrial and urban centers of the interior; secondly, an intricate network of roads and railways was con- structed within the central plateau to link Mexico City with the main surround- ing centers; and, finally, road and rail connections were provided for foreign trade with the US through a dozen border points along the frontier. Most of the major towns and cities also have commercial airports. As a result, Mexico nas a comprehensive and strongly competitive land transport infrastructure, with port and airport facilities to complement the other modes. The main traffic flows for agricultural products are located between the northeastern area principal centers of production, the main cities and the US border. The raw materials move from all over the country to the industrial centers of Monterrey, San Luis Potosi, Guadalajara and Mexico City, where finished in- dustrial products originate, in turn, and are destined for local consumption or for export, mainly to the US. Although the railways have a clear-cut advan- tage over road transport for the carriage of bulk over medium and long distances, road transport is carrying about half of international transport and a much  -3- more substantial part of national transport. Passenger traffic is mainly carried by roads. (i) Railways 2.05 Mexican railways have played an important role in the process of economic growth; in recent years, however, there has been only a marginal expansion of the rail network, which now extends to 24,508 km. Freight traf- fic, neverthe'less, has been growing at an annual rate of 5.2% since 1960 to reach about 24 billion ton-km in 1972 (Table 1). Passenger traffic has practically been stagnant during the same period at about 4.5 billion pass-km. Other aspects of recent change include the replacement of steam by diesel locomotives, renewal or upgrading of the rail network, and increase and modernization of rolling stock. The Bank is participating in these improve- ments (para. 2.06). 2.06 Despite growing freLgnt traft:Lc and improved efficiency and pro- ductivity, the financial situation of the railways has gradually deteriorated, and increasingly large Federal Government transfers have been required to cover current account deficits, debt amortizations and new investments. In 1971, the net annual deficit was about 1.9 billion pesos (about US$150 mil- lion). The major problems of the railways are financial, because tariffs have been held constant since 1958 while costs have steadily increased at a pace which has not been compensated by increasing revenues or by economies in operations. Significant improvement could probably be achieved through greater efficiency of management and operations, including reduction of certain operat- ing costs and the closure of certa::n branch lines. The fundamental problems, however, are related to the pricing of freight and passenger services. After the financing of a first railway project in 1954 for "Ferrocarriles del Pacifico" (Loan 103-ME, US$61 million), the Bank is now financing a second railway project for "Ferrocarriles Nacionales de Mexico" (Loan 825-ME, US$75 million), which comprises a plan of action and the railways' 1972-1973 invest- ment plan. The project is intended to start a drive toward improved performance and financial viability after the Government, having accepted recommendations regarding the transport sector made by the Bank, declared as policy that the railways should be run on a commercial basis. Despite recent changes in manage- ment of the railways which have postponed some of the ongoing reforms, a tariff increase has been proposed by the railways and, if adopted by the Government, should substantially improve the financial position of the railways. (ii) Highways 2.07 The highway system and its administration are described in Chapter 3. (iii) Civil Aviation 2.08 Air transport has become increasingly important for passenger traffic. The two principal airlines, the State-owned Aeronaves de Mexico (renamed AEROMEXICO in 1972) and the privately owned Mexicana de Aviacion, jointly increased the number of pass-km from 1.0 billion to 4.5 billion  -4- between 1962 and 1972 (Table 2). Freight transport is not yet of great im- portance (about 40,000 tons a year). The improvement program for the air- port network, which started in 1965, includes 85 airports; there are pres- ently 11 airports capable of accommodating long-range aircraft, 34 airports suitable for medium-range aircraft, and 40 airports limited to short-range aircraft. 2.09 The Government's aviation policy is based on the premise that air transport plays an important role in national development, particularly in the expansion of the tourism sector. Civil aviation in Mexico is well advanced and is characterized by greater technical efficiency than in most developing countries. A major shortcoming, however, was the fact that there was no single well defined entity with full authority and responsibility for coordinating the activities of the main agencies and enterprises concerned with aviation. When the Mexican Government recently requested Bank financing for the construction and improvement of eight airports, 1/ the Bank urged a restructuring and centralizing of the aviation responsibility. To solve the problem, the Mexicans have recently created an ad-hoc coordination committee involving all agencies responsible for air transport. (iv) Ports 2.10 The growth of the Mexican economy has not depended to any signifi- cant extent on sea trade because about two-thirds of total imports in goods have been shipped across the land frontier with the USA. Seaborne exports are relatively more important than seaborne imports but account for less than half of total merchandise export value. The country's ports do, however, play a significant role in domestic trade, which now provides about 55% of all port activity. 2.11 Mexico has 36 deep water ports of which five - Veracruz, Tampico, Guaymas, Mazatlan and Manzanillo - handle 80% of the general and dry bulk cargo. Total traffic was 15.6 million tons in 1970. In January 1970, the Government created under the Secretariat of the Presidency a "National Com- mittee for Ports Coordination", which has established in the main ports the so-called "Enterprises for Port Services" to handle cargo; this system has proved to be satisfactory. 2.12 The Bank is financing a port project (Loan 820-ME, US$20 million) signed in May 1972. The project will: (a) improve efficiency of operations -n the five major ports by the provision of high priority installations and equipment and (b) establish an institutional basis for dealing with ports efficiently. The project is progressing satisfactorily, although behind schedule. The establishment of the Department of Ports Operations in the Ministry of Marine ( a condition of the Loan Agreement for the port project) has been accomplished, and staffing has been completed. 1/ This project was appraised in October 1973.  -5- (v) Pipelines 2.13 Petroleos Mexicanos (PEMEX), the Government agency responsible for oil exploitation in Mexico, is operating about 3,000 km of oil pipeline and about 3,800 km of gas pipeline. All of these lines are operating at near capacity, and new traffic has been shifted to other modes of transport in recent years. C. Transport Policy and Coordination 2.14 Legally, the Secretariat of Communications and Transport (SCT) is responsible for advising on transport coordination issues; in practice, how- ever, the work is spread among a number of Secretariats and other Government agencies, without formal coordination of the work of these agencies. The 1970 Bank sector mission issued a list of recommendations after discussion with those responsible for the transport sector. One important recommendation, the merger of all the departments dealing with transport under one Secretariat, was not accepted by the incoming Government because it was not consistent with its desired allocation of responsibilities. The creation in 1972 of a Directorate for Transport Coordination within SOP has not resolved the problem since the other agencies are reluctant to accept SOP's leadership in these matters. 2.15 Three Secretariats are directly involved in transport policy and planning: SOP, SCT and the Secretariat of the Presidency. SOP is responsible for building the transport infrastructure except for ports and pipelines and for maintaining the road network; it deals directly with the Secretariat of the Presidency and has very few official contacts with SCT. SCT controls the operation of the system by fixing tariffs, delivering licenses, etc. SCT also deals directly with the Presidency. The Presidency approves all transport investment and is also involved in many other transport matters such as tariffs. 2.16 These three Secretariats have recognized the lack of transport co- ordination and have elaborated proposals to coordinate and program the transport sector. During negotiations for the Second Railway Project (Loan 825-ME), the Government agreed to strengthen the Planning Department of SCT, and a new structure for this Department, including better staffing, has recently been approved by the Secretariat of the Presidency but has not yet been implemented. The new organization will have a much larger staff than the present one, and, with the help of external consultants, SCT will prepare a long-term transport program. The proposed new structure has been reviewed by the Bank and judged acceptable. Very recently, the Secretariat of the Presidency created a Transport Coordination Committee responsible for planning and coordinating investments, including all the entities dealing with transport. The Government is in the process of determining the responsibilities of each of the above organizations and, during negotiations, ic submitted proposals acceptable to the Bank on the steps that it will take for effective planning in the transport sector. 2.17 Since 1965, about 23% of total public investment has been devoted to the transport sector, about 31% of which has been financed by internal credits and 20% by international credits. During the same period, interna-  -6- tional credit lhas financed 14% of road construction and about 28% of the railways' investment. Of the total transport investment, 56% has been devoted to roads, 26% to railways and 18% to other transport modes (Table 3). Al- though we have no transport data indicating the share of each transport mode, road transport is by far the most important, and the allocation of the transport investments among modes seems reasonable. 2.18 All infrastructure investments for roads, railways and airports are programmed and carried out by SOP, which has just updated a six-year investment program for 1971-1976. The revised program for the last four years (1973-1976) totals 36.8 billion pesos (about US$2.9 billion), of which 7.1% is for railway construction, 19.3% for Federal highways, 14.4% for state highways, 52.3% for feeder roads and rural development programs and 6.9% for airports. Each investment was to be economically justified individually, but the total program is not based on a comprehensive transport survey. As mentioned earlier (para. 2.16), the Mexican Government is preparing a long-term transport program which would permit SOP to carry out the most appropriate infrastructure construction. 3. THE HIGHWAYS A. Highway Network 3.01 Mlexican highways have developed rapidly in the past 10 years, as shown by the following and Table 4: km Increase 1962 1972 Federal and Toll Highways 24,137 35,218 46% State Roads 27,093 35,069 29% Local Roads 3,310 54,104 /1 1530% /1 Including roads built by hand labor. In addition, there has been a substantial improvement in quality, the length of paved roads having increased from about 28,900 km in 1961 to about 46,000 ho in 1972. 3.02 The highway network in Mexico has 0.038 km per km2 and 1.42 km of road per thousand inhabitants (Table 5). The system is characterized by its high quality and uneven distribution. An analysis of the distribution of the highway network indicates that about 25% of the network is concentrated on only 9% of the country's area and that another 50% of the network is located on about 40% of the area; the remaining 25% of the network serves about half of the country. However, a major portion of the country is underpopulated and the density of kilometers of road per thousand inhabitants is higher in the  -7 - underpopulated areas than in the heavily populated ones. The Government of Mexico is looking at the underpopulated areas (such as Baia California, Chihuahua and Sonora) and is trying to determine if the very small density of population is due to the lack of roads or if the reverse is true. It is con- sidering a general program of development for these areas including, inter alia, road construction, especially feeder roads. B. Characteristics and Growth of Road Traffic 3.03 The road transport fleet has grown rapidly during the last 10 years, and the vehicle fleet has been increasing by about 9% per annum (private cars 10.7% per annum, buses 3.2% per annum and trucks 6.1% per annum) to reach some 2,150,000 vehicles in 1972 (Table 6). The size of the fleet is commensu- rate with the present demand of road transport. During the same period, the consumption of diesel has been increasing by 9.5% per annum and consumption of gasoline by 6.2% per annum (Table 7). 3.04 From 1965 to 1970, traffic counts were carried out on a satisfactory basis by the Directorate of Planning and Programming of SOP, and good informa- tion is available for the period, showing that the traffic increased by about 10% per annum. Since 1971, the Department of Traffic Engineering has been in charge of traffic counts; it has carried out some specific counts since then but is now reconsidering the whole methodology and, next year, will begin a general traffic count, using autnmatic devices. The Department expects to analyze 30,000 km of roads during the first year and to extend the accounting to the total network in the following years. 3.05 Except for some sections of the network where traffic is particularly heavy and which will need to be strengthened, the network is basically adequate. In 1971, the distribution of traffic was as follows: Roads with ADT Percent of the Network /1 < 200 49 201 - 500 17 501 - 1,000 14 1,001 - 1,500 8 1,501 - 2,000 5 2,001 - 2,500 2 2,501 - 3,500 2 3,501 - 4,500 1 4,501 - 5,500 1 ? 5,500 1 /1 Federal Highway network excluding toll roads. 3.06 SCT is responsible for controlling road transport on the Federal network. This transport is largely in the hands of individual owner drivers, and competition among them is keen despite very strong regulations. Each  truck recuires a permit indicating the road on which to operate and the freight and weight being transported. After a period of weakness (in 1972, about 80,000 trucks were operating without a permit), SCT is reexerting its control, and soon all trucks operating on the Federal network will have a permit issued regularly by SCT. SCT is also fixing the road tariffs. The present tariff system for goods is old (1954) and is under review. Goods are classified into five categories, the tariffs for which vary with the distances. The truckers must apply the tariff, and they can increase it only by 25% when they are operating on a non-paved road. In practice, the Direc- torate of Tariffs within SCT does not have sufficient personnel to control the application of tariffs, and often the rates payed by users are lower than the official tariff. When SCT decided to enforce regulations at the begin- ning of 1973, it started collecting data to analyze the economic effect of the road transport regulation in order to determine the usefulness of main- taining such a strong regulation. Some authorities within the Mexican Govern- ment favor road transport regulation and will certainly be very reluctant to reduce it. Undoubtedly, road transport will be regulated to a greater or lesser extent for some time to come; however, the economic advantages and disadvantages of the road regulation should be carefully analyzed. During negotiations, assurances were obtained from the Government that it will undertake a study of the economic consequences of the road transport regula- tions; the details and conclusions of the study will be discussed with the Bank. C. Highway Planning and Financing 3.07 Table 8 gives a breakdown of expenditures on highways for the 1960- 1972 period, showing the great importance given to the development and main- tenance of the highway system. Expenditures increased from Ps 941.0 million in 1960 to Ps 4,894 million in 1972, or by about 520% (390% in real terms). 3.08 SOP prepared a six-year highway program (1971-1976) as part of the general transport investment program (para. 2.18). This program was approved by the Secretariat of the Presidency after discussion by a subcommittee com- prising SOP, SCT, the Secretariat of Finance and the Secretariat of the Presidency. SOP has presently updated the six-year program (1971-1976) and has just published a program for the years 1973-1976. This program is main- ly used as a guideline for preparing the yearly budget and is not supported by any general transport survey. In the preparation of the highway program, SOP using the following order of priorities: (a) maintaining the existing network satisfactorily. (b) Building rural infrastructure to incorporate the small villages into the political, economic and social life of the nation. (c) Implementing feeder road construction to increase production and to obtain a better utilization of the main network; and  - 9 - (d) Constructing the missing links of the main network to con- nect all the capital cities of the states and all the main ports and to link the main municipalities with the capital cities of the states. 3.09 The updated four-year program (1973-1976) is mainly oriented toward feeder and tertiary road construction as follows: Millions of Pesos Percentages Federal Highways 7,066 22.3% State Roads 5,330 16.8% Local and Rural Roads 5,000 15.8% Roads Built by Hand Labor 14,260 45.1% 31,656 100.0% This program assumes that 44% of Federal highway construction and 53% of state roads would be partially financed by international lending institu- tions. 3.10 SOP intends to improve or build, in four years, about 330,000 km of low standard roads all over the country by the use of hand labor. This is a part of a program of public works being carried out by hand labor, which, in 1973, employed about 300,000 laborers and is expected to employ an average of about 500,000 during the next few years. The Government has given a very high priority to this program and has already approved a Ps 2.5 billion allocation for 1973. It is too early to evaluate the results of the program. 3.11 Road user charges in Mexico are a combination of (a) charges levied by the Federal Government on the manufacture of vehicles and tires, (b) licenses and minor taxes levied by the State Governments, (c) revenue from toll roads and bridges, and (d) taxes on fuel and lubricants collected by the national oil company (PEMEX) which amount to 12% of the value of PEMEX's total sales. With the exception of toll revenues, none of the charges are earmarked for roads. Federal and state taxes go to the general budget while PEMEX retains part of the taxes on fuel and lubricants for the financing of its investment, with the remainder going to the general budget. 3.12 ITp to 1971, the revenues from road user charges were more than suf- ficient to cover the total construction and maintenance outlay of the road system (Table 9). In 1972, the total road outlays (about Ps 4.9 billion) were not covered by the road user charges (Ps 4.6 billion). This is mainly explained by the large program of roads built by hand labor that began during that year (about Ps 720 million). 3.13 While users of gasoline carried the main burden of taxation, diesel fuel is, in fact, being subsidized. The difference between retail prices and total cost of diesel fuel does not cover the 12% sales tax (para. 3.11).  - 10 - The deficit is mainly covered by revenues from gasoline sales. This imbalance has implications for road/rail competition in Mexico. The problem will be studied in detail: a road user charges study, put as one of the conditions of the Second Railway Loan to Mexico (Loan 825-ME), will start soon. A con- tract will be signed shortly between the Government and a joint venture of consulting firms for carrying out the study. 3.14 The position for toll road traiffic is easier to assess since toll facilities are financed and operated by Caminos, 1/ which is required to be self-supporting financially and to generate capital resources. Its financial situation, after a deteriorating period in recent years, mainly caused by delays and cost overruns in the construction of toll facilities, is now acceptable, the last balance sheet showing a net profit for 1972. D. Highway Administration 3.15 Since the Federal Government pays either wholly or partly for all highways in Mexico, SOP is concerned, directly or indirectly, in the planning and construction of all highways. The responsibilities for the highway system are divided among various authorities as follows: (a) Federal Highways - SOP is directly responsible for the planning, construction and maintenance of all Federal highways. These are financed 100% from Federal funds. (b) State Highways - Planning, construction and maintenance of state highways are the responsibility of State Highway Boards which include an SOP representative assisted by an adequate staff. The annual state highway programs are submitted to SOP for review and approval because 50% of the cost of all works, including maintenance, is borne by the Federal Government. (c) Local Roads - Planning and construction of local roads are the responsibility of SOP. On completion, such roads are transferred to the corresponding State Highway Board for maintenance with Board funds. Construction is financed from one-third Federal, one-third state and one-third local (either municipalities or private enterprise) funds. (d) Rural Roads - SOP recently started constructing rural roads to join small towns and villages with the nearest main road. These are planned and constructed by SOP and are financed entirely with Federal funds. Maintenance will be carried out by the towns assisted by SOP. (e) Roads Built by Hand Labor - This is another recent development aimed at building low standard roads and upgrading existing 1/ Caminos y Puentes Federales de Ingresos y Servicios Conexos, the autono- mous agency in charge of operating and maintaining toll facilities.  - 11 - trails and, at the same time, providing income to the poorer level of the population. SOP finances and manages the program, and maintenance is carried out with the assistance of nearby dwellers (para. 3.10). (f) Toll Facilities - While SOP plans and constructs toll roads and bridges, they are operated and maintained by Caminos. Funds for financing these facilities are provided from tolls levied on users. 3.16 While the above division of responsibility could lead to confusion or duplication of functions, the system works adequately because of the over- riding authority of SOP. 3.17 Early in 1972, SOP was reorganized to improve efficiency and to in- clude new activities such as hand-labor works and social assistance. A new Under-Secretariat was created and the General Directorates are now self- contained units. The new organization and staffing of SOP appear satisfactory, with clearly established lines of authority (Chart I). 3.18 The Secretariat of Communications and Transport (SCT) is responsible for control of traffic and road transport using the Federal network. The law is enforced by SCT's Federal Highway Police. SCT's Traffic Engineering and Vehicle Control Department is responsible for the control of axle loading and vehicle size as well as for compliance with the requirements of the operating permits (para. 3.06). Spot checks are carried out by means of portable scales. SCT plans to construct freight terminals on the outskirts of the main cities along the trunk routes. E. Highway Engineerin 3.19 Highways and bridges are well engineered by the Directorate of Federal Highways in the SOP, using up-to-date techniques. The same Directorate is responsible for construction of Federal highways and supervises construc- tion with its own staff. The Directorate is well staffed and organized (Chart II). SOP has satisfactory design standards for the Federal highway network (Table 10). F. Highway Construction 3.20 Highway constrtction is carried out under unit price contracts awarded on the basis of competitive bidding. Supervision of construction is carried out satisfactorily by SOP staff. 3.21 The local construction industry is strong, well equipped and well organized. The National Chamber of the Construction Industry has a member- ship of about 4,200 contracting firms, 700 of which specialize in highway works. There is a wide range of work capacity among these specialized firms, which include about seven firms able to execute highway works amounting to  - 12 - US$10 to 15 million annually, and 10 to 15 firms in the US$4 to 6 million range. Competition is intense, and this may have discouraged foreign firms from bidding for highway contracts in Mexico. 3.22 In 1967, the Government enacted a law establishing uniform procedures for the registration of contracting firms and for the supervision of public works. A permanent conmmittee carries out studies and makes recommendations concerning contract awards, unit prices, specifications and similar matters. In addition, SOP has an office where contracting firms must be registered. About 2,000 firms have been registered, and they are obliged to update registration information annually. Foreign contractors need register only if awarded a contract; the procedure takes between two and three months. 3.23 Foreign contractors may import their equipment in Mexico under a temporary admission regime in compliance with the Government's legislation and administrative procedures. C. Highway Maintenance 3.24 SOP, through its Directorate for Maintenance of Federal Highways, is responsible for the maintenance of the Federal highway system. Routine maintenance is carried out by the Government's own forces and, in general, is satisfactory. Only major betterment is carried out by contract. The Directorate, which is well organized and staffed, operates through 16 main- tenance divisions, each headed by a chief engineer. 3.25 The maintenance, operation and allocation of SOP equipment are controlled by the Directorate of Equipment and Transportation, which operates in close cooneration with the Directorate for Maintenance of Federal Highways. The total estimated depreciated value of the maintenance equipment is US$4n million, but part of this eouipment needs replacing. 3.26 SOP yearly budzetary allocations are not sufficient to cover the purchase and replacement of maintenance equipment, and the shortfall has been covered with foreign loans. In 1963, for instance, the Bank (under Loan 354-?T) financed maintenance equipment worth about US$8 million: in 1969, the Inter-American Development Bank (IDB) made a loan which included US$5 million for maintenance equipment; and, in February 1972, IDB provided US$25.0 million for the purchase of maintenance and workshop equipment as well as for con- sti-Ircion of divisional workshops and offices. However, to bring the pace of exuipment replacement up to the required level, SOP intends to seek additional budgetary allocations. 3.27 The growth of the highway network creates the need for a commensurate growth in maintenance effort. Maintenance expenditures on Federal highways increased from Ps 259 million (US$20.7 million equivalent) in 1960 to Ps 978 million (US$78.2 million equivalent) in 1972 (Table 8). These amounts covered some betterment work and the purchase of equipment, but still enabled a satis- factory level of maintenance to be achieved. During loan negotiations, the Government confirmed that it will continue to maintain the Federal highway system adequately.  - 13 - 4. THE PROJECT A. Ceneral Description 4.01 The proposed project consists of: (a) The widening (including paving) of the following four highways totaling 201 km: (1) Monterrey-Linares (2) Coatzacoalcos-?{inatitlan (3) Mazatlan-Aeropuerto (4) Los Reyes-Texcoco-Lecheria (b) The construction (including paving) of the following 12 highways totaling 1,674 km: (5) Tepalcatepec-Tecalitlan (6) Miahuatlan-Santa Elena (7) Temascaltepec-Zihuatanejo (8) Huixtla-Motozintla-Comalapa (9) Maravatio-Zinapecuaro (10) Ameca-Puerto Vallarta (11) Tlapa-Huamuxtitlan-Tecomatlan (12) Naucalpan-Atlacomulco (13) Playa Azul-Coahuayana (14) Sayula-Rio Uspanapa (15) Pochutla-Salina Cruz (16) Cuerrero-Nuevo Laredo 4.02 The project highways (Map No. IBRD 10549R) have been selected by the Oovernment in agreement with the Bank as having high priority within the Federal highway system. Some of the highways (Nos. (1), (2), (5), (7), (9), (10), (12), (13), and (16)) are extensions of highways financed under previous Bank loans and others are connections between such highways. The project will constitute about 40% of SOP's Federal highway construction program for the 1973-1976 period. 4.03 Design standards generally are shown in Table 10 and specifically for each road in Table 11. They are similar to those used for previous highway projects and are satisfactory. The project roads are described in detail in Chapter 5 and in Annex 2. B. Cost Estimates, Financing and Disbursement 4.04 The total cost of the project is estimated at US$241.4 million in- cluding contingency allowances. Table 12 shows the cost estimates for each  - 14 - highway and Table 13 the breakdown of construction cost by major items (earth- works, drainage, etc.) as well as the construction cost per km. A sumnary of project cost and the foreign exchange component (which the loan will finance) follows: Ps millions US$ millions Foreign Local Foreign Total Local Foreign Total Exchange a. Highways (i) To be widened 276.2 184.2 460.4 22.1 14.7 36.8 40 (ii) To be constructed 1,109.7 739.8 1,849.5 88.8 59.2 148.n 40 Sub-total 1,385.9 924.0 2,309.9 110.9 73.9 184.8 b. Contingencies (i) Physical 10% 138.6 92.4 231.0 11.0 7.5 18.5 40 (ii) Escalation 11.6% 160.8 107.2 268.0 12.8 8.6 21.4 40 Sub-total 299.4 199.6 499.0 23.8 16.1 39.9 Total Construction Cost (a+b) 1,685.3 1,123.6 2,808.9 134.7 90.0 224.7 40 c. Supervision of Construction 168.5 - 168.5 13.5 - 13.5 1/ (6% of a + b) d. Right-of-Wiay 40.0 - 40.0 3.2 - 3.2 1/ Sub-total 208.5 - 208.5 16.7 - 16.7 Total Project Cost (a+b+c) 1,893.8 1,123.6 3,017.4 151.4 90.0 241.4 1/ Not financed under the project 4.05 Engineering for the proposed nroject is being carried out by SOP and local consultants and has been completed for only ten roads. For the remaining roads, SOP expects detailed engineering to be completed by various dates through July 1974. Bridge design is complete for only two roads; for the remaining roads, it is also expected to be completed by various dates through Julv 1974. Costs have been estimated by SOP on the basis of completed  - 15 - detailed engineering for ten roads, on the available engineering information for the remaining six roads, and on unit prices used for recently awarded con- tracts for similar works. These estimates are considered reasonable. 4.06 As in previous Bank-financed highway projects, supervision of con- struction will be carried out by SOP staff, which is well experienced and competent. The cost of supervision has been estimated at 6% of the construc- tion cost. Contingency allowances of 10% for quantity increases have been included as well as an additional 11.6% for price increases; the latter has been estimated on the basis of a 6.5% average annual increase for local costs and 7.5% for foreign costs from the time of bidding until completion of con- struction. These contingency allowances are considered adequate. 4.07 Right-of-way costs amounting to Ps 40 million (US$3.2 million equivalent) will not be financed by the loan. SOP does not foresee any difficulties or delays in acquiring the right-of-way for the project roads. 4.08 The foreign exchange component of the construction cost has been estimated at 40% on the basis of an analysis prepared by SOP. The analysis has been checked by the Bank and is acceptable. It assumes that the works will be carried out by firms established in Mexico, as a result of experience with previous Bank-financed highway projects. The foreign exchange component for some of the previous Federal highway projects (Loans 268 HE and 354-IE) was 36%; for the two toll road projects (Loans 317-ME and 401-ME), it was 36.7% while, for the last Federal highway project (Loan 695-ME), it was reduced to 33%. The reasons for an increase from 33% to 40% are as follows: (a) "Second order" foreign exchange costs have been taken into account. 1/ (b) The cost of fuel and lubricants has been taken as foreign exchange cost, since, for the last two years, Mexico has been a net importer of hydrocarbons and petroleum products. (c) The higher design standards and better specifications in Bank-financed projects lead to the use of additional and more sophisticated (imported) equipment. Between 1968 and 1971, imports of highway construction equipment by contractors increased by 10% of the 1968 figure. (d) Ten of the roads proposed for construction cross mountainous and rocky terrain as opposed to only two roads under Loan 695-ME, thus entailing more equipment-intensive work and, consequently, additional imports of specialized equipment, tires, spare parts, steel and explosives. 1/ Estimated depreciation of imported capital assets and imported components of equipment and materials used in local manufacture of light equipment, cement, tires, and petroleum products.  - 16 - 4.09 The local costs will be met by the Government from budgetary ap- propriations; recent experience with previous highway projects has shown that, except for a few months in 1971 when a review of the Government's in- vestment policies slowed down the pace of works, enough funds have been made available on a timely basis for execution of project works. The average yearly investment of about Ps 480 million to cover local costs of project works would not be a problem for the Government, which is planning outlays for highways for 1973-1976 in the amount of about Ps 31.7 billion (para. 3.09). However, the Bank obtained assurances during negotiations that, for the pres- ent project, adequate funds will be made available promptly as needed. 4.10 SOP has staff competent to supervise the construction of project wqorks; thus, as for previous Bank loans for roads in Mexico, consultants will not be employed for supervision; supervision costs will be entirely financed by SOP. 4.11 Disbursements will be made on the basis of 40% of the expenditures for civil works contracts (representing the foreign exchange component). However, since detailed engineering of some project roads is still incomplete, the disbursement for works on such roads will be conditional upon confirmation of economic justification, based on the cost estimates that would become avail- able as the detailed engineering is eventually completed. If the economic justification is not confirmed, the Government will be permitted to propose other roads for inclusion in the project, and such roads will be subject to the same evaluation criteria. Assurances were obtained regarding this matter during negotiations. Based on the above-mentioned foreign exchange component and on the proposed execution schedule, an estimated disbursement schedule has been prepared (Annex 3). Surplus funds remaining in the loan account on completion of the project will be cancelled. C. Execution 4.12 Execution of project works will be the responsibility of SOP through the Directorate of Federal Highways, which is well organized and staffed (para. 3.19). In addition, the Control Office (now under the Directorate General for Programming), which was established in 1967 to ensure that Bank projects are carried out according to the agreed detailed engineering and construction schedule, will continue its function for works under the pres- ent project. The office has, so far, shown satisfactory results in keeping cost