Philippines - Third Highway Project

Report No. 1297a-PH FILE COPY Philippines: Appraisal of a Third Highway Project December 10, 1976 Transportation Division East Asia and Pacific Region FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS* Currency Unit = Pesos (P) US$1.00 = 7.35 (August 1976) -Pi = US$0.1360 P1 million = US$136,000 *The exchange rate is floating, but the rate used in this report is indi- cated above. WEIGHTS AND MEASURES Metric System 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 kilogram (kg) 2.205 pounds (lb) 1 metric ton (m ton) 1.1 US short tons (sh tons) ABBREVIATIONS AND ACRONYMS AADT = Annual Average Daily Traffic ADB = Asian Development Bank BOC = Bureau of Customs BOT = Board of Transportation DPH = Department of Public Highways B/C = Benefit/Cost Ratio BPW = Bureau of Public Works DPWTC = Department of Public Works, Transportation & Communications ER = Economic Return FYB = First Year Benefits GNP = Gross National Product HSF = Highway Special Fund IATCTP = Inter-Agency Technical Committee on Transport Planning ILO = International Labor Organization NDP = Net Domestic Product NEDA = National Economic and Development Authority PAL = Philippine Air Lines PCMP = Progressive Car Manufacturing Program PNR = Philippine National Railways PPDO = Planning and Project Development Office PRC = Philippine Railway Company PTS = Philippine Transport Survey UNDP = United Nations Development Programme vpd = Vehicles Per Day FISCAL YEAR 1975 = July 1, 1974 - June 30, 1975 1976 = July 1, 1975 - December 31, 1976 From 1977 = January 1 - December 31  PHILIPPINES FOR OFFICIAL USE ONLY THIRD HIGHWAY PROJECT TABLE OF CONTENTS Page No. SUNMARY .......................................... i - ii I. INTRODUCTION ..................................... 1 II. THE TRANSPORT SECTOR ............................. 2 A. Economic Setting ............................. 2 B. Transport Modes .............................. 3 C. Transport Planning and Coordination .... ...... 6 III. HIGHWAYS ................................. 7 A. The Network .................................. 7 B. Highway Traffic .............................. 8 C. Administration ................................ 10 D. Planning and Financing ....................... 10 E. Design and Construction ...................... 12 F. Maintenance .................................. 13 G. Training ..................................... 14 IV. THE PROJECT ...................................... 15 A. Description .................................. 15 B. Cost Estimates and Foreign Exchange Component 20 C. Execution .................................... 22 D. Procurement .................................. 23 E. Financing .................................... 24 F. Disbursements ................................ 24 V. ECONOMIC EVALUATION .............................. 25 A. General ...................................... 25 B. Construction and Improvement of National Roads ....................................... 26 C. Reconstruction of Minor Roads .... ............ 27 D. Road Maintenance Program ..................... 28 E. Risks ........................................ 29 VI. RECOMMENDATIONS ................................... 29 This report has been prepared by Messrs. A.F. Ballereau (Economist), and K.V.S.K. Nathan (Engineer). Mr. E.H. Chittleburgh (Training Advisor) assisted the mission on training matters. This documnent has a rstricted diutribulon *nd may be used by recipients only in the performance of their official dutis. Its contents may Mot otherwis be disclosd without World lnk authorization.  ANNEX 1. Description of Project Roads 2. Staff Training Component 3. Project Related Documents and Data Available in the Project File TABLES 1. Domestic Freight and Passenger Traffic Data, 1968-74 and 1980-85 2. Public Transport Investment Programs and Sources of Funds, FY 1968-80 3. Public Highway Network, 1974 4. Motor Vehicle Statistics, FY 1966-75 5. Motor Vehicle Fuel Consumption, FY 1966-75 6. Expenditures by Highway Works and Source of Funds, FY 1966-75 7. Expenditures on Highways by Road System, FY 1966-75 8. Expenditures on Highway Maintenance by Road System, FY 1972-81 9. Highway User Charges, FY 1966-75 10. Highway Design Standards 11. Minor Roads Identified for Improvement 12. Road Maintenance Program: Workshops for Construction and Improvement (Luzon Island) 13. Road Maintenance Program: Maintenance Equipment for Procurement (Luzon Island) 14. Road Maintenance Program: Physical Targets and Budget Requirements for the National Road Network, 1977-81 15. List of Roads for Feasibility Studies and Detailed Engineering 16. Advisers for Technical Assistance 17. Detailed Project Costs Estimates 18. Schedule of Estimated Disbursements 19. Estimated Traffic Growth on Project Roads 20. Traffic Volumes on Project Roads 21. Estimated Vehicle Operating Costs and Savings on Project National Roads, 1980 22. Estimated Vehicle Operating Costs and Savings on Project Minor Roads, 1980 23. Estimated Economic Costs and Benefits Streams for Reconstruction and Improvement of National Roads (10 sections) 24. Estimated Economic Costs and Benefits for Reconstruction of Minor Roads (20 sections) 25. Road Maintenance Program: Estimated Economic Costs and Benefits Streams, 1977-81 26. Economic and Sensitivity Analysis CHARTS IBRD 16191 Organization of the Department of Public Highways IBRD 16234 Implementation Schedule MAPS IBRD 12320 Construction IBRD 12321 Other Project Elements  PHILIPPINES APPRAISAL OF A THIRD HIGHWAY PROJECT SUMMARY i. The demand for transport in the Philippines continues to increase rapidly at a somewhat higher rate than the average growth of the economy. In spite of past investments, the transport infrastructure is still insuf- ficient to cope with the present level of traffic and meet the expected demand. Part of the transport network has continued to deteriorate as mainte- nance is often inadequate. The need for better road transport at lower costs is still far from satisfied and is likely to grow rapidly in the future as economic growth picks up. ii. Public sector investments in transport represent about 50% of the total public infrastructure expenditure. The share for highway investment is about 80% of the expenditure in the public transport sector, reflecting the dominant role of this mode; highways carry about 80% of passenger movement and 45% of freight. The Department of Public Highways (DPH) has taken steps to respond to the need for more adequate road transport by improving the planning and coordination of road investments; this will involve among other things systematic traffic data collection and processing to guide in formulating economically sound investment programs. iii. The proposed FY 1977-80 public investment program for roads envisages a major increase in investments from an annual level of about D 1.6 billion in 1976 to P 3.3 billion in 1980 (at current prices). It is a major step toward meeting the targets for the highway network which are: (i) the reconstruction and realignment of certain major trunk routes; (ii) the paving and/or strengthening of virtually all national highways, totalling about 23,000 km (less than 40% are paved), and those provincial highways with high traffic volumes; (iii) the improvement of the condition of graveled and unsurfaced minor roads, chiefly through improved maintenance; and (iv) the institution of an adequate system to maintain paved highways. iv. The Bank has previously assisted the Government in the transport sector with five loans totaling US$110.6 million, including two port pro- jects totaling US$14.6 million in 1961 and 1973, one shipping project for US$20 million in 1974, and two highways projects for US$8.0 million in 1971, and US$68.0 million in 1973. In addition, the Bank has assisted in financing the construction and improvement of feeder roads serving rural areas under irrigation, multipurpose and rural development projects. v. The Third Highway Project will include the construction and improve- ment of about 500 km of national roads of which only about 43 km represent new roads; improvement of 230 km of minor roads; implementation of the first phase of a Five-Year Road Maintenance Program which includes a road restoration  - ii - component; and consulting services for supervising construction and improve- ment of project roads, for carrying out feasibility studies and engineering of 1,400 km of national roads, 800 km of minor roads and ferry crossings to prepare future highway projects, and for continuing technical assistance and training. vi. The construction and improvement works on national roads and the procurement of road maintenance equipment, tools, workshop machinery and spares will be carried out by contract on the basis of international competi- tive bidding, in accordance with the Bank's "Guidelines for Procurement". Supervision of construction will be carried out by consultants except for roads engineered by the DPH which it will also supervise with the assistance of some foreign technical personnel. The feasibility studies and engineer- ing, technical assistance to strengthen the DPH and training services will be carried out by experienced foreign consultants assisted by domestic firms. The estimated cost of the project is US$196 million, with a foreign exchange component of US$95 million. The loan is based on the estimated foreign costs. vii. The benefits from the construction and improvement of the highways will be mainly to lower vehicle operating costs by improving sections of the highway network which have inadequate standards. The improved roads will also serve agricultural production areas of the potentially rich islands of Visayas and Mindanao by easing access to markets which is now hampered by periodic floods. Economic returns on the national roads are high and vary between 18% and 36%. The road maintenance equipment and workshops to be procured under the project will contribute to the setting up of an efficient maintenance organization, starting with Luzon Island, to prevent deteriora- tion of newly paved roads and improve the riding conditions of graveled roads. The project also includes studies for new projects which will extend highway development to other important islands and improve social and economic parity among the island populations. The growing investments in roadworks are also expected to help relieve local unemployment. viii. The project constitutes a suitable basis for a Bank loan of US$95 million equivalent to the Government of the Philippines for a 20-year term, including a four and a half year grace period.  PHILIPPINES APPRAISAL OF A THIRD HIGHWAY PROJECT I. INTRODUCTION 1.01 The Government of the Republic of the Philippines has requested the Bank's assistance to help finance a Third Highway Project consisting of: (a) construction and improvement of 500 km of national roads comprising 10 sections and improvement of 230 km of minor roads comprising 16 sections; (b) implementation of the first phase of a Road Maintenance Program compris- ing: (i) construction or enlargement of base and area workshops on Luzon Island; (ii) procurement of road maintenance equipment including spares, hand tools and workshop tools and machinery; (iii) procurement of spare parts and components for existing equipment; and (iv) restoration of deteri- orated sections of the national road network to a maintainable condition; (c) consulting services for (i) supervising construction and improvement of roads in (a) above; (ii) feasibility studies and detailed engineering for future projects; (iii) technical assistance to strengthen the Department of Public Highways (DPH) and help to implement the Road Maintenance Program in (b) above; (iv) designing and supervising the construction of maintenance work- shops; and (v) training of the DPH work-force. The estimated cost of the project is US$196 million, with a Bank participation of US$95 million. 1.02 The Bank's previous assistance in financing the transport sector has involved five loans; two port projects (Loan 290-PH for US$8.5 million in 1961 and Loan 939-PH for US$6.1 million in 1973), one shipping project (Loan 1048-PH for US$20 million in 1974); and two highway projects (Loan 731-PH for US$8.0 million in 1971 and Loan 950-PH for US$68.0 million in 1973). Performance on the First Port Project, which included procurement of dredging equipment, was unsatisfactory due to inadequate operation and maintenance of the dredges and some US$1.1 million of the loan was cancelled. The Second Port Project, after a slow start due to cumbersome Government procedures in contract awards for civil works, is progressing satisfactorily. The First Highway Project was completed in 1975; works had been progressing satisfac- torily until March 1973 when they were suspended for about two months due to civil disturbances which eventually led to the deletion of a section of the road worth about 20% of the project. No part of the loan was cancelled because of the need for funds to meet the increase in construction costs of the remaining works. The Second Highway Project is progressing about on schedule and to date about 60% of the civil works have been completed. The technical assistance which was included in the First Project and continued in the Second helped to improve DPH organization and operations, but further assistance is required, particularly for road maintenance. 1.03 The present project forms part of the Government's infrastructure program for 1977-80 and was prepared on the basis of priorities established by a UNDP-financed Transport Survey (1968-70) which recommended a 10-year transport investment program placing main emphasis on highways. In 1971, the Government began to implement the program with the construction of  -2- the Japanese financed Pan-Philippines highway and the Cotabato-Digos road (160 km) in Mindanao Island, financed by the Bank under the First Highway Project. It was followed, in 1973, by the Second Highway Project which included the construction and improvement of about 52 km of expressway and about 640 km of other national roads, all in Luzon Island. The feasibility studies and detailed engineering of the proposed project were carried out under the Second Project, the studies being financed by the UNDP. 1.04 This report is based on information provided by the Government and its consultants, and on the findings of the April/May 1976 appraisal mission, composed of Messrs. A. F. Ballereau (Economist) and K. V. S. K. Nathan (Engineer). Mr. Chittleburgh (Training Advisor) assisted the mission on training matters. II. THE TRANSPORT SECTOR A. Economic Setting 2.01 The Philippines archipelago comprises some 7,100 islands and covers about 300,000 km2 in land areas, roughly the same size as Italy. The two largest islands, Luzon, with Manila the capital and Mindanao, represent about two-thirds of the area and account for about three-quarters of the population of 42.5 million (estimates of mid-1975). The balance of the population lives mainly on a group of large islands, the Visayas, located between Luzon and Mindanao. The annual growth rate of the population, 3% during 1960-75, is one of the highest in the world. 2.02 Agriculture, including fishery and forestry, remains the main sector of the country's economy and output has grown at an average of 3% p.a. since 1970. Now, it generates nearly 36% of the Net Domestic Product (NDP), accounts for about 70% of export earnings (sugar, coconut and forestry products), and employs over 50% of the labor force. For the same period, manufacturing and mining grew at 7.2% p.a. and accounts for about 27% of the NDP; commerce and other soft services grew at 5.6% p.a. and represent around 40% of the NDP. The Philippines has scope for further development of her abundant natural resources, with particular potential in tropical agriculture, forestry, mining (copper, gold, iron, chrome and nickel) and tourism. Following a period of acute balance of payments difficulties in 1970-72, there was a sharp increase in output and income in 1973-74. The growth in GNP averaged about 5% p.a. in 1970-72, doubled to 10% in 1973-74 and then declined to about 6% a year in 1974-75. The GNP per capita was $370 in mid-1975 and has grown about 3% over the past five years. The Government development program is expected to sustain a growth rate of 7% in real terms by the end of the decade, provided that the international economic situation improves and the country takes full advantage of this opportunity. The rate of registered unemployment has decreased to 4% from about 8% in 1970 but still remains high in larger urban areas such as  - 3 - Greater Manila (8% compared to 12% in 1970). In addition, there is a wide- spread underemployment, especially in the services sector. B. Transport Modes General 2.03 The demand for transport in the Philippines was estimated for 1968 in the Philippine Transport Survey (PTS), carried out by Metra/Sauti (France/ Italy), which was the first attempt to quantify the movement of passengers and goods. Since then, the Government through the efforts of the Planning and Project Developme_nt Office (PPDO) of the Department of Public Works, Transport and Communications (DPWTC) has updated the PTS for 1974 and made projections up to 1985. The Government has agreed as part of the Second Highway Project to improve the collection and processing of data in the transport sector by establishing in each transport agency a comprehensive system to provide regularly all data required for assessing present and future demand. However, the system is not yet operating due to inadequate administration and staffing. The fragmentary data available make it difficult to give an accurate view of the sector's recent evolution. They appear to indicate, however, that the development of transport in general between 1968 and 1974 was faster than the economy as a whole. Road transport is the dominant mode within the two major islands and probably accounts for nearly 80% of passenger traffic; but its relative importance in the total freight movement has dropped between 1968-74 from nearly 60% to 44% (Table 1). Inter- island and coastal shipping, serving a population scattered over hundreds of islands, is now the largest transport mode for freight traffic with about 53% and accounts for nearly 10% of passenger movement. Railroads are of marginal importance, because of short inland distances and poor management, and carry only a small fraction of the total traffic. Domestic aviation, still of small importance, is developing rapidly, mainly serving passenger traffic. 2.04 The overall growth rate of freight movement averaged more than 8% p.a. between 1968 and 1974 while passenger movement grew by 5% p.a. Inter-island and coastal shipping growth was high for both freight and passenger movement with about 14% and 8% respectively, while road transport grew at the rates of about 4% and 5% respectively. PPDO forecasts assume for all modes together an average growth of about 8% p.a. until 1985, which seems realistic. Road transport is expected to grow at about 8% and 7% respectively for freight and passenger movements; and coastal shipping growth should stabilize at about the same rates. 2.05 Public investments in the transport sector accounted for over 50% of public infrasructure expenditure during the last investment periods FY1968-71 and FY1972-75 (Table 2). But, still, public transport investments hardly represent 1% of the GNP each year and were insufficient to cope with transport demand. Inadequate funding and weak administration resulted in a generally  -4- poor maintenance of the network for all modes. Also, insufficient coordina- tioin and overlapping of responsibilities have hampered rational transport planning and efficient project execution. However, the situation is expected to improve as the funds available for public infrastructure investments have notably increased with the tax reforms introduced in recent years, especially the substantial increase of taxes on gasoline and other fuels. Also the inadequacies in data availability and administration are gradually being remedied. 2.06 The Government's efforts have been concentrated on roads which received over the last ten years about 80% of the funds allocated to public transport. Over the same period, other transport modes were allocated little funds. Airports received about 10% and ports about 8%, railways almost none until 1975. A review of the adequacy of these modes is being undertaken through specific studies to assess the needs and priorities of additional investments (para 2.17). The efforts required to further improve the Philippines transport network should aim at: (i) providing a more efficient communications system to link the major centers of activity, (ii) improving transport within these centers, and (iii) linking isolated islands to the mainland. Highways 2.07 Parts of the present highway system are still inadequate to cope with the current level of traffic despite the Government's efforts since 1970. Vehicles operating and travel costs are generally high since only 38% of national highways and 13% of provincial roads are paved, the rest of the network being either gravelled or unsurfaced. A continued high level of investment in highways will be required. Details are given in Chapter III. Railways 2.08 The only railway of significance is the Government-owned Philippine National Railways (PNR) which has a network on Luzon totaling 1,060 km of which 740 km of main line and 80 km of branch lines and sidings are operating. Most of PNR's track were relaid during the 1960's with Japanese aid. The remainder is in very poor condition and closed for the most part. Man- agement of the railways has been poor, maintenance of facilities inadequate and operations for years were inefficient and unprofitable. The main line is paralleled by highways for most of its length, and as haulage distances of most commodities are relatively short, it is unlikely that the railway will ever be competitive with trucks and buses. 2.09 Since the PNR is an important employer (staff of about 8,000), the Government finds it difficult to close it down and its present objective is to improve its operations to permit the railroad to cover at least current operating costs. The programs under the Rehabilitation Plan, 1971-75, have improved services, and passenger and freight traffic have increased somewhat since 1973. Higher fares permitted a small operating surplus but this recovery does not signify the long-term economic viability of the PNR. A second railway,  the Philippine Railway Company (PRC), is privately owned and operates an antiquated 117 km track of diminishing importance on Panay Island. The PRC will be rehabilitated temporarily at low cost to continue service until its phasing out when the improvement of the road network in Panay will be com- pleted. Ports 2.10 There are about 80 national and 390 municipal ports throughout the Philippine archipelago, plus numerous private piers and wharves. The long- established public ports have generally been sited where natural protection is available but sedimentation problems occur in many cases. The more modern private piers and wharves, which handle 80-85% of export shipments, have generally been located to take advantage of natural deep water. Swell is generally a problem only during typhoons and many ports have been able to avoid building expensive breakwaters. Most of the public ports are poorly maintained and have not been designed for modern cargo-handling techniques. Sheds are often lacking, although private warehouses are usually available nearby. Cargo-handling is generally in the hands of private companies and in many ports there is a lack of equipment. Manila, the largest.port, accounts for about 70% of all imports and 5% of all exports. 2.11 Coastal shipping is the most important transport mode for freight, and second for passengers after roads. There are about 480 inter-island ves- sels of over 100 gross tons and a much greater number of small ships. The potential of inter-island and coastal shipping, however, has not yet been realized due to inadequate port facilities and the antiquated local shipping fleet. More than 34% of the inter-island fleet and 41% of the ocean-going fleet were 30 or more years old in 1974. There are about 50 Philippine ship- ping companies, but the majority of the fleet is owned by only 10. 2.12 Administration and control of the national ports have been in the hands of the Bureau of Customs (BOC) of the Ministry of Finance while physical planning, construction and maintenance have been the responsibility of the Bureau of Public works (BPW) of DPWTC. No satisfactory mechanism existed in the past for coordinating the activities of BOC and BPW, with the result that port investments were often unrelated to port needs, and required main- tenance was neglected. A further problem was the inadequacy of records in the BOC, making it impossible to develop a sound data base for analyzing port and inter-island traffic volumes by route and commodity breakdown. The reorganization of the DPWTC now under consideration by the Government is expected to improve the existing organization and develop an efficient data collection system (para. 2.17). The Government, as agreed with the Bank, established the Philippine Ports Authority (PPA)in 1974, which will become fully operational by late 1976. It will take over the port-related functions carried out so far by BOC and BPW.  -6- Civil Aviation 2.13 Manila, the only international airport in the Philippines, is served by 19 international and regional scheduled airlines, including Philippine Air Lines (PAL), which has both international and domestic services. There is an extensive network of domestic airports (78) operated by the Government and served by PAL, now the sole domestic carrier. Domestic pas- senger traffic has been increasing at about 12% p.a. over the past six years; air freight is still insignificant. The Manila Airport is being rehabilitated and extended to meet traffic demand by 1983 with the assistance of a US$26 million loan from ADB. C. Transport Planning and Coordination 2.14 As a result of the Government reorganization in 1972, transport planning is now the joint responsibility of the National Economic and Devel- opment Authority (NEDA) and the DPWTC. As a central planning agency, NEDA has the overall planning responsibility for public capital investments through its Infrastructure Program and Project Office, which reviews and approves invest- ments proposed from each transport agency. NEDA is assisted in this task by the Inter-Agency Technical Committee on Transport Planning (IATCTP), staffed with representives from each transport agency, including the DPH. The IATCTP formulates and recommends comprehensive and integrated long-range transport plans; formulates standards and guidelines for the preparation of agency plans for transport development and coordinates transport programs and projects; and serves as a forum for the resolution of operational problems of transport agencies. 2.15 Under the Secretary of the DPWTC, the Planning and Project Develop- ment Office (PPDO) has the responsibility for undertaking comprehensive regional planning studies with focus on infrastructure investments and formu- lating on this basis priorities of major infrastructure projects. PPDO maintains liaison with NEDA and provides the bulk of technical input to transport planning. The Board of Transportation, as a semi-detached unit of the DPWTC, handles the quasi-judicial function of granting routes to transport companies and prescribing rates, schedules and regulations for their operations. The Bureau of Transportation in the same department and working within policy guidelines laid down by the Board of Transportation, is responsible for the enforcement of regulations concerning all modes of transportation, except for railways. The PNR remains responsible to the Office of the President. These organizational developments have in practice improved the planning and coor- dination functions of the Government. However, there are still many instances of overlapping or lack of coordination such as the exclusion of the railways from the juridiction of the Bureau of Transportation. 2.16 The Government's Transport Infrastructure Investment Program en- visages an expenditure of P 13,700 million during the period FY 1977-80 (Table 2). About P 3,000 million (22%) are expected to be financed by  - 7 - foreign sources. The program is to be periodically updated. The program is ambitious because it will require an increase in public expenditures on trans- port from an annual level of P 2.0 billion in 1976 to P 3.7 billion in 1980 at current prices but the Government, given appropriate technical assistance, has the capacity to execute this program. The proposed investment program was not adequately supported by technical studies other than investigations related to regional planning by the PPDO. The largest share is distributed to roads but substantial amounts are planned for other modes; this seems reasonable in view of the past investment backlogs. With the ongoing efforts to improve the collection of transport data particularly for highways and ports, a sound basis will soon be available for improved planning and the preparation of the next Transport Infrastructure Investment Program. 2.17 A Bank Transport Planning mission which visited the Philippines in July 1975 made a number of recommendations to improve the effectiveness of transport planning and coordination. The mission's report was received favorably by the Government and implementation of some of the recommendations is underway. The recommendations included the regrouping of all planning and coordination activities in a single agency either under NEDA or under an independent new Department of Transport to be created. The mission also recommended that technical assistance be provided through appointment of advisers to each transport agency to strengthen their capabilities in basic data collection, processing and planning functions. The advisers would also assist NEDA in preparing a transport investment study. Following receipt of proposals from qualified consulting firms, the Government has negotiated a contract with Sauti/Hoff (Italy/Denmark) to provide these advisers who will be financed by the Bank under the Manila Urban Development Project (Loans 1272-T-PH and 1282-PH). III. HIGHWAYS A. The Network 3.01 The public highway network totaling about 99,000 km, consists of about 23,000 km of national roads, 30,000 km of provincial roads, 27,000 km of city and municipal roads and 19,000 km of other roads (feeder, farm to market and other local roads) (Table 3). The national roads include about 47 km of four-lane toll expressways with grade separated intersections north and south of Manila. Since 1970, the Government has made a substantial ef- fort to improve and develop the road system mainly with local resources, supplemented in recent years by foreign assistance mainly from Japan, USAID and international agencies such as IBRD and ADB. The achievement during the last six years is impressive with over 13,000 km of newly constructed roads (National Roads, about 4,000 km), including about 6,700 km of earth roads, 3,440 km of gravel roads, and 3,140 km of paved roads (asphalt and concrete). Among those new roads is the principal artery in the country, the 2,000 km Pan-Philippine Highway, which when completed will extend from the north of Luzon to the south of Mindanao. The construction of this 1,300 km road,  - 8 - financed with Japanese assistance, started in 1970 and is about 75% completed. Progress has been slow due to the poor performance of some contractors and inadequate supervision by the DPH. 3.02 The average road density is 0.3 km of road/km2 of land area and 2.3 km of road/1,000 inhabitants. These compare favorably with ratios of 0.5 km of road/km2 and 1.3 km of road/1,000 inhabitants in Korea and 0.1 km of road/km2 and 1.3 km of road/1,000 inhabitants in Thailand. The road density is generally sufficient to serve transport needs, but the condition of most of the highway network is-unsatisfactory. Only 38% of national roads and 13% of the provincial roads are paved (compared with 85% and 35% in Thailand). Moreover, both paved and unpaved roads are generally in poor condition. Many roads were initially badly designed and constructed, and inadequate maintenance in the past has resulted in serious deterior- ation of some high cost pavements. Damage to roads results also from severe flooding during rainy seasons and frequent overloading of trucks, which is common practice particularly in logging and mining areas. The Second High- way Project sought to remedy the deficiencies in highway maintenance and vehicle axle load control. Some progress has been made but, nevertheless, there is a continuing need to improve the highway network, particularly by the (i) reconstruction and improvement of major trunk routes and connecting minor roads; and (ii) implementation of an enlarged and improved road mainte- nance program including a large amount of restoration works. B. Highway Traffic 3.03 Between 1966 and 1975, the motor vehicle fleet grew from about 325,000 to about 740,000, an average annual increase of about 9.6% p.a. (Table 4). The composition of the fleet in 1975 was 53% passenger cars, 29% trucks, 3% buses, 8% jeepneys and 7% other vehicles. The vehicle fleet is fairly large with one vehicle per 60 inhabitants compared to one per 185 in Korea and one per 120 in Thailand. 3.04 The motor vehicle manufacturing industry consists of the assembly of cars and trucks and the production of multi-purpose vehicles. Almost all cars and commercial vehicles sold are now assembled locally. The local industry is being developed under the Progressive Car Manufacturing Program (PCMP) initiated in 1972 which is aimed at foreign exchange savings through domestic manufacture of automotive components. Five foreign car manufacturers have been selected by the Board of Investments to participate in the program, whose goal is to increase the domestic component ratio to about 56% in 1976. The assembly of passenger cars has risen from about 12,000 units in 1972 prior to the PCMP to about 27,000 units in 1975. The PCMP also brought about the production of low cost light commercial vehicles with a larger local content, commonly known as Asian Utility Vehicles (Ford's Fiera, GM's Harabas, Chrysler's Cimaron, and DMG's Trakbayan). Production of these vehicles rose from about 6,000 units in 1973 to more than 18,000 units in 1975. A Progres- sive Truck Manufacturing Program similar to the PCMP was instituted early in 1976 for the local manufacture of trucks with a gross vehicle weight not  -9- exceeding 40,000 lbs. Even prior to this program, trucks were being assembled locally (Table 4). 3.05 Data on growth of demand for road transport is not collected and analyzed on a regular basis. However, judging from the increases in the nation's motor vehicle fleet and the volume of gasoline consumption attribut- able to road transport, traffic growth between 1966 and 1973 was substantial. During this period, the increase in gasoline consumption is estimated to have been about 10% p.a. (Table 5). Since then, traffic growth has been slowed by the increase in oil prices but it is expected to increase with the growth of output and income. 3.06 Routine traffic counts on the national highways were taken twice a year until 1971 when they were suspended pending preparation of improved procedures for collection and processing of traffic data by consultants Kampsax/Berger (Denmark/USA) as part of a UNDP-financed technical assistance program under the First Highway Project. The Government undertook under the Second Highway Project to implement the consultants' recommendations and since August 1975, the DPH has resumed a nationwide traffic counting program. Special traffic counts and origin and destination studies have been con- ducted by consultants who were carrying out feasibility studies and by the DPH for various roads proposed for financing by Bank and ADB loans or for bilateral financing. However, more efforts are required to enable effective planning of highway investments and maintenance operations. During negoti- ations, the Government gave assurances that it will put into operation not later than December 31, 1977 a country wide system to collect, record and process traffic data and make such modification to the said system as shall be agreed with the Bank. 3.07 Only 10% of trucking is carried out by general haulage operators. Ninety percent of freight services are provided by trucks owned by enterprises and hauling their own goods; and the utilization of these trucks appears to be low. Among the factors which deter the growth of efficient commercial trucking is the unrealistically low trucking rates which are set by the BOT. Passenger transport is operated by private companies and regulated by BOT for route licensing and fares. Taxis and buses are owned by a few large companies while "jeepneys," an extended jeep carrying some 12 to 16 people, are gener- ally driver-owned and are very popular because of low fares and convenience. However, urban traffic congestion, particularly in Greater Manila, has led to traffic management measures which restrict access of jeepneys to main arteries and encourage the expansion of bus services. These measures have been resisted by the bus companies which claim that rates are too low to permit them to buy new buses and operate them profitably during peak hours. The technical assistance advisers to be appointed to each transport agency (para 2.17) will assist the Government in reviewing the present tariff structure and formulating a realistic policy on trucking rates and passenger fares.  - 10 - C. Administration 3.08 The responsibility for constructing, maintaining and, to some extent, planning of national roads is vested in the DPH which was created in May 1974 by elevating the former Bureau of Public Highways of the DPWTC. In May 1975, the Department received in addition the responsibility for the supervision of the construction and maintenance of Barangay roads (or farm to market roads) which includes practically all roads other than national roads, provincial roads, and city and municipal roads. Local authorities are responsible for the provincial, city and municipal roads except for the supervision of construction and improvement of these roads which is carried out by the DPH when expenditures are charged to the general funds. All provincial, city and municipal roads are maintained by their respective local government. 3.09 The DPH is headed by a Secretary who is assisted by an Under Secretary. Two Assistant Secretaries work under them, one in charge of all administrative matters, and the other in charge of operations. The present organization (Chart No. 16191) was set up by the Presidential Commission on Reorganization as detailed in its report published in March 1973, which generally follows the recommendations by consultants under a UNDP-financed technical assistance program, started under the First Highway Project and later continued with Bank financing under the Second. 3.10 The operations of construction and maintenance of the national roads are the responsibility of 14 DPH Regional Offices, each headed by a Regional Director. Their work is supervised at headquarters by the Bureau of Construction and Maintenance which is responsible for the construc- tion and maintenance standards. The regions are subdivided into districts or cities whose numbers vary with the size of the region. There is a total of 149 districts and cities, each headed by a district or city engineer. Some of the city engineers are employed by the DPH and they function as DPH district engineers in respect of national roads that pass through the city and municipal areas. The Bureau of Equipment is responsible for the management, repair and maintenance of road construction and maintenance equipment which is rented mainly to DPH regions and district offices at pre-set rental rates which are fair and comparable to those in the industry. It has its own regional equip- ment services organizations with direct control of 14 base workshops and a number of area workshops and mobile shops. The Bureau of Barangay Roads supervises the construction and maintenance of farm-to-market roads. D. Planning and Financing 3.11 In the DPH, a Planning and Development Service has been established with responsibility for programming the annual allocation and disbursement of funds and preparing the highway component of the Four-Year Development Plan (para 3.15). For this purpose, its task includes the evaluation of major road projects and ranking of priorities among projects; but the Service had only a  - 11 - limited responsibility in the preparation of this project which was based for the road and maintenance components on feasibility studies carried out by two foreign firms (paras 4.03 and 4.06). It has made a modest start by undertak- ing a study of road components of integrated irrigation and rural development projects, but will eventually plan, undertake and supervise a program of feasibility studies. The strengthening of this office has been included under the present project with the appointment in July 1976 of an expatriate Transport Economist who will assist the Planning and Development Service in its functions at headquarters and in the regions. However, the staffing of this service is not satisfactory as there are no economists and many of the other positions have not been filled. During negotiations, assurances were obtained from the Government that it will fill all vacant positions for professional staff consisting of 3 economists and 15 engineers before December 31, 1977. 3.12 In each DPH Regional Office, a planning division has been formed to identify projects for studies, indicate regional priorities and super- vise the collection of traffic and accident data. The strengthening of the planning capabilities of the regional offices and the systematic collection of traffic data will be provided through the guidance and train- ing of the Planning and Development Service. 3.13 The Government plans to spend a total of about 11,200 million pesos (US$1,520 million) for highways under the next investment program (FY 1977-80). This program is over three times the total actual expenditures during the previous Four-Year Program (FY 1972-75). 1/ During this period, total highway expenditures, including administration and maintenance, increased at a rate of over 50% p.a. at current prices, and doubled between 1974 and 1975. Actual construction expenditures over the period, averaged between 55% and 65% of the total, while maintenance accounted for 30%, the remainder being administrative expenditures (Tables 6, 7 and 8). During the same period, revenues from highway users increased at the rate of 5% to 10% p.a. through 1973; in 1974 they jumped by 115% and by 57% in 1975, as a result of the increase in price of crude oil and subsequent tax increases based on the recommendations of the technical assistance consultants and the Bank. A new annual energy tax was introduced in 1975 to penalize private cars, particularly high consumption models and sports cars (rates are heavy, ranging from 150 pesos per year for a new small car to 12,000 pesos a year for a sports car. These revenues (Table 9) covered only about 40-60% of highway expenditures. 3.14 Almost 80% of highway revenues are obtained from fuel oil taxes and the remainder is contributed by motor vehicle fees, licenses and other items including tolls levied on the two expressways north and south of Manila. Road user charges, despite recent increases, are still comparatively low and they should be reviewed periodically to cover gradually a larger 1/ Period FY 1972-75 was chosen for comparison as FY 1976 extended for 18 months because of a change in the Fiscal Year.  - 12 - proportion of highway expenditures. About 90% of total revenues were ear- marked for the Highway Special Fund (HSF) until it was abolished in July 1975, in common with all special funds. The HSF was in the past used to cover most highway expenditures and the general funds contributed about 10% of con- struction expenditures up to FY 1970, but this share has increased substan- tially since then to about half of the expenditures. In FY 1975, the HSF covered exclusively maintenance and minor improvement expenditures to insure that these high priority operations were not neglected. With the abolition of the HSF, funds required for road maintenance, particularly restoration works were not assured. However, during negotiations, assurances were obtained from the Government that it will commit funds annually for road maintenance, including restoration in accordance with the agreed Five-Year Maintenance Program (paras 3.21 and 4.09). 3.15 The Philippines is not yet considered among the countries suitable for highway sector lending, since it has not yet established a well planned highway investment program. At this stage, much more planning effort is required to transform the projected Four-Year Development Program into a realistic and appropriate plan. Only the first two years of the Program includes projects under preparation (feasibility studies and detailed engi- neering); the other projects listed are mere ideas expressing unevaluated preference. NEDA is aware of these deficiencies in the Program and has taken steps to improve the planning activities in each transport agency and to assure adequate coordination. Staffing constraints have been generally a bottleneck, and the Bank has agreed under the Manila Urban Development Project (Loan 1282-PH), to assist in financing a technical assistance team of seven advisers to help in transport planning (para 2.17). NEDA intends to prepare by 1978, with the assistance of the seven advisers, a new transport investment program, which is to be regularly updated. E. Design and Construction 3.16 The design and construction of all national roads are carried out by the DPH either directly or by employing consultants and contractors. Large projects are mostly designed by consultants but a few have been under- taken by special teams in headquarters and by the regional offices. Design standards appropriate to Philippine conditions were developed by the DPH with the assistance of consultants, Norconsult (Norway) during the first UNDP- financed road feasibility studies in 1971-72. Additional standards for minor roads were recommended by the general consultants, Scott Wilson Kirkpatrick & Partners (U.K.) who supervised the detailed engineering of the project roads. They are satisfactory and have been applied to the project roads (Table 10). Consultants are also used for construction supervision of large projects financed by international agencies, such as the Bank and ADB. Construction is carried out principally by contract and, for Bank and ADB-financed projects, under international competitive bidding procedures.  - 13 - 3.17 Provincial, city and municipal roads financed by local funds are designed and constructed by their respective local governments. Since 1968, under the Provincial Development Assistance Program (PDAP), many provinces have developed an advanced planning and implementing capability through the organization of the offices of the provincial engineer and the setting up of equipment pools and workshops and training facilities. USAID has been assisting the provinces under this program with funds and technical assist- ance since 1974. 3.18 The improvement and construction of farm to market roads will receive a new impetus with the creation of the Bureau of Barangay Roads. An inventory is presently underway and the total length of the roads may exceed 50,000 km including a large number of trails. The work in the field, surveys, provision of equipment and supervision is undertaken by DPH Districts, but the actual construction is done by village labor. F. Maintenance 3.19 The maintenance of national roads and other roads has been generally poor due to an inefficient maintenance organization, insufficient maintenance funds, and unsatisfactory planning, budgeting and operating procedures. Routine road maintenance is carried out in each region by force account, and periodic maintenance is carried out, when undertaken, by contractors. However, the DPH is not equipped to maintain the national road network adequately. Es- sential items of equipment are not available, hand tools are in short supply, and workshop facilities to service and repair equipment are grossly inadequate. The existing depots are virtually junkyards with all types of equipment broken down and in scrap condition. Consequently, the newly organized road mainten- ance division in the DPH headquarters and regions have not been able to operate efficiently. Years of neglect of road maintenance have, in fact, resulted in a large part of the network deteriorating to a condition where the roads cannot be maintained by normal maintenance methods and restoration works have to be carried out to put them in a maintainable condition. 3.20 Some improvements, however, have taken place following the recom- mendations of technical assistance consultants, Kampsax/Berger (Denmark/ USA) who have identified major problem areas. They were appointed in 1972 under the First Highway Project, and continued under the Second. In a first group of recommendations, the consultants advised on the improvement of the maintenance organization, planning, budgeting and operating procedures and equipment management which were implemented at DPH headquarters in Manila and in two pilot regions in 1973-75, but with modest success due to funds not being released in time. A second group of recommendations was contained in their report of April 1975 which proposed a Five-Year Road Maintenance Program (FY 1976-80) and included a Highway Maintenance Manual describing operations and procedures to accomplish maintenance tasks. The next stage to be included in the present project is to implement the five-year program, and extend to the rest of the country the improved maintenance procedures tested in the two  - 14 - pilot regions. The DPH has started to implement the program with respect to routine maintenance but only exceptionally for periodic maintenance and restoration works as lack of funds prevented the procurement of adequate equipment and material, and recruitment of staff. 3.21 The budgeting procedures for road maintenance have been greatly improved by the adoption of the consultants recommendations. The allocation of maintenance funds to the regions is now based on technical requirements by a formula which expresses in Equivalent Maintenance Kilometers (EMK) the actual road lengths, as adjusted by correction factors for surface type, width, traffic levels and length and type of bridges. The average maintenance cost per EMK in 1975 was about US$1,100. The technical assistance proposed in the project is expected to assist in proper planning and preparation of adequate annual budgets to cover all maintenance expenditures. G. Training 3.22 Training has been conducted for more than 25 years for technical and administrative personnel, mainly on-the-job, by the various DPH functional units. Upon the creation of the DPH, Training Officer posts were established in the headquarters and regions to meet the manpower development needs and to organize training courses in the Administrative Service and Bureau of Equip- ment and Barangay Roads. However, insufficient care was taken in selecting staff and little support was given by headquarters to regional efforts to conduct training programs on a regular basis. The expansion of the road network together with technological advances experienced in highway mainten- ance, construction and equipment have accentuated the need for more compre- hensive and organized programs of training for both existing and new personnel. 3.23 The need to improve the performance of the DPH workforce was recog- nized by the Bank in 1973 and, accordingly, funds were included in the Second Highway Project for a consultants' study to identify manpower development needs and recommend suitable training programs. The consultants, Roy Jorgensen Associates, Inc. (USA) submitted a final report in early 1976. The report did not fully take into account the existing training facilities, took little account of the high educational standard of the DPH workforce, and used in- exact methods to identify training requirements. The result was that the training requirements were somewhat exaggerated. However realistic provisions have been made within the present project (para 4.15) to assist the DPH in meeting the need for training as outlined in para 3.22.  - 15 - IV. THE PROJECT A. Description 4.01 The object of the project is to assist in improving the highway network, mainly in the Visayas and Mindanao Islands and in implementing the first phase of a road maintenance program in Luzon Island. Other purposes of the project are to improve the operations of the DPH and to prepare future projects (see Maps Nos. 12320 and 12321 at the end of the report). 4.02 The project consists of: (a) the construction and improvement of 10 national road sections totaling 500 km and 16 minor road sections totaling about 230 km; (b) the implementation of the first phase of a Five-Year Road Maintenance Program comprising: (i) the construction or enlargement of 5 base and 23 area workshops on Luzon Island; (ii) procurement of road maintenance equipment including spares, hand tools, workshop tools and machinery; and (iii) procurement of spares and components for existing equipment; and (iv) restoration of deteriorated sections of the national road network to a maintainable condition included in the first two years of the Five-Year Program; (c) consulting services for: (i) supervision of the construction and improvement of roads in (a) above; (ii) feasibility studies of about 1,400 km of national roads, 800 km of minor roads and seven ferry crossings to be followed by detailed engineering of elements found justified; (iii) technical assistance to strengthen the DPH and help in im- plementing the road maintenance program in (b) above; (iv) designing and supervising the construction of work- shops in Luzon Island; and (v) training of DPH personnel. (a) Construction and Improvement of Roads (i) National Roads 4.03 The 10 national road sections totaling about 500 km, described in Annex 1, will be constructed and improved mainly on present alignment except for the Passi-Dao (35 km) road and Iloilo-Jaro (9 km) diversion road, which will be constructed on new alignments. The existing roads have rough and narrow pavements which have deteriorated because of bad design, poor maintenance and heavy traffic volumes. Feasibility studies were carried out in 1974-75 by consultants, Norconsult/Hoff and Overgaard (Norway/Denmark), financed by the UNDP with the Bank acting as Executing Agency. Detailed engineering was carried out by the DPH Region V Design Office in Legaspi,  - 16 - and three local consulting firms between mid-1975 and mid-1976 except for the Passi-Dao Road (35 km) expected to be completed early in 1977. All three local consulting firms employed a few expatriates under arrange- ments with foreign consulting firms operating in the country. The detailed engineering was supervised by general consultants, Scott Wilson, Kirkpatrick and Partners (U.K.). The foreign cost of the detailed engineering was financed under the Second Highway Project. The work is generally satis- factory. 4.04 The new road pavements will vary from gravel to bituminous surface treatment and asphalt or portland cement concrete. The road improvements will generally follow existing alignments except for a few bypasses around towns and for two major re-alignments along the Zarraga-Passi road. On some sections, embankments will be raised to reduce damage arising from severe flooding. The roads will be upgraded by improving and widening shoulders and, in many sections, by widening the pavements to cope with increased traffic volumes or by doubling present carriageway for the Bacolod-Silay road. The roads are designed in accordance with Philippines Highway design standards (Table 10). (ii) Minor Roads 4.05 The 16 minor roads sections totaling 230 km (Table 11) are located in Panay, Negros, and Mindanao islands, and most of them connect with the national roads being improved under this project. They were identified by the feasibility study consultants as requiring improvements at the same time as the national roads. The roads are in a poor condition with narrow widths, inadequate drainage and unsatisfactory earth or gravel surfaces and are difficult to negotiate during the wet season. A brief description of the level of improvement of the minor roads is given in Annex 1, para 30. Fourteen minor road sections were engineered by newly created DPH Design Offices in Regions VI and X, and two on Panay Island by local consultants. Designs are in accordance with recently set up design standards for minor roads (Table 10). (b) Road Maintenance Program 4.06 The Road Maintenance Program included in the present project is the first phase, limited to Luzon Island, of a Five-Year Program which eventually will be extended to the rest of the country. The Maintenance Program for national highways (FY 1976-80) was prepared by consultants, Kampsax/Berger (Denmark/USA), in 1974-75 under the ongoing Second Highway Project. The consultants' recommendations have been accepted in principle by the Government and the Bank (para 3.20). 4.07 Luzon Island was selected for the first phase of the program since traffic density is high and most highway investments have been concentrated there - the Japanese financed Pan-Philippines Highway, the Bank's Second High- way Project and an ADB road Project. The project will improve and equip 5 Regional Base Shops and 12 Area Shops, and build and equip 11 new Area Shops.  - 17 - Two Regional Base Shops on Luzon will be built and equipped with Japanese aid outside the present project. Details and cost estimates of construction and improvement of workshops and their location are given in Table 12. A list of maintenance equipment, spares, hand tools, workshop and tools machinery to be procured under the project, including cost estimates, is given in Table 13. The maintenance equipment was identified after reviewing the whole DPH equip- ment fleet, including recent purchases through Japanese aid. Available equip- ment was allocated with priority given to road maintenance and only items that were not available or were not in adequate numbers to meet road maintenance requirements have been included in the project. Spare parts and components for the maintenance of existing equipment in Luzon have been identified tentatively and would meet requirements over a two-year period. Actual requirements will be determined by the technical assistance experts who will be appointed under the project to assist the Bureau of Equipment (para 4.12). 4.08 The Government will continue road maintenance on a country-wide basis in accordance with the consultants' recommendations using the existing inadequate equipment and workshop facilities in all other regions until a second phase is implemented. In addition, the Government has agreed to carry out the Road Restoration Program as recommended by the consultants in the Five-Year Maintenance Program, in order to prevent further deterioration of the road network and to save maintenance funds. The scope of works of the overall Program for the national road network, including normal maintenance and the Restoration Program, over the 1977-81 period, which is considered as the base period for the project, is detailed in Table 14. The physical targets for normal maintenance increase from 22,500 km in 1977 to 25,000 km in 1981, while the Road Restoration Program should be completed by late 1981, and is to be carried out mainly by contractors. The budget requirements call for a total expenditure of about 432 million pesos in 1977 rising to about 528 million pesos in 1981; it represents an important increase compared to past expenditures in 1975 and 1976 when the corresponding expenditures did not exceed 300 million pesos per year. The Government has indicated that it will be able to meet the budget requirements for normal maintenance and that part of the road restoration works to be carried out by force account. To assist the Government in financing restoration works to be carried out by contract, the project includes provision to meet the foreign costs for the first two years of the Five-Year Program. 4.09 The successful implementation of the Five-Year Maintenance Program requires a substantial effort from the DPH. During negotiations, the Govern- ment gave assurances that it would implement the program as described in Table 14 and agreed that: (i) road restoration works, as recommended by consultants will start not later than January 1977 and be carried out until completion in 1981; (ii) progress reports will be submitted semi-annually each August and February; the first on August 1, 1977 and for the following years, covering achievements for normal maintenance and restoration works;  - 18 - (iii) annual detailed physical targets and budget requirements will be planned and prepared in accordance with the pro- cedures recommended by Kampsax/Berger and submitted in October of each year for the Bank's approval, giving a list of road sections to be restored with details of road locations, length, traffic data, standards and cost estimates; the first target report to be submitted by October 1, 1977; (iv) annual release of funds to DPH will be in line with budget requirements to implement the annual maintenance programs as agreed with the Bank; and (v) DPH will no later than the end of 1977 dispose in an appropri- ate way of all scrap parts and components and non-serviceable equipment and take measures to dispose thereafter regularly of the equipment which has reached the end of its economic life. (c) Consulting Services (i) Construction Supervision 4.10 Construction supervision will be undertaken by the same local con- sultants who carried out the detailed engineering of the project roads. To strengthen their supervision staff, local consultants are expected to recruit experienced expatriates to fill key positions. All consultants will use counterpart staff from the DPH to the extent qualified staff can be made avail- able. DPH Regions V, VI and X will supervise directly the roads engineered by their design staff. The technical assistance to be provided by consultants under the project to strengthen the DPH (see paras 4.12 and 4.13) will help in the organization and operation of the supervision teams. During loan nego- tiations, assurances were obtained from the Government that the qualifi- cations, terms, and conditions of the supervision consultants and DPH staff, will be satisfactory to the Bank. (ii) Feasibility Studies and Engineering for Future Projects 4.11 The present project includes the conduct of feasibility studies and engineering by consultants for about 1,400 km of national roads and about 800 km of minor roads and seven ferry crossings. The proposed roads and ferry crossings are listed in Table 15. The Government has selected these roads on the basis of current traffic counts, development potential, and population of areas served. Some of the roads were identified by the Philippine Transport Survey carried out in 1968-70 by consultants, Metra/Sauti (France/Italy). The ferry crossings are expected to facilitate inter-island movement of motor vehicles. During loan negotiations, assurances were obtained from the Govern- ment that qualified consultants would be retained under terms and conditions satisfactory to the Bank.  - 19 - (iii) Technical Assistance to DPH 4.12 The performance of the DPH has improved through technical assist- ance by consultants financed under successive highway projects. Started in 1971, the services of Kampsax/Berger (Denmark/USA), which were financed by the UNDP, under the First Highway Project helped to improve the organization and operations of the DPH, then a bureau. Among the measures implemented were the separation of the administrative and technical functions, the reduction of the number of divisions, the division of construction and maintenance re- sponsibilities, and the strengthening of the regional offices. The consultants continued their work until mid 1975 under the Second Highway Project, with new terms of reference which placed emphasis on road maintenance and included the preparation of a Five-Year Maintenance Program for national highways. Part of their recommendations with respect to procedures and operations of maintenance were implemented by DPH headquarters and the regions. However, the gradual reduction of foreign consulting firms' input, which prepared projects for the DPH and their replacement by local firms calls for additional scrutiny by the DPH to review project preparation. Also, a somewhat high turnover of staff attracted by the private sector leaves a vacuum which needs to be filled. Further, DPH staff in some areas such as maintenance lacks the expertise to implement successfully the Five-Year Maintenance Program. 4.13 The technical assistance input proposed in the present project will help the Bureau of Construction and Maintenance with four experts for a two- year period each, to advise the four Chiefs of the Divisions of Construction, Maintenance, Design, and Soils and Materials. In addition, two short-term experts will be employed in the Maintenance Division to assist with the implementation of the Road Maintenance Program, one to help with the imple- mentation and improvement of operations of the diverse maintenance crews, the other to assist in implementing the road restoration component. The Bureau of Equipment will also be strengthened with one expert to advise the Director, also for a two-year period, in organizing a modern and efficient workshop net- work with proper spare parts control and management system, and with two short-term experts, one to help with the reorganization of the spare parts depots and the procurement of spares, the other to assist in the preparation of specifications, bid documents, and evaluation of bids for the procurement of equipment, tools, and workshop machinery. An expert has been appointed to assist the Director of the Planning and Development Service from July 1, 1976 for a two-year period, in developing statistical data, including traffic counts, to improve the preparation of highway programs. The cost of his services up to the effective date of the Loan Agreement, not exceeding US$50,000, is recommended for retroactive financing under the project. A total of 168 man/months will be required to carry out this Technical Assistance Program (Table 16). During loan negotiations, assurances were obtained from the Government that qualified consultants would be retained under terms and conditions satisfactory to the Bank.  - 20 - 4.14 A Bank staff member was seconded in September 1973 under the Second Highway Project to establish the IBRD Projects Office in the DPH, responsible for the monitoring of the implementation of projects and the preparation of future projects. He was succeeded in July 1975 by his Filipino Deputy. In view of the considerably expanded work load, the Government has requested the return of the same person to advise the Executive Director of IBRD Projects Office, with the post to be financed again under the Second Highway Project, Loan 950-PH. (iv) Training 4.15 A small training program is proposed in the project and consists of three Training Advisers, two to assist the existing Training Units located in the Personnel Division of the Administrative Services and the Bureau of Equip- ment, and one to start training facilities in the Bureau of Construction and Maintenance. The latter Bureau has no formal training unit and so far, has relied on ad hoc seminars conducted in the field by local and headquar- ters personnel. The details of the program and the training experts' services are given in Annex 2. The services which are expected to be provided by a consulting firm will extend over a two-year period and involve 72 man/months at about US$6,000 per man/month. During loan negotiations, assurances were obtained from the Government that the qualifications and conditions of the consultants to be appointed as training advisers will be satisfactory to the Bank. (v) Workshops 4.16 Design and construction supervision of workshops will be undertaken by local consultants. The design work will consist of reviewing existing DPH plans, revising as necessary and preparing detailed drawings and bid documents. During loan negotiations, assurances were obtained from the Government that the qualifications and conditions of the consultants to be appointed will be satisfactory to the Bank. B. Cost Estimates and Foreign Exchange Component 4.17 The total cost of the project, including right-of-way cost, is es- timated at about 1,438 million pesos or US$196 million equivalent. The total cost includes physical contingencies of 10% on all items, and price conting- encies of 24% and 21% for civil works and consulting services respectively over a four-year period and 8% for equipment over a one-year period. Infla- tion for civil works has been assumed to be 12% p.a. 1977-79 and 10% p.a. for 1980; for consulting services, 8% p.a. for 1977-79 and 7% p.a. for 1980; and for equipment, 8% p.a. The Bank loan of US$95 million will finance the foreign exchange cost of the project estimated to be about 48% of total costs. Detailed costs estimates are given in Table 17 and are summarized below:  - 21 - Foreign (Pesos Million) (US$ Million) Exchange Item Local Foreign Total Local Foreign Total Component (x) A. Construction and Improve- ment of: 1. National Roads (500 km) 294.8 294.8 589.6 40.2 40.2 80.4 2. Minor Roads (230 km) 31.9 32.0 63.9 4.3 4.4 8.7 Sub-Total (A) 326.7 326.8 653.5 44.5 44.6 89.1 50 B. Road Maintenance Program 132.6 158.1 290.7 18.1 21.5 39.6 54 C. Consulting Services 47.8 44.9 92.7 6.5 6.1 12.6 48 Sub-Total (A,B & C) 507.1 529.8 1036.9 69.1 72.2 141.3 51 D. Contingencies 1. Physical 50.7 52.9 103.6 6.9 7.2 14.1 2. Price 115.4 114.6 230.0 16.0 15.6 31.6 Sub-Total (D) 166.1 167.5 333.6 22.9 22.8 45.7 50 E. Right-of-Way 67.6 - 67.6 9.2 - 9.2 TOTAL 740.8 697.3 1438.1 101.2 95.0 196.2 48 4.18 The estimated average construction cost per km (excluding contin- gency allowances) is about US$160,000 for the national roads, and about US$40,000 for the minor roads. Construction supervision by consultants is estimated at about 8% of construction cost. The man-month rate for expatri- ate consultants is estimated to be about US$8,250 or US$6,000, excluding international travel expenses and local costs for housing and local travel. These costs are reasonable. 4.19 The cost estimates were prepared independently by the consultants who did the detailed engineering and by the DPH for their respective roads. The estimates were checked and assembled by the general consultants. Quanti- ties have been derived from detailed designs except for the Passi-Dao Road (35 km) for which cost estimates were based on preliminary engineering. Detailed engineering is expected to be completed early in 1977. Unit prices were based on an analysis of the cost of labor, materials, depreciation, operation of equipment, and contractors' overheads and profits. A 10% contingency allow- ance for quantity and time overruns is considered adequate. Cost estimates for construction supervision, feasibility studies and detailed engineering have been based on experience on the Second Highway Project. During loan negotiations, final cost estimates for the project were agreed with the Government.  - 22 - C. Execution 4.20 The DPH, through its Projects Office (Chart No. 16191), and assisted by qualified consultants, will be responsible for the execution of the project. The Projects Office was set up to supervise Bank financed highway projects and includes on its staff a Bank highway engineer seconded to the DPH. The project will be executed over a four-year period and should be completed in December 1980. A schedule showing the phases of implementa- tion for each component of the project is attached at the end of the report (Chart No. 16234). Road works will extend over three years and the Road Maintenance Program elements on Luzon Island will require two years to execute. The Program will be fully operational on this island by late 1978. During negotiations, the Government confirmed the proposed implementation schedule and agreed to submit regular quarterly progress reports to the Bank to mon- itor the overall implementation of the project, in addition to the special reporting requirements for the Road Maintenance Program (para 4.09). 4.21 The road construction and improvement works have been divided into 13 contracts for the national roads and 12 for the minor roads. The sizes of the contracts were determined to obtain economies of scale on the larger works and provide a number of smaller contracts to encourage local contractors. Cost estimates for individual contracts for the national roads range from US$1.4 to US$8.8 million and for the minor roads from US$0.25 to US$1.0 million equivalent. Some 72 local contractors, four local/ foreign joint ventures, and five foreign contractors have applied for prequalification. Of these, 19 local contractors have been found qualified to execute contracts between US$2.0 million and US$5.4 million. Five local contractors, three local/ foreign joint ventures and all five foreign contractors have been prequalified to execute the largest contracts in the project. Six of the local contractors have won 10 of the 14 contracts of the Second Highway Project, and with the exception of one, are performing satisfactorily. The bidding schedule has been arranged to allow unsuccessful bidders to bid on subsequent contracts. The bids for the first contracts were opened before loan negotiations and are close to the cost estimates. Contracts will be awarded soon after the signing of the loan agreement. 4.22 The local contracting industry has benefited from several measures instituted by the Government to place it on an equal footing with foreign contractors and to assist in other non-discriminatory ways. Foreign exchange requirements of local contractors are readily made available by the Govern- ment and equipment to be used on Bank-financed projects is allowed to be im- ported duty-free. Advances of up to 15% of contract sums are permitted on all contracts and retention funds have been limited to 5% of sums due to con- tractors. The contract conditions will include an adequate price adjustment clause on major pay-items for price fluctuation of basic materials, fuel, labor, and plant. Experience in the Second Highway Project shows that the local contracting industry is competitive and does not need special assis- tance.  - 23 - 4.23 Civil works for the construction and expansion of workshop facili- ties are expected to be executed by local contractors. The estimated cost of the works will be about US$200,000-US$400,000 for each base shop and less for the area shops. The workshop designs and construction supervision will be carried out by local consultants. The local building industry is efficient and competitive and the proposed arrangements are satisfactory. 4.24 The potential of the project for relieving unemployment in the country has been considered. Although the contractors are left to choose their own construction methods, employment of a large amount of labor is expected to be generated by the prospective award of most contracts to local contractors. Many local sub-contractors, using labor-intensive methods, particularly for the supply of materials, are also expected to be employed by both local and foreign contractors. An ILO technical assistance team is currently undertaking studies on labor intensive schemes. The Bank will monitor its work and, if appropriate, will consider a component in the next highway project as a pilot program for labor intensive methods. 4.25 No significant ecological problems are expected. The reconstructed roads will have improved drainage facilities which will benefit the immediate environment. Noise and dust will also be considerably reduced due to better surfacing; wider and well constructed shoulders will contribute to road safety. The roads will largely follow existing alignments, thus minimizing disturbances to property and persons. 4.26 Some additional right-of-way will be required for the works. In the Second Highway Project, contractors did not get full access to sites on many contracts for a year or more after award of contracts. In view of serious problems in the past, confirmation was obtained during negotiations that acquisition of right-of-way will be completed on each road section before any contract for construction or improvement is awarded. D. Procurement 4.27 Contracts for the construction and improvement of the national roads amounting to about US$80 million will be awarded to prequalified contractors on the basis of international competitive bidding in accordance with the Bank's "Guidelines for Procurement". Contracts (average value about US$500,000 each) for the reconstruction of minor roads amounting to about US$9 million and small contracts (value to be determined by Government as detailed program is prepared) for the road restoration works amounts to about US$21 million will be awarded to prequalified contractors on the basis of local competitive bidding following procedures and conditions acceptable to the Bank. Contracts for civil works for the construction and extension of workshops (average value about US$150,000 each), including installation of workshop equipment, amounting  - 24 - to about US$4.3 million will also be awarded to qualified contractors on the basis of local competitive bidding following procedures and conditions accept- able to the Bank. Foreign contractors operating in the country will be allowed to participate in all local bidding. Workshop equipment, tools, road main- tenance equipment, spare parts and components amounting to about US$14.3 million will be procured on the basis of international competitive bidding in accordance with Bank guidelines. A preference limited to 15% of CIF price of imported goods, or the customs duty, whichever is lower, would be extended to local manufacturers in the evaluation of bids. Procurement of off-the shelf items under US$15,000 and procurement of hand tools for road maintenance may follow normal Government procurement procedures and conditions which are acceptable to the Bank; the total amount of such purchases should not exceed US$500,000. E. Financing 4.28 The proposed loan will finance the foreign exchange component of road construction and improvement, road maintenance program and-consulting services (including training). An analysis of the Government Highway Investment Program shows that no undue difficulties are expected in the provision of funds for financing the local currency component of the project. During the construction period, FY1977-80, only 10-15% of the budgetary funds expected to be allocated annually for highway expenditures will be needed to match the foreign component of the proposed Bank Project (Table 2). F. Disbursements 4.29 Disbursements from the loan account will be on the basis of: (a) 50% of total cost of construction and improvement of roads; (b) 30% of total cost of construction of workshops; (c) 40% of costs of road restoration works; (d) 100% of CIF cost of imported equipment, spare parts, tools, and components, if procured directly abroad or 65%, if procured locally; (e) 100% of ex-factory cost of equipment, spare parts, tools including hand tools, and components produced locally; (f) 100% of foreign costs of consulting services or, if local consultants are used, 45% of total costs. Withdrawals in respect of payments for expenditures on the road restoration works to be carried out by contracts over the first two years of the maintenance program commencing in January 1977 will be made only after the program has been approved by the Bank for each year. Retroactive financing of about US$50,000 equivalent is recom- mended for financing the services of an expert to assist the Director of the Planning & Development Service, DPH. The schedule of estimated disbursements is given in Table 18. During loan negotiations, agreement on this schedule was reached with the Government.  - 25 - V. ECONOMIC EVALUATION A. General 5.01 The Third Highway Project will continue Bank assistance to the Philippines in improving and modernizing the road transport system. The benefits accruing from the project are essentially the reduction of the high costs of moving goods and people and provision of easier access to some isolated areas with high economic development potential. The project will help to cope with the present and prospective growth of transport demand, help to maintain price competitiveness of export products and assist the implementation of the Government's policy for decentralizing industry. The demand for domestic transport, both freight and passengers, in recent years increased slightly faster than the growth rate of the economy, in spite of a severe, but apparently temporary, slowdown since the "oil crisis" in 1974 (paras 3.03 to 3.07). 5.02 The construction and improvement of national roads.(500 km) and the reconstruction of minor roads (230 km) in the project will help the Govern- ment in its efforts to achieve the ambitious target of constructing and improving about 25,700 km of national, provincial and local roads, during the next Investment Program (1977-80). This project supports the Government's present strategy of giving emphasis to reconstruction of poorly maintained roads and to the paving of existing gravel roads, which still account for over half of the national network, rather than concentrating on the construction of new high-standard highways. A substantial effort is being made to develop the capabilities of regional offices to design and supervise the construction and improvement of minor roads such as provincial or local (feeder) roads. Feasi- bility studies of roads have shown that for most sections, at the present time, the optimum first stage of improvement is, depending on traffic volumes, to pave or gravel the road largely on the present alignment, with only minimum improvement of sharp curves, widening and improvements of drainage, etc. The present approach of minimizing and phasing investments enables the highway system to meet a much larger total transport demand at lower cost; it follows the recommendations of the consultants and of the Bank. 5.03 The economic analysis of the project roads was carried out by con- sultants, Norconsult, in association with Hoff and Overgaard (Norway/Denmark) in Feasibility Studies completed in mid-1975. It was updated in mid-1976 by the general consultants, Scott Wilson, Kirkpatrick and Partners (U.K.) as part of the detailed engineering study carried out jointly by local firms and DPH Regional Offices. The economic setting and the present traffic vol- umes of the roads for construction and improvement are described in Annex 1. The consultants' estimated traffic assignment, expected volumes and growth rates (Tables 19 and 20) are based on DPH traffic counts organized for the  - 26 - feasibility studies in 1973. The general consultants supplemented those counts with special counts performed in May 1976, which were taken as the base year. 5.04 The expected growth rates of traffic between 1976 and 1999 vary, among the roads, from 7.5% to 10% for cars, 6% to 9% for buses, 4% to 6.5% for trucks, and 2% to 4% for jeepneys. The growth rates are based on past trends which were adjusted to take into account expected increases of GNP, population, and regional per-capita income. The growth rates of traffic were further adjusted to reflect the recent slow-down in production, registration of vehicles and gasoline consumption (Tables 4 and 5). The generated or induced traffic is expected to increase total traffic by amounts ranging from 20% to 30% at the opening of the new project roads. These increases were derived from studies of earlier cases where the elasticity of demand of road transport as a function of the reduction of operating costs was measured. The rates were adjusted to take account of development potential of industries and other activities such as rural settlement, fishing, timber and tourism. Traffic diversion from other roads will occur for three of the ten project roads, but will be significant only for Iloilo-Jaro and Zarraga-Passi. Traffic diversion from rail will occur on the latter road and will probably lead to the closing down of the antiquated Panay Railway when, in the future, the road section between Passi and Roxas will be constructed. B. Construction and Improvement of National Roads 5.05 The 10 road sections for construction and improvement (Annex 1) are scattered in the southern islands of the archipelago. Four roads are located in Pdnay (144 km), two on Negros (105 km), two on Cebu (68 km), one on Mindanao (156 km), and one in southern Luzon (27 km). The average traffic on some of those roads in the vicinity of important centers (Iloilo, Bacolod and Cebu) is high, between 2,400 and 5,900 AADT in 1976, reflecting very diversified economic activities including, in addition to agriculture, pro- cessing of sugar cane (mainly Panay and Negros), mining on Cebu, trade and services. All the other roads, with traffic ranging between 300 and 1,700 AADT, are of the rural type, with some fast growing settlements in the case of the Mindanao road. 5.06 The benefits from the proposed construction and improvement of those ten roads were determined as the difference or savings in road user costs with and without the project, for the normal and diverted traffic and for the generated traffic; benefits also comprise travel time savings restricted to working time, and reduction in road maintenance costs. The average vehicle operating costs for each road are given in Table 21, and were assessed for typical vehicles. Savings on the new improved roads range between 19% and to 50%, taking into account road standards, traffic density, speed, side friction and passengers' time. The savings in working time for passenger vehicles were quantified on the basis of 6.40 pesos/hr. per average car, 3.60 per jeepneys, and 11.80 per buses. Working time savings were quantified  - 27 - for the driver and helpers of buses and trucks and were included in fixed costs. Benefits from reduction of accidents were also quantified but are not significant. 5.07 The streams of costs and benefits are shown in detail in Table 23. Economic returns (ERs) for each road, calculated over an assumed 20 year service life of the investment, vary between 18% and 36%. The sensitivity of the ERs was tested by varying construction costs by +15% and benefits by +25%. Under the pessimistic assumption of an increase in construction costs concurrent with a decrease in benefits, the ERs would be between 15% and 31% (Table 26). Exclusion of passenger time savings would reduce the above re- turns by about two to six percentage points. Thus, the highway construction elements of the project are likely to yield quite satisfactory returns. C. Reconstruction of Minor Roads 5.08 The 16 minor road sections to be reconstructed and improved under the project are located in the islands of Panay (74 km), Negros (105 km) and Mindanao (51 km). Two are provincial and the other local/feeder roads, serving largely regional interests as they link small towns and villages to national roads to be constructed and improved also under the project. The minor roads will help in the development of rather isolated regions with dense population or having potential for new rural settlements such as in Mindanao. The areas served depend essentially on agriculture, particularly on rice, sugar cane, pineapple, coconut, corn and vegetables. The present condition of these gravel roads is poor, and deterioration is accentuated with the increase of traffic. Traffic volumes range between 100 and 370 AADT (Table 20), except for three small sections where volumes are 50 AADT or less. The roads require little or no realignment within the service life to satisfy their multi-purpose transport function. Annex 1, (para 29), gives additional details on the improvement levels proposed. 5.09 Of the assessed benefits, about 65% represent savings in vehicle operating costs due to the improved conditions on the newly paved or graveled roads compared with the existing rough earth or gravel surfaces, about 15% result from reduction in road maintenance costs, and about 10% each from reduction in travel time and generation of new traffic. The average vehicle operating costs, are shown in Table 22, and take into account highway standards, terrain condition, vehicle speed, and passengers time. The vehicle operating costs per km will be reduced by 28% to 54%. As the roads will follow closely their existing alignments, negligible benefit is obtained from distance reduction, but savings occur from reduced travel time due to increased speed of vehicles. Hourly time values per vehicle are identical with those used in the analysis of the national roads (para 5.06). In addition to reduced travel costs benefiting the road users, part of which may be passed on to urban consumers and to farmers in the areas served, there are quantified benefits from the reduction of accidents due to better road surface. The new roads  - 28 - would also bring other non-quantifiable benefits such as quicker and improved services, and reduction of the nuisance caused by heavy dust resulting from increasing traffic on the existing gravel surfaces. 5.10 The estimated costs and benefits in 1980, the opening year, and the first-year benefits (FYB) as a percentage of costs for each road are shown in Table 24. FYB range between 10% and 60% with passenger time savings included, and between 9% and 56% without. An analysis has been made which indicates that ERs over a 10 year period would be in excess of 10% in all cases. The sensitivity of the FYB was tested under the same assumptions as for the highway construction (para 5.07) and the pessimistic assumption gives FYB ranging between 8% and 49% (Table 26). These FYB in 1980 are sufficient in view of the expected high traffic growth, to yield a stream of net benefits which will justify the reconstruction of those minor roads. D. Road Maintenance Program 5.11 The recommended program for improving the standard of maintenance covers about 22,500 km of graveled and paved national roads (paras 3.19 to 3.21). The program is expected to yield considerable savings in vehicle operating costs for the whole network. These savings would accrue gradually while the program is being implemented by: (i) preventing further increases in vehicle operating costs; and (ii) gradually improving road conditions and reducing vehicle operating costs. Only the latter element was included in the quantification of the program's benefits in the economic analysis carried out by consultants, Kampsax/Berger. 5.12 The estimated costs and benefits streams from vehicl