Philippines - Rural Roads Improvement Project

Document of FIL ON The World Bank 60pp FOR OFFICIAL USE ONLY Report No. 2896-PH PHILIPPINES STAFF APPRAISAL REPORT OF A RURAL ROADS IMPROVEMENT PROJECT April 30, 1980 Transportation Division Projects Department East Asia and Pacific Regional Office This document has a restricted distribution and may be used by recipients oin their official duties. Its contents may not otherwise be disclosed without World Bank authorization. . . ~~~~~~~~~~~~~~~~~~~~~~~~~~  CURRENCY EQUIVALENTS* Currency Unit = Pesos (P.) US$1100 = P 7.40 (January 1980) P 1.00 = US$o.135 *The exchange rate is floating; the rate used in this report is indicated above. WEIGHTS AND MEASURES Metric System IMetric British/US equivalent 1 meter (n) = 3.28 feet (ft) 1 kilometer (km) = 0.62 mile (mi) 1 square kilometer (sq km) 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) = 0.98 British long tons (Ig ton) ABBREVIATIONS AND ACRONYMIS AADT - Annual Average Daily Traffic ADB - Asian Development Bank ADT - Average Daily Traffic BBR - Bureau of Barangay Roads of the MPH BOC - Bureau of Construction of the MIPH BON-I - Bureau of Maintenance of the MPH BOT - Board of Transportation B/C - Benefit/Cost Ratio BRDP - Barangay Road Development Program of the MLGCD ENK - Equivalent Maintenance Kilometers ER - Economic Return FYB - First Year Benefits GDP - Gross Domestic Product GNP - Gross National Product MIOTC - Ministry of Transportation and Communications MOB - Ministry of Budget MLGCD - Ministry of Local Government and Community Development MIPH - IMinistry of Public Highways MPWTC - Ministry of Public Works, Transportation and Communications NEDA - National Economic and Development Authority NTSS - National Transport Systems Study PDS - Provincial Development Staff PEO - Provincial Engineer's Office PDAP - Provincial Development Assistance Program PPDO/IiPH - Planning and Project Development Office of the 1tPH PPDO/MPWTC - Planning and Project Development Office of the MIPWTC RRP - Rural Roads Program of the MLGCD UNDP - United Nations Development Program USAID - United States Agency for International Development vpd - Vehicles Per Day FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY PHILIPPINES STAFF APPRAISAL REPORT OF A RURAL ROADS IMPROVEMENT PROJECT TABLE OF CONTENTS Page No. 1. INTRODUCTION . . . . . . . . . . . . . . . . . 1 General . . . . . . .. . . . . . . . . . . ... . . 1 Geographic and Demographic Setting . . . . . . . . . . . 3 Rural Sector . . . .. . . . . . . . . . 4 Transport Sector . . . . . . . . . . .5 Transport Strategies .. .14 Previous Bank Assistance in the Transport Sector . . . . 16 2. THE HIGHWAY SUBSECTOR . . ... . . . . . . . . 19 The Network . . . . . . . . . . . . . . . . . . . . . . 19 Stategy in the Highway Sector . . . . . . . . . . . . . 20 Motor Vehicles and Traffic . . . . . . . . . . . . . . . 21 Highway Expenditures and Revenues . . . . . . . . . . . 23 Administrative and Institutional Aspects . . . . . . . . 25 Interagency Cooperation . . . . . . . . . 36 Sector Lending... 37 3. THE PROJECT .... . . . . . . . . 38 Objectives of the Project . . . . . . . . . . . . . . . 38 Description of the Project . . . . . . . . . . . . . . . 38 Estimated Project Cost and Financing . . . . . . . . . . 56 Project Implementation . . . . . . . . . . . . . . . . . 59 Procurement, Implementation Schedule and Right-of-Way . 72 Disbursements ..74 Environmental Aspects.. .74 4. ECONOMIC EVALUATION . . . . . . . . ..76 Main Benefits and Beneficiaries . . . . . . . . . . . . 76 Traffic Analysis . . . ....................... . .... . 79 Construction and Maintenance Costs . .. . . . . . 80 Overall Economic Evaluation. . . . . . . . . . . . . . . 80 5. AGREEMENTS TO BE REACHED AND RECOMMENDATIONS . . . . . . . 82 This report is based on the findings of a Bank mission which visited the Philippines in October/November 1979. The mission was composed of Mr. L. Schiffman (Engineer) and Mrs. I. Bradfield (Economist). 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.  - ii - TABLES IN TEXT Page No. 3.1 Project Cost Summary . . . . . . . . . . . . . . . . . 26 ANNEXES 1. MLGCD and Provincial Governments - Action Program for Project Implementation 2. Outline Terms of Reference for Technical Assistance 3. Economic Evaluation: Assumptions and Methodology 4. Supporting Tables and Charts 5. Related Documents and Data Available in the Project File MAPS 1. IBRD 14858 - Location Map 2. IBRD 14859 - Construction and Improvement of Rural Roads 3. IBRD 11159R-1 - National Road Construction  PHILIPPINES Staff Appraisal Report RURAL ROAD IMPROVEMENT PROJECT 1. Introduction A. General 1.01 The Government of the Philippines has requested Bank Group assist- ance in financing a rural-road /1 project. The Bank has previously financed rural roads in the Philippines as a component of irrigation, multipurpose and rural development projects. Implementation of the road component of these projects has been carried out from the center largely thro'ugh the Ministry of Public Highways (MPH) whose major responsibility is construction and maintenance of national roads. This approach focused on the immediate need to improve physical facilities but did not directly address the problem of strengthening local institutions to implement the Government's decentralization policy. 1.02 The proposed project represents the first Bank Group effort aimed at directly assisting the provincial governments in carrying out road improvement and maintenance programs under the overall guidance of the Ministry of Local Government and Community Development (MLGCD). This effort would support the Government's policy of expanding local government responsibility for the planning, construction and maintenance of all local (rural) roads. 1.03 The Government's strategy to accomplish decentralization is to greatly expand the ability of provincial governments to plan, construct and maintain rural roads, and to improve the capability of MLGCD so that it can effectively direct and train provincial staff and monitor their work. Over the longer term, trained provincial staff would extend technical assistance to the barangays (villages) to upgrade their planning and maintenance capability. 1.04 Initially, six provinces, representing a cross section of the 73 provinces in the Philippines, were selected for inclusion in the project. These six provinces - Iloilo, Cebu, Quezon, Aklan, Camarines Norte and Ilocos Sur represent differing conditions throughout the country and vary in their fiscal and implementation capability, with Iloilo and Cebu being relatively better off and further advanced than Quezon and Aklan, while Ilocos Sur and Camarines Norte are among the poorest and the least developed provinces. A project in these provinces would provide useful experience that can be applied to all types of provinces in future road improvement programs. 1.05 While the project constitutes only a beginning in terms of meeting the very large physical and institutional needs of the country, it would provide the foundation for the long-term development of an effective, locally /1 Refers to provincial, municipal, and barangay (village) roads.  -2- based program for rural roads. This project is also one of a series of projects now being developed by the Government and the Bank to increase the capacity of local governments to provide and maintain the basic infrastructure needed to encourage rural development in the Philippines. The Project was prepared by MLGCD assisted by consultants and the Project and Program Development Office (PPDO) of MPH. B. Geographic and Demographic Setting 1.06 The Philippines cover some 297,000 sq km scattered over more than 7,000 islands between the Pacific Ocean and the China sea. The 45 largest islands account for 98% of the area. The population is around 45 million (1978), growing at a rate of about 2.8% annually. Real GNP has recently been growing 6% annually. Underemployment, unequal income distribution and high population growth are major economic problems. C. Rural Sector 1.07 Almost three quarters of the population in the Philippines live in rural areas, where social services are poor, economic activities limited, agricultural productivity low and underemployment high. Characteristics of Philippine agriculture are the dominance of small farms and the widespread tenancy, particularly among rice and corn farmers. The Government is giving high priority to the economic development of rural areas and is complement- ing its economic programs with actions designed to increase the share of benefits that accrue to the small producer. These actions include agrarian reform, improved provision for health care, extension and supervised credit programs geared to the needs of small farmers, and farm-to-market roads. 1.08 Agriculture is the predominant sector in the Philippine economy, accounting for about 30% of GDP and over-half of total employment. Other sources of income and employment include forestry, fishing, mining, small- scale manufacturing and service industries, but small farms provide the main income for 65% of the rural population. Farming is chiefly oriented towards food grain production (60% rice and 40% corn) for domestic consumption, while coconuts and sugar are the main export crops. Beginning in the late sixties, agricultural growth has been spurred by an increase in land productivity. Increased agricultural yields were mainly due to double cropping, use of high-yielding varieties, fertilizers and chemicals, and expanding irrigated areas. 1.09 Rice, corn and coconut production account for almost 82% of all farms, and almost 88% of the farm population depend on these crops for their main source of income. Other important activities include sugar, abaca, banana farming, livestock production, fishing, and forestry. Rootcrops and other vegetables are grown widely for subsistence. From 1970 to 1978, value added in agriculture, fisheries and forestry increased at an annual rate of 4.9%. Palay and corn are by far the two most important crops, accounting for about 40% of the value of production, 55-60% of area, and about 70% of employ- ment. Although its relative importance has decreased somewhat in the 1970s,  -3- palay is still the most important crop in the Philippines; it is grown and consumed in all regions and under all types of environmental conditions (irrigated lowland, lowland rainfed and upland areas). D. Transport Sector 1.10 In the last decade, the Philippines made significant advances in the transport field, far exceeding any previous decade both in terms of funds expended and results achieved. Annual public transport infrastructure expenditures, representing about one-third of total public investment outlays, increased rapidly from P 282 million in 1968 to P 2.9 billion in 1978,/i with highways absorbing about 74% of the total. Of the remainder, airports received about 10%, ports 9% and railways 7%. These expenditures to improve the hitherto neglected transport system were necessary to meet the increased demand for movement of goods and passengers resulting from higher income, population and industrial and agricultural production. As a result of the increased investment in highways, the road network expanded rapidly and in 1979 encompassed 152,800 kms. For the first time, it provided access to many important population centers in the interior of the two largest islands, Luzon in the north and Mindanao in the south, which together comprise about 70% of the country's land area /2 and three-quarters of its population. 1.11 The preliminary 1980-83 projections for commodity flows and pas- senger traffic indicate a larger increase in inter-island movements of freight and passengers between the food deficit areas of Luzon and the agricultural surplus areas of Mindanao than for road transport within the major islands. Accordingly, the Government plans to increase the shale of ports and airports in the 1980-83 transport infrastructure investment program: 19% for ports, 14% for airports, 9% for railways, and 58% for highways. No significant public funds are allocated for shipping investment since it is largely financed by the private sector. During 1980-83, transport's share of public investment is expected to decrease from the previous level of 30% to about 20% of the total public infrastructure program because of increasing shares allo- cated to the power sector to meet the country's energy requirements. (a) Highways 1.12 Estimates based on preliminary data indicate that road transport is the dominant mode, accounting for nearly 80% of passenger and more than half of total freight traffic. Privately operated inter-island shipping, serving a population scattered over hundreds of islands, appears to account for nearly all of the remaining freight traffic since relatively short inland distances and low traffic volumes have limited railways to a small fraction of total freight traffic. Details of the highway sector are given in Chapter 2. /1 About 1.3% of GNP. /2 300,000 sq km.  -4- (b) Railways 1.13 The Government owned Philippine National Railways (PNR) has a network on Luzon totalling 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 was relaid during the 1960s with Japanese aid, but the roadbed is in very poor condition and many bridges are unsafe. Management, maintenance and operations of the railways have been inadequate. The main line is paralleled by highways for most of its length and, as haulage distances for most commodities are relatively short and scheduled services unreliable, the railway is not presently competitive with trucks and buses. It is unlikely that this situation will change in the near future. 1.14 The Government's present objective is to improve PNR operations to permit the railroad to cover at least current operating costs. Programs under the 1971-76 Rehabilitation Plan have improved services somewhat. In 1977, PNR obtained a loan from the Asian Development Bank (ADB) to rehabilitate its Southern Line (about 450 km), which serves the area between Manila and Legaspi. A second railway, the privately owned Panay Railway, operates an antiquated 117 km of track on Panay Island. It is presently unsafe but scheduled for minimum rehabilitation to permit limited service. (c) Ports 1.15 There are 18 major and 76 minor national ports, and about 390 municipal ports thri,ughout the Philippine archipelago, plus over 200 private piers and wharves. Manila, the largest port, accounts for about 43% of the 23 million tons of cargo handled each year by public ports. Most long- established public ports are located where natural protection is available but sedimentation problems occur in many newer ports. More modern private piers and wharves, which handle 80-85% of export shipments, are generally located to take advantage of naturally deep water. Many public ports suffer from inadequate work areas and transit sheds, antiquated cargo-handling facilities, disorganized port operations and poor maintenance. The cumulative effects of these deficiencies are congestion and confusion, which unduly restrict the movement of cargo, and slow stevedoring and ship turn around time. 1.16 In the past few years the Government has received assistance from ADB for improvement of port facilities at Davao and Cotabato, from the Federal Republic of Germany for port works at Davao and Iligan, and from the Bank for the expansion of the Ports of Cagayan de Oro and General Santos under the Second Port Project (Loan 993-PH)(para. 1.27). As a part of this project, the Bank supported the establishment of the Philippine Port Authority (PPA). Since it became operational in 1976, PPA has taken over the management and operation of all national ports, expanded its technical staff and improved accounting procedures with the assistance of Bank-financed consultants. 1.17 The Bank's objective in the port sector is to assist the PPA in developing a national port policy, increasing port capacity to meet industrial  - 5 - development in secondary urban growth centers, and improving administration, operations, and planning for all major national ports. PPA's current Investment Plan (1980-86) not only aims at increasing capacity at major ports, but also at consolidating ports of various sizes and functions in outlying areas where improved overland mobility makes economies of scale and effi- ciency possible. The selection of ports for future improvement is determined in the context of the traffic patterns of the total transport network, the development potential of the hinterlands, and the natural conditions of the harbors. (d) Inter-Island and Coastal Shipping 1.18 Despite its status as an important transport mode for freight, the potential of interisland and coastal shipping has not yet been fully realized, mainly due to inadequate port facilities and the antiquated local shipping fleet. There are about 480 inter-island vessels of over -100 gross tons, and many more smaller ships. In 1978, more than 34% of the inter-island fleet were 25 or more years old. Most smaller ships are converted naval or military vessels, and overloading and prolonged journeys are characteristic. There are about 50 Philippine inter-island vessel operators, but the majority of the fleet is owned by only ten major firms. In addition to the inter-island fleet, smaller craft provide low-cost, short-haul transport of agricultural products for local as well as inter-island markets, and barges are used extensively to move raw and refined sugar, rice, and other produce. Coastal transport is frequently a logical alternative where cross-island road construction is made difficult by mountainous terrain, and numerous roadsteads and shallow water ports have been developed where land access is severely limited. 1.19 The increasing regional specialization in production patterns and rural development has given inter-island shipping a new impetus to play a major role in the Government's plans for increased food production and regional balance in economic and social development. The growing need for food in deficit areas has to be met by increased production in surplus areas such as Mindanao. This in turn requires efficient marine transport of both agricultural inputs and outputs. (e) Civil Aviation 1.20 Manila, the only major international airport in the Philippines, is served by 20 international and regional airlines, including Philippine Air Lines (PAL). The latter provides international services, and is the principal carrier for 78 domestic airports operated by the Government. Domestic passenger traffic has increased by about 12% p.a. over the past six years, while air freight is still insignificant. With the assistance of a US$26 million loan from ADB, the Manila International Airport is being rehabilitated and extended to meet traffic demand expected by 1983.  -6- (f) Transport Planning and Coordination 1.21 In addition to increased transport expenditures and system expansion in the 1970s, the Government has taken important steps to improve the organi- zational structure of the planning and administrative units responsible for transport. These units have been substantially restructured since the major Government reorganization initiated in 1972, which has resulted in a strength- ening of the planning, implementation and operational capabilities of the various transport agencies and to better coordination of planning responsibilities. 1.22 Transport planning is now the joint responsibility of the National Economic and Development Authority (NEDA) and the Ministry of Transportation and Communications (MOTC). As a central planning agency, NEDA has overall responsibility for public capital investments through its Infrastructure Program and Project Office, which reviews and approves investments proposed by each transport operating agency. MOTC, which became operational in July 1979 with a small staff, is not yet fully equipped to discharge the functions of intermodal transport planning, coordination and regulation. The Ministry is still evolving and is in the process of expanding its staff and preparing to absorb the transport planning functions now discharged largely by NEDA. To assist MOTC in carrying out its tasks effectively, the project includes funds to finance advisory services under the overall guidance of NEDA. They will complement the technical assistance provided under Loan 1282-PH (Manila Urban Development Project) to assist the Government in undertaking a National Transport System Study in preparation for a ten-year transport investment program. The study is scheduled for completion in late 1981. E. Transport Strategies 1.23 Transport improvement programs are designed to promote the Govern- ment's objectives of (i) increasing food production and rural incomes; (ii) promoting regional balance in socio-economic development by establishing growth poles away from Metropolitan Manila; and (iii) expanding industrial production for domestic and foreign markets. The Government strategy, aimed at increasing transport capacity so that it can meet the growing demand, has both investment and operational dimensions. (i) Investment strategies 1.24 The Government is in the process of formulating detailed investment and operational strategies for each mode to provide an analytical framework for project selection and transport operation. At the center, MOTC/NEDA are assisted by foreign advisors to undertake review and evaluation of operating agency proposals for their consistency with: (i) sectoral and overall development objectives such as agricultural and industrial development; (ii) financial resource availability; (iii) inter-modal efficiency; and (iv) agency implementation capabilities.  7- 1.25 To enable MOTC/NEDA to carry out inter-modal planning functions, the analytical capacity of transport agencies at the regional and provincial levels must also be greatly strengthened. The Philippine a^-hipelago, with its chain of over 7,000 islands, provides a strong case for delegating major planning responsibilities to regions and provinces. The objective is the assembly of relevant data and information by local planners to identify specific transport problems, examine alternatives in terms of costs and benefits and rank priorities on the basis of local knowledge. Effective transfer and strengthening of local planning responsibilities can be accomplished only in the long term. However, the Government has clearly established the direction in which it intends to move. (ii) Operational Strategies 1.26 In order to reduce the need for capital expenditures or, at least, make it possible to postpone investment needs, the Government is making an increasingly greater effort to improve the operational efficiency of exist- ing facilities and administrative procedures. Plans are currently being formulated to improve vehicle operations in Metropolitan Manila through a comprehensive scheme of traffic management. Greater attention is being focussed on the maintenance of roads and ports, and on a restructuring of the management staffing and procedures for port operations and transport regulation. These operational improvements would make existing and future investments more productive and would yield much higher returns than investments in new projects. F. Previous Bank Assistance in the Transport Sector 1.27 The Bank Group's assistance to support the Government's efforts to modernize and expand the transport sector included the First Port Loan (290-PH) in 1961 amounting to US$8.5 million which financed procurement of dredging equipment. In 1973, a Second Port Loan (939-PH) of US$6.2 million was provided to assist the expansion of two important ports on Mindanao: Cagayan de Oro in the north and General Santos in the south. The project is about 98% complete. The Bank's FY80 transport lending program for the Philippines includes a Third Port Project. 1.28 The Bank's First Shipping project was prepared to help modernize the old inter-island fleet, provide technical assistance to strengthen planning and administrative capabilities in the maritime industry sector and formulate a ten-year investment program for inter-island shipping. Until recently, implementation of this project has been delayed by institutional problems. They related to the uncertainty about how various financial institutions would handle interest rate issues and subloan administration and appraisal, subborrowers' reluctance to assume foreign exchange risks, and a disagreement about how ship safety inspection is to be undertaken. Some of these issues are now being resolved, and accordingly, the rate of commitment has increased substantially.  -8- 1.29 The highway sector has received the bulk of the Bank's lending for transport in the Philippines: four loans (Loans 731-PH, 950-PH, 1353-PH and 1661-PH) totalling US$271 million have been made for the improvement of important sections of national highways and connecting secondary roads, and for a country-wide maintenance organization for national roads, including improvement of workshops and procurement of maintenance equipment, spare parts and workshop machinery (Map 14858). These projects have also helped to develop the Philippine contracting industry and local consulting firms, which gained valuable experience through their association with foreign consultants on the design of the project roads. 1.30 The First Highway Project is fully disbursed although the small portion deleted from the original construction contract due to civil disorders in the area has not yet been completed by the Government. The Second Highway Project is 99% complete. Problems in implementation, largely due to a shortage of local funds and unsatisfactory performance by some contractors, were overcome but resulted in a delay of about three years in project completion. The Third Highway Project is about 30% complete. There were some initial problems in the implementation of its maintenance compo- nent but the government is now making satisfactory progress. Delays have also been experienced in construction of the project roads, mainly due to the use of unsatisfactory prequalification procedures. To avoid repetition of this problem, the Government has agreed to adopt improved prequalification procedures for this project, similar to those being used for the Fourth Highway Project (para. 3.35). Implementation of the Fourth Highway Project using improved prequalification procedures, began slowly in the latter half of 1979 but there are no major problems. The Bank's future lending program for transport includes a fifth highway loan, the components of which will be defined on the basis of experience with ongoing projects. 1.31 The Project Performance Audit Report (PPAR) on the First Highway Project concluded that problems during implementation were largely caused by civil disturbances in the project area. Despite such problems, the project's re-estimated economic return was satisfactory. The transfer of responsibility for engineering and construction supervision from expatriate consultants to local firms and the rapid increase in local staff employed provided a good example of the possibilities in this field.  - 9 - 2. THE HIGHWAY SUBSECTOR A. The Network 2.01 The public road transport system in the Philippines is made up of three major interlocking components: (a) national; (b) provincial, municipal and city; and (c) barangay roads. The total network (Table 2.1) consists of some 152,800 km of roads (1979I)of which 22,900 km are classified as national, 29,000 km provincial, 13,400 km city and municipal, and 87,500 km barangay roads. National roads include about 122 km of toll expressways with grade separated intersections north and south of Manila. Except for the toll roads, road classification is often arbitrary as it is not always based on function. In remote areas such as northeastern Luzon and many parts of Mindanao, national roads serve as penetration roads providing the only access to the villages. In many parts of the country, provincial and barangay roads are indistinguishable: both are characterized by a low volume of traffic and serve limited influence areas, mainly providing the means for moving agricultural inputs and outputs and connecting rural communities with administrative and market centers. 2.02 Despite Government efforts since 1969 to develop a modern highway network (Table 2.2), the system is still inadequate for the current level of traffic. Although sufficient in location and extent, for the most part, condition of the rcds is deplorable, and missing bridges effectively isolate many rural communilies. Most unimproved roads are in poor condition (Table 3.1) due to: (a) deficient designs resulting in inadequate drainage, embankment and pavements; (b) lack of proper maintenance; (c) damage from frequent overloading (many of the trunk roads were built long ago and intended to carry only a small number of light vehicles); and (d) insufficient funds to repair flood damage caused during the rainy and typhoon seasons. Moreover, vehicle operating and travel costs are generally high, as only 41% of the national highways and 13% of the provincial roads are paved, (compared with 95% and 20% in Thailand); the rest are either gravel or unsurfaced. B. Strategy in the Highway Sector 2.03 The strategy of Bank lending for highways has been to: (i) increase the capacity of the existing infrastructure; (ii) improve project preparation and implementation capabilities; and (iii) develop an institutional framework to carry out proper maintenance. Continued assistance in attaining these objectives will be needed, primarily focusing on maintenance and institutional development. A further objective of the Bank is to expand its participation in improving the capability of farm-to-market and feeder roads to accommodate motorized traffic and to help increase food production. Using rural roads planning and construction as a vehicle, the Bank will assist the Government in developing operational capability and improving financial management in the provinces.  - 10 - C. Motor Vehicles and Traffic 2.04 Between 1966 and 1978, the motor vehicle fleet grew from about 325,000 to about 944,000 vehicles, /1 an average increase of about 10% p.a. (Table 2.3). There are about 235,000 motorcycles and pedicabs. Composition of the fleet in 1978 was 52% passenger cars and jeeps, 30% trucks, 8% jeepneys, 2% buses and 9% other vehicles. About 50% of the total vehicle fleet is registered in Central and Southern Luzon, and for the entire country, there is about one vehicle per 60 inhabitants. Comparable figures in Korea and Thailand are about 75 and 70. About 40% of the total fleet is registered as commercial./2 2.05 Until recently, data on highway traffic growth were not collected and analyzed on a regular basis. However, judging from increases in the motor vehicle fleet and the volume of gasoline consumed by road transport, traffic growth between 1966 and 1979 was substantial. Fuel consumption during the period 1966-73 is estimated to have increased by 10% p.a. During 1973-75, traffic growth was slowed by an increase in oil prices. Since 1976, however, despite further increases in fuel prices, traffic has begun to increase again with the growth of output and income (Table 2.4). 2.06 Under the Third and Fourth Highway Projects (Loans 1353 and 1661-PH) the Government began to implement a system for collecting, processing and analyzing traffic data. As the Government undertakes traffic analysis annually, it should be able to obtain reliable estimates of traffic growth. D. Highway Expenditures and Revenues 2.07 During the 1967-78 period, total highway expenditures, including administration and maintenance, increased approximately ten times in real terms. Construction averaged 60-65% of total expenditures, maintenance about 25%, with the remainder being administrative costs (Table 2.5). In 1978 the Government's total highway expenditures amounted to P2.9 billion, of which about P 1 billion were for routine and periodic maintenance and P 1.6 billion for construction, with the balance devoted to administrative costs. The amount allocated for maintenance would have been adequate if more efficiently used. /1 Including motorcycles and pedicabs (motorized three-wheeled vehicles) which constitute about 12% of all vehicles registered outside Metropolitan Manila. /2 The commercial fleet is underestimated because a number of vehicles classified as cars and motorcycles are actually commercial vans, pickups, pedicabs and other vehicles (e.g., jeeps) used for commercial purposes. It is commonly observed, especially in rural areas, that privately-owned jeeps and pedicabs are multi-purpose vehicles used for both passenger and freight transportation. Outside of Metropolitan Manila, there is a higher proportion of vehicles in the commercial category.  - 11 - 2.08 Highway revenues are obtained from specific road user charges which include fuel oil taxes, motor vehicle fees, licenses, tolls and a common carrier tax on their gross receipts. Between 1967 and 1978 revenues from these charges increased tenfold (Table 2.6). A new annual energy tax was introduced in 1975 to discourage private car ownership, in line with the recommendations of the technical assistance consultants and the Bank. In 1978 revenues from road user charges (excluding import duties) amounted to P 2.2 billion. In the same year, revenues from import duties and taxes were a little over P 1 billion, of which P 136 million should be considered as road user taxes since this amount represents an import surcharge on motor vehicles above the normal rate levied on other consumer goods and machinery. Including this surcharge, revenue from all road user charges fully covered total maintenance expenditures and 70% of the construction costs (63% without the surcharge). 2.09 The various road user taxes are collected by different government agencies: the Bureau of Customs (BOC), Bureau of Indirect Tax (Ministry of Finance) and Bureau of Land Transport (MOTC), each attempting to optimize its revenue from these taxes. No reliable data exist on the short-run marginal cost of highway use or on user charges by vehicle type. Without these data, it is difficult to determine how various sized vehicles are contributing towards covering their respective marginal costs through user charges, and thus the extent of any subsidization or cross-subsidization among different vehicle types. However, judging from the low level of diesel fuel taxes, it can be assumed that heavy vehicles (10-12 tons), which normally use diesel fuel, and which incur relatively more damage to the roads, may not cover their short-run marginal cost. In order to understand the present situation better, the Government is assembling relevant data with which to analyze the road user tax structure and to formulate a comprehensive transport pricing policy. E. Administrative and Institutional Aspects 2.10 Responsibility for planning, design, construction and maintenance of the road transport system is divided, with some overlap, among the National Government agencies and local authorities. (i) National Roads 2.11 Responsibility for planning, constructing, and maintaining national roads is vested in MPH, which was created in May 1974 from the former Bureau of Public Highways. In May 1976, MPH was given the added responsibility of supervising construction and overseeing maintenance of barangay roads. Construction and maintenance of provincial, city and municipal roads are in the hands of local and provincial authorities. However, when local roads are constructed with funds from the National Treasury,/l MPH is required /1 Refers to national funds appropriated under the "Aid to Provincial Road Development Program" administered by MPH.  - 12 - to provide technical assistance and construction supervision. MPH is headed by a Minister, assisted by a Deputy Minister and four Assistant Ministers. Construction and maintenance of national roads are the responsibility of 13 MPH Regional Offices, each headed by a Regional Director (Chart 19727). 2.12 MPH has offices at district and city levels. The number of offices within a region varies according to its size. There are a total of 149 districts and cities, each headed by a district or city engineer. The city engineers function as MPH district engineers for national roads that pass through city areas. The Bureaus of Construction (BOC) and Maintenance (BOM), which are responsible for setting construction and maintenance standards, supervise and monitor the work of the Regions and districts. 2.13 The Bureau of Equipment (BOE) is responsible for the management, repair and maintenance of MPH's road construction and maintenance equipment. Equipment is rented to MPH regions and district offices at preset rates which are comparable to those in the construction industry. BOE has its own regional equipment service offices, which directly control 12 base work- shops /1 and a number of area workshops and mobile shops. 2.14 Although design, construction and maintenance of national roads are in principle the responsibility of MPH's 13 Regional Offices, because of the lack of capability, the Ministry has created a number of Special Project Offices /2 (SPO's) to oversee the design and construction of externally funded projects. These offices are part of the Bureau of Construction (BOC) at MPH headquarters in Manila (Chart 19727). Under the direction of the appropriate SPO, the design work is usually carried out by local or foreign consulting firms, or occasionally through a Regional Office. Construction work that is performed through contractors is administered and supervised by the SPOs, generally by using consultants, but sometimes through Regional Offices. 2.15 Maintenance. Maintenance funds for national roads are disbursed by MPH central headquarters to the 13 Regional Offices, after approval of the annual budget predicated on the length (adjusted for type, condition and traffic volume) of roads in each region. The Regional Offices, in turn, allocate the funds to the various districts (and cities) on the same basis, subject to the rather wide discretion of the Regional Director who also has /1 There are only 12 workshops for the MPH's 13 regions as two regions (4A & 4B) share one workshop. /2 There are presently five SPOs: IBRD, Asian Development Bank (ADB), Philippine-Japan Highway Loan (PJHL), Philippine-Australian Development Assistance Program, and the Special Local and Other Foreign Projects Office.  - 13 - complete control over the disposition of all MPH road maintenance equipment in the regional equipment pool. Actual maintenance work is carried out by the District and City offices almost entirely by force account. A dialogue is being carried out with the Government on the feasibility of increasing the use of small contractors to deal with periodic maintenance. 2.16 The greatest weakness in the Philippines highway sector has been inadequate road maintenance. Since the Bank's involvement in the highway sector in 1970, it has observed a serious lack of attention to road mainte- nance in the field. In an attempt to redress this situation, a maintenance study was carried out, and a five-year maintenance program was formulated. The Government is currently implementing this program under the Third and Fourth Highway projects. Satisfactory progress is being made on a detailed maintenance action program agreed with the Bank under the Fourth Highway Project (Loan 1661-PH). However, sustained efforts by MPH will be necessary over a period of years before substantial physical improvements can be expected. (ii) Secondary Roads 2.17 The Provincial Governments of the 73 provinces in the Philippines are responsible for the planning, design, construction and maintenance of some 29,000 km of provincial roads (1979). The 65 cities and 1,440 municipal /1 governments are similarly responsible for the approximately 13,400 km (1979) of urban and rural recondary roads in their areas. These three local govern- ment authorities op, rate under the general direction of the Ministry of Local Government and Community Development (MLGCD)/2 which provides some funds, advice and overall supervision. Each province, city and municipal government has an engineering office, responsible for all types of construction and maintenance, including roads. 2.18 Project proposals for provincial, city and municipal roads originate at the local level, where planning capability barely exists, and are coor- dinated on a regional basis by the MLGCD (which maintains 13 Regional Offices throughout the country). Funding is provided either from the budget of the province, city or municipality or directly in the MPH budget by the National Government when improvement of certain provincial roads is included in the National Government's Aid to Provincial Roads Development Program. 2.19 Maintenance. Maintenance of provincial, city and municipal roads is the responsibility of the respective local government authority and a main- tenance equipment pool is generally maintained by the Engineer's Office. /1 The municipalities cover groups of rural population centers. They are subunits of provinces. Cities, independent of provinces, deal directly with the National Government. /2 Except for Metro Manila.  - 14 - Funds are provided partly from the local government budget and partly through grants 11 from the National Government. The maintenance funds from the National Government, however, are channelled to local governments through MPH, which has been specifically directed by the President to: (a) set nationwide maintenance standards; (b) establish planning requirements and control procedures; (c) release maintenance funds; and (d) monitor the financial and physical aspects of all road maintenance activities. 2.20 In addition to MPH, MLGCD is also responsible for monitoring the maintenance activities of the provinces. However, very little monitoring is actually performed. This is due to the lack of available supervisory staff and to the ill-defined maintenance operations and practices of the provinces which MPH and MLGCD are supposed to monitor. Without proper monitoring of physical work and expenditures, it is often difficult to judge if all the funds allocated for maintenance are actually expended for the intended purpose. 2.21 Added difficulties result from the provinces' lack of essential items of maintenance equipment, hand tools, and workshop facilities to service and repair equipment. The combined result of these factors is that maintenance of provincial roads is sadly neglected. To rectify this problem, the project includes the procurement of maintenance equipment, construction or improvement of workshops, and technical assistance to strengthen the managerial capacity of the project provinces and improve the work of maintenance crews. Moreover, MPH and MLGCD are expected to better define their responsibilities (para. 2.28) and improve their gu:idance and monitoring functions with the assistance of advisors financed by the Bank. (iii) Barangay Roads 2.22 The third and lowest tier in the Philippine road system is made up of the barangay roads, consisting of about 87,500 km (1979). The barangay is the smallest political subdivision in the Philippines. Nationwide, there are about 35,000 barangays, averaging about 20 to each municipality or city. There are about 20 municipalities to each province. Each barangay has a population of at least 1,000 and has its elected or appointed Barangay Captain and its Council. /1 Grants are provided on the following basis: Local National Government Government Classification funds grants Provincial roads 33% 67% City roads 67% 33% Municipal roads 40% 60%  - 15 - 2.23 Project proposals for barangay roads originate at the barangay level and are coordinated first on a District or City level by the MPH District Office or the City Engineer's Office, then on a Regional basis by the MPH Regional Office and finally, on a national basis by MPH headquarters in Manila through its Bureau of Barangay Roads (BBR). Normally, the coordi- nation consists of an aggregation of project proposals that are considered acceptable by successive review levels. 2.24 Despite this arrangement, MLGCD is also involved in the planning, design and construction of barangay roads, due to its overall monitoring and support functions of all local government units. Through its Grants-in-Aid (GIA) and Development Fund Programs, MLGCD provides financial assistance to the barangays for construction works and performs a review and monitoring function as well as providing technical assistance. Additionally, through its Barangay Roads Development Program (BRDP), MLGCD attempts to plan, coordinate and monitor the nationwide barangay roads construction program being carried out by MPH. 2.25 Some of the barangay roads are improved as "self-help" projects with materials and some equipment provided by MLGCD through the GIA facility. The work is performed by the barangay people under the direction of the Barangay Captain with technical assistance provided by MLGCD, the province, the municipality or the MPH District Office. Other barangay road improvements are undertaken by the Municipality or the City, using funds provided by MLGCD from its Development Fund and are carried out by force account under the super- vision of the Municipality or the City using barangay labor or by small local contractors. Still others are improved by the MPH District Office through force account using barangay labor, by small local contractors, or by arrangement ("Pakyaw" contract /1) with a private contractor, the barangay or the municipality, with funding from the barangay roads program of the National Government. Funds for the design and construction of externally-assisted barangay road projects are channelled by MPH's BBR through the Barangay Roads Division of the MPH District Office or City Engineer's Office which carries out the design and construction work by force account, through small local contractors or by "pakyaw" contracts. 2.26 Maintenance. Regardless of the system used for design and construction, maintenance of barangay roads is the responsibility of the barangays. Funds for this purpose (presently P 4,500 per km) are provided by the National Government through the MPH (BBR) directly to the barangays./2 A1 A negotiated contract whereby MPH provides equipment and materials and the local government unit or a private contractor provides the labor force. /2 The funds are held in trust by the Municipal Treasurers, and released on the joint authorization of the Barangay Captain and the MPH District Engineer.  - 16 - The MPH District Office is required to provide direction and technical assistance, and barangay labor is used to do the work. Under the Bank Group's Philippine Rural Infrastructure (PRIP) Project (Credit No. 790-PH) mainte- nance equipment for some districts is being procured. This equipment will be controlled by the MPH District Office but the Government has agreed that it would be used solely for maintenance work on barangay roads. (iv) Basic Organizational Responsibilities for Roads 2.27 MPH, the recognized technical highway authority, is responsible for planning, constructing and maintaining the national highway system, and providing technical assistance to other agencies of Government. Provincial Engineering Offices, (PEOs) with development guidance from MLGCD, are directly responsible for planning, constructing and maintaining the provincial highway system,/1 In addition, Both MPH and MLGCD have barangay road assistance programs. The BBR in MPH is large, with more than 100 employees at its headquarters in Manila. The unit in MLGCD is relatively pew with much fewer employees. Basic objectives of the two ministries concerning rural roads are consistent but definitions of authority and responsibility are not. 2.28 As part of the process of rationalizing the relationship between MLGCD and MPH and delegating the responsibility for administering rural roads to MLGCD, a series of memoranda of agreement concerning construction and improvement of rural/2 roads are presently being drawn up between MPH, MLGCD, the M1inistry of Finance (MOF), the Ministry of the Budget (MOB) and the project provinces. Under these agreements, MPH will have responsibility for setting standards and, for a transitional period, will provide technical assistance to MLGCD and the provinces. MLGCD will monitor physical implementation and expenditures by the provinces and provide technical assistance to the provinces. The provinces will have full authority to plan, program and execute maintenance of all local roads (except for city roads). During negotiations, the Government agreed that satisfactory memoranda will be agreed between the Government and the Bank prior to loan effectiveness. In addition, assurances were obtained from the Government that the agreed memoranda would be signed by December 31, 1980 and that their provisions would be carried out in accordance with timetables and programs satisfactory to the Bank. 2.29 The objective of this move is to gradually hand over to local agen- cies responsibilities for planning, construction and maintenance of all local roads, with MLGCD performing a coordinating and monitoring function. The major objective of MlGCD is to assist local agencies of government in developing their own capabilities with the local roads program of MLGCD as a major means towards realizing that objective. The project includes a technical assistance program to improve the capability of MLGCD so that it can /1 Municipal and city roads form part of this secondary road network. /2 Refers to provincial, municipal and barangay (village) roads. Memoranda of Agreement concerning maintenance of these roads have already (Decem- ber 11, 1979) been concluded and signed, and are satisfactory to the Bank.  - 17 - effectively monitor and supervise the work undertaken by the provinces as well as train the provincial staff in the near term. Over the longer term, trained provincial staff would in turn extend technical assistance to the municipali- ties and barangays to build up their planning and maintenance capability. The major functions of MPH would be the planning, construction and maintenance of national highways, and the provision of technical assistance to MLGCD and the provinces, particularly in the field of contract administration, design standards and quality control. Technical assistance consultants to be financed under the project and who would work under the direction of MLGCD, would draw upon the expertise and experience of MPH in formulating their work program to assist MLGCD and the project provinces. F. Inter-Agency Cooperation 2.30 During project preparation, extensive discussions took place with officials of USAID and ADB, with a view towards coordinating the work of these lending agencies involved in rural roads in the Philippines. Although ADB's operations thus far have exclusively used MPH as the implementing agency, USAID has long been involved in developing local government capabilities through its Provincial Development Assistance Program (PDAP). Under this program USAID provides technical assistance to MLGCD and participating provinces and reimburses up to 75% of the capital costs for satisfactorily completed road projects. Design and construction are carried out by force account or contract through local government engineering offices, with coordination an, monitoring by MLGCD. 2.31 The proposed project complements the work of USAID. Officials of both USAID and ADB expressed an interest in following similar procedures adopted for the project on (i) the project evaluation methodology; (ii) imple- mentation of construction work by contract; and (iii) the reimbursement scheme designed in accordance with varying fiscal capabilities of the provinces rather than the uniform 75% reimbursement. ADB is considering an extension of the technical assistance program to MLGCD under the same terms of reference when the two-year term of the Bank-financed advisors expires. This would take place under an ADB-financed technical assistance program of transport advisory services to be provided to a number of provinces. G. Sector Lending 2.32 The sector lending approach is particularly suitable for rural roads as it is impractical for the Bank to closely supervise short stretches of low standard roads scattered throughout the country. However, the institu- tions involved are not yet sufficiently strong to allow for this type of approach. For this reason, the present project places a primary emphasis on strengthening the institutions dealing with local roads. This will enable sector lending to be adopted in the future for low cost, rural road projects in the Philippines.  - 18 - 3. THE PROJECT A. Objectives of the Project 3.01 The objectives of the project are to: (i) improve high priority rural roads through reconstruction, restoration and improved maintenance; and (ii) strengthen planning, administrative, engineering and maintenance capabilities of provincial highway authorities under the overall direction of MLGCD. The project also includes reconstruction and improvement of the national road in Occidental Mindoro to provide all-year road access to the island's western coastal area where substantial investments in the agricul- tural sector are planned. The project was prepared by MLGCD assisted by consultants and by the Project and Program Development Office (PPDO) of MPH. B. Description of the Project 3.02 The Project consists of: 1. Construction and Maintenance of Rural Roads (a) Construction and improvement of approximately 730 km of provincial and barangay roads in the six provinces of Iloilo, Cebu, Aklan, Quezon, Camarines Norte and Ilocos Sur (Map 14859 and Table 3.6). (b) Maintenance program for the six provinces: (i) construction and improvement of provincial workshops and quality control laboratories (Table 3.7); and (ii) procurement of road maintenance equipment (including spare parts), tools, and machinery for provincial workshops and quality control laboratories (Tables 3.8 and 3.9); (c) procurement of engineering tools and equipment, training apparatus and supplies for MLGCD and the six provinces (Tables 3.10 and 3.11); (d) technical assistance to: (i) tLGCD and the six provinces for improved transport planning, engineering, quality control, construction supervision, and maintenance (Table 3.13) and technical and on-thejob training in road maintenance (Table 3.12); and (ii) MLGCD and PPDO/MPH for retroactive financing of services provided to prepare this project, including traffic surveys and analyses; and (e) consulting services for detailed engineering and construction supervision of (a) and (b) above, and for feasibility studies to prepare a future rural roads improvement project. 2. Construction and Improvement of National Roads (a) Reconstruction and improvement of approximately 90 km of national and 60 km of provincial roads in Occidental Mindoro (Map No. 111594) ;  - 19 - (b) construction of new facilities for the MPH Soils and Materials Quality Control Service (SMQCS); and (c) consulting services for construction supervision of (a) above and for detailed engineering and construction supervision of (b) above. 3. Technical Assistance to MOTC/NEDA for continuation of transport advisory services (Table 3.13). (a) Construction and Improvement of Rural Roads 3.03 The project roads (Table 3.6) are impassable for part of the year with extremely rough and narrow surfaces. Inadequate drainage, poor original design and construction and little or no maintenance have caused rapid deterioration of surfaces even under very light traffic. These roads would be restored or upgraded to all-weather, all-year standards, largely following existing alignments. Where necessary, bridges would be strengthened or replaced and embankments would be raised to reduce damage during floods. All roads would have improved drainage and cross drainage structures; subgrades would be properly drained using appropriate materials; and roadway surfacing would be protected by roadside berms or shoulders. Some of the more heavily traveled sections would have bituminous stabilized surfaces. 3.04 About 200 km of barangay roads are located in Iloilo to support the Rainfed Agriculture (Iloilo) Project (Loan 1815-PH). Of this total, 70 km are already included for Bank financing (Table 3.6). The Government, using its own resources, will rehabilitate, restore or improve the remaining 130 km, utilizing labor-based methods. The 130 km includes about 50 km of barangay roads to be improved using barangay labor, a minimum of equipment and a labor-intensive construction system. Labor-based methods are also expected to be applied in carrying out maintenance operations: clearing ditches, controlling vegetation, and transporting and spreading materials. In order to help improve efficiency and identify new areas where improved labor-based methods could be applied, the provinces will be assisted by technical assistance advisors. The Bank is expected to provide additional assistance during project supervision in determining means, methods, and practices of increasing the labor/capital ratio wherever appropriate in road construction and maintenance works. Except for the technical assistance consultants included in the project, this work will be financed with funds provided by the Government. Assurances were obtained that required local funds would be made available on a timely basis, and that the details of the program, an action plan for its implementation, and the terms of reference for the technical assistance consultants will be satisfactory to the Bank.  - 20 - (b) Maintenance Program 3.05 The previous highway projects in the Philippines addressed the problem of maintaining national highways. In this project, the focus is on proper maintenance of provincial and barangay roads. At present, the- provinces do not have essential equipment and tools to properly carry out their road maintenance function; workshop facilities to service and repair equipment are grossly inadequate; there is no proper organizational set up or staff capable of performing the required tasks; maintenance operations and procedures are ill defined; quality control of maintenance materials is nonexistent; and funds allocated for maintenance, while generally adequate, are not efficiently expended for maintenance. To rectify these problems, the project includes: (i) the procurement of road maintenance equipment, tools, machinery, soils and materials testing equipment and parts and com- ponents for existing salvageable equipment; (ii) construction or improvement of workshops and quality control laboratories; and (iii) technical assis- tance to assist the provinces with maintenance planning, management practices, operations, workshop and equipment management, and spare parts control. (c) Procurement of Other Equipment 3.06 To assist MLGCD and the provincial authorities to carry out their responsibilities more efficiently, the project includes: (i) procurement of technical tools, apparatus and office equipment for MLGCD and the Provincial Development Staffs (PDSs) and Provincial Engineers Offices (PEOs) (Table 3.10); and (ii) procurement of training apparatus, equipment and supplies for MLGCD's training unit (Table 3.11). 3.07 Prior to actual procurement, the list of goods to be purchased and the improvements to be made to the workshops and laboratories under the project will be reviewed in detail by the provinces and MLGCD with the aid of the technical assistance advisors to be appointed under the project. The final list will be submitted for Bank review and agreement prior to initiating procurement action or letting civil works construction contracts. (d) Technical Assistance for Institution Building MLGCD 3.08 MLGCD has the major responsibility for providing guidance and moni- toring of development activities by the local authorities. With the increas- ing emphasis placed on the Government's decentralization policy, MLGCD could emerge as the key institution to help implement this Government objective in the field of rural road improvement and maintenance. Presently, however, MLGCD lacks the resources and the capability to properly coordinate, super- vise or monitor an expanded rural roads program due to inadequate facilities and a shortage of competent staff. MLGCD needs staff in the various disci- plines necessary to undertake contract administration, monitor construction and maintenance activities of local governments, prepare a national local road improvement program, advise on financial management and to train provincial staff. The technical assistance component of the project was thus tailored to the needs of MLGCD to enable its various units to assume greater responsibility.  - 21 - 3.09 With the assistance of consultants, MLGCD has completed a study to determine actions required to improve organization and management proce- dures of MLGCD and the PEOs. The major recommendations of this Organization and Management Study (see Project File), which was completed in November 1979, have been accepted by the Government and are to be implemented, in consultation with the Bank, in accordance with an agreed action program (Annex 1). MLGCD has already changed its internal structure to bring res- ponsibility for all rural roads under one manager (Chart No. 21430), regardless of the source of funding. Although major improvements in MLGCD are required, a beginning has been made with this change in organizational structure. It now has the skeleton of the staff necessary to expand, organize and improve its operations. The project includes 144 manmonths ol technical assistance (six technical experts for a two-year period - Table 3.13) to assist NLGCD in carrying out necessary improvements to the Ministry's organization and management (Annex 1) and to help improve programming, feasibility studies, financial management, road maintenance, design standards and procedures, equipment management systems and contract administration. During negotiations, assurances were obtained that the Government will make necessary improvements, in consultation with the Bank, to the organization and management practices of MLGCD and the provinces, including recruitment and appointment of suitably qualified staff to fill key positions. 3.10 The experts will initially assist the Ministry staff in performing their duties, gradually taking a less active role so that the Ministry staff would eventually carry on their operations independently, with the experts performing only n advisory role. MLGCD will coordinate the work of the technical assistarice advisors and the consultants appointed to carry out rural road feasibility studies in preparation for a future rural road improvement project. Further details and outline terms of reference for this technical assistance are presented in Annex 2. Terms of reference were agreed with the Government during negotiations and assurances were obtained that the qualifications and work program of the technical assistance advisors will be satisfactory to the Bank. Provincial PDSs and PEOs 3.11 MLGCD would provide supervisory and monitoring functions, but the actual work would be carried out by the project provinces. However, the capacity of these provinces/i to plan, design, construct and maintain rural roads is generally inadequate. Among the six included in the project, some planning and engineering capability is found in Iloilo and Cebu and to a lesser extent, in Aklan and Quezon. Camarines Norte and Ilocos Sur are the weakest of the six. None of the provinces has any appreciable experience in dealing with consultants or contractors, in soil investigation, materials exploration, quality control, cost estimating or in other important facets of road engineering and construction. The Project thus includes 9 experts /1 In common with virtually all other provinces in the Philippines.  - 22 - (216 man-months - Table 3.13) who would provide assistance to: (i) the PDS of each province for feasibility studies, transport planning, budgeting and programming to help prepare a transport development plan; and (ii) PEOs for design, detailed engineering, contract administration, construction supervision, road maintenance planning and procedures, equipment usage and operation, and workshop operations, including spare parts control. 3.12 At the beginning /1 of their assignment, the experts would assist the provincial staff to effectively carry out the greater responsibilities now being placed at the provincial level. After initially working together with the experts, provincial personnel would gradually begin to operate independently with the experts acting only as advisors. Under MLGCD coordi- nation, each advisor would divide his time between two of the six provinces, allocating a higher percentage of time available to the less capable units. Should it prove desirable, the experts would provide assistance, at the request of MLGCD, to other provinces not presently included in the project. Further details and outline terms of reference for this technical assistance are given in Annex 2. During negotiations, agreement was reached with the Government on the terms of reference and assurances were obtained that the qualifications and work program of the technical assistance advisors will be satisfactory to the Bank. Training 3.13 Technical assistance for training, extended to MLGCD and the provinces, will further promote the institution building objective of the project. A training unit will be set up within MLGCD, and technical assistance advisors (48 man-months) appointed to develop a training program, utilizing and adapting systems and materials already developed by MPH for the national road program. Training will be carried out at the provincial level by the Provincial Engineers Offices (PEOs), and MLGCD's training unit will provide materials and equipment and would train the PEO teachers. The project also includes advanced technical training and overseas study tours (Table 3.12) for selected permanent staff of the provinces and MLGCD. During negotiations, required regulations for implementation of this program were agreed with the Government and assurances were obtained that the detailed arrangements for the program will be satisfactory to the Bank. 3.14 On-the-Job Training. To provide practical action-oriented training in proper road maintenance methods and procedures and to emphasize the use of appropriate technology in road maintenance operations, the project includes 72 man-months of technical assistance over a two-year period (Table 3.12). These advisors would assist MLGCD in establishing a special Training Production Unit (TPU), staffed by two local specialists experienced in road maintenance, augmented by an expatriate expert. This unit would train the seconded staff (minimum period 12 weeks) from the PEO maintenance divisions on sample lengths of existing rural roads. This training unit system, if successful, would become a permanent part of MLGCD's training program, to be replicated in other provinces. /1 The advisors to the PEOs are scheduled to take up their duties beginning in January 1981, allowing time for the provinces to recruit and appoint satisfactorily qualified counterpart staff and to procure needed facili- ties, tools and equipment (Chart 21374).  - 23 - 3.15 The training effort would be monitored and appraised by MLGCD, with the help of the technical assistance training advisors appointed under this project, in order to determine its effectiveness and needed modifications. At the end of two years, it is expected that the participat- ing provinces would be able to function with only general guidance and supervision from MLGCD. During negotiations, assurances were obtained from the Government that the details of the training program, its timing and approach, and the terms of reference of the training consultants will be satisfactory to the Bank. (e) Consulting Services 3.16 Provincial and Barangay Roads. Detailed engineering and construc- tion supervision for the provincial and barangay project roads would be undertaken by the PEOs assisted by local consultants in accordance with guidelines to be issued by NLGCD, taking into account conditions peculiar to particular provinces and promoting the use of labor-based construction methods wherever feasible. During negotiations, agreement was reached with the Government on the terms of reference for the consultants and assurances were obtained that the qualifications and work program of the consultants will be satisfactory to the Bank. 3.17 Workshops. Design and construction supervision of workshop improvements would be undertaken by the PEOs assisted by local consultants. The consultants would also review prequalification applications, prepare bid documents and evaluate tenders received, subject to final examination and approval by MLGCD. The consultants would provide an adequate, full-time supervision staff for each workshop site where improvements would be under- taken, and a coordinating control group at their main office. Assurances were obtained from the Government during negotiations that the qualifi- cations, terms of reference and work program of the consultants will be satisfactory to the Bank. 3.18 Feasibility Studies. Under the project, consultants will under- take studies, with emphasis on institutional improvements in preparation for a future rural roads improvement project in an additional 20 provinces, continuing the work begun under the Fourth Highway Project (Loan 1661-PH). During negotiations, agreement was reached on the terms of reference and assurances were obtained that the qualifications of the consultants would be satisfactory to the Bank. (f) Construction and Improvement of National and Provincial Roads in Occidental Mindoro 3.19 The project includes the construction and improvement of about 150 km roads /1 in the Province of Occidental Mindoro linking San Jose and /1 Approximately 90 km of national and 60 km of provincial roads. The provincial roads will be reclassified to national status after improvement.  - 24 - Mamburao along the western coastline of the island of Mindoro. Also included is an access road in San Jose to the port area and a connecting road from the town center south to the existing provincial road (Map No. 11159RI). These roads were originally proposed for inclusion in a Second Integrated Mindoro Rural Develpment Project to serve fertile agricultural areas which now have access, during part of the year, only by sea. The Government and the Bank subsequently agreed to finance the essential elements, irrigation and roads, in separate project loans. The irrigation component is being financed under the Medium-Scale Irrigation Project (Loan 1809-PH). The road component, which is essential for the success of the irrigation project, is proposed for inclusion in this project. The proposed improvements would be constructed to MPH standards mostly on existing alignments (Table 3.4). Bridges would be constructed or replaced where necessary, with overflow structures used wherever feasible. Pavements would be bituminous surface treatment or gravel depending on expected traffic volumes. On some sections, embankments would be placed or raised to reduce damage from the expected severe flooding in this area. All road sections would have adequate drainage and cross drainage structures. The port spur road and town center access road would have asphalt concrete pavement with stabilized shoulders to accommodate the heavy volume of anticipated traffic in the urban area. Detailed engineering, financed under Loan 1102-PH, was carried out by an expatriate consultant firm and later was reviewed and modified by MPH to a lower standard in accordance with expected volumes of traffic. Detailed engineering and contract documentation has been completed by MPH, assisted by consultants. Construction supervision will be undertaken by a consulting firm. (g) Soils and Materials Laboratory for MPH 3.20 Under Loans 1353-PH and 1661-PH some equipment was financed to help modernize the MPH's Soils and Materials Quality Control Service (SMQCS). However, its present facilities are entirely unsuitable for a Central Laboratory serving the entire country which performs soils and materials testing, foundation engineering and construction quality control for all government agencies. For this reason, the Project includes the construction of properly planned and adequately equipped facilities for the SMQCS. (h) Consulting Services to MPH (i) New MPH Central Soils and Materials Laboratory 3.21 Design and construction supervision for the new MPH Central Labora- tory facilities will be undertaken by consultants. During design, close coordination would be maintained between the consultants and the SMQCS. The technical assistance experts appointed under the Fourth Highway Project (Loan 1661-PH) for MPH will provide advice and assistance. During negoti- ations, assurances were obtained from .the Government that the qualifications of the consultants, their prior experience, the terms of reference and the consultant's work program will be satisfactory to the Bank.  - 25 - (ii) Construction Supervision of Roads in Occidental Mindoro 3.22 Construction supervision of the roads in Occidental Mindoro will be undertaken by a consulting firm. The consultant will also assist MPH with the piequalification of contractors and during bidding and evaluatio-a. Local consulting firms, if selected, would be expected to recruit experi- enced expatriates to fill key positions. Assurances were obtained from the Government during negotiations that the qualifications, proposed supervision organization, terms of reference and consultant's work program will be satisfactory to the Bank. (i) Technical Assistance to MOTC/NEDA 3.23 In addition, 124 man-months of technical assistance (Table 3.13) has been included in the project to continue the ongoing transport planning advisory services (para. 1.24) financed by the Bank under previous projects. Agreement was reached with the Government prior to negotiations on the triems of reference for the consultants. Their qualifications and work program are satisfactory. C. Estimated Project Cost and Financing 3.24 The total cost of the project, including land acquisition, is estimated at about P 776 million or US$105 million equivalent. This includes physical contingencies of 10% on all items. Overall, physical and price contingenci s combined represent about 27% of the total project costc0' The proposed loan of US$62 million would finance 59% of the total project cost, including US$43.5 million foreign exchange costs and US$18.5 million equivalent of the total local costs. The foreign exchange cost is estimated at 41% and local costs to be financed, at 18%, of the total project cost, including US$108,000 equivalent of retroactive financing for consulting services for project preparation work undertaken after July 1, 1979 by MPH and MLGCD, including the cost of traffic surveys and analyses. The local cost financing has been provided in accordance with the Bank's policy of financing up to 60% of the total project cost in the Philippines to help ease the country's balance of payments problem. The Bank would finance 30% of the local cost of civil works and 100% of technical assistance, training and consulting services. The Government would finance the balance (US$42.9 million equivalent) of the total local cost of US$61.4 million equivalent plun taxes./2 Detailed cost estimates are given in Table 3.5 and are summarized below. /1 Inflation, during the project implementation period, has been assumed to be, as follows: For Local Costs, 16% for 1980, 10% for 1981 and 7% p.a. thereafter; for Foreign Costs, 10.5% for 1980, 9% for 1981, 8% for 1982 and 7% p.a. thereafter. /2 MPH and MLGCD are, however, effectively exempt from taxes and duties for direct purchases.  Table 3.1: SUMIIARY OF PROJECT COSTS Local Foreign Total Bank Local Foreign Total Bank % Project Components cost exchange cost share cost exchange cost share Bank Item Description -------- (P million) -------- ------- (US$ million) -------- financing A. Implementation through ILGCD 1. Construction and Improvement of Rural Roads (722 km) 159.9 57.0 216.9 112.2 21.7 7.6 29.3 15.1 52 2. Provincial Workshops and Laboratories 3.7 2.0 5.7 2.8 0.5 0.3 0.8 0.4 50 3. Procurement of Maint. Tools & Equipment 2.2 56.5 58.7 56.5 0.3 7.6 7.9 7.6 96 4. Procurement of Other Equipment - 8.1 8.1 8.1 - 1.1 1.1 1.1 100 5. Tech. Asst. to MLGCD & Provinces - 22.1 22.1 22.1 - 3.0 3.0 3.0 100 6. Training for MLGCD and Provinces 1.2 5.6 6.8 6.6 0.1 0.8 0.9 0.9 97 7. Consulting Services 14.8 11.1 25.9 25.9 2.0 1.5 3.5 3.5 100 B. Implementation through MPH 1. Construction & Improvement of National & Provincial Roads in Occidental Mindoro (155 km) 81.0 44.0 125.0 62.5 10.9 6.0 16.9 8.4 50 2. Construction of new MPH Central Soils & Materials Laboratory 7.4 11.1 18.5 11.1 1.0 1.5 2.5 1.5 60 3. Tech. Asst. & Consulting Services 1.5 9.2 10.7 10.7 0.2 1.2 1.4 1.4 100 C. Implementation through MOTC/NEDA 1. Technical Assistance (124 m/m) - 9.5 9.5 9.5 - 1.3 1.3 1.3 100 Subtotal (A to C) 271.7 236.2 507.9 328.0 36.7 31.9 68.6 44.2 64 D. Contingencies 1. Physical 27.2 23.6 50.8 32.8 3.7 3.2 6.9 4.4 64 2. Price 92.5 62.2 154.7 99.2 12.5 8.4 20.9 13.4 64 Subtotal (D) 119.7 85.8 205.5 132.0 16.2 11.6 27.8 17.8 64 Total (A to D) 391.4 322.0 713.4 460.0 52.9 43.5 96.4 62.0 64 E. Land Acquisition 63.0 - 63.0 - 8.5 - 8.5 - - Total Project Cost 454.4 322.0 776.4 460.0 61.4 43.5 104.9 62.0 59  - 27 - 3.25 Except for the roads in Occidental Mindoro and the new MPH Central Laboratory facilities, which are entirely the National Government's responsibility, the costs of the rural road and provincial workshop improve- ments would be shared between the national and provincial governments, with the National Government contributing varying amounts in acco- ance with the different fiscal capabilities of each participating province. During nego- tiations, final cost estimates for the project and the cost-sharing formulae between the national and the six provincial governments were agreed with the Government. 3.26 The average construction cost per km (excluding contingency allow- ances and right-of-way) is estimated at about US$108,000 equivalent for national roads, and about US$30,000 equivalent for rural roads. Construction supervision for national roads by consultants and consulting services by local consultants for rural roads and workshops (including design, detailed engi- neering, preparation of contract documents and construction supervision) is estimated at about 6.5% of construction cost. Overall, the project includes 556 man-months of expatriate and 48 man-months of local technical assistance (Tables 3.12 and 3.13). The man-month rate for expatriate technical assistance advisors, exclusive of contingencies, is estimated at about US$8,700 or US$7,500, if international travel expenses and local costs for housing and local travel are also excluded. The estimated cost for local consultants' services is about US$2,700 equivalent. These costs are considered reasonable and are based on previous experience. 3.27 Cost estimates were independently prepared by the consultants who carried out the preliminary engineering and reviewed by MPH and MLGCD for the national and rural roads, respectively. The estimates for rural roads were checked and assembled by the consultants using quantities derived from detailed reconnaissance. Details of the methodology employed are given in the Project File. Unit prices were based on an analysis of the cost of labor, materials, depreciation, operation of equipment, and contractors' overhead and profit, taking into account recent bids received for similar projects as well as the latest prices for basic materials and labor. A 10% physical contingency allowance for estimates prepared on the basis of detailed reconnaissance is considered adequate, particularly since refine- ments during final detailed engineering are expected to decrease estimated costs. Cost estimates for construction supervision, detailed engineering, technical assistance and training have been based on experience during the Second and Third Highway Projects; cost estimates for equipment also took into account suppliers' recent quotations. 3.28 Direct foreign exchange costs are the c.i.f. costs of imported materials, equipment and machinery, construction equipment depreciation, foreign contractors' overhead and profit, and anticipated foreign consulting services. Depreciation costs have been calculated from consultant, MPH and MLGCD estimates of the depreciation on typical inventories of imported con- struction equipment which foreign and domestic contractors would require for civil works. Indirect foreign exchange costs consist of locally processed materials, such as bitumen, reinforcing steel and cement, for which raw materials or equipment would have to be imported. Estimates of the required quantities and import content of these materials were also prepared by  - 28 - consultants and reviewed by MLGCD, MPH and the mission. During negotiations, final cost estimates for the project were agreed with the Government. D. Project Implementation 3.29 M1GCD and the provinces, assisted by qualified consultants, will be the executing agency for all project components associated with rural roads. MPH, assisted by consultants, will be the executing agency for the construction and improvement of the roads in Occidental Mindoro, the provision of a new MPH Central Soils and Materials Laboratory and the consulting services for detailed engineering and construction supervision of these two project components. The technical assistance for transport advisory services will be the responsibility of MOTC and NEDA. 3.30 In order to ensure uniformity and because the provincial authori- ties have little experience in contract administration, all procurement, except that being executed by MPH and MOTC, will be ,carried out by MLGCD with the participation of the concerned provincial authorities and with the help of the technical assistance advisors provided under the Project. This includes: (a) machinery and equipment; (b) civil works by contract; (c) consulting services and technical assistance; and (d) arrangements for overseas training and study tours. 3.31 The project will be implemented over a four-year period. The road construction and workshop improvement components will require about three years to execute. An action program (Annex 1) for MLGCD and the provinces, with particular emphasis on institutional matters, was agreed with the Government during negotiations. The schedule showing the various phases of implementation for each project component is attached as Chart 21374. During negotiations, the implementation schedule was agreed with the Government and assurances were obtained that the Government will: (a) adhere to the agreed action program; (b) submit regular semiannual progress reports to the Bank; (c) monitor overall implementation of the Project; and (d) prepare a completion report within six months of the Closing Date. E. Procurement 3.32 Contracts for construction and improvement of the national roads, amounting to about US$17 million equivalent, will be awarded to prequalified contractors on the basis of international competitive bidding in accordance with the Bank Group's "Guidelines for Procurement." Contracts for the construction and improvement of rural roads, totalling about US$29 million equivalent, will be awarded to prequalified contractors on the basis of local competitive bidding, under procedures satisfactory to the Bank. Civil works contracts for the construction and extension of workshops and labora- tories, including installation of equipment, totalling about US$3.3 million equivalent, would be awarded to prequalified contractors on the basis of local competitive bidding under procedures satisfactory to the Bank. For  - 29 - rural roads and workshops, international competitive bidding would not be appropriate as the relatively small contracts involved would be scattered in six separate provinces and phased over a period of four years. However, foreign firms operating in the Philippines would be eligible to participate. All construction contracts would contain appropriate price escalation clauses to account for expected inflation. 3.33 Workshop equipment and machinery, soils and materials testing equipment, road maintenance equipment, technical tools and apparatus, and training equipment and supplies with a total cost of about US$9.0 million equivalent would be procured on the basis of international competitive bidding in accordance with the Bank's "Guidelines for Procurement." A preference limited to 15% of the c.i.f. 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, each costing less than US$10,000 equivalent 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$300,000 equivalent. 3.34 Rural road improvement works have been tentatively divided into 29 contract packages. Cost estimates for individual contract packages range from US$200,000 to US$2.5 million equivalent. Mindoro road construc- tion and improvement works have been tentatively divided into four contracts. Cost estimates for individual contracts range from US$3.0 million to US$6.0 million equivalent. These amounts ensure economies of scale as well as providing opportunit:.es to local contractors, which is one of the objectives of the project. All contractors would be prequalified and would be eligible to bid on one or several packages. 3.35 Local contractors, some of whom have formed joint ventures with foreign firms, have been very active in bidding for large and small contracts on previous Bank-financed road construction projects in the Philippines. It is expected that the local contracting industry would bid for all the contract packages included in this project but that foreign contractors would be primarily interested in the larger packages. The bidding schedule would be arranged to allow unsuccessful bidders to bid on subsequent packages. A large number of local, local/foreign joint ventures, and foreign contractors are expected to apply for prequalification, and the Government has agreed that MLGCD and MPH will institute a detailed system for careful evaluation of prequalification applications, similar to the procedures adopted by MPH under the Fourth Highway Project (Loan 1661-PH). F. Right-of-Way 3.36 The national and provincial governments acquire right-of-way by negotiation as far as possible, although they have adequate compulsory powers, if needed. There have been cases in previous projects where delay  - 30 - in acquiring rights-of-way has caused disruption of scheduling. Confirmation was obtained during negotiations that the appropriate government authority will take action to make available the right-of-way on each road section and the land required for each workshop or laboratory before awarding the contract for its construction. G. Disbursements 3.37 The loan would be disbursed against normal documentation over a five-year period on the basis of: (a) 55% of total construction and improvement costs for rural roads; (b) 50% of total construction costs for roads in Mindoro; (c) 50% of total construction costs for provincial workshops and laboratories; (d) 60% of total construction costs for the MPH soils and materials laboratory; (e) 100% of the c.i.f. cost of imported equipment, spare parts, tools, machinery and components, if procured directly abroad, or 65% if procured locally; (f) 100% of the ex-factory cost of equipment, spare parts, tools, and components produced locally; and (g) 100% of the cost of consulting services (whether expatriate or local) and the cost of overseas training. Withdrawals for expenditures on the rural road improvement works to be carried out by contract over the three and one-half years commencing in January 1981 will be made only after the size and scheduling of the program has been reviewed and agreed to by the Bank for the following year. During loan negotiations, agreement on a schedule of estimated disbursements was reached with the Government (Table 3.14). H. Environmental Aspects 3.38 No environmental or ecological problems are anticipated as a result of this project. This conclusion is reinforced by the fact that there would be basically no changes in the alignment of project roads to be improved under the Bank loan. On the contrary, improvement of the various road sections and the institution of proper routine maintenance would improve the environment by keeping down noise and dust. Wider and better constructed shoulders would also contribute to road safety. 3.39 Design of the drainage for the roads, including the structures, would be carried out in collaboration with the National Irrigation Authority (NIA) so that the works will not cause or aggravate flooding or erosion. Road construction, improvement, and maintenance would provide better surfacing, making travel much easier and more comfortable. Moreover, as the project roads would largely follow existing alignments, this would minimize disturbances to property and persons.  - 31 - 4. ECONOMIC EVALUATION A. Main Benefits and Beneficiaries 4.01 The major quantifiable benefits of the project will result from the provision of more economical transportation in areas where an existing or potential transport demand has been identified. The project roads, including the national/provincial roads in Occidental Mindoro, will serve areas that are predominantly agricultural, thus providing the local population with opportunities to: (a) improve their bargaining position vis-a-vis truckers (who tend to follow good roads) and thereby obtain higher prices for their products; (b) improve the quality and quantity of their yields through prompt, low-cost delivery of agricultural inputs; (c) benefit from the activities of agricultural extension workers, who will be provided with easier access to remote barrios; and (d) intensify land use. 4.02 A detailed analysis has been carried out for roads in the provinces of Iloilo, Cebu, Aklan, Quezon and Occidental Mindoro. The socioeconomic characteristics of each road's influence area have been carefully documented to analyze and forecast agricultural production and land use, population, the volume and type of traffic, marketing system, credit availability, transport prices, farmgate and market prices of agricultural commodities, and production costs. The feasibility studies of project roads are in the Project File. Development constraints and potentials of each project road influence area (RIA) were identified to enable relevant agricultural agencies to formulate appropriate action programs for agricultural develop- ment in the RIAs. During negotiations the need for such action programs was discussed with the Government. In view of the heavy emphasis placed on agricultural development in the current investment plan (1980-83), no difficulties are foreseen in the Government's adoption of such programs which would incorporate various existing programs of agricultural extension and credit services, coconut replanting, seed multiplication and the like. The population served by project roads generally have per capita incomes below the absolute poverty threshold for the Philippines.  - 32 - 4.03 The first group of quantified project benefits are based on the projected increase in the net value of animal and/or crop production, including better ex-farm prices of inputs and crops. Increased production is expected to result from the introduction of hybrid varieties, the adoption of diversified production and multicropping, and the cultivation of idle land as the project provides remote barrios with low cost transport and easy access to agricultural extension workers. 4.04 In assessing the project's benefits, it was assumed that the adoption of new farming techniques would result in increased production in about three years for food crops and bananas, and from five to ten years for new hybrid coconuts. Once roads are improved, the cultivated area for cash crops is expected to expand more rapidly than that for food crops, as farmers would be encouraged to grow perishable, but highly profitable, fruits such as bananas, mangoes and grapes. Other income-generating activities expected to expand include producing cassava for animal feed and tapioca, peanuts, abaca fiber, and vegetables; raising cattle; and breeding fish. 4.05 The project roads in the Province of Iloilo would support the Bank- financed Rainfed Agriculture (Iloilo) Project (Loan 18-15-PH) whose main objective is to accelerate palay production through the provision of seed banks, agricultural extension services and farmer training centers. The project's secondary objectives are to develop and increase such cash crops as vegetables, sorghum, and peanuts as well as livestock production. 4.06 A number of case studies undertaken in the Philippines have shown that there is a close correlation between improved roads and higher farmgate prices for agricultural commodities as well as increased transfer of modern farming techniques through agricultural extension services. A case study of 46 barrios in the Philippines representing different topography, soil fertility, culture, traditions and socioeconomic characteristics of the local population showed that the producer response to improved road conditions was overwhelmingly positive for all major crops. Following road improvement, the increase in the volume of marketed products ranged from 12% to 104%, (Table 4.1), while the decrease in transport prices charged by truckers and other transporters ranged from 40% to 60% (Table 4.2). Two additional studies /1 carried out in Mindanao and Luzon have similarly observed a positive correlation between improved roads and higher farmgate /lower transport prices. In the Philippines, there is a high degree of competition among transport operators, and reduced transport costs resulting from improved roads are generally passed on to the farmers. From this past experience, it can be judged that the improved roads under the project would benefit the farmers, local population, and transport operators providing services in the influence areas. However, in quantifying the project's agricultural benefits more conservative assumptions have been adopted than /1 One ADB-financed study on the Impact of Feeder Roads on Mindanao (1978) and the other study on the Impact of Rural Roads in Southeast Asian Countries by SEATAC (1979).  - 33 - those found in these case studies. The assumptions and methodology adapted for the economic evaluation of project roads are contained in Annex 3. 4.07 The second group of quantifiable benefits is based on the reduction in the transport costs of: (i) nonagricultural commodities, such as consu,q: goods and minerals and (ii) passengers. Road user savings for these two types of traffic not directly related to agricultural production have been quantified to supplement the primary benefit component of the net value added on incremental output resulting from the road construction or from a combine' road/agricultural investment (e.g. Iloilo). The share of these reduced transport costs as percent of total benefits vary widely from about 10% to 70%. B. Traffic Analysis 4.08 Traffic counts and origin-destination surveys have been carried out during November-December 1979, on all roads proposed by the Government and the results analyzed to obtain traffic estimates. The range in the level of existing traffic on the project roads varied greatly from an average annual daily traffic of 10 to 933 (Table 4.3). Traffic on these roads is expected to grow at about 5-6% p.a.. Table 4.4 gives the estimated vehicle operating costs on the project roads by vehicle and by road type. All the assumptions regarding traffic estimates and costs are contained in the Project File. C. Construction and Maintenance Costs 4.09 In the economic evaluation, net-of-tax costs have been used for construction. The foreign exchange cost has been shadow priced by applying the conversion factor of 0.9. It was assumed that, in accordance with the project implementation schedule (Chart 21374), 10% of the costs would be incurred in 1981, 35% in 1982, 45% in 1983 and 10% in 1984, which is the opening year. The maintenance costs of the project roads have been estimated by consultants as shown in Table 4.5. D. Overall Economic Evaluation 4.10 Economic analysis has been carried out for about 90 individual roads with a total length of about 1,000 km. Out of these roads some 530 ima of roads with an economic rate of return (ERR) of at least 17% were selected for inclusion in the project. The returns on the rural roads range from 17% to 55% with an overall ERR of 31%. The returns on the national/provin" cial roads in Occidental Mindoro are 23% and 22%, with a weighted average of 23%. The overall ERR of all roads is 28% based on the relative weights of .62 and .38 of the investment costs for the rural roads in the six provinces and the national/provincial roads in Occidental Mindoro (Table 3.6). Further details on the evaluation are provided in the Project File. These rates of return exclude investment in road maintenance equipment,  - 34 - workshops and related equipment and machinery, and technical assistance. The benefits of the maintenance components have not been quantified but experience in this type of investment elsewhere suggests high returns giving this type of investment the highest priority in road development programs. 4.11 Sensitivity tests carried out for the project roads showed that an increase of 20% in investment costs reduces the overall ERR to 28%; a reduc- tion of benefits by 20% lowers the ERR to 27%, while a simultaneous increase in costs and reduction of benefits by 20% results in a drop in ERR to 25% (Table 4.6). Project Risks 4.12 The risks, in terms of potential economic benefits, are normally in the estimates of traffic and agricultural growth rates and savings in vehicle operating costs and they have been accounted for. Because of the new approach being taken by the project in decentralizing responsibility and authority, the main risks are associated with the performance of MLGCD and the provinces in implementing the various project components. While risks are not inconsiderable, the proposed approach provides the opportunity to achieve the Government's decentralization policy. The lack of trained staff poses a problem but the substantial technical assistance, organiza- tional changes, and agreed action programs, which are an essential part of the project, should minimize this risk.  -35- 5. AGREEMENTS TO BE REACHED AND RECOMMENDATIONS 5.01 During loan negotiations, it was agreed with the Government, and included as covenants in the Loan Agreement, that the Government will: (a) reach agreement with the Bank, prior to loan effectiveness, on satisfactory memoranda of agreement between MPH, MLGCD, MOF, MOB and the project provinces concerning division of responsi- bility for construction and improvement of local roads, including budgetary authority and fund allocation, in order to avoid duplication of effort (paras. 2.28 and 2.29); (b) conclude and sign the memoranda referred to in para. (a) above by December 31, 1980 and carry out their provisions in accordance with timetables and programs satisfactory to the Bank (para. 2.29); (c) complete arrangements by December 31, 1980 between MLGCD and the six project provinces for sharing costs of project components associated with rural roads (para. 3.25); (d) implement an improved rural roads maintenance program in accordance with a schedule satisfactory to the Bank and furnish to the Bank by October 31 of each year beginning in 1980 and continuing until the completion of the Project, an annual program satisfactory to the Bank of physical targets and budget requirements for implementation of the road main- tenance program for the following year (para. 2.21 and 3.05); (e) make necessary improvements, in consultation with the Bank, to the organization and management practices of MLGCD and the provinces, including the recruitment and appointment of suitably qualified staff to fill key positions (para. 3.09); (f) make specific funding provisions for the implementation of all project components (para. 3.04 and 3.24); (g) arrange for timely acquisition of land for right-of-way for each road section and workshop site prior to awarding construc- tion contracts (para. 3.36); (h) employ qualified and experienced consultants, acceptable to the Bank, to design and supervise road construction and improvement, and improvement of workshops and quality control laboratories (paras. 3.16, 3.17, 3.21, and 3.22); (i) utilize evaluation methods, standards and procedures satis- factory to the Bank in determining the list of contractors to be prequalified to bid on project components (para. 3.35);  - 36 - (j) employ qualified and experienced expatriate and local consultants, acceptable to the Bank, to provide technical assistance to MLGCD, PDSs and PEOs (paras. 3.10, 3.11, 3.12, 3.13, 3.14 and 3.15); (k) provide the Bank with a comprehensive semi-annual progress report on implementation of the Project (para. 3.31); and (1) institute a training evaluation system within MLGCD's training unit, in consultation with the Bank, and continuously appraise and monitor the effectiveness of the manpower development and training programs (para. 3.15). 5.02 In addition, agreement was reached with the Government on: (a) a schedule (Annex 1) for the implementation of organizational improvements (in NLGCD and the provincial PEOs) and for implementation of the road maintenance component of the project including training and operational improvements (paras. 3.09, 3.13 and 3.15); (b) rural road maintenance and provincial workshop equipment, tools and machinery including parts and components for exist- ing equipment, soils and materials testing apparatus and equipment for provincial quality control laboratories (para. 3.06 and 3.07), to be procured under the project; (c) the cost estimates for the project (paras. 3.25 and 3.28) and the schedule of estimated disbursements (para. 3.37); (d) a project implementation schedule, and arrangements for reporting progress, including preparation of a completion report within six months of the Closing Date (para. 3.31); (e) the cost-sharing formulae between the national and the six provin- cial governments for project components associated with rural roads (para. 3.25); and (f) an action program (Annex 1) for implementation, by MLGCD and the six project provinces, of project components associated with rural roads (para. 3.31). 5.03 Subject to agreement on the foregoing matters, the project is suitable for a Bank loan of US$62 million equivalent (representing about 59% of the total cost) for a period of 20 years, including a five-year grace period. The Borrower would be the Republic of the Philippines.  - 37 - ANNEX 1 Page 1 PHILIPPINES RURAL ROADS IMPROVEMENT PROJECT MLGCD and Provincial Governments Action Program for Project Implementation A. MLGCD 1. Institutional Improvements In order to implement the major recommendations of the Organiza- tion and Management Study (paras. 3.08 and 3.09) and increase its capability, MLGCD should: Target Date (a) Reach agreement on arrangements with the six project provinces for sharing project costs and allocation of funds (including maintenance funds), clearly indicating the funds to be provided by the national government and the details of a province- specific formula for recovery by the national government of a portion of the total costs from the provinces in such a manner that their fiscal capa- bility to fulfill their responsibilities, fully implement the project and continue the general development of the province will not be impaired. The agreement should also clearly delineate the division of responsibilities and the lines of authority between MLGCD and the provincial govern- ments for construction, improvement and maintenance of all rural roads (provincial, municipal and barangay). April 1980 (b) Modify its organizational structure to concen- trate authority and responsibility for all rural roads programs under one Ministry unit (Chart 21430). July 1980 (c) Appoint suitably qualified persons to become: (i) Director of MLGCD's Rural Roads Program Office; and (ii) Project Manager for this Project both of whom shall be satisfactory to the Bank. September 1980  - 38 - ANNEX 1 Page 2 Target Date (d) Arrange, through coordination with the Ministry of Budget (MOB) and the Ministry of Finance (MOF), to provide from national government resources, sufficient funds (on a timely basis) to expeditiously implement the Project. A portion of these funds are to be later recovered from the provinces in accordance with the agreed arrangements (see para. (a) above). July 1980 (e) Select and appoint, subject to Bank concurrence, suitably qualified technical assistance training experts to advise and assist on training program development and initial implementation, for the provinces, through MLGCD. September 1980 (f) Institute a target-oriented budget system, begin- ning with the 1981 budget, to provide adequate funds for MLGCD's in-house operations. October 1980 (g) Provide sufficient funds in 1981 and subsequent years in MLGCD's budget to cover salaries and allowances for the additional staff to be appointed. October 1980 (h) Acquire adequate space and proper facilities for the Rural Roads Program staff, including necessary equipment, apparatus and supplies, providing sufficient funds in the 1981 and subsequent budgets for initial and recurrent expenditures. October 1980 (i) Appoint or recruit sufficient, qualified staff to fill key positions in MLGCD's revised organiz- ation, including an adequate number of qualified counterpart staff to the technical assistance experts being appointed under this project to provide assistance and advice. Recruit or appoint a sufficient number of qualified support staff to appropriate positions in its revised organization. December 1980 (j) Appoint or recruit qualified staff to the Rural Roads Program Training Division and develop, with the help of technical assistance training consultants, the training programs aimed at  - 39 - ANNEX 1 Page 3 Target Date provincial personnel with emphasis on maintenance of rural roads, operation, maintenance and repair of equipment using source material developed by USAID, MPH and other agencies to produce audio- visual material and training courses for use by PEO's. December 1980 (k) Reach agreement with MPH concerning division of responsibilities for construction, improvement and maintenance of all rural roads. The agree- ment should cover provincial, municipal and barangay roads and should include arrangements for allocation of funds provided by the National Government for both construction and maintenance. April 1981 (1) Select qualified personnel from the provincial Government units and from MLGCD staff to be sent overseas for advanced technical training and for short study tours. December 1981 (m) Institute, with the help of technical assist- ance experts to be appointed under this project an on-the-job training program, using a Training Production Unit attached to the Training Division of the Rural Roads Program Office. December 1982 2. Rural Roads Construction and Improvement (n) Select and appoint, subject to Bank concurrence, qualified and experienced local consulting firms to undertake detailed engineering and construc- tion supervision of the project roads and for the improvements to provincial workshops and laboratories. April 1980 (First Year Program) (o) Seiert and appoint, subject to Bank concurrence, suil ably qualified technical assistance consult- z. .s to assist in improving its organization, management and technical capability and in guiding, supervising and monitoring the work of the provinces and of the local design consultants. December 1980 (p) Arrange, on a centralized basis, for the pre- qualification of contractors to undertake the construction of the project rural roads and workshop  - 40 - ANNEX 1 Page 4 Target Date improvements, using an improved prequalification evaluation procedure satisfactory to the Bank. September 1980 (q) After completion of the detailed engineering and preparation of contract documents for the first year construction program for the rural roads included in this project, conduct local competitive bidding for the rural roads improve- ment works on a centralized basis, evaluate the bids using systems and procedures satisfactory to the Bank and, with Bank concurrence, award contracts for construction. October-December 1980 (r) Begin construction of the first year program for the Rural Roads Improvement Project (75 km). January 1981 B. Provincial Governments 1. Institutional Improvements (a) Reorganize the PDS and PEO to clarify division of authority and responsibility. December 1980 (b) Provide sufficient funds in 1981 provincial budgets to cover staff salaries and allowances for additional staff. October 1980 (c) Recruit qualified personnel to fill key posi- tions and provide adequate support staff. November 1980 (d) Appoint suitable counterpart staff to provincial technical assistance advisors. November 1980 (e) Acquire necessary additional office space and facilities for PDS and PEO, providing sufficient funds in 1981 and subsequent provincial budgets for initial and recurrent costs, including utilities and supplies. December 1980 (f) Conduct a comprehensive rural road condition inventory on a yearly basis to be used for maintenance planning as well as road improvement programs. June 1981  - 41 - ANNEX 1 Page 5 Target Date (g) Conduct training at the provincial level, with assistance from technical assistance advisors and using resources and training materials provided by MLGCD. June 1981 (h) Nominate staff for MLGCD training courses, including on-the-job training, advanced overseas technical training and overseas study tours. October 1981 (i) Appoint sufficient qualified staff to properly operate provincial workshops and laboratories and improve methods, procedures and operations with the help of technical assistance consultants to be appointed under this project. December 1982 2. Rural Roads Construction and Improvement (j) Acquire necessary land for provincial workshops and laboratories and required right-of-way for project roads. December-June 1981 (k) Institute adequate quality control procedures using improved laboratory facilities and qualified personnel with the help of MLGCD and the technical assistance consultants to be appointed under this project. December 1981 (1) Improve workshop facilities by acquiring, through MLGCD, necessary equipment, tools and machinery as well as improving physical facilities. January 1982 (m) Improve the conduct of rural roads maintenance operations using modified and improved methods and procedures determined with the aid of MLGCD and the technical assistance consultants, by recruiting and appointing adequate maintenance personnel and by implementing a satisfactory training program. December 1982 (n) Supervise, with the help of local consultants to be appointed under this project, the rural roads improvement work performed by contractors and the improvements to the provincial workshops and laboratories, assisted by MLGCD and the technical assistance consultants appointed under this project. 1981-1984  - 42 - ANNEX 1 Page 6 Target Date C. Preparation of Future Rural Roads Improvement Project Feasibility Study for 20 Additional Provinces The project includes funds for conducting a feasibility study in preparation of a future rural improvement project which will cover about 20 additional provinces. It will be necessary for MLGCD and the provinces to provide adequate and qualified counterpart staff to assist the consultants in carrying out the study. This counterpart staff should be available beginning in May 1980 and their appointments should be completed by September 1980. May- September 1980 D. Consulting Services 1. Adequate and qualified counterpart staff should be provided by the Government to assist the consultants who will be appointed to provide the technical assistance to MLGCD and the provinces. This staff should be available by September 1980. September 1980 2. Detailed terms of reference for the various consult- ing services and technical assistance included in the project will need to be completed in final form (draft terms of reference are in the Project File) by MLGCD and MPH and submitted to the Bank for review and concurrence. These will include: (a) Terms of reference for consulting services (except for the first year's program) to perform detailed engineering and construction supervison for the rural roads improvements included in the project; June 1980 (b) Terms of reference for construction supervision for the national roads included in the project; June 1980 (c) Terms of reference for detailed engineering and construction supervision for the provincial workshop improvements (except for the first year's program) and for the new soils and materials laboratory for MPH; September 1980 (d) Terms of reference for the consultancy services for training included in the project; and (e) Terms of reference for the various technical assistance services for MLGCD and the provincial governments, based on the agreed outline terms of reference (Annex 2). September 1980  - 43 - ANNEX 2 Page 1 PHILIPPINES RURAL ROADS IMPROVEMENT PROJECT TECHNICAL ASSISTANCE TO MLGCD AND PROVINCES - OUTLINE TERMS OF REFERENCE 1. The project includes 360 man-months of technical assistance/i to help MLGCD and the provincial governments to improve and upgrade their operations associated with rural roads. Objectives and outline terms of reference for the technical assistance are given below. A. MLGCD 2. Technical assistance (144 man-months) will be provided to MLGCD at the center to assist in setting the framework for a comprehensive nation-wide rural roads program which will be coordinated, monitored and supervised by MLGCD but which will be implemented by local government units. MLGCD will provide guidelines, set standards, allocate funds, coordinate efforts of various agencies, and monitor implementation. The proposed project will serve as a vehicle to accomplish these overall objectives, will represent the first phase of a rural roads program that is national in scope, and will provide experience in the six key provinces that will later be used to extend efforts to the other pro-vinces in the Philippines, modifying initial procedures and systems wherever necessary. 3. Outline Terms of Reference - Six technical assistance experts will be provided to MLGCD for a two-year period under the project (Table 3.13): (a) Economic and Financial Analysis: Assist MLGCD in setting up an Economic and Financial Management Studies Unit within the Planning and Programming Division of its Rural Roads Program Office (Chart 3) and provide advice and assistance in planning, programming, systems and procedures for economic and financial studies, allocation and control methods for funds, budgeting and auditing. (b) Maintenance (i) Road Maintenance. Assist MLGCD in setting up a central rural road maintenance staff unit for maintenance planning, program- ming, management and monitoring within its Rural Roads Program Office (Chart 3) to provide guidance and assistance to local government authorities in maintenance planning and programming ming, quality control, road inventories and installation of improved systems and procedures for rural road maintenance. Provide advice and assistance in allocation and control of /1 Excluding that associated with training (Table 3.12)  - 44 - ANNEX 2 Page 2 maintenance funds, monitoring and evaluation of maintenance operations and in issuing guidelines and standards; and (ii) Maintenance Facilities and Equipment. Assist MLGCD in setting up its rural road maintenance staff unit (see para. 3(b)(i) above) to provide guidance and asssistance to local government authorities in installing and implementing systems and procedures for equipment maintenance and repair. Provide advice and assistance in installing a centralized procurement system for equipment, workshop machinery, tools and other items, focusing on the procurement to be carried out under this project but assisting in creating a central M1GCD procurement unit on a permanent basis. Provide advice and assistance in supervising, monitoring and evaluating local government operations associated with equipment for rural road maintenance, including inventory control. (c) Rural Road Design and Construction (i) Design Engineering. Assist MLGCD in setting up its rural roads design and construction unit within its Rural Roads Program Office (Chart 3) to provide guidance and assistance to local government authorities in planning, design, detailed engineering and contract documentation and administration. Provide advice and assistance to MLGCD in issuing guidelines and standards to ensure a common approach to rural road design and contract documentation. Assist in preparation of a design manual, model contract plans and standard drawings for roads, bridges and drainage structures. Provide advice and assistance in formulating nation-wide criteria for rural road design with particular emphasis on bridges and drainage structures. Assist MLGCD in formulating and installing systems for a nationwide rural road bridge and drainage structure rehabilitation program including inspec- tion procedures, evaluation methodology and guidelines, standards and procedures for rehabilitation, strengthening, improvement or reconstruction of minor bridges and drainage structures. Provide advice and assistance in supervising, reviewing, monitoring and evaluating the work of the Provin- cial Engineer's Offices and the local consulting engineering firms engaged in the detailed engineering of rural roads, focusing in particular on the project roads but helping to install permanent systems for use on other roads. (ii) Materials and Specifications. Assist MLGCD in setting up its rural roads design and construction unit (see para. 3(c)(i) above) to provide guidance and assistance to local government authorities in developing standard procedures for soils, surveys, foundation investigations and  - 4.5 - ANNEX 2 Page 3 material exploration, including laboratory testing; for design of road surfaces; and for inspection and testing of materials and workmanship during construction, including criteria for frequency of sampling and testing. Provide advice and assistance in the development of standard specifications for construction of rural roads and bridges. Emphasis will be placed on simplification of specifications to the extent possible using innovative approaches in order to establish realistic and practical specifications appropriate for rural roads, focusing on the maximum use of locally available materials and labor-based construction methods; and (iii) Construction Engineering. Assist MLGCD in setting up its rural roads design and construction unit [see para. 3(c)(i)] above to provide guidance and assistance to local government authorities in developing standard policies and procedures for: (a) prequalification of contractors; (b) contract documentation, advertising for bids and bid evaluation; (c) bases for measurement and payment for contract work items; (d) reporting systems and requirements during construction; (e) treatment of contractor claims; and (f) construction suparvision policies, procedures and requirements. Provide advice and assistance to MLGCD in the preparation and distribution of a construction supervision manual, participating in seminars and other MLGCD training programs. Provide advice and assistance in supervising, monitoring, and evaluating the work of the Provincial Engineer's Offices and the local consulting engineering firms engaged in supervising construction of rural roads, focusing in particular on the project roads but helping to install permanent systems for use on other roads. B. Provincial Governments 4. Technical assistance (216 man-months) will be provided under this project to the provincial governments in order to assist them in improving their organization and upgrading their capabilities in rural road planning, design, construction and maintenance. Most provincial governments in the Philippines lack the capability to satisfactorily plan or design roads and bridges. The six key provinces targeted under this project include two with some capability in planning and engineering (Iloilo and Cebu), two with none (Camarines Norte and Ilocos Sur), and two with the basic organization but little capability (Aklan and Quezon). In order to ensure better concen- tration of scarce resources and to promote improved maintenance of provin- cial roads, the project roads will be constructed through contract, with local consultants engaged to supervise construction.  - 46 - ANNEX 2 Page 4 Outline Terms of Reference 5. The six provinces included in the project will be divided into three sets, with a team of three technical assistance experts assigned to each set of two provinces. In this way, the experts can divide their time between provinces, paying more attention to those less capable. Nine experts will be provided under the project for a two-year period each (Table 3.13): (a) Economic and Financial Analysis (3 experts): Assist the Provincial Development Staff (PDS) of each province in improving their systems, procedures and operations in road network planning, feasibility studies, programming, financial management and budgeting; (b) Rural Road Design and Construction (3 experts): Assist the provincial Engineer's Office (PEO) in each province in improving their capabilities in rural road planning, design, detailed engineering, construction contract documentation and administra- tion, monitoring of (local) consulting services, and construction supervision. Provide advice and assistance, in cooperation with MLGCD's Rural Roads Program office, to help gradually increase the PEO's participation in the implementation of the rural roads program as the provincial staff gains in experience and capability. The object is to assist in improving the PEO's capabilities to the point where it can independently conduct its rural road operations, with only general guidance from MLGCD. (c) Maintenance of Rural Roads (3 experts). Assist the PEO in each province to improve its road maintenance activities, including workshop operations and maintenance and repair of equipment. Provide assistance and advice, in cooperation with MLGCD's Rural Roads Program office, in road maintenance planning, road inventories and methods and procedures for road maintenance operations, including participation in MLGCD's maintenance train- ing program. Similarly, provide assistance and advice in workshop planning and operation, equipment utilization and spare parts control. 6. The nine technical assistance experts will be responsible to the Provincial Governor of the province during their stay and to MLGCD on an overall basis. At the request of MLGCD, they may provide technical assis- tance to other provinces not presently included in this project or in other matters within their competence. Further details concerning the terms of reference for the technical assistance are in the Project Files.  - 47 - ANNEX 3 Page 1 PHILIPPINES RURAL ROADS IMPROVEMENT PROJECT Economic Evaluation: Assumptions and Methodology In undertaking the feasibility studies in preparation for the project, the following assumptions and methodology were adopted. (i) Population 1. The population estimates within each influence area were made both through interviews with local people and the origin-destination surveys taken in November/December 1979. From these sources, the barrios and municipalities which fell within a particular road influence area were located, and the corresponding population estimated from the National Census and Statistics Office data (NCSO). Using the last census year of 1975 as the base year, the future growth rates were estimated on the basis of the 1970-75 population trends, adjusted by the following factors: (i) estimated income growth; (ii) development potential of the area; (iii) national policy of population growth control; (iv) stimulating effect of the new road; and (v) opinions of local authorities. (ii) Influence Area 2. The internal influence area of each project road has been deline- ated, in the field, on topographic maps on a scale of 1:50,000. Later refinements were made on the basis of interview data from the field. In order to get a good estimate of the boundary lines, local officials and farmers were interviewed concerning the use of each road. Once the influ- ence area was established, the land use was plotted on the map indicating areas devoted to different crops and identifying idle potential agricultural land. The influence area narrows down to a triangle when approaching the major road to which a particular feeder road is connected because the population at the start of the feeder road would be included in the influ- ence area of the major road. (iii) Agricultural Production 3. Data on present agricultural production and marketing were obtained from provinical agriculturists, BAEX and BAECON officials, municipal mayors, municipal and provincial development staff and coordinators, truck-traders, dealers and farmers.  - 48 - ANNEX 3 Page 2 4. The land uses in each area were estimated on topographic maps and each crop area was measured in hectares. The yield per ha was further refined on the basis of field observations and interviews with local authorities and farmers. 5. Without the project, it was assumed that the increases in agricul- tural production, especially palay, would follow past trends, 60% coming from increased yields and 40% from expanded cultivation. With the project and the complementary agricultural investment, the relative contribution of the yield and area factors would vary with each road, and separate estimates have been made for each road (see Examples 1-4, Paragraph B). 6. In projecting agricultural production, the following factors were taken into account: (a) Data on previous crop yields, when statistically reliable, provided the benchmark; (b) For the planned development projects having an impact on agricul- tural production in the influence area, only the projects consid- ered to have a high probability of being implemented were consid- ered; (c) The projected growth rates for major commodities in the RIAs are 2% - 4% lower than the estimates of NEDA and BAECON, depending on the development prospects of each RIA as determined by the agri- culturalists of the feasibility study team. While NEDA and BAECON assumed 100% farmer responses to improved roads, the feasibility study conservatively assumed 50% farmer participation in increased agricultural activities as a result of improved roads. (d) The estimates of future coconut production take into account the Philippine Coconut Authority's (PCA) planned expansion for the growth of a high yield variety (HYV Dwarf Mlalayan type). The target is to replant 60,000 ha per year over a 40 year period to replace the existing 2.4 million ha of coconut trees. In ten years time, the yield of the hybrid variety could reach 4 tons per ha, with about 150 trees, compared to the present average of less than one ton per ha. This yield increase would represent an annual average growth rate of over 4%; and (e) Ample experience in the Philippines has shown that agricultural extension workers followed good roads to spread know-how on modern methods of cultivation more effectively. Agricultural extension work was assumed to take effect gradually from 2 to 3 years after the construction of the road.  - 49 - ANNEX 3 Page 3 (iv) Farm-gate Prices 7. The farm-gate prices have been obtained through field interviews with local agricultural authorities and farmers. The farm-gate prices would be higher in the project case partly due to lower transport costs and partly due to higher quality of products such as copra which, from the variety of dwarf trees, has a thicker meat. Several studies on the impact of rural road investments in the Philippines have indicated that due to a high degree of competition among transport operators, reduced transport costs resulting from improved roads are generally passed on to the farmers in the form of higher farm-gate prices (ranging from 10% to 60%). However, the feasibility study conservatively estimated such increases to be between 10%-20% depending on the number of transport operators serving the RIAs and the extent of user savings obtainable from the new road.  -50 - ANNEX 4 Page 1 PHILIPPINES Rural Roads Improvement Project Supporting Tables and Charts TABLES 2.1 Public Highway Network, 1979 2.2 Public Highway Network, 1975-79 2.3 MIotor Vehicle Statistics, FY66-78 2.4 Motor Vehicle Fuel Consumption, FY66-79 2.5 Expenditures by Highway Works and Source of Funds, FY66-78 2.6 Revenues From Highway Users, FY66-78 3.1 National Roads - Surface Type and Condition (1977/78) 3.2 Expenditures on Highways by Road System, FY66-78 3.3 Expenditures on Highway Mtaintenance by Road System, FY72-82 3.4 National Highway Design Standards 3.5 Project Components and Cost Estimates 3.6 Road Construction and Improvement - Project Road Sections 3.7 Provincial Workshops and Equipment Pools; Quality Control Laboratories; and Provincial Engineer's Offices - Present Facilities and Required Improvements 3.8 Procurement of Road Maintenance Equipment, Workshop Machinery, Tools and Equipment 3.9 Procurement of Quality Control Laboratory Apparatus and Equipment 3.10 Procurement of Engineering Equipment, Technical Tools and Apparatus, Office Equipment, Communications Equipment, and Utility Vehicles for MLGCD and Provincial PDSs and PEOs 3.11 Procurement of Training Equipment and Supplies for MLGCD 3.12 Training for MLGCD and Local Governments 3.13 Technical Assistance 3.14 Schedule of Estimated Disbursements 4.1 Average Percentage Increase in Sales Volume in 1968 from One Year Before and One Year After Road Construction Improving the Access to the Barrio 4.2 Average Decrease in Transportation Costs After Road Construction in 1968 4.3 Estimated Traffic on Project Roads 4.4 Vehicle Operating Costs in Pesos per km on Level Gravel Roads September 1979 Prices Excluding Taxes 4.5 Economic Maintenance Costs per km Gravel Roads 4.6 Internal Rates of Return Sensitivity Analysis  - 51 - ANNEX 4 Page 2 CHARTS 1. MIinistry of Public Highways Organization Chart - Worl Bank Chart 19727 2. Ministry of Local Government and Community Development - Current Organizational Structure - World Bank Chart 21189 3. Ministry of Local Government and Community Development - Proposed Organizational Structure - World Bank Chart 21430 4. Implementation Schedule - World Bank Chart 21374  - 52 - Table 2.1 PHILIPPINES RURAL ROADS IMPROVEMENT PROJECT Public Highway Network 1979 (km) Total Paved Category and type length Concrete Bituminous % Gravel % Earth % National Roads - Expressway 122 122 - 100 - - - - Other 22,790 4,369 5,078 41 12,536 55 807 4 Subtotal 22,912 4,491 5,078 42 12,536 55 807 3 Secondary Roads Provincial 28,997 531 3,184 13 19,350 67 5,932 20 City 3,374 351 1,742 62 1,060 31 221 7 Municipal 10,075 1,280 1,348 26 5,286 52 2,161 22 Subtotal 42,446 2,162 6,274 20 25,696 61 8,314 19 Barangay Roads/a Municipal 80,673 745 570 2 37,930 47 41,428 51 City 6,792 79 557 9 4,346 64 1,810 27 Subtotal 87,465 827 1,217 2 42,501 49 42,920 49 Total 152,823 7,480 12,569 13 80,733 53 52,041 34 Road Density in 1979 Road km/sq km 0.5 Road km/1,000 inhabitants 3.2 /a Some of these roads are little more than trails. Source: Ministry of Public Highways January 1980  - 53 - Table 2.2 PHILIPPINES RURAL ROADS IMPROVEMENT PROJECT PUBLIC HIGHWAY NETWORK 1975-1979 (km) National Provincial City Municipal Barangay Roads Year Roads Roads Roads Roads City Municipal Total 1979/a 22,912 28,997 3,374 10,075 6,792 80,673 152,823 1978 22,305 28,224 3,004 9,526 5,157 - 51,362 119,578 1977 21,852 29,189 2,826 9,128 5,075 47,811 115,881 1976 21,255 28,872 2,775 11,018 23,432 28,410 115,762 1975 21,260 28,431 2,462 8,257 4,506 27,580 92,496 1969 18,095 23,775 5,408 16,315 - - 63,593 /a Based on 1978/7) Road Inventory. The large increase in barangay roads is due to the addition of previously unrecorded road links. Many sections were reclassified in 1977 from city to municipal barangay roads. Source: Ministry of Public Highways January 1980  - 54 - Table 2.3 PHILIPPINES RURAL ROADS IMPROVEMENT PROJECT MOTOR VEHICLE STATISTICS, FY66-78/a Year Cars /b Jeepneys /c Buses Trucks EMV |d Total Registrations 1966 165,744 31,969 14,218 98,701 13,433 324,065 1967 209,199 35,339 12,028 105,483 21,608 383,657 1968 235,676 40,418 14,402 114,195 26,727 431,418 1969 261,968 48,874 14,215 123,994 28,072 477,123 1970 268,260 43,262 13,506 152,664 30,530 488,322 1971. 276,547 43,739 13,018 140,850 32,184 506,338 1972 301,992 44,940 15,870 152,413 42,593 557,808 1973 318,022 57,729 17,532 175,582 50,328 614,292 1974 371,334 59,268 19,199 204,791 54,569 709,581 1975 388,890 56,901 18,325 207,758 58,917 730,791 1976 391,800 59,183 18,721 223,143 59,274 752,121 1977 433,837 69,008 19,485 246,060 66,974 835,364 1978 486,400 81,172 21,233 274,710 78,585 944,100 Average Annual Change (%) 1966-70 12.6 7.8 - 11.5 22.8 10.8 1966-76 9.4 6.5 3.1 10.2 17.5 9.7 1970-72 6.1 2.0 8.4 - 18.1 6.9 1972-74 10.9 14.8 10.0 15.9 13.1 12.8 1974-76 2.7 - - 19.6 4.3 3.0 1976-77 10.7 16.6 4.1 10.2 12.9 11.1 1977-78 12.1 17.6 9.0 11.6 17.3 13.0 Changing Composition (%) 1966 51 10 4 31 4 100 1976 51 8 2 31 8 100 1977 52 8 2 30 8 100 978 52 8 2 29 9 100 Motor Vehicles Assembled in the Philippines, 1971-78 Year Passenger cars Commercial vehicles Total 1971 9,447 11,219 20,666 1972 11,994 9,522 21,516 1973 16,737 15,534 32,271 1974 21,844 22,303 44,147 1975 27,497 23,768 51,625 1976 29,434 26,154 55,588 1977 30,126 29,326 59,452 1978 34,405 35,017 69,422 /a Excludes trailers with no power units. /b Includes Jeeps (noncommercial). /c Jeepneys and Jeeps converted for passenger transport. /d EI4V - Equivalent (4 wheels) Motor Vehicle for Motorcycles (3 motorcycles = 1 EMV) Source: Bureau of Land Transportation January 1980  - 55 - Table 2.4 PHILIPPINES RURAL ROADS IMPROVEMENT PROJECT MOTOR VEHICLE FUEL CONSUMPTION, FY66-79 Year Gasoline Diesel fuel ------- (Million liters) ------- 1966 1,450 - 1967 1,771 1,402 1968 1,877 1,578 1969 2,205 1,629 1970 2,280 1,919 1971 2,481 1,721 1972 2,710 1,902 1973 2,839 2,320 1974 2,570 2,181 1975 2,294 1,994 1976 2,335 2,201 1977 2,313 2,330 1978 2,284 2,369 1979 2,343 3,632 Average Annual Change (%) 1966-73 10.1 9.8/a 1973-75 -11.0 -7.8 1975-76 1.8 9.4 1976-77 - 1.0 5.8 1977-78 - 1.3 1.7 1978-79 2.6 10.0 /a FY67-73. Source: Ministry of Public Highways; Board of Energy Utilization; Oil Industry Commission. January 1980  PHILIPPINES RURAL ROADS IMPROVEMENT PROJECT EXPENDITURES BY HIGHWAY WORKS AND SOURCE OF FUNDS, FY66-78 /a (P million) Item 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976/g 1977 1978 Administration /b Highway special funds 24.0 19.1 24.5 29.6 30.9 26.0 26.6 12.5 101.0 119.2 - - - Other funds 5-7 6.2 7.8 11.4 24.1 26.5 43.6 93.1 78.4 165.2 104.0 150.4 169.2 General funds - - - - - - - - - - 130.5 88.5 115.6 Subtotal 29.7 25.3 32.3 41.0 55.0 52.5 70.2 105.6 179.4 284.4 234.5 238.9 284.8 Maintenance /c Highway special funds 83.7 72.4 126.0 125.5 103.5 121.3 155.6 130.8 209.1 430.2 - - - Other funds 0.5 0.6 1.0 0.2 0.5 0.3 - 85.3 50.7 50.0 - - - General funds - - - - - - - - 10.1 53.3 795.9 874.9 1,084.3 1 U, Subtotal 84.2 73.0 127.0 125.7 104.0 121.6 155.6 216.1 269.9 533.5 795.9 874.9 1,084.3 Construction /d Highway special funds /e 32.7 103.7 104.3 88.7 148.2 89.8 116.2 114.9 66.3 94.5 - - - General funds 25.9 7.4 22.7 18.8 149.5 112.8 178.7 321.8 463.5 1,018.5 2,470.6 1,545.0 1,527.2 Bond funds 7.7 60.8 64.6 70.2 45.8 3.0 1.1 1.2 - - - - - Other funds 0.7 1.4 1.5 2.9 3.3 10.1 7.9 35.2 16.4 7.5 - - - Foreign sources /f - - 42.8 3.2 67.6 15.5 50.2 57.6 63.2 219.0 409.1 73.5 58.9 Subtotal 67.0 173.3 235.9 183.8 414.4 231.2 354.1 530.7 609.4 1,339.5 2,879.7 1,618.5 1,586.1 Total 180.9 271.6 395.2 350.5 573.4 405.3 579.9 852.4 1,058.7 2,157.4 3,910.1 2.732.3 2,955.2 /a Expenditures of National Government only. /b Includes loan amortization for FY66-78. Tc Includes routine & special maintenance, and emergency repairs. /d Includes construction of buildings. /e Expenditures are for road improvement works only. /f Exchange rates used: FY74: US$1.00 = F 6.80: FY75: US$1.00 = P 7.00; FY76: US$ = P 7.64; FY77: US$1.00 - P 7.50; FY78: US$1.00 = P 7.50. /g Expenditures from July 1, 1975 to December 31, 1976. Source: Ministry of Public Highways. January 1980  PHILIPPINES RURAL ROADS IMPROVEMENT PROJECT REVENUES FROM HIGHWAY USERS, FY66-78 (Pesos million) Item 1966 1967 1968 1969 1970 '371 1972 1973 1974 1975 1976 1977 1978 Fuel oil taxes /a 123.5 145.1 152.8 181.3 189.0 198.5 207.6 185.8 466.7 804.9 1,171.6 1,512.1 1,904.6 Motor vehicle fees /b 63.5 68.5 81.6 84.9 96.7 101.8 109.9 98.9 145.4 155.7 259.0 241.6 253.8 Motor vehicle registration 56.2 55.2 72.2 74.4 85.2 88.5 } 180.7 172.1 182.0 Licenses and plates 3.7 4.3 4.4 4.5 4.8 5.8 } No breakdown available 18.6 11.8 11.2 1 Miscellaneous 3.6 9.0 5.0 6.0 6.7 7.5 } 19.5 17.9 21.5 Special revenues 40.2 39.8Le 39.1 Total 187.0 213.6 234.4 266.2 285.7 300.3 317.5 284.7/c 612.1 960.6 1,430.6 1,753.7 2,158.4 Annual increase (%) 9.6 14.2 9.7 13.6 7.2 5.1 5.7 10.3 115.0 56.9 48.9 22.6 23.1 Earmarked for Highway Special Fund /d 169.2 193.5 213.1 241.0 258.5 271.1 287.3 258.4 585.6 931.8 - - - /a Fuel oil taxes include taxes on gasoline, diesel fuel and lubricants. /b Motor vehicle fees include registration fees, drivers' and conductors' licenses, fees on plates and miscel- laneous, (e.g., fines, penalties, surcharges). Details of breakdown data not available for FY72-75. /c Books had been closed earlier and the remaining accruals were transferred to next fiscal year as reported by Board of Internal Revenue. /d Abolished in 1975, revenues now are placed in the general fund. X /e Emergency Ad Valorem Tax, Legal Research Fund and Special Revenue Tax. Source: Ministry of Public Highways. January 1980  -58 - Table 3.1 PHILIPPINES RURAL ROADS IHPROVEMENT PROJECT National Roads - Surface Type and Condition (1977/78) S u r f a c e C o n d i t i o n Bad & Good Fair very bad /b Total (km) (%) (km) (%) (km) (%) (km) (%) Surface type Unpaved (earth) - - 210 1.0 460 2.1 670 3.1 Gravel 826 3.7 5,472 24.5 6,968 31.2 13,266 59.4 DBST/BST 558 2.5 759 3.4 290 1.3 1,607 7.2 Asphalt concrete 625 2.8 1,094 4.9 692 3.1 2,411 10.8 Cement concrete 3,436 15.4 581 2.6 334 1.5 4,351 19.5 Total 5,445 24.4 8,116 36.4 8,744 39.2 22,305/a 100.0 /a National roads which are included in the annual maintenance program. /b Estimates made on the basis of road inventory data collected for the Third and Fourth Highway Projects showed that 25% of these roads were bad and 75% very bad. Source: Ministry of Public Highways December 1979  PHILIPPINES RURAL ROADS IMPROVEMENT PROJECT EXPENDITURES ON HIGHWAYS BY ROAD SYSTEM, FY66-78/a (P million) System 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 National highways 112.2 196.2 288.4 241.6 441.5 291.0 432.0 691.9 910.8 1,868.1 3,516.8 2,324.4 2,434.9 Provincial/City roads 34.5 43.7 62.4 61.8 76.8 67.5 91.3 51.1 53.4 145.0 208.8 179.7 208.1 Municipal/barangay roads 16.8 20.1 29.4 29.3 34.6 31.7 42.6 28.7 16.2 66.0 184.5 228.2 312.2 Loan amortization 17.4 11.6 15.0 17.8 20.5 15.1 14.0 80.7 78.3 78.3 - - - Total 180.9 271.6 395.2 350.5 573.4 405.3 579.9 852.4 1,058.7 2,157.4 3,910.1 2,732.3 2.955.2 1 /a Expenditures of National Government only. Source: Ministry of Public Highways. January 1980 H 1I0I  PHILIPPINES RURAL ROADS IMPROVEMENT PROJECT Expenditures on Highway Maintenance by Road System, FY72-82 /a (P million) Actual Planned /b 1972 1973 1974 1975 1976/d 1977 1978 1979 1980 1981 1982 I. Routine Maintenance /c National roads 94.7 72.1 150.5 263.6 354.1 356.2/e 404-5/e 425.0 649.1 684.0 721.0 Provincial roads 39.5 34.8 42.4 100.6 182.5 143.4 201.3 211.4 222.0 233.1 255.0 Municipal & City roads 21.4 23.9 16.2 66.0 25.5 35.7 37.5 39.4 41.4 44.3 Barangay roads - - - - } 158.8 114.4 152.4 160.0 168.0 176.4 186.0 Subtotal 155.6 130.8 209.1 430.2 695.4 639.5 793.9 863.9 1,078.5 1,134.9 1,206.3 II. Periodic Maintenance /c National roads /f - - 7.0 37.3 74.7 40.0 130.6 180.0 276.0 395.2 554.4 Provincial roads - - Municipal & City roads - - } 3.1 16.0 25.8 29.4 27.7 29.1 30.5 32.0 35.0 Barangay roads - - Subtotal - - 10.1 53.3 100.5 69.4 158.3 209.1 306.5 427.2 589.4 Subtotal (I and II) 155.6 130.8 219.2 483.5 795.9 708.9 952.2 1,073.0 1,385.0 1,562.1 1,795.7 III. Emergency Repairs Calamity fund - 85.3 50.7 50.0 - 166.0 132.1 131.8 170.5 180.0 195.0 Total /g 155.6 216.1 269.9 533.5 795.9 874.9 1,084.3 1,204.8 1,555.5 1,742.1 1,990.7 0D /a Expenditures of National Government only. /b 1979-82 estimates assume that routine maintenance requirements will increase at a growth rate of 4% to 5% p.a., the same as the network. /c Financed from the Highway Special Fund until 1975 when the Fund was abolished. /d Includes expenditures from July 1, 1975 to December 31, 1976 due to a change in the Fiscal Year. /e Amount budgeted. Actually only P 339.9 million was released in 1977 and P 389.9 million in 1978. /f From 1977 to 1982, represents the national road restoration program being undertaken (Table 3.2). /g Costs shown are actual for 1972 to 1978 and are estimated at 1979 prices for 1979 to 1982. Actual expenditures for 1979 are not yet available. Source: Ministry of Public Highways. January 1980  PHILIPPINES RURAL ROADS IMPROVEMENT PROJECT National Highway Design Standards Flat Rolling (Hilly) Mountainous Terrain: Minor Express- Minor Express- Minor Express- Class of road:/a roads /b 2 3 4 5 way roads /b 3 4 5 way roads /b 2 3 4 5 way Parameter Design speed (km/h) 60 60 80 80 100 120 40-50 50 60 70 90 100 30 40 50 60 70 100 Pavement width (m) 6.0 6.1 6.7 7.0 2x7.3 2x7.3 6.0 6.1 6.7 7.0 2x7.3 2x7.3 5.5 5.5 6.0 6.7 2x7.O 2x7.0 Median width (m) - - - - 4.0 12.0 - - - - 4.0 12.0 - - - - 2.0 4.0 Shoulder width (m) 1.5 1.5 2.0 2.5 3.0 3.0 1.0-1.5 1.5 2.0 2.0 3.0 3.0 1.0 1.0 1.5 1.5 3.0 3.0 Right-of-Way (m) 30 30 60 60 60 60 30 30 60 60 60 60 30 40 40 50 60 60 Stopping sight distance (m) 70 70 110 110 180 260 60 60 70 90 150 230 50 50 60 70 90 190 Passing sight distance (m) 350 350 450 450 600/c 800/c 275-300 300 400 400 525/c 700/c 275 275 300 350 450/c 600/c Maximum superelevation (%) 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 8 Minimum horizontal radius (m) 125 125 240 240 400 750 50-90 90 200 200 350 550 25 50 80 125 180 400 Structural Design: "Standard Specifications for Highway Bridges" adopted by the American Association of State Highway and Transport Officials (AASHTO). Loading: HS 20-44 & HS 15-44 Pavement Design: Based on an equivalent standard 8-ton single axle load. /a Class I (not shown) is intended to cover rehabilitation of an existing road of any class, such as improvement of pavement, reshaping of shoulders, repairs to drainage, etc. /b Standards of minor roads may be relaxed where terrain and other physical conditions necessitate lower standards. Minor roads are defined as those that are contiguous, feeding or connecting to a national road, are constructed by MPH as part of a national road project, but where use or traffic volumes dictate a lower standard. Such roads are usually turned over to provinces, municipalities or barangays for maintenance after construction. /c Only to be applied if constructed as an undivided highway in the initial stage. Source: Ministry of Public Highways December 1979  - 62 -Tal 3. PHILIPPINES Project Comeone.t. an d Cost tatlustes Loca Forige Total Batk Locl Foroig, Total tack % Coe.tro t-Ir Length cot -eha,,ge coa ahara coat eaohat4e tat share tatk coat per '5 It ec. leoccipt too 11557