Sierra Leone - Second Highway Project

Document of The World Bank FIl COPY FOR OFFICIAL USE ONLY Report No. P-2991-SL REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO THE REPUBLIC OF SIERRA LEONE FOR A SECOND HIGHWAY PROJECT March 18, 1981 lhis document hs A restricted disributin and may be used by recipients only In the performnce of their official dutles. Its contents may not otherwise be disclsd without Wrld ank anho aon.  CURRENCY EQUIVALENTS Currency Unit = Leone (Le) Le 1.00 US$0.95 US$1.00 = Le 1.05 Le 1.0 million = US$0.95 million FISCAL YEAR July 1 to June 30 WEIGHTS AND MEASURES: BRITISH SYSTEM British/US Metric 1 foot = 0.305 meter (m) 1 mile (mi) = 1.61 kilometers (km) 1 square mile (sq mi) = 2.59 square kilometers (km2) 1 ton (long ton) 1.016 metric tons (m tons) 1 imp gallon = 4.54 liters 1 US gallon = 3.78 liters ABBREVIATIONS AND ACRONYMS ADF African Development Fund adt average daily traffic ARE Area Road Engineer CARE Cooperative for American Relief Everywhere EDF European Development Fund ERR Economic Rate of Return HDM Highway Design and Maintenance Model KfW Kreditanstalt fur Wiederaufbau LTS Land Transport Survey MDEP Ministry of Development and Economic Planning MoW Ministry of Works MTC Ministry of Transport and Communications OPEC Fund OPEC Fund for International Development PPAR Project Performance Audit Report RTC Road Transport Corporation SHE Senior Highway Engineer SLA Sierra Leone Airways SLPMB Sierra Leone Produce Marketing Board SLR Sierra Leone Railway UNDP United Nations Development Programme voc vehicle operating costs  FOR OFFICIAL USE UIN LI SIERRA LEONE SECOND HIGHWAY PROJECT CREDIT AND PROJECT SUMMARY Borrower: Republic of Sierra Leone Amount: SDRs 8.1 million (US$10.0 million) Terms: Standard Project Description: The project aims at improving the efficiency of road maintenance operations in Sierra Leone, preserving the links between Freetown and the provinces, and improving road transportation among the major towns in the pro- vinces. It includes: (a) planning and implementing routine maintenance on about 4,400 miles of primary, secondary and subsidiary roads; (b) resealing of about 200 miles of paved roads; (c) rehabilitation of some 370 miles of gravel roads; and (d) consulting services and training. The project will benefit the rural and urban population by helping to lower transportation costs, improve accessibility to remote agricultural areas and increase availability of food. It will also help improve agricultural extension services and facilitate the distribution of farm inputs on a more extensive scale. Further expected benefits include savings from reduced road re-construction costs and enhancement of institutional capacity to plan and execute road mainte- nance programs. The possible risks involved are mainly institutional. The successful implementation of the project depends on institutional improvements and the Government's ability to provide the necessary funds for maintenance operations. The risks are not unusual for this type of project. Estimated Costs: US$ Million Total Total with Local Foreign net of taxes Taxes Taxes Equipment 0.4 5.1 5.5 - 5.5 Incremental operating costs of 0.3 2.5 2.8 0.6 3.4 routine maintenance Resealing of paved roads 0.7 5.2 5.9 0.1 6.0 Rehabilitation of gravel roads 0.9 2.7 3.6 0.7 4.3 Consulting services and training 2.4 2.5 4.9 - 4.9 Contingencies 1.1 3.4 4.5 0.4 4.9 TOTAL 5.8 21.4 27.2 1.8 29.0 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.  Financing Plan: US$ Million Local Foreign Total IDA 0.5 9.5 10.0 OPEC Fund 0.5 6.5 7.0 ADF 0.5 5.4 5.9 Government 6.1 - 6.1 TOTAL 7.6 21.4 29.0 Estimated Disbursements: US$ Million FY81 FY82 FY83 FY84 FY85 Annual 0.1 1.9 3.2 3.7 1.1 Cumulative 0.1 2.0 5.2 8.9 10.0 Rate of Return: Over 100 percent Staff Appraisal Report: No. 1923a - SL dated March 11, 1981. Map: IBRD 13244  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT FOR A SECOND HIGHWAY PROJECT 1. I submit the following report and recommendation on a proposed development credit to the Republic of Sierra Leone for the equivalent of SDR 8.1 million (US$10.0 million) on standard IDA terms to help finance a second highway project. The OPEC Fund for International Development is expected to co-finance this project on a parallel basis with a loan of US$7.0 million for 20 years, including five years of grace, without interest. The project would also be co-financed on a parallel basis by the African Development Fund (ADF) with a loan of US$5.9 million equivalent substantially on the same terms as the IDA credit. PART I - THE ECONOMY 1/ 2. A basic economic report, "Sierra Leone - Current Economic Position and Prospects" (No. 494a-SL dated November 28, 1974) was distributed to the Executive Directors. Subsequently, two updating Economic Memoranda (No. 1106-SL dated June 25, 1976 and No. 2153-SL dated June 26, 1979) have also been distributed to the Executive Directors. A Bank economic mission visited Sierra Leone in May 1980 and its principal findings are incorporated into this report. Country data sheets are contained in Annex I. Structural Characteristics 3. The economy of Sierra Leone is dualistic in character, a rela- tively small modern sector co-existing alongside a large traditional agri- cultural sector. For its source of income and growth, Sierra Leone relies heavily on agriculture and mining, although in recent years depletion of the country's richest mineral deposits has led to a decline in their relative contribution to the economy. Diamonds, the largest export earner, accounted for nearly 56 percent of exports in 1979. 4. The agricultural sector, still largely outside the monetized economy, provides livelihood for nearly 80 percent of the population. Its contribution to GDP, however, is around 35 percent, implying a low level of agricultural productivity and food output per capita on the average. Rice is the staple food and is grown by over 80 percent of the farmers, primarily 1/ Substantially unchanged from the President's Report for the Eastern Integrated Agricultural Development Project III dated December 19, 1980 (Report No. P-2929-SL).  - 2 - for subsistence, although the country still faces rice shortages. Coffee, cocoa and oil palm products are the major export crops and also the princi- pal sources of cash income for the agricultural population. 5. Sierra Leone-s social and economic infrastructure is not yet well developed. Although the extent of the road transport network is generally adequate for its present needs, there is an urgent need for improved mainte- nance and the development of feeder roads. The country has good water resources, although the hydro power potential is still relatively untapped. Only about 12 percent of the population has access to a safe drinking water supply, mostly in the urban areas. Health facilities are inadequate and infant and childhood mortality rates are among the highest in Africa. Although the Government has in recent years invested quite heavily in education, primary and secondary school enrollment ratios are low (37 percent and 11 percent, respectively) and the country's illiteracy rate remains high, around 85 percent. 6. The dualistic economic structure is reflected in income dispari- ties between the modern and traditional sectors. With a population of about 3.3 million, average per capita GNP in 1979 was estimated at about US$250. The average per capita rural income is around US$120 while it averages about US$600 in the urban centers. About 23 percent of the population lives in urban areas. The urban migration rate (4.9 percent) is relatively low compared with neighboring countries; however, approximately 30 percent of the urban population has an income level below the urban absolute poverty threshold estimated at around US$105. Economic Performance (1) Production and Income 7. During its first decade of independence between 1962 and 1972, the financial resources available to Sierra Leone did not come under undue pressure as a result primarily of a reasonable rate of growth in domestic resources. Throughout this period, a nearly 5 percent growth in GDP per annum provided substantial foreign exchange earnings and also contributed to a satisfactory growth in public revenues. Beginning in 1972, however, this situation changed. Diamond output began to decline, mainly as a result of the depletion of alluvial deposits; there was a sharp increase in oil prices in 1973 coupled with rising import prices of manufactured goods; and in 1975 the country lost its second largest source of export earnings when the only iron ore mine closed due to rising production costs and a declining iron ore grade. As a consequence, the GDP declined by 4 percent in 1975/76 and remained virtually stagnant thereafter. During this period (1974 and 1979) the growth of GDP was less than one percent (0.9 percent) per annum on the average. With a population growth rate of about 2.5 percent per year, this resulted in a sharp decline in already low per capita real incomes.  -3- (2) Fiscal Performance 8. From 1973, the slowdown in economic growth and the erosion of the export base were accompanied by a marked deterioration in fiscal performance characterized by stagnating public revenues and expanding public expenditure policies. During the period 1973 to 1979, while public revenues increased an average of 12 percent a year, public expenditures grew about 21 percent per annum and the overall budget deficit widened from Le 21 million in 1973 (about 6 percent of GNP) to approximately Le 114 million in 1979 (about 13 percent of GNP). Fiscal and monetary expansion, financed largely by short-term external borrowing, led to ever widening budgetary deficits, a further deterioration in the balance of payments and a substantial increase in the country's external debt burden. During the last two years, the increase in expenditures was largely attributable to civil service salary adjustments, expansion in the internal security forces and extra budgetary spending related to the OAU Conference held in Freetown. (3) Balance of Payments 9. The impact of stagnant production on the balance of payments was masked until 1974 by favorable export prices for Sierra Leone-s major exports. Consequently, the country's foreign exchange reserves remained at satisfactory levels until the end of 1973. Difficulties began to emerge in 1974 and 1975 when import prices rose sharply as a result of the oil crisis and interna- tional inflation, while export performance remained modest. In 1974 and afterwards, the balance of payments began to deteriorate and show increasing overall deficits. As petroleum consumption is relatively high in Sierra Leone (mining, transport, power), the balance of payments position has been parti- cularly affected by oil price increases. The cost of petroleum imports jumped from US$8 million in 1971 to about US$70 million in 1979, now claiming more than one third of the country's export earnings. While world diamond prices have remained strong in recent years, since the volume of Sierra Leone's diamond output declined, overall export earnings showed only modest growth. Import demand, on the other hand, rose sharply with rising import costs and expansionary fiscal and monetary policies. The overall balance of payments deficit rose to US$43 million in 1979 from about US$7 million in 1974. Sierra Leone's net foreign exchange reserves which stood at around US$36 million at the end of 1974, have declined steadily and remained tight since then. In December 1980 gross official reserves amounted to US$32 million, of which only US$7.7 million, equivalent to one week's imports, was freely disposable. (4) Development of Objectives and Development Efforts 10. The country's first National Development Plan (1974/75-1978/79) was prepared with the assistance of the UNDP and the UN Department of Technical Cooperation for Development. The development strategy and objec- tives stated in the plan and many of its basic elements were well conceived and articulated. Priority was to be given to the expansion of the productive capacity of the economy and to a more equitable distribution of wealth and incomes. Unfortunately the period of the Plan coincided with the rapid depletion of the country's principal source of foreign exchange earnings and  a deterioration in the Government's fiscal performance. These factors undercut the economic and financial resource assumptions underlying the Plan. The Goverment's policies concentrated increasingly on short-term financial problems and neglected the requirements of longer-term structural adjustment. More recently, the Government began to focus again on medium-term policies and formulated a three year public investment program (1978/79-1980/81) as an interim measure and initiated preparation of a second National Development Plan. The public investment program attempted to shift resources to increased commodity production, particularly in agriculture. The second plan, which will become operational starting from 1981/82, is expected to address the question of structural adjustment and give emphasis to the productive sectors together with income distribution objectives. 11. Over the past five years, between 1974/75 and 1978/79, development spending by the public sector amounted to Le 150 million (about 45 percent less than the plan target, which was based on an annual GDF growth rate of 6 percent as compared with the actual growth rate of 0.9 percent). Out of this total about 22 percent was spent on agriculture, 20 percent on road transport, 17 percent on energy, 15 percent on social services and 25 percent on other economic and general services. Of these expenditures, 17 percent was financed by budgetary savings while the remaining 83 percent came from .external and internal borrowings. Recent Measures for Economic Stabilization 12. Faced with increasing difficulties with respect to balance of payments, servicing of external debt and acceleration in the domestic inflation rate, the Government of Sierra Leone entered into a one year standby arrangement with the IMF in November 1979 for SDR's 17 million in the second and third credit tranches. The stabilization program supported by the standby arrangement included revenue raising measures, a limit on public expenditures, restrictions on new external debt, tighter monetary policy and adjustment in producer prices. The Government made satisfac- tory progress in implementing the program, especially as regards revenue raising measures and restrictions on short-term external borrowing. Following IMF review missions in January and again in April 1980, Sierra Leone has been able to purchase the full amount of the standby facility. 13. The 1979/80 budget was drawn up in the light of the Government's decision to implement a financial program to be supported by the Fund. Fiscal policies under the standby arrangement were geared towards reducing the budgetary deficits and inflationary financing, through additional revenue measures and restrictions on public spending. Sierra Leone has been success- ful in implementing the revenue measures and curtailing the net government borrowing from the banking system. However, there have been slippages in the areas of government expenditures. Recurrent expenditures have so far risen faster than program targets, while capital expenditures on OAU-related projects are estimated to have exceeded the initially envisaged amount  - 5 - of Le 100 million and to have reached about Le 123 million. The faster-than- programmed increase in recurrent expenditures has been due primarily to unpredicted sharp increases in oil and other import prices, high levels of rice imports, and weakness in implementing the newly centralized expenditure control measures. 14. Sierra Leone's external trade balance as well as current account balance have improved modestly in 1979/80 as compared with the previous year. Export earnings have increased by about 10 percent above the 1978/79 level as a result primarily of favorable export receipts from diamonds. The total import bill on the other hand has been kept at a reasonable level despite sharp increases in oil prices and higher-than-expected level of rice imports. This was achieved through restrictive credit policies, intensifi- cation of administrative controls on low priority imports, and through centralization of the procurement procedures for the public sector. However, largely because of the heavy debt service obligations, the foreign exchange situation has remained extremely tight throughout the fiscal year. 15. The highly expansionary monetary and credit trends of earlier years were contained under the stabilization program. As of June 1980, the rate of expansion of money supply was substantially lower than the year before (15 percent compared with 27 percent). During the first three quarters of the program period (June 1979-March 1980), net credit to Government rose by 18 percent compared with an actual increase of 38 percent in the comparable period of the previous year. 16. The FY81 budget introduced new tax measures to yield an incremental tax revenue of nearly Le 20 million, about 10 percent above the estimated outturn of the last year. The growth of recurrent expenditures is restricted to 15 percent which, with the current inflation rate, implies a virtually unchanged level of government activity in real terms. In October 1980, a 20-30 percent general wage and salary increase (the first since 1978) was granted by the Government. Although not provided for in the budget, this increase was accompanied by partially offsetting revenue measures on import duties. 17. Sierra Leone has requested further IMF support for a medium-term economic and financial program under the Extended Fund Facility to start at the end of the standby period. The Government and the IMF have recently completed negotiations and consideration by the IMF Board is expected in late March 1981. If approved by the Board, the program will enable Sierra Leone to purchase about SDR 186 million over the three-year period starting from the Board approval date. The release of Fund resources in each year will be subject to annual performance reviews by the IMF and observance of quarterly performance criteria. External Debt and Creditworthiness 18. In the face of slow growth in public revenues and export receipts, Sierra Leone has, since the mid-1970's, relied heavily on foreign borrowing to finance its capital expenditures. Total external public debt outstanding increased by about US$132 million between 1975 and 1979. As of June 30,  - 6 - 1979 Sierra Leone's external public debt outstanding, including arrears of principal, amounted to US$329.7 million of which US$277.6 million was *disbursed. The total debt outstanding and disbursed consisted roughly of 47 percent in commercial credits, 28 percent bilateral loans and 25 percent loans and credit from international institutions. As of June 30, 1979, the Bank Group held about 13 percent of Sierra Leone's external debt outstanding and disbursed. Assistance from bilateral government sources came mostly from the Federal Republic of Germany, the People's Republic of China and the Netherlands. 19. The maturity structure of Sierra Leone's external public debt has deteriorated sharply since 1975 as a result of increased reliance on supplier credits. The average maturity of all new commitments declined from 16 years (in the early 1970s) to around 5 years in 1978/79. The major portion of the supplier credits obtained in 1978 and 1979 were contracted in connection with projects related to the OAU Conference. Based on the external debt commit- ments made until December 1979, it is estimated that, without debt relief, the external public debt service payments for 1980 would stand around US$72.0 million, equivalent to about 33 percent of expected export earnings and about 46 percent of expected government revenues. Since this was unmanageable, the Government in November 1979 approached the creditor countries through the Paris Club and in February 1980 negotiated a second debt relief agreement. The total debt relief granted by this agreement amounts to an estimated US$10 million for 1980 and US$7.5 million for 1981. After taking the debt relief into account, actual debt service payments due declined from US$72.0 million to about US$62.0 million in 1980. This latter amount represents 28 percent of expected export earnings and about 40 percent of expected government revenues in 1980; debt service is expected to remain at about this level in FY81 and FY82. Thereafter it should decline, assuming Sierra Leone does not contract significant amounts of new short-term debt. Debt service on Bank Group loans and credits amounted to about 2.8 percent of Sierra Leone's total debt service liability in 1980. Future Prospects 20. The next two to three years are likely to be extremely difficult ones for Sierra Leone: the earliest revival of the economic activity is not expected before the mid-1980's even with new investments in mining and continued investments in agriculture. During this period, while export earnings may at best increase modestly, the cost of imports will continue their upward trend, creating pressures on the balance of payments as well as the budget. The balance of payments situation and the budget will addi- tionally be burdened with heavy debt service obligations falling due on pre- viously contracted short-term debt. At the time the Paris Club agreed to debt rescheduling for 1980, it also committed itself to similar rescheduling for 1981 and 1982, on the condition that Sierra Leone continue to have a program with the DMF. Over the next two fiscal years, therefore, continued stabilization efforts will be required. In the medium and longer-term, it is foreseeable that Sierra Leone will both restore and sustain its creditworthi- ness provided the Government implements policies and investment programs aimed at the structural transformation of the economy. The future outlook of the  - 7 - mninirg sector in Sierra Leone is difficult to assess in view of the limited knowledge of the extent of mineral deposits. There are good prospects for kimberlite underground diamond mining; large iron ore reserves have been discovered, but these are of low ore grade; mining of rutile has just resumed and there are plans to expand bauxite production. The proposed Bumbuna hydro power project could provide lower cost energy to support these activities. A further intensification of the present efforts in the agricultural sector should strengthen the country's renewable resource base, increase export earnings from cocoa, coffee and palm oil, and raise the standard of living and incomes for the vast majority of the country's people. The implementation of programs designed to achieve structural transformation will take time to implement and will require substantial flows of external assistance on conces- sionary terms. Although the present balance of payments situation and the country's debt profile would not justify lending on normal IBRD terms, the country-s low per capita income and its recent efforts to improve economic performance justify extending IDA assistance. At the same time, to ensure an adequate flow of foreign exchange resources for the country's development program during a period of budgetary stringency, it would be appropriate to finance a portion of the local costs of projects. PART II - BANK GROUP OPERATIONS IN SIERRA LEONE 1/ Bank Group Operations 21. Bank Group lending operations in Sierra Leone to date have total- led US$66.6 million. There have been four loans amounting to US$18.7 million and eight credits totalling US$45.8 million. IFC has provided a loan of US$2.1 million to Sierra Cement Manufacturing Company, Ltd. (SERACEM). Three loans and four credits are fully disbursed. Bank Group lending has supported agriculture (40.8 percent), education (15.9 percent), power (24.6 percent) and roads (14.7 percent) and technical assistance (4.0 percent). Annex II contains a summary statement of Bank loans and IDA credits as of January 31, 1981 and notes on the execution of ongoing projects. In general, the execu- tion of the ongoing agricultural and education projects has been satisfactory; the implementation of the institutional aspects of the third power project has encountered some problems mostly due to weak management. Lending Strategy 22. The principal objectives of Bank Group assistance to Sierra Leone are to: (a) support improved economic management, including economic development planning and project preparation; (b) stimulate agricultural production with a view both to broadening the country's export base, e.g., cocoa, coffee and palm oil, and also to helping attain self-sufficiency in 1/ Substantially unchanged from the President-s Report for the Eastern Integrated Agricultural Development Project III dated December 19, 1980 (Report No. P-2929-SL).  - 8- the production of staple foods; (c) improve the country's essential infra- structure, particularly roads and power, the inadequacy of which presently constitutes a constraint upon the country' s economic growth; (d) raise the income levels and standard of living of the poorest section of the popula- tion; and (e) broaden access to education, particularly in the rural areas, and improve its quality. At the same time, the Bank Group aims through its projects to encourage the adoption of appropriate sector pricing and tariff policies and to strengthen the management and operations of the relevant government departments and corporations. 23. Since the halt in 1975 of iron ore production and the gradual decline in the production of diamonds, it has become increasingly important to develop the agricultural and manufacturing potential of the economy. Bank Group-financed agricultural development projects have provided improved extension services, feeder roads and farm inputs to smallholders affected by the projects. These activities were started in the Eastern area under the first project, and expanded under the second project which also initiated similar assistance in the Northern area. The third agricultural development project (approved by the Executive Directors on January 13, 1981) would extend coverage of the Eastern project, which has been successfully completed, to the entire province and would place added emphasis on production of coffee and cocoa in order to diversify the country's export base. The proposed fourth agricultural project would expand smallholder activities in a second phase operation in the Northern province. These ongoing and prospective operations will complement other integrated agricultural development projects under way elsewhere in Sierra Leone with the assistance of the International Fund for Agricultural Development (IFAD) and the European Economic Community (EEC). To ensure smooth assimilation of these projects into the agriculture ministry and help rationalize agricultural policies and credit, an agricultural services project is being prepared for possible Bank Group support. A possible indus- trial development (IDF) project may be prepared to assist in financing small and medium scale enterprise development in agro-industries, manufacturing and services. 24. In infrastructure, the Bank Group's first highway project assisted in the construction of the country's main trunk road system, in implementing a maintenance program, and in preparing studies for further improvement of the road system. The proposed Second Highway Project aims at strengthening the country's capacity to program and execute road maintenance. A third project in the power sector, approved in 1977, is helping finance urgently needed extension of electric power generation and distribution facilities in Freetown and several provincial centers, thereby restoring a measure of reliability in the supply of power required for sustaining the Sierra Leone economy. The project is also intended to help strengthen the finances and management of the Sierra Leone Electricity Corporation (SLEC). At the same time, the project includes assistance for the preparation of the Bumbuna hydroelectric scheme which is aimed at reducing the country's dependence on petroleum-based power. 25. In the social sectors, two education projects approved by the Bank Group have been directed towards improving and diversifying education at the secondary level, including teacher training, modernizing curricula  - 9 - to increase the relevance of education to employment, encouraging rural and non-formal training and strengthening educational planning and management. Preparation has begun on a third education project which inter alia is expected to support the Government's efforts to increase access to primary education in the rural areas. 26. To achieve its medium and longer-term development objectives, the Government needs to improve its economic planning and project preparation capability. The Bank Group has already provided technical advice to the Government in the formulation of its current three-year public investment program (1978/9-1980/1). In response to a request from the Government, the Bank Group is also financing a technical assistance project which, in coopera- tion with UNDP/TCD, is designed to assist the Government in the formulation of a second National Economic Development Plan and the preparation of well- conceived development projects in a number of priority sectors. 27. As noted in Part I of this report, Sierra Leone has experienced serious economic difficulties in the last few years, and, as a consequence, the level of Bank Group lending has been low. Continued improvement in the Government's management of the economy will be important in determining the level of future Bank Group lending. PART III - THE TRANSPORT SECTOR A. Introduction Sector Characteristics 28. The transport sector of Sierra Leone comprises a road network of about 4,400 miles of classified roads and an undetermined number of local tracks; one international airport and eight local airfields; and three sea ports. A UNDP financed land transport survey in 1966, for which the Bank was the executing agency, concluded that rail transport was uneconomic compared with road transport; since the Sierra Leone Railway (SLR) was an unprofitable enterprise, the railway was phased out in 1973. Since civil aviation does not play a prominent role in the economy, and with the railways no longer in existence, the roads and the ports are the key elements in the transport sector. 29. Compared to such neighboring countries as Guinea and Liberia, Sierra Leone's transport infrastructure is fairly extensive and until recently was adequate to meet the country-s requirements. However, the urgent need to diversify the country's export base calls for an intensification of agricul- tural development as well as improvement in the related transport system, particularly roads. In the road sub-sector, the immediate need is to maintain the existing road network, which is generally in a serious state of disrepair, and for the construction of more feeder roads and local tracks. In order to maintain the road network efficiently, some existing paved roads need new surface layers and some heavily trafficked gravel roads need to be paved.  - 10 - Policy Planning and Co-ordination 30. The Government's transport sector policy, as stated in its FY75- 79 National Development Plan, concentrates mainly on the highway sub-sector, including highway construction and improvement, feeder road construction, and road maintenance. During the five year period FY75-79, the Government invested about Le 150 million in all sectors of which about Le 30 million, or 20 percent, was invested in roads. 31. Responsibility for transport planning is shared by the Central Planning Unit of the Ministry of Development and Economic Planning (MDEP), the Ministry of Transport and Communications (MTC), and the Ministry of Works (MOW). MOW proposes roads to be built and is responsible for their construction and maintenance. MTC determines highway regulations and air and sea transport policy. MOW and the Central Planning Unit of MDEP advise on road priorities, in accordance with the objectives of the National Develop- ment Plan. 32. While the closure of the railways eliminated an uneconomic trans- port mode, the Government still needs to strike a better balance between the maintenance of existing infrastructure, the construction of new main roads, and the construction of rural access roads. In the past, because it was not adequately staffed, MDEP did not take the lead in this coordination role. However, improvements are now expected as a result of assistance being provided under three existing projects: the IDA Technical Assistance Credit (SL 970) to strengthen planning capability, project preparation and execution capacity in key sectoral ministries; the UNDP financed Planning Projects in Economic Management (SIL/79/005) and Infrastructure Planning (SIL/79/004) for which the World Bank is executing agency; and the proposed project which includes technical assistance to strengthen MOW-s capacity to plan and execute road maintenance programs. B. The Road Transport Sub-Sector The Road System 33. Of the 4,400 miles of roads which make up the classified road net- work of Sierra Leone, only about 17 percent or 764 miles are paved. The network is centered around the more economically developed areas such as Kenema and Makeni. Nonetheless, the average density for most areas of the country is fairly high and that of the entire network, 0.16 miles per sq. mile compares favorably with, say, Guinea (0.14) or Liberia (0.12). Traffic is high by West African standards, with an estimated 612 miles of roads having an average daily traffic (ADT) of over 400 vehicles per day and another 869 miles with an ADT of more than 150 vehicles. Only about half of the roads with an ADT of more than 150 vehicles are paved, and it is likely that paving most of the remainder would be economically justified. The vehicle fleet is estimated at about 33,000 vehicles at 1980, or about one vehicle per 100 inhabitants. This is somewhat less than in Liberia  - 11 - j . bat considerably more than in neighboring Guinea (less than 0.5). In recent years vehicle statistics have not been kept properly, and the proposed prcj>cj includes technical assistance to improve data collection and analysis. Administration 34. Responsibility for the construction, maintenance and administration of the highway system of Sierra Leone as well as for public buildings, air- ports, jetties and ferries rests with the Ministry of Public Works (MOW). The MOW has a staff of over 10,000 employees and, apart from two expatriates in c-ltZnical positions, is almost completely indigenized. Over the years, the ability of MOW to execute its tasks effectively has been severely hampered by several factors including a persistent shortage of spare parts and fuel, inadequate and broken down equipment, overstaffing at the lower level and low work morale at the middle and upper levels. MOW has seven Area Offices each headed by an Area Engineer. At present Area Engineers are responsible for minor construction works and for maintenance of all public infrastructure. The Area Engineers are subjected to considerable political pressure to under- take a variety of new construction works of doubtful economic justification which often take priority over maintenance needs. The proposed project includes a study to recommend improvements to MOW's organizational structure and procedures which should assist in overcoming some of these problems (para. 43(d) below). The Contracting Industry 35. Owing principally to lack of capital, managerial skills and technical expertise, no truly indigenous firms are involved in the road construction industry in Sierra Leone and participation by MOW has hitherto been limited to the building of some bridges and short sections of roads as well as the preparation of designs for and supervision of the construction of minor projects. Major road and bridge construction as well as civil engineering works and technical supervision are still largely undertaken by foreign firms. Under the proposed project, a study would be undertaken to assess the present condition and needs of Sierra Leone's construction industry and what measures need to be taken to increase the competence and capacity of domestic contractors. Road Transport Industry 36. The road transport industry of Sierra Leone operates under a mixed enterprise system. A publicly owned Road Transport Corporation (RTC) provides passenger services alongside a sizeable number of privately owned small enter- prises (truckers, mini buses, taxis). Following heavy financial losses in the freight transportation business, RTC now concentrates on passenger transporta- tion alone and is finding it hard to break even in the face of government-set passenger fares that have not kept pace with inflation. Unlike passenger fares, tariffs for freight transport are determined by the market and no private or public agency exists for organizing road freight transport. Entry into the latter industry is legally restricted to nationals of Sierra Leone, but this limitation has in practice been largely ignored with the result that foreigners are extensively involved in the industry. To date, the road trans- port industry has on balance managed to provide adequate services despite scarcities of spare parts and equipment and rapidly rising operating costs.  - 12 - Road Construction and Maintenance 37. Whilst major construction works are normally executed by foreign firms, MOW is gradually developing the capability to undertake major road and bridge design work. The design standards used for road engineering are somewhat unbalanced and would be reviewed under the project. Equipment intensive methods are used for force account road construction or rehabilita- tion and for bridge works, while labor intensive methods are used for routine maintenance. There may be greater scope for labor utilization and under the proposed project a consultant study would examine the appropriate use of labor in road construction and maintenance. Because of MOW's limited construction capability, a U.S. private charitable organization, Cooperative American Relief Everywhere (CARE) is executing on behalf of Government a feeder road construction program with financial assistance from USAID and the EEC and Bank Group under ongoing agricultural development projects in the Northern and Eastern Regions of Sierra Leone. The CARE program is proceeding well and the works are of good quality. However, the roads were built to higher standards than normal, partly in the knowledge that maintenance would probably be neglected; more recently the standards have been revised downwards by an agreement between Government, CARE and IDA. Also in September 1977, the Government created a feeder road maintenance unit within MOW to be responsible jointly with CARE for maintenance of feeder roads built by the latter. 38. The effectiveness of road investment in promoting economic develop- ment, particularly in the rural areas, has been constrained by inadequate road maintenance. In some instances newly constructed feeder roads are being utilized as secondary roads because of the state of disrepair of the secondary system. Road maintenance expenditures decreased from about 4.2 percent of Government recurrent expenditures in FY71 to about 2.5 percent in FY79. Budgetary and foreign exchange constraints have resulted in lack of spare parts and equipment, and these problems have been aggravated by diversion of equipment to other activities, the relatively low priority accorded to maintenance compared with new investment, inadequate workshops, and poor training and supervision of field staff and laborers. These problems would be addressed under the proposed project. Past Bank Group Assistance 39. Bank Group assistance in the transport sector in Sierra Leone has to date been relatively modest in financial terms. A loan and credit for the First Highway Project (Loan 710/Credit 218-SL, US$7.2 million, 1971) financed the construction of the Bo-Kenema road and a first phase of road maintenance, including equipment, technical assistance and training. The project has been completed and the loan and credit amounts fully disbursed. The project ran into cost overrun problems and a Supplementary Credit of US$2.3 million was approved in 1975. Although the ex post economic rate of return (25%) exceeded appraisal estimates, the Project Performance Audit Report dated June 13, 1978, noted that implementation of the routine and periodic maintenance component of the project fell short of expectations due to diversion of equipment for use by other Government agencies; subordination of maintenance to construction; and budgetary and personnel constraints. To the extent possible the present project tries to minimize the risk of this recurring.  - 13 - 40. The Bank Group's principal objective in the transport sector is to encourage the Government to relate its transport expenditures to broader economic objectives, particularly in support of agriculture. The first priority is adequate road maintenance so that the condition of existing roads will permit efficient transport in support of rural development. The second priority is rational selection, preparation, and implementation of road investments, including feeder roads, and improvement works on primary and secondary roads. The Technical Assistance Project (Credit 970 SL) and the proposed project focus on strengthening transport planning and improving highway maintenance and is based to a significant degree on the lessons learned from the First Highway Project. PART IV - THE PROJECT 41. The project was prepared with the help of consultants financed by UNDP and was appraised by the Bank Group in October 1977, but further pro- cessing had to be held in abeyance for over two years, pending improvements in the management of the economy. It was reappraised in May 1980. A report entitled "Sierra Leone: Second Highway Project, Staff Appraisal Report", No. 1923a-SL, dated March 11, 1981, is being circulated separately to the Executive Directors. Negotiations took place in Washington February 17-19, 1981. The Sierra Leone negotiation team was led by the Honorable E.S. Kargbo, Minister of Works. Supplementary project data are provided in Annex III. Objectives 42. The proposed project is expected to strengthen and improve the efficiency and productivity of the road maintenance organization of the country through the provision of equipment, spare parts, technical assistance and training. It would support the country's agricultural development efforts by helping preserve the road links between farms, domestic markets and the Freetown seaport. Description 43. The proposed project would include: (i) the planning and execu- tion of routine maintenance on the entire classified network of about 4,400 miles of paved and gravel roads by force account; (ii) the resealing of about 200 miles of paved roads by contract, or about one-quarter of the paved network, most of which requires resealing at this time; (iii) the rehabilitation of some 370 miles of gravel roads by force account, or about one-tenth of the gravel network much of which now requires regravelling; and (iv) technical assistance to MOW and studies. More specifically, the project would include the following: (a) Routine Maintenance: At one maintenance worker per mile of road, the present ratio is excessive in relation to output. Under the project, gangs of MOW's labor force will be complemented by light mechanized units for patching, grading and minor repairs, thereby significantly increasing labor output and productivity. By September 1 of each year, during implementation,  - 14 - the Government will furnish to the Association, for its approval, a program of routine maintenance to be carried out during the next year (Credit Agree- ment, Section 3.01 (f)). In 1979, the Government purchased road equipment under suppliers' credits. Most of the equipment has been identified for use under the proposed project. During negotiations, the Government agreed that this equipment would be used exclusively for the proposed project (Credit Agreement, Section 3.06). A few additional pieces of complementary equipment, such as compactors, compressors and service equipment will be financed under the Project. To improve workshop facilities, a building currently used for equipment storage will be remodeled to become the new Freetown Central Work- shop. The latter would be fully equipped, and additional equipment for five area workshops would be obtained. Finally, MOW's soils laboratory in Free- town would be provided with new equipment, vehicles and assistance in staff retraining. (b) Resealing of Paved Roads: 200 miles of priority road sections would be resealed under contract over a period of two years. The roads would be selected with the assistance of consultants provided under the project. A study would be undertaken by the consultants under terms of reference satisfactory to the Association to determine priority road sec- tions for resealing; by August 31, 1981, the Government will furnish to the Association for its approval a program for the resealing of the selected paved roads (Credit Agreement, Section 3.01(d)). (c) Rehabilitation of Gravel Roads: The project provides for the regravelling of about 370 miles of gravel roads by force account. Priority sections of the country-s gravel roads will be selected for rehabilitation under the project. The roads will be selected on the basis of a study to be carried out by the consultants under the project in accordance with terms of reference satisfactory to the Association; by December 31, 1981, the Govern- ment will furnish to the Association for its approval a program for the rehabilitation of the selected gravel roads (Credit Agreement, Section 3.01 (e)). (d) Technical Assistance Training and Studies: A consulting team comprising one senior highway engineer (39 m/m), one training specialist (15 m/m), two highway maintenance engineers (66 m/m), one mechanical (24 ra/m), one transport economist (24 m/m) and six Sierra Leonian area road engineers (ARE's, 37 m/m each) will assist MOW, during the period of implementation, to strengthen its capacity to plan and execute road maintenance projects efficiently. They will also, with the help of short-term experts (38 m/m), prepare a follow up road maintenance program, review the organizational struc- ture and responsibilities of the Ministry of Works, and submit recommendations regarding the maintenance of feeder roads and local tracks. They will also review MOW