Peru - Eighth Highway Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 3619b-PE STAFF APPRAISAL REPORT EIGHTH HIGHWAY PROJECT PERU January 21, 1982 Projects Department Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Currency Equivalents (January 1981) (October 1981) A 1 Peruvian Sol = US$0.00282 = US$0.00221 US,$1.00 - 354 Soles = 453 Soles System of Weights and Measures Metric 1 kilometer (km) = 0.62 mile (mi) 1 meter (m) = 3.28 feet (ft) 1 kilogram (kg) = 2.20 pounds (lb) 1 metric ton = 2,205 pounds 1 metric ton-kilometer = 0.69 short ton-mile 1 passenger-kilometer = 0.62 passenger-mile Fiscal Year January 1 to December 31 Abbreviations and Acronyms BIT - Basic Network, Red Basica Intermodal de Transportes CORPAC - Corporacion Peruana de Aeropuertos y Aviacion Comercial CPV - Compania Peruana de Vapores CSLCOP - Consejo Superior de Licitaciones y Contratos de Obras Publicas DGC - Directorate General of Highways DGCT )- Directorate General of Land Transport DGEE - Directorate General of Special Studies DGTA - Directorate General of Land Transport DGWT - Directorate General of Water Transport ENAFER - Empresa Nacional de Ferrocarriles ENAPU - Empresa Nacional de Puertos ENATRU - Empresa Nacional de Transporte Urbano IDB - Inter-American Development Bank INP - National Planning Institute KfW - Kreditanstalt fur Wiederaufbau MDA - Ministry of Aeronautics MTC - Ministry of Transport and Communications ORDE - Organismo Regional de Desarrollo ORDEZA - Organismo Regional para el Desarrollo de la Zona Afectada ORETT - Comision Reguladora de Tarifas de Transporte OSP - Sectoral Planning Office PC - Peruvian Corporation PETROPERU - State-Owned Petroleum Company SEZ - Mechanical Equipment Service SIDERPERU - State-Owned Steel Company vpd - vehicles per day  FOR OFFICIAL USE ONLI STAFF APPRAISAL REPORT EIGHTH HIGHWAY PROJECT PERU TABLE OF CONTENTS Page No. I. THE TRANSPORT SECTOR .......................1............. A. General ............................................. B. Highways .............. 2 C. Railways ............. 3 D. Water Transport ..................................... 4 E. Aviation. q 5 F. Coordination and Planning . 5 II. THE ROAD TRANSPORT INDUSTRY .............................. 7 A. General ............................................. 7 B. Regulatory Framework ................................ 7 C. Tariffs and Costs ................................... 8 D. The Vehicle Fleet ................................... 8 E. Organization of the Industry .......... ............. 9 III. THE HIGHWAY SUBSECTOR .......... ......................... 10 A. The Network ......................................... 10 B. Highway Administration ............................. 11 C. Highway Financing and Road User Charges .... ......... 12 D. Highway Planning and Engineering .................... 13 E. Highway Construction ............................. 14 F. Highway Maintenance ....................15............ L5 G. Recent Developments and Prospects ................... 17 IV. COMPLETED AND ONGOING HIGHWAY PROJECTS ....... R .. ......... 19 A. Completed Projects .................................. 19 B. Ongoing Projects .................................... 21 V. THE PROJECT ........ ................ ...................... 21 A. Objectives and General Description ................... 21 B. Cost Estimates ....................................... 24 C. Financing and Disbursement .............. A ........... 26 D. Implementation .......................... ....... 29 E. Procurement ................................. 30 F. Monitoring .......................................... 30 G. Project Risks ...................................... 31 This report is based on the findings of an appraisal mission which visited Peru during March 1981. The mission comprised Messrs. William Matthey (Highway Engineer), Bengt Bostrom (Senior Transport Economist), and Alberto Paz (Transport Economist), G. Morra (Senior Training Specialist), A. Garaud and A. Mackie (Consultants). The report has been edited by Miss V. R. Foster. 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.  TABLE OF CONTENTS (Continued) Page No. VI. ROAD REHABILITATION AND MAINTENANCE .................... 31 A. Road Rehabilitation .......................... 31 B. Road Maintenance Program .......... ................ 33 C. Strengthening of Highway Agencies ......... ......... 36 D. Training ............ 37 E. Economic Evaluation .............. .. ............... 37 VII. ROAD IMPROVEMENT AND REGIONAL DEVELOPMENT ......... ..... 39 A. General ... 39 B. Selva Central - Regional Development .......... ... 40 C. Alto Mayo - Regional Development ................. . 43 D. Economic Evaluation of Road Improvements .......... 45 VIII. AGREEMENTS REACHED AND RECOMMENDATION .................. 45 TABLES 1.1 Central Government Budget for Transport 1977-1981 48 1.2 Transport Sector Share of GDP - 1970-1979 49 1.3 Cargo Transport by Mode of Transport ........ 50 2.1 Vehicle Weights and Dimensions ................. 51 2.2 Road Vehicle Fleet 1976-1980 52 3.1 Highway Network by Type of Surface . .. 53 3.2 Road User Charges and Expenditures 1976-1981 .54 3.3 MTC Level of Expenditures 1976-1981 55 '3.4 INP Investment Plan 1981-1985. 56 3.5 MTC Equipment Fleet 1978 and 1981 ..57 5.1 Summary of'Road Improvement Costs ....... 58 5.2 List and Cost Estimate of Maintenance Equipment 59 5.3 Estimated Disbursement Schedule .60 5.4 Implementation Schedule .61 6.1 Projected Expenditures for Road Maintenance .62 6.2 Training Program - Cost Estimate ......... 63 6.3 Traffic on Project Roads 1980 and Traffic Growth 64 6.4 Vehicle Operating Costs ..65 6.5 Costs and Benefits for Roads to Be Rehabilitated 66 7.1 Area and Population of the Selva Central. 67 7.2 Principal Crops in the Selva Central .68 7.3 Costs and Benefits ...... .. ................. . .. . 69 7.4 Economic Returns and Sensitivity Tests ... 70  TABLE OF CONTENTS (Continued) - iii - Page No. ANNEXES 1 Other Transport Loans ....................... . ......... . 71 2 Plan of Action ............. 72 3 Outline Terms of Reference for the Feasibility Study of the Selva Central . .76 4 Maritime Transport Advisory Services - Outline Terms of Reference ..... .. ...................... 78 5 Internal Auditing and Accounting Procedures .79 6 Project Monitoring Indices .......... 0-0 ..... 0 ....... 84 7 Details of Road Sections to be Rehabilitated 86 8 Training Component.... .88 9 Selected Documents and Data Available in the Project File ....... - ..................--o 90 CHARTS World Bank 23282 - MTC Organization ..... o............ 91 World Bank 23283 - Tentative Organization .o ........ o.. 92 MAPS IBRD 15906 - Peru - Eighth Highway Project IBRD 15979 - Peru - Eighth Highway Project, Selva Central Regional Development Area   I. THE TRANSPORT SECTOR A. General 2 1.01 Peru, with an area of 1.3 million km , is the fourth largest country in Latin America. It has a population of almost 18 million. The Andes, which closely parallel the Pacific coastline of Peru over its entire length, divide the country into a narrow coastal region (Costa), a mountainous region (Sierra) and the Amazon basin plains region (Selva). The Costa is the most populated and economically developed part of the country. Six out of the ten largest urban centers in Peru are located in the region, including Lima, the country's capital. 1.02 Peru's topographic, geological and climatic conditions often render transport extremely difficult. The transport network reflects these diffi- culties and has shaped the country's development accordingly. Since the nineteenth century, several isolated railways have been built by private interests to connect mining areas in the Sierra with coastal ports (para 1.08), but highways and road transport are the country's basic movers of domestic freight and passengers. Only highways and, more recently, civil aviation, have played a role in integrating the country, but the lack of an adequate road network is still one of the most difficult problems confronting Peru. 1.03 The road transport system in the Costa is broadly adequate. Here lies the backbone of the Peruvian roaa network, the 2,700 km long Pan- American Highway running parallel to the coast (Map IBRD 15906). From this road, several major secondary roads and two railroads link with large towns in the Sierra, while a handful of roads, mostly unimproved, lead into the Selva. Of these, the Bank-financed Trans-Andean Highway from Lima to Pucallpa constitutes the only all-weather road connecting the three regions of the country 1/. Expansion and improvement of the transport network, particularly in the Sierra and Selva, by road, air and river, are necessary to meet the growing transport requirements and to give access to areas of the country presently isolated and undeveloped. 1.04 General objectives for the transport sector were formulated in the 1977-1986 Transport Plan (Plan Director) whose guiding principle was "the provision of a rational transport system which would contribute to the socio-economic development of the country." The Ministry of Transport and Communications (MTC) has since updated this plan, most recently for the 1979-1990 period, and it is generally acceptable to the Bank. Over the past five years, however, implementation has fallen far short of the plan's original goals, due in part to economic constraints in Peru and to a relatively low transport sector budget. The share of transport in public expenditure declined from 4.9% in 1977 (US$125 million equivalent) to 4.5% in 1981 (US$208 million equivalent) after a decline in real terms in 1978-1979 (Table 1.1). Given the importance of transport, these absolute levels are very low. 1/ Paving of the northernmost Trans-Andean route, from Olmos to Tarapoto, as far as Corral Quemado (196 km), has recently been contracted with IDB financing.  - 2 - 1.05 Total demand for transport during the same period has increased slowly and, in some cases, decreased, which has limited the pressure on the transport system. Various indicators reflect this development. As one example, the total road vehicle fleet increased only 9% between 1976 and 1980. Transport demand, reflected in the contribution to GDP (Table 1.2), increased only from about 4.8% in 1970 to 5.7% in 1979, with no change in the 1976-1979 period. In constant prices, the relative share of air transport increased, with water transport decreasing, and land transport remaining constant at about 77% of transport in total GDP. Public passenger transport during 1976-1980 increased about 4% per year with about 70% by road, 14% by rail and 16% by air within the country of a total 6,266 million passenger- kilometers. Private automobile travel virtually stopped growing between 1976 and 1980. The number of cars grew only 1% per year, and the consumption of gasoline declined. Cargo transport grew somewhat more (Table 1.3), but mostly by the increased use of large diesel driven trucks, which grew 7% per year. As a result of the low demand increase, major bottlenecks have not developed in the transport network until very recently, when they became evident in two of the ports and on several road sections. 1.06 Meanwhile, a more serious pressure on the transport system has been growing as a result of neglect of maintenance and a weakening in the responsible transport institutions, particularly in the highway sector. The condition of the roadnet has been deteriorating, leading to higher transport costs, particularly in the Sierra and Selva. MTC's 1981 and 1982 goals, as well as the 1981-1985 medium-term investment program by the National Planning Institute (INP), address this issue by increased resources for highway mainte- nance. The overall program, which is discussed in more detail in Chapter III, represents a substantial increase in the budget compared to those given in paragraph 1.04. On the institutional side, the Government is strengthening MTC (para 3.33) and, at the same time, giving the modal transport agencies (ENAFER, ENAPU and CORPAC) more independence as state-owned companies. A question remaining, therefore, is whether MTC can be rapidly reorganized and strengthened to make effective use of increased investments in the highway subsector. The challenge for the next few years is to reverse the deteriora- tion of the highway network with limited budgetary and staff resources. B. Highways 1.07 Road transport and highways are dealt with in detail in Chapters II and III. For the purpose of this general review of the transport sector, it is sufficient to note that Peru's highway network totals some 58,500 km, of which only about 6,000 km are paved. After the heavy emphasis on highway construction in the mid-1960s, road development has been concentrated on paving and improving some of the more heavily used roads and slowly extending the system. The highway system, except in the Costa, is still, however, in an early stage of development. Peru's road density is half that of its neighbors, Ecuador and Chile, partly because of the large unexplored areas in the Selva and the high concentration of economic activity in the Costa. The roads connecting the Costa with the Sierra and the Selva are generally low standard, the roads in the Sierra are at best passable, and the roads in the eastern piedmont and in the Selva are rudimentary, mainly dry weather tracks.  -3- C. Railways 1.08 Peru has never had a fully integrated railway system. Several separate east-west railway lines developed, largely as part of the mining and export of mineral deposits in the Sierra. These lines still serve that main objective. In the 1930s, the railway system consisted of about 4,200 km of track; at present, after the closing of several lines (the latest badly damaged by the 1970 earthquake), the system has been reduced to a route length of some 2,200 km. 1.09 The Central and Southern Railways are by far the most important in the country and they have an important role to play in their respective areas of influence. The Central Railway links the mineral-producing area of Cerro de Pasco and La Oroya with the port of Callao and, therefore, is an important supplement to the limited capacity of the Central Highway. It also hauls some agricultural products from the Sierra to Lima and general cargo in the opposite direction. It is the highest standard gauge railway in the world (4,829 m) and one of the most difficult to operate because of the steep grades (over 4%), the many switchbacks and the sharp curves. The importance of the railway became obvious when both the highway and the railway were cut off by landslides early this year. An emergency IDB loan is being used for repairs to both the highway and the railway. 1.10 The Southern Railway connects the Pacific port of Matarani with Puno in the Sierra and, by ferry over Lake Titicaca, with Bolivia. From Puno, another line goes to Cuzco over the main plateau. The grades of the Southern Railway are not as steep as those of the Central, but they are still quite severe. The Huancayo-Huancavelica and Cuzco-Santa Ana narrow gauge lines constitute natural extensions of the Central and Southern Railways respectively. 1.11 Centromin, a large state-owned mining company, owns and operates two standard gauge railway lines: Cerro de Pasco-La Oroya (132 km) and Cahucha-Pachacayo (80 km). Both lines feed traffic to the Central Railway, supplying it with more than half its total freight tonnage as well as passengers. 1.12 The Empresa Nacional de Ferrocarriles del Peru (ENAFER), created in 1972, owns and operates the Central and Southern Railways following their purchase from private interests. ENAFER has, since its creation, almost continuously needed Government subsidies both for renewal of rolling stock and sometimes to help cover direct operating expenditures. Although there has been a substantial upgrading of track and rolling stock, particularly in 1974-1975, large investments are still required for track rehabilitation, rolling stock and spare parts. An investment plan, mainly for rolling stock, is now funded by the Government; about US$76 million is programed for this purpose in 1981-1982, but no new construction is now foreseen.  -4- D. Water Transport 1.13 Domestic coastal and river shipping provides about 36% of the ton-km in the overall movement of cargo traffic in Peru. Coastal shipping is concentrated in the movement of bulk cargo, particularly crude oil and oil products and, to a lesser extent, iron ore to supply the state-owned SIDERPERU steel works at Chimbote. PETROPERU, the state oil company, ships crude oil from its loading installations at Bayovar, terminal of the North Peruvian pipeline, to the refineries near Talara and Callao, as well as products, including natural gas, from Talara mainly to Callao. Domestic river traffic, although growing, is still only about 2.5% of total traffic; it is fairly diversified, consisting mainly of dry cargo. As a result of improved economic conditions since 1979 and trade liberalization, import traffic at the ports of Matarani and Callao is now causing congestion and ship delays. In the immediate term, better equipment will be acquired to improve the situation. In the longer term, the Empresa Nacional de Puertos (ENAPU) is planning expansion of both ports. 1.14 The extensive river system of the upper Amazon River and its tribu- taries provides a natural transportation network for the whole of eastern Peru. The Amazon River within Peru is navigable year round by ships of 20 ft draft up to Iquitos. Further inland, the tributaries provide a network navigable by vessels of 4 ft draft, for distances of about 8,000 km during the wet season, five to six months of the year. However, since this system is oriented toward Brazil and the Atlantic and does not connect with the populated and developed regions of the country, it has been largely underutilized. The lack of ports and the general underdevelopment of the region are contributing factors. It was with the idea of utilizing such an extensive transport network more fully for the development of the region that the Trans-Andean transport corridor concept was developed and supported by the Bank. The corridor is served by the central highway from the coast to the riverport at Pucallpa on a tributary of the Amazon, and from there, by river, to vast areas of the Selva. 1.15 The use of coastal shipping is also still limited compared to its potential. Service and facilities have been directed mostly at petroleum movements along the dense traffic corridor of the Costa region. The limited capacity of the coastal fleet, the lack of specialized port facilities and the inadequacy of port and custom regulations have hampered the expansion of coastal shipping. Improved coastal shipping services could offer potential users flexibility similar to that provided by road transport; however, such flexibility presupposes an integration of the trucking and shipping services by means of intermodal shipping technology (Ro-Ro, containers) which is not yet used in Peru. The lack of facilities and equipment at the ports has also restricted the expanded application of cargo unitization, especially for inland and coastal transport. Initiated under Loan 1025-PE, a study of higher density transport along the coast has been carried out by MTC. This study indicated a larger role for coastal shipping provided labor and institutional constraints can be overcome. Another determinant factor would be the adequate pricing of fuel and trucking services (para 2.06). Transfer of freight traffic to coastal shipping would reduce the need for costly investment to increase road capacity of the Pan-American Highway. In order for this alter- native to be practically developed, more work is needed, focusing on  -5- (a) port, labor and customs regulation; (b) marketing, in particular, coordi- nation with truckers; and (c) pricing, including user charges applicable to road freight transport. This is addressed by a study under the project (para 5.10). E. Aviation 1.16 Peru, for reasons of topography, has long relied on air transport as one of the means of regional integration. As is the case with other Andean countries, aviation has been particularly useful to overcome the difficult crossing of high mountain ranges. One of the two main airlines, Faucett, which is privately owned, was founded as early as 1928 and is, therefore, one of the oldest in the Americas. The other important carrier, Aeroperu, was created by the Government in 1973 as the result of a reorgani- zation of SATCO, the airline element of the Peruvian Air Force, which had operated since 1960. These two carriers have had about equal shares of the domestic traffic, with Aeroperu dominating the international traffic. On the ground, the Governmental Agency, Corporacion Peruana de Aeropuertos y Aviacion Comercial (CORPAC), is charged with operating and maintaining airports and enroute facilities. CORPAC now administers 56 airports, or almost all the airports for commercial air transport in Peru. About 110 civil aircraft are registered in Peru, of which about half are used for air taxi and crop-spraying operations. 1.17 The most important part of the domestic traffic is the movement of passengers, with air freight significant for high value air cargo and movement to isolated areas of the country. Passenger traffic at the CORPAC airports increased from about one million in 1971 to more than 2.0 million in 1979, an average growth of 9% per year. Sustained growth has been aided to a great extent by the provision of improved and expanded air services. Since 1972, the number of jet aircraft in domestic service has grown from one three-engine Boeing 727-100 to a total of four such aircraft, three two-engine BAC-l-ll and three two-engine Fokker F-28 aircraft. The two commercial air- lines, Aeroperu and Faucett, have both suffered from inadequate airport infrastructure, which has limited them to aircraft that are costly to operate. In part, this situation will be alleviated by a recent Bank Loan to CORPAC (Loan 1963-PE, Annex 1). F. Coordination and Planning 1.18 The creation, in 1969, of MTC by grouping the former Ministry of Development and Public Works with agencies in the various transport modes, together with the creation of its Sectoral Planning Office (OSP), strengthened the institutional basis for rational coordination and planning in the transport sector. MTC has four Directorates through which it directs and controls the various modes: the Directorate General of Highways (DGC); the Directorate General of Land Transport (DGCT) responsible for road transport; the Directorate General of Water Transport (DGWT), responsible for shipping and ports; and the Directorate General of Air Transport (DGTA), responsible for civil aviation. Six agencies, including operating companies for railways (ENAFER), shipping (CPV), ports (ENAPU), airports (CORPAC) and the public transport agency which serves metropolitan Lima (ENATRU), as well as a Comision Reguladora de Tarifas de Transporte (previously ORETT), come under the Ministry.  l_.ls The tariff commission under MTC is responsible for reviewing and proposing tariff structures for the fixed facilities such as airports (CORPAC) and ports (ENAPU), as well as the public transport operators such as railways (ENAFER), the airlines and the various bus and truck companies. In recent years, ORETT has continuously updated tariffs for most transport modes, adjusting for inflation. The tariff policy has resulted in incomes sufficient for almost all of the independent transport agencies to cover their normal operating costs. The most important exceptions are ENAFER and ENATRU, whose operating revenues are insufficient to cover adequate replacement programs. 1.20 OSP is responsible for the preparation and formulation of transport policy and planning, under the general guidelines of, and coordination by, the National Planning Institute (INP). OSP has prepared the sectoral parts of the national budgets for the Ministry of Economy and Finance since 1973. More recently, OSP has embarked on more ambitious planning (started under a UNDP- financed technical assistance project for transport planning) by producing, and later updating (para 1.04), the first Ten-Year Draft Transport Master Plan (Plan Director) 1977-1986, followed by six preliminary regional plans for the various development regions into which the country is divided. 1.21 The present Government, on taking power in July 1980, rapidly established a general five-year goal of road rehabilitation and improvement, mostly of parts of the basic network. A total of 2,800 km are involved over the 1981-1985 period, with about 550 km identified for immediate urgent rehabilitation or improvement. A large part of these (433 km) are included in the present project, while the Government, with its own funds, has started rehabilitation work on 117 km. In addition, the 1981-1985 plan includes virtually new construction of some 1,100 km. The present administration is also committed to improving road maintenance and strengthening the responsible highway organizations, as described in Chapter III. Of the new roads in the 1981-1985 period, the most important are different stretches of the Marginal de la Selva. These are, from North to South, upgrading of Olmos-Corral Quemado-Tarapoto; new roads Juanjui-Pizana, San Alejandro-Puerto Bermudez and Satipo-Rio Puyemi; and upgrading of Puerto Bermudez-Villa Rica-La Merced-Satipo. These works are well justified, but the initial level of road standard needs careful attention in view of the gradual development of traffic in a newly developed area. Because of this consideration, during negotiatiolns, it was agreed with the Government that the Bank would be given the opportunity to review and comment on any major investments (over US$10 million) which are started in the period. 1.22 In addition to almost US$1.5 billion in 1981-1985 for land transport, investments of about US$209.8 million for water transport and US$222.6 million for air transport infrastructure are planned for this period. For water transport, this amount includes US$68.5 million in ships or ship conversions for the Compania Peruana de Vapores (CPV). These investments are generally well justified, but more alternatives for medium-term development in the ports of Callao and Matarani should be considered. This matter is now under study by ENAPU.  - 7 - II. THE ROAD TRANSPORT INDUSTRY A. General 2.01 Road transport is the basic carrier for domestic freight traffic. In 1980, highways carried 80% of all domestic traffic, excluding waterborne petroleum products (57% if these are considered). During the past five years, domestic road freight volume has grown at an average annual rate of about 6%, which is not significantly different from the rate at which total domestic freight has grown. The share of international freight transported by road is not very important except for limited traffic to and from Bolivia. 2.02 Road transport services carry 70% of inter-urban passengers and about 7% of the international passenger traffic. Most of the services operate along the Pan-American Highway running between Piura, Lima and Pisco. Across the country, the most important service lines are Lima-La Oroya (center) and Arequipa-Puno (south). The road transport shares of both freight and passenger traffic are not expected to show significant changes in the future. B. Regulatory Framework 2.03 MTC, through DGCT, regulates and supervises road transport, while its tariff commission (para 1.19) sets tariff ceilings for road passenger services, as well as for road freight transport of several commodities, and recommends taxes and other charges that affect road transport. DGCT also regulates operating permits and defines the commercial status of operators (companies, owner-operators, brokers). This regulatory framework has allowed for adequate competition; capacity has followed the growth of transport demand. Supply of transport services outside the Costa region is still constrained by the difficult terrain and the poor condition of the roads. 2.04 Truck overloading is common practice, particularly in the Costa region, and contributes to rapid deterioration of pavements and higher main- tenance costs. Vehicle weights and dimensions are properly regulated but the regulations are not systematically enforced because of inadequate equipment; the latest limits (Table 2.1) were established by Presidential Decree (Decreto Supremo No. OOl-81-TC) in 1981 (replacing a decree of 1973) and are adequate. Allowable weights and dimensions differ between the Costa region and the other two regions because of different topography-related design standards for roads and bridges. The above decree establishes fines but does not define responsi- bilities for enforcement. Up to 1978, this was the responsibility of MTC, which manned five fixed scales located on three access routes to Lima, in Arequipa and in Olmos. Until 1976, portable scales were also used. In order to improve enforcement of axle weight limits, the fixed scales were turned over to the police (Guardia Civil). Budget constraints have limited their upkeep, and they have become non-operational. The Government has decided to resume enforcement of weight limits. The existing weighing stations will be reactivated and additional control points established, using mobile equipment, under the proposed project (Chapter V). During negotiations, the Government confirmed that, not later than December 31, 1982, it would adopt an expanded program for enforcing improved vehicle weight control.  -8- C. Tariffs and Costs 2.05 Tariffs, in recent years, have followed inflation and the real increases in basic vehicle operating costs. They cover, in general, the average perceived operating costs. Insurance, maintenance and depreciation are cost items frequently not considered. As is common, cross-subsidies occur between urban and inter-urban transport. Tariffs, which differ according to type of road and regions of the country, are generally adhered to in the Costa region, but not in the Sierra and Selva regions, where actual rates tend to be higher than the tariffs. This is explained by the operators' reluctance to travel on roads in poor condition, to face risks of road closures due to landslides and often to have to operate with low load factors, considerations which are not fully reflected in the tariffs. 2.06 Fuel prices have been low in the past but have been increasing steadily. The price of premium gasoline (95 octane) went to $/. 520 per gallon (slighl:ly above US$1.13) in September 1981, which was above the FOB export price (oppor- tunity price) of crude oil plus the refining and commercialization costs. The price of 84 octane gasoline is slightly below international levels and that of diesel oil is well below. 1/ The Government has scheduled further steady increases in these prices over the next year and expects that the average price of regular gasoline will reach US$1.25/gallon in mid-1982. 2.07 The Government also uses low fuel prices as a tool to reduce the cost of transport from, and within, the Selva region. Tax levels imposed on gasoline are about 11% of those applied in other regions and about 30% in t'e case of diesel. On the average, gasoline and diesel sales prices in the Selva region are about one-half what they are in the other two regions. The local impact is significant, while the shortfall in total revenue is small, since road motor fuel consumed in the Selva is only 4% of the total in Peru; there- fore, this issue is not considered to be of major importance. D. The Vehicle Fleet 2.08 Vehicle fleet data are shown in Table 2.2. In 1980, there were close to 500,000 vehicles in Peru, of which 82% were light vehicles, 4% weres buses and 14% were trucks. Most of the fleet has gasoline-powered engines, more than half of the total number of vehicles are over seven years old and two-thirds of all vehicles are concentrated in Lima. 1/ The structure of prices for gasoline and diesel oil (Costa/Sierra prices) in US$ per gallon in September 1981 was: Premium Gasoline 84 Oct. Gasoline Diesel Oil Base Price (Including Transport) 0.55 0.45 0.30 Taxes 0.52 0.43 0.21 Sales Margin 0.06 0.05 0.04 User Price 1.13 0.93 0.55 International Price /a 1.06 1.00 0.90 /a Average F.O.B. export price of these products from export refineries in the Caribbean area.  - 9 - 2.09 Buses in public service predominantly attend the national and regional demand for passenger traffic. About two-thirds of the units operate across the country in the central zone and average a seating capacity of 36. Almost 50% of the buses exceed seven years of age. Buses used on national service lines are all diesel-powered. Bus service does not always satisfy the traffic demand adequately, especially in urban areas. 2.10 The truck fleet in Peru has about 70,000 units. Since 1976, it grew at an average yearly rate of about 2%. The Government, in the past, has supported a policy of standardizing the truck fleet by limiting domestic production of assembled or manufactured trucks to a few makes. Recent opening of truck imports will introduce a competitive factor and may lower the high costs of locally produced trucks. About 10% of all trucks are trailers and semi-trailers. Close to 88% of the fleet, mostly owner-operated small vehicles, is gasoline-powered, and only about 11% has a load capacity of more than nine tons. About 60% of the total truck fleet is engaged in public freight trans- port. Annual average utilization of trucks with over nine tons of carrying capacity is estimated to be some 60,000 km with load factors ranging between 55% and 60%. Smaller trucks are estimated to have even lower utilization. Significant variations in annual utilization and average load factors between regions are to be expected. The spatial distribution of trucks is also uneven. Lima alone has 42% of the trucks. Demand is met, but there is room for increased efficiency and reliability. E. Organization of the Industry 2.11 The national and regional passenger service industry is basically organized in bus companies and automobile committees. Large firms in public transport are relatively better organized than smaller ones. In 1979, there were 249 different companies. The automobile committees are owners' associa- tions with about 3,000 units used as intercity taxicabs. 2.12 The truck fleet that provides public freight service is composed of companies and owner-operators (often organized in cooperatives). Companies own about 4% of the public transport fleet and supply about 7% of the fleet's total static capacity, which is estimated to be around 450,000 tons. Most companies (85%) are concentrated around the principal centers of economic activity (e.g., Lima, Chiclayo, Trujillo and Arequipa). In 1979, there were over 200 companies. Owner-operators, both individual and organized into cooperatives, own about 96% of the trucks and supply about 93% of the total static capacity. This type of organization is found in both the Costa and Sierra regions, with a relatively higher concentration in the Costa. Owner- operators usually search for, and deal directly with, users, which often fails to provide either efficient use of capacity or satisfactory service. Because of the atomized market service that owner-operators produce, brokers act to concentrate freight and negotiate contracts with both users and operators. 2.13 The medium and long term policy of the Government is to foster the formation and development of large companies for national and regional passenger and freight services, with more homogeneous, newer, diesel-powered fleets. Buses should tend toward the 40-seat models, and trucks should tend to average 30 tons of loading capacity in the Costa region and 15 tons in the Sierra and Selva regions, in order to minimize transport costs under the prevailing terrain limitations.  - 10 III. THE HIGHWAY SUBSECTOR A. The Network 3.01 Although highway transport is the main mover of cargo and passengers in Peru, the highway network is still in an early stage of development (para 1.07). This is a reflection of the difficult topography and high cost: of construction in the Sierra and of the largely undeveloped condition of the Selva. The proportion of paved and gravel roads, in relation to the overall network, is low. As shown in Table 3.1, the system at present consists of over 6,000 km of paved roads, 12,500 km of gravel roads and almost 40,000 km of earth roads and tracks. Highway construction in recent years has been rela-- tively limited. The highway network increased from 42,800 km in 1965 to 50,300 km in 1970, 56,400 km in 1976 and about 58,500 km in 1980 Thus, it is clear that the rapid expansion in the earlier period, 1965-1976, has slowed down considerably. Improvement and development of the road network, although desirable, is constrained by the large resources which would be required. In consequence, a priority roadnet to serve existing traffic and projected development needs, named the basic network (Red Basica - BIT), has been planned as the medium-term target for improvement and development. The BIT, some of which is not yet constructed, will eventually reach a length of about 13,500 km in the mid 1990s. General upgrading of the whole system can be regarded only as a long-term objective. 3.02 The highway network is classified into: (a) interdepartmental or national; (b) departmental; and (c) feeder roads. However, in the past decade, the classification has had little real significance since there have been no corresponding differences in either organizational responsibility or budgetary provisions. Currently, the national roadnet consists of about 15,000 km, including almost 4,500 km of paved roads and about 7,000 km of gravel roads. Departmental roads account for about 12,300 km, of which only 1,100 km are paved; the remaining 31,000 km are feeder roads and tracks. A third, unrelated classification of the highway network is used for preparing maintenance budgets (para 3.25). Once the law creating the Development Corporations and smaller community organizations is finalized, MTC should define its role, as well as that of the local organizations, in the planning, engineering and maintenance of each class of road. During negotiations, agreement was reached with the Government that, not later than October 1, 1982, it would adopt a road classification system as the basis for establishing the jurisdiction oE national, regional and other authorities in regard to road planning, design, construction and maintenance and would update road classification annually thereafter. 3.03 Traffic in Peru is concentrated on the paved roads, and on the Pan-American Highway in particular. On this highway, traffic varies from 6,000 and more vehicles per day (vpd) close to Lima to 2,000-3,000 vpd on many sections in Central Peru, tapering off to about 1,000 vpd in the extreme North and South. On the Lima-Pucallpa road, traffic is 3,500 vehicles per day close to Lima, decreasing to 1,900 vpd entering La Oroya and 500 vpd to the east of it. Traffic over 1,000 vpd is exceptional on most roads in the Selva and Sierra, where even main roads carry only 200-500 vpd. Over the next decade, this general distribution of traffic flows is not expected to change signifi- cantly, so that the largest portion of vehicle-km will remain on roads which have already been constructed, and usually, to some extent, improved.  - 11 - 3.04 Upon taking power, the present Government demonstrated its strong commitment to a vigorous policy of improving road infrastructure. Besides an ambitious program of road improvement concerning, in particular, the sections of the Marginal de la Selva road (para 1.21), the present administration is also committed to reestablishing effective road maintenance, rehabilitating or reconstructing damaged roads and strengthening highway administration. B. Highway Administration 3.05 Planning, construction and maintenance of the entire network has, until recently, been solely the responsibility of MTC. During the past decade, the need to decentralize MTC's operations led to a series of organiza- tional changes which, in general, have not been fully effective. A reorganiza- tion in 1973 created a General Directorate of Land Transport (DGTT) responsible for road and rail transport, including regulation and supervision of road operations and urban transport, while also creating seven regions (by 1978 increased to 13) reporting directly to the Vice Minister, responsible for all MTC operations, of which road maintenance and construction were only a part. This action lessened attention to road infrastructure, and maintenance in particular, by both the regional and subordinate departmental engineering staff. 3.06 At about the same time, a new form of more autonomous regional organization was developed to manage reconstruction following the 1970 earth- quake in the Huaraz Valley. This new organization, known as an Organismo de Desarrollo (ORDE), was made responsible for all Government functions in its area. The relative success of this first ORDE led to its perpetuation in 1978, with a larger area of responsibility. This was followed, in the 1978- 1980 period, by the creation of 11 more such entities which absorbed eight MTC regions (16 departments), leaving five regions (eight departments) reporting directly to MTC. Decentralization, however, was incomplete, lacking clear definition concerning the inter-relation of the ORDEs and MTC. Thus MTC, at the time that the present Government was elected, retained responsibility for most major road construction, but for construction by force account and maintenance in only five regions. 3.07 Inadequate internal management has also adversely affected MTC's performance in the highway field. The most serious problems, which are more fully discussed in other sections of this chapter, are: - insufficient focus on road infrastructure, both by MTC and the regional offices; - failure to adequately integrate soils and geotechnical expertise with highway engineering; - insufficient authority of the chief of road maintenance (vis-a-vis regional director); and - lack of effective integration of MTC's mechanical equipment service (SEM) in regional operations.  - 12 - 3.08 In recent years, MTC has been further weakened by numerous losses of engineers at all levels, both to the private sector, as a result of low salaries, and to other Government positions, within and outside the Ministry, offering better career possibilities. In addition, retirement has taken a toll of senior staff, while the MTC organization has failed to develop younger, sufficiently experienced highway engineers. The present staffing of 116 engineers and less than 100 technicians, working directly in highway infrastructure-related assignments both in MTC and the ORDEs, is grossly inadequate for managing the highway construction, rehabilitation and mainte- nance programs which are presently being prepared by the Government. Recently initiated measures to strengthen MTC are discussed at the end of this chapter. C. Highway Financing and Road User Charges 3.09 Highway expenditures are financed mainly from the general budget. Direct revenues amount to about 25% of MTC's expenditures for the highway sector, of which Peru's system of road toll collection on main roads provided almost 50%, or S/. 1,845 million (US$6.6 million), of a total of S/. 3,986 million (US$14.2 million) in 1980. The remainder is mainly income from various licenses and rental of equipment outside MTC. 3.10 Most highway financing is obtained from the Ministry of Economy and Finance and from external sources. Road user-related fiscal revenues in total, however, have exceeded total highway expenditures since 1968. The major source, i.e., import duties and motor fuel taxes, represented 26% and 62% respectively of road user income to the Government in 1980, when about S/. 50 billion (US$178 million) were collected and expenditures accounted for some SI. 32.2 billion (US$114.9 million) (Tables 3.2 and 3.3). The total budget for MTC that year was about S/. 35 billion, including works financed by foreign loans. The new Government's program (para 1.21) has put considerable emphasis on rehabilitation of the existing highway network and road construc- tion along the eastern piedmont (Ceja de Selva). These efforts are going to need substantial external financing, although road user contributions to the Government will meet most, if not all, of the Government's counterpart requirements. 3.11 Because of the slowdown of the economy, the total road user charge revenues have dropped in real terms between 1976 and 1980 from S/. 55 billion to SI. 50 billion (purchasing power of 1980). This trend is not likely to continue as the economy recovers and the Government continues its policy of regularly increasing the price of fuels. As indicated in Table 3.4, there will be a requirement for local funds for investment of about US$665 million, or US$113 million average per year, over the period 1981-1985. This sum is in addition to S/. 5,872 million in 1981 (US$17 million) required for MTC overhead and wage expenditures, and clearly lower than the SI. 50 billion (US$178 million) collected in 1980 and anticipated increases in total revenues, indicated above. 3.12 Budget allocations for road maintenance have been about US$300 per. km or even lower for several years in the 1970s. This figure has improved in the last'two years to about US$600 per km but a substantial backlog of deferred maintenance has accumulated. The maintenance budgets requested  - 13 - by MTC have been intended only for financing emergency work and routine main- tenance, without including periodic maintenance, for which MTC has lacked capacity and, in addition, have been based on fully maintaining only a priority portion of the roadnet (para 3.25). Clearly, substantial increases in maintenance budgets are required to reach the goal of improved maintenance. However, substantial improvements in maintenance would also result from improved control over how maintenance funds are used. Measures to strengthen highway administration (para 5.07) and increase maintenance equipment avail- ability (para 5.06) are included in the proposed project. D. Highway Planning and Engineering 3.13 The road component of the 1979-1990 Transport Plan (para 1.04) gave increased priority to highway maintenance and to improvement of major roads. An updated investment plan (1981-1985), reflecting the new Government's aims (para 1.21), is summarized in Table 3.4. 3.14 OSP is responsible for keeping the Transport Plan up to date (para 1.20); it coordinates its activities with those of INP, which approves budget programs since external financing is an important factor in planning investments. Rightly convinced of the need to set investment priorities on the basis of adequate technical and economic studies, MTC has, in recent years, created a separate office, Estudios Economicos (OEE), for preparing or supervising preparation of feasibility studies. OEE has performed well but has not been fully integrated with MTC's traditional directorates, especially DGC, which prepares highway investment programs and related budget estimates for submission to OSP. 3.15 The current weaknesses in the planning process are: (a) lack of coordination between various departments in MTC (OEE, DGC, OSP) and INP (Central Planning Office); and (b) unrealistic cost estimating and scheduling. Technical assistance (para 5.10) is proposed under the project to strengthen MTC's planning capability. 3.16 Highway engineering is the responsibility of the engineering direc- torate of DGC, which treats road engineering primarily as a geometric problem, and which lacks the tradition and background of integrating geotechnical, soils, materials and drainage considerations with route location and design. A separate General Directorate of Special Studies (DGEE) is responsible for these latter aspects as support staff, providing services only on demand, since it lacks its own operating budgets. Although major design work is generally contracted to consultants, fees negotiated by DGC are too low to reflect the work needed to execute soils investigations adequately. DGEE is insufficiently involved in design budget preparation and reviewing of detailed engineering. As a result of this fragmented internal organization and lack of awareness of MTC, Peru is about two decades behind the times in proper utilization of engineering, soils, materials and geological expertise, and has no systematic program of research and development aimed at road problems. The result is, all too often, substantial quantity and cost in- creases during construction, and delays while additional design engineering  - 14 - must be performed by construction supervisors. During preparation of the proposed project, special attention has been given to studies of unstable slope conditions and drainage problems. E. Highway Construction 3.17 Highway construction is the responsibility of the Construction Directorate. Major projects are, by law, subject to public bidding by contractors although, recently, some penetration roads (such as San Alejandro-Puerto Bermudez) have been undertaken by force account, utilizing contractor equipment and personnel. Supervision of construction is performed mostly by consultants, with ministry staff supervising a few small projects, such as isolated bridges. In recent years, the ORDEs (para 3.06) have also undertaken a limited amount of road construction, both by contract and by administration. 3.18 An excess of 600 contractors are registered with the Consejo Superior de Licitaciones y Contratos de Obras Publicas (CSLCOP). Of these, about 25 form a core of larger companies, and about one-half of them have capable, well structured management and resources. The next tier consists of about 50 medium-sized companies, which are struggling to grow by acquiring work as fast as they can, and are, therefore, potential sources of contrac- tual difficulties. The balance comprises small companies, usually run by one professional (engineer or architect); they generally operate within their limitations. The main problem which the domestic industry faces is the availability of trained, skilled workers and of professionals. The deep recession of the late 1970s, which had an accentuated effect on construct-lon, caused skilled workers to emigrate or to find other employment; a large number of engineers also emigrated. SENCICO, the industry's own training institution for development of skilled workers and foremen, is beginning to set up training programs. Much of the contractors' equipment is old, but, with the prospect of the Government's large road program, significant re-equipping is taking place, supported by commercial credit and lease lines available to the industry. Peruvian contractors should be capable of catering for up to 70% of the demand for periodic maintenance, improvement and new construction work, which MTC is expected to put out to tender over the next few years. The balance should be made up by foreign contractors. Provisions in the present budget law allow exemption for Bank-financed projects from the requirements for mandatory joint ventures for foreign contractors. The Government plans to continue to seek such provisions in the future. 3.19 The performance of the local contractors is adequate in quality, but delays in completion frequently arise, primarily due to inadequate rock- crushing capacity and insufficient advance planning. Work by MTC force account is generally less satisfactory because of the lack of crushing or gravel processing capability and the lack of proper engineering preparation.  - 15- 3.20 Since the present government took over, it reinstated Cooperacion Popular, a system for communal organization for infrastructure development, mostly by labor-intensive methods. Cooperacion Popular has started work on rural feeder roads and on access roads for province capitals which are not linked to the national grid. The organization of Cooperacion Popular and its lines of communication and authority are being set up and would expectedly emerge as an established channel for carrying out rural works on particular roads under programs undertaken by the regional authorities. The proposed project would include a study of appropriate arrangements to fund regional rural road programs. 3.21 Construction supervision by consultants has proved generally satis- factory with regard to quality control, but is hampered by insufficient detailed engineering, requiring field redesign for which the supervisors are inadequately staffed. 3.22 Delays in project execution are aggravated by cumbersome administra- tive procedures within MTC and by Government contracting regulations outside MTC's direct control. Delays in expropriation of property and in obtaining approvals for design revisions have frequently held up roadworks, while the process of justifying increases in work quantities beyond stipulated limits, which are unrealistic for highway projects, involves approval from the Con- traloria General de la Republica (Annex 5) (external to MTC). These factors have contributed substantially to delays on past Bank-financed projects. There is need for a thorough review of regulations governing construction contracts and for greater MTC input regarding conditions suitable for roadworks. The Plan of Action (para 5.07) provides that, not later than September 30, 1982, MTC would prepare, for discussion with the Bank and within the Government, specific recommendations concerning improvements in procedures for road construction tendering and administration. F. Highway Maintenance 3.23 Highway maintenance has been the responsibility of MTC's regional directorates, some of which have recently come under the authority of ORDEs (para 3.06). These regional organizations have had considerable independence in administering their maintenance programs. The Central Maintenance Division, until recently an office of road operations under DGTT, has handled general planning and budget allocations and has provided technical assistance and guidance to the regions. A separate Mechanical Equipment Service (SEM) of MTC is responsible for providing, repairing and operating all equipment within MTC both for construction and maintenance. 3.24 Road maintenance requirements are subject to sharp differences in Peru's three zones - the Costa, the Sierra and the Selva - because of the differences in materials, topography, geology and climate. Emergencies occasioned by landslides, landslips and mudflows, triggered by rainfall and earthquakes, are common, and are, in some cases, annual phenomena in the Sierra and higher Selva areas. Washouts by fast flowing rivers debouching from their mountain ravines, or temporarily trapped as the result of land- slides, affect all three zones. To a greater extent than in most countries, therefore, emergency repairs figure as the top priority and have diverted  - 16 - resources and attention from routine and periodic maintenance activities. For many years, budget allocations for maintenance have been insufficient (para 3.12) to meet emergency and routine maintenance needs, with almost complete neglect of periodic resealing and regraveling. Utilization of resources available for maintenance work has been inefficient; the Central Maintenance office has had insufficient authority and staff to exercise any control over how maintenance funds were really spent. 3.25 Consultants for road maintenance management (1973-1977), financed under a Bank loan (Loan 706-PE), recommended a four-year program of manage- ment improvements, training and equipment purchases to increase MTC's capa-- bility for executing routine and emergency maintenance, while contracting an extensive program of road rehabilitation. To remain within practical budget limits, the program retained the MTC maintenance classification of a priority roadnet (about 23,000 km) on which full routine maintenance would be scheduled, while the remaining roads would receive only essential repairs. MTC accepted the recommendations, and its Central Maintenance office has since made regular efforts to introduce the system. However, the deterioration of the network has not been checked because of a combination of insufficient resources, lack of commitment and training in the regions and low availability of equipment. 3.26 A major impediment to road maintenance has been the inadequate operations of SEM, which is responsible for renting the equipment to the regions. Among its deficiencies are: (a) fleet composition unsuited to maintenance needs; (b) equipment in poor condition; (c) deficient repair shop facilities; (d) parts and supplies inventories far below acceptable minimum levels; (e) personnel, particularly mechanics and operators, undertrained for their jobs; (f) poor management, including analysis of user workloads, replacement criteria, fleet administration and cost, accounting and rental procedures; and (g) non-integration of SEM's regional operations with those of its equipment users. 3.27 Under the ongoing Lima-Amazon Corridor project, the Government agreed to several measures aimed at improving SEM operations including procurement: of equipment, recommended by the maintenance consultants (para 3.25), and tech- nical assistance, to assist with overhaul of the existing fleet, preparation of a training program and revisions to the equipment rental systems. Short- sighted MTC management and lack of priority accorded to obtaining external technical assistance led to a long delay in engaging consultants to SEM. Meanwhile, equipment procurement by MTC/SEM favored construction-type equip- ment, suitable also for emergency maintenance, but did not provide needed routine maintenance-type equipment. 3.28 Charging for the use of equipment was introduced at the time SEM was established in 1969. Although the principle of renting equipment to all users (public and private) was sound, the system has never operated effectively because of: (a) insufficient equipment; (b) lack of experienced management; and (c) inherent difficulties in making a commercial system fit into a context determined by Government regulations and procedures. Various attempts by MTC/SEM to improve performance were not fully effective. Assuring SEM of sufficient funds, available on a timely basis, which were needed to support operations both in Lima and in the regions, proved to  - 17 - be a dominant problem. For a time, SEM automatically received a fixed per- centage of all maintenance budgets, which led to complaints that the regional users were paying for equipment which SEM was unable to furnish. This arrange- ment was changed to a rental charge based on actual use and SEM experienced difficulty in collecting on time from regional users. SEM also experienced long delays in obtaining approval to adjust its schedule of charges. SEM could not operate as a self-supporting equipment rental organization without a well managed system of programing and funding road maintenance and force account works and defining related equipment requirements. 3.29 The 1978 economic crisis also sharply affected equipment mainte- nance. SEM, dependent on reduced revenue to meet its costs, discharged a large number of its mechanics. Spare parts purchases dwindled, and operating units were increasingly repaired by cannibalizing broken-down units. At the time of reformulation of the Lima-Amazon Corridor project, it was clear that equipment overhaul was a vital priority if effective maintenance was to be reinstituted. The present MTC management is in the process of a review of the revised functions and responsibilities of SEM. 3.30 The present inventory of SEM's fleet includes 2,521 units, of which 984 are working, 985 are under repair and 552 can only be scrapped. The overall statistics and comparison between the positions in 1978 and March 1981 are shown in Table 3.5. The important differences are the reduc- tion in the number of scrap units in the fleet from 1,418 units to 552 units and the change in the mix of the fleet to a bias toward heavy construction units as a result of a procurement program costing US$27 million, financed by various agencies. The present fleet mix is more suited to a program of 70% construction, 30% maintenance work, and it will take some years before any replacement program could affect a significant change in the mix as the older heavy construction units are scrapped and replaced by maintenance units. G. Recent Developments and Prospects 3.31 Loan 1196-PE was reformulated in March 1979 to support (a) stop-gap measures to halt the deterioration of maintenance capability and (b) the preparation of a comprehensive rehabilitation program. The stopgap measures were directed at improving the capacity of the equipment fleet and workshops through purchase of spare parts and initiation of a program of equipment overhaul and scrapping. A condition for disbursing on spare parts purchases was that SEM engage the technical assistance (para 3.27). In the framework of the reformulation, the Government undertook to increase highway maintenance allocation and has actually provided substantially more than agreed, as follows: Maintenance allocation (US$ equiv.) 1979 1980 1981 Planned 19.6 21.2 23.0 Actual (budget) 22.4 33.8 38.4  - 18 - 3.32 The technical assistance to SEM, which is also assisting in preparing a program for equipment renewal and establishing adequate stocks of spare parts, started in September 1980, with the overhaul program as its first priority. However, engaging consulting services to prepare the road rehabilitation program was further delayed by the change in MTC"s management and is starting a year later. Since these studies would not be available before mid-1982, a first tranche of rehabilitation subprojects of obvious priority was identified and is included under the proposed project. The proposed project would also provide additional spare parts and services for an accelerated and expanded equipment overhaul program. 3.33 The ambitious construction program and the urgent need for rapid advance in maintenance and rehabilitation is above the capacity of MTC as presently organized and staffed. The new MTC management quickly recognized the current inadequacies, as well as the underlying salary and career prospect problems, and initiated remedial measures: (a) Reorganization of DGTT (it has been renamed the General Directorate of Highways, DGC) and its field offices was approved by the legis- lature in May 1981. Although all the details of the new organiza- tion have not been finalized, the underlying concepts are: (i) separation of highway infrastructure responsibility from matters related to traffic and transport services (public transport licensing, vehicle registration, accident monitoring and prevention, and trucking and railway regulations); (ii) separation, in the field, of road maintenance from all other activities; and (iii) responsibility for both operation and maintenance of equipment to rest under a single head at field Departmental level, with the central equipment service responsible for major repairs, workshop procedures, equipment fleet planning and support services. (b) Employment of Consultants for all project type work, including preparation of designs, construction supervision and management of force account works. (c) Reorientation of the Departmental (field) organization exclusively toward road maintenance and equipment management. (d) Integrating equipment management by making it the responsibility of the equipment users (Departments). 3.34 MTC's management is also aware that, in order to attract high-caliber professionals, it will need to offer better salaries. This problem can, how- ever, be resolved only in the medium term within the more general context of conditions of Government service. In the short term, MTC has transitional authority, under the reorganizational law, to establish special conditions of service and pay for engineering and technical staff. The proposed project  - 19 - would include contracting the services of individual consultants (para 5.07) in order to strengthen DGC's management and also to provide on-the-job training to junior engineers who would be recruited by MTC. The Plan of Action (para 5.07) provides that, not later than June 30, 1983, MTC would, to the extent permissible by law, propose adequate personnel grade classifications and salary levels for permanent staff in DGC and SEM. During negotiations, the Government agreed that such classifications and salary levels would be introduced by January 1, 1984. 3.35 Road maintenance efforts by MTC need vigorous and rapid improvement and expansion. A three-year road maintenance program (1982-1984) with specific physical and institutional targets and estimated funding requirements, includ- ing the start of contracted periodic maintenance in 1982, would be adopted by MTC (Chapter VI). The proposed project would support this program by providing financing for: (a) training; (b) spare parts and services for accelerated overhaul of broken-down equipment; (c) workshop improvements and equipment; (d) urgently needed light routine maintenance equipment; and (e) engineers (individuals or a consulting firm) to reinforce maintenance management. 3.36 Two pending matters, which would have an important impact on imple- menting the proposed program, remain to be resolved. First, the legislation which would establish the Corporaciones de Desarrollo in each political department, and which would define their organization and functions, is still being prepared by the Government. This legislation would clarify the role and participation of departmental and municipal authorities in road matters, as well as the role foreseen for MTC in providing assistance and support. Second, the internal reorganization of the highway organization DCG, within MTC, has not been completely defined. In particular, the proposals for management of equipment operation and repair, as well as for planning and controlling the use of maintenance resources, are incomplete. In 1982, the existing semi-independent ORDEs would continue to exist, although MTC would have control of the entire national road maintenance budget and therefore would, in practice, control road maintenance staff even in the areas under ORDE's jurisdiction. Since MTC's maintenance efforts would initially focus on the more important roads in the network (para 6.07), the lack of full defini- tion on these points should not delay introducing basic improvements in both management and organization. IV. COMPLETED AND ONGOING HIGHWAY PROJECTS 4.01 The Bank has made a total of 13 loans to Peru in the transport sector, with an effective lending of US$277.3 million if a canceled US$15 million railway loan is excluded. Of these loans, four were for port opera- tions, two for railways (one of which was canceled), five for highways, one for ports and highways combined and one for aviation (Annex 1). A. Completed Projects 4.02 Two highway loans were made with road maintenance as their objective (Loan 127-PE, US$5 million, 1955, and Loan 300-PE, US$10 million, 1961). Although the first road maintenance project ran into several difficulties,  - 20 - the maintenance effort was continued and expanded with considerable success under the second maintenance project. The projects were completed in 1959 and 1966. 4.03 Three highway loans have helped to reconstruct and improve the La Oroya-Pucallpa road. The first (Loan 271-PE, US$5.5 million, 1960) helped to finance construction and paving of about 166 km of the Aguaytia- Pucallpa road, the most eastern section of the 800-km central road linking Lima with Pucallpa on the upper Amazon River system. Because of difficult soils and climatic conditions, lack of experience, and inadequate engineering preparation, the road was only 80% completed when loan funds were exhausted in 1976; at that time, the Government was unable to raise funds to continue the works. Subsequently, extensive failures occurred in the Aguaytia-Neshuya section, which were later corrected by MTC. This section was included for upgrading under Loan 1196-PE, but was withdrawn when the project was reformu- lated in 1979. The second (Loan 425-PE, US$33 million, 1965) was for the La Oroya-Aguaytia section. In November 1969, the Government and the Bank agreed, after large cost overruns had occurred, partly due to inadequate engineering, to reduce the scope of the project to match the available funds; consequently, the remaining works were postponed to a second phase. The scaled-down project was completed in January 1973, 18 months after the original Closing Date (see PPAR 76-292, April 23, 1976). The third La Oroya-Pucallpa loan (Loan 1025-PE, US$26 million, July 1974) financed the remaining works (second phase) in the most critical part of the La Oroya-Aguaytia section, i.e., the 219-km Huanuco-Aguaytia section. Because of initial delays and substantial cost increases, the scope of the project was reduced in February 1978. The project as executed provided for paving of the entire section, except for about 55 km of road in highly unstable terrain, which was deferred until further geotechnical studies included in the project were carried out. It also included the purchase of a portion of the maintenance equipment required for the Lima-Pucallpa road. In addition, 200 km of feeder roads co be improved and two transport-related studies were included in the project. Construction was completed in early 1981. 4.04 In addition to the highway loans for the La Oroya-Pucallpa road, a road project (Loan 706-PE, US$30 million, September 1970) was quickly approved by the Bank in order to help reconstruct the access roads to, and within, the Callejon de Huaylas, an area struck by a violent earthquake in May 1970. The loan financed the necessary studies and subsequent construc- tion of roads. The executing agency in this case was not MTC but ORDEZA, an autonomous agency charged with the reconstruction work. The project had only been identified at the time the loan was made, and a preliminary study of alternative routes for the access road, a feasibility study, and detailed engineering still had to be carried out. Although the Bank acted rapidly to approve the loan, the time required for the studies was underestimated at the time of appraisal, and a number of difficulties developed with the con- sultants engaged to prepare them; the rate of disbursement, therefore, was slower than forecast. Once the preparation was completed, however, construc- tion under ORDEZA proceeded satisfactorily until 1976 when lack of local funds for cost overruns slowed progress. The project was completed in 1977 (see PPAR No. 3080, July 25, 1980).  - 21 - B. Ongoing Projects 4.05 Loan 1196-PE (US$76.5 million) of May 1976 financed a combined highway and riverport project for the Lima-Amazon Transport Corridor. It initially consisted of a further stage in the development and upgrading of this corridor, including completion of construction, improvement and paving of the 240 km La Oroya-Huanuco section; construction and improvement of about 110 km of feeder roads leading into the corridor; and construction of port facili- ties in the river ports of Pucallpa and Yurimaguas, expansion of the port of Iquitos and purchase of cargo-handling equipment for the three ports. Several transport studies were also included. Progress of the port component has been slow. Contracting of road works was exceedingly slow, delayed in part because or uncompleted road contracts under Loan 1025-PE and because of MTC's limited implementation capacity. However, all contracts except those for feeder roads have now been awarded. A reformulation of the projecL was agreed in 1979, concentrating on its most urgently needed components, while increasing road maintenance support and eliminating improvement of the lowest priority road section, which could not be completed within a reasonable time. All works are now under way and should be completed in 1983. 4.06 The reformulation of Loan 1196-PE started the reorientation of plan- ning toward highway rehabilitation and maintenance. Engaging the necessary consultants, however, has taken time, the delay, in part, attributable to MTC's new management taking stock of the situation, reviewing and finally endorsing the objectives of the studies and the technical assistance. Consul- tants for the comprehensive study of rehabilitation priorities, under Loan 1196-PE, started their work in October 1981. V. THE PROJECT A. Objectives and General Description 5.01 The importance to Peru's development of improved highway access to its inland regions (para 3.01) and the urgent requirement for repair and rehabilitation of the existing road network make the definition of program for both these activities the crux of the comprehensive strategy needed for improving highway infrastructure. The new Government, elected in 1980, campaigned heavily on promises to vigorously expand and improve the road network and is accordingly undertaking a very extensive five-year road program (para 1.21). The Bank's role in the continued development of Peru's transport sector is that of encouraging a suitable balance between economically sound investments in rehabilitation, maintenance and construction to support national development. 5.02 The pressing request from the President and the Government to expand and accelerate Bank financing for roads has led to plans for two successive projects so that, while preparation of a subsequent proposed highway main- tenance and rehabilitation project continues, this first project of highway rehabilitation and improvement can be initiated. Studies for such a followup project would be completed in 1982, by which time organizational changes which are being introduced by the new Government would also be defined. Institu- tional improvement within MTC, its maintenance service, and its equipment  - 22 - management would be pursued actively through continued dialogue with the Government. More efficient use of the private sector's growing capacity in engineering and construction, and of international assistance in updating highway technology and management would also be encouraged. 5.03 The proposed project would support: (a) a first tranche of road rehabilitation; (b) measures to increase maintenance equipment availability; (c) strengthening of highway administration; (d) road improvements needed for regional development; and (e) assistance to the transport sector. Partls (a) and (b) represent only a prelude to further, urgently needed action pending completion of more comprehensive programs (para 5.02). More speci- fically, the proposed project would include: (I) Road Rehabilitation (195 km) 5.04 Civil works, detailed engineering and supervision of construction for a part of the first tranche of road rehabilitation comprising three paved road sections, namely: (i) Morococha-La Oroya road (44 km), part of the Central Highway; (ii) Talara-Cancas road (98 km), near the northern end of the Pan-American Highway; and (iii) Piura-Paita road (53 km), connecting the major cotton center of Piura to the port of Paita. Improvement standards and costs are given in Table 5.1 and a description of the road sections is in Chapter VI. 5.05 Consultant services for detailed engineering of a second tranche of road rehabilitation works and a pilot geotechnical project (to introduce state- of-the-art slide stabilization techniques), with construction expected to start in 1983. The scope and location of these projects would be established by the ongoing rehabilitation study. (II) Improving Maintenance Equipment Availability 5.06 The proposed project would include acquisition of spare parts, contracted services and workshop improvements to expand and accelerate equip- ment rehabilitation (para 6.11) as well as procurement of some light equipment needed for routine maintenance (Table 5.2). (III) Strengthening of Highway Administration 5.07 Steps needed to strengthen: (a) highway administration; (b) MTC's capacity to implement the project; and (c) road maintenance and equipment management are given in a Plan of Action (Annex 2), which was discussed and agreed with the Government during negotiations. In support of this Plan, the project would include:  - 23 - (i) contracting of about 17 consultants, to serve as in-line and advisory MTC staff for periods of one-and-a-half to two years (para 6.14); (ii) implementing a training program for SEM and DGC operational staff (para 6.15); and (iii) installation of an improved vehicle weight control system including technical assistance services and equipment. (IV) Road Improvements in Support of Regional Development (400 km) 5.08 Civil works, detailed engineering and supervision of construction are included to improve the main roads serving two important and developing regions: (a) part of the Selva Central area, whose potential for development was established in a study financed under Loan 1196-PE, and (b) the Rio-Mayo area, containing the Alto Mayo agricultural development project for which FAO/IBRD support is being developed (Chapter VII). The road sections which would be improved are: (a) Selva Central Area (i) Tarma-San Ramon-La Merced (53 km of the 72 km total length); (ii) La Merced-Villa Rica (56 km); (iii) Chanchamayo Bridge to Satipo (110 km); and (iv) Access to Oxapampa (about 44 km). (b) The Rio Mayo Area (v) Rioja-Moyobamba-Tarapoto (137 km). Improvement standards and costs are given in Table 5.1, and a description of the road sections is in Chapter VII. Cofinancing is being sought for the access road to Oxapampa. 5.09 The project would also include (a) the preparation of a detailed regional agricultural development program, including feeder road require- ments, for the Selva Central area served by the project roads (Annex 3); and (b) engineering studies and detailed engineering, respectively, for the road to Oxapampa (Selva Central) and the Rioja to Corral Quemado road improvement. The latter would complete an improved connection of the Mayo River area with the coast. (V) Transport Sector Studies and Assistance 5.10 The project would include (a) a study of regulatory and organiza- tional issues affecting the development of coastal shipping, including insti- tutional aspects of developing integrated cabotage/trucking services along the coast (Annex 4); (b) an institutional study to define the organization and procedures needed to establish a separate channel for local authorities to obtain financing for feeder and access roads; and (c) technical assistance to strengthen OSP/DGC investment planning and scheduling (para 3.15).  - 24 - 5.11 Implementation of the project is expected to take about four years (1982-1985). Further description, economic evaluation and specific covenants concerning each element of the project are given in subsequent sections of this Chapter and in Chapters VI and VII. B. Cost Estimates 5.12 The total cost of the project is estimated at US$186 million equivalent, of which components estimated to cost US$180 million would be eligible for financing under the proposed loan with parallel cofinancing for the remainder (para 5.08). These components have an estimated foreign exchange cost component of US$93 million (about 52%) which would be financed by the Bank. A summary of project costs is given on the following page. Base costs are estimated at October 1981 prices. 5.13 The costs of spare parts, equipment overhaul, workshop improvements and maintenance equipment were prepared by SEM and their consultants. These estimates are based upon recent experience in Peru (under Loan 1196-PE) as well as worldwide experience and are adequate; they were reviewed by a Bank-- financed consultant. The startup costs of training, to cover the first two years, were based on Bank experience on similar projects. 5.14 The costs of civil works for road rehabilitation and road improve-- ments are based on detailed engineering prepared by Peruvian consultants and MTC, except for the La Merced-Oxapampa section (15% of total civil works costs) for which preliminary engineering studies are available. This is sufficient to avoid the risk of major cost increases due to insufficiently precise bills of quantities. The relatively high average cost of road rehabil- itation, about US$160,000 per km, reflects the large amount of pavement strengthening and complete pavement reconstruction required to support the forecast traffic. It also reflects the need to raise the grades and improve drainage along portions of the roads. Road improvement costs vary from as much as US$515,000 per kilometer, in the difficult Carpapata descent between Tarma and San Ramon, to US$120,000 per kilometer for the paved sections of the Tarapoto-Moyobamba-Rioja road. 5.15 Unit prices have been based upon recent bids for similar work adjusted for price escalation. Supervision cost estimates, amounting to about 12% of construction costs, are based on past experience in Peru, including an allow- ance for additional engineering by the supervising consultants, particularly additional borings, and their assistance to MTC in requesting and evaluating bids. Physical contingencies are set at 15% for construction and rehabilita- tion, reflecting uncertainty concerning the condition of existing pavement and the difficulty of road construction in the Andes. 5.16 Estimates of the foreign exchange cost component for civil works are based on an analysis of contractors' bids (including taxes of about 15%) on current Bank-financed projects (materials, fuel, asphalt, equipment, spare parts, labor and overheads). It was assumed that one-third of the works would be awarded to foreign contractors. Under the current Bank-financed project, the ratio is lower, but the pressure of the stepped-up construction program on the local contractors is already being felt, and more foreign firms are currently participating in bidding procedures than was formerly the case. Peru is presently a net importer of construction equipment, spare parts and  - 25 - COST ESTIMATES (millions US$) 1/ Bank Participation Local Foreign C Total Amount (M) Rehabilitation, Maintenance and Institutional Strengthening A. Road Rehabilitation Program (i) Civil works for first tranche (195 km) 15.00 16.10 (52) 31.10 (ii) Construction supervision of first tranche (12% of A (i)) 1.85 1.85 (50) 3.70 (iii) Detailed engineering for A(i) 0.28 0.12 (30) 0.40 (iv) Detailed engineering for 1983 roads 0.70 0.30 (30) 1.00 (v) Detailed geotechnical engineering 0.12 0.28 (70) 0.40 SUBTOTAL A 17.95 18.65 36.60 17.60 (48) B. Improving Equipment Availability (i) Spare parts to complete overhaul program 0.38 3.82 (91) 4.20 (ii) Contracted services for overhaul program 0.65 0.35 (35) 1.00 (iii) Workshop improvements and equipping 1.05 1.95 (65) 3.00 (iv) Maintenance equipment 0.27 2.73 (91) 3.00 SUBTOTAL B 2.35 8.85 11.20 8.85 (79) C. Improving Highway Administration ((i) Specialists for in-line and advisory positions 0.90 0.50 (35) 1.40 (ii) Training Program 0.33 0.87 (73) 1.20 (iii) Vehicle weight control system 0.12 0.28 (70) 0.40 SUBTOTAL C 1.35 1.65 3.00 2.10 (70) Road Tmprovements in Support of Regional Deoeld1ment D. Roads (i) Civil works for 219 km in Selva Central area 25.73 23.77 (48) 49.50 (ii) Civil works for 137 km in Alto Mayo area 6.60 6.10 (48) 12.70 (iii) Detailed engineering for B(i) & (ii) 1.12 0.48 (30) 1.60 (iv) Construction supervision (12% of B(i) & (ii)) 3.70 3.70 (50) 7.40 SUBTOTAL D 37.15 34.05 71.:0 34i96 (48) E. Studies (i) Integrated development study in Selva Central 0.40 0.60 (60) 1.00 (ii) Institutional study for feeder road financing 0.08 0.12 (60) 0.20 SUBTOTAL E 0.48 0.72 1.20 0.84 (70) Transport Sector Management F. Studies and Assistance (i) Coastal corridor operations study 0.12 0.28 (70) 0.40 (ii) Planning assistance to MTC 0.10 0.10 (50) 0.20 SUBTOTAL F 0.22 0.38 0.60 0.41 batse Cost - Bank fitanced componients- 59.50 64.30 123.80 64.00 (52) G. Contingencies (i) Physical (15% A+D and 10% others) e.95 9.05 18.00 9.10 (ii) Price (26%)3/ 18.55 19.65 38.20 19.90 Total Cost - Bank financed comnonents 87.00 93.00 180.n0 93.00 (52) H. Cofinanced Component - Aecess Road to Oxapampa - Total Cost including Contingencies 3.00 3.00 6.00 TOTAL PROJECT COST 90.00 96.00 186.00 1/ Price equivalents in soles not given. The current policy of constant adjustment of the exchange rate would continue to be pursued, making the sole equivalent vary rapidly. 2/ October 1981 prices. 3/ Based on cost escalation in US$ terms, of 10% p.a. for 1981 to 1983 and 9% p.a. in 1984 and 1985.  - 26 - structural steel, but is self-sufficient in crude oil and its by-products, which are locally refined. However, in view of the magnitude of the Govern- ment's road construction program, Peru is expected to become a net importer of asphalt by 1982. Locally produced goods, raw materials and manufacturing processes also have significant foreign exchange components. The civil works foreign exchange component averages about 50%, with road rehabilitation slightly higher and road improvement about 2% lower. Detailed engineering is being prepared by local consultants, but construction supervision would be entrusted to joint ventures of foreign and local firms. The estimated foreign exchange components for these services average about 30% and 50% respectively. Detailed engineering for the pilot geotechnical project would be carried out by a mix of foreign and local consultants, for which a foreign exchange component of 70% has been estimated. Some specialists for strengthening the highway administration, in particular in fields of high technical expertise such as geotechnical engineering, would have to be contracted internationally although most in-line positions would be filled locally. The average foreign exchLange component for all these services has been estimated at 35%. Maintenance equipment and spare parts are imported and have a foreign exchange component of 91%, allowing for local dealer costs. The equipping and improving of workshops would have a foreign exchange component of about 65%, and contracted services for equipment overhaul an estimated 35%. For transport studies, technical assistance and training, the estimated foreign exchange components range between 75 and 50%, depending upon the expected participation of foreign experts and the technical equipment importation which is included; the average for these services is about 70%. The project includes 250 man-months of technical assistance (para 6.14), of which about 140 man-months would be for foreign consultants and about 110 man-months would be for local professionals. This estimate does not include services for engineering, construction supervi- sion, contracted training staff and experts to strengthen DGC. The man-month cost for foreign consultants (including salaries, costs, fees, international and local travel and subsistence) was estimated to average US$10,800; the average local man-month cost was estimated to be US$2,300. C. Financing and Disbursement 5.17 The proposed Bank loan of US$93.0 million would finance about 50% of project expenditures. For the road access to Oxapampa, cofinancing would be used with KfW as the most likely source of funds. Thus, for the remaining project cost, about US$4.5 million would be provided as cofinancing and US$88.5 million by the Peruvian Government. The loan would be made to the Government of Peru, with MTC responsible for project execution. 5.18 Retroactive financing for a total amount not exceeding US$1 million would be allowed for consulting and other services contracted after March 1981. Specifically, the costs of consulting services for design of the Tarapoto-Rioja, Chanchomayo-Satipo and La Merced-Villa Rica-Oxapampa road sections and for design review, before start of construction, of all project roads, would be eligible for such financing. The cost of supervising consultants to assist MTC with contractors prequalifications, updating cost estimates and evaluating bids on the first groups of contracts, which would be bid as soon as possible, would also be eligible. Costs of consulting services and mapping for the agricultural development study in the Selva Central area would be eligible. Similarly, the services of contracted individual engineers (consultants) to fill positions needed: (a) for completing project preparation or strengthening MTC highway operations; (b) for extending staff under ongoing technical  - 27 - assistance to SEM (para 3.26), which is now being financed under Loan 1196-PE, in particular of a training specialist; and (c) for overseas courses for training officers and additional services to accelerate equipment overhaul, would also be eligible. (i) Working Fund for Financing of Civil Works 5.19 Under the ongoing and previous highway loans, the interval between payment to contractors by MTC and receipt of disbursements from the Bank has typically been about three months. MTC, in consequence, has had to provide, from its budget, the funds to pay the externally financed share of contracts, partially financed by the Bank, during this interval. This situation is serious in view of the rampant inflation in Peru (57.9% in 1978, 67.7% in 1979 and 58.2% in 1980) and a corresponding lag in adjustment of exchange rates. This time lag in disbursements results in a substantially lower real participation (about 10%) in financing by the Bank. MTC's difficulties in providing funds for such payments have resulted in delays in payments to contractors, which have contributed to delays in project implementation. MTC's allocated budget provides funds only for its eventual share of such contracts. While the budget law provides for total cost allocation for each investment regardless of its particular financing, funds released to MTC are limited to the Government contribution only, e.g., the local cost component. Although the Ministry of Economy and Finance does, in fact, provide MTC funds earlier than programed from other items in its approved budget, these funds are not additional to the annual budget but are "borrowed" from other MTC projects. This creates the cash-flow problem for MTC in meeting its total obligations and additional complications on any undischarged commitments which are carried over into a subsequent fiscal year. 5.20 To correct the situation, two accounts would be established. The Government would establish and maintain a Revolving Fund in the amount of eight weeks' estimated expenditures for civil works. The Bank would establish and maintain a Working Fund, which would provide immediate replenishment of the Bank's share of project expenditures to the Government's Revolving Fund. MTC may request the Bank to make payments from the Loan Account into a Special Account, to be opened in the Banco de la Nacion. The amount on deposit in the Special Account may be increased or decreased by the Bank as required for project execution, but should not exceed US$4.8 million (estimated three months Bank share of local expenditures for road rehabilitation and road improvement). Payments from the Special Account would be made by Banco de la Nacion against withdrawal applications to reimburse the Government's Revolving Fund for the Bank's share of project expenditures. This arrangement would reduce the time required for MTC to obtain the externally financed share of its budget to about two weeks, which would resolve its cash-flow problem. Withdrawals from the Special Account would be made on the basis of the exchange rate in effect on the date of disbursement from the Special Account. Banco de la Nacion would forward the withdrawal applications to the Bank for review and replenishment of the Special Account. Banco de la Nacion would forward monthly Statements of Account reflecting transactions to the Special Account and would forward, not later than four months after the end of each fiscal year, the results of an audit of the Special Account. The Bank would recover the amounts advanced to the Special Account by reducing the disbursement percentage when the undisbursed balance under the road rehabilitation and road improvement components reaches twice the amount of the advances made into the  - 28 - Special Account. During negotiations, agreement was reached on establishment, by the Government, of the Revolving Fund by August 31, 1982 and on the pro-- cedures for replenishment of such Fund by the Government and from the Special Account. Agreement was also reached concerning the operation of the Special Account. (ii) Disbursements 5.21 Disbursement of the Bank loan would be made against full documenta- tion, as follows: (a) civil works including road rehabilitation, road improvements and workshop improvements - 48% of total expenditures. Since, by law, MTC is required to place, in interest-bearing bank accounts, the 5% retained from contract payments for civil works, disburse-- ments would actually be made at the rate of 51% of the actual monthly payments, excluding the retention guarantee. The contractors would eventually receive, from MTC, the deposited retention funds, plus accrued interest; (b) road maintenance equipment, workshop equipment, spare parts, vehicle weighing equipment and training abroad - 100% of foreign expenditures; (c) consulting services for detailed engineering and construction supervision - 100% of foreign exchange expenditures under the contract and 25% of local currency expenditures to cover indirect foreign exchange costs; and (d) transport sector studies, technical assistance, including contracted staff for in-line and advisory positions, contracted services for the overhaul program and contracted services for training - 70% of total expenditures. 5.22 The estimated disbursement schedule, reflecting realistic progress in project implementation, in line with past experience in Peru (Table 5.3), is summarized below. The schedule anticipates 20% larger cumulative disbursement at the end of FY1984 than the average of Bank highway projects in Latin America. This is reasonable in view of the establishment of the Working Fund and of the measures to strengthen MTC's administration which are included in the project. The closing date would be June 30, 1986. US$ millions End of F.Y. 1983 1984 1985 1986 Annual 18.30 32.40 31.20 11.10 Cumulative 18.30 50.70 81.90 93.00  - 29 - (iii) Internal Accounting Procedures and Auditing Requirements 5.23 MTC's internal accounting system has been reviewed and found gener- ally adequate for the identification and certification of Bank project-related financial transactions. The format, content, frequency and timing of financial reports were confirmed during negotiations. Internal audit of MTC's accounts is carried out by an Auditoria; external audit of all Government-related transactions is the responsibility of the Contraloria General de la Republica. The capacity and capability of Contraloria to audit the proposed project-related financial transactions has been investigated, and it is felt that, subject to some safeguards, and taking into consideration the simplicity of MTC's account- ing system and the prompt production of periodic financial reports, Contraloria could conduct a satisfactory audit of the Bank-financed transactions, with audit reports to be furnished to the Bank within four months from the end of each fiscal year. After the first year, should Contraloria not be satisfactory, private auditors would be appointed. Agreement on appointing an auditor, and on the scope of financial reporting and auditing requirements, was reached during negotiations. Details on MTC's accounting system, tentative financial reporting arrangements, and particulars of Contraloria are in Annex 5. D. Implementation 5.24 Execution of the project would be the responsibility of MTC. Following the recent decree restructuring MTC and creating the Directorate of Highways, which provides the framework for improved administration of the highway subsector, (a) strengthened management in DGC and (b) definition of responsibilities and delegation of authority are required in order to make the reorganization effective. Key measures needed to strengthen MTC's capability to implement the proposed project are contained in a Plan of Action (para 5.07). 5.25 The project would be carried out over the period 1982-1985. The implementation schedule (Table 5.4) was reviewed and confirmed during negotia- tions. Most civil works would be contracted in 1982 with construction scheduled mainly in 1983-1984. The other project components would be carried out in the 1982-1983 period. Consultants, satisfactory to the Bank, would be engaged for construction supervision, studies and technical assistance for training. Additional mechanical staff and outside services for accelerated equipment overhaul would be contracted once sufficient spare parts are received. Managers, engineers and technicians to fill in-line or advisory positions or to provide technical assistance services for strengthening highway administration would be contracted in accordance with a schedule which was agreed at the time of negotiations and is satisfactory. Filling specific selected key positions (para 6.14) would be a condition for loan effectiveness. 5.26 The Special Projects Unit under the Consejo de Ministros would be responsible for contracting and managing the consulting services for the development study of the Selva Central areas affected by project road improve- ments. MTC would provide assistance in formulating and supervising the trans- port infrastructure component of this study. As part of the Plan of Action, agreement was reached concerning the dates by which these studies would be started.  - 30 - 5.27 The project would provide for MTC expanding the role of the Inter- National Loans Office established for the Project Coordinator under Loan 1196-PE, which would become specifically responsible for (a) providing consoli- dated reporting on project monitoring indices (Annex 6); and (b) preparing the project completion report. During negotiations, it was agreed that MTC would provide the office with the staff, budget and support needed to carry out these responsibilities. E. Procurement 5.28 Construction contracts for improvement and rehabilitation works would be procured by international competitive bidding (ICB) in accordance with Bank Guidelines dated March 1977. The new contracting regulations, January 1981, approved by supreme decree, impose no special restrictions on foreign contractors' participation in civil works, and provisions in the budget law overcome the problem of mandatory joint ventures (para 3.18). Bidding would be in four groups of contracts, each of two to four geographi- cally proximate lots, at about two-month intervals. Contracts for individual lots are expected to range between US$3.5 million and US$17.0 million. Contractors would be prequalified for one or more lots, depending upon capacity. The grouping of lots and conditions of bidding were confirmed at the time of negotiations. 5.29 Construction supervision, detailed engineering for rehabilitation of further highway sections and engineering studies would be conducted by consultants engaged in accordance with Bank Guidelines dated August 1981. International and local.consulting firms would be prequalified and selected to supervise construction of each group of contracts. Joint ventures of international and local firms would be required in most cases in order to strengthen local capability, which is being strained by the boom in roadworks. The arrangements to prequalify international/local joint ventures were con- firmed at the time of negotiations. 5.30 Road maintenance equipment and workshop tools, amounting to about US$4.5 million, would be procured by ICB in accordance with Bank Guidelines. Qualified local suppliers of equipment produced in Peru and those from Cartagena Agreement member countries participating in international competit-ive bidding would be accorded a margin of preference of 15% or the prevailing custom duty, whichever is lower. Spare parts for overhaul of specific makes of equipment, amounting to about US$3.8 million, would be defined with the assistance of consultants (para 6.11) and would be procured by locally adver-- tised competitive bidding or directly from established dealers. The program for such procurement would be reviewed and agreed with the Bank. Improvements to workshops and training facilities, amounting to about US$1.5 million, would be advertised locally, in accordance with local competitive bidding procedures, which are satisfactory. F. Monitoring 5.31 MTC would be responsible for monitoring and reporting, through the Project Coordinator's office (para. 5.27), on progress of (a) project components and (b) measures included in the Plan of Action. Project monitor- ing indices, given in Annex 6, provide for regular reports concerning: (a) civil works and consulting services, with progress compared to the implementation schedule (Table 5.4) and Plan of Action key dates;  - 31 - (b) equipment availability, by comparing MTC's operational equipment with its total equipment; (c) road maintenance execution, measured by kilometers of road maintained; (d) staff training and recruitment, by showing number of staff trained and comparing number of professional and technical staff to required staffing levels; and (e) traffic volumes using the improved and rehabilitated roads. G. Project Risks 5.32 Cost estimates for road rehabilitation and road improvement works have been based on detailed engineering or carefully prepared preliminary engineering studies (para 5.14). The arrangements for supervision are adequate and reflect minor corrections of weaknesses encountered under previous projects where the experience was generally adequate. Nevertheless, the risk of cost overruns is higher on the road improvements in mountainous sections than in other non-Andean countries in the Region. 5.33 MTC's capacity to manage the project, as part of the Government's entire road program, is the area of greatest risk to timely project implementa- tion. The project provides special measures to strengthen MTC's capacity in order to reduce this risk. 5.34 The Ministry of Economy and Finance has confirmed that sufficient counterpart funds would be made available to MTC, and the establishment of the Working Fund (para 5.20) should avoid delays in payments to contractors, which have sometimes occi;-red in previous highway projects. VI. ROAD REHABILITATION AND MAINTENANCE A. Road Rehabilitation 6.01 A road rehabilitation program (1983-1986) is being prepared under the Lima-Amazon Corridor Project (Loan 1196-PE) by consultants to MTC (para 3.31). The program would have four main objectives: (a) to identify the road sections requiring road rehabilitation over the 1983-1986 period and to provide preliminary engineering sufficient to establish the nature and costs of the required work; (b) to define the periodic maintenance requirements which would need to be contracted during the same period in order to supplement MTC's maintenance program; (c) to develop a pavement management system for systematic planning, programing and engineering of pavement resealing, strengthening and rehabilitation; and (d) to define a pilot program to introduce modern techniques and equipment for countering landslide problems.  - 32 - 6.02 Preparation of the rehabilitation program would be complete in August 1982, and subsequent detailed engineering for the roads to be contracted in 1983 and 1984 would be prepared by consultants financed under the proposed project (para 5.05). It is expected that about 800 km of pavement reconstruc- tion or strengthening and 3,000 km of resealing and regraveling over a four- year period would result from this study. At the time of negotiations, the Government confirmed that, based on the study recommendations, by September 1, 1982, in consultation with the Bank, it would adopt a four-year road rehabili- tation program. 6.03 The urgency of checking the continuing deterioration of road condition demanded immediate measures, as well as future plans. The new Government, by late 1980, identified about 700 km of roads urgently requiring improvement or rehabilitation as a first package of its eventual five-year target of improving .and rehabilitating 2,800 km of roads; 312 of these roads identified as requiring urgent rehabilitation were scheduled for execution starting in 1981 or early 1982. Of these, 117 km are being financed entirely by the Government, and 195 km are included in the proposed project. 6.04 The first tranche of the rehabilitation program which would be contracted in 1980 would comprise three road sections (Annex 7), namely: (a) Morococha-La Oroya road (44 km). This road section is a part of the Central Highway and connects the San Mateo-Morococha road section to the Oroya-Pucallpa road. Paving of both abutting sections is being financed under ongoing Loan 1196-PE. The rehabilitation would strengthen or reconstruct existing pave- ment, including passage through the mining town of La Oroya. (b) Talara-Cancas road (98 km). This road section is at the northern end of the Pan-American Highway, not far from the Ecuadoran border. Rehabilitation would include extensive reconstruction and strengthening of existing pavement, raising grade in some sections subject to flooding, and construction of protective works to counter erosion along two tortuous sections in hilly terrain. (c) Piura-Paita road (53 km). This road connects the major cotton center of Piura to the port of Paita. The rehabilitation would include a 7-km section of the Pan-American Highway and would involve reconstruction and strengthening of existing pavement while also raising road grade along about 25 km of road to reduce blockage by sand dunes. The rehabilitation of two other road sections, Tanaka-Chala (70 km) and Huanta-Ayacucho (47 km), for which less detailed engineering was required, has been undertaken by MTC with local financing in order to advance the start on these urgently needed projects.  - 33 - B. Road Maintenance Program 6.05 MTC's capacity to execute road maintenance is insufficient to initially carry out more than a limited program. The constraints include: (a) lack of sufficient and appropriate equipment; (b) insufficiently trained staff, including engineers; and (c) poor planning and management. These problems are being addressed under the proposed project. The training program, the equipment overhaul program, purchase of additional maintenance equipment and technical assistance to SEM, which would establish equipment renewal and procurement needs, would increase the capacity of the departments to execute a full program. During negotiations, the Government confirmed that, by July 31, 1982, it would present its proposed maintenance program for 1983 for review and comment by the Bank and that, annually thereafter, it would present an updated program, including budget requirements, for the succeeding year. 6.06 The objectives of the present short-term maintenance program, 1982-1984, are: (a) to obtain immediate, more efficient utilization of avail- able resources; (b) to concentrate these resources on maintenance of priority roads; (c) to start contracting supplemental maintenance works; and (d) to expand the roadnet covered by maintenance as additional resources become available. The basis for planning road maintenance requirements was developed and tested in two pilot departments, by MTC and its consultants, during preparation of the proposed 1978-1981 program (para 3.25). Since that time, little of the recommended program has been executed, and both the equipment fleet and road conditions have changed. In addition, little of the training recommended as a part of the program has been conducted, and the work-force characteristics have been adversely affected by cutbacks of skilled workers in 1978-1979 and losses to the private sector, which are continuing. 6.07 Physical road maintenance targets for 1982-1984, reflecting pre- liminary estimates of current field capacity and equipment constraints, are shown on the following page. Programing for maintenance work would initially give priority first to paved roads and second to gravel roads. As shown, MTC would be able, by 1984, to meet 90% of the paved road routine maintenance requirement and, respectively, 80% and 50% of those of gravel and earth roads in the priority network (para 3.25) by 1984. Detailed estimated budget requirements for labor, equipment, fuel, spare parts and materials are given in Table 6.1.  - 34 - Road Surface Type Percentage of Maintenance Requirements to be Met by MTC (R = routine, P = periodic, E = emergency) 1982 1983 1984 R P E R P E R P E Priority Network Paved (7,000 km) 60 50 100 75 60 100 90 70 100 Gravel (12,000 km) 50 50 100 60 60 100 80 70 100 Earth (13,000 km) 30 - 100 40 - 100 50 - 100 Remaining Network essential 100 essential 100 essential 100 (27,000 km) repairs repairs repairs Budget Requirement (in US$ millions, October 1981) Recurrent 26.43 29.84 33.94 Periodic (contracted) 12.50 15.00 17.50 Total 38.93 44.84 51.44 6.08 The program above also includes contracted sealing and regraveling, starting in 1982. The full requirements for such work would be developed as a part of the road rehabilitation program (para 6.01), to overcome the backlog requirement. Also, the capacity of MTC's maintenance organization to plan for and to have this work executed must be developed. During negotiations, the Government confirmed that, not later than September 1, 1982, it would present its proposed road rehabilitation program for 1983, for review and comment by the Bank, and that annually thereafter it would present an updated program for the succeeding year. 6.09 Annual recurrent expenditures for road maintenance would grow from about US$39 million in 1982 to US$51.5 million in 1984 (1981 prices), towaLrd an estimated eventual level of about US$60 million annually once the rehabil- itation program is complete. Additional capital expenditures of about US$12 million annually would be required for equipment renewal and workshop improve- ments. These figures would need to be reassessed, as the program progresses, to reflect actual equipment utilization and MTC policy regarding equipment rebuilding as an alternative to renewal. Projected expenditures for the Maintenance Program and improvements to the equipment fleet and workshops in the 1982-1984 period would average about US$67 million annually. 6.10 An equipment renewal program is being prepared by the consultants who are providing technical assistance to SEM (para 3.32), with the object of attaining systematic annual replacement of wornout maintenance equipment and vehicles, and concurrently correcting the bias in the composition of the  - 35 - existing fleet, which is structured for construction rather than maintenance needs. This program would also be ready by the second quarter of calendar 1982. The Government confirmed, during negotiations, that, based upon its review of the consultants' recommended program, not later than September 1, 1982, it would present its proposed program of equipment renewal for 1983 for review and comment by the Bank and that, annually thereafter, it would present an updated program for the succeeding year. 6.11 Measures to increase equipment availability have already been initiated. The program for overhaul of broken-down equipment (para 3.31), with spare parts purchases financed under the ongoing loan, is expected to repair 138 units of equipment, mostly dump trucks and motorgraders, by mid- 1982. The spare parts purchase program would also establish an initial stock of fast-moving spare parts needed for preventive maintenance of all MTC's dumptrucks and heavy equipment. Expansion and acceleration of this program, under the proposed project, would permit the rehabilitation of another 275 units of equipment and vehicles by mid-1983. The proposed project would include: (a) acquisition of spare parts to complete the overhaul program of a further 275 units of equipment and vehicles needed for road maintenance; (b) contracting for services by suppliers and/or contracting addi- tional mechanical staff to accelerate the repair works, including further technical assistance to SEM; (c) improving workshops, including acquisition of workshop equipment and tools needed for the repairs and preventive equipment main- tenance; and (d) acquisition of additional light equipment and vehicles needed to improve MTC's capacity to perform and supervise routine maintenance. As a part of the road maintenance budget requirements (para 6.07), agreement was reached with the Government during negotiations on the annual value of fast-moving spare parts which would be procured to support repair of the presently operating and overhauled equipment units. The Plan of Action includes the reports of spare parts purchases, which would be maintained for review by the Bank. 6.12 The program of equipment rehabilitation is also being used for on-the-job training of mechanical staff. Regional shop mechanics have been brought to Lima, where the majority of units have been concentrated to participate in overhaul operations and will be returned to their regional workshop to continue working on overhauls of similar units. Additional mechanics would also be contracted by MTC to accelerate overhaul operations, and some, if not all, would subsequently be kept on as MTC staff. The purchase of needed workshop tools is being financed under the ongoing loan with addi- tional purchases included under the proposed project.  - 36 - C. Strengthening of Highway Agencies 6.13 Recent changes, which have started to establish a framework for strengthening DGC's management of highway maintenance, were discussed in Chapter III. However, important policy directives need to be introduced in order to implement MTC's maintenance policy. Steps of major importance are: (a) classifying the roadnet and establishing the respective responsi- bilities of DGC's headquarters division and field offices for engineering, construction and maintenance of each class of road:; (b) establishing the responsibility, authority and financial autonomy of the field offices in planning and carrying out maintenance; (c) establishing maintenance priority over force account construction in the allocation and use of equipment; and (d) introducing contracted maintenance. A schedule of key actions needed to meet these objectives is included in the Plan of Action (para 5.07). 6.14 DGC's management and technical capacity is severely strained. To strengthen DGC, experienced managers and professionals would be contracted, for a period of about two years, to work in in-line and advisory positions and to help supervise and train more junior staff. The positions, which were confirmed prior to negotiations, are given below. The schedule for contracting engineers or managers to fill all positions was reviewed and is satisfactory. Engaging satisfactory individuals or consultants to fill five key positions, which were agreed during negotiations, would be a condition for loan effec- tiveness. Positions Number Man-Years Engineer Managers * 5 10 Construction Managers 2 4 Design Engineers 2 4 Geotechnical and Soils Engineers 3 6 Maintenance Engineers 3 6 Equipment and Workshop Managers 2 4 TOTAL 17 34 * Key Positions to be filled as a condition for effectiveness (para 5.25).  - 37 - D. Training 6.15 MTC has contracted an expatriate training specialist to establish, by February 28, 1982, the initial phase of MTC's training program for 1982- 1983. Training activities under the initial phase would begin in May 1982. The program for the subsequent phase would be established by June 30, 1982. The entire four-year (1982-1985) training program would strengthen and expand ongoing training activities and would be especially addressed to supervising engineers, road foremen, equipment operators, drivers, mechanics and store- keepers. The program would train about 1,500 personnel, 850 from DGC and 650 from SEM, and would include the establishment of a permanent Training Division; the recruitment of training specialists/instructors; the purchase of training equipment and materials; the organization of seminars for senior staff; training arrangements with SENATI and other suitable institutions outside MTC; and short courses abroad for training officers and middle and high-level staff (Annex 8 and Table 6.2). The Plan of Action (para 5.07) provides that, by June 30, 1982, MTC would furnish to the Bank the proposed training program and would provide the road maintenance equipment for field training and an adequate supply of spare parts for the training of operators and mechanics. E. Economic Evaluation 6.16 The economic evaluation of the road rehabilitation has focused on the selected road sections. The economic justification of the other measures for strengthening maintenance and management and improving equipment availability and training has not been evaluated in detail, but it would, on the basis of comparison with similar projects, yield at least equal or higher benefits than rehabilitation work. For these road sections, the main benefits considered were savings in vehicle operating costs, time savings and savings in the cost of maintenance of the road. Most important of these are the vehicle operating cost savings calculated in a way broadly similar to that of the Highway Design Model. Existing traffic volumes and historic growth trends were obtained from a program of traffic counts on main roads, and projected growth estimates were prepared using origin-destination (0-D) survey results and projected economic growth of the different areas served by each road. Traffic volumes and growth rates are shown in Table 6.3. 6.17 Vehicle operating costs were estimated on the basis that new or rehabilitated pavement would be in good condition while the existing badly paved surface condition would not change during the period of analysis. Table 6.4 shows the basic vehicle operating costs, i.e., those calculated for the ideal situation of a good surfaced, straight, flat and congestion-free road. Relevant vehicle operating costs were calculated for each type of vehicle by adjusting the basic costs to the conditions and geometric character- istics of each particular road. No consideration was given to the effect of congestion on vehicle operating costs since the ratio volume of traffic-capacity of the roads is, and will remain, relatively low, even at the end of the period of analysis. 6.18 The time cost of passengers traveling on the two north roads was also estimated, based on information obtained from an 0-D census on the Piura- Paita road. It was assumed that both the vehicle occupancy and travel motive distribution would be much the same for the Talara-Cancas road. It was found  - 38 - that 3.5 passengers and 26 passengers were the average occupancy of light vehicles and buses. Of Light vehicle passengers, 42% traveled for work motives. On buses, this figure rose to 70%. For the La Oroya-Morococha road, O-D surveys showed an average occupancy of 3.05 and 20.53 passengers for light vehicles and buses respectively; 86% of light vehicle passengers were found to travel because of work. This figure rose to 95% in buses. For people traveling as light vehicle passengers on the northern roads, a higher income level was assumed (S/. 893 per hour) than that of bus passengers (S/. 387 per hour). The values considered for the La Oroya-Morococha road were SI. 835 and SI. 280 respectively. With these hourly values based on average regional income and the average speed of each type of vehicle, a time cost value was estimated for passengers traveling because of work, for both the present and project roads. No value was assigned to passengers who travel for reasons other than work. 6.19 Maintenance costs were calculated based on MTC norms developed with the assistance of consultants in 1974-1977 (para 3.04). Differences in pavement maintenance were estimated for roads in good and present condition. Although the related maintenance activities are not carried out at present with the necessary frequency, it was estimated, for this analysis, that further road deterioration would be prevented in the without project situations by perform- ing the required maintenance. 6.20 The financial construction costs, calculated in constant soles (January 1981), were adjusted to eliminate fiscal transfer payments and to price fuel at its opportunity cost. No attempt was made to shadow price other inputs. Fiscal transfer payments were estimated, and, after marginal pricing of fuel derivatives, the coefficient of 0.85 was obtained as the ratio of economic/financial construction costs. The residual value was estimated as 46% of total rehabilitation investment costs for the Talara-Cancas road, and 40% for the Piura-Paita and La Oroya-Morococha roads. 6.21 Rehabilitation of the three project roads yielded economic rates of return for the Morococha-La Oroya, Talara-Cancas and Piura-Paita road projects respectively as follows: With time savings Without time savings Morococha-La Oroya 58% 46% Talara-Cancas 32% 28% Piura-Paita 43% 38% Table 6.5 shows the economic annual cost and benefit streams for each road project and for each road section (without time savings) and the corresponding rates of return, and sensitivity tests are provided in Table 7.4. An analysis to determine the optimum timing of investments showed that all rehabilitation projects should be carried out as planned. For the overall economic analysis of the whole project, only the estimate without time savings was used.  - 39 - VII. ROAD IMPROVEMENT AND REGIONAL DEVELOPMENT A. General 7.01 Peru's three ecological zones - the Costa, the Sierra and the Selva - have distinct agricultural characteristics. In the rainless Costa, production is possible only under irrigation and is generally a high-input, high-output mechanized activity which produces most of the agricultural export crops (cotton, sugar), as well as a high proportion of the country's food. Agricul- tural expansion is limited to those areas where irrigation is economically feasible. In the cold, high-altitude Sierra, good agricultural soil is scarce and mostly concentrated in scattered, high valleys, with the remaining areas sparsely farmed. Agriculture, both rainfed and irrigated, is traditionally a low-input, low-output subsistence activity. In both these zones, land pressure is high, and, therefore, as access to the portions of the Selva with better potential becomes possible, spontaneous movement of settlers to these zones takes place. 7.02 Even in the Selva zone, there exist considerable differences in the agricultural potential of different areas. The areas of higher potential, on account of climatic, rainfall, topographic and soils conditions, are generally found in the upper Selva regions (elev. 800-2,000 m), although the lower areas may also have relatively higher potential than barren Sierra plateaus and coastal deserts. The basic concept in the planning of the "Marginal de la Selva" road was to connect the under-utilized areas of the upper Selva to each other, as well as to the main trans-Andean roads, which traverse all three zones, and thus provide access to both the coastal markets and the Amazon basin river ports. Development of the areas roughly east of Lima and the Mayo and Huallaga river valley of the "Ceja de Selva" area in the north of Peru has been, and is, constrained by inadequate road access, which results in high transport costs and limits market access for produce. 7.03 Spontaneous settlements in these zones starts around even the crudest seasonal motorable tracks, so that a number of other important development problems also need to be addressed: land titling, erosion control, farm extension, education and provision of other basic services. However, road transport infrastructure also plays an important role in providing access for technicians, extension agents, health officials and other service officers, as well as facilitating the import of farm inputs. The road improvements in the proposed project would support ongoing or planned regional/agricultural development assistance and would encourage further settlement in areas where coordinated regional development programs could help avoid some of the ecolo- gical consequences of unguided colonization.  - 40 - B. Selva Central - Regional Development (i) Production and Potential 7.04 The potential of the Selva Central for economic development has led to a number of studies and projects to open up the area since the beginnirLg of this century. The area is relatively close to metropolitan Lima (Map IBRD 15979), and its climate, soils and topography allow a relatively wide range of agricultural use. Below an altitude of some 2,000 meters, the prevailing natural vegetation is tropical forest, with a variety of species depending on soils and rainfall. A relatively large part of the upper Selva Central has broken topography, which limits agricultural use and makes construction of infrastructure, such as roads, costly. So far, the opening-up of the area has been slow, generally starting with the cutting of the most valuable species of wood and continuing with more intensive use for vegetable production, fruit orchards and cattle raising, mainly in the valleys. On the higher slopes, forest exploitation continues, as well as a wide variety of tropical crops such as coffee, oranges, papaya and bananas (Tables 7.1-7.2). 7.05 With the broken topography of the upper Selva and, in some areas, limitations of soil quality, forestry is going to continue as a main activity with a relatively large proportion of protective forests to avoid excessive soil erosion. Closer attention to forest management, with a more vigorous reforestation program, is therefore essential. Presently, only large properties need to carry out such programs. 7.06 Known mineral resources in the Selva Central are limited to a small production of lead and zinc and the Ganso Azul (Pachitea) small oil field (1,400 barrels/day); its production is refined in the 2,500 barrel/day refinery in Pucallpa. The area, however, with high and even rainfall and rugged topography, has considerable resources of hydroelectric power, virtually unused. Several projects of a total of 11,000 MW are being studied for long- term development. (ii) Development Programs 7.07 The World Bank started discussions with INP and MTC in February 1973 with the objective of financing studies and programs for integrated development of the region. In June 1973, INP recommended forming a multi-- sectoral committee to develop terms of reference for actions to develop projects in the region, such as basic studies to be carried out to define investment priorities. Later, as a result of the institutional difficulties of a multisectoral approach, MTC, which was responsible for the largest volume of investment, began an evaluation of road projects in the area. This was done in accordance with guidelines established by the above-mentioned committee with emphasis on integrated regional development. The prefeasibility study was started by the Oficina Sectorial de Planificacion and Direccion de Ingenieria, and the Oficina de Estudios Economicos, established in 1979, finished the work in May 1980.  - 41 - 7.08 The main objective of this study was to define a transport system to permit access to, and development of, several valleys (Pachitea, Pichis, Palcazu, Tambo, Urubamba and Alto Ucayali). The final result anticipated by the proposed development was integration within the region and, with the rest of Peru, exploiting new resources for the Peruvian economy and permitting immigration into the region; the study primarily identifies the transport network required to do that. Essentially, four development areas have been identified which will progressively allow use of an additional 3,165,000 hectares and, ultimately, a settlement with a population of some 700,000 persons until year 2010. The major part of the area (85%) will permit exploitation of forestry resources. The areas are the San Alejandro-Puerto Bermudez, the Palcazu River Valley, the Pozuzo-Codo del Pozuzo in the northern part of the region, south of the road Tingo Maria-San Alejandro-Pucallpa and the Satipo- Atalaya area still further south. 7.09 There is a clear need for multisectoral coordination by the respec- tive ORDE (proposed Corporacion) for the area to plan and direct an orderly settlement and to avoid ecological degradation. This goal is met, to some extent, by the Pichis-Palcazu project office. USAID will assist the Govern- ment in developing the Pichis-Palcazu Valley, and a project unit has been established for the development of this valley. However, the Corporacion to be responsible for the area needs to be developed. The Pichis-Palcazu office (under the Prime Minister) will be the focal point for all development efforts in the region, including Oxapampa, the Chanchamayo Valley and Satipo, which are separate geographic areas. 7.10 In the Chanchamayo Valley area and other districts close to San Ramon-La Merced, around Oxapampa and between La Merced and Satipo, a greater degree of development, mostly by spontaneous settlement, has taken place over a period of years. The whole zone is very well located at a relatively short distance east of Lima, the main market, but access is still a major constraint. The latest impetus was given by the construction of the La Merced- Satipo and La Merced-Villa Rica penetration roads a few years ago, which opened up other areas of forest. The proposed project would pursue this development by improved access from the west, through the Villa Rica/ Satipo-La Merced-San Ramon-Tarma routes for a general upgrading of agricul- tural sales to the Costa and the Lima metropolitan area. It would also improve access to the Oxapampa area, for which KfW is reviewing a regional/ agricultural development project; the original colonization of this area was largely of German origin. The access road to Oxapampa would form part of this project. 7.11 Under the project, the Government would undertake, with Bank participation, a rural development study for the San Ramon-Satipo-Atalaya region, taking into account the activities of other aid agencies (USAID, KfW) and the fact that the San Ramon-La Merced and Oxapampa areas, already relatively well developed, would serve as a suitable base for required insti- tutions. This project could assist such a rural development project by the necessary specific feasibility study (see Terms of Reference in Annex 3). The study would provide a framework for longer term development of feeder roads in parts of the region. Since the production potential would take a long time to realize, possibly longer than the 30 years indicated, it would be premature to initiate any action on specific feeder roads in the context of this highway project until the study has been completed.  - 42 - (iii) Road Infrastructure Requirements 7.12 Road access to Selva Central is essentially by San Ramon-Tarma- La Oroya-Lima (295 km) or, to a much lesser extent, Pucallpa-Tingo Maria- Huanuco-Lima (783 km). The area is also served by river transport on the Ucayali River and its various tributaries and by air mainly from San Ramon. Apart from upgrading the existing roads included in the project, the completion of the Villa Rica-Puerto Bermudez and San Alejandro-Puerto Bermudez roads (also serving the Pichis-Palcazu valley) and the improvement of the La Merced- Oxapampa-Pozuzo roads are required for using the potential of the area. In the longer term, the improvement of the airport of Atalaya and the Huacho-Oyon- Ambo road is desirable in order to open up a shorter distance to the coast as an alternative to the Lima-La Oroya road. 7.13 The major access to the Selva Central by the Lima-La Oroya-Tarma-- San Ramon road has, in part, been improved or rehabilitated under previous Bank-financed projects. The highest altitude road section (elev. 4,834 m) of the road to Lima, between San-Mateo and Morococha, was rehabilitated under Loan 1196-PE. The rehabilitation of the adjoining Morococha-La Oroya road is included in the proposed project. The road between La Oroya and Aguaytia has been improved and paved under Loan 1196-PE and its predecessor, Loan 1025-PE. The most difficult road section, which at present severely limits access to the southern Selva Central area, is part of the Tarma-San Ramon section. The road sections which would be improved under the proposed project are: (a) Selva Central Area (i) Tarma-San Ramon-La Merced (72 km). The portion of this road from the San Felix bridge to the towns of San Ramon and La Merced (up to San Carlos Bridge): about 19 km is already being paved, entirely financed by the Government. The Tarma-San Felix bridge road section (53 km), whose improvement would be included under the project, starts as rehabilitation of paved road for about 25 km (to Huayocnioc bridge) and then changes to widening and paving the steep, narrow, tortuous descent which forms the main transportation bottleneck between the agriculturally rich San Ramon, La Merced area and the markets of the Sierra and the Coast. (ii) La Merced-Villa Rica (56 km). The platform to this road has been constructed to engineered gravel road standards. Improvement works would include protective works against river scour, slope stabilization measures, drainage improve- ments and paving. (iii) Chanchamayo Bridge to Satipo (110 km). Branching east from the above road, at the Chanchamayo bridge site about 12 km from La Merced, the platform of this road has also been constructed to engineered geometric gravel road standards. Inadequate drainage, cross drainage and a number of areas with slope stability problems would be corrected, the road would be paved, and some protective works against river action would be constructed.  - 43 - (iv) Access to Oxapampa (about 44 km). Improving an existing, narrow, access road to gravel road standards (5.0 m wide) has been studied for cofinancing by KfW. (iv) Traffic 7.14 In view of the long timeframe for development of the area, projected traffic growth on the road improvements is dominated by the demand, by the population and by the production already in the region. The traffic on the project roads varies considerably (Table 6.3) from 113 ADT close to Oxapampa to almost 1,900 ADT between La Merced and San Ramon. The population in the Selva Central, with the development taking place over the past decade, is growing at 3-5% per year, a figure which may become slightly higher depending on the intensity of the development programs. For full-scale development over some 30 years, a population growth of 5% per year for Selva Central as a whole has been forecast. For this long timeframe, the effect from the road on traffic generation will largely occur after the first ten years. No separa- tion of generated traffic has therefore been made. C. Alto Mayo - Regional Development (i) Production and Potential 7.15 Another part of the humid subtropical "Ceja de Selva" is the Alto Mayo area, some 800 km north of the Selva Central. This area, like part of the Selva Central, is one of the few reserves of underutilized accessible land suitable for arable cropping in Peru. The Government looks to agricul- tural development of the Ceja de Selva not only to produce food for its settlers but also to contribute to exports or reduce imports. Oil palm, rice, fruits, coffee and tea and also livestock production are being developed. Apart from oil palm, production is mainly by small and medium farmers. There is no "latifundia" problem and no need for agrarian reform as such, although increased effort is needed to grant land titles to the settlers. 7.16 The major areas of agricultural development in the Ceja de Selva are the Alto Mayo and Huallaga Valleys in the department of San Martin. The total population in this part of the department was about 188,000 at the time of the last census (in 1972), growing to about 240,000 at present, of which the majority (over 60%) are urban dwellers mainly in Tarapoto, and in the small towns of Moyobamba, Rioja and Juanjui, supporting the surrounding areas by various services. (ii) Development Programs 7.17 The Alto Mayo rural development project, now under preparation for possible Bank financing, is one part of the strategy for development of the area. The Alto Mayo valley is a relatively flat valley which now supports some 60,000 people. More intensive use of the land would permit another 50-60,000 by 1990. A wider variety of production is possible than in most of the Selva Central. The crops, depending on soils and elevation, vary from rice, corn, soya and sorghum for sale outside the region to plantain,  - 44 - yuca, beans and all kinds of fruits, such as bananas, pineapples, mango, papaya and guava, as well as coffee. A large part of the land is or will be irrigated, growing ultimately to some 70,000 hectares compared to 25,000 for fruits and 20,000 hectares for pasture. 7.18 A similar development is under way in the Huallaga Valley south of Tarapoto with support from USAID and other bilateral aid. The altitude and rainfall in this area are lower; therefore, the agricultural use is different: forestry, tobacco farming and cattle raising are typical examples. A number of agro-industries are in the planning stage: an edible oil plant, a dairy plant, an animal feed plant and an integrated sugar plant, in addition to warehouses and silos for storage of food products. Generally, the Tarapoto area has shown a more active growth than the much older capital of San Martin, Moyabamba, but access to the rest of Peru is still a limiting factor. (iii) Road Infrastructure Requirements and Traffic 7.19 The opening up of the "Ceja de Selva" reached the Alto Mayo area in 1978, connecting it with a dry season road to the Pan-American Highway at Olmos, 500 km distant to the northwest. The road connecting the towns of Rioja and Moyabamba to Tarapoto had already been completed eight years earlier under a USAID project. The major project in this part of San Martin would be rehabilitation and partial upgrading of the main road through the area from Rioja-Moyobamba to Tarapoto. The platform for this road was constructed in the period 1968-1970. Improvement would consist of paving the road section in the Alto Mayo area (33 km), including the Rioja-Moyobamba road section, and also paving the road section in the Bajo Mayo area between Tarapoto and the Bolivia bridge across the Mayo river (34 km). The Central section (70 km), climbing between the lower and higher agricultural areas, would be rehabili- tated to gravel road standard. All sections would benefit from measures to improve drainage and to stabilize localized areas of slope or platform insta- bility. Another vital problem is improved access to the coast. This is partly to be solved by the IDB-financed upgrading of the Olmos-Corral Quemado road, 1/ which is about to start, and by strengthening the road maintenance capability under the proposed project and a study of improvements to the most critical sections of the Corral Quemado-Rioja Section. 7.20 Current traffic on the Rioja-Tarapoto Road is a blend of local and some long-distance traffic between the Huallaga Valley and the rest of Peru since this road is the only access. The development programs under way will influence both, but particularly the long-distance movements. This has been reflected in the traffic forecasts (Table 6.3) where growth in truck traffic is anticipated to be a high 6% or more per year. 1/ This project for a 196-km road is expected to cost US$150 million, of which US$81.5 million is financed by IDB for completion in 1985.  - 45 - D. Economic Evaluation of Road Improvements 7.21 The development of traffic will be influenced by various proposed, as well as ongoing, programs in the two Selva areas. Improvements to these main roads will undoubtedly assist agricultural development. The precise extent of influence of the road improvements upon traffic growth, is, however, difficult to determine. Compared to a 3% annual growth rate on developed roads in the Costa, the traffic growth on these Selva roads generally ranges from 4.5 to 6% per year. These growth rates have been adopted (Table 6.3) for the purposes of the economic evaluation and for determining the general road standards to be used for different road sections. 7.22 Detailed calculations of construction costs have been carried out for the different road sections by MTC and consultants. All have been correlated against recent prices for similar types of work. These financial costs have been converted to economic costs by the exclusion of taxes and by shadow pricing of fuel requirements. The combined factor used is .85 of the financial cost for these roads. 7.23 The main benefit of the project roads and their improvement is a reduction in transport cost, mainly for trucks. Most trucks in this area are owner-operated and relatively small because of the terrain limitations. The methodology for estimating vehicle operating costs is more completely described in Chapter VI. On the basis of vehicle operating cost savings only, without including any passenger time savings or benefits from reduced road maintenance costs, the rates of return for these roads range from 18% to 63% based on cost/benefits in Table 7.3. For these calculations, an assumed economic life of ten years has been included generally after a two-year construction period. The overall return is 40% for these roads and 39% for the project as a whole. A sensitivity test was carried out, showing that only for one road section did the rate of return go as low as 13% (Table 7.4). If discounted at the opportunity cost of capital (13%), construction cost could increase 121% for road rehabilitation works and 176% for new road construction before being uneconomic. First-year returns are also all very high, indicating that these works are overdue. These estimates are all conservative since all present costs associated with road closures and other constraints on traffic have not been included together with time and mainte- nance cost savings. In the rainy season, particularly in the Selva Central, these constraints are frequent, but not easy to estimate with accuracy. VIII. AGREEMENTS REACHED AND RECOMMENDATION 8.01 During negotiations, agreement was reached with the Government on the following: (a) that the Bank would be given the opportunity to review and comment on any major investments (over US$10 million) which are started in the period (para 1.21); (b) that, not later than December 31, 1982, it would adopt an expanded program for enforcing improved vehicle weight control (para 2.04);  - 46 - (c) that, not later than October 1, 1982, it would adopt a road classi- fication system as the basis for establishing the jurisdiction of national, regional and other authorities in regard to road planning, design, construction and maintenance and would update road classification annually thereafter (para 3.02); (d) introduction by MTC, to the extent permissible by law, of adequate personnel grade classifications and salary levels for permanent staff in DGC and SEM by January 1, 1984 (para 3.34); (e) the Plan of Action, which incorporates target dates for the steps needed to strengthen highway administration, MTC's capacity to implement the project, and road maintenance and equipment management (para 5.07); (f) the establishment, by the Government, of the Revolving Fund by August 31, 1982 and the procedures for replenishment of such Fund by the Government and from the Special Account; also agreement concerning the operation of the Special Account (para 5.20); (g) format, content, frequency and timing of financial reports; also appointing of an auditor and the scope of financial reporting and auditing requirements (para 5.23); (h) that MTC would provide its International Loans Office with the staff, budget and support needed to carry out its responsibilities under the project (para 5.27); (i) grouping of lots and conditions of bidding for road improvement and rehabilitation works (para 5.28); (j) arrangements to prequalify international/local joint ventures of consulting firms for construction supervision (para 5.29); (k) adoption of a four-year road rehabilitation program based on the consultants' study recommendations, in consultation with the Bank, by September 1, 1982 (para 6.02); (1) presentation of MTC's proposed maintenance program for 1983, inclading budget requirements, for review and comment by the Bank, by July 31, 1982 and annually thereafter (para 6.05); (m) that, not later than September 1, 1982, it would present its proposed road rehabilitation program for 1983, for review and comment by the Bank, and that, annually thereafter, it would present an updated program for the succeeding year (para 6.08);  - 47 - (n) that, not later than September 1, 1982, it would present its proposed program of equipment renewal for 1983 for review and comment by the Bank, and that, annually thereafter, it would present an updated program for the succeeding year (para 6.10); and (o) road maintenance budget requirements, including the annual value of fast-moving spare parts (para 6.11). 8.02 The filling of five key positions for technical assistance services would be a condition for loan effectiveness (paras 5.25 and 6.14). 8.03 Subject to the above, the project provides a suitable basis for a Bank loan of US$93 million. The terms would be 17 years, including a four- year grace period. January 21, 1982  - 48 - PERU TABLE 1.1 EIGHTH HIGHWAY PROJECT Central Government Budget for Transport Infrastructure 1977-1981 Soles (millions) 1977 1978 1979 1980 1981 Ministry of Transport and Communications (MTC) Current Expenditure 2493 2864 3939 6355 12274 Road Maintenance N.A. 1692 5033 1/ 9499 l/ 15956 1/ Total MTC 9981.2 11481.1 25354 42334 65907 CORPAC 70 218 457 ENAFER 450 235 714 2071 3077 ENATRU 100 174 1337 ENAPU 3956.3 7288 ORDE's Total 1405 4987 14123 Soles (million) 10501.2 11816.1 31821.3 58971 83107 Soles/$ 83.8 156.3 225 281 400 US$ m 125.3 75.6 141.4 208 .1 207.8 Total Central Government Budget 221,631.7 289,740.6 576752 967,171 1859,820 Share of Transport (%) 4.74 4.08 5.52 6.04 4.47 1/ Includes ORDE's and SEM Source: Budget laws, mission estimates August 1981  PERU EIGHTH HIGULAY PROJECT Transport Sector Share of GDP 1970-1979 Millions of 1973 Soles 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 Transport by land 13,622 13,988 15,005 15,998 17,104 18,214 19,333 19,581 19,461 20,140 water 1,945 2,373 2,494 2,984 4,079 4,113 3,971 3,793 3.506 3,758 air 776 701 738 910 1,044 1,698 1,814 2,059 2,144 2,239 Transport total 16,343 17,062 18,237 19,892 22,227 24,025 25,118 25,433 25,111 26,137 > Total CDP in 342,313 359,263 367,472 383,163 414,969 431,697 443,715 444,931 441,721 456,415 Producer's prices % Share for Transport 4.8 4.7 5.0 5.2 5.4 5.6 5.7 5.7 5.7 5.7 Source: Peru: Major Development Policy Issues and Recommendations, April 27, 1981 August 1981  - 50 - Table 1.3 PERU EIGHTH HIGHWAY PROJECT Cargo Transport by Mode Ton km/year (000,000) Coastal River and Highways Railways Shipping Lake Total 1976 General Cargo 5,100 200 - 200 5,500 Petroleum 100 100 3,700 100 4,000 Minerals 100 300 500 900 Other Special Cargo 600 600 Total 5,900 600 4,200 300 11,000 1980 (Estimate) General Cargo 6,443 200 257 6,900 Petroleum 157 128 4,043 129 4,457 Minerals 100 329 814 1,243 Other Special Cargo 857 857 Total 7,557 657 4,857 386 13,457 1990 (Projected) General Cargo 9,800 200 400 10,400 Petroleum 3.00 200 4,900 200 5,600 Minerals 100 400 1,600 2,100 Other Special Cargo 1,500 _1500 Total 11,700 800 6,500 600 19,600 Average Yearly Growth(%) 1976-1980 (actual) 6.4 1.8 3.7 6.5 '5.2 1980-1990 (projected) 4.5 2.0 3.0 4.5 :3.8 Source: MTC, Plan Sectorial de Transportes a Largo Plazo, 1979-80 MTC, Plan Operativo Sectorial 1981-82 August 1981  - 51 - TABLE 2.1 PERU EIGHTH HIGHWAY PROJECT Vehicle Weights and Dimensions Critical Aspect Type of Vehicle Roads A Roads B Length Truck and Trailer 20.0 m 16.4 m Height All 4.0m 4.0m Width All 2.6m 2.6m Weight Front Axle All 6.0 tons 4.0 tons Weight Rear Single Axle All 11.0 tons 10.0 tons Weight Rear Tandem Axle All 18.0 tons 16.0 tons Total Weight 3 axle truck + 3 axle trailer 45.0 tons - Total Weight Truck + Semitrailer 34.0 tons NOTE: Roads A: Panamericana de la Costa, Arequipa-Mollendo, Lima-La Oroya- i?uanuco-Pucallpa, La Oroya-Huancayo, La Oroya-Tarma, Pacasmayo-Tembladera, Pativilca-Huaraz-Caraz. Roads B: All other national roads. Source: Decreto Supremo No. 001-81-TO, published in the official newspaper, El Peruano on January 19, 1981. May 1981  - 52 - TABLE 2.2 PERU EIGHTH HIGHWAY PROJECT Road Vehicle Fleet - 1976-1980 1976 1977 1978 1979 1980 / Automobiles 265,486 272,643 273,872 273,363 278,222 Station Wagons 23,380 26,798 28,134 29,259 31,238 Pick-ups 75,726 81,073 82,648 84,497 89,196 Buses 17,001 17,454 17,842 17,754 17,790 Light Trucks 58,971 60,762 60,924 61,225 62,796 Trailers and 2/ semi-trailers- 2,607 2,831 2,963 3,254 3,669 Tractors for tractor trailers 2,436 2,607 2,774 2,883 - 3,173 TOTAL 445,607 464,168 469,157 472,235 486,084 Population(millions) 15.91 16.36 16.82 17.29 17.78 Persons/motorized vehicle (motori- zation) 35.9 35.5 36.1 36.9 36.9 1/ Estimates 2/ Non-powered vehicles Source: MTC - Vehicle Ownership Registry April 1981  - 53 - TABLE 3.1 PERU EIGHTH HIGHWAY PROJECT Highway Network by Type of Surface (km) A) Evolution of the Network 1976-1980 Type 1976 1977 1978 1979 1980 Paved 6,185 6,029 6,029 6,256 6,257 Gravel 12,269 11,866 11,866 12,534 12,536 Earthy/ 16,835 14,606 14,605 14,911 14,916 Tracks 21,127 24,141 24,142 24,815 24,809 TOTAL 56,416 56,642 56,642 58,516 58,518 B) Classification of the Network in 1980 TZpe Total National Departmental Feeder Paved 6,257 4,425 1,093 739 Gravel 12,536 6,997 2,840 2,699 Earth!/ 14,916 3,120 5,156 6,640 Tracks 24,809 715 3,214 20,880 TOTAL 58,518 15,257 12,303 30,958 1/ The surface is either natural earth or covered with unclassified material. Source: MTC - Direccion General de Transporte Terrestre December 1981  - 54 - Table 3.2 PERU EIGHTH HIGHWAY PROJECT Road User Charges and Expenditures - 1976-80 (Million Soles) 1976 1977 1978 1979 1980 A. User Charges Vehicle Registration, taxes and licences 1,050 1,790 1,907(e) 2,024(e) 2,141 Import Duties 750 1,125(e) 7,000(e) 10,130(e) 13,265 Motor Fuel Taxes 6,284 10,240.9 8,956 20,242 30,,994 Motor Fuel VAT 1,233 2,210 2,038.8 2,131.2 1,795.3 Road Tolls 178 355.5 810(e) 1,265,8 1,845.3 Totals 9,495 15,721.4(e) 20,711.8(e) 35,793(e) 50,040.6 B. Highway Expenditures 2,321 3,169 6,871.6 18,699.7 32,169.5 fe) Signifies estimated values when data not available. Source: MTC - Oficina de Planeamiento y Presupuesto, D.G.T.T. Direccion General de Contribuciones December 1981  PERU EIGHTH HIGHWAY PROJECT MTC HIGHWAY EXPENDITURES: 1976-1981 Current Soles (Millions) 1978 1979 1980 1981 1. Salaries and Overheads / 218.4 257.5 418.1 807.0 (e) Wages 165.0 211.6 334.4 685.6 (e) Goods 15.2 18.4 20.9 31.5 (e) Services 13.8 16.6 19.2 31.9 (e) Transfers 24.4 10.9 43.5 58.0 (e) 2. Studies 213.2 473.0 576.0 (e) 679.0 3. Construction 4,748.0 12,936.2 15,811.4 27,511.0 4. Maintenance (Budget)b/ 1,692.0 5,033.0 9,499.0 15,956.0 5. SEM equipment - - 5,865.0 _,045.0 TOTAL 6,871.6 18,699.7 32,169.5 51,998.0 (US$ million equivalent) (43.96) (83.11) (114.9) (130.0) a/ Does not include MTC's non-highway directorateds and administration overheads. bI Includes ORDE's and SEM e/ Estimate based on budget figures Source: MTC - Oficina de Planeamiento y Presupuesto - DGTT and mission estimates December 1981  PERU EIGHTH HIGHWAY PROJECT INP 1981-85 Transport Investment Plan Surface Transport (US$ Million) Total 1981-85 1981 1982 1983 1984 1985 Local Foreign Total Preinvestment 4.15 3.30 2.78 1.74 1.81 12.88 .90 13.78 Ongoing Projects 158.35 105.25 100.05 109.18 127.02 272.62 327.24 599.86 New Projects 132.55 188.73 244.75 183.37 129.10 379.21 499.28 878.49 Road Paving .79 7.94 7.94 7.94 7.94 16.27 16.27 32.54 Olmos-Corral Quemado 15.90 27.83 23.86 11.93 - 38.36 41.16 79.52 Tarma Oxapampa - 14.40 25.20 21.60 10.80 35.71 36.29 72.00 1 Cruce Catacaos 4.44 - - - - 2.64 1.80 4.44 W Huancayo Abancay - - - - 13.23 6.61 6.62 13.23 San Alejandro-Pto. Bermudez 2.12 14.02 21.69 18.52 6.35 30.95 31.75 62.70 Satipo-Rio Puyemi - - - 10.77 21.54 16.14 16.17 32.31 Juanjui-Pizana 2.65 12.43 16.67 10.58 - 21.96 20.37 42.33 La Merced-Satipo .59 3.97 15.87 10.58 8.86 19.37 20.50 39.87 Panamerican Highway 3.17 11.38 14.02 - - 13.49 15.08 28.57 Central Highway 5.00 - - - - 2.65 2.35 5.00 Corral Quemado-Tarapoto - 26.46 46.56 39.68 19.84 67.46 65.08 132.54 Bridges 11.67 7.94 7.93 7.93 7.94 15.87 27.54 43.41 Pisco Ayacucho 6.13 7.14 8.73 2.91 - 12.21 12.70 24.91 Road Rehabilitation .79 9.26 9.26 9.26 9.26 21.56 16.27 37.83 Villa Rica-Pto. Bermudez - 5.29 6.88 - - 6.09 6.08 12.17 Oyon-Ambo .05 5.29 15.87 18.52 13.23 26.50 26.46 52.96 Arequipa-Puno - 3.70 6.74 13.15 10.11 16.32 17.38 33.70 Other Marginal Hwy. 2.43 - - - - 1.11 1.32 2.43 ENAFER 76.29 - - - - 4.29 72.00 76.29 Peru-Bolivia Rail .53 .21 - - - .74 - .74 H Caripa-Condorcocha - 2.47 6.53 - - 2.90 6.10 9.00 SEM Equipment _ 29.00 11.00 - - - 40.00 40.00 0 295.05 297.28 347.58 294.29 257.93 664.71 827.42 1,492.13 Source: INP, Prices in 1981 dollars - 1US$ - 378 Soles December 1981  PERU EIGHTI HIGHWAY PROJECT MTC Equipment Fleet 1978 & 1981 1978 1981 For For Vehicles Working Repair Scrap Total Working Repair Scrap Total Dump trucks 179 161 531 871 204 182 172 558 Others 179 156 358 693 189 160 93 442 Sub-Total 358 317 889 1,564 393 342 265 1,000 Equipment. Bulldozer 90 150 186 426 187 189 92 468 Grader 83 109 1ll 303 114 142 47 303 F.E. Loader 40 57 55 152 78 61 29 168 Rollers 29 75 33 137 57 78 33 168 Others 115 147 144 406 155 173 86 414 'Sub-Total 357 538 529 1,424 591 643 287 1,521 Overall Totals 715 855 1,418 2,988 984 985 552 2,521 Scrap 1,418 552 Total units Working or For Repair 1,570 1,969 Source: SEM records December 1981  - 58 - TABLE 5.1 PERU EIGHTH HIGHWAY PROJECT Road Rehabilitation and Improvement Design Standards and Cost Estimates Length 1980 Base -/ 6 Surface Width Shoulder Principal Types Road (Section) (km) AADT Cost (US$x10 ) and Type Width of Work Rehabilitation 1. Morococha-Oroya~2/ 44 1780/1404 10.20 7.20m - A.C. 0.75m P/R, ID 2. Piura-Paita 3/ 53 4405/691 7.20 6.60m - A.C. 1.20m P/R. RG 3. Talara-Cancas 98 697 13.70 6.60m - A.C. 1.20m P/R, RG, ID Improvements 4. Tarma-Pte. San Felix 53 17.40 (Tarma-Pte. Huayacnioc)A- (25.7) 1600 (3.80) (7.20m - A.C.) (variable) P/R, ID (Pte. Huayacnioc-Pte. San Felix) (27.3) 497 (13.60) (6.00m - A.C.) 0.75m P/C, S, ST, RW, ID 5. La Merced-Villa Rica 56 11.40 (La Merced-Desvio Satipo) (12.5) (841) (3.00) (6.60m - A.C.) 1.20m P/C, S, ST, RW, ID (Desvio Satipo-Villa Rica) (43.5) (495/202) (8.40) (6.60m - S.T.) 0.75m P/C, S, ST, RW, ID 6. Chanohamavo-Satipo 110 494/360 20.50 6.00m - S.T. 0.75m P/C, S, ST, RG, RW,ID 7. Access to Oxapampa , 44 113 6.00 SOOm - GR - P/C, S, ST, ID 8. Rioja-Moyobamba-Tarapoto - 137 12.50 (Rioja (km 481 - km 514) (33) (205/130) (3.40) (6.00m - S.T.) 0.75m P/C, ST, ID (km 514 - km 584) (70) (130) (4.60) (7.50m-8.40m-GR) - PIR, ST, ID (km 584 - (km 618) Tarapota) (34) (1686/190) (4.50) (6.00m - S.T.) 0.75m P/C, ST, ID 1/ Does not include-contingencies 2/ Includes about 6 km of streee improvement through Oroya 3/ Includes about 7 km of Panamerican Highway between Piura and road junction to Paita. 4/ Includes about 2.5 km of street improvement in Tarma 5/ Includes about 2 km of street improvement in Tarapota LEGEND Types of Improvement Works Surface Type P/R Pavement Reconstruction A.C. Asphalt Concrete P/C Pavement New Construction S.T. Surface Treatment S New Structures GR Gravel ST Stabilization of Slopes RG Raise Grade RW River Protection Work ID Improve Drainage Source: Mission estimates December 1981  -- 59 - TABLE 5.2 PERU EIGHTH HIGHWAY PROJECT Tentative List and Cost Estimate of Maintenance Equipment (October 1981 Prices) A. Equipment Overhaul Program (Second Phase) Thousands of US Dollars Spare parts Contracted Labor 129 Trucks 1,330 125 146 Equipment Units 2,795 430 4,125 555 (Foreign Exchange 91%) (3,750) B. New Maintenance Equipment Thousands of US Dollars Cost/Unit Total Cost 50 Dump Trucks 35.0 1,750 50 Pick-up Trucks 10.0 500 30 Asphalt Kettles 5.0 150 30 Vibratory Rollers (Pedestrian) 4.5 135 30 Plate Compactors 3.0 90 2,625 Spare Parts 375 Total under Program 3,000 Source: SEM, Consultants and Mission October 1981  - 60 - TABLE 5.3 PERU EIGHTH HIGHWAY PROJECT Estimated Disbursement Schedule (US$ millions) Latin America End of Annual Cumulative (2) as % Highway Projects F.Y. (1) (2) Total % Total 1982 0 0 0 0 1983 18.30 18.30 19.7 18 1984 32.40 50.70 54.5 36 1985 31.20 81.90 88.1 58 1986 11.10 93.00 100.0 77 Source: Mission estimates Assumptions concerning implementation delays 1) Start of all civil works delayed by 2 months plus 1 month additional slippage for each quarter after the start of the project. 2) Duration of civil works would overrun by about 25%. 3) 25% of civil works expenditures (10%+15% contingency) would occur during contract overruns. 4) Disbursements would lag expenditures by 3 months. December 1981  PERU EIGHT HIGHWAY PROJECT Implementation Schedule Year 1981 1982 1 1983 1984 1985 Quarter 1