Mexico - Seventh Highway Project

Document of The World Bank FOR OMCAL USE ONLY Rqet No. 5162 PROJECT COMPLETION REPORT MEXICO SEVENTH HIGWAY PROJECT CLQ ON 968-ME) June 26, 1984 Latin America and Caribbean Regional Office ThI decumed ha a restricted distisbuth. and may he used by recipieut only in the perferinac of their sEfcial duties Us centeat may not odhewwse be discosed without World Dank autborvzatiom.  FOR OFFMCIAL USE ONLY ,MEXICO SEVENTH HIGHMAY PROJECT (LOAN 968-ME) PROJECT COMPLETION REPORT TABLE OF CONTENTS Page No. PREFACE ............ i BASIC DATA SHEET . ii MISSION DA.A -iii HIMGLIGKTS iv I. IDTRODUCTION L II. PROJECT PREPARATION, APPRAISAL AND NEG OTIATIONS 1. III. PROJEC- EXECUTION 4 IV. COST ESTIMATES AND DISBURSEMENTS 6 V. ECONOMIC REEVALUATION . 8 VI. PERFORMANCE OF THE BORROWE . .10 VII. ROLE OF THE BANK..11 VIII. RONLUSIOWS THE .....BANK ...................... .................... 11 VIII. CONCLUSIONS..---------------------- 1.1 TABLES 1. Original Seventh Highway Project . 12 2. Revised Seventh Highway Project .13 3. Comparison Between the Appraisal & Final Cost Estimates . 14 4. Indicators for Economic Reevaluation .15 ANNEX Letter from the Borrower ................................ 16 MAP IBRD 10549R (PCR) - Mexico - Seventh Highway Project This document has a susicted dtbutn and may be ued by cipients only m th -performance of their offlcil duds Its contents may not othris be disclosd wbout World Bank authorizaion.  PROJEC3 COaP1ETON REPORT MFlCO SEVENH HIGHAY PROJECr (Loan 968-NE) PEFACE This report presents a performance audit of the Seventh Higbway Project in Mexico for which the Executive Directors approved Loan 968-NE in the amount of US$90 million on February 12, 1974. The loan was closed, fully disbursed, on June 30, 1982. The report consists of a Project Completion Report (PCR) prepared by the Bank's Latin America and Caribbean Regional Office and an Annex presenting the Borrower's comments on the PCRL In accordance wlth the revised procedures for project performance audit reporting, this Project Completion Report was read by the Operations Evaluation Department (OED) but the project was not audited by OED staff. The draft report was sent to the Borrower for comments; the reply is shown as an Anex.  MEXICO SEVENTH HIGHWAY PROJECT (LOAN 968-ME) PRojECT COMPLETION REPORT Basic Data Sheet Key Project Data Original Item Plan Actual Total Project Cost (US$ million) 241.4 1/ 326.9 1/ Loan Amount (US$ million) 90.0 90.0 Disbursed as of July 1981 90.0 90.0 Date Physical Component Completed 06/30/78 1983 Economic Rate of Return (Z) 23.0 24.0 Other Project Data First Mention in Files 04126/72 Government Application - 11J17/72 Negotiations 12/04/73 12/04/73 Board Approval 02/12/74 02/12/74 Loan Agreement Date 03/01/74 Effectiveness Date 05/29/74 05129/74 Closing Date 12/31/78 06/30/82 Borrower Nacional Financiera S.A. (NAFINSA) Executing Agency SAHOP Follow-On Project Highway Sector Project Loan Number Loan 1671-ME Amount US$120.0 million equivalent Loan Agreement 08/23/79 Country Exchange Rate Name of Currency (abbreviation) Mexican peso (Mex$) Appraisal Year Average US$1.00 = Mex$12.5 Intervening years average 2/ 1973-1975 - US$1.00 = Mex$12.5 1976 - US$1.00 = Mex$15.4 1977 - US$1.00 = Mex$22.6 a 1978-1979 - US$1.00 = Mex$22.8 1980 - US$1.00 = Mex$23.0 1981 - US$1.00 = Mex$24.5 1/ Project cost in the original plan refers to the original project, while the actual cost refers to the reduced project (para 3.06). 2/ Source: International Financial Statistics. IMF  - iii - MEXICO SEVENTH HIGHWAY PROJECT (LOAN 968-ME) PROJECT COMPLETION REPORT Mission Data No. of No. of Staff ype DMonth/Year Staff Weeks Weeks Date of Report Identification 05/72 2 2 4 06/06/72 Preparation 12/72 1 1/2 1/2 01/03/73 Preparation 02/73 1 1/2 1/2 03/03/73 Preparation 02/73 2 1 2 03/23/73 Appraisal 05/73 3 3 9 11/14/73 Post-Appraisal 10/73 2 1 2 N.A. TOTALS 8 18 Supervision Supervision 04/74 1 1 1 05/21/74 Supervision 11/74 2 2 4 N.A. Supervision 05/75 1 2 2 06/13/75 Supervision 07/75 2 2 4 09/10/75 Supervision 02/76 1 1 1 03/17/76 Operational 06/76 1 1 1 06/17/76 Supervision-Operational 07/76 2 2 4 08/30/76 Supervision 04/77 2 1 2 05/25/77 Supervision 09/77 2 1 2 10/02/77 Supervision 01/78 2 2 4 02/07/78 Supervision 04/78 3 1-1/2 4-1/2 05/12/78 Supervision 04/79 1 1 1 04/06/79 Supervision 06/79 1 1 1 06/29/79 Supervision 10/79 1 2 2 11/02/79 Supervision 04/80 1 2 2 05/29/80 Supervision 11/80 2 1 2 12/19/80 Supervision 07/81 1 1 1 07/31/81 Total Supervision Effort (Staff Weeks) FY1974 FY1975 FY1976 FY1977 FY1978 FY1979 FY1980 FY1981 FY1982 Total 0.9 4.1 8.0 7.2 12.5 4.3 4.5 2.1 2.2 45.8  -iv- PROJECr COMPLETION REPORT MEXICO SEVENTH HIGBRAY PROJECT (LOAN 968-ME) HIGELIGHTS 1. Loan 968-ME for US$90 million supported widening and construction of about 1,245 km of Mexico's highway network. Of these, three main highways 4 were widened to four lanes (127.5 km) and seven major new roads were constructed (1,118 km). 2. The project had originally included four roads (201 km) to be widened to four lanes a-d twelve new roads (1,674 km) to be constructed, a contemplated total of 1,875 km. Due to long dElays, calused by a shortage of local funds, in beginning implementation of the project, estimated project costs increased by a factor of three. By April 1966, almost three years after loan signature, when the Government proposed a major reduction in project scope, no work had yet begun on any of the portions of the project to be deleted. Progress on other project roads had reached about 25Z of completion. 3. Despite the delays and increases in costs, the project was generally successful in achieving its objective of assisting in modernizing and constructing key sections of Mexico's road network. Economic returns on the investments were satisfactory because cost increases were offset by increases, in real terms, in vehicle operating cost savings and time savings. 4. The following points may be of particular interest:- (a) increases in costs, reasons therefore and action taken (paras. 3.01 to 3.06); and (b) effects of inflation, design changes and shortages of local funds (paras. 4.01 and 4.02). .~  PROJECT COMPLETION REPORT MEXICO SEVWNTH HIGHWAY PROJECT (WAN 968-ME) I. INTRODUCTION 1.01 mexico's large size, rugged topography and dispersed population have made transport a crucial element of the country's development policy. In the highway subsector, the main emphasis from the mid-1950s to 1970 was on completing the primary radial network from the central region to important state capitals and toward key border points. In the early 1970s, this effort was continued, and major new highways were built to open up the Baja California peninsula and link the regions along the Pacific and Gulf of Mexico coasts respectively. Emphasis then shifted to rural roads invest- ments, and 73,000 km of feeder roads were built over the period 1971-1976 (corresponding to one fifth of new investment expenditures), bringing some 6.4 million people living in 7,400 small and isolated localities into the mainstream of economic life. The highway network now includes about 62,000 km of paved roads, 88,000 km of gravel roads, and 48,000 km of earth roads; in general, the network is adequately maintained and of good standard. 1.02 Over a period of 18 years, since 1964, the Bank has made eight highway loans to Mexico for a total of US$387 million equivalent. Out of a total primary network of some 40,000 km, the Bank has assisted or is assist- ing in the improvement or construction of about 14,000 km. In the course of this long association, the Secretariat of Public Works (now the Secretariat of Human Settlements and Public Works - SAHOP) 1/ has achieved considerable progress in all aspects of highway planning, evaluation and execution. The quality of the works executed under past Bank projects has been satisfactory. II. PROJECT PREPARATION, APPRAISAL AND NEGOTIATIONS 2.01 In May 1972, a reconnaissance mission visited Mexico to identify a possible Seventh Highway Project. Government officials originally presented the mission members with a preliminary list of two roads needing widening from two to four lanes (35 km) and four roads for reconstruction (685 km). The list was subsequently extended, and, late in 1972, the Mexican Government formally requested Bank assistance to finance the improvement or construction of 18 main roads in several regions of the country. The economic information and engineering studies for the proposed roads were being prepared by SAHOP and were expected to be completed at various dates through the end of 1973. The preliminary cost estimate of the project was about US$200 million. 2.02 Detailed engineering for six of the project roads 2/ was not going to be completed by the assumed date of Board presentation, but the Mexican Government requested that the package of 18 roads be appraised at one time. The Bank agreed to include works on 16 roads, totaling about 1,875 km, in the proposed project (Table 1). For those roads on which detailed engineering was not completed, the evaluation would be based on preliminary cost fig res, and disbursement would be conditional upon confirmation of the economic justification based on the cost estimates after detailed engineering was completed. Such confirmation was subsequently received. 1/ Throughout this report, the Secretariat is referred to as SAHOP. 2/ Items 1, 4, 6, 7, 8 and 10 in Table 1.  - 2 - 2.03 The project was appraised in April 1973. Most of the project roads were justified on the basis of savings in vehicle operating costs and traffic growth, but the economic justification of four of the roads was based largely on agricultural development 3/. To achieve this development, the Bank considered indispensable the carrying out of small irrigation works along three of those roads 4/ at a total cost of about US$5 million. The above-mentioned works were supposed to start six years later (in 1978); therefore, the Bank requested and obtained Government assurances that the works would be included In the long-term program of the Government and would be carried out in a timely manner. The works were subsequently carried out in the context of the large Mexican irrigation and rainfed agricultural schemes. 2.04 The Issues Paper was circulated on June 7, 1973; its highlights included. (a) Foreign Exchange Component. The Mexican Government recalculated the foreign exchange component of the proposed project and found it to be about 40%, as compared to the 33% used in the previous one. The reason presented for the increase was that standards, as well as better specifications and their strict enforcement in highway construction, had led to the use of additional and more sophis- ticated imported equipment. The Bank, after reviewing the analysis carried out by SAHOP, found the increase justified. (b) Reserved Bidding for Part of Proposed Works. SAROP requested that certain works, such as specific bridge works and signalization, amounting to 12% of estimated project cost, be reserved for local contractors although still awarded on the basis of competitive bidding. The Bank recognized that, in practice, because of the strength of the local industry, bidding for highway projects in Mexico is virtually limited to the domestic contracting industry. It thus agreed that the advertising of the above-mentioned works, when not exceeding US$24.3 million, could be limited to newspapers of general circulation in Mexico. (c) Conditions for Board Presentation. The Second Railway Project (Loan 825-ME) included provisions to carry out a road user charges study. Since the start of the study was experiencing extensive delays, the Bank decided to make the finalization of a contract with the consultants for carrying out the study a condition for Board presentation of the proposed Seventh Highway Project. 2.05 Negotiations took place in Washington between the 3rd and 5th of December 1973. By the end of January 1974, substantial progress toward the initiation of the above-mentioned road user charges study had been made. The executing agency for the study (SCT) 5/ was negotiating the details of a 3/ Table 1, Items 13, 14, 15 and 16. 4/ Table 1, Items 13, 15 and 16. 51 Secretaria de Comunicaciones y Transportes, the Secretariat in charge of Transport policies.  -3- contract with the consultants who had made the best technical offer. The Bank felt that there was little chance that those negotiations would not lead to the signature of a contract and that the condition of such signature for Board presentation would only delay the implementation of the project. Therefore, the Bank agreed to waive that condition 6/,. A loan for the amount of US$90 million equivalent was approved by the Executive Directors on February 2, 1974, and the loan became effective on May 29, 1974. 2.06 The estimated cost of the project, as given in the appraisal report, was: US$ Million Foreign Local Foreign Total Exchange a. Highways Ci) to be widened 22.1 14.7 36.8 40 (ii) to be constructed 88.8 59.2 148.0 40 Subtotal 110.9 73.9 184.8 b. Contingencies (i) Physical (1OZ) 11.0 7.5 18.5 40 Cii) Escalation (11.62) 12.8 8.6 21.4 Subtotal 23.8 16.1 39.9 Total Construction Cost (a+b) 134.7 90.0 224.7 40 C. Supervision of Construction 13.5 - 13.5 1/ C6Z of (a+b) d. Right-of-Way 3.2 - 3.2 1/ Subtotal 16.7 16.7 Total Project Cost 151.4 90.0 241.4 1/ Not financed under the project. 2.07 This Completion Report is based on information obtained from the Minutes of the Board Meeting, the Bank's Record Center, LAC Information Center, and reports prepared by SAHOP, in charge of the project supervision. 6/ The Project Completion Report for the Second Railway Project, dated February 9, 1979, states that the study was carried out.  -4- III. PROJECT EXECUTION 3.01 Project implementation suffered substantial delays almost from the start because of a sbortage of local funds due to a sudden change in the economic performance of the country. Mexico, after a long period of price stability, experienced, in 1973, the beginning of a strong and continuing inr flationary process. During the initial period of project execution, SAHOP found itself in a financial squeeze which left it with an eroded budget inr sufficient to fulfill its commitments. Later on, the shortage of funds was the result of Government stabilization policies which included not only a re- duction in overall expenditures but also a concentration of available funds in projects considered of the highest priority and expected to have a large .9 and prompt impact upon the productive capacity of the country. During 1974, 1975, and 1976, budgetary allocations for the Seventh Highway Project were Mex$ 14.8 million, Mex$ 270.0 million, and Mex$ 506.0 million respectively, over a total original project cost of Mex$ 2,808.9 million and a scheduled completion date of mid-1978. Furthermore, by mid-1975, SAHOP estimated project cost increases of 53% and expected them to reach 88% by the tine that the works were completed. In the fall of 1975, the Seventh Highway Project was placed on the list of problem projects. 3.02 To enable broader international competition, roads were divided into 33 bidding sections. Contractors could bid for one or more sections, and contracts would be awarded on the basis of (a) the lowest evaluated bid for the entire road or (b) the lowest evaluated combination of bids for its sections. The shortage of funds (para 3.01) slowed the pace of bidding considerably. Only three international bids were invited in 1974, 15 in 1975 and none in 1976. 3.03 Inflationary pressures were also the cause of bid proposals being substantially higher than expected, with increases ranging from 0 to over 100% of the estimated bids. The problem was exacerbated by the lack of an escalation clause in the contracts, which added to the bidders' uncertainties regarding future prices. Early in 1975, SAHOP organized a working group responsible for finding an adequate price escalation formula to be included in subsequent contracts. A proposed clause was submitted for approval to a high level committee comprising four Under-Secretaries and a representative of the Chamber of the Construction Industry, and a final clause was approved and implemented in early 1976, resulting in an evident reduction of the bid prices. The escalation clause stated that, when the costs that were the basis for estimating the bid unit prices underwent an increase of more than 5% of the works not yet carried out, the contractor could request the adjustment of his unit prices providing a full justification for such action. 3.04 By mid-1975, progress on project implementation was minimum, and no disbursements had been made. By that time, it was evident that measures to tackle the problem of substantial cost increases, coupled with budgetary constraints, were needed. The Bank and SAHOP started to study alternative solutions, which included:  (a) reducing the scope of the project on the basis of a revised cost estimate, deleting some of the project roads so that the Bank could continue its participation at the same 40Z rate of disbursement; (b) reducing Bank participation so that the original scope of the project could be maintained; and Cc) a combination of (a) and (b). One year later, no decision had been reached, although both SABOP and the Bank favored a reduction in the size of the project. By then, the Mexican authorities preferred to leave the final decision regarding changes in the scope of the project to the new government that was going to be inaugurated in December 1976. 3.05 On April 19, 1977, the Government formally proposed to the Bank a program for implementing project works, which included the reduction of the scope of the project by deleting five roads and part of a sixth road; the project's original total length of roads, 1,875 km, was therefore reduced by 659 km to 1,216 km 7/. Nb contracts had been awarded for works on any of the roads to be deleted. 3.06 SAHOP's proposal included two important features: (a) the total loan amount would be maintained at US$90 million; and (b) the disbursement percentage would be kept at 40%; in fact, the size of the project reduction was tailored so that the disbursement rate would not be affected. The pro- posal also included a yearly investment program, road by road, for the re- duced project. The Bank, after confirming that the roads in the project were still economically justified in spite of the increased costs, and satisfied that the Government proposals were an important step toward the successful (albeit delayed) completion of the now reduced project by June 30, 1981, agreed to it. The Loan Agreement was changed accordingly on July 31, 1977. 3.07 The pace of civil works on the project roads improved substantially after the reduction of the project scope, and, in early 1978, the Bank deleted the loan from the list of problem projects. By the middle of 1979, project completion was estimated at 73% as compared to the 17% progress on the reduced project by the end of 1976 (two and a half years after loan effectiveness). 3.08 In November 1979, the Mexican Government requested that the Coatza- coalcos-Minatitlan road also be deleted from the project. The original pro- posal was to widen the road from two- to four-lane to accommodate increasing traffic between Coatzacoalcos and Minatitlan as well as between that area and Tehuantepec, Veracruz, Mexico City and Villahermosa. What was not foreseen then was the tremendous economic growth, based on the petroleum development that had occurred in the region since 1975. As a result, traffic on the critical Coatzacoalcos bridge, the only practical gateway between the left bank of the Coatzacoalcos river and the State of Tabasco, had doubled to 14,000 vehicles a day, reaching capacity. Since the bridge, not the Coatzacoalcos-Minatitlan road, had become the major transport bottleneck, the 71 Subsequent changes in the design of some of the roads brought the total length of project roads to 1,245.5 km.  Mexican Government decided to build a new bridge, closer to Minatitlan, with 31 km of access roads (including a bypass of the town), at an estimated total cost of US$60 million. The construction of the bridge would change the traffic pattern in the area, making it possible to delay widening of the project road. The Bank agreed to the deletion of the road from the project and to the reallocation of the thus freed funds to the remaining works under the loan. 3.09 The project continued to experience large cost increases, caused mainly by inflation but exacerbated by design modifications due, in some cases, to increased traffic projections, but mostly to unexpected works in difficult mountainous areas. Revision of cost estimates performed in late 1979 showed the total costs of the reduced project to be Mex$ 6,000 million rather than the Mex$ 4,500 estimated in June 1979. It was then clear that, even with the deletion of the Coatzacoalcos-Minatitlan road, the US$90 mil- lion of the loan were about US$27.6 million short to cover the foreign exchange component of the project. The Bank started to consider alternative actions that would enable it to participate until the end of the construction works, but it was finally decided that the solution that would best corres- pond to the spirit of the Sector Loan (Loan 1671-ME signed on August 23, 1979) would be to continue disbursements at the rate of 40X 8/ until funds ran out, provided that the remainder of the road sections would not be financed out of the Highway Sector Loan. This alternative would confirm the basis on which the Sector Loan was made, i.e., that the Bank had confidence in the programs carried out by SAHOP, on which there were periodic consulta- tions, and that the Bank expected that road sections, once started, would be completed. The provision of funds for completion of the works on three roads that would remain after disbursement of all loan funds would be monitored through the semi-annual consultations on budget and multi-year programs on which the Bank was given opportunities to comment. The Mexican Government agreed to this approach, and the loan was fully disbursed by July 1981. 3.10 Three of the project roads (Temascatelpec-Zihuatanejo, Playa Azul- Coahuayana and Pochutla-Salina Cruz) are expected to be completed by the end of 1982. The reasons for the slippage of these roads are: (a) unrealistic schedule of complicated works and (b) low budget allocations triggered by a shift of Government concerns toward modernizing the existing network. IV. COST ESTIMATES AND DISBURSEMENTS 4.01 The outstanding characteristic of the project was the sharp in- crease of final project costs in current Mexican pesos. Nominal construction costs of the revised project increased more than 300Z over initial cost estimates, when expressed in current Mexican pesos, and 126% in US dollars (Table 3) . These Increases took place in an unprecedented period of infla- tion which started in 1973 (para 3.01), but were exacerbated by the cost in- 8/ Actually 42% of 95Z (expenditures -5% retention) (para 4.03).  -7- cr-eases resulting from changes in design (para 3.10). SAROP carried out the construction supervision (not Bank-financed) with its own staff, and the costs incurred in this task are not available. 4.02 While construction prices were increasing rapidly, the public sec- tor budget was not keeping pace as inflation control measures were taken. The road budget was cut in real terms to reduce the impact of the public sector deficit. The domestic component for completing the project on schedule was not available, and Bank funds could not be disbursed. The Bank insisted unsuccessfully that budget allocations be increased for the project roads, and loan disbursements lagged far behind appraisal estimates, as sbown below: Accumulated Disbursements in -JS$ uiUior Actual as X Fiscal Year Appraisal Estimates Actual of Appraisal 1974 0.4 0 0 1975 9.0 0 0 1976 28.0 7.0 25 1977 54.0 22.8 42 1978 82.0 32.2 39 1979 90.0 54.0 60 1980 90.0 75.1 83 1981 90.0 88.3 98 1982 90.0 90.0 100 4.03 The Mexican Government retains 5% of payments under civil works contracts, for a period of one year, as a guarantee that the contract has been properly executed. After much discussion with Mexican autborities, the Controller's Department decided that the Bank could not disburse against this retention until it was actually disbursed to the contractor 9/. This led to a considerable record-keeping problem for the Government and NAFINSA, and, during the negotiations for the Small Scale Agricultural Infrastructure Project (Loan 1643-ME) in November 1978, the Bank agreed to disburse against the value of civil works contracts, less the amount retained, but the disbursement rate-would he increased slightly in order to finance the same portion of total project costs. NAFINSA, in a letter dated March 2, 1979, requested that the Bank adopt the sme approach to several other loans, includIng Loan 968-BE. The Bank agreed to NAFIRSA'Ws request, and, in August 1979, the loan agreement was amended: disbursement percentage for civil works was increased to 42%, and guarantee retentions were excluded from the disbursement base. 4.04 The allocation of proceeds of the loan wa revised once, as follows: 9/ Contractors were given a bond, equivalent to the 5% retention, which was discountable at commercial banks before the one year-period ended.  -8- Revisions Category Orgnl(11/30/1979) I CivLil works. for part A of the project 14,700,000 90,000,000 II Civil works for part B of the projet -59,200,000 0 III Unallocated 16,100,000 0 Total 90,000,000 90,000,000 At the tim of the reallocatiLon, iLt was decided to place all civil works in the project under category I. V ECONOMIC REEVALUATION 5.01 The Seventh pighway Project was justified at appraisal90, 0 inly on the basis of quantifiable benefits accruiLng to road users from reduced vehi- cle operating costs and travel time which would result from improwements in road design and surface characteriLsticr. In the case of three of the project roads 0II benefits were derived from expected agricultural development. The al;raisal estimate of the weighted economic rate of return (ERR) was 23%, whiJle reevaluation, based on SAHOP' s Fn-al Report of February 1982 amnl on composite savings In vehicle operating costs derived from simi1 r projects in Mexico and other Latin Americau countries, resulted in a weighted ERK of 24%. Lack of relevant data precluded an economic analysis based on agricultural development for the three above-mentioned roads. 5.02 For the purpose of the eronomic reevaluation, costs were expressed In constant 1981 Mexican pesos using the construction industry price index provided by the BRank of MAexico. W hen expressed in constant 1981 pesos, the real total cost of the project increased by only 23Z, mainly due to design changes justified by larger-thai-expected traffic growth rates and by dt- planned extra works in difficult mutiosterrain. Whbat follows takes a closer look at the economic performance of individual. project roads. Highway Widened from Two to Four Lanes 5.03 As shown in Table 4, the three roads under this category - Monterrey-Morelos, Mazatan-Aeropuerto and Los Reyes-Lecheria - have ERRs of 71Z, 84% and 68% respectively, substantially above the appraisal ERRs of about 30%. Although not enough Information was available to reproduce the appraisal analysis, the ofst likely reason for the important difference is the appraisal underestimation of time saviengs in projects designed to avoid or reduce congestion. 10/ Items 8, 9 and 10 in. Table 2.  9 5.04 In the case of the Mazatlan-Aeropuerto road, the real cost of civil works was 92% above that estimated at appraisal. The reason was that a bigher level of service was considered necessary for the level of traffic which was occurring on the road, and design changes, such as overpasses and service-roads, were thus incorporated. The real cost of the Monterrey-Montemorelos road suffered an increase of 22% while that of Los Reyes-Lecheria declined by 10%. Construction of New Roads 5.05 The roads under this category show ex-post economic returns remark- aoly close to appraisal expectations (Table 3). The four roads already com- pleted - Ruixta-Comalapa, Mararatio-Zinapecuaro, Tlapa-Tecomatlan and Cerrero-Nuevo Laredo - have satisfactory rates of return ranging from 10.5Z to 36Z. 111. Of the remaining roads, Playa AzuIl-Coahanyana and Pochutla- Santa Cruz show rates of return (and first year benefits) below the oppor- tunity cost of capital, considered for this exercise to be 12%. The Mexican Government, aware that investments in these roads might have been premature, delayed their completion in favor of highly justified reconstruction projects. 5.06 Table 3 shows that the real cost of the civil works of four of the roads experienced increases ranging between 20% and 42%, whitle the real cost of the other roads deelined. The four roads mentioned above cross very difficult mountainous terrain, and construction required extra works that were not contemplated at appraisal time. 5.07 Current traffic on the new roads, based on counts carried out by SAROP, are, in general, somewhat below the very optimistic levels expected at the time of appraisal (Table 3), mainly because most of the roads have only recently been completed. In the case of the still uncompleted roads (para 5.05), traffic estimations are the result of extrapolating current traffic in already completed sections of the road, thus probably underesti- mating traffic growth when the roads will be operational for soie time. Conclusion 5.08 In spite of the financial problems encountered during project exe- cution and the ensuing delays in project completion, the Seventh Highway Pro- ject shows a satisfactory economic performance. Increases in costs, because of design changes and delays in project implementation, have mostly been offset by the increase in real terms of the value of vehicle operating costs savings and the value of time savings. 11/ Excluding Guerrero-Nuevo Laredo, the remaining roads have ERRs equal or above 13%. Guerrero-Nuevo Laredo was justified at appraisal on the basis of agricultural development. The economic analysis in this PCR is based on savings in time and vehicle operating costs.  - 10 - VI. PERFORMANCE OF THE BORROWEI 6.01 Considering the serious economic problems experienced by Mexico during the execution of the project, the Borrower's performance was generally satisfactory. What follows discusses the major covenants of the Guarantee Agreement and the Borrower's effort to comply with them. 6.02 Section 3.01. Prompt provision of funds as required for project execution.' To cope with the inflationary process that started in 1973, the Mexican Government drastically reduced public expenditures in real terms, forcing SAHOP to limit anTal allocations for the project roads. Such a policy, although detrimental for the pace of project execution, served its purpose of spreading the restricted funds among several projects, thus satisfying the need to proceed in all regions of the country and allowing a larger number of contractors to continue to work. Om the other hand, the insufficient allocation of funds during the early 1980s and the consequent slippage of the completion of three project roads to the end of 1982 were no longer the result of macroeconomic stabilization policies but of the shift of SAHOP's emphasis from new construction to the upgrading of the primary road network. This shift was Justified by the extraordinary traffic growth accompanying the country's economic recuperation that started in late 1977. 6.03 Section 3.06 -The guarantor shall undertake, or cause to be undertaken, a study of the economic effects of the guarantor's road transport regulations.- This study was not carried out as originally envisaged in the Guarantee Agreement. However, the serious transport bottlenecks produced by the reactivation of the economy (begun in 1977) required measures to relax regulation controls in order to -temporarilyi increase the supply of road transporters. These measures were adopted permanently in August 1980, when the Government enacted a new Regulation for the use of roads under the existing Highway Law, and are expected to be improved in the foreseeable future with tbe implementation of the Federal Road Transport Development Program. The Government's efforts in the area of transport regulations are of a magnitude beyond what the Bank expected at the time of the loan signature and fulfill, in spirit, the above covenant. The dialogue between the Mexican Government and the Bank on this subject is currently being carried out under the framework of the Highway Sector Loan (Loau 1671-ME). 6.04 Section 4.02 -The Guarantor shall continue to: (i) cause all the roads and bridges of its federal highway system to be adequately maintained, and all necessary repairs thereof to be promptly made, all in accordance with sound engineering practices; and (ii) take all reasonable steps (including appropriate application of regulations on axle loading and vehicle size) necessaxy to ensure the proper use of such roads and bridges.' The efforts of the Borrower to comply with this covenant bave been satisfactory. Road maintenance in Mexico is adequate. Regarding weight controls, SCr established a working group in 1977 to study and propose new legislation for the use of roads under the existing Highway Law. Under the leadership of SCr, representatives of SAHOP, the Secretary of Industry, shippers such as PEMEX, vehicle manufacturers and trucking asociations worked for three years in drafting the new regulations, which were enacted by the President on October 3, 1980. The main changes brought about by the new regulations are in the areas of (a) the classification of vehicles and the roads on which  - 11 - they can operate; (b) the maximum weight and dimensions allowed for each; and (c) the special conditions for exceptions. The new regulations relate higher axle weights to vehicle speeds, which are, therefore, given much emphasis. The gist of the new regulations lies in the establishment of a new document issued to each truck - the Certificate of Weight and Dimensions (and speed limits) - which should be consulted by shippers and loaders; it serves as the basis for enforcement of the law, carried out by the Highway Police. In summary, the new regulations seek to put weight and dimension limits mDre in line with the current technological developments in roads and vehicles. As a result, a more efficient operation of the fleet and a drastically reduced incidence of overloading are expected. The new regulations are based on the premise of bigher load limits, coupled with strict control on the manufac- ture, reinforcement or enlargement of chassis, and on the use of vehicles capable of carrying higher loads. The issuing of the new truck Certificate of Weight and Dimensions is viewed as a deterrent for overloading as much as a means for facilitating enforcement. There is still no information available to the Bank to assess the impact of these new regulations. VII. ROLE OF THE BANK 7.01 The Bank contributed, during project preparation, through review and comments on the feasibility and engineering studies. During execution, the Bank showed the necessary degree of flexibility in agreeing to project uodifications and, in the spirit of sector loan approach, to the full disbursement of the loan before physical completion of all project roads. VIII. CONCLUSIONS 8.01 The Seventh Highway Project has been successful, in spite of the cost and time overruns, in meeting its main objective of mDdernizing and constructing key sections of Mexico's road network with a satisfactory econo- mic return on the investment. 8.02 The initial project scope and implementation schedule implied an overall level of highway expenditures that was well above the Government's financial capabilities. In order to pursue the project as originally planned, SAHOP would have had to give it preferential budget treatment at the expense of other highway expenditures of equal or greater priority. Such measures would certainly have improved the loan rating from the Bank's point of view, but might not bave been the optimal policy for the country. 8.03 The problems encountered with the Seventh Highway Project illus- trated the limitations of conventional project lending in Mexico, a country with a highway infrastructure in the hands of mature and well developed ins- titutions. With Bank funds tied to a few large projects, failure to allocate domestic funds for these projects (for reasons of budget limitations or changes in priorities after signing the loan agreement) leads to a slow dis- bursing project about which there is little the Bank can do. The approach followed in the Highway Sector Loan to Mexico (Loan 1671-ME) is intended to overcome those limitations and to allow the Bank to better integrate its con- tribution into SAHOP's planning and budgeting process.  - 12 - TABLE 1 MEXICO SEVENTH HIGHWAY PROJECT (LOAN 968-ME) PROJECT COMPLETION REPORT Original Seventh Highway Project Highways to be Widened Length (km) 1. Monterrey-Linares 101 2. Coatzacoalcos-Minatitlan 22 3. Mazatlan-Aeropuerto 14 4. Los Reyes-Texcoco-Lecheria 64 Subtotal 201 Highways to be Constructed 5. Tepalcatepec-Tecalitlan 96 6. Mihuatlan-Santa Elena 111 7. Temascaltepec-Zihuatanejo 326 8. HuixtIa-Motozitla-Comalapa 111 9. Maravatio-Zinapecuaro 42 10. Ameca-Puerto. Vallarta 180 11. TLapa-uainttitlanr-Tecomatlan 87 12. Naucalpan-Atlacomulco 102 13. Playa Azul-Coahuayana 203 14. Sayula-Rio Uspanapa 120 15. Pochutla-Salina Cruz 185 16. Guerro-Nuevo Laredo 131 Subtotal 1,674 Total 1,875 .a  - 13 - TABLE 2 MEXICO SEVENTH HIGHWAY PROJECT (LOAN 968-NE) PROJECT COMPLETION REPORT Revised Seventh Highway Project Highways to be Widened 1/ Length (km) 1. Nouterrey-Monremorelos 50.0 2. Mazatlan-Aeropuerto 13.5 3. Los Reyes-Texcoco-Lecheria 64.0 Subtotal 127.5 Construction of New Roads 4. Temascaltepec-Zihuatanejo 330.2 5. Ebi,xtla-Comalapa 106.2 6. Maravatio-Zinapecuario 46.8 7. Tlapa-Huamuxtitlan-Remocatlan 91.0 8. Playa Azul-Coahuayana 235.6 9. Pochutla-Salina Cruz 178.1 10. Ciudad Guerrero-Nueva Laredo 130.1 Subtotal 1,118.0 Total 1,245.5 1/ The revised project included the Coatzacoalcos-Minatitlan road, which was deleted from the project more than two years after the project scope reduction (paras 3.08, 3.09).  - 14 - TABLE 3 MEXCO SEVENTH HIGHWAY PROJECT (LOAN 968-ME) PROJECT COMPLETION REPORT Comparison Between the Appraisal and Fiual Cost Estimates Appraisal 1/ Final Costs Mexican S US$ / Mexican $ US$ 31 Roads to be Widened 1. Monterrey-Montemorelos 90.5 7.24 605.0 23.54 2. Mazatlan-Aeropuerto 24.8 1.98 130.0 5.7 3. Los Reyes-Lecheria 284.8 22.78 805.0 34.26 Roads to be Constructed 4. Temascaltepec-Zihuatanejo 418.4 33.47 2,294.3 91.10 5. ldixtla-Comalapa 172.3 13.78 439.0 23.21 6. Maravatio-Zinapecuaro 34.0 2.72 60.0 3.17 7. Tlapa-Tecomatlan 81.6 6.53 422.0 15.83 8. Playa Azul-Coabuayana 367.3 29.38 1,946.5 80.95 9. Pochutla-Salina Cruz 234.2 18.74 912.0. 38.93 10. Guerrero-Nueva Laredo 98.4 7.87 220.0 10.22 Total 1,806.3 144.49 7,833.8 326.91 (100) (100) (434) (226) 1/ lcluding contingencies. 2/ Based on exchange rate at the time of the appraisal. 3/ Based on exchange rate at the time of work.  MEXICO SEVENTH HIGHWAY PROJECT (LOAN 968-ME) PROJECT COMPLETION REPORT Indicators for Economic Reevaluation Construction Costs (millions) Traffic Growth ERR (Constant 1981 Pesos) Appraisal 1/ Actual Change Appraisal Actual Appraisal Actual 1. Monterrey-Montemorelos 635 775 +22 12 10 28 71 35 3/ 2. Mazatlan-Aeroperto 125 240 +92 11 13 29 84 34 3/ I 3. Los Reyes-Lecheria 1,480 1,335 -10 10 7 36 68 32 3/ M 4. Temascaltepec-Zihuatanejo 2,345 3,320 +42 19 11 21 18 5. Huixtla-Comalapa 855 1,025 +20 14 12 21 19 6. Maravatlo-Ziapecuaro 195 165 -15 10 6 32 36 7. Tlapa-Tecomatlan 610 580 - 5 15 9 15 13 8. Playa Azul-Coahuayana 2,215 2,970 +34 12 10 11 8 9. Pochutla-Salina Cruz 1,170 1,615 +38 10 11 10 11 10. Guerrero-Nueva Laredo 505 455 -10 9 12 13 10 Total 10.135 12,480 +23% 23 2/ 24 2/ 1/ Appraisal estimates x 5.196 to reflect the increase in the construction index, and correcting for variations in length actually executed. 2/ Weighted averages. / ERRs not including value of time savings.  ANNEX - 16 - E-1229/84 May 15, 1984 Spanish (Mexico) OED JCB:ecc Direcci6n General de Planeacion Secretaria de Comunicaciones y Transportes Mexico City, April 17, 1984 105-84/000346 Mr. Shiv S. Kapur Director, OED World Bank Washington, DC 20433 Re: Project CoMpletion Report - Loan 968-ME Dear Mr. Kapur: I have pleasure in informing you that having reviewed the above-mentioned document, enclosed with your letter of March 22, we find no significant discrepancies between your figures and data and those contained in our own records. We therefore approve the content. Very truly yours, /s/ Ing. Alejandro Gonzales Cueto Director General  1'r : -7- v~~~~~~~~~~~~- ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I s5C n