Honduras - Seventh Highway Project

Document of The World Bank FOR OFFICIAL USE ONLY FILE Report No. 5080 PROJECT COMPLETION REPORT HONDURAS SEVENTH HIGHWAY PROJECT (LOAN 1341-HO/1342-T-HO) May 14, 1984 Operations Evaluation Department 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.  I  FOR OFFICIAL USE ONLY HONDURAS SEVENTH HIGHWAY PROJECT (LOAN 1341-HO/1342-T-HO) PROJECT COMPLETION REPORT TABLE OF CONTENTS Page No. PREFACE . ................................................ i BASIC DATA SHEET . ....................................... MISSION DATA . .......................................... HIGHLIGHTS .i. HIGLIGTS............................................. i I. INTRODUCTION .......................................... . 1 II. PROJECT PREPARATION, APPRAISAL AND NEGOTIATIONS ........ 1 III. PROJECT EXECUTION ... ..................................... 2 IV. COST ESTIMATES AND DISBURSEMENTS ....................... 10 V. ECONOMIC EVALUATION . . .................... 12 VI. PERFORMANCE OF THE BORROWER ..... ....................... 13 VII. ROLE OF THE BANK ....... ................................ 14 VIII. CONCLUSIONS ............................................ 15 TABLES 1. Costs of Civil Works per Km (US$) ...................... 17 2. Comparison Between the Appraisal and Final Cost .......... 18 ANNEX Borrower Comments . . . 19 MAP IBRD 14823R (PCR) 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   HONDURAS SEVENTH HIGHWAY PROJECT (LOAN 1341-HO/1342-T-HO) PROJECT COMPLETION REPORT PREFACE The following is a Project Completion Report on the Honduras Seventh Highway Project for which loans in the amount of US$35.0 million (US$7.0 million on Third Window Terms and US$28.0 million on Standard Terms) were approved by the Executive Directors on November 23, 1976. The loans are about 96% disbursed. About US$0.7 million are not committed and would be cancelled. The Loan closed on December 31, 1983. This Completion Report was prepared by the Bank's Latin America and the Caribbean Regional Office and is based on information obtained from the Minutes of the Board Meeting, LAC Information Center, Appraisal Report No. 12353a-HO, staff supervision reports, consultants' final reports and reports from the Project Unit in the Secretariat of Communications, Public Works and Transport (SECOPT). In accordance with the revised procedures for project performance audit reporting, this Completion Report was read by the Operations Evaluation Department but was not audited by OED staff. The draft Completion Report was sent to the Borrower, Comments received are presented as an annex and have been incorporated in the text of the report.   - ii - HONDURAS SEVENTH HIGHWAY PROJECT (LOAN 1341-HO/1342-T-HO) PROJECT COMPLETION REPORT BASIC DATA SHEET Key Project Data Appraisal Item Estimates Actual Total Project Cost (US$ million) 51.2 51.3 1/ Loan Amount (US$ million) 35.0 35.0 Disbursed (04-10-84) 35.0 33.4 Estimated Economic Rates of Return (%): Talanga-Juticalpa Road 16 21 Juticalpa-Catacamas Road 11 12 Date Physical Components Completed 6-81 12-83 Financial Performance - Fair Institutional Performance Fair Proportion of Time Overrun (%) 56 Other Project Data Original Item Plan Actual First Mention in Files or Timetables 06-02-75 Appraisal - 07-76 Negotiations 09-08-76 10-20-76 Board Approval 10-26-76 11-23-76 Loan Agreement - 12-16-76 Effectiveness 03-16-77 05-20-77 Closing Date 12-31-81 12-31-83 Borrower Republic of Honduras Executing Agency Secretariat for Communications, Public Works and Transportation (SECOPT) Fiscal Year of the Borrower January 1 - December 31 Follow-on Project Name Eighth Highway Project Loan Number 1901-HO Amount (US$ million) 28.0 Loan Agreement 09-29-80 1/ As explained throughout this report, some project components have been deleted while others have been added. A meaningful comparison of final costs with appraisal estimates can be done only for individual components of the project.   - iii - HONDURAS SEVENTH HIGHWAY PROJECT (LOAN 1341-HO/1342-T-HO) PROJECT COMPLETION REPORT MISSION DATA 1/ Month/ No. of No. of Staff/ Date of Type Year Weeks Persons Weeks Report Preparation 05-75 1 2 2 06-02-75 Preparation 08-75 1 2 2 09-03-75 Preparation 10-75 1 1 1 10-28-75 Preparation 01-76 1 2 2 02-06-76 Appraisal 02-76 2 4 8 07-27-76 Post-Appraisal 09-76 1 1 1 09-29-76 Supervision 01-77 1 1 1 01-21-77 Limited Supervision 2/ 03-77 0.5 1 0.5 04-20-77 Supervision 07-77 1 3 3 08-05-77 Supervision 02-78 1 2 2 03-06-78 Supervision 05-78 1 2 2 06-05-78 Supervision 01-79 1 4 4 03-01-79 Limited Supervision 3/ 03-79 1 1 1 06-01-79 Supervision 06-79 2 3 6 07-16-79 Technical Assistance 4/ 06-79 2 1 2 08-08-79 Supervision 09-79 2 3 6 11-08-79 Limited Supervision 5/ 10-79 1 1 1 11-12-79 Supervision 08-80 1 1 1 09-24-80 Supervision 02-81 2 1 2 03-10-81 Supervision 05-81 1.5 3 4.5 06-09-81 Supervision 03-82 2 3 6 04-13-82 Supervision 08-82 0.5 1 0.5 09-01-82 Supervision 03-83 1 2 2 05-05-83 TOTAL SUPERVISION EFFORT FY1977 FY1978 FY1979 FY1980 FY1981 FY1982 FY1983 (cont.) Staff Weeks 3.4 21.4 12.8 8.1 17.2 9.3 15.0 1/ Most of these missions included work for the Sixth and Eighth Highway Projects. 2/ To supervise the preparation of the Highway Master Plan. 3/ To supervise the labor-intensive Feeder Road Construction component. 4/ A Bank-appointed consultant visited Honduras to assist SECOPT in carrying out its commitment regarding personnel incentives. 5/ To supervise the training component of the technical assistance to the Directorate General for Roads and Airports Maintenance (DGMCA).   - iv - HONDURAS SEVENTH HIGHWAY PROJECT (LOAN 1341-HO/1342-T-HO) PROJECT COMPLETION REPORT HIGHLIGHTS The Seventh Highway Project was successful in achieving its main objective of reconstructing the Talanga-Juticalpa-Catacamas road. This was done at a cost 13% below appraisal estimates, in spite of the additional costs brought about by the upgrading of the standards of the Juticalpa-Catacamas section (para 3.05) and the need to carry out substantial repair works on the project road (para 3.07). The ex-post economic evaluation yielded estimated rates of return for the Talanga-Juticalpa and the Juticalpa-Catacamas road sections of 21% and 12% respectively, confirming the probable viability of the project (para 5.03). During the execution of the civil works, the Borrower initiated changes in the design standards of the Juticalpa-Catacamas road and in the alignment of the Talanga-Guaimaca road without prior Bank consultation. In the first case, the Bank found the changes justified and accepted their inclusion in the project (para 3.05). However, in the case of the new alignment for the Talanga-Guaimaca road, which necessitated a new bridge 54m long, the Bank did not fully accept the Government's arguments for the change and did not agree to finance the new bridge from the proceeds of the Loan (para 3.03). Two civil works contractors presented claims to the Borrower, for diverse reasons (paras 3.03 and 3.05). Loan funds freed because of the lower-than-expected cost of civil works and the deletion from the project of the Telica Dam Study (para 3.15) were reallocated to the construction of three access roads connecting the main road to the towns of Campamento, Juticalpa and Catacamas (para 3.08); to the construction of a 6.05 km road between Catacamas and the Escuela Nacional de Agricultura (para 3.09); to the purchase of additional equipment and spare parts for the country's highway maintenance program (para 3.15); and to the Labor-Intensive Road Construction Program (para 3.16). The following discussion summarizes the main aspects of the Technical Assistance elements included in the project: (a) Transport Planning. A Highway Master Plan was developed under the project (paras 3.11 and 3.12). (b) Technical Assistance to the Directorate General for Roads (DGC). This technical assistance focused on the organization and equipment of laboratories. Its training element was hampered by the slow progress in laboratory construction and shortage of supplies. Two practical courses were offered and,   in addition, four laboratory technicians attended specialized courses in Mexico (paras 3.13, 3.17 and 3.18). (c) Technical Assistance for the Directorate General for Road and Airport Maintenance (DGMCA). The consultants helped to introduce a system for road maintenance and equipment management in a Pilot District. However, implementation of the system at the national level was postponed and is being carried out under the follow-on Eighth Highway Project (paras 3.19, 3.20 and 3.21). (d) Technical Assistance to the Construction Industry. Consultants carried out a study identifying the mDst serious bottlenecks faced by the industry. However, since the study is still being reviewed, the technical assistance that should have emanated from it has not been carried out. The lessons to be learned from the project, identified in this Report, refer to: (a) the need to examine cost estimates in future projects in Honduras more carefully; (b) the need for future Bank supervision to increase emphasis following through on the institution-building aspects of the projects, after securing prior Government commitment; (c) the difficulties inherent in establishing an efficient road maintenance system in countries greatly lacking in staff and facilities; and (d) the need for continuation of the Bank's efforts to identify and implement appropriate technologies in labor-abundant countries.   HONDURAS SEVENTH HIGHWAY PROJECT (LOAN 1341-HO/1342-T-HO) PROJECT COMPLETION REPORT I. INTRODUCTION 1.01 Honduras, with an area of 115,200 km2, is the second largest of the five Central American countries. The generally rough topography, character- ized by several mountain ranges, makes the development of the road infra- structure difficult and expensive. Significant road development in Honduras started only in the mid-1960s, and, during the last decade, major efforts were made to extend and improve the network. Roads now interconnect major population centers; however, parts of the country, especially the east and northeast, have poor access and low road density. The present network consists of about 8,545 km, of which 1,716 are paved. Its backbone is the north-south road which, starting at the San Lorenzo Port on the Pacific Ocean, passes through Tegucigalpa and San Pedro Sula, reaching Puerto Cortes on the Caribbean Sea (Map IBRD 14823R (PCR)). 1.02 Over the past 25 years, the Bank has been involved continuously with highway development in Honduras. Since 1955, eight highway projects have been approved, with loans and credits amounting to US$88 million equivalent. With the reconstruction of the Talanga-Juticalpa-Catacamas road, financed under the subject project, the primary road network has been largely completed. The emphasis of investment in the road subsector has now shifted toward the expansion and improvement of the secondary and feeder roads and the maintenance of the system. This policy, supported by the Highway Master Plan (December 1977) prepared under the Seventh Highway Project (para 3.11), provided the basis for the formulation of the ongoing Eighth Highway Project (Loan 1901-HO), under which about 350 km of feeder roads located in selected, agriculturally productive valleys are being constructed and about 115 km of existing secondary roads are being improved. 1.03 This project completion report is based on information obtained from the Minutes of the Board Meeting, the LAC Information Center, Appraisal Report No. 12353a-HO, staff supervision reports, consultants' final reports and reports from the Project Unit in the Secretariat of Communications, Public Works and Transport (SECOPT). II. PROJECT PREPARATION, APPRAISAL AND NEGOTIATIONS 2.01 The civil works components of the project constitute the second tranche of the reconstruction of the Tegucigalpa-Talanga-Juticalpa-Catacamas highway corridor; reconstruction of the first tranche (Tegucigalpa-Talanga) was financed under the Sixth Highway Project (Loan 896-HO) and completed in February 1977. The feasibility study for the Tegucigalpa-Talanga-Juticalpa road was prepared by U.K. consultants, with financing provided by the Central  American Bank for Economic Integration (CABEI) and the U.K. Government. The study was completed in 1971 and updated by the Sectoral Planning Office of SECOPT in late 1975. Detailed engineering was prepared by the same consultants and completed in 1973. For the Juticalpa-Catacamas section, the feasibility study and detailed engineering were prepared in 1974-75 by US consultants, with financing provided under Loan 896-HO. 2.02 The project was appraised in February 1976. The issues paper, circulated on April 7, 1976, dealt mainly with the question of the investment necessary for the development of the area of influence of the project road. In particular, the paper discussed the possibility of excluding from the project the reconstruction of the Juticalpa-Catacamas road to release funds for a comprehensive study of the Guayape Valley development and for the construction of the feeder roads program that would emanate from such study. The Decision Memorandum, issued on April 30, 1976, stated that it would not be advisable to postpone reconstruction of the Juticalpa-Catacamas road in order to have funds for feeder roads since the logical first step in improving the Guayape Valley roads was to reconstruct the Juticalpa-Catacamas road. Thus, reconstruction of the road was retained in the project, although loan funds were also allocated for a study of the development of the Guayape Valley. Loan negotiations took place in October 1976; the loans, amounting to US$35.0 million (US$7 million on Third Window Terms and US$28 million on Standard Terms), were approved by the Executive Directors on November 23, 1976 and became effective on May 20, 1977. 2.03 The components of the project and their estimated costs as given in the Appraisal Report, are shown in the tabulation on the next page. III. PROJECT EXECUTION Civil Works 3.01 Invitations for prequalification of contractors were issued in August, 1976, following Bank guidelines on procurement. Nineteen firms (one local, 18 foreign) were prequalified and, on December 23, 1976, SECOPT issued the invitations to submit bids for one or more of the four sections into which the project road had been subdivided. Contracts were awarded as follows: (a) Section II 1/, Talanga-Guaimaca (33.1 km), to a French-Honduran joint venture; (b) Sections III and IV, Guaimaca-Rio Guayape (33.9 km) and Rio Guayape-Juticalpa (47.0 km), to a US contractor; and (c) Section V, Jutlcalpa-Catacamas (38.3 km) to an Italian firm. 1/ Section I was the Tegucigalpa-Talanga road financed under the Sixth Highway Project.  -3- Foreign US$ Millions Exchange Local Foreign Total Component (%) a) Road Reconstruction, including Right-of-Way 10.1 21.0 31.1 68 b) Supervision of Construction (522 man/months) 1.2 1.3 2.5 50 c) Study of an Integrated Development Program for the Guayape Valley (33 man/months) 0.1 0.5 0.6 80 d) Preparation of a Highway Master Plan (56 man/months) 0.1 0.3 0.4 80 e) Procurement of: - Maintenance, Workshop and Laboratory Equipment 0.3 2.2 2.5 90 - Spare Parts - 0.3 0.3 100 f) Technical Assistance to SECOPT (65 man/months) 0.1 0.3 0.4 80 g) Technical Assistance to the Local Construction Industry (20 man/months) - 0.1 0.1 80 2/ Total Base Costs 11.9 260 7. 68 h) Contingencies: Physical (about 10% of Item (a)) 1.0 2.1 3.1 Price Adjustment (about 27% of base costs) - For Civil Works 3.0 6.3 9.3 - For Equipment Purchases - 0.3 0.3 - For Consulting Services 0.3 0.3 0.6 Total 16.2 35.0 51.2 68 3.02 Although the Italian firm was the lowest bidder for Section II, the contract, with the Bank's concurrence, was awarded to the French-Honduran joint venture to give an opportunity to new companies to establish themselves in the country. The basic value of contracts awarded for civil works was about US$28.0 million, 10% below the appraisal estimate of US$31.0 million (excluding contingencies). 3.03 The reconstruction of the Talanga-Guaimaca Road (Section II) began in September 1977 and thereafter proceeded ahead of schedule. In February 1978, a Bank mission found that, over a 10-km road section, works were 2/ Local costs amounting to about US$20,000 not shown because of rounding of figures.  - 4 - proceeding on a revised alignment that was about 3 km longer than the original design, necessitating the construction of a new bridge 54 m long. The change was initiated without prior consultation with the Bank. Although the new alignment provided somewhat better geometrics, the Bank did not fully accept the Governments's arguments for the change and did not agree to the financing of the cost of the new bridge from the proceeds of the Loan. The design and construction of the bridge were therefore financed from the Government's own resources. The Talanga-Guaimaca road section was successfully completed in May 1979 at a total cost of US$6.1 million--about US$184,000 per km--and the quality of works was considered good. Immediately after the completion of works, the French partner of the joint venture submitted claims totaling about US$1.1 million as compensation for costs incurred because of the shortage of fuel in the country during the construction period and the execution of works not covered by the contract; the supervision consultants had not approved these extra works, which were not part of the design. The Directorate General for Roads (DGC) did not accept these claims. Following this refusal, the French partner of the civil venture inititated arbitration procedures through the International Chamber of Commerce in Paris. Although the Government reiterated its refusal of the claims to the appointed arbitrator, the case still has not been resolved.3/ 3.04 Works on the Guaimaca-Rio Guayape road (Section III) were satisfactorily completed in September 1979 at a total cost of US$8.7 million, or about US$250,000 per km. After the completion of works on Section III, the US contractor encountered financial difficulties, causing delays in the implementation of works on the Rio Guayape-Juticalpa road (Section IV). The firm stopped work in March 1981, and the contractor's insurer assumed the responsibility for carrying out the contracted works through subcontractors. This road section was expected to be completed by early 1983, but, because of a shortage of bitumen coupled with some financial and organizational problems of the subcontractors, it was completed in December, 1983. The Government invoked the penalty clause for late completion. Total cost of the Rio-Guayape-Juticalpa road was US$13.8 million, or US$241,000 per km.3/ 3.05 Construction of Section V (Juticalpa-Catacamas) by the Italian firm was carried out on schedule and completed by the end of 1980 at a total cost of US$8.4 million, or about US$221,000 per km. In early 1978, a Bank mission found that SECOPT had upgraded the design standards to make them homogeneous with those for the Talanga-Juticalpa section. The changes in standards, introduced without prior consultation with the Bank, were based on a sub- stantial increase in traffic volumes with respect to appraisal estimates. The Bank, based on what SECOPT submitted, post-facto, accepted the changes, and the Loan Agreement was amended accordingly. After completion of works in 1982, the contractor submitted claims to the Government for about US$2.0 mil- lion, alleging increased costs because of the execution of works not covered by the contract and higher-than-expected labor costs. Part of these claims was accepted by the Government but not made effective because the contractor didnot submit required evidence. 3.06 The supervision of the civil works was carried out by a joint venture of Honduran, Nicaraguan and Costa Rican firms. During the early 3/ See the Borrower's comment on this paragraph (Annex I).  - 5 - stages of project implementation, its performance was hampered by inadequate coordination between the Project Unit, the DGC and the supervisory group, leading to an excessive turnover of personnel within this group. These shortcomings resulted in decisions being taken without a clear definition of who was responsible for monitoring compliance with Bank procedures. As a result, Bank approval was not solicited by the Government regarding changes in civil works (paras 3.03 and 3.05). During 1979, SECOPT undertook the improvement of supervision and of the Project Unit including a substantial change in staff, and the clear definition of the functions and responsibilities of each of the above-mentioned groups. These actions improved the consultants' performance, which was generally adequate. The estimated total cost of supervision (US$3.3 million) was 32% above the appraisal estimate and represents 10% of the cost of the civil works. The cost overrun was caused by delays in the completion of the civil works, which necessitated a two and a half years extension of the consultants' services. 3.07 Exceptionally heavy rains during August and September of 1979 caused serious damage and landslides on all sections of the Tegucigalpa- Catacamas road. Some repairs were carried out by contract on a cost-plus fee nasis by the US contractor for Sections III and IV. However, based on further assessment of the condition of the road, the Bank and SECOPT concluded that, in order to prevent possible serious deterioration, additional repair and maintenance works along the Tegucigalpa-Catacamas road should be included in the project. Initially, SECOPT proposed, and the Bank agreed, to award the contract for the repairs to the US contractor, but, in view of the firms's financial problems, the contract for an amount of US$1.36 million was awarded to a local contractor following local competitive bidding procedures acceptable to the Bank. Works were completed by November 1983. A local firm was retained for the supervision of the repair works at a total cost of US$187,000. This amount represents 14% of the civil works, which is adequate. In general, there is a minimum supervision effort that is required regardless of the size of the civil works. Therefore, for small projects, the cost of supervision represents a higher proportion of the cost of civil works. 3.08 Because of the lower-than-expected costs of civil works (para 3.02), loan funds became available for other uses. Early in 1980, SECOPT proposed, and the Bank agreed, to use uncommitted loan funds for the construction of three access roads connecting the main road and the towns of Campamento (2.17 km), Juticalpa (3.17 km) and Catacamas (1.29 km). The Bank initially asked SECOPT to request proposals from the US and the Italian contractors responsible for Sections IV and V respectively for carrying out these works; however, since the Italian firm had barely enough equipment to complete its section of the main road, the contracts were signed with the US firm. Construction of the access roads to Campamento and Juticalpa stopped in March 1981 because of the financial difficulties of the contractor, when works were about 30% complete. At that time, construction of the access road to Catacamas had not yet started. The contractor's insurance company also took over these projects, which were completed by the end of June 1983, at an estimated total cost of US$1.4 million (about US$210,000 per km).  - 6 - 3.09 In December 1980, SECOPT proposed the construction a 6.05-km road between Catacamas and ENA (Escuela Nacional de Agricultura). The Bank, after reviewing the feasibility study report, approved the inclusion of this road in the project. Following local bidding procedures acceptable to the Bank, a contract was signed in October 1982. Works were completed satisfactorily in November, 1983 at a total cost of US$1.06 million (about US$175,000 per km). A local firm was retained for the supervision of this element of the project. Total cost of supervision was US$159,000, or 15% of the civil works. 3.10 Table 1 summarizes information regarding the cost per km of the different roads included in the project. Appraisal estimates of the cost per km of the Talanga-Juticalpa road were excessive. Although the substantial repairs that had to be carried out after the heavy rains of 1979 (para 3.07) were naturally not envisaged at the time of appraisal, final costs are still below appraisal estimates. The repair costs have been mostly concentrated on the Guaimaca-Juticalpa section, raising its cost substantially above the cost per km of the Talanga-Guaimaca section. Transport Planning 3.11 The Bank, under the technical assistance component of Loan 896-HO, financed a transport planning study which was carried out by US consultants. The study, completed in late 1976, laid the groundwork and provided the basic data needed to prepare a Highway Master Plan under the project. The same consultants were retained to develop the Plan, which was satisfactorily completed at the end of 1977. Under the Plan, covering in detail the 1978-1982 period, priority was given to small scale improvements of the trunk network, with special attention to deferred maintenance and to the construction of secondary and low standard feeder roads to serve agricultural areas. The priorities identified under the plan served as the basis for defining the Eighth Highway Project. 3.12 Loan funds were also used to extend the consultants' services initiated under the Sixth Highway Project in the area of training staff of two offices within SECOPT (the General Directorate for Transport and the Sectoral Planning Office). The consultants' report emphasized that qualified staff, as well as a sustained planning effort, would be required by SECOPT for the successful implementation of the Plan. In view of this consideration, and also recognizing institutional weaknesses within SECOPT, the Bank agreed to the use of about US$100,000 of loan funds to hire an experienced Honduran transport economist for a three-year period. Despite these efforts, improvements in planning capabilities were not adequately incorporated within SECOPT's institutional structure. Most of the difficulties can be attributed to lack of qualified staff.4/ The total cost of the transport planning element of the project, including the hiring of the local economist, was about US$522,000, as compared with the appraisal estimate of US$475,000. 4/ The Borrower attributes the difficulties to the provision of technical assitance to separate departments within SECOPT, instead of focusing on a coordinated planning unit.  Purchase of Maintenance, Workshop and Laboratory Equipment 3.13 The loan included funds for the purchase of the most urgently needed maintenance, workshop and laboratory equipment through international competitive bidding. By early 1980, the procurement of maintenance equipment and spare parts, as originally envisaged, had been completed. However, the exclusion from the project of the Telica Dam Study (para 3.15) freed loan funds which, at the Government's request, were reallocated to the purchase of additional maintenance equipment and spare parts. Deliveries are expected to be completed in 1984; the total cost of this component is US$3.3 million. 3.14 For the purchase of workshop and laboratory equipment, Section 4 (b) of the Loan Agreement states that no disbursement would be made until SECOPT had provided facilities, satisfactory to the Bank, for the installa- tion of the equipment. To this effect, the Borrower undertook to build a laboratory and a workshop in San Pedro Sula and to improve the existing laboratory in Tegucigalpa. The works proceeded extremely slowly because of managerial problems, shortage of funds and inadequate design of the San Pedro Sula workshop, which required substantial revisions to make it functional. The necessary installations became operational between mid-1982 and early 1983. The Bank, aware of the time-consuming process of equipment procurement in Honduras, agreed that the invitation to bid for the equipment might take place before the buildings were completed, reconfirming, at the same time, the above-mentioned condition for disbursement. Procurement of workshop equipment has been completed at a total cost of about US$569,000, while procurement of laboratory equipment was completed by December 1983 at a cost of about US$293,000. Telica Dam Study 3.15 The original Loan Agreement included funds for a study of the inte- grated development program of the Guayape Valley. In mid-1978, the Bank was informed that the Canadian International Development Association (CIDA) had made a formal proposal for carrying out the study. The proposal was accepted, and the US$500,000 allocated for that purpose became available for other uses. In July 1979, SECOPT proposed, and the Bank agreed, to use US$100,000 of those funds for the engineering studies of the Catacamas-Culmi road. By the end of 1979, after lengthy debates, the Bank agreed with the Ministry of Natural Resources (MNR) on the use of the remaining funds for a study of the Telica Dam site in the Guayape region with the purpose of investigating its potential for irrigation, domestic water supply, flood control and hydropower development. The Loan Agreement was modified accordingly. A Bank Agricultural Division, in charge of this component, agreed, in mid-1980, to MNR's selection of a French-Honduran consulting firm for carrying out the study. The consultants' proposal included a foreign exchange requirement of US$720,000, which was made available under Category 5 (a) of the revised allocation of proceeds of the Loan. However, since the study was never started, the Bank informed the Borrower, in November 1982, that, since it was clear that the study could not be completed before the loan's closing date, the Bank would no longer consider its financing under  - 8 - the Project. The Bank recommended, and the Borrower agreed to, a realloca- tion of the loan proceeds to finance much needed equipment and spare parts for its highway maintenance program. Labor Intensive Road Construction Program 3.16 In February 1976, the Bank agreed to a Government proposal to promote the development of labor-intensive technology for low volume feeder road construction and maintenance. To support the launching of the labor- based construction program, a two-year, US$400,000 technical assistance scheme was established, financed in equal parts by the Government of Honduras and by the Bank's research program for appropriate construction technol- ogies. The scheme was initiated in March 1976 with the arrival in Tegucigalpa of the German consultants who, working with Honduran public sector engineers and economists in a newly created "Feeder Roads Unit," provided assistance to develop the organization and methods of road selection, construction, supervision and administration, suitable to labor- intensive techniques. The program soon gained substantial local acceptance, and about 150 km of roads were built between 1976 and 1978. In January 1978, the Ministry transformed the Feeder Roads Unit into a "Department of Labor-Intensive Construction" within DGV. Since the contract for consultant services was to expire in September 1978, the Government, in May 1978, proposed to the Bank the extension of the program for an additional two-year period with financing for extension of the consultant services and acquisition of equipment, using the surplus funds that resulted from highway construction cost savings due to both lower-than-expected base costs and lower incidence of cost escalation. The Bank agreed, and the second part of the program was included in the project in September 1978. The Loan Agreement was changed accordingly, and the proceeds of the loan were revised to allocate US$1.0 million to the program. A Final Report issued by the consultants points out that the work performed under the 1976-1980 Labor-Intensive Road Construction Program resulted in the construction or improvement of over 330 km of all-weather rural access roads to the Honduran network. The program, now also covering the maintenance of rural roads, is proceeding well, funded by its own resources as well as by several bi-lateral and multi-lateral agencies. Technical Assistance to the Directorate General for Roads (DGC) 3.17 In November 1980, a German firm was selected to carry out this technical assistance which included, inter-alia, a study of DGC's Human Resources and Institutional Improvements, especially the organization and equipment of laboratories. The training aspects of the technical assistance were scheduled to take place after the laboratory buildings were completed and the new equipment installed. However, because of slow progress on the laboratory constructions and shortages of training supplies, the training program, conducted in May and June of 1980, suffered from inadequate facilities, equipment and textbooks.5/ Two practical courses on Soils and Materials Mechanics were offered to Taboratory engineers and assistants. The consultants' final report of August 1980 contains recommendations regarding training of laboratory personnel in the aspects of organization, planning and 5/ The Borrower attributes the problem to delays in contracting consultants and supply shortages.  -7- Purchase of Maintenance, Workshop and Laboratory Equipment 3.13 The loan included funds for the purchase of the most urgently needed maintenance, workshop and laboratory equipment through international competitive bidding. By early 1980, the procurement of maintenance equipment and spare parts, as originally envisaged, had been completed. However, the exclusion from the project of the Telica Dam Study (para 3.15) freed loan funds which, at the Government's request, were reallocated to the purchase of additional maintenance equipment and spare parts. Deliveries are expected to be completed in 1984; the total cost of this component is US$3.3 million. 3.14 For the purchase of workshop and laboratory equipment, Section 4 (b) of the Loan Agreement states that no disbursement would be made until SECOPT had provided facilities, satisfactory to the Bank, for the installa- tion of the equipment. To this effect, the Borrower undertook to build a laboratory and a workshop in San Pedro Sula and to improve the existing laboratory in Tegucigalpa. The works proceeded extremely slowly because of managerial problems, shortage of funds and inadequate design of the San Pedro Sula workshop, which required substantial revisions to make it functional. The necessary installations became operational between mid-1982 and early 1983. The Bank, aware of the time-consuming process of equipment procurement in Honduras, agreed that the invitation to bid for the equipment might take place before the buildings were completed, reconfirming, at the same time, the above-mentioned condition for disbursement. Procurement of workshop equipment has been completed at a total cost of about US$569,000, while procurement of laboratory equipment was completed by December 1983 at a cost of about US$293,000. Telica Dam Study 3.15 The original Loan Agreement included funds for a study of the inte- grated development program of the Guayape Valley. In mid-1978, the Bank was informed that the Canadian International Development Association (CIDA) had made a formal proposal for carrying out the study. The proposal was accepted, and the US$500,000 allocated for that purpose became available for other uses. In July 1979, SECOPT proposed, and the Bank agreed, to use US$100,000 of those funds for the engineering studies of the Catacamas-Culmi road. By the end of 1979, after lengthy debates, the Bank agreed with the Ministry of Natural Resources (MNR) on the use of the remaining funds for a study of the Telica Dam site in the Guayape region with the purpose of investigating its potential for irrigation, domestic water supply, flood control and hydropower development. The Loan Agreement was modified accordingly. A Bank Agricultural Division, in charge of this component, agreed, in mid-1980, to MNR's selection of a French-Honduran consulting firm for carrying out the study. The consultants' proposal included a foreign exchange requirement of US$720,000, which was made available under Category 5 (a) of the revised allocation of proceeds of the Loan. However, since the study was never started, the Bank informed the Borrower, in November 1982, that, since it was clear that the study could not be completed before the loan's closing date, the Bank would no longer consider its financing under  the Project. The Bank recommended, and the Borrower agreed to, a realloca- tion of the loan proceeds to finance-much needed equipment and spare parts for its highway maintenance program. Labor Intensive Road Construction Program 3.16 In February 1976, the Bank agreed to a Government proposal to promote the development of labor-intensive technology for low volume feeder road construction and maintenance. To support the launching of the labor- based construction program, a two-year, US$400,000 technical assistance scheme was established, financed in equal parts by the Government of Honduras and by the Bank's research program for appropriate construction technol- ogies. The scheme was initiated in March 1976 with the arrival in Tegucigalpa of the German consultants who, working with Honduran public sector engineers and economists in a newly created "Feeder Roads Unit," provided assistance to develop the organization and methods of road selection, construction, supervision and administration, suitable to labor- intensive techniques. The program soon gained substantial local acceptance, and about 150 km of roads were built between 1976 and 1978. In January 1978, the Ministry transformed the Feeder Roads Unit into a "Department of Labor-Intensive Construction" within DGV. Since the contract for consultant services was to expire in September 1978, the Government, in May 1978, proposed to the Bank the extension of the program for an additional two-year period with financing for extension of the consultant services and acquisition of equipment, using the surplus funds that resulted from highway construction cost savings due to both lower-than-expected base costs and lower incidence of cost escalation. The Bank agreed, and the second part of the program was included in the project in September 1978. The Loan Agreement was changed accordingly, and the proceeds of the loan were revised to allocate US$1.0 million to the program. A Final Report issued by the consultants points out that the work performed under the 1976-1980 Labor-Intensive Road Construction Program resulted in the construction or improvement of over 330 km of all-weather rural access roads to the Honduran network. The program, now also covering the maintenance of rural roads, is proceeding well, funded by its own resources as well as by several bi-lateral and multi-lateral agencies. Technical Assistance to the Directorate General for Roads (DGC) 3.17 In November 1980, a German firm was selected to carry out this technical assistance which included, inter-alia, a study of DGC's Human Resources and Institutional Improvements, especially the organization and equipment of laboratories. The training aspects of the technical assistance were scheduled to take place after the laboratory buildings were completed and the new equipment installed. However, because of slow progress on the laboratory constructions and shortages of training supplies, the training program, conducted in May and June of 1980, suffered from inadequate facilities, equipment and textbooks.5/ Two practical courses on Soils and Materials Mechanics were offered to Taboratory engineers and assistants. The consultants' final report of August 1980 contains recommendations regarding training of laboratory personnel in the aspects of organization, planning and 5/ The Borrower attributes the problem to delays in contracting consultants and supply shortages.  - 7 - Purchase of Maintenance, Workshop and Laboratory Equipment 3.13 The loan included funds for the purchase of the most urgently needed maintenance, workshop and laboratory equipment through international competitive bidding. By early 1980, the procurement of maintenance equipment and spare parts, as originally envisaged, had been completed. However, the exclusion from the project of the Telica Dam Study (para 3.15) freed loan funds which, at the Government's request, were reallocated to the purchase of additional maintenance equipment and spare parts. Deliveries are expected to be completed in 1984; the total cost of this component is US$3.3 million. 3.14 For the purchase of workshop and laboratory equipment, Section 4 (b) of the Loan Agreement states that no disbursement would be made until SECOPT had provided facilities, satisfactory to the Bank, for the installa- tion of the equipment. To this effect, the Borrower undertook to build a laboratory and a workshop in San Pedro Sula and to improve the existing laboratory in Tegucigalpa. The works proceeded extremely slowly because of managerial problems, shortage of funds and inadequate design of the San Pedro Sula workshop, which required substantial revisions to make it functional. The necessary installations became operational between mid-1982 and early 1983. The Bank, aware of the time-consuming process of equipment procurement in Honduras, agreed that the invitation to bid for the equipment might take place before the buildings were completed, reconfirming, at the same time, the above-mentioned condition for disbursement. Procurement of workshop equipment has been completed at a total cost of about US$569,000, while procurement of laboratory equipment was completed by December 1983 at a cost of about US$293,000. Telica Dam Study 3.15 The original Loan Agreement included funds for a study of the inte- grated development program of the Guayape Valley. In mid-1978, the Bank was informed that the Canadian International Development Association (CIDA) had made a formal proposal for carrying out the study. The proposal was accepted, and the US$500,000 allocated for that purpose became available for other uses. In July 1979, SECOPT proposed, and the Bank agreed, to use US$100,000 of those funds for the engineering studies of the Catacamas-Culmi road. By the end of 1979, after lengthy debates, the Bank agreed with the Ministry of Natural Resources (MNR) on the use of the remaining funds for a study of the Telica Dam site in the Guayape region with the purpose of investigating its potential for irrigation, domestic water supply, flood control and hydropower development. The Loan Agreement was modified accordingly. A Bank Agricultural Division, in charge of this component, agreed, in mid-1980, to MNR's selection of a French-Honduran consulting firm for carrying out the study. The consultants' proposal included a foreign exchange requirement of US$720,000, which was made available under Category 5 (a) of the revised allocation of proceeds of the Loan. However, since the study was never started, the Bank informed the Borrower, in November 1982, that, since it was clear that the study could not be completed before the loan's closing date, the Bank would no longer consider its financing under  - 8 - the Project. The Bank recommended, and the Borrower agreed to, a realloca- tion of the loan proceeds to finance much needed equipment and spare parts for its highway maintenance program. Labor Intensive Road Construction Program 3.16 In February 1976, the Bank agreed to a Government proposal to promote the development of labor-intensive technology for low volume feeder road construction and maintenance. To support the launching of the labor- based construction program, a two-year, US$400,000 technical assistance scheme was established, financed in equal parts by the Government of Honduras and by the Bank's research program for appropriate construction technol- ogies. The scheme was initiated in March 1976 with the arrival in Tegucigalpa of the German consultants who, working with Honduran public sector engineers and economists in a newly created "Feeder Roads Unit," provided assistance to develop the organization and methods of road selection, construction, supervision and administration, suitable to labor- intensive techniques. The program soon gained substantial local acceptance, and about 150 km of roads were built between 1976 and 1978. In January 1978, the Ministry transformed the Feeder Roads Unit into a "Department of Labor-Intensive Construction" within DGV. Since the contract for consultant services was to expire in September 1978, the Government, in May 1978, proposed to the Bank the extension of the program for an additional two-year period with financing for extension of the consultant services and acquisition of equipment, using the surplus funds that resulted from highway construction cost savings due to both lower-than-expected base costs and lower incidence of cost escalation. The Bank agreed, and the second part of the program was included in the project in September 1978. The Loan Agreement was changed accordingly, and the proceeds of the loan were revised to allocate US$1.0 million to the program. A Final Report issued by the consultants points out that the work performed under the 1976-1980 Labor-Intensive Road Construction Program resulted in the construction or improvement of over 330 km of all-weather rural access roads to the Honduran network. The program, now also covering the maintenance of rural roads, is proceeding well, funded by its own resources as well as by several bi-lateral and multi-lateral agencies. Technical Assistance to the Directorate General for Roads (DGC) 3.17 In November 1980, a German firm was selected to carry out this technical assistance which included, inter-alia, a study of DGC's Human Resources and Institutional Improvements, especially the organization and equipment of laboratories. The training aspects of the technical assistance were scheduled to take place after the laboratory buildings were completed and the new equipment installed. However, because of slow progress on the laboratory constructions and shortages of training supplies, the training program, conducted in May and June of 1980, suffered from inadequate facilities, equipment and textbooks.5/ Two practical courses on Soils and Materials Mechanics were offered to Taboratory engineers and assistants. The consultants' final report of August 1980 contains recommendations regarding training of laboratory personnel in the aspects of organization, planning and 5/ The Borrower attributes the problem to delays in contracting consultants and supply shortages.  control of road construction which SECOPT is endeavoring to carry out. To this effect, an experienced local engineer has been appointed as Chief of the Geotechnical Department and is currently implementing the consultants' recommendations. The cost of this component was US$116,000. 3.18 Also, under the training program, SECOPT reached an agreement with the Mexican Secretariat of Public Works (SAHOP) to send four laboratory technicians to Mexico, with transportation and cost-of-living expenses paid from loan proceeds. The trainees attended a special six-month (April/ September 1981) course at a total cost of about US$17,000. Technical Assistance for the Directorate General for Road and Airport Maintenance (DGMCA) 3.19 This technical assistance was carried out by the consultants (US) between May 1978 and November 1980. Its main objective was to design and introduce a system for road maintenance and equipment management for at least one year in a Pilot District before extending the system at the national level. Periodic meetings and lectures chaired by the consultants were carried out to implement and test new management procedures. In addition, 18 members of the DGMCA, comprising engineers, administrators and executives, made one- week training trips to the United States to observe the implementation of road maintenance and equipment management systems in several districts of the states of Maryland and New Mexico. 3.20 The first program was completed satisfactorily but, when the system was considered suitable for implementation at the national level, the consultants were asked by SECOPT to postpone its introduction to other districts and to concentrate on studies required for the preparation of the Eighth Highway Project. This postponement resulted in the extension of the contract by four months. Furthermore, because of the delay in the preparation of the contract for the continuation of the consultants' services under the Eighth Project, SECOPT requested a new three-month extension, which was agreed by the Bank, to ensure the continuity of this technical assistance. 3.21 A final report, presented by the consultants in June 1981, lists the objectives partially achieved under the Seventh Highway Project and expected to be consolidated under the ongoing Eighth Highway Project. Among them: (a) the implementation of a new system for maintenance and equip- ment administration comprising the programing, execution, control and evaluation of the work performed; (b) the simplification of data collection and field reports; (c) the study of a new costing system; (d) the centralization of data to be used as a management tool; and  - l1O - (e) the reduction of the delays experienced in the procurement of spare parts with the creation of an office of the Proveeduria de la Republica (Central Procurement Office) attached to DGMCA. 3.22 The final cost of the technical assistance to DGMCA was about US$694,000, which, added to the cost of the technical assistance to DGC and to the scholarship program (paras 3.17 and 3.18), represents a total cost of about US$827,000, 74% above the appraisal estimate of US$475,000. This substantial increase in cost is mostly due to the extension of the scope and duration of the work by the US consultants (paras 3.19 and 3.20). Technical Assistance to the Construction Industry 3.23 In compliance with Section 3.04 of the Loan Agreement, the Borrower, in November 1977, signed an agreement with the Honduran Chamber of Construction Industry for assisting in the carrying out of an aid program to the local construction industry. German consultants were selected to provide this technical assistance, and the contract was signed in August 1979. A consultants' report identified the most serious physical and financial bottlenecks faced by the industry and made specific recommendations leading to increasing the predictability of future work and the availability of timely credit supply. However, the technical assistance to the construction industry that should have emanated from the consultants' study was not carried out. The report is presently being reviewed by the Honduran Chamber of Construction Industry and SECOPT. Their recommendations will be discussed with the Honduran Government in the near future since Loan 1901-HO estab- lishes the obligation of the Borrower to act on the report's recommenda- tions. The total cost of this project component was US$226,000, 64% above the appraisal estimate of US$138,000. IV. COST ESTIMATES AND DISBURSEMENTS 4.01 A comparison between appraisal and final cost estimates (including contingencies) is shown in Table 2. The final cost of the original project items which remained in the project is currently estimated at about US$44.0 million, including normal contingency allowances, some US$7.2 million (14%) less than the appraisal estimate. The remaining funds were used for new project elements (Labor Intensive Road Construction Program, access roads, etc.) or for increasing the scope of the original ones. Bank participation remained at 68% of the total project cost, as estimated during the appraisal. 4.02 Disbursements lagged considerably behind appraisal estimates during the first year-and-a-half of project implementation, as shown in the following tabulation. A four-month delay in starting the construction of the Talanga-Juticalpa road, indecision on the use of the Guayape Study funds, delays caused by a contractor's financial problems, and additional procure- ment of maintenance equipment and civil works also contributed to the dis- bursement delays. The acceleration of disbursements in 1979 reflects the on-schedule completion of most of the project's original civil works, by far the largest element of the project.  - 11 - Disbursements (US$ millions) Appraisal Actual as % of FY Estimates Actual Appraisal 1977 50 - 0 1978 7.00 40 6 1979 18.50 16.84 91 1980 29.00 23.35 81 1981 34.00 27.70 82 1982 35.00 29.70 85 1983 - 33.40 6/ _ 4.03 The allocation of loan proceeds has been revised four times, as shown below, to provide for the Labor Intensive Program and other project revisions. (US$'000) Revisions Categories Original First Second Third Fourth 9/78 1/81 2/82 1/83 A. Civil Works 21,000 21,000 25,500 26,350 26,350 B. Equipment for Maintenance Workshop and Laboratories 2,500 2,500 3,050 3,020 4,175 C. Consultant Services (i) Design and supervision of Part A and B of the Project 1,300 1,300 1,500 1,875 1,875 (ii) Transport Planning (Part D) 300 300 440 540 444 (iii) Technical Assistance to DEC and DGMCA (Part E) 300 300 805 725 725 (iv) Technical Assistance to construction industry (Part E) 100 100 250 220 220 (v) Guayape Study (Part G) 500 500 820 820 96 (vi) Labor-Intensive Program (Part H) - 1,000 1,000 1,115 1,115 (vii) Unallocated 9,000 8,000 1.635 335 - Total 35,000 35,000 35,000 35,000 35,000 6/ As of April 10, 1984 about US$1.3 million of Loan 1341-HO and US$0.3 million of Loan 1342-T-HO were still undisbursed. Current estimates of the final cost of the project suggest that about US$0.7 million are not committed and would be cancelled.  - 12 - 4.04 The original Closing Date, December 31, 1981, was extended twice first to June 30, 1983 and finally to December 31, 1983. V. ECONOMIC EVALUATION 5.01 The upgrading of the gravel Talanga-Catacamas road was justified at appraisal on the basis of quantifiable benefits accruing to road users mainly from reduced vehicle operating costs which would result from improvements in road design and surface characteristics and from a 13.2-km shortening of the Talanga-Juticalpa Section. 5.02 The economic reevaluation of the project road was based on a methodology similar to the one used at appraisal. However, certain assumptions have been modified, as follows: (a) Savings in Maintenance Costs The appraisal estimated that the difference in maintenance expenditures for the "with" and "without" project cases would result in a net additional economic cost for the project. However, given the present level of traffic (about 700 vehicles per day), an assumption of net savings from reduced maintenance costs seems more realistic. Since the results of the economic analysis were not sensitive to different assumptions about maintenance costs, they were ignored in the economic reevaluation. (b) Projected Traffic Growth Projected traffic growth at the time of the appraisal was heavily based on the possible development of the forest industry in the Olancho region, which was expected to be limited by a rapid rate of exhaustion of resources. Therefore, the appraisal projected a conservative average annual traffic growth rate of 5% for the first ten years of the lifetime of the project and 4% thereafter, although the historical traffic growth rate in the years preceding the appraisal had been about 8% p.a. Traffic counts carried out by SECOPT in March 1983 show that actual traffic levels in the Talanga-Juticalpa and the Juticalpa-Catacamas road section are 13% and 7%, respec- tively, above those expected at appraisal for that year. This higher-than-expected traffic is explained by the development taking place in the several valleys in the area of influence of the project road. Therefore, in spite of the modest growth of the forest industry, the economic reevaluation has been based on a projected annual traffic growth of 6% for the first 10 years of the project and 5% thereafter.  - 13 - 5.03 The ex-post economic evaluation yielded estimated economic rates of return (ERR) of 21% for the Talanga-Juticalpa road and 12% for the Juticalpa- Catacamas road, versus the 16% and 11% respectively estimated at appraisal. The substantial difference in the ex-ante and ex-post ERR for the Talanga- Juticalpa road is due to an actual and projected traffic growth above that estimated at appraisal and to a final cost of construction 16% below the appraisal estimate 7/. In the case of the Juticalpa-Catacamas road, the extra benefits brought about by the higher traffic growth were mostly offset by a real cost of construction 23% above that envisaged at the time of appraisal. This cost increase was due to the adoption of a higher design standard than that agreed at appraisal (para 3.05). VI. PERFORMANCE OF THE BORROWER 6.01 The performance of the Borrower, except for the changes in road designs initiated without previous consultation with the Bank, can be considered as generally satisfactory. Regarding the contractors' claims, the Borrower is reviewing their different elements and is prepared to satisfy those claims found justified. Following are the major covenants and the Borrower's efforts to comply. 6.02 "Section 3.08 (a). Except as the Bank shall otherwise agree, the Borrower shall: not later than June 30, 1977, submit to the bank a detailed plan setting forth the action to be taken by the Borrower, including, without limitation, the provision of adequate incentives, in order to recruit and retain the services of qualified personnel for DGC and DGMCA." The covenant was partially fulfilled. After several postponements of the deadline to submit the above mentioned plan, the Bank sent, in July 1979, a consultant to assist SECOPT in this matter (the cost of these services did not come from loan proceeds). As an interim solution to the implementation of the Plan's recommenda- tions, the Government strengthened SECOPT's capabilities by con- tracting advisors at salaries higher than the civil service scale. 6.03 Section 4.03 (a). The Borrower shall: (i) cause all national roads of the Borrower to be adequately maintained and cause all necessary repairs thereof to be made, all in accordance with sound engineering practices; (ii) cause all maintenance equipment of the Borrower to be adequately maintained and cause all necessary repairs and renewals thereof to be made, all in accordance with sound engineering practice; (iii) cause existing repair workshops to be adequately maintained, particularly by improving, not later than December 31, 1977 and in manner satisfactory to the Bank, the equipment repair and laboratory facilities at Tegucigalpa and San Pedro Sula 7/ The comparison between actual and appraisal estimated costs (including contingencies) was made in constant 1982 prices.  - 14 - (including disposal of obsolete equipment presently stockpiled therein); and (iv) provide, promptly as needed, the funds, facilities, services and other resources required for the foregoing." The Borrower partially complied with the preceding covenant. Compliance with item (i) is expected to improve after the equipment financed under the Seventh and Eighth Highway Projects is in operation. The continuation under the Eighth Highway Project of the technical assistance in this area is also expected to strengthen the capabilities of DGMCA and improve maintenance operations. Compliance with item (ii) is also expected under the Eighth Highway Project. Regarding item (iii), the San Pedro Sula laboratory, the Tegucigalpa workshop, the San Pedro Sula workshop and the Tegucigalpa laboratory are operational. Some equipment remains to be delivered by the supplier to the San Pedro Sula laboratory. The delay in complying with item (iii) was mainly the result of temporary lack of compliance with item (iv). 6.04 "Section 4.03 (b) (i). The Borrower shall take all necessary action to: not later than June 30, 1977 or such date as shall be acceptable to the Bank, cause the dimensions and weights of the vehicles using the national roads of the Borrower to be kept within the limits provided by the laws and regulations of the Borrower." SECOPT complied well in advance with the preceding covenant. Enforcement of maximum weights and dimensions of vehicles started on January 6, 1977, and the program is being continued success- fully. Currently there are 13 weighing stations in operation. VII. ROLE OF THE BANK 7.01 The Bank was significantly involved in project identification and preparation by inclusion of feasibility studies under the preceding Sixth Highway Project and by participation in review of subsequent designs and studies which were financed by others. The scope and size of this, the Seventh Highway Project, were within SECOPT's administrative capabilities. The original implementation schedule was reasonable, but additional works and procurement of equipment described in preceding chapters delayed completion beyond the originally envisaged date. 7.02 The Bank, during project implementation, showed the necessary flexibility to reassign funds released by the lower-than-expected civil works costs and by the deletion from the project of the Guayape Valley Study. At the same time, in the case of the changes in road design standards and alignments initiated by the Borrower without prior consultation, the Bank's response was adequately firm. The Bank accepted those changes that were justified, as well as part of the already started realignment for which substantial costs had already been incurred. However, it refused to finance a new bridge, leaving to the Borrower the responsibility of bearing most of the cost of the Government's decision.  - 15 - VIII. CONCLUSIONS 8.01 The Seventh Highway Project was successful in achieving its main objective of completing the second tranche of the Tegucigalpa-Catacamas highway, with an estimated rate of return above that expected at appraisal. In addition, the well chosen technical assistance elements resulted in some improvements in the area of road maintenance and transport planning which are expected to continue under the Eighth Highway Project. However, because of the Borrower's financial and staffing constraints, planning efforts, namely the updating of the Highway Master Plan completed under the project, were not pursued. The Government was committed, under the Eighth Highway Project, to update the Plan, using its own resources. Because of financial constraints, the Government requested that surplus funds from the Seventh Highway Project be reallocated to finance the updating of the Plan. The Bank did not agree to this request, but waived the Borrower's obligation to update the Plan under the Eighth Highway Project. In the case of the implementation of a maintenance system at national level, results continue to be below expecta- tions, with budgetary constraints and delays in equipment and spare parts procurement contributing to the slow pace of achievement in this area. 8.02 There are several lessons to be learned from this project: (a) One particular lesson can be learned from the fact that appraisals of the last three Highway Projects in Honduras substantially overestimated the cost of civil works. This pattern suggests that, in the future, the Bank should examine cost estimates in Honduras more carefully in order to improve the planning process of resource allocations. (b) In addition, future Bank project supervision should give more emphasis to the institution-building aspects of its technical assistance components. The Seventh Highway Project had, as the main objective of its transport planning element, the prepara- tion of a Highway Master Plan. However, the plan, by itself, becomes a temporary tool if the planning agency does not develop the necessary capabilities to monitor and update it in a continuous and systematic way. Although the project marginally provided for such needs, supervision efforts focused on the civil works component and did not pay early attention to the detrimental effects that the lack of coordination of the project executing units of the different lending agencies were having on the technical assistance for planning. (c) Another lesson to be learned from this project refers to the difficulties inherent in establishing an efficient road maintenance system in countries greatly lacking in staff and facilities. The Bank should be less optimistic in this area,  - 16 - realizing that the development of such a system is a slow and tortuous process that can be achieved only over a longer term. In addition, the Bank should consider the possibility, in future projects, of reducing the emphasis on the implementation of over-sophisticated management information systems. The focus, as a first step, should be on developing, from the in-place system, high standard field work together with simple forms for reporting inputs so that physical targets and costs can be readily controlled and that realistic planning and budgeting can be carried out. The introduction of such improvements should be preceded by some measure of success in training the necessary local staff. (d) A final lesson can be derived from the implementation of the Labor-Intensive Program for road construction in Honduras. The success of the program, coupled with the substantial institution-building that accompanied it, indicates that the Bank should continue with its efforts to identify and implement appropriate technologies in labor-abundant countries.  - 17 - TABLE 1 HONDURAS SEVENTH HIGHWAY PROJECT (LOAN 1341-HO/1342-T-HO) PROJECT COMPLETION REPORT Costs of Civil Works per km (US$) Appraisal Original Final Road Section Estimate 1/ Contract Costs Talanga-Guaimaca (33 km) ) 187,100 194,006 2/ Guaimaca-Rio Guayape (34 km) ) 303,800 ) 266,619 2/-3/ ) ) 263,205 6/ Rio Guayape-Juticalpa (48 km) ) ) 241,400 3/ Juticalpa-Catacamas (38 km) 198,700 222,340 4/ 233,003 2/-4/ Access Roads - 219,000 210,000 5/ Catacamas - ENA - 167,600 175,000 1/ Including physical and price contingencies 2/ Including repair works contracted with a local firm (para 3.07) 3/ Including the supplementary contract signed with the US contractor to carry out additional works on these road sections (para 3.07) 4/ Design standards were raised to make this road homogeneous with the Talanga-Juticalpa Road (para 3.05) 5/ Includes the cost of installing main water pipes and access connections to houses 6/ US$195,488/km was the original contract value excluding the additional works later contracted (para 3.07)  - 18 - TABLE 2 HONDURAS SEVENTH HIGHWAY PROJECT (LOAN 1341-HO/1342-T-HO) PROJECT COMPLETION REPORT Comparison Between the Appraisal and Final Cost Estimates Total Cost Estimates Increase/ Appraisal 1/ Final Decreases (US$ million) A. Civil Works (a) Talanga-Catacamas Road 42.54 37.00 -13 (b) Tegucigalpa-Catacamas repair works - 1.36 - (c) ENA road 1.06 - (d) Access roads - 1.40 - B. Maintenance Equipment 2.82 3.30 +17 C. Workshop Equipment .56 .57 + 2 D. Laboratory Equipment .14 .29 +107 E. Consultant Services (a) Construction supervision 3.30 3.65 +11 (b) Transport planning .48 .52 + 8 (c) Technical assistances to DGV and .48 .83 +73 DGMAC (d) Technical assistance to the construction industry .14 .23 +64 (e) Guayape Valley Int.Dev.Project .75 - - (f) Catamacas-Culmi engineering study - .12 (g) Labor-Intensive Program - .92 Total 51.21 51.25 1/ Including contingencies  - 19 - Annex Page 1 of 5 HONDURAS SEVENTH HIGHWAY PROJECT (LOAN 1341-HO/1342-T-HO) PROJECT COMPLETION REPORT Translation Incoming telex to the World Bank from SECOPT April 10, 1984 Mr. Shiv S. Kapur, Director, OED Dear Sir: As requested we are intorming you of our agreement with the contents of the Project Completion Report (for Loans 1341/1342-HO); we attach below certain suggestions which we feel are appropriate, though we leave it to your judgement as to whether to include them or not. Page iii: eliminate note 2, "Estimated date." Page v: - paragraph 2, line 7: change length from 55 m to 54 m. - paragraph 3: it is not the case that two contractors sued 1/; only the Dumez Company sued the Government, while the Cogefar Company umade a claim to the DGC. - paragraph 4, line 6: change the length of the road built between Catacamas and the Escuela Nacional de Agricultura from 6.6 km to 6.05 km. - Comment: no reference is made to the project to correct the other deficiencies of the Tegucigalpa-Catacamas highway. Page vi, paragraph 2, line 1: replace "Direccion General de Carreteras" by "Direccion General de Caminos." Page 1, Introduction, paragraph 1.01, line 11: replace 1,610 by "1,716 are paved." Paragraph 2.02. - Line 10: it would improve the report to say "reconstruction of the Juticalpa-Catacamas road." - Line 13: it would be better to say "the decision to reconstruct the road was retained." 1/T.N. The report does not use the word "sued," but the distinction intended in this comment makes little sense unless translated in this way. In any event, the writer's comment applies only to the Spanish version.  - 20 - Annex Page 2 of 5 Paragraph 3.01. It is suggested that the, paragraph be written as follows: "Invitations for prequalifioation of contractors were issued in August 1976 in accordance with the World Bank guidelines on procurement included in the Loan Agreement. Nineteen construction firms were prequalified among which were one Honduran company seso4.ated with a foreign company. On December 20, 1976 the Secretariat in a written communication informed the prequalified firms (regarding) their participation in one or more of the four sections into which the project had been subdivided. On December 23, the invitation to bid was published in the largest daily Honduran newspapers. Contracts were awarded as follows: (a) Section II, Talanga-Guaimaca (33.1 km) to a French-Honduran company; (b) Sections III and IV, Guaimaca-Rio Guayape (33.9 km) and Rio Guayape-Juticalpa (47 km) to a U.S. contractor; and (c) Section V, Juticalpa-Catacamas (38.32 km) to an Italian firm." Paragraph 3.03. - Line 2: replace October by September. - Line 7: change 55 m to 54 m. Page 5, paragraph 3.03. It is suggested that the (remainder of the) paragraph read as follows: "...French partner in the joint venture presented claims for a total of about US$1.1 million as oompensation for additional costs incurred in executing the work, which according to the contractor should have been recognized by the Government in addition to the unit prices established in the contract. SECOPT having consulted the DGC and the consultants did not accept these claims; following this refusal.... in Paris. The position of the Honduran Government was to refuse arbitration on the basis that the claim was presented by only one of the partners in the joint venture." Paragraph 3.04, line 8: change text to: ... using subcontractors. It was expected that the remaining work would be completed by early 1983 but because of the financial problems of the insurer and the organizational problems of the subcontractors the work was only completed in December 1983. The Government invoked the penalty clause for late completion.  - 21 - Annex Page 3 of 5 The total cost of the Rio Guayape-Juticalpa section and access roads (para. 3.08) was US$13.08 million, or US$241,000 per km." Paragraph 3.05, line 12. Change text to: "... works in 1982, the contractor subnitted clai,na to the DGC for approximately US$2 million, alleging increased costs resulting from execution of works. Part of these claims was accepted by DGC but was not settled before the due date because the contractor did not present the necessary supporting documents." Paragraph 3.06. It is suggested that the start of paragraph be changed as follows: "The supervision of the civil works was carried out b} a -onsortium of Central American firms consisting of one company each irom Honduras, Nicaragua and Costa Rica. During the early stages of project implementation, its performance was hampered by inadequate coordination between the Project Unit, the DGC and the supervisory group, leading to an excessive turnover of personnel within this group. These shortcomings..." Ibid., page 6, line 2. Change text to "...undertook the improvement of supervision and of the Project Unit, including a substantial change..." - Line 7. Change text to: "...(US$3.3 million) was 32% above the - Line 10. Change text to: "... a two and a half year extension of the consultants' services, which represented an increase of 63% in the original period of services." Paragraph 3.07 - Line 2. Change to: "... caused serious damage and destruction on various sections of the Tegucigalpa-Catacamas road." - Line 8. Change text to: ... repairs and maintenance on the said road." - Line 15. Change text to: ... the works were concluded in November 1983." - Lines 15 to 17. Change text to: "... a local firm was retained for the supervision of the repair works at a final cost of US$182,000." Paragraph 3.08. - Line 6. Change text to: "... towns of Campamento (2.17 km), Juticalpa (3.17 km) and Catacamas (1.29 ki)."  - 22 - Annex Page 4 of 5 - Line 17. Change text to: "...these projects which were completed in December 1983 at a final cost of US$1.4 million (about US$210,000 per km)." Paragraph 3.09. - Line 6. Change text to: "...the work was completed satisfactorily in November 1983, the final length of the project being 6.05 km at a total cost of US$1.06 million (US$175,000 per km)." - Line 10. Change text to: "... the total cost of supervision was US$159,000, or 15% of the civil works." Paragraph 3.12. - Line 3. Change text to: "...training staff of the two departments within SECOPT (the General Directorate for Transport and the General Directorate of Sectoral Planning)." Ibid., page 8, line 2. It is suggested that the paragraphs be divided at this point and the text changed to: "Part of the difficulties in the transport planning component of the project can be attributed to the use of separate consulting services instead of focusing on a coordinated planning unit. The total cost of the planning element, including the hiring of a local economist, was US$522,000 as compared with the appraisal estimate of US$475,000. Paragraph 3.14, last line. Change to: "...cost of US$293,000." Paragraph 3.16, line 18. Change to: "...withing DGV given that the final contract..." Ibid., page 9, line 1. Change to: "...the consultant services and acquisition of equipment for this program, using the surplus funds that resulted from highway construction cost savings due to lower-than-expected base costs and the effects of a reduction in cost increases. The Bank..." Paragraph 3.17. - Line 8. Change to: "...equipment installed. Owing to delays in the contracting of consultants and the supply shortages, the training program - Line 17. Change to: "... to this effect the DGC has appointed a civil engineer with adequate experience as head of the Geotechnics Department, who is currently implementing the consultants' recommendations. The cost of ..."  - 23 - Annex Page 5 of 5 Page 12, paragraph 4.02, last line. Change to: "...(which constitutes) the largest element of the project, namely 74%." Page 17, paragraph 8.01, line 13. Change "excendentarlo" to *excedente."2/ Page 18, paragraph (b), line 15. Change "Proyecto" to "proyectos . "3/ Page 18, paragraph (c), line 13. (The recommendation is merely to make a small change in the order of works in Spanish, which does not affect the English version, namely "high standard field work.") Page 19. Change lengths of road sections in accordance with the changes in paragraph 3.01 of the report. Regards, Edwin Roberto Leiva Director General 2/ In English both words mean "surplus." 3/ In the English version "project" cannot be made plural but in the Spanish text the change should be made if more than one project is involved.   IBRD 14823R(PCK 8S- RR* B 55' 87. 8 55. 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