Papua New Guinea - Third Highway Project

Dawasa6t of The World Bank FOR OFmFCIAL USE ONLY Report No. 6441 PROJECT COMPLETION REPORT PAPUA NEW GUINEA THIRD HIGHWAY PROJECT (LOAN 1856/CREDIT 1030-PNC) October 7, 1986 it Asia and Pacific Regional Office This document has a restricted distribution asd may be used by recipients only in ;he performance of their offcil duties. Its contents may not otherwise be disclosed without World Bank authorization.  TNt WORLD SIANK FM OMTCL VU ONLYV Weshmlon.D( 2013) U.! A October 7, 1986 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Papua New Guinea Third Highway Project (Loan 1856/Credit 1030-PNG) Attached, for information, is d copy of e report entiiiled "Project Completion Report on Papua New Guinea Third Highway Project (Loan 1856/ Credit 1030-PNG)" prepared by the East Asia and Pacific Regional Office. Under the modified system for project performance auditing, further evaluation of this project by the Operations Evaluation Department has not been made. Attachment This document hasa restricted distribution and may be used by recipients only in the pertormance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  FOR OMCIUL USE ONLY PAPUA NEW GUINEA THIRD HIGHWAY PROJECT (LOAN 1856/CREDIT 1030-PNG) PROJECT COMPLETION REPORT Table of Contents Page No. PREFACE* ....... oo * a o oa oo ao BASIC DATA SHEET ................... .. ............ ..a o . . ......... ii HIGHLIGHTS .......... o ... .................... ........- a. ....... 0 iii I. Project Background and Sectoral Setting..................... 1 II. Project Formulation so.o...ooo...ooooo. *ooos 3 III. Project Implementationo......o.o........ o........o......o......... 5 IV. Project Cost and Bank Loan.................................. 8 V. Institutional De.elopment...... ...... ........ .... . ,.. .. 9 VI. Economic Reevaluation.......... ........ ..... , ... ..o.. .o 10 VII. The Role of the Banko........................ oo............... VIII. Conclusionso...........o...o.oooo...o....o....oo.o...o.ooo....o.....o 12 Tables 1. Actual and Expected Project Implementation...................., 13 2. Actual and Forecast Estimates of Project Cost............... 14 3. Actual and Forecast Disbursements................ ,. 15 A. Compliance with Loan Cor.ditions . ..................................................... 16 5. Actual and Forecast Traffic, 1979-20050.........................0 18 6. Comparisons of Vehicle Operating Costs.,,, .090....... 00..0...0 19 7. Ex-Post Estimates of Economic Rates of Return......,.........,. 20 MAP IBRI) 11428R2: Third Highway Project 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.  PAPUA NEW GUINEA THIRD HIGHWAY PROJECT (LOAN 1856/CREDIT 1030-PNC) PROJECT COMPLETION REPORT Preface This is a project completion report (PCR) of the Third Highway Project for which Loan 1856/Credit 1030-PNG were approved in May 1980 for the combined sum of US$30.0 million. The PCR was prepared by the East Asia and Pacific Transportation Division, based upon a review of the project's files and data supplied by the Department of Works and Supply and also the Department of Transport, Port Moresby, PNG. Bank staff who worked on the project have also been inter- viewed. In accordance with the revised project performance reporting procedures this report has been read in the Operations Evaluation Department (OED) but the project was not audited by OED staff. The draft Completion Report was sent to the Borrower for comments; however, none were received.  - ii - PROJECT COMPLETION REPORT B%SIC DATA SHEET PAPUA NEW GUINEA - THIRD HIGHWAY PROJFCT - (LOAN 1856/CREDIT 1030) KEY PROJECT DATA Item Appraisal Actuaj Total Project cost (USS million) 42.42 55.15 Overrun (x) - 3n_n Loan amount (US$ million) 17.0 17.0 Credit amount (US$ million) 13.0 13.0 Di-sbursed ) - 30.0 Cancelled )__ _ Repaid to ) Jan. 15. 1986 0.6 n.6 outstanding to ) Jan. 15, 1986 29.4 29.4 Date Physical Components completed 05731/83 12/11/84 Proportion Completed by Above Date (2) - 73 Proportion of Time Overrun (x) - sn Economic Rate of Return (X) 18 16.9 Institutional Performance Good Fair OTHER PROJECT DATA Original Item Plan Revisions Actual First Mention in Files or Timetable 08/27/78 / / 08/27/78 Negotiations 04/02/80 /4/02/80 Board Approval 05/27/80 78 0 05/27/80 Loan Agreement Date 09/16/80 _7_ 7_ 097/16/80 Effectiveness Date 11/06780 / / 11/06/80 Closing Date 12/31/84 /____ _ /02/12/85 Borrower Independent State of Papua New Guinea Executing Agency Department of Works and Services (DWS) Fiscal Year of Borrower January I - December 31 Follow-on Project Name Road Improvemnt Project Loan Number 'L-2265-PNG Amount (USS million) 31.0 Loan Agreement Date 04/27/83 MISSION DATA No. of No. of Date of Item ?lonth, Year Weeks Persons Man-weeks Report Preparation 10/78 1.0/a 2 2.0 11/13/78 Preappraisal 05/79 2.0 2 4.n 05/31/79 Appraisal 10/79 3.0/a 2 6.0 11/15/7q Total 6.0 12.0 Supervision 1 10/80 1.0 I 1.0 11/05/8n Supervision 2 03/81 1.0/b 2 2.n 03/31/RI Supervision 3 02/82 0.5/b 2 1.0 03/25/82 Supervision 4 08/83 1.5 1 1.5 08/30/83 Supervision 5 11/83 1.T/c 2 2.0 12/15/83 Supervision 6 05/84 E.0/c 1 1.0 06/25/84 Supervision 7 10/84 1.0/c 2 2.0 11/16/R4 Supervision 8 03/85 -1. 0/7 1 1.0 03/27/85 Completion 05/85 1.0 1 1.0 06/30/86 Total 9.0 12.5 COUNTRY EXCFANCE RATES Name of Currency (abbreviation) Rins ( K Year: Appraisal Year Average 1979 Exchange-Rate: US$1 - K 0.71 Intervening Years Average 1980-84 US$1 R K .81 Completion year 1985 USSI * K 0.90 Average 1979/85 USSI K 0.85 /a Originally including supervision of second highlands road improvement project. /b Originally including preparation of The Road Improvement project. /c Originally including Supervision of The Road Improvement project.  - iii - PAPUA NEW GUINEA THIRD HIGHWAY PROJECT (LOAN 1856/CREDIT 1030-PNG) PROJECT COMPLETION REPORT Highlights The Third Highway Project continued the Bank's assistance to the Government of Papua New Guinea for improving its road transport system. The project supported the Government's rural development strategy by financing a major expansion of the main highway in the highlands of PNG. The project achieved most of its objectives. The civil works were executed by foreign contractors who were supervised by the Department of Works and Supply, assisted by Consultants (3.04). This component experienced considerable delays due mainly to difficulties in land acquisition and the provision of the right of way (3.02). The other components, which were the design of a maintenance program (3.06), the conduct of rural transport studies (3.10) and equipment procurement (3.12), were all well executed. Also, despite cost overruns, the economic rate of return was only slightly lower than anticipated at appraisal (6.03). A prominent feature of the project was its contribution to devel- oping the Borrower's implementation capacity through the training of some PNG engineers who were assigned to the consulting team (5.02). They were able to gain considerable contract management experience which tLey can now apply to other ongoing projects. The main lesson learned is the need to pay greater attention to soils investigations at tne design stage, given the young geological age of the highlands area and the frequent earth tremors (3.03). Some of the problems which occurred during construction, specifically side slope instability and the need for additioa.al earthworks might well have been avoided if the detailed engineering had been done better.  PAPUA NEW GUINEA THIRD HIGHWAY PROJECT (LOAN 1856/CREDIT 1030-PNG) PROJECT COMPLETION REPORT I. Project Backagound and Sectoral Setting The Transport Sector 1.01 Papua New Guinea (PNG) is a sparsely populated island nation, with widely scattered centers of economic activity. In the recent past, the PNG economy has shown little growth, averaging 2.0Z p.a. since the 1970s. This was due to the virtual recession since 1979 in the modern sector (dominated by copper and gold mining) and modest growth in the traditional sector (subsis- tence agriculture) of the economy. The entire economy is dependent on imports and exports but, due to the topography, transport is difficult and expen- sive4 The transport system reflects the country's geography, topography and population distribution. It relies heavily on highways, interisland and coastal shipping for freight transport and on air transport for passenger movements; there is no railway. 1.02 Most transport takes place in the relatively few richer areas, con- verging on the major ports at Lae and Port Moresby on the mainland, and on mineral-rich islands. Transport volumes remain low; not considering copper and timber exports which move through specialized ports, overseas tonnage in 1984 totalled some 1.4 million tons of which almiost one half was due to fuel imports. Coastal shipping carried some 350,000 tons and 26,000 passengers. Some 1.2 million passengers and a little (about 100 tons) freight travel by air annually. There are no data on traffic volumes and distances by small boats and trucks but they would not be as important as other traffic flows, Generally, other modes lost freight to road transport as more roads were opened, while passengers continued to prefer air travel. 1.03 The Government is aware of the inadequacies in the transport system. Tariffs are high, transport operations overregulated, the safety record poor, maintenance expensive, and there is a shortage of trained person- nel. Since domestic construction capacity is in its infancy, major works require foreign contractors. In this scenario, the PNG Government has placed emphasis on reducing transport costs and also providing better land transport and improved services to the rural areas, where most people live. The Govern- ment is also using a system of contract management (a variation of force account works) to implement major projects and help develop domestic construction capacity. 1.04 The Bank's purpose in lending for transport was basically to support rural development. Bank involvement has been directed at improved road main- tenance, development of local contractors, and training of PNG civil engineers. In addition the projects have included the rehabilitation and improvement of roads and bridges as well as expanding port throughput capacity. A summary of Bank investments follows:  - 2 - Project Signing Date Credit/Loan # Amount i$ m) 1. Highways I 06/24/1970 C-204/673 9.0 2. Highways II 01/28/1977 C-677 19.0 3. Highways III 09/16/1980 C-1030/L-1856 30.0 4. Road Improvement 04/27/1983 L-'265 31.0 Subtotal 89.0 5. Ports I 07/21/1972 C-326 9.2 6. Ports II 05/18/1978 L-1551 3.5 Subtotal 12.7 Total 114.4 The Road Subsector 1.05 PNG has a road network of some 18,600 km of which approximately 1,120 km are paved. Trunk roads total 5,000 km; they serve mainly the rela- tively more populated areas around provincial capitals and coastal centers from which they radiate. Regional networks are generally not interconnected; only recently has the Highlands Highway provided an all weather long distance (430 km) connection, from the highlands to the coastal city of Lae. It carries about 400 to 600 vehicles per day (vpd); this is much more than the typical trunk road volume of 150 vpd, most of which are utilitarian vehi- cles. Investments over the last ten years have not significantly expanded the network but rather served to upgrade sections with highest traffic that justi- fied higher standards. The condition of most provincial roads remains poor, with weak bridges and, in general, deficient drainage which impedes traffic during heavy rains. 1.06 Registered motor vehicles totalled some 51,000 in 1981, the last year for which complete data are available. The average growth rate during 1971-81 was 3% p.a. Small utilitarian vehicles and buses registered the highest rate increases, with cars declining in number but still making up one fourth of the registered fleet. Utilitarian vehicles now account for 45% of registered vehicles; trucks for only about 15%, reflecting their lesser suita- bility to the low-standard network; buses, for 5%, and mostly used in towns. 1.07 The Bank Group's assistance has included acting as executing agency for the UNDP-financed transport survey of 1968-69. This transport survey provided the framework for the reorganization of transport administration, identification of issues and the preparation of an initial investment program. Subsequently, the first two Bank Group-financed highway projects  - 3 - provided major assistance for improvement and paving of over 200 km of the Highlands Highway. The projects also included components for (a) institution- building in the Department of Works and Supply (DWS) and in the Department of Transport (DT); (b) f2rmulation and revision of transport sector policies; and (c) technical assistance and training for transport personnel. The policy changes supported by the project included the relaxtion of excessive transport regulationst better cost recovery and the use of more appropriate road design standards. 1.08 The Third project continued to promote the development of the highlands region and also addressed the problems of road maintenance through- out the country. This report reviews the progress made under the Third project based on information provided by the DWS, the DT and a review of the Bank Group's files in Washington, D.C. Bank staff who are familiar with the project have also contributed to this review. II. PROJECT FORMULATION Preparation Stage 2.01 The project arose originally out of the findings of the UNDP trans- port survey which focused on the need to continue development in the Highlands region. Feasibility studies and preliminary engineering were subsequently carried out by the DWS, assisted by a team of foreign consultants and were completed by early 1979. At appraisal the detailed engineering had been completed and contractors prequalified. . Project Objectives 2.02 The main objective was to support the development of the Central Highlands region by helping the Government complete its program of improvement to the Highlands Highway. Other objectives were (i) to improve the standard of road maintenance in the country through technical assistance, training and support of organizational reform; and (ii) to assist in developing a national capacity for identifying, preparing and implementing a large number of small scale rural transport projects. Appraisal Stage 2.03 The appraisal mission, composed of an engineer and an economist, visited PNG in October 1979 and reviewed the project proposals. These included the detailed engineering, economic evaluation, bid documents and other information requested previously by the Bank. 2.04 Several issues were raised at appraisal, including: (a) Loan amount. Initially, US$22.0 million had been allocated for this project, but appraisal estimates showed that at least US$28.4 siil- lion was needed to cover the foreign cost component. The mission recommended that the Bank increase its participation in project financing to cover all foreign exchange costs.  -4- (b) Availability of counterpart funds. Implementation of the project was scheduled to commence in late 1980 for which counterpart funds of K 5.0 million (US$ 7.0 million) was needed. The Government had by then allocated K 3.0 million for this project in its budget. The mission recommended that adequate allocation in its 1980 National Public Expenditure Plan (NPEP) budget be a condition of loan/credit effectiveness. (c) User charges. The Government subsidized all transport modes, in particular road and air transport. It was estimated that road users paid only 17% of total road investment costs and about 50% of main- tenance costs. For air transport, the revenues collected from users were only about 25% of costs. The Government had then recently completed a thorough study of transport user charges. Its then Department of Transport and Civil Aviation (DTCA) had also produced a program of specific changes as well as a draft transport policy paper which addressed this and other (regulation) issues. The mis- sion recommended that during negotiations the Bank should obtain a statement from the Government on (i) its general transport pricing policy; and (ii) the proposed level and timing of future changes. (d) Deregulation. All transport modes in PNG were then considered to be overregulated. The road transport industry was licensed under the Heavy Vehicle Act which allocated licenses by route and capacity. This licensing system was inefficient and hindered the entry and competition for rates and services. in recognition of this the DTCA was about to undertake a brief study of deregulation proposals. The mission recommended that the results of this study be made available for discussion at negotiations and that agreements be reached on deregulation. These agreements were to be presented to the National Executive Council as a condition of loan/credit effectiveness. 2.05 Loan negotiations were held in Washington in April 1980. The Government and the Bank Group agreed on a number of points, the principal ones being: (a) the loan/credit amount would be increased to US$30.0 million. The IDA amount would be US$13.0 million and the IBRD portion US$17.0 million. Also the Governmer agreed to provide timely and adequate counterpart funding; (b) the Government would prepare a proposal on general transport pricing policy to increase road user charges progressively to a level suffi- cient to cover, by December 31, 1986, the cost of maintenance and administration of the infrastructure; (c) the draft program, submitted by the PNG delegation, setting out the principles and timing for reviewing regulations governing the truck- ing industry;  - 5 - (d) the Government would p-epare guidelines on the steps to be taken to support the development and strengthening of domestic road contractors. Project Description 2.06 The project, as negotiated, consisted of the following: (a) improvement and paving of about 137 km of the Highlands Highway between Kassam Pass and Daulo Pass; (b) a program of road maintenance of national, provincial and village roads; (c) the provision of traffic counting equipment; (d) studies and detailed engineering of the Togoba-Wapenamanda road (67 km), to be carried out with the assistance of consultants; and ,e) technical assistance for preparation of rural road transport projects. 2.07 The appraisal report, No. 2838a-PNG was dated April 24, 1960. The project was approved by the Executive Directors in May 1980 and Loan Agreement No. 1856-PNG (US$ 17.0 million, for 20 years including 5 years of grace with interest at 8.25% p.a.) together with Development Credit Agreement No. 1030 (US$13.0 million at standard IDA terms) were signed on September 16, 1980. The Loan/Development Credit Agreements became effective on November 6, 1980. III. PROJECT IMPLEMENTATION Overview 3.01 Contracts for road construction were awarded after minor delays. However, actual progress was slow due mainly to the land acquisition problems typical of construction works in PNG. The Kassam-Daulo Pass Highway was completed about one year behind schedule. T.ie rural transport study was suc- cessfully completed by various consultants in 1982. The road maintenance study was completed in late 1985, considerably behind schedule; similatly pro- curement of the traffic counting equipment was late. The project had a 48% cost overrun in kina due mainly to increased volumes of earth and drainage works on the Kassam-Daulo Pass Highway. Road Construction and Paving 3.02 The Government awarded the contract ti the lowest bidder (an Australian firm) in June 1980, some months before loan/credit effectiveness. Works execution commenced well but the rate of pi'gress was quickly reduced to much below expectations for a variety of reasons. For example, due to the heavy rainfall and high soil moisture content the contractor experienced dif-  ficulty in compacting fill material. Also there were severe difficulties relating to land acquisition, disputes over compensatihn to local landowners and the leasing of borrow pits. The contractor was often denied access to various work sites and to borrow areas by local people; this resulted in the submission of many claims by the contractor. Problems were also experienced with unstable, steep hillsides where slope stability was a continuous problem. Later on civil unrest and security problems in the area, as well as labor strife made progress even more difficult. Also the contractor's manage- ment organization was for some time not fully adequate and the equipment available was inappropriate for certain tasks. All of these slowed construction to the extent that it was only 62% completed by the expected date. 3.03 Most of these problems were eventually rectified and the construc- tion finally completed to a satisfactory standard by December 1984, about 16 months behind schedule. There was a 55% cost overrun (K 24.9 million esti- mated vs. K 38.8 million actual, including claims) but this was due mostly to the major increases in earthwork qt.antities which were in turn due to the high incidence of unstable side slopes encountered. The difficulty in establishing and maintaining stable cut side slopes has always plagued road construction in the highlands area. The necessity for revising side slope designs, improving drainage in the field and repairing slope failures not only increased the earthwork quantities but also caused substantial delays in progress of the works. Eventually most of the problems having to do with slope stability were resolved by flattening side slopes and improving drainage. However, this problem was basically unavoidable because the highway construction was in a young geological area with unstable soils which were subject to excessively high rainfall and frequent earth tremors. 3.04 Supervision of the work was carried out in a satisfactory manner by a team of foreign consultants in association with a local firm. Reporting was prompt and in adequate detail for monitoring of the project. Also the consultant/contractor relationship was good. 3.05 The actual total length of road constructed totalled 138 km. It was handed over to the DWS maintenance organization. Technical Assistance for Road Maintenance 3.06 Consultants (a Danish firm) were initially selected in 1981 by DWS to provide technical assistance in road maintenance and staff tra.ning, but they never really started work. This was because the DWS experienced diffic- ulty in getting the National Executive Council to approve the consultants sub- mission at a time when there was considerable debate over the phasing of this component. In the end, the Government decided to divide it into two phases; first a study to determine maintenanke needs, and second, an implementation phase. The first phase was to form a basis for a continuing program to up- grade the maintenance capability of the DWS and provincial authorities. It thus became necessary to revise terms of reference to reflect the phasing and invite new consultant's sulbmissions. A British firm was finaLly selected in April 1983.  - 7 - 3.07 Under Phase I of the study, the technical assistance staff identified road maintenance needs and made recommendations for improvement in planning, programming, executing, monitoring and cost accounting for road maintenance operations. Under Phase Is, the consultants provided two road maintenance experts to assist DWS in establishing a maintenance unit in order to improve the efficiency of road maintenance operations. The consultants issued a final operational report in June 1985 which dealt with all aspects of the road maintenance program. This represented a significant contribution to improved maintenance practices in PNG. 3.08 The actual implementation of some of these proposals will be carried out by the DWS under the proposed Tcansport Improvement Project. Technical Assistance for Road Transport 3.09 This component was executed by DTCA, which later became the Department of Transport when civil aviation was separated from it in 1985. A joint venture consulting team (West German/UK) was selected from a field of five proposals in mid-1980. Due to budgetary constraints at DT, and also due to unavailability of consultant staff, work did not commence until January 1981. 3.10 The objective was to prepare rural transport programs in five selected provinces which would become components of a proposed Rural Transport Project. This initial road screening and selection was all satisfactorily carried out by mid-1982. Subsequently, engineering studies to help with the preparation of the project were carried out by another group of consultants. Some of the roads selected were eventually financed as part of the ongoing Road Improvement Project (Ln. 2265-PNG) and others were done by the provinces themselves. Engineering of the Togoba-Wapenamanda Road 3.11 Under this component, feasibility studies for a 67 km road section were to be carried out and detailed engineering and economic analysis com- pleted for the first 25 km for which DWS engaged Australian consultants in early 1982. However, the Bank, in a letter of July 20, 1982, decided not to finance this consultancy contract because this contract had been signed and the work undertaken without the Bank having been given the opportunity to review the TOR or the contract itself. Later on the contract was terminated by the DWS owing to dissatisfaction with the consultant's performance. Detailed engineering on the Togoba-Tambul section was subsequently completed by the DWS itself in 1984 and its construction will be financed under the ongoing Road Improvement Project, L-2265-PNG. Purchase of Equipment 3.12 The project included the provision of equipment to be used in setting up a traffic counting system. The system of some 22 counting stations required about 25 traffic counters and 50 cassettes to record traffic volumes. After a long delay, the DT proceeded with the procurement of the equipment in mid-1983. ICB was used and the equipment finally procured and  some of it installed by end 1985. It is expected that by end 1986, DT will be able to carry out traffic counts accurately as part of an effort to collect traffic statistics through the country. IV. PROJECT COST AND BANK LOAN/IDA CREDIT Project Cost 4.01 The total cost of the project, including contingencies, was about K 44.67 million or US$55.15 million equivalent. This represents a cost over- run of about 48% in kina overall and 30% in US dollars, reflecting the depre- ciation of the currency. Most of this was due to the large cverrun in civil works cost, actually there were savings in all other componetnts except land acquisition. The reasons for the civil works cost overruns arose mainly from the large additional quantities of earthworks needed (para. 3.03). Project costs are detailed in Table 2. Loan/Credit Disbursements 4.02 Cumulative disbursements (detailed in Table 3) compared to appra.sal estimates are as follows: FY81 FY82 FY83 FY84 FY85