Mexico - Highway Maintenance Project

Document of The World Bank FOR OFFICIAL USE ONLY ,i-%a- IL? 7f-A161 Report No. 6634-ME STAFF APPRAISAL REPORT MEXICO HIGHWAY MAINTENANCE PROJECT May 20, 1987 Projects Department Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipienb ony in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authofization.  CURRENCY ELUIVArDENTS Currency Unit a Mexican Peso (Mex$) US$1 2 Mex$ 1235 Mex$1 million - US$810 (May 1987) FISCAL YEAR January 1 - December 31 W4EIGHTS AND MEASURES Metric: British/US Equivalent 1 meter (m) = 3.28 feet (ft) 1 kilometer (km) = 0.62 mile (mi) 1 kilogram (kg) m 2.20 pounds (lb) 1 metric ton (m ton) = 2,205 pounds 1 liter (1) = 0.26 gallons (gal) ABBREVIATIONS AADT Average Annual Daily Traffic BANOBRAS National Bank for Public Works and Services CyPF Caminos y Puentes Federales, the Toll Road and Bridge Authority DGCOP Directorate General for Maintenance of Public Works ERR Economic Rate of Return HDM Hlghway Design and Maintenance Standards Model IBRD International Bank for Reconstruction and Development IDB Tnter-American Development Bank ICB International Competitive Bidding LCB Local Competitive Bidding NPV Net Present Vilue PEMEX Mexican Petro'eum Monopoly SAHOP Secretariat of Human Settlements and Public Works SCT Secretariat of Communications and Transport SHCP Secretariat of Finance and Public Credit SPP Secretariat of Programing and Budgeting  FOR OMCIL USE ONLY MEXICO STAFF APPRAISAL REPORT HIGHWAY MAINTENANCE PROJECT TABLE OF CONTENTS Page No. I. PROJECT SUMMARY . . . . . . , . . . . . . . . . . . . . . . . 1 II. THE TPANSPORT SECTO . . . . . . . . . . . . ......... 4 A. The Transport System: (i) Transport and the Economy . . . . . . . . . . . . . . 4 (ii) Institutional Framework . . . . . . . . . . * . . . . 5 (iii) Transport Investment . . .... .. ........ 6 B. Bank Involvement in the Sector and Current Lending Strate',. ................ 6 C. The Highway Subsector . . . . . . . . . . . . . . . . . . . 7 (i) The Network .. . ... .......... 7 (ii) Institutional Framework ............ . 7 (iii) Highway Investment . . . . . . . . . . . . . . . . 9 D. Highway Maintenance .................... 10 (i) Status and Needs of the Network . . . . . . . . . . . 10 (ii) Maiatenance Budgets . . . .. ...... . . . .. ... 12 (iii) Maintenance Planning and Programing . . . . . . . . . 12 (iv) Cost Recovery and Road IUser Charges . . . . . . . . . 12 III. THE MAINTENANCE IMPROVEMENT PROGRAM AND THE PROJECT . . . . . . 13 A. Project Origin and Rationale for Bank Involvement . . . . . 13 B. SCT's Four-year Maintenance Improvement Program . . . . . . 14 C. The ProJect and Its Components . . . . . . . . . . . . . . . 15 (i) Project Objectives . .. . . . . ... . . . . . . . 15 (ii) Project Scope . . . . . . . . 15 (iii) Periodic Maintenance of Roads and Bridges . . . . . . 15 (iv) Equipment Replacement, Rehabilitation and Acquisition . oo. .......a....................... 16 (v) Workshops, Tools and Equipment . . . . . . . . . . . 16 (vi) Training Program . . . . . . . . . . . . . . 17 (vii) Consulting Services and Technical Assistance. . . . . 18 D. Project Costs and Financing . . . . . . . . . . . . . ... . 18 E. Economic Evaluation and Justification . . . . . . . . . . . 20 Fe Risk Assessment . . . * , * * * * a & * . * * . . . . 21 This report is based upon the findings of an appraisal mission that visited Mexico in November 1986. The Mission was comprised of Messrs. L. Schiffman, Senior Transport Engineer (Mission Leader) and K. Ohbi, Economist. Mr. M. Demarre, Bridge Engineer, assisted in establishing the project's bridge component, and Mr. J. Duarte, Financial Analyst, assisted the mission in matters related to accounting and auditing. 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.  Page No. IV. PROJECT IMPLEMENTATION . . . . . . . . . . . . . . . . . . 22 A. Subproject Selection, Preparation and Evaluation . . . . . 22 S. Project Execution .. . .. ... . O . e * * . . . X . . . . 23 C. Project Monitoring . . . . . . . . . . . . . v. . . . . . 23 D. Procurement and Consultant Services . . a. . . . . . . . 24 E. Disbursements, Accounts and Audits . . . . *. . . . . . 28 V. AGREEMENTS REACHED AND RECOMMENDATIONS . . . . . . . . . . . . 29 TABLES 2.1 Indicators of Highway Demand 1970-1985 . . . . . . . . . . 31 2.2 Transport Investment Summary (1977-1986) . . . . . . . . . . 92 2.3 Prior Transport Lending v . . o * . . . . . . . o v . v . . . 33 2.4 Highway Traffic on Selected Toll Roads . . . . . . . . . . . 34 2.5 Development of the Road Network (1952-1986) a 35 2.6 Federal Highway Network - Design Criteria and Standards . . . 36 2.7 Distribution of Maintenance Personnel by Centro . . . . . . . 37 2.8 Federal Highway Investments (1977-1986) . a . . . . . . a . 38 2.9 Condition Inventory of the Federal Highway Network (1985/86). 39 2.10 SCT's Maintenance Budgets . . . . . . . . . . a . . . . * 40 2.11 History of Fuel Prices . . . . . .* * * . * * * eo* * * 41 2.12 Comparative Costs and Revenues .. .. . . . . . . . . . . . 42 3.1 Past and Ongoing Operations in the Highway Subsector . . . . 43 3.2 Composition of Maintenance Improvement Program and Physical Targets ......,..... *. e * 44 3.3 Proposed SCT Road Maintenance Budgets . . . . . . . . . . . 45 3.4 Pavement Strengthening Program . * . . . e e * * * * . * * 46 3.5 Periodic Maintenance Program for 1987 . . . . . . . . . . . . 47 3.6 Proposed Periodic Maintenance Program for 1988 . . . . . , . 48 3.7 Tentative Periodic Maintenance Program (1989-1991) . . . . . 49 3.8 Summary of Estimated Costs . . . . . . . * * * . . . . e o a 50 3.9 Maintenance Interventions for Asphaltic Concrete Paved Roads 51 4.1 Allocation of Loan Proceeds . o. . . . . . . . . . . . . . . 52 4.2 Schedule of Estimated Disbursements . , . . . . . * 53 ANNEXES 1. Past Bank Involvement and Operational Issues in the Highway Sector . ao. ....a . .a , . e a 54 2. Maintenance of Bridges on the Federal Highway Network . . . . 62 3. SCT's Road Maintenance Equipment Fleet . . . . a . a . . . 72 4. Road and Equipment Maintenance Training Program . . . . . . . 87 5. Technical Assistance and Consulting Services . . . . . . . . 99 6. Economic Analysis and Evaluation of the Maintenance Program . 102 7. Implementation Plan for Project Execution .. .. a. * .. , 113  Page No. 8. Project Execution and Monitoring v 8 . . . . . . . . . . . 117 9. Related Documents and Data Available in the Project File . . 122 CHARTS Chart I - Organization of SCT .tionofeTe.v. v.vve124 Chart 2 - SCT: Highway Maintenance Organization . . 0 . . . . * . . 125 Chart 3 - Organization (Typical) Centro SCT . . . . . O e . . , . e e 126 MAP IBRD 20343 - MEXICO: Federal Road Network  MEXICO HIGHWAY MAINTENANCE PROJECT I. PROJECT SUMMARY Borrower: Banco Nacional de Obras y Servicios Publicos, S.A. (BANOBRAS) Guarantor: United Mex:can States Beneficiary: Secretaria de Comunicaciones y Transportes (SCT) Amount: US$135 million Terms: Repayment in 15 years, including three years of grace at the standard variable interest rate. Onlending Loan proceeds to be relent to Government (for SCT) on same Terms: terms and conditions as the Bank loan with the Government bearing the foreign exchange risk. Project Objectives: The objective of the proposed project is, primarily, to assist the Government and SCT in improving road maintenance operations for the federal network so that the present backlog of deferred periodic maintenance can be reduced or eliminated and maintenance requirements provided for in future on a timely basis. In additior., the project would help to promote the inplementation of appropriate cost recovery policies for road users. Project Description: The Project would help to support the Government's Five-Year Maintenance Improvement Program (1987-1991). Financing would be provided for a portion of the Program and would include: (a) periodic maintenance of paved federal roads and bridges; (b) provision of new, improved or expanded workshop facilities, including required machinery, tools and spare parts; (c) procurement of road maintenance equipment; (d) implementation of SCT's equipment overhaul and rehabilitation program; (e) training in equipment operation, repair and maintenance and in road maintenance planning and operations; and (f) consulting services for training and for studies and technical support to upgrade maintenance planning, design and execution. Since the needs greatly exceed the funds available, the size of the Program is based on the budgetary resources that the Government has confirmed will be allocated and represents the minimum level of expenditures needed to prevent further deterioration of the federal road network.  - 2 - Risks: There are three main risks with regard to the Project. The first concerns the possible failure by the Government to allocate sufficient budgetary funds on a timely basis. However, this rlsk is mitigated by the Government's agreement to hold annual consultations on road investments and to provide the necessary budgetary resources to carry out the Federal Road Maintenance Improvement Program. The second, concerning the Road User Cost Recovery Scheme, involves the possibility that future progress on this policy issue may face political resistance, particularly regarding increases in taxes to fully recover the cost of road damage attributable to trucks and other heavy vehicles. However, the Government has taken a series of measures to increase taxes on trucks In the 1987 tax law, including an initial 130% increase in road tolls for trucks which are to be further raised to bring the total increase to 260% In 1987, as well as substantial increases in annual truck permit taxes. Also, the price of diesel fuel has been increased by 130% during the past year to bring it in line with border prices. In light of the foregoing, and the Government's agreement to implement the Road User Cost Recovery Scheme and raise user taxes on trucks and other heavy vehicles to cover at least the related marginal costs attributable to them, this risk is also acceptable. Lastly, there is the risk that the institutional strengthening aspects will not be given the necessary priority. Project preparation has proceede in close collaboration with Government authorities in ord- a ensure commitment to objectives and minimize these rw 9 Estimated Cost: The total cost of the SCT 1987-1991 Highwav Maintenance Improvement Program for the Federal Highway Network is estimated at US$910 million. The proposed Project represents 31% (US$282 million equivalent) of the total program with a forelgn exchange component of US$135 million equivalent. The Bank loan would cover 100% of the foreign exchange requirements of the project components.  -3- Estimated Project Costs: ---- US$ million Bank Project Component Local Foreign Total Participation 1. Periodic Maintenance Program for Roads on the Federal Highway Network 94.60 60.40 155.00 60.40 2. Repair and Rehabilitation Program for Existing Bridges and Culverts on the Federal Highway Network 15.25 9.75 25.00 9.75 3. Workshop Construction, Rehabilitation, Improvement and Expansion Program including Workshop Tools and Equipment and an Initial Stock of Spare Parts for Scheduled Maintenance 3.75 2.25 6.00 2.25 4. Repair and Rehabilitation Program for Existing Equipment 2.50 5.50 8.00 5.50 5. Procurement of New Road Maintenance Equipment 2.50 32.50 35.00 30.00 6. Training Program including Technical Support for Training 0.90 0.50 1.40 1.40 7. Consulting Services and Technical Support 1.70 0.80 2.50 2.50 Total Base Costs 121.20 111.70 232.90 111.80 Physical Contingencies 12.10 11.20 23.30 11.20 Price Contingencies 13.20 12.10 25.30 12.00 Total Project Cost 1/ 146.50 135.00 281.50 135.00 Financing: US$ Million Government 146.5 Bank 135.0 Total 281.5 Estimated Disbursements: (US$ Million) Fiscal Year 1988 1989 1990 1991 1992 1993 1994 Annual 14.02/ 9.0 28.3 32.4 25.7 17.5 8.1 Cumulative 14.0 23.0 51.3 83.7 109.4 126.9 135.0 Rate of Return: Over 40%. 1/ Includes US$45 million equivalent in taxes and duties. 2/ Early disbursements due to retroactive financing of initial works.  - 4 - II. THE TRANSPORT SECTOR A. The Transport System (i) Transport and the Economy 2,01 The dramatic swings in the Mexican economy over the past 10 years have had a significant impact on the transport sector. The surge in economic activity in the late 1970's and early 1980's with GDP rising by an average 6% per year in real terms coupled with an unprecedented demand for imported grains led to a period of high traffic growth for all modes of transport (Table 2.1). The ports registered annual average increases of over 8X in cargo tons handled from 1978 to 1981. Railway traffic increased by 5% per year from 1977 to 1981 and would have been higher except for eerious operational and physical bottlenecks. Highway traffic grew by over 13% annually during the same period. Despite an extensive transport network, including some 225,000 km of roads (75,000 km paved), about 20,000 km of railways, 20,000 km of pipelines, some 33 ports serving international traffic and 50 airports capable of handling medium and larger size aircraft, transport bottlenecks were occurring which directly affected major economic sectors, Investment in transport, which had declined in relative terms from 26% of public sector investment before the 1970's to 9%, was accelerated, particularly for ports and railways. The sectoral focus was on prov.ding sufficient capacity to support the oil-led growth of the economy. 2.02 By 1982, however, the fiscal over-expansion of the economy became untenable. The fiscal deficit reached over 17% of GDP. Subsidies had already reached over 8% of GDP by 1980. Capital flight accelerated and the peso had to be devalued by 268% in nominal terms in 1982. GDP fell in 1982 and in 1983. As the Government's stabilization, demand-management program took hold, traffic declined and the focus in the transport sector was on helping to reduce the fiscal deficit by improving operational efficiency, curtailing investment and reducing unwarranted subsidies. With declining personal income and industrial activity and substantial real increases in transport-related prices, road traffic grew by only 4% per year from 1981 to 1985 and rail traffic by a little over 1% annually. Port traffic declined by 3.5% over the period as domestic grain production recovered, replacing import requirements. 2.03 The uncertainty in the economy makes long range estimates of transport needs difficult. The restructuring of Mexican industry, particularly in the steel and fertilizer subsectors has serious implications for the transport sector. Furthermore, the focus on promoting non-traditional exports to fuel the economic recovery suggests that new types of commodity movements, which require higher levels of transport services as compared with traditional traffic flows, will place new demands on the transport system. Over the next several years, however, as budgets remain limited, the emphasis in transport will be to: treat the backlog of maintenance and rehabilitation works which have accumulated; minimize new construction; and continue to rationalize public sector expenditures. The following discussion of the sector generally focuses on issues which relate to the highway subsector and road maintenance, in particular. A recent Sector Strategy Paper (Green Cover, February 20, 1987) provides a broader  - 5 - assessment of the main se^toral issues. In addition, recent Staff Appraisal Reports for the Second Highway Sector Project (2428-ME, FY84) and the Railway Sector Project (2575-ME, FY85) provide a detailed discussiol, o. land transport. (ii) Institutional Framework 2.04 The transport sector in general is characterized by a relatively stable and qui1ified cadre of high level staff which do not change significantly with changes in Government administration. The principal issue, however, which was continuously identified hy Bank sector reviews in the 1970's, was the lack of coordination in the transport sector due to the multiplicity of ministries responsible for the various modes. In late 1982, the Secretariat of Communications and Transport (SCT) was reorganized (Chart 1) to encompass all transport modes with three subsecretariats: one for infrastructure, responsible for the design, execution and maintenance of all civil works; one for operations, responsible for all transport operations, tariffs and regulations and for overseeing parastatal enterprises; and one for communications. In addition, a Directorate General for Planning (DGP), answering to the Secretary, was established with responsibility for investment and geaeral hudgetary planning and monitoring. While the reformulation with regard to the subsecretariats was carried out relatively smoothly, it has taken more time to establish an effective planning entity with the capability to handle all transport modes. Staff, organizational and technical constraints have had to be overcome. 2.05 Planning units within the various modal directorates are responsible for identifying and proposing capital investments and operating budget estimates. They provide the technical. details required for the analyses of investments and, in some cases, carry out the economic evaluations. DGP, in turn, has the responsibility for carrying out or reviewing the economic evaluation and providing a multimodal, consistent analytical framewvrk for the preparation of the medium- and long-term investment programs. The Secretariat for Programing and Budgetting (SPP) has played an important role in ensuring consistent modal planning. The Directorate General for Public Infrastructure and Social Development of SPP must approve the proposed SCT investment and oierating budgets and conducts a serious review of all major investments in the sector. This Directorate is also responsible for approving the budgets of the transport parastatal enterprises and calls on the relevent directorates of SCT for their opinion. 2.06 Bank efforts through the recent loans to the various subsectors have sought to help the Government in the upgrading of DGP's capabilities with the belief that once DGP can demonstrate its ability to effectively assess the various modes, its role within SCT, vis-a-vis the subsecretariats, will be enhanced. While the unit's analytical skills and tools are well-developed for highways, incremental measures have been taken to help DGP acquire similar skills and tools for the evaluation of rail and port operations and investments. Foreign and local consultant support has been contracted and a team of young engineers has been organized as the analytical core of DGP. Currently, consultants are working to develop a sectoral data base, to develop and upgrade a set of consistent evaluation methodologies and to prepare draft "Esquemas Directores", operational and investment strategies, for each mode. The objective is to have established a  - 6 - well-orgon'zed and trained planning unit by the end of this sexenium (1988) with a well-defined sector strategy for the new administration. (iii) Transport Investment 2.07 When the economic crisis began in 1982, Government had to curtail radically the sectoral investment plans which were cut by 23Z in real terms and by 1985, transport investment levels (about US$1,100 million equivalent) were 43% below the 1981 levels (Table 2.2). The crucial prob'em faced by the Government was that a broad range of works initiated in 1979-1981 could not be finished. Therefore, resources were directed to those works which could be completed quickly and generate immediate benefits while lower priority undertakings at early stages of execution were stopped. Maintenance e:rpenditures were generally sustained while construction and equipment were cut. 2.08 The investment reviews for 1983 to 1985 confirmed the appropriateness of the Government approach and supported the initiation of certain high priority works such as the widening of highly congested toll road sections to tour lanes. The reviews did conclude that there was a growing backlog of investment needs and deferred maintenance, particularly in the highway subsector. Since 1985, the fall in oil prices brought about further economic shocks resulting in another investment budget reduction for 1986 of 39% in real terms from 1985 levels. Investments in roads are reviewed in paragraphs 2.18 and 2.19. B. Bank Involvement in the Sector and Current Lending Strategy 2.09 The Bank has made a total of 19 loans to transport to date covering roads (10), railways (5), ports (3) and air (1) (Table 2.3). Details concerning the development of Bank lending and conclusions of the audits of completed projects in the highway subsector are provided in Annex 1. In highways, as in the other subsectors, the projects met their original objectives in terms of benefits generated and institution building but faced delays and cost overruns 1/. While there have been substantial advances in terms of investment planning, design and constrr-tion and operational improvements under these projects, prior to 1982 there was much less success or dialogue with regard to policy issues regarding pricing, user charges, regulation and subsidies. The problem was partially institutional with the loans going to the Secretariat of Public Works (SAHOP) or the railways, for example, while the policies were determined by another secretariat. 2.10 Since 1982 and the change in administration, the role of the Bank in the sector has changed significantly. The two basic reasons for the change were the institutional reorganization bringing SCT and SAHOP together (para 2.04) and, more importantly, the economic crisis during which Bank lending was of macroeconomic importance and the policy isues which were of concern to the Bank, were now also of concern to the Government. With the 1/ Third Highway Project (528-ME, FY1968), PPAR No. 832 of August 8, 1975, Fourth Highway Project (695-ME, FY1970), PPAR No. 2575 of June 29, 1979, Seventh Highway Project (968-ME, FY1974), PCR No. 5162 of June 25, 1984, and First Highway Sector Project (1671-ME, FY1979), PCR of March 3, 1986.  - 7 - reorganization of SCT, the raising of fuel prices to international levels (para 2.28), the increase and reclassification of railway freight tariffs reducing railway operating ratios from 145 in 1981 to 95 in 1985, the enactment of a comprehensive contract between Government and the National Railways (NdeM) to improve the railway operations and financial status, and the preparation of studies and concrete proposals to tationalize and improve cost recovery for roads and ports, the Government showed its commitment to take the necessary actions in the sector. The Bank responded with a comprehensive lending program resulting in the Second Fighway Sector Project (2428-ME, FY84), the Lazaro Cardenas Port Project (2450-ME, FY84), the Chiapas Rural Roads Project (2525-ME, FY85) and the Railway Sector Project (2575-ME, FY85). 2.11 Th,e extended economic recession, exacerbated by 'he fall in international oil prices coupled with the fact that the administration is entering its last two years have led to a more limited lending program for the sector. The upcoming projects, including the proposed Highway Maintenance Project, are directed at meeting the immediate needs of the present administration, in accordance with the Bank's overall lending strategy, as well as providing a financing bridge into the early years of the new administration. In the highway subsector, the Maintenance Project is designed to help rationalize public sector investment, filling a financing gap which is not covered by the Second Highway Sector Project (para 3.01), and to increase public sector revenues through appropriate cost recovery policies. In this way, the Maintenance Prolect complements the ongoing Sector Project and is consistent with overall Bank Lending Strategy. C. The Highway Subsector (i) The Network 2.12 Road transport in Mexico has consistently maintained its position as the major mode for both passengers and freight, accounting for over 90% of all passenger-km and almost 50% of total freight ton-km. Road traffic generally grew by 10% per year from 1971 to 1981 and since then is still growing by 4% per year despite economic recession and substartial real price increases for road related items (Table 2.4). The Federal Highway Network (FHN), along with the rest of Mexico's road system, has evolved rapidly (Table 2.5). From 1952, when there were only 27,000 km of roads, of which 16,000 km were paved, the road overall system has grown to over 225,000 km, of which about 75,000 km are paved (including 1,500 km with four or more lanes). The slower annual rate of growth of paved roads, from 6.6% per year between 1952-1960, to 2.4% from 1975-1980 and to 2,0% from 1980-1986, is a sign that the network has reached relative maturity and that, with the exception of some areas, the trunk network is in place. Road investment in the past ten years has shifted from the extension of the trunk network to rural access roads and, more recently, to the widening of existing trunk roads to relieve congestion. More information on the operational aspects of the highway subsector and the road transport industry is provided in Annex 1. (ii) Institutional Framework 2.13 Under SCT's organization, road-related operational tasks are divided between the Subsecretariat for Infrastructure and the Subsecretariat  - 8 - for Operations (Chart 1). The Subsecretariat for Infrastructure has jurisdiction over the General Directorate for Federal Roads, the General Directorate for Rural Roads, the General Directorate for Technical Services and over the General Directorate for Maintenance of Public Works (DGCOP) as well. These Directorates have primary responsibility for the design, construction and maintenance of roads under federal jurisdiction. The Subsecretariat for Operations includes the General Directorate for Tariffs, the General Directorate for Road Transport and the General Directorate for Trafflc Safety, which are responsible for transport service aspects including vehicle and service regulation tariffs, and safety and police functions. At the state level, SCT maintains a fully staffed and equipped unit or Centro SCT in each state (two in Veracruz) to carry out SCT's construction, maintenance and operational functions. 2.14 Administration of the road network is principally under the jurisdiction of the Federal Government, with the exception of state and municipal roads: (a) Federal Highways: SCT is directly responsible for the planning, construction and maintenance of all federal highways; financing is 100% from federal funds. The network consists of 45,000 km, with about 41,800 km paved (93%). Approximately 2,150 km have gravel surfaces and the balance of 1,100 km are earth roads. (b) Toll Facilities: While SCT plans and constructs toll roads and bridges, they are operated and maintained by the Federal Road and Bridge Authority (CyPF). The toll road network consists of 953 km, of which about 52% have four or more lanes. Toll revenues cover all operating costs including maintenance and substantial financial surpluses have been generated in recent years. (c) State Highways: Planning, construction and maintenance of the 56,000 km of state roads (51% paved) are the responsibility of each state's highway administration. Coordination with the federal authorities is carried out by state highway boards (Junta Local de Caminos), of which the state Governor is chairman and on which SCT is represented through its Centro SCT. A mixture of federal and state funding is applied to cover maintenance and construction costs. (d) Local Roads 2/: The 1,500 km of local roads are also the responsibility of the state highway boards, and financing is provided on a t-i-partite basis between the federal government, the state and local authorities and private enterprises. (e) Rural Roads: Since 1971, a very large rural roads program has been carried out, aimed at joining small towns and villages with the nearest main road and providing temporary employment through the application of labor-intensive construction methods. Over 85,000 km have been built in the last 15 years under a yariety of federal 2/ Those that, for administrative reasons, are not defined as rural roads.  - 9 - programs and there are now about 94,000 km of these roads. All rural roads programs have been now consolidated under SCT, with SCT having responsibility for construction and maintenance and the states participating ir. the selection and planning of new roads; financing is 100% from federal funds. 2.15 SCT's General Directorate for Federal Highways (DGCF) has a large, well organized staff that designs most of the federal highways and bridges in the country employing modern techniques; the criteria and standards used (Table 2.6) are adequate. Most of the construction work is done by DGCF through contracting with some modernization (widening) works handled by SCT's DGCOP using the same standards. There are competent Mexican consulting firms engaged in highway and bridge design, but SCT employs them only when their staff is fully occupied, and then mainly for major bridge design. 2.16 DGCOP (Chart 2) is responsible both for the maintenance of the federal highway network and of the rural road system. Maintenance of toll roads, however, is the responsibility of CyPF. Normal routine and periodic maintenance is presently carried out mostly by DGCOP's own forces; major betterment works ("modernization') and some periodic maintenance are carried out by contract. DGCOP has approximately 15,000 personnel, 520 at headquarters in Mexico City and about 450 at each centro and its satellites (Table 2.7). It operates in each state through divisions attached to the Centros SCT (para 2.13). The maintenance organization of each centro (Chart 3) is supervised by a Resident General for Maintenance responsible to the Director of the Centro SCT, who in turn reports to the Minister, SCT. In addition, the Resident General for Maintenance is supervised, insofar as technical and operational matters are concerned, by the Director General for Maintenance of Public Works, who is himself responsible, through the Suboecretary for Infrastructure, to the Minister, SCT (Chart 1). Maintenance crews are organized by residencies with approximately 100 workers covering about 500 km per residency. The maintenance, operation and allocation of SCT equipment are controlled by the Equipment Directorate which is part of DGCOP. The Equipment Directorate is well organized including a planning and programing department; systematic records are kept of each item of equipment and each vehicle, recording its use and maintenance data and forecasting the timing of its replacement. The main concerns with regard to the institutional set-up of DGCOP are the planning and programing capabilities in the central office (para 2.25). 2,17 The Road Construction Industry. One of the results of more than 25 years of a sustained level of road construction in Mexico has been the development of a large number of experienced and well equipped road construction contractors and a well defined relationship between contractors and SCT. Domestic contracting firms must register annually providing detailed data on their operations. There is a wide range of capacity among them, with the emphasis on medium-sized firms. Supervision of construction is carried out satisfactorily by SCT personnel, There is a healthy competitive climate among contractors and cons.ruction prices are reasonable, discouraging foreign firms from bidding for highway contracts in Mexico. (iii) Highway Investment 2.18 Highways have experienced a continual drop in the relative share of transport investment, falling from over 60% of investment in 1977 to  - 10 - almost 40% in the mid-1980's. In re,al terms, the recent cuts in public sector investment have been particularly severe in the highways. The 1986 budget (Table 2.8) for federal highways (including construction and maintenance) was 35% below 1985 levels with an equivalent US$ 300 million to cover almost 46,000 kilometers of some of the most highly 'trafficked" roads in Latin America. A review of the level of congestion and the condition of the Mexican network confirm that the budgetary levels are now dangerously low, leading to excessive vehicle operating costs and allowing the progressive deterioration of the federal trunk network such that the cost of future rehabilitation, when funds are finally available, will be substantially higher. Improvement to four lanes can usually be justified when traffic reaches between 6,000-8,000 vehicles per day on two-lane roads. In Mexico, over 4,400 km of road have already reached daily traffic levels of over 6,000 vehicles, while only 1,500 km of four- or six-lane road have been provided. While traffic growth has declined because of the recessiort and increased tolls and fuel prices, the problem of levels of service for existing traffic remains severe and the estimated rates of return and first year benefit ratios for modernization works are high. 2.19 The most serious risk caused by the low current budgetary levels, however, is the accumulating backlog of deferred maintenance as periodic maintenance needs are not met and the network is strained by more and heavier vehicles than were originally anticipated. The same is true for rural road maintenance whe-a after 15 years of building over 85,000 km of rural roads, Mexico has paid too little attention to the maintenance of such roads. During negotiations, agreement was reached with the Government on its proposed 1987-1991 highway sector total expenditure program including maintenance, The balance between construction, rehabilitation and maintenance as shown in the Program is satisfactory, with a substantial increase in the maintenance component (Table 3.3). Details of the highway sector expenditure program for the period 1987 to 1991 are shown in the Project File. In addition, it was agreed during negotiations that consultations on the highway sector expenditure program would be held annually to ensure that an appropriate balance between construction, rehabilitation and maintenance is maintained, and that the Government's detailed annual highway sector expenditure program will be acceptable to the Bank. It was also agreed during negotiations that sufficient funds would be made available to satisfactorily carry out required maintenance (para 2.24) to acceptable standards (para 3.03). D. Highway Maintenance (i) Status and Needs of the Network 2.20 For the purposes of allocating maintenance resources, the federal highway network is divided by DGCOP into three priority classes: the priority basic network (17,000 km) generally with the highest traffic (over 5,000 vehicles per day (vpd)) connecting major cities; the basic network (13,000 km) generally with 1,500-5,000 vpd; and the lower priority network (15,000 km) with less than 1,500 vpd. On the lower priority network, SCT has not carried out adequate routine maintenance or virtually any periodic maintenance over the past several years. Many of these road sections have asphaltic concrete pavements that are 15 to 30 years old, that were designed and constructed to standards inadequate to properly support today's higher axle loads (Annex 1) and are rapidly deteriorating. Similarly, the basic network also has suffered, although to a lesser degree, from the same  - 11 - neglect. Many of the pavements are substandard and are too weak to support present day axle loads and traffic densities. The Priority Basic Network has received adequate and timely routine maintenance and, to the extent that funds have been available, periodic maintenance as well. Substandard and weak pavements in this group, in some cases, have been strengthened or reconstructed. Nevertheless, the preponderance of roads, even in the higher priority category, have not received the periodic maintenance attention over the last few years that their age, condition and traffic level would normally dictate. On average, only about 3% per year have actually had either periodic maintenance (overlay) or strengthening work carried out, far below the amount needed to reduce the accumulated backlog or to satisfy current requirements. Similarly, instead of the quadriennial sealing that should be performed, only about 10% of these roads have been resealed each year. In contrast, CyPF, with its relatively greater financial resources, has been able to maintain its 953 km of toll roads in a very satisfactory manner. 2.21 Reeent inventories confirm the growing seriousness of the situation. While only 6% of the network is classified as being in poor condition, over 602 is classified as being in fair condition which indicates a need for timely maintenance before a large portion of the network deteriorates requiring more costly reconstruction (Table 2.9). A more detailed review of the roads in fair and poor condition revealed that about 2,700 km require substantial strengthening beyond original design standards in order to accomodate todayts axle loads and traffic. In addition, another 3,500 km represent the accumulated backlog of deferred periodic maintenance. Furthermore, each year an additional 3,600 km will require overlays as part of normal periodic maintenance. In 1986, however, DGCOP only carried out about 1,000 km of overlay which would mean that the average kilometer of federal paved highway would receive an overlay only once in a forty year period. 2.22 The situation with reg&rd to bridges is very similar. The FHN includes about 4,500 structures over 6 m in length which are classified as bridges. Of these, about 75% were built before 1950 %nd the design loads prevailing at that time are no longer in keeping with current truck loadings. Furthermore, poor design of details such as expansion joints and bearings have contributed to the present deteriorated condition of the bridges. Recent surveys indicate that about 950 of the bridges require extensive periodic maintenance. In addition, another 450 bridges require reconstruction, to provide strengthening, widening or improvement. Some of this reconstruct4on, strengthening and widening works (about 100 bridges) will be financed under the on-going Second Highway Sector Project (Loan 2428-ME), with the balance of 350 bridges reconstructed with financing from the Government's own resources. Annex 2 provides additional details concerning bridges on the federal highway network. 2.23 The SCT equipment fleet has also deteriorated during the last four years as replacement budgets have been minimal and imports restricted. About 60% of SCT's 6,000 vehicles and heavy equipment units are over ten years old and another 30X has an age of between four and ten years. The age of the fleet coupled with a lack of spare parts have led to premature breakdowns and low equipment availability. Some of tne shortfall has been made up in recent years by leasing equipment from private contractors as a short term measure. Further details relating to SCT's road maintenance equipment fleet are provided in Annex 3.  - 12 - (ii) Maintenance Budgets 2.24 The major factor In the deteriorating condition of the network has been the lack of adequate maintenance budgets. While maintenance budgets have steadily increased in real terms since 1982 (with the exception of 1986) and have risen as a relative proportion of highway expenditures from 13% in 1981 to over 30% in 19B6 (Tables 2.8 and 2,10), it is clear that more substantial increases will be required to eliminate the accumulated backlog and meet normal anntal maintenance requirements. The maintenance outlay for federal trunk roads in 1985 of US$3,500 equivalent per km should be increased to an average US$5,000 equivalent per km over the next five years (Para 3.05). Similarly, rural road maintenance budgets should be raised from US$250 equivalent per km to US$450 equivalent per km. (iii) Maintenance Planning and Programing. 2.25 As a part of its annual maintenance planning and budgeting exercise, DGCOP's maintenance resident engineers review and rate all the federal roads in each of the areas under the responsibility of the Centros SCT. m e list of each Centro's proposed maintenance work for the year, prepared on the basis of this information by the maintenance residents, is then reviewed by DGCOP's Programing and Evaluation Directorate which produces a country-wide maintenance program based on priorities and budgetary limitations. The authorized program is then sent back to the Centros for implementation. Generally, the Centros SCT and the maintenance resident engineers provide road inventory data in a satisfactory manner considering the limitations of the rating system now in use (para 4.01). The Programing and Evaluation Directorate however, needs substantial strengthening in order to properly carry out its responsibilities. it presently has inadequate qualified staff and also needs to upgrade its capabilities in terms of the methodology used to determine priorities and the equipment available to it. kiv) Cost Recovery and Road User Charges. 2.26 To eliminate the backlog of deferred maintenance and meet normal road maintenance requirements, substantial budgetary increases are needed (para 3.05). With road construction and modernization budgets already cut to a minimum, however, and budget resources restricted in the other subsectors, there are limited opportunities for resource transfers within the sector or subsector. Given the Government's need to reduce the public sector deficit, then, the question arises as to whether road users are adequately covering the costs of construction and maintenance of the network through various road-related taxes and whether there are opportunities for increasing revenues, minimizing the impact of the increase in maintenance budgets on the fiscal deficit. SCT, in coordination with the B&nk, recently conducted a study of road user charges 3/ which concluded that total revenues from all road users are insufficient to cover total road construction and maintenance needs. More importantly, the study concluded that trucks, in particular, were not even covering the marginal road costs attributable to their use of the highway network (all road rehabilitation costs and 70% of periodic maintenance costs). If the cost of congestion on the network were added, the deficits would be far greater. 3/ "Estudio Sobre Cargos a los Usiiarios del Sistema Carretero", SCT, February 1985, and "Transport Pricing Study", World Bank, January 1986,  - 13 - 2.27 Based on the maintenance strategies and costs developed during the preparation for this project, it is estimated that the Government should spend about US$1,000 million equivalent per year to maintain the federal, state and rural networks and to expand capacity to sustain present levels of service in terms of congestion. Of this amount, about US$400 million equivalent per year represents the marginal costs attributable to the passing of vehicles over the network. Such marginal costs include all rehabilitation costs but exclude all routine maintenance costs and 30% of periodic maintenance costs both of which are attributable to the effects of time and weather. 2.28 Present user tax revenues are derived from special automobile purchase taxes, annual registration fees and tolls. Value added taxes on transport items are excluded as are fuel taxes which are the normal source for road-related revenues in most countries. Since 1982, fuel prices have been raised considerably in real terms with diesel rising from US$0.35 per liter in 1981 to US$0.153 per liter in 1987 (Table 2.11). With the decline in the international price of oil and oil-related products, Mexico's domestic price is now equivalent to its opportunity cost but does not provide an adequate additional contribution for road infrastructure. Total tax revenues are estimated at US$500 mlllion equivalent. Of the US$375 million of marginal costs attributable to trucks, truck-related tax revenues amount to only US$60 million equivalent, with the heavier trucks representing the largest portion of the deficit (Table 2.12). The most important step in reducing the deficit and raising federal road-related revenues is to raise user taxes on trucks to cover at least the road damage (marginal) costs on the trunk network attributable to them. While there are a series of possible tax measures, the required increase would be equivalent to a US$0.03 per liter increase in fuel prices. To be able to distribute the taxes more equitably by vehicle weight, consideration should be given to raising the annual registration tax progressively by gross vehicle weight. The impact on total truck conts would be less than 3%. Some related steps have already been taken by the Government, as detailed in para 3.24, but further action is needed. At negotiations, the Government agreed that road user taxes on trucks should be at least equal to wLe marginal costs attributable to the road damage to the federal road network caused by those vehicles and has provided a letter, satisfactory to the Bank, indicating the steps it intends to take to accomplish this objective. III. The Maintenance Improvement Program and the Project A. Project Origin and Rationale for Bank Involvement 3.01 Under the Second Highway Sector Project, flnancing has been mostly directed at major reconstruction and modernization, improving some of the more deteriorated roads and relieving the major congestion bottlenecks on the trunk network. In addition, the Sector Project includes a component for rural road periodic maintenance and rehabilitation in aa effort to obtain a stronger Government commitment to better maintenance of rural roads. Through semi-annual reviews, the Bank has monitored and discussed the overall  - 14 - allocation of funds between maintenance anen construction. It was through these reviews that the need for extending Bank technical and financial support directly to trunk road maintenance became apparent. During the Country Program Implementation Review held in July 1965, the Government proposed that the Bank support its efforts to reduce the backlog of deferred maintenance that had rapidly accumulated. A diagnostic review of the road maintenance situation was carried out through the joint efforts of DGP, DGCOP and Bank staff and a detailed Five-Year Maintenance Improvement Program was prepared. While a portion of the funds under the Sector Project have been redirected to finance an intensive road strengthening program covering critically weak sections of the network (para 3.05) there are not sufficient funds in the sector loan to support the broader periodic maintenance needs. Government and Bank representatives agreed that a specific lending operation directed at maintenance was appropriate and would help direct attention both within SCT and the government financial agencies to the maintenance problem. 3.02 Bank loans in the highway subsector (Table 3.1), including the ongoing Second Highway Sector Project, have focussed on Mexico's road construction and modernization programs in an attempt to ensure the application of appropriate technical and economic evaluation criteria and to carry on a dialogue concerning general sector policies, While a portion of the ongoing Second Highway Sector Project has been reoriented to include an expanded road pavement and bridge strengthening program covering critically weak sections of the federal highway network, there is a need for extending the Bank's technical and financial support directly to road maintenance. The proposed project would focus on overall maintenance and the institutional improvements required as well as other deferred maintenance needs, and would complement the ongoing sector project (para 2,11). The Project is consistent with the Bank's country strategy by focussing on the rationalization of public sector expenditures while ensuring that infrastructure is in a satisfactory condition to support the economic recovery. B. SCT's Five-Year Maintenance Improvement Program 3.03 With the establishment of highway maintenance improvement as a rational priority, the Government has developed a comprehensive highway maintenance improvement program to enhance its road maintenance planning, administration and execution capabilities through a coordinated effort directed at all aspects of maintenance operations. The program is based on the development of a set of desirable (from a technical and economic perspective) maintenance policies which would be gradually achieved over a five-year period (1987-1991). It is focussed on the areas of particular concern and weakness described in paras 2.20 to 2.25, taking into account the available human, technical and financial resources of the Government, and is directed specif'eally at the paved 41,800 km of the Federal Highway Network for which SCT is responsible. 3.04 SCT's Five-Year Maintenance Improvement Program (1987-1991) includes routine and periodic maintenance of federal paved roads and bridges; acquisition of new road maintenance equipment and spare parts while retiring overage and unusable equipment; construction, rehabilitation and improvement of maintenance workshops including procurement of machinery, equipment and tools; repair, rehabilitation, overhaul and reconstruction of existing deadlined equipment including purchase of replacement parts and spare parts for operational use; expansion and improvement of SCT's maintenance training program; and technical assistance and consulting services for studies and  - 15 - assistance in planning and programing maintenance operations. The composition of the program is summarized in Table 3.2. 3.05 As shown in Table 3.3, SCT's overall maintenance budget for the five-year period 1987 to 1991 is estimated to require expenditures totaling US$1,310 million equivalent, including the proposed pavement and bridge strengthening program and the amounts needed for rural road maintenance and rehabilitation. Excluding the total budgetted amounts for rural road maintenance and rehabilitation and for pavement and bridge strengthening, the Maintenance Improvement Program requires about US$910 million equivalent over five years or an average of US$180 million equivalent annually. This can be compared with the maintenance budget in 1986 of US$93 million equivalent (Table 3.3), This amount includes about US$20 million equivalent per year for a five-year period which is needed to eliminate the accumulated backlog of deferred periodic maintenance. The rural road maintenance and rehabilitation work will require expenditures averaging US$40 million equivalent per year, for a total of US$200 million. The pavement and bridge strengthening program (Table 3.4) will need a total of US$200 million equivalent over the five-year period. At negotiations, the Government confirmed its agreement to the scope and composition of the program and provided assurances that it will allocate the necessary budget resources for the entire five-year Maintenance Improvement Program on a timely basis. C. The Project and Its Components (i) Project Objectives 3.06 The objectives of the proposed project are, primarily, to assist the Government and SCT in improving their road maintenance capabilities and operations on the federal network so that the present backlog of deferred periodic maintenance can be reduced or eliminated and maintenance requirements provided for in future on a timely basis. In addition, the project would enhance the cost-effectiveness and help maximize the economic benefits of road maintenance by improving maintenance planning and management. Lastly, the project would promote the implementation of appropriate cost recovery policies for roads such that taxes on heavy vehicles cover at least the marginal road costs attributable to them. (ii) Project Scope 3.07 The basis of the Project is the Government's Five-Year Maintenance Improvement Program (1987-1991). Financing under the Project would be provided for a portion of the Program (Table 3.3) including: (a) periodic maintenance of federal roads and bridges carried out through contracts; (b) provision of new, improved or expanded workshop facilities, including required machinery, tools and spare parts; (c) procurement of new road maintenance equipment; (d) implementation of SCT's equipment overhaul and rehabilitation program; (e) training in equipment operation, repair and maintenance and in road maintenance planning and operations; and (f) consulting services for training and for studies and technical support to assist in and upgrade maintenance planning, design and execution. Since the needs greatly exceed the funds available, the size of the Program has been determined based on the minimum level of budgetary resources required to stabilize and improve the condition of the federal network. The Project covers only a portion of the Program with the balance being funded by the Government using its own resources (para 3.18).  - 16 - (lii) Periodic Maintenance of Roads and Bridges 3.08 Roads. Over the five year (1987-1991) period, 18,200 km of the paved Federal Highway Network will be overlain with asphaltic concrete as part of SCI's Maintenance Improvement Program (Tables 3.5 to 3.7). Of this total, about 3,500 km represent the accumulated backlog of deferred periodic maintenance. These roads, if not soon resurfaced, will be subject to further rapid deterioration. Another 3,000 to 3,500 km per year wiLll normally require resurfacing. It is also necessary that the pavement surface be sealed at intervals of four to six years, requiring treatment of about 7,500 km each year (of which about 5,000 km are overdue and represent deferred works). Project financing will provide for 7,000 km (of the total of 18,200 km) of periodic maintenance (overlay) and 9,000 km (of the total of 48,000 km) of chip sealing (surface treatment) of paved federal roads over the five-year project period, all of which will be accomplished through contracting (Table 3.2). 3.09 Bridges. SCT's Maintenance Improvement Program includes about 950 bridges requiring periodic maintenance. Of this total, about 400 require major repairs and will be included for financing under the proposed Project (para 3.18). The balance of approximately 550 bridges need minor repairs and/or maintenance work which will be financed by the Government using their own resources and which can be handled by the Centros during routine maintenance operations. DGCOP's bridge monitoring and review system will also be updated and strengthened to provide a permanent process of bridge inspection and maintenance (para 3.17). Annex 2 provides details of the proposed bridge repair and rehabilitation program. (iv) Equipment Replacement, Rehabilitation and Acquisition 3.10 To carry out its maintenance responsibilities, SCT needs a fleet of about 3,300 pieces of equipment. At this time, 60% of SCT's fleet of about 6,000 vehicles and heavy equipment units is older than ten years and another 30% is between four and ten years old. Under SCT's Maintenance Improvement Program, 2,270 items of new vehicles and equipment will be acquired; 915 items of the existing fleet will be rehabilitated; and the best of the remaining fleet will make up the balance. Over the period 1987-1991 about 3,000 overage, damaged or unrepairable vehicles will be written off and scrapped (Table 3.2). The fleet should then have a reasonable age profile much more in keeping with SCT's equipment maintenance capacity. 3.11 The Project will finance procurement of a portion of the new road maintenance equipment and associated spare parts and implementation of all of the equipment overhaul, rehabilitation and reconstruction work (915 units) included in SCT's Maintenance Improvement Program. Annex 3 provides details of the equipment procurement and rehabilitation programs. (v) Workshops, Tools and Equipment 3.12 The Program will also provide new, rehabilitated, improved or expanded central workshop facilities, in 31 Centros, including required machinery, equipment, tools and spare parts, for repair and maintenance of equipment used for maintenance of roads. In addition, 82 satellite maintenance centers will be provided or improved. Further details and layout plans are contained in the Project File. The Project will finance the civil works involved and part of the workshop tools, equipment and spare parts needed. Annex 3 provides details of the workshop program.  - 17 - (vi) Traiiing Program 3.13 DGCOP's training unit hts been operational for more than five years and in 1986 p,:ovided training for about 1,400 managerial, technical, equipment operators, mechanics and road maintenance personnel. However, its training program has several significant deficiencies, especially in the areas of heavy equipment operation and maintenance, on-the-job training of road maintenance crews, up-grading the performance of field foremen and work crew chiefs; bridge maintenance; dnd in road planning and programing. To help DGCOP in correcting these deficiencies and to strengthen monitoring, evaluation and feed-back in the training system, a significant training component has been included in the proposed project. 3.14 With inputs from several of DGCOP's general residents and general superintendents of maintenance of selected centro maintenance centers, the DGCOP training unit has developed a revised training program to correct the existing personnel deficiencies. This training program, to be implemented under the project over a period of five years, would improve the performance capabilities of about 30 general residents (engineers) for road maintenance and 20 of their DGCOP central office counterparts, 30 general superintendents for equipment and 30 of their shop superintendents and, through on-the-lob training, an estimated 3,000 semi-skilled field work-crew members, 120 road and bridge maintenance engineere, 300 road and bridge maintenance foremen, 1,200 maintenance mechanics and 4,500 heavy equipment operators. 3.15 As physical space for training in the existing centers is acceptable, the Program includes provision for supplemental furniture and office equipment for the central training unit and the eight training centers, audio-visual equipment and training aids for the eight centers and a more limited amount in the other 23 state maintenance centers to support on-the-job training, specialized training equipment for the eight centers and for the central training unit, the further development of the short-course training modules and their implementation during the 1987-91 period, including provisions for training of trainers in each of the state centers who would be responsible for carrying out informal on-the-job training and a small number of short study/observation trips abroad and in-country seminars including some for training and evaluation for central training unit staff. The training component of the Maintenance Improvement Program will be included for financing under the Project. 3.16 DGCOP has been very successful in recent years in obtaining a higher level of instructor ability and pertinent experience through contracting nearly all training to consultant training firms and organizations and it is intended to continue this practice. However, as an institutional development measure the training capability of the DGCOP training unit would be increased through the addition of a senior staff member to monitor and evaluate training programs and to coordinate a feed-back system for further improvement of training. In support of this, resident road maintenance engineers and equipment maintenance superintendents would receive instruction in training evaluation. In addition, the training unit would convene periodic round table discussions to enable training staff and the residencies to exchange views on maintenance-related matters and on progress and the aptness of the training being given. During negotiations, confirmation was obtained from the Government on the scope and composition of  - 18 - the training program, including course content and use of consultants, along the lines establlished during appraisal. Details of the training program are shown in Annex 4. (vii) Consulting Services and Technical Assistance 3.17 As part of the Maintenance Improvement Program, SCT will carry out a compreheusive road and bridge condition inventory using consultants to augment DGCOP's staff where needed. The consultants will provide services related to road roughness and deflection surveys, non-destructive testing of bridge components, weigh-in-motion surveys and analysis and design of maintenance interventions for roads and bridges. In addition, consultants will be engaged to provide technical support to DGCOP's Programing and Evaluation Directorate in improving maintenance planning and programing systems, methods and execution. DGCOP's bridge moTtitoring and review system would also be updated and strengthened to provide a permanent process of bridge inspection and maintenance. The Project will include financing for the consulting services and technical assistance included in the Program. Annex 5 provides details of the services required along with outline terms of reference. During negotiations, confirmation frem thp Government was obtained concerning the scope and timing of consulting services to be used, the terms of reference and the estimated cost. D. Project Costs and Financing 3.18 The proposed project covers a portion of the civil works for pavements and bridges (periodic maintenance); part of the new equipment to be procured, including associated spare parts; rehabilitation of existing equipment; workshop improvements; training and the provision of technical support and consulting services. The estimated cost of the Project is US$281.5 million equivalent with a foreign exchange cost of US$135 million. The proposed Bank Loan, US$135 million, would finance the total foreign exchange portion of the cost of selected items for Bank financing. Cost estimates are based on prices as of May 1987, and include a 10% physical contingency and about US$45 million equivalent for taxes and duties. Detailed analysis has shown the foreign exchange content of the type of civil works included in the Project to be about 39%, while, that for the equipment rehabilitation program is estimated to be approximately 69%. Overall the foreign exchange portion represents about 48% of the total cost of the Project. The estimated cost of each project component, expressed in terms of equivalent May 1987 US Dollars, and the estimated foreign exchange content are shown in Table 3.8 and are summarized in the table below.  - 19 - Project Component and Estimated Costs - Estimated Costs - Foreign Bank Parti- Project Component (US$ Million Equivalent) Exchange cipation Local Foreign Total (US$ Mllion) Civil Works 1. Periodic Maintenance Program for L,ads on the Federal Highway Network 94.60 60.40 155l00 39 60X40 2. Repair and Rehabilitation Program for Existing Bridges and Culverts on Federal Highway Network 15.25 9.75 25.00 39 9.75 3. Workshop Construction, Rehabilitation, Inprovement and Expansion Program including Workshop Tools and Equipment and an Initial Stock of Spare Parts for Scheduled Maintenance 3.75 2.25 6.00 39 2.25 Maintenance Equnpment 4. Repair and Rehabilitation Program for Existing Equipment 2.50 5.50 8.00 69 r.50 5, Procurement of New Road Maintenance Equipment including associated spare parts 2.50 32.50 35.00 93 30.00 Training 6. Training Program including Technical Support for Training 1! 0.90 0.50 1.40 35 1.40 Consulting Services 7. Consulting Services and Technical Support 1.70 0.80 2.50 33 2.50 Total Base Costs 121.20 111.70 232.90 48 111.80 8. Physical Contingencies 12.10 11.20 23.30 48 11.20 Subtotal 133.30 122.90 256.20 48 123.00 9. Price Contingencies 13.20 12.10 25.30 48 12.00 Total Project Cost 146.50 135.00 281.50 48 135.00 - as_ - 1/ Does not include salaries of Government employees. Note: Inflation factors used to deternine price contingencies are: 3X for 1987, 1.0% for years 1988 through 1990, and 3.5% for years 1991 to 1995.  - 20 - E. Economic Evaluation and Justification 3.19 The Federal Road Maintenance Improvement Program is well justified economically with an estimated economic rate of return (ERR) exceeding 40%. Annex 6 provides the details relating to the methodology used and the results obtained. The program has been evaluated in two stages: first, the impact of 27 alternative road nmaintenance policies on the traffic related deterioration of 14 representative links of the network totalling 916 km wes tested in order to determine an optional road maintenance strategy; and second, the results thus obtained were applied to the federal road network and the budget necessary to implement the maintenance strategy was derived. The first stage of the evaluation was carried out using the latest version of the Bank's Highway Design and Maintenance Model (HDM III). 3.20 The representative links were selezted by SCT based upon a detailed inventory of surface conditions on 2000 km of roads and supplemented by a general inventory of the geometric and structural characteristics of the network. The representative links typify the terrain, climate, traffic structural and surface condition of the network. About 2,700 km of weak pavements which will be strengthened under the ongoing Highway Sector Project have been excluded from the analysis network. 3.21 The maintenance policies used in the analyses were developed in collaboration with SCT's Directorate General of Maintenance and reflect the maintenance operations in use in Mexico. mhe frequency of application of these operations has been varied to reflect the various intensities of the maintenance policies ranging from low to highly intensive. The unit costs of the maintenance operations used are the higher range of average costs applicable in Mexico (assuming contracting operations) and are reasonable for the region. The traffic voldmes and their compositions for each of the representative links were checked by SCT's Directorate General of Planning and are based on the actual counts supplemented by origin/destination data. The unit cost of vehicles, parts, labor, lubricants and fuel were obtained by SCT's consultants through dealer quotations. Ne value of time has been imputed to passengers. 3.22 Vor each representative link, the HDM III model was used to simulate life-cycle costs based upon initial surface conditions (e.g. roughness and area cracked, number of years since last periodic intervention et al.) horizontal and vertical geometric characteristics, the road maintenance policies in force and the volume and composition of traffic using the link. Thus for each link, the maintenance policy alternative yielding the least cost to society (minimum costs to the road authority and the users) i.e., the highest net present value was identified. From the foregoing, a matrix of recommended policies was derived. The recommended policies for the different traffic volumes and initial road conditions would yield, under typical conditions, a minimum ERR of over 40%. During project implementation, the matrix of recommended maintenance policies will be refined to take into consideration the results of field measurements. 3.23 For the second stage of the analysis, the recommende' road maintenance strategy was generalized to the entire network (excluding the roads with pavements too weak to support the existing traffic and axle  - 21 - loading and in need of major strengthening). To carry out this task, the road network was grouped into three classes of road conditions i.e. poor, fair and good, according to the different levels of traffic based on a condition inventory and information on traffic distribution. To obtain the estimates of budgetary support for implementing the recommended maintenance strategy, the physical quantities of work (i.e. annual quantities of periodic (overlays and seals) and routine maintenance) were derived based on the assumption that there will be no growth of the network during the execution of the five year maintenance program and that despite the application of the maintenance strategy, every year, about 5% of the roads classified-as "good" and "fair" will revert to the next lower classification and all the overl*'yed roads will pass up to the "good" classification. The physical quantities were then converted into costs through the application of unit costs of maintenance operations. The final stage of the analysis relates to the identification and evaluation of each specific group of periodic maintenance (paving) works for inclusion, each year, in the annual program. Economic evaluation for a tentative list of road pavlng works carrled out by SCT, was analyzed during appraisal for cost and trafflc variations, and found satisfactory. The proposed works were found to yield economic rates ot return over 40%. During negotiations, a final list yielding economic returns above 40% was submitted for Bank review and also found acceptable. Subsequent groups of road paving works would he also identified and evaluated by SCT. During negotiations, agreement was reached with the Government that periodic maintenance works for roads and bridges to be included in the pluriannual program would he selected In the context of a balanced investment strategy, and in no case would yield an ERR below 12X% estimated in accordance with economic crlteria satisfactory to the Bank. Based on the foregoing, the proposed budgetary requirements were confirmed as was the detailed program for the first year (Annex 6). Procedures for annual updating of the maintenance program have been agreed (para 4.02). The methodology to be followed for the economic evaluation of specific bridge works to be included in the maintenance program is described in Annex 6. F. Risk Assessment 3.24 There are three main risks with regard to the Project. The first concerns the possible failure by the Government to allocate sufficient budgetary funds on a timely basis. However, this risk is mitigated by the Government's agreement to hold annual consultations on road investments and to provide the necessary budgetary resources to carry out the Federal Road Maintenance Improvement Program. The second, concerning the Road User Cost Recovery Scheme, involves the possibility that future progress on this policy issue may face political resistance, particularly regarding increases in taxes to fully recover the cost of road damage attributable to trucks and other heavy vehicles. However, the Government has taken a series of measures to increase taxes on trucks in the 1987 tax law, including an initial 130% increase in road tolls for trucks which are to he further raised to bring the total increase to 260% in 1987, as well as substantial increases in annual truck permit taxes. Also, the price of diesel fuel has been increased by 130% during the past year to bring it in line with border prices. In light of the foregoing, and the Government's agreement to implement the Road User Cost Recovery Scheme and raise user taxes on trucks and other heavy vehicles to cover at least the related marginal costs attributable to them, this risk is also acceptable. Lastly, there is the risk that the institutional strengthening aspects will not be given the necessary priority. Project preparation has proceeded in close collaboration with Government authorities in order to ensure commitment to oblectives and minimiz2 these risks.  - 22 - IV. PROJECT IMPLEMENTATION A. Subproject Selection, Preparation and Evaluation 4.01 The first year road and bridge periodic maintenance program was developed by applying SCT's present rating procedures (Annex 6) and field reviews. This provided a priority list of works to be carried out in 1987 based on need and condition with priority being given to the most heavily "trafficked" roads. The economic feasibility of typical maintenance works on such roads was confirmed using HDM III. SCT then reviewed the program and updated data concerning traffic and road conditions. During negotiations the list indicating the particular road sections to be treated during the first year of the project's execution was confirmed. The details of the first year program are in the Project File. 4.Ok On an annual basis during the course of project execution, SCT, through DGCOP, will update its inventory of roads and bridges on the federal highway network and determine current traffic levels and number of rating points. Using this information, gathered on the basis of a modified highway rating system agreed with the Bank (Annex 5), a proposed periodic maintenance program for roads and bridges will be established for that year and provided to the Bank for review (Annex 8). Tentative programs, using presently available inventory data, traffic levels and probable deterioration rates, have been established (Tables 3.5 to 3.7) but will need to be confirmed on the basis of more detailed, current field inspection and testing (Annex 5). At negotiations, agreement was reached with the Government concerning the annual review by the Bank of the proposed maintenance program and on the procedures and methodologies to be applied by the Government in its preparation. 4.03 On the basis of a survey of all of SCT's equipment fleet with the data gathered, including condition, entered into a computerized data base, the status, condition, availability, utility and age profile of the maintenance equipment fleet and of the maintenance equipment workshops and equipment yards was determined. Using the program of routine and periodic maintenance of federal highways and bridges determined in the manner given above, the equipment and workshop needs for road and bridge maintenance for the federal highway netwcrk, with especial focus on SCT's five-year maintenance program, was established. This exercise resulted in the production of a five-year equipment acquisition program to be carried out in conjunction with an equipment retirement, replacement and scrapping program (Annex 3). Similarly, the survey referred to above resulted in the determination of needed spare and replacement parts for scheduled maintenance and an equipment rehabilitation and repair program to be carried out over a five-year period to return presently broken down and sidelined equipment to usefulness where economically justified (Annex 3). In addition, a program for building new workshops where needed and for expanding, improving or rehabilitating existing workshops was established. The cost of needed machinery, tools and spare parts for these maintenance workshops was also established. During negotiations, confirmation was obtained from the Government on all procurement items, on the workshop construction and improvement program and on the equipment scrapping program.  - 23 - B. Project Execution 4.04 BANOBRAS will be the Borrower and will relend the loan proceeds to the Government (for SCT) under the same terms and conditions as the Bank loan with the Government bearing the foreign exchange risk. It will he a condition of effectiveiese that the Borrower and the Guarantor enter into contractual arrangemsnts satisfactory to the Bank for the transfer of loan funds. SCT, through DGCOP, will be responsible for the implementation of the project. During negotiations, agreement was reached with SCT (and DGCOP) on an implementation plan and schedule for project execution (Annex 7). Within DGCOP, at headquarters, the Directorate for Programing and Evaluation will be responsible for the planning, execution, monitoring and reporting of project activities, coordinating project implementation functions of the other directorates at headquarters and of the Centros in the various states. The Centros will carry out the authorized maintenance activities for roads and bridges included in the federal highway network, including supervision of work performed by contractors, and will provide appropriate inventory, progress and other data as needed to the central office. 4.05 The Centros will also implement the equipment scrapping, rehabilitation and repair program as well as the maintenance workshop rehabilitation and improvement program, both in coordination and under the direction of the Equipment Directorate at headquarters. The Equipment Directorate will handle the procurement of new maintenance equipment, spare parts,tools and machinery as well as the design, bid and award process for new workshops to be constructed by contractors. 4.06 DGCOP's Training Unit, which reports directly to the Director General of DGCOP (Chart 2) will be responsible for carrying out the maintenance training program, including the engagement of consultants to provide technical assistance or teaching in connection with the training program. The Training Unit will operate in close coordination with the Programing and Evaluation Directorate. Other consulting services will be the responsibility of the Directorate for Programing and Evaluation which will s,lect, engage, supervise and monitor the consultants providing technical assistance or other consultancy services in connection with the road and bridge maintenance programs, the rating and evaluation systems or field investigations and studies having to do with the establishment or verification of the proposed programs (Annex 5). C. Project Monitoring 4e07 The Project would be supervised and monitored by the Bank through the normal supervision mechanism, and through provision by SCT of quarterly reports to the Bank, in a manner satisfactory to the Bank, on all phases of the project. These reports would be produced by DGCOP's Directorate of Programing and Evaluation using data and contributions from each of the directorates or centroa carrying out the work of the project. In addition, an annual consultation between the Bank and SCT would take place during November of each year to review the various proposed programs for the coming project implementation year, to assess the status of the project and of SCT's maintenance operations using the agreed targets and monitoring indicators established under the project and to discuss and resolve outstanding issues  - 24 - and implementation problems. SCT will, in addition, provide, within six months of the Closing Date of the Loan, a Project Completion Report. During negotiations, agreement was obtained from the Government that SCT will provide adequate and timely data and information to the Bank for project monitoring purposes. Annex 8 provides details concerning project execution and monitoring. 4,08 In order to maintain close control of rroject execution activities, set goals to attain and correct deficiencies or solve problems before difficulties become unmanageable, SCT will continuously monitor appropriate performance indicators including physical and operational targets. Table 3.2 gives a summary of the Program's physical targets. The operational targets relate to the quality and efficiency of SCT's maintenance operations and will include among others: (a) average number of hours that equipment is utilized; (b) percent of fleet available for use; (c) percent of fleet actually utilized; (d) equipment downtime; (e) number of potholes patched per day per work unit; and (f) number of kilometers overlain or sealed per day per work unit. SCT will provide information concerning these performance indicators to the Bank on an annual basis during the joint review of project progress that will take place in November of each year. During negotiations, the agreement of the Government was obtained regarding this process along with confirmation of the specific physical and operational targets to be achieved. Annex 8 provides further details concerning the performance indicators to be used and the project monitoring arrangements to be followed. E. Procurement and Consultant Services 4.09 Precurement under the project will be carried out as shown in the table below:  - 25 - Procuremenj Method (US$ Million)l/ Project Element ICB LCB Other Total Civil Works Periodic Maintenance Program for Roads on the Federal Highway Network - 187,4 - 187.4 (72.5) (72.5) Repair and Rehabilitation Program for Existing Bridges and Culverts on Federal Highway Network - 30.2 - 30.2 (11,7) (11.7) Workshop Construction, Rehabilitation, Improvement and Eypansion Program including Workshop Tools and Equipment and an Initial Stock of Spare Parts for Scheduled MaIntena-ace - 6.7 0,5 2/ 7.2 (4.2) (0.3) (4,5) Equipment Rehabilitation and Repair of Existing Equipment 9.7 - 9.7 (6.6) (6.6) Procurement of New Road Maintenance Equipment including associated Spare Parts 42.3 - - 42.3 (35.0) (35.0) Training and Consulting Services Training - 1.7 1.7 (1.7) (1.7) Consulting Services - 3.0 3e0 (3.0) (3.0) Totals3| 42.3 234,0 5.2 281,5 (35.0) (95.0) (5.0) (135.0) 1/ Amounts in parentheses show the allocations from the proceeds of the Loan. 2/ International Shopping and Off-the -Shelf Local Purchase. 3/ See Table 3.8.  - 26 - 4.10 Civil Works. Civil works having an estimated total value of approximately US$217.6 million equivalent for periodic maintenance of roads and bridges forming part of the Federal Highway Network will be contracted out by SCT through DGCOP. Periodic maintenance works for roads paved with asphalt concrete that are to be carried out by contract include placement of seal coat (sealing) in certain cases and adding a layer of asphaltic concrete hot mix (overlaying) in other cases, both on the surface of an existing asphaltic concrete pavement. Where necessary, the work will also include use of appropriate geotextiles ard admixtures; patching the existing pavement in advance of the overlay or seal coat; and placement of a levelling course to bring the pavement surface to the correct grade, elevation and cross-slope, also in advance of the main work. Contracts to carry out this work will generally vary in length of road to be treated from about 15 kms to 60 kms, with costs varying from about US$250,000 to US$1.0 million equivalent. While it will be possible for contractors to bid on more than one of these contract packages at a time, nevertheless, the small size, geographical dispersion and isolation in some cases is expected to discourage foreign contractors from bidding. 4.11 Similarly, contracts will be let for repair and rehabilitation of bridges on the federal highway network. These contracts will cover from one to five bridges on the average, and will cost about US$25,000 to US$250,000 equivalent each. Except for very few requiring special expertise not available in Mexico, the same comments apply to bridges as were made above regarding roads. In addition, contracts for construction of new workshops and for rehabilitation and improvement or expansion of existing workshops costing about US$ 25,000. to US$ 100,000. each will be let for a total of US$3.3 million equivalent. Again, it is extremely unlikely that foreign contractors would be interested in these very small contracts, particularly in view of their scattered nature. 4.12 The domestic construction industry is quite active and there are many competent and experienced construction firms located throughout the country who would be prepared to bid on both large and small construction contracts. Many of these firms either have or are willing to acquire the appropriate equipment to carry out the type of work contemplated under the Project and there are a sufficient number of firms experienced in this type of work. Contracts for civil works, for the reasons given above, will therefore be let on the basis of Local Competitive Bidding (LCB), except that any foreign contractor who wishes to do so may participate on an equal basis with the domestic contractors. Local competitive bidding procedures have been reviewed and, except where indicated below, have been found to be satisfactory. There should be no difficulty in achieving mearingful competition. 4e13 Procurement practices, relating to contracting of civil works, which need to be modified in order to conform to Bank policies involve the registration process (prequalification); the time periods allowed during the procurement process for the various steps and functions to be carried out; the evaluation and award process and the budgetary process. Further details concerning the recommended procurement process are given in Annex 8. Agreement was obtained from the Government during negotiations that the procurement process used will be satisfactory to the Bank.  - 27 - 4.14 New Equipment. Under the Project, road maintenance equipment (including spare parts) valued at approximately US$42.3 million equivalent will be procured. This equipment will be procured using International Competitive Bidding (ICB) in accordance with the Bank's Guidelines for Procurement. A margin of preference will be granted to domestic manufacturers amounting to 15% of the c.i.f. bid price of foreign goods or the amount of customs duties or other import taxes which a non-exempt importer would have to pay, whichever is lower. During negotiations, the Government's confirmation was obtained that all new equipment and spare parts to be purchased with financing under the proposed Project will be procured in accordance with the Bank's Guidelines. 4.15 Existing Equipment. Under the Project, about US$9.7 million equivalent will be spent to rehabilitate, rebuild, and repair equipment presently in the fleet which is idle or unusable due to need for repairs or rehabilitation. This work will be performed by domestic industry or local commercial machine shops on a contract basis using LCB. It is very unlikely that foreign firms would be interested in this work due to its small size, except in special cases where particular expertise or special machinery is needed to carry out the required work but is not available in the country. In such cases, shopping procedures, obtaining at least three quotations and following the Bank's Guidelines for Procurement, will be used. Where, as described above, LCB procedures are used, the requirements given above for civil works (para 4.12) will apply equally to these contracts. Training equipment, and workshop machinery and tools will also be procured under the Project. Where available in Mexico, these items will be purchased using LCB as described above except that, where procurement packages do not exceed US$ 25,000 in value, purchases locally off-the-shelf will be permitted on the basis of at least three price quotations subject to an aggregate total not to exceed US$750,000 equivalent. Where not available domestically, they will be procured using International Shopping in accordance with the Bank's Guidelines for Procurement. During negotiations, agreement with the Government was reached that the methods and procedures to be followed in carrying out these types of procurement will be satisfactory to the Bank. 4.16 Consulting Services. Consulting services for technical assistance, for studies and for training as well as for field investigations, and fcr design of pavement and bridge repairs and rehabilitation, amounting ti approximately US$4.5 million equivalent will be obtained in accordance with the Bank's Guidelines for the use of consultants. The local domestic consulting industry is very active, qualified and experienced and will be able to satisfactorily carry out the work required with the possible exception of certain specific expertise that may not be easily available within the country. While the consultant selection process will be open to foreign firms, it is likely that foreign experts, where needed, would be engaged as individuals or through joint ventures with local firms to provide the expertise that may not be available domestically. The consultant's terms of reference, their suitability for the specific assignment and the draft contract for all these consultants will he reviewed and approved by the Bank before their appointment. During negotiations, agreement was reached with the Government on outline terms of reference (Annex 5) for these consulting assignments and on the procedures to be followed, as delineated above, in making selections, appointments and awards.  - 28 - 4.17 Prior Review. The Bank will review, before any bidding for civil works or goods takes place, the draft standard model advertisement, tender documents and contracts (including a description of the advertising, bid, evaluation and award procedures to be followed) prepared by the Government for use under the Project. Where necessary, the documents will he modified before use so that they will be satisfactory to the Bank. The approved documents will then be used for tenders let and awards made under the Project except that any modifications made to them will be subject to prior approval of the Bank. All contracts for goods costing the equivalent of US$500,000 or more will nevertheless be subject to the Bank's full prior review of tender documentation, bid evaluation and award. All contracts for civil workF costing the equivalent of US$500,000 or more and all contracts for goods costing the equivalent of US$250,000 or more will be subject to the Bank's prior review of bidding documents but post review of awards. The review would cover a minimum of 75% of the total estimated value of all goods and works contracts. The balance of contracts would be subject to post review on a randc.a, sampling basis after contracts have been signed. Contractual arrangements with consultants will be subject to the Bank's prior review, as delineated above (para 4.16), regardless of the amounts involved. E. Disbursements, Accounts and Audits 4.18 Disbursements from the Loan Account would be made on the basis of 39% of total expenditures for civil works; 100% of foreign currency expenditures for purchases of new equipment and associated spare parts and for spare and replacement parts or other goods purchased from foreign sources; 100% of ex-factory costs for equipment, spare parts or other goods that are domestically manufactured, or 65% of total expenditures for locally procured equipment, machinery, tools, spare parts or for equipment rehabilitation or repair work performed locally through contract; 100% of total costs for technical assistance and other consulting services; and 100% of total costs for training and associated expenditures. Overall, the Bank would finance an estimated 48% of total project costs, equal to the total foreign exchange portion of the Project cost. The allocation of loan proceeds for the various disbursement categories is given in Table 4.1. Retroactive financing will be provided for expenditures incurred after November 15, 1986 but before the date of loan signature, up to a maximum of US$13.5 million. All disbursements will be net of taxes and duties. During negotiations, agreemeitt was reached with the Government on the disbursement percentages as delineated above, for all of the project's components. 4,19 In order to reduce the time interval during which the Government would be financing the Bank's share of project costs with its own funds, a Special Account will be set up in the Banco de Mexico under the control of BANOBRAS which could be drawn against on the basis of project expenditures for previously approved subprojects and/or contracts and which will be replenished from time to time by the Bank at the request of the Borrower as needed for project purposes. These replenishments will be made on the basis of documentation justifying the withdrawals previously made but will not exceed US$ 10 million at any given time. Disbursements, and withdrawals from the Special Account, will be made on the basis of Statements of Expenditure for civil works, for costs incurred relating to the equipment rehabilitation program and for training costs. Disbursements relating to the new equipment purchase program and for consulting services will be based on the Bank's usual documentation requirements. SCT has adequate accounting and auditing procedures and control to permit disbursements to be made on the basis of  - 29 - Statements of Expenditure (SOE). For this Project, such disbursements may be made, using SOE's, for individual expenditures not exceeding US$150,000. Supporting documentation would be retained by SCT, would be subJect to auditing under agreed procedures and would be available for inspection by Bank staff during project supervision missions. 4.20 Standard disbursement profiles prepared by the Bank for the LAC region and, in particular, for Mexico indicate that a seven-year period is required to obtain full disbursement for this type of project and the implementation period has accordingly been estimated to be seven years (Table 4.2). Given its design, it is, however, not unlikely that this project could be implemented at a faster rate and be completed in five and one-half years. Under such a scenario, the price contingencies shown in Table 3.8, Summary of Estimated Costs, would be reduced, causing a reduction in the overall cost of the project from US$281.5 million equivalent to US$275 million equivalent, producing a related reduction in the amount of financing needed from US$135 million to US$132 million. 4.21 Agreement was reached during negotiations that annual audits of the Special Account and the SCT project accounts will be carried out in accordance with generally acceptable auditing standards and procedures by independent and qualified auditors. Audit reports, in a format satisfactory to the Bank, for each financial year will be furnished to the Bank within six months of the close of the audited period. V. AGREEMENTS REACHED AND RECOMMENDATIONS 5.01 During negotiations, agreement was reached with BANOBRAS and the Government on the following: (a) annual consultations to be held on the highway sector expenditure program to ensure an appropriate balance between construction, rehabilitation and maintenance; the annual program to be satisfactory to the Bank (para 2.19); (b) increase road user taxes on trucks to cover at least the marginal costs of road damage attributable to them (para 2.28); (c) scope and composition of the Federal Road Maintenance Improvement Program (para 3.05); (d) provision of necessary budgetary resources to carry out the Maintenance Improvement Program (para 3.05); (e) scope and composition of the training program (para 3,16); (f) scope and timing of consulting services, terms of reference and estimated cost (para 3.17); (g) works to be included in the first year program of periodic maintenance for roads (para 4.01);  - 30 - (h) annual review of Maintenance Improvement Program for federal roads and bridges and of procedures and methodologies to be applied in its preparation (para 4.02); (i) all procurement items, workshop construction and improvement program and the equipment scrapping program (para 4.03); and (j) physical and operational targets to be achieved (para 4.08). 5.02 Agreement was also reached on: (a) an implementation plan and schedule for project execution (para 4.04); (b) project reporting requirements (para 4.07); (c) procurement procedures and documentation to be applied for civil works, goods and services (paras 4,13-4,17); (d) amount of retroactive financing (para 4.18); and (e) audit procedures and reporting (para 4.21). 5.03 It will be a condition of effectiveness that the Borrower and the Guarantor enter into contractual arrangements satisfactory to the Bank for the transfer of loan funds (para 4,04). 5.04 Subject to the above assurances and conditions, the proposed project would be suitable for a Bank loan of US$135 million, with a term of 15 years, including a grace period of three years. May 20, 1987  - 31 - TAKE 2e1 Indicatois of Highmt Duiu8d 1970-1985 AversE Aual Ilease () 1970 1975 1980 1985 1970-1975 1975-1980 1980-1985 PopgatimQ (thu8mands) 48,225 57,537 67,406 78,500 3.6 3.2 3.1 UIP (millions of 1970 pesos) 444,271 609,976 841,855 911,500 6.5 6.7 1.6 Vebicles In CIrclaticn (thusamds) 1,792 3,340 5,828 6,932 13.3 11.8 3.5 Automobiles (th I8usd) 1,234 2,401 4,255 4,921 14.2 12.1 3.0 Trucks (tidusads) 525 888 1,489 1,917 11.1 10.9 5.2 aiea (thnisands) 33 51 84 94 9.1 10.5 2.3 Geine Oaswptim by Road Vddcles (ud.Uluio liters) 7,856 10,865 18,316 25,217 6.7 11.0 6.6 Diese 0MMU1ptilon by Road Vehicles (million liters) 3,599 5,499 8,215 12,922 8.8 8.4 9.5 Pasew Cwrs/ l000 Irmbitants 26 42 63 63 10.1 8.4 0 Source: AMociiam M:dcna de la Ihiustria Ahtatriz, "La Iinistria httriz de MdoD e Clfras", SCr, SPP Nbaeiber 1986  - 32 - TABLE 2.2 MEXI00 HIGWAY MANTENANCE PRDJ= Trport InvesiLt (millions of 1986 Mef$) Transport 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 -*>de (est.) HIghxays 265,300 278,400 304,600 340,100 516,700 370,400 334,000 298,200 270,100 177,300 Railwys 125,500 109,700 178,100 243,400 299,500 258,100 188,300 192,100 193,400 127,100 Aviation 19,500 20,300 21,700 23,000 38,200 11,600 133,400 29,000 103,200 67,100 Ports 15,700 14,700 31,100 %,900 168,9OO 143,100 60,800 64,600 63,200 45,200 Totals 426,000 423,100 535,500 763,400 1,023,300 783,200 716,500 583,900 629,900 386,700 1/ Me.$570: US$1.0 Source: Bank staff, SCT and SPP Navember 1986.  - 33 - TABLE 2.3 MEXICO HIGHWAY MAINTENANCE PROJECT Prior Transport Lending Bank Amount Date Status Loan No Project Name (US$ million) (FY) (FY) 103-ME First Railway Project to Ferrocarril del Pacifico 61.0 1954 Completed 1959 268-ME First Highway Project 25.0 1961 Completed 1968 317-ME First Toll Road Project 30.5 1962 Completed 1967 354-ME Second Highway Project 40.0 1964 Completed 1972 401-ME Second Toll Road Project 32.0 1965 Completed 1970 528-ME Third Highway Project 27.5 1968 Completed 1973 695-ME Fourth Highway Project 21.8 1970 Completed 1977 820-ME First Port Project 20.0 1972 Completed 1977 825-ME Second Railway Project (N de M) 75.0 1972 Completed 1977 968-ME Seventh Highway Project 90.0 1974 Completed 1982 1022-ME Airport Development Project 25.0 1974 Completed 1982 1232-ME Third Railway Project (N de M) 100.0 1976 Completed 1983 1671-ME First Highway Sector Project 120.0 1979 Completed 1984 1929-ME Fourth Railway Project (N de M)150.0 1981 Completed 1986 1964-ME Port Development Prep.Project 4.51/ 1981 Completed 1986 2428-ME Second Highway Sector Project 200.0 1984 Est.Comp. 1988 2450-ME Lazaro Cardenas Ind.Port Pr. 76.3 1984 Est.Comp. 1990 2525-ME Chiapas Rural Roads Project 22.0 1985 Est.Comp. 1991 2575-ME Railway Sector Project 300.0 1985 Est.Comp. 1992 1/ After cancellations. Source: Bank staff November 1986  - 34 - TABLE 2.4b MEXICO HIGHWAY MA.INTENANCE PROJECT Highway Traffic on Selected Toll Roads (Thousands of Vehicles/Day) 1/ Average Annual Rate of Increase (M) Road Section 1971 1975 1977 1980 1981 1985 (1975-1985) Mexico-Cuernavaca 10.4 14.6 15.8 19.5 21.5 19.3 3.2 Cuernavaca-Amacuzac 4.4 6.2 6.5 8.7 9.7 8.1 3.0 Amacuzac-Iguala 2.4 3.5 3.9 5.0 5.6 5.1 4.5 Mexico-Queretaro 9.7 15.4 6,3 23.5 27.3 41.0 16.6 Queretaro-Celaya 5.1 7.1 7.3 10.0 11.7 9.4 3.2 Mexico-Puebla 13.5 19.1 20.1 28.4 32.7 46.8 14.5 Mexico-Teotihuacan 15.9 22,3 27.0 42.0 47.2 52.7 13.6 La Pera-Cuautla 2.6 4.5 4.1 6.2 7.7 8.6 2.7 Puebla-Orizaba 3.5 6.8 6.7 11.9 13.7 14.9 11.9 Tijuana-Ensenada 3.3 4.5 4.5 5.2 6.9 16.5 26.7 Apaseo-Irapuato 3.2 4.4 3.7 7.0 8.3 7.3 6.6 Orizaba-Cordoba 4e9 7.4 8,3 12.2 13.8 12.0 6.2 Guadalajara-Zapatlanejo 3.5 5.7 6.3 7.3 8.6 9.2 6.1 Compostela-Chapalilla - 0.6 0.7 1.0 102 1.3 11.7 Notes: 1. See Map IBRD 20343 for the location of these road connections. 2. For additional representative traffic intensities, see Annex 6, Table 2. 1/ Average Annual Daily Traffic (AADT). Source: Caiinos y Puentes Federales November 1986  HIGY MWD E PRB Development of the Bud Network (lb) 1952 1960 1970 1975 1980 1981 1982 1984 1985 1986 Federal Roads 13,033 23,828 29,358 38,292 42,521 43,408 43,661 44,612 44,359 44,700 Earth 479 974 620 901 757 961 955 1,096 360 340 Gravel 1,517 2,623 1,310 1,590 2,063 1,971 1,851 2,151 2,499 2,560 Paved - 2 lanes 11,037 20,231 27,299 35,427 39,153 39,852 40,184 40,352 39,530 39,780 Paved - 4+- lanes - - 129 374 548 624 671 1,013 1,970 2,020 Ib31 Roads I/ 113 290 868 1,028 932 932 932 953 953 953 Paved - 2 lanes 52 229 496 552 480 480 480 458 458 458 Paved - 4+ lanes 61 61 472 476 452 452 452 495 495 495 State Roads 10,830 15,137 29,984 37,102 49,302 50,741 51,772 55,420 56,295 56,988 Earth 1,560 1,756 2,986 2,967 7,831 8,350 7,508 5,874 2,376 2,150 Gravel 4,388 7,325 15,091 15,437 17,176 16,851 16,846 21,127 23,487 23,937 Paved 4,882 6,056 11,907 18,698 24,295 25,540 27,418 28,419 30,432 30,901 local Roads 3,356 2,787 7,530 13,489 3,194 1,951 1,304 2/ 2/ 2/ Earth 591 1,130 2,544 3,175 787 513 354 - - Gravel 2,619 1,235 3,353 6,378 1,050 612 559 - - - Paved 146 402 1,633 3,936 1,357 826 391 - - - Rural Poads - - 2,160 64-777 83,268 84,709 85,783 90,558 91,250 93,075 Earth - - 429 15,443 15,360 14,777 11,908 9,116 780 1,250 Gravel - - 1,70B 49,310 67,273 69,294 73,237 80,578 89,398 90,625 Paved - - 23 24 635 638 638 894 1,072 1,200 Earth Tracks NA 2,850 1,520 22,486 33,409 31,487 30,250 29,430 31,398 29,800 TOUAL 27,332 44,892 71,520 186,218 212,626 213,238 213,702 221,003 224,255 225,516 Tracks NA 2,850 1,520 31,530 33,409 31,497 30,250 29,430 31,398 29,800 Earth 2,630 3,860 6,579 22,486 24,735 24,601 20,725 16,086 3,516 -,740 Gravel 8,524 11,203 21,462 72,715 87,562 89,728 92,493 103,856 115,384 117,122 Paved - 2 lanes 16,117 26,918 41,358 58,637 65,920 67,336 69,111 70,123 71,492 72,339 Paved - 44- lanres 61 61 601 850 1,000 1,076 1,123 1,508 2,465 2,515 1/ Also ccnsdered part of the overall federal highiqy system. 2/ Included in totals for state roads. Souce: SCr  - 36 - 3NaD TAWIE 2.6 Federal Iliglus Netwok Ia1p Citeria e-d &tamards clas E D C B A2 A MS less than 100 100-500 500-1500 1500-3000 3000-5000 5000-20000 5000-2D000 It_n AADI1/ AAUT AADT AAMT AAD AMr A0Y2/ !~~ 2?~ (KP" Fiat terrain 50-70 50-70 70-100 80-100 90-110 90-110 90-110 Rflrxg terrain 40-60 40-60 50-80 60-90 70-110 70-110 70-110 Mbxntainous terrain 30-40 30-40 40-60 50-70 60-80 60-80 60-80 dius (O Flat terrain 70-150 70-150 150-350 210-420 270-420 270-420 270-420 RMIlhrg terrain 40-105 40-105 70-210 105-270 150-350 150-350 150-350 Mbuntainous terrain 20-40 20-40 40-105 70-150 105-210 105-210 105-210 hdingn Grade (%) Fiat terrain 7.0 6.0 5.0 4.0 4.0 4.0 4.0 itllig terrain 10.0 9.0 7.0 6.0 5.0 5.0 5.0 ltimtainous terrain 13.0 12.0 8.0 7.0 6.0 6.0 6.0 .eM Stamlards Roaiwy Width (M9 4.0 6.0 7.0 9.0 12.0 22.0 2 x 11.0 Paveerit Wldth (to 4.0 6.0 6.0 7.0 7.0 2x 7.0 2x 7.0 Seulder Width (M - - 0.5 1.0 2.5 3.0 3.0 Saperelevatlw (WM 0.10 1M. Qw@-slope (X) 3 3 2 2 2 2 2 WIdth of MWin (l - - - - - 1.0 8.0 Mni Sigt Distance (O Flat terrain 55-95 55-95 95-155 115-175 135-175 135-175 135-175 Roblirg terrain 40-75 40-75 55-115 75-135 95-155 95-155 95-155 Mxmtainxus terrain 30-40 30-40 40-75 55-95 75-115 75-115 75-115 Flat terrain - 255-315 315-450 380-485 405-495 405-495 405-495 blUlig terrain - 100-270 225-380 270-405 315-450 315-450 315-450 ?buntainos terrain - 135-100 180-270 225-315 270-380 270-380 270-380 -gDign HS20 (AA&MLD)3/ 1/ AADT - Amrual Average Daily Traffic. 2 Separated Roadways. 3 Amrican Association of State Hghway and Transportation Officials. Nbte: Rauges shown are from "Minima" to "Desirable". Swrce: scr Nbvember 1986  - 37 - HigtS fllmtn1 Pre Dietributlan of NeiaSeae Psr_mel b Cat"e --4UPERV I SU SORSO PERATORS-- -LASBOERE Relds t md Omnrei peretn/ Mm Eip. Sesio Ant. aOprb. Centre squrlittcsdnt Feorlm" Porcn Drivers fcb lS CoMtrs4 Lar. bworo 11 E pinat Tobls LlASCLIr 3 6 12 27 12 25 67 3 I 15 OAM CIFMIA MRE 12 it 43 135 60 40 Is II 9 #11 MA aIFRIA SU3 I 5 0 SD 22 Sl 40 a 14 I16 C E 10 to 26 13 s0 17 21 J01 10 10 45 aWILA 14 26 a. 13 as 206 4 P0 40 BeLlUlA 2 7 6 24 14 21 46 a 6 1i WHIWpAs 13 31 49 102 25 32 310 Is 6 513 CHIHL.M Is 25 26 122 55 65 231 4 22 w1 0PAW 16 32 3 115 36 s0 253 7 22 me S OMATO 8 7 47 74 IS 35 1s la 0 46 0UE1 0 14 20 53 97 30 S 316 20 50 678 HID0"O 7 30 Is 55 a 54 112 17 17 345 4M.SW 20 42 74 146 27 G 4 21 52 606 '=3lto 9 24 26 64 70 46 Is$ 12 7 4SO I60IAcm 18 3Y Si 107 53 10 40 2 go an ma 6 12 11 55 la 3 10 3 13 2a1 WAMIT 5 13 IS 59 17 40 124 12 12 31 4EW LEON 9 20 43 so 35 8 13 16 17 444 WUACA 12 37 63 126 36 45 416 Ia Is 401 PUEBA a 29 42 SI 20 30 11 2 9 410 (EREUARO 7 13 14 52 12 37 20 7 S 55 ufimY nROO 4 6 4 35 9 2 tQS 9 5 211 SMI WIS POSI 15 32 46 113 35 69 2 Is S o1 SINLA 8 32 24 is 2 34 176 18 426 S014m is 10 30 87 23 79 215 3 46S TABASCO 4 II 14 43 9 35 120 6 S 248 TASLIPAS 11 30 62 144 46 l1s 215 8 3 71s 7LAJCC.A 3 10 it 25 Is 30 74 7 1 150 VERARJZ ZWAMTM 22 5 103 182 22 93 471 5 35 1016 2Z011ZA SR- - _ YUCATAN S 20 21 60 17 30 157 0 3 316 ZMAAECAS IS 26 22 U 31 43 ISO 9 7 435 IOTILS 312 693 1013 262 63n 1615 Gal 63 33 7" Notm. 1. In addition to tte porsosi llated# cact OCtro Ins a General Resident for Vointm a ond a G* ra Ssporlateddnt for 6qulp t l _latenma. 2. IIWP's Central Offile bha 77 profeasulonl staff, 201 andnlnstrotlve porrml, 55 oerotarle and 15 fear levl cl*oya foee a t.i of 53 peresns. Ovrall, UP Io$ IS,= p.eniol. 3. Perene l as*ipgd t the Cnter In %racrow Zoe Su rre Included Int tt1 flw.. for t15 breruZ Zan beto Cetre. Soircot SCI Itev.o