Nicaragua - Recovery in the Transport Sector

Document of The World Bank FOR OFFICIAL USE ONLY CONFIDENTIAL Report No. 14474-NI NICARAGUA RECOVERY IN THE TRANSPORT SECTOR JUNE 23, 1995 F LE COPY Infrastructure Division Country Department II Latin American and Caribbean Region This document has a restricted distribution and may be used by the recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. NICARAGUA RECOVERY IN THE TRANSPORT SECTOR Currency Equivalents Currency Unit = C6rdoba US$1.00 = C$7.4 in May 1995 Fiscal Year January 1 to December 31 Weiahts And Measures Metric British/US Equivalent I meter (m) = 3.28 feet (ft) 1 kilometer (km) 0.62 mile (mi) 1 kilogram (kg) = 2.20 pounds (lb) 1 metric ton (m ton) = 2.205 pounds (lb) 1 liter (1) = 0.27 gallon (gal) I hectare (ha) 2.47 acres Abbreviations and Acronyms APENN Asociaci6n de Productoresy Exportadores Nicaraguenses No-tradicionales Nicaraguan Association of Non-Traditional Producers and Exporters ARI Acuerdo de Reestructuraci6n Institucional Institutional Restructuring Agreement BCIE Banco Centroamericano para Integraci6n Econ6mica Central American Bank for Economic Integration CEPAL Comisi6n Econdmica para Am6rica Latina Economic Commisison for Latin America CERAP Comit6 Ejecutivo para la Reforma de la Administraci6n Pziblica Executive Comitee for Public Administration Reform CERC Corporaci6n de Empresas Regionales de Construcci6n Regional Highway Construction Agencies COCATRAM Comisi6n CentroamOricana de Transporte Maritimo Central American Comission of Maritime Transport DANIDA Danish International Development Agency DGAT Director General de Transporte Acu6tico Director General for Aquatic Transport Abbreviations and Acronyms DGTT Direcci6n General de Transport Terrestre Directorate-General of Land Transport EAAI Empresa Administradora del Adropuerto Internacional International Airport Administration ENAP Empresa Nacional de Puertos National Port Agency FIDEG Fundaci6n Internacional para el Desafto Ec6nomico Global International Foundation for Global Economic Challenge GDP Gross Domestic Product GON Government of Nicaragua GTZ Deutsche Gesellschaft Fur Technische Zusammenarbeit German Technical Assistance Agency HDM Highway Design and Maintenance HMF Highway Maintenance Fund ICAO International Civil Aviation Organization INETER Instituto Nicaraguense de Estudios Territoriales Nicaraguan Institute of Land Studies ITP Integral Transport Plan JICA Japanese International Cooperation Agency MCT Ministerio de Construci6n y Transporte Ministry of Construction and Transport MOI Ministry of Infrastructure PSMP Public Sector Modernization Project REMECAR Rehabilitaci6n y Mejoramiento de Caminos Rurales Rehabilitation and Improvement of Rural Roads u s Table of Contents Executive summary........................................................................................... (i-Viii) I. Economic Recovery and the Transport Sector A . B ackground................................................................................................. B. Economic strategy....................................................................................... 2 C. Recent and future economic growth...........................................................2 D. Export performance and composition.......................................................... 3 E. Transport and future export growth............................................................. 4 F. Transport sector issues................................................................................ 6 II. Infrastructure Rehabilitation and Maintenance A. Transport network capacity......................................................................... 8 B. The road network ........................................................................................ 9 Traffic management-related infrastructure ......................................... 10 C. Priority investments in roads ..................................................................... East-W est corridor ............................................................................ 12 North-South corridor .......................................................................... 12 Feeder and rural roads........................................................................ 13 D . P o rts ....................................................................................................... 3 Condition and coverage ...................................................................... 13 E. Interoceanic Dry Canal .............................................................................. 14 F . A irp orts ..................................................................................................... 15 G. Indicative investment plan......................................................................... 16 III. Regulatory Reform and the Role of the Private Sector A. Interurban Transport ................................................................................. 18 Freight Services................................................................................... 8 B. M ain Issues in Interurban Transport.......................................................... 19 Lack of competitiveness in freight operations................................... 19 Vehicle weight and axle load regulation............................................. 19 Remaining Controls on entry and price............................................... 21 C. Ports and maritime transport ..................................................................... 21 Lack of competitiveness ..................................................................... 22 Inadequate public sector management................................................ 23 Acceleration of the labor retrenchment process.................................. 23 This Report is based on the findings of two Missions that visited Nicaragua, in March and June 1995. The Mission teams comprised Robin Carruthers, Task Manager, Senior Transport Specialist (LA2IN), Guillermo Ruan, Highway Engineer (LA21N), Jose Carbajo, Economist (TWUTD), Jerry Lebo Consultant, Economist (TWUTD) and Giuseppe Bacigalupo and Jean-Francois Biros (Consultants). Peer reviewers are Antti Talvitie (OEDD3) and Mirta Pokorny (ECIN). Ms Migdalia Quijada assisted in the production of the Report. The Department Director is Edilberto Segura, the Lead Economist is Ian Bannon and the Division Chief is Martin Staab. 11 IV. Public Sector Reform and Capacity Building A. The scope and reform of M CT.................................................................. 25 Institutional structure.......................................................................... 25 Capacity building and human resources ............................................. 26 M CT reforms...................................................................................... 26 Transport Planning ............................................................................. 27 B. Highway M aintenance............................................................................... 27 Organizational structure ..................................................................... 27 M aintenance expenditures .................................................................. 28 User charges and revenue mobilization..............................................29 Financing of road maintenance ........................................................... 29 C . P o rts .......................................................................................................... 3 1 Role of ENAP..................................................................................... 31 Reform options for ports..................................................................... 31 V. Public Transport A. Importance of public transport .................................................................. 33 B. Organization of services.................................:.......................................... 34 C . B u s fares ................................................................................................... 3 5 D. Improving the quality of the bus fleet........................................................ 36 E. Route changes and monitoring of concessions........................................... 36 F. Urban transport planning ........................................................................... 37 TABLES 1.1 Nicaragua's GDP growth (1990-1994) ............................................................ 2 1.2 Nicaragua's export growth (1990-1994) .......................................................... 3 1.3 Exports by product (1990-1994)....................................................................... 4 1.4 Principal Export Destinations (1990-1994)....................................................... 5 1.5 Proportion of Nicaragua's External Trade through Corinto (1991-94)............. 6 2.1 Comparison of Road Infrastructure in selected countries.................................. 9 2.2 Condition of the road network, 1994............................................................... 10 2.3 Traffic at Central American Ports (1985-1993).............................................. 13 2.4a Possible sources of Finance for Investment Recommendations....................... 17 2.4b Recommended Investments, (1996-2000) ...................................................... 17 3.1 Port Labor Productivity (1990-1994).............................................................. 22 4.1 Road expenditures, (1991-1994)..................................................................... 28 4.2 Road user charge revenues and maintenance expenditure (1991-1994).......... 29 5.1 M odal split of passenger trips in M anagua...................................................... 33 5.2 Estimates of commercial bus fare in M anagua, 1995......................................35 iii EXECUTIVE SUMMARY i. The purpose of this report is to provide timely advice to the Nicaraguan government on the short and medium-term actions and measures that are needed in the transport sector to contribute to the country's economic growth. Various weaknesses in the transport sector today are contributing to the high cost of transport, acting as a bottleneck to exports, and reducing the gains of broader liberalization and economic reform efforts. This study identifies those policy interventions and investment options for the transport sector which are essential if the economy is to continue to grow and achieve its long term development objectives. There are four broad areas of transport sector policy that need to be addressed in the short to medium-term: 1. infrastructure rehabilitation and maintenance; 2. regulatory reform and the role of the private sector; 3. public sector reform and capacity building, and; 4. urban transport. 1. Infrastructure rehabilitation and maintenance ii. In terms of coverage, Nicaragua's transport infrastructure is generally of sufficient capacity in relation to the country's short- and medium-term growth prospects However, the existing transport infrastructure is in poor condition due to the economic and political circumstances of the last twenty years. Significant rehabilitation of the country's transport infrastructure is now necessary to avoid its deteriorating condition from becoming an obstacle to the country's economic recovery. The main needs for infrastructure investment in rehabilitation and maintenance are: * Roads: Road investment should focus on: (a) reconstruction of the East-West and North-South export corridors; (b) completing the principal production circuit that connects the export corridors and provides access to the major agricultural production region: (c) complementary investment in selected rural and feeder roads, and; (d) bridge strengthening to allow the legal operation of heavier trucks. * Ports: In the short term the only essential investments are the renovation of the unreliable container crane and the reconstruction of the container berth at Corinto and the provision of cold storage, easily accessible container storage, an adequate container crane and a reliable electricity supply at Rama. In the longer term, investments in improving the access channel at Corinto might be necessary to allow its use by larger ships. * Airports: No major: investment other than the provision of freight storage facilities, and possibly minor improvements to the passenger terminal, can be justified in the short to medium term. In the longer term, new passenger and freight terminals will be needed. iii. Transport sector investment in the period 1996 through 1999 should total about US$300 million, of which about one third should be dedicated to preventative maintenance of iv the road network. There will be a continued high dependence on donor and multilateral funding, most of which will require counterpart funding by the Government. If financial resources from this source are insufficient to support all the recommended projects, priority should be given to preventative road maintenance and to starting fewer new projects rather than extending the implementation period of all the recommended projects. 2. Regulatory reform and the role of the private sector iv. Following privatization of the road transport industry and the partial elimination of public control, the provision of these transport services has improved, particularly trucking and urban bus services. But a variety of regulations which control rates, entry and operations continue, creating inefficiencies and inhibiting the participation of the private sector in the provision of transport services. The main recommendations regarding regulatory reform and the role of the private sector are: o Lack of competitiveness of freight operations: The lack of competitiveness of road freight operators is due in large part to high operating costs, lack of credit access for vehicle replacement and outdated vehicle weight regulations. Remaining regulations other than those relating to safety and environment should be substantially eliminated and measures implemented to reduce vehicle capital and maintenance costs. As bridges are strengthened, vehicle weight limits should be increased, and at the same time, strictly enforced. o Remaining controls on road transport: There is no justification for retaining current regulations on entry and rates, and entry into the interurban passenger market should be deregulated and the remaining controls over some freight rates abolished. o Excessive role of the public sector in ports: Labor productivity is very low and participation of the private sector in Nicaragua's ports is negligible. Immediate steps toward privatization of ENAP (Empresa Nacional de Puertos) that need to be taken include: (a) agreeing to a feasible scheme for reducing the port labor force, including retraining of redundant employees for other viable activities; (b) the transfer of non-port activities from ENAP and the divestiture of minor ports to municipalities, and; (c) formulation of a concessioning of the administration of the three major ports (Corinto, Sandino and Rama) within two years of creating independent port agencies. 3. Public sector reform and capacity building v. MCT still functions as a Ministry responsible for doing and controlling rather than for supervising and monitoring. The main areas for reform, that are part of a broader program of public sector development are: o MCT structure and functions: The principal long term recommendation of a recent institutional study was the creation of a new Ministry of Infrastructure V (MOI), more appropriate to the future needs of the sector than the current MCT. In the short term, MCT should be restructured to supervise and monitor private sector operation of the transport sector, rather than undertake transport operations itself or through its own agencies. With this change in its role, a smaller but more professional and better trained staff with better technological support will be required. *Highway maintenance: Activities related to highway construction and maintenance consume a large part of MCT's budget, but this has proved inadequate to maintain the network in line with the needs of an expanding and diversifying economy. The semi-autonomous regional highway construction agencies, should be privatized and all road maintenance activities contracted. In addition, alternative sustainable road maintenance financing mechanisms need to be developed, including the creation of a Highway Maintenance Fund (HMF), to be financed mostly by additional user charges. * Ports: The Government has prepared a draft law to create the Empresa Portuaria Nacional (EPN) that will replace ENAP. A more radical approach is recommended, with the medium-term goal of full privatization of the ports and creation of a national port agency with a role limited to guaranteeing freedom of access to port services at competitive rates, providing an adequate level of service, and regulating and managing the concession contracts. 4. Urban transport vi. Public transport accounts for an estimated 72% of all motorized trips in Managua and is provided almost entirely by private buses, with less than 14% of trips being made by private car and 8% by taxi. Estimates of household expenditure on public transport are a very high 15% to 20%, about double the level usually considered acceptable. Despite this high expenditure, there are too few buses, and those that do operate are generally old, badly maintained and too small. vii. The provision and financing of an adequate public transport system is perceived by government and users as the most pressing problem in the whole of the transport sector. Operators revenues fail to meet total operating expenditures by about 20%, but the scope for increases is severely limited by the ability of users to pay. Users are generally dissatisfied with the service provided and suffer high levels of assault and theft on buses, but are prepared to pay slightly higher fares in return for improvements in services. The main issues to be addressed in improving urban transport are the level of bus fares, the quality of the bus fleet, regulation of bus and taxi services and comprehensive urban transport planning. * Bus fares:. Formal fares, but not those actually paid by most passengers, should be minimally increased to help private operators improve their financial viability. Greater cooperation between bus operators, Government and commercial banks could substantially reduce capital and operating costs, without a need for Government guarantees or subsidies. vi o Bus fleet quality: Many vehicles in the urban bus fleet still do not achieve the minimum standards of safety and comfort. More flexible and accessible financing schemes and the introduction of alternative standards of service should be encouraged to facilitate vehicle replacement. o Service regulation: The Government lacks capacity to plan and monitor route concessions and is slow to decide changes proposed by operators. Reduced fare and route regulation of bus operations would result in services more compatible with users' needs. o Planning: Institutional responsibility for urban transport is divided between the MCT, the municipalities and the police (with no one being responsible for the environmental consequences of urban transport activities). There is no comprehensive urban transport planning that integrates road development, street maintenance, traffic management, public transport, safety, environment and institutional development. An Integral Transport Plan should be prepared to remedy this deficiency. Summary of specific recommendations viii. The report contains a number of specific recommendations in relation to each of the four main issues described above. These are: 1. Infrastructure rehabilitation and maintenance Investment scheduling para 2.16 It is recommended that no projects be initiated unless the finance for their completion is assured, and that a realistic expectation of the availability of future Government finance be used in making the assessments of which projects should be initiated. Ports - Corinto para 2.19 In the short term, the only recommended investments are the renovation or replacement of the unreliable container crane and reconstruction of the container berth. Ports - Rama para 2.21 It is recommended that the container berth at Rama be concessioned. The bidding rules should prevent the concession being awarded to the same operator as has the concession for the ro-ro terminal. Canal Seco para 2.23 It is recommended that the Government take a positive but cautious approach to this proposal, encouraging the consortium to undertake its feasibility studies, but without giving any guarantees of future concessions or terms relating to any concession. vii Transport Sector para 2.26 The recommended short to medium term investment program would require almost US$300 million over the next four years, or about US$75 million per year. This includes US$25 million per year required for maintenance of the highway network, to prevent it from deteriorating further. If the US$36 million required from Government sources is not available, priority should be given to road maintenance and to starting fewer projects rather than extending the implementation period of all of those recommended. 2. Regulatory reform and the role of the private sector Road passenger transport regulation para 3.13 It is recommended that entry to inter-urban passenger transport be deregulated immediately and all remaining tariff controls be removed. Road freight regulation para 3.14 There is no justification to maintain regulated rates for liquid cargo and, therefore, it is recommended that this regulation be eliminated. Road vehicle weights para 3.15 It is recommended that measures to strengthen bridges to permit 37-ton gross vehicle weights be undertaken as a priority and that, as the bridges are strengthened, gross vehicle weight and axle load regulations be aligned with those of adjoining countries and strictly enforced. Port labor redundancy par 3.29 It is recommended that all potential sources of financing labor redundancy and retraining be investigated, in advance of restructuring of ENAP and concessioning of port operations. 3. Public sector reform and capacity building Transport planning and regulation par 4.10 It is recommended that a more reliable and current inventory of infrastructure and data base of vehicles and services be established. Highway maintenance planning and funding par 4.19 It is recommended that proposals for the establishment of a Highway Maintenance Fund (HMF), financed mostly by additional user charges, in particular a fuel price supplement viii and fixed license charges, similar to those considered in 1993, be prepared for presentation to Congress before the end of the present Administration. Privatization of members of the CERC para 4.23 It is recommended that members of the CERC be privatized immediately, independently of progress in establishing a HMF. Port administration autonomy para 4.29 It is recommended that Corinto, Rama and Sandino be administered by separate autonomous port agencies and that administration of the smaller ports be transferred to the municipalities, with ENAP's remaining functions being transferred to MCT and a new regulatory agency. The agencies of the three named ports should be concessioned or otherwise privatized within two years of their creation. Port Law para 4.31 A further recommendation is that the draft Port Law, creating a new National Port Agency be reformulated, reducing the responsibilities of the agency even further. 4. Public transport Bus fares para 5.11 It is recommended that the basic urban bus fare immediately be increased to C$1.00. Vehicle replacement and spare parts purchase para 5.13 It is recommended that MCT encourage, but not subsidize, the formation of a users cooperative to purchase spare parts at non-monopoly prices and develop a scheme, also without Govemment guarantees or subsidies, to reduce the commercial bank's perceived risk of lending to bus cooperatives. Route concessioning para 5.15 It is recommended that a thorough revision be made of the method of regulating and concessioning public transport, with particular attention being made to institutional responsibilities. Urban transport planning para 5.17 It is recommended that an Integral Transport Plan (ITP), broader than that proposed by JICA, be prepared for Managua. 1 I. ECONOMIC RECOVERY AND THE TRANSPORT SECTOR 1.1 The purpose of this study is to provide an understanding of the role of the transport sector in the economic recovery of Nicaragua. The transport sector currently displays several constraints that could hinder economic growth. Sector inefficiencies and high costs are acting as bottlenecks to exports and reducing the gains of broader liberalization and economic reform efforts. Although the capacity of the Nicaraguan transport network compares favorably to that of neighboring countries, sub-sector deficiencies both in operation and vehicle fleets are extensive. For example, the road system is in poor condition; traffic through the Pacific ports has until very recently been falling despite a growing agricultural sector, while improvements in the port facilities on the Atlantic are not keeping pace with the changing pattern of exports and regional trade. Freight services are very costly and urban transport in Managua is poorly regulated and places an unreasonable burden on household budgets. 1.2 The objective of this study is to help identify transport policy interventions and investment options for the short- and medium-term which are considered necessary to avoid transport infrastructure and services from becoming a bottleneck to sustained economic growth. The role that the government should play in the provision of transport infrastructure and services is also considered. 1.3 This chapter briefly examines the recent economic developments in the Nicaraguan economy, the importance and changing patterns of external trade, and the interaction between these changes and the condition and needs of the transport sector in the near-term. A. Background 1.4 The Nicaraguan economy grew in 1994 at an estimated 3.2% (see Table 1.1), indicating a positive shift in performance that has eluded the country since 1984 and particularly since the current administration took office in 1990. A series of recent policies and reforms undertaken by the present administration are responsible, together with the inflow of external aid, for the positive turnaround experienced by the economy, although the improvement is less than had been hoped for. The agricultural sector, and in particular non- traditional exports, has been the best performer in terms of growth rates in 1994. Export performance has been marked by a significant reorientation of trade toward the east coast of the US and other Central America countries. 1.5 Various challenges, however, which need to be addressed in the short run, still lie ahead on the path to sustained economic growth. The poor condition of transport infrastructure; the lack of competitiveness of Nicaraguan freight operators; ports which fail to attract traffic and compete with their Central America neighbors; and the relatively high cost of urban transport in Managua, are some of the challenges that need to be addressed. To do so, the Government needs to program its actions strategically and cost-effectively to make good use of its very limited own resources and the foreseeable limited foreign aid. A substantial part of the strategy for the recovery of the transport sector involves the redefinition of the government's role, away from being a provider of services to becoming a regulator and protector of national interests. 2 B. Economic strategy 1.6 The recent economic strategy of the GOVERNMENT to turn the economy around and aim at positive economic growth has been based on several interrelated components: from the redeployment of public assets to more productive uses through privatization and the continued deregulation of the economy (such as the telecommunication and power sectors), to improving the Government's institutional capacity to design and implement policies, and to the strengthening of public finances through increased public sector savings in order to facilitate the rebuilding of the country's infrastructure (such as is taking place under the Public Sector Reform Program). 1.7 The performance of the Nicaraguan economy over the last four years has been characterized by a remarkable stabilization effort accompanied by a strong fiscal adjustment, a persistent external imbalance, and until recently no economic growth. The lack of a supply response in the agricultural sector, and a decline in international commodity prices for its main traditional exports, contributed to the economic misfortunes experienced by the Nicaraguan economy between 1990 and 1993. C. Recent and future economic growth 1.8 Nevertheless, the most recent economic performance shows strong signs that the Government's strategy is paying off. GDP grew in 1994 at an estimated 3.2 %, which compares very favorably with the 0.4% growth of 1992 and the negative growth experienced in 1991 and 1993. In the 1993/94 cycle, agricultural production grew 16.1% with respect to the 1992/93 crop, despite adverse drought conditions. Non-traditional exports grew 57.4%; non- traditional agricultural exports, in particular, doubled in 1994 reaching US$51.7 million. Fish and seafood exports also grew by over 54%, reaching US$50.4 million in 1994 compared with only US$9.0 million in 1990. Export growth continued into the first quarter of 1995, at a 28% annual rate. Table 1.1: Nicaragua's GDP growth (1990-1994) . 1990 1991 1992 1993 1994 USS billion 1.76 1.76 1.77 1.75 1.79 Realgrowth 0.0% -0.2% 0.4% -0.4% 3.2% Source: CEPAL: Notas sobre la Economia y Desarrollo, No. 556/557 1.9 In the short run, however, the possibility of a high and sustained rate of economic growth appears difficult not only because of macroeconomic constraints, but also due to sector bottlenecks and inefficiencies. The economy will have difficulty sustaining projected growth of 2% to 3.5 % annually until its process of structural transformation takes root and private sector confidence is established. The structural transformation depends on the consolidation of the 3 macroeconomic stabilization process, a major reduction in external debt, a strengthened institutional capacity of the state, and substantial progress in resolving the property rights issue. 1.10 A recovery of agriculture, fishing and mining production, a gradual recovery of the export sectors, and improved productivity are expected to be the main sources of growth in 1995 and 1996. After 1996, growth is expected to come primarily from increased private investment, especially in agriculture-based export activities. For these private investments to yield their expected high rates of return, it is necessary to have the potential infrastructure bottlenecks substantially eased or removed. D. Export performance and composition 1.11 It is widely agreed that the future economic growth of Nicaragua depends to a large extent on the prospects of its export sectors. In 1994, exports grew 28 %, which together with the 23 % growth experienced in 1993, represents a healthy sign of growth in the economy and an important reversal in the negative trend experienced since 1990. In value terms, total exports declined by 33 % between 1990 and 1992, recovered to the 1991 level in 1993, and by 1994 were above the 1990 level, at US$350 million. Current Bank projections' for sustainable annual export growth in the medium term continue at a modest 2% to 3.5%. Table 1.2: Nicaragua's export growth (1990-1995) 1990 1991 1992 1993 1994 1995' USS million 330.5 272.4 223.1 273.7 350.2 488.0 Real growth 6.4 -17.6 -18.1 22.7 27.9 28.3 Source: Oficina de Estudios Econ6micos Aduaneros, Managua (1) Based in first quarter results 1.12 There has been a significant change in the composition of exports, in terms of volume, between 1990 and 1994. Most notably, the participation of traditional products2 in the total value of exports has decreased from 80 % in 1990 to 65 % in September of 1994, with cotton declining from 11% to 1% of the total by value, sugar from 11% to 6% and bananas from 8% to 2%. Coffee and meat have maintained their share of value around 20 % each, while shrimp and lobster have both increased 4 percentage points, from 1% to 5% of total value. In the same period, 15 percentage points were gained by the non-traditional segment of the export market (Table 1.3). 1.13 The change in the composition of exports has been accompanied by a reorientation of foreign trade in respect of the origins of imports, but more importantly in respect of the destination of exports. Whereas in 1991 a significant proportion of trade was with the Far East Country Economic Memorandum, World Bank, February 1994 2 Traditional exports include ajonjoli, cotton, sugar, banana, coffee, meat, melaza, gold and silver; but also shrimp and lobster. Non-traditional exports include melon, castor seed, garlic, ginger, onions, mangoes, peanuts, and sesame seed. 4 (almost 15% by volume) and the West Coast of the United States (also about 15%), since then there has been a tripling of export trade with the United States (almost all the increase being with Miami and the East Coast), neighboring countries in Central America (up 67%) and to a lesser extent with Europe (up by over 20%). Exports to the Far East have reduced to less than 1% of the total (Table 1.4). With these changes accelerating as export growth increases, the development of adequate port facilities on Nicaragua's Atlantic coast will become even more important to avoid the additional cost of using ports in adjoining countries. Table 1.3: I g a Exports by Product 1990 1991 1992 1993 1994 1994/91 Product tons tons tons tons tons Change Banana 101,932 106,942 56,224 28,569 27,080 -73.4% Cotton 24,139 26,800 23,230 268 1,507 -93.8% Sugar 116,210 10,169 100,470 60,700 73,354 -36.9% Coffee 38,526 19,888 45,106 29,619 44,492 15.5% Sesame 5,025 8,363 5,117 11,427 7,707 53.4% Shrimp 655 882 63 1,366 2,620 300.0% Meat 29,340 15,584 17,677 25,304 26,037 -11.3% Lobster 212 902 1,192 753 875 312.7% Molasses 35,693 53,147 72,421 90,200 52,893 48.2% Sub total traditional 353,722 244,668 323,492 250,199 238,559 -32.6% Annual growth -30.8% 32.2% -22.7% -4.7% Non traditional 145,008 159,944 87,007 154,422 265,805 83.3% Annual growth 9.3% -83.8% 43.7% 41.9% Total 498,730 404,612 410,499 404,621 504,364 1.1% Annual growth -23.3% 1.4% -1.5% 19.8% Source: Direcci6n General de Aduanas. E. Transport and future export growth 1.13 The economic recovery of Nicaragua requires minimum levels of transport infrastructure and the efficient delivery of transport services in order to achieve sustained rates of growth. Insufficient, or malfunctioning, transport infrastructure quickly acts as a bottleneck for external as well as internal trade, thereby limiting the competitiveness of exports as well as limiting the development of areas with agricultural potential. Two main transport factors are currently limiting export growth, and will likely become major constraints in the future: the cost of exporting via Nicaraguan ports and the lack of adequate infrastructure facilities. 1.14 The cost of using ports of neighboring Honduras or Costa Rica is very high. For example, the total transport cost to Miami via Puerto Cortez in Honduras is about US$500 per 40-foot container more expensive than through the port of Rama. If these and similar cost increases for other forms of transport are applied to all products exported through ports in neighboring countries, the total additional cost, compared to exporting through Corinto and Rama, is of the order of US$7 million per year and savings of a similar order of magnitude for 5 imports. The costs also represent a loss of profitability for the exporter of between 1% (for high value products such as frozen fish) and 20% (for perishable products such as melons), the latter being a significant disincentive to bring into production new land with higher production costs and lower profitability than that presently in use. The efficiency of the ports of Corinto and Rama need to be increased and their tariffs reduced, and the road infrastructure to Rama needs to be improved to reverse current practice of using the ports of neighboring countries. The proposed reconstruction of the road between the Honduras and Cost Rica borders could make Corinto more attractive to exporters from those adjoining countries. Table 1.4: Principal Export Destinations (by value, 1990-1994) Country 1990 1991 1992 1993 1994 US$thousand US$thousand US$ thousand US$ thousand US$ thousand Costa Rica 15,733 11,802 17,173 22,829 25,417 Guatemala 12,949 11,420 5,293 7,343 8,449 El Salvador 9,607 19,667 13,652 15,257 39,149 Honduras 8,740 8,817 5,540 11,585 12,424 Sub-total 49,019 53,697 43,650 59,007 87,433 Mexico 20,653 12,947 13,727 10,270 11,601 Other ALADI 5,284 1,277 9,244 1,114 2,665 Caribbean 9,040 7,593 11,916 12,066 13,444 Asia 12,183 1,862 3,461 371 1,024 Europe 113,612 69,423 60,347 43,582 83,524 Canada 66,285 33,743 8,142 29,285 2,672 USA 25,166 53,326 55,081 109,034 145,800 Japan 17,478 35,791 21,411 1,329 1,404 Other 23,304 5,227 2,517 3,297 5,872 Total 342,024 274,886 229,496 269,355 355,439 Source: Direcci6n General de Aduanas. 1.15 Regarding infrastructure facilities, there is still a lack of chilled and refrigerated storage at Managua International airport, making the export of products that need such facilities very limited, and acting as a constraint to the development of similar new export products. Many non-traditional export products that are still relatively unimportant would have a potential for high growth if these specialized facilities existed. In recognition of this, the Nicaraguan Association of Exporters of Non-Traditional Products (APENN) is providing a minimum volume of chilled and refrigerated storage in a converted freight terminal at the airport, while the airport authority is rehabilitating, out of its operating budget, the aprons and taxiways to provide aircraft access to the new facilities. 6 Table 1.5: Proportion of Nicaragua's External Trade through Corinto Imports I Exports Year Corinto Total Corinto Corinto Total Corinto thou.tons thou. tons % thou. tons thou. tons % 1991 741 1,714 43.2% 305 494 61.7% 1992 270 1,618 16.8% 266 408 65.2% 1993 326 1,134 28.7% 158 362 43.6% 1994 353 1,400 25.2% 151 504 35.3% Source: Puertos del Istno Centroamericano, COCA TRAM, 1994 1.17 The lack of adequate services and facilities at Corinto, combined with high tariffs and a redirection in foreign trade explain in large part the port's diminishing participation in Nicaragua's foreign trade. Whereas in 1991 almost 62% of Nicaragua's exports and more than 43% of its imports passed through the port, by 1994 these shares had reduced to 25% and 35% respectively. The additional cost of trading through ports in adjacent countries represents a financial loss to the Nicaraguan economy and a severe constraint on the growth of external trade. F. Transport sector issues 1.18 With the elimination of its railway system in 1993, Nicaragua has largely committed itself to a road-based transport system for getting its exports to deep-water ports. However, most infrastructure and vehicle fleets are in poor condition, and neither is adequate to support Nicaragua's transition to a market based-economy. Furthermore, because nearly all of Nicaragua's exports are agricultural products with low value added and small margin to sustain high transport costs, low labor productivity and operational inefficiencies in the port sector have further slowed economic recovery prospects. 1.19 The Government's Policy Framework Paper for 1994-97 (May 31, 1994), recognizes the need to intensify the process of structural reform for the efficient functioning of a competitive economy. This reform includes the privatization and deregulation of service provision, as well as the institutional reform within the government units. The Government has already removed some constraints in the transport sector through recent reforms (for example, the removal of import restrictions on refined petroleum), but other key problems remain, including neglected physical infrastructure which needs to be rehabilitated and adapted; insufficient resources for maintenance, especially roads; unnecessary presence of the government in the ownership and control of transport assets; institutional shortcomings which affect the administration of the sector; and a shortage of the human resource skills needed to regulate and manage a market-based transport sector. 1.20 The need to rehabilitate and modernize the transport sector is now an urgent priority if the Government is to achieve sustained export-led economic growth. The government has 7 already started the process by undertaking an ambitious plan of public sector reform (beginning with the Ministry of Construction and Transport), and by divesting itself of public assets; most recently the power and telecommunications industries and, two years ago, urban transport. There are, however, five broad sets of issues that need to be addressed in the short term which this study examines next and for which it provides recommendations. These five issues are: * infrastructure rehabilitation and maintenance. Transport capacity in Nicaragua is sufficient for the short term but it is in poor condition due to inadequate maintenance, especially in the road and port sub-sectors. Given the very limited resources available, expenditures on transport infrastructure should concentrate on maintenance and rehabilitation along the main export corridors; * regulatory reform and the role of the private sector. Despite the large economic liberalization effort carried out by the current administration, there still persists a variety of regulations that control rates, entry and operations in the transport sector which create inefficiencies and inhibit the participation of the private sector; * public sector reform and capacity building. Market regulatory reform needs to be accompanied by institutional reform of the public sector to define its new role as planner and regulator instead of provider of transport services or infrastructure. The reform of the scope and functions of the Ministry of Construction and Transport needs to be implemented in the near term., and; * urban transport. Urban transport in Managua lacks planning and integration with traffic management and road and street development. Urban transport fares represent a sizable proportion of household incomes and thus need to be reviewed in the context of subsidies provided to private operators and measures to reduce operating costs. 8 II. INFRASTRUCTURE REHABILITATION AND MAINTENANCE 2.1 This chapter briefly describes the condition and coverage of the road and port infrastructure and identifies the maintenance and investment priorities that are considered necessary for the country in the short to medium term. With two notable exceptions, Nicaragua's current transport infrastructure (roads, ports and airports) has sufficient capacity to accommodate the traffic associated with the levels of economic activity that can be expected in the short to medium term. It is the poor condition of the infrastructure that is an increasing obstacle to economic growth. This is primarily so in the road and port sub-sectors while aviation infrastructure is in the least bad condition. Given current and future financial constraints, investment expenditures in transport infrastructure should focus on rehabilitating and maintaining the core road, port and aviation networks that make up the East-West North- East trade corridors, which currently support the vast majority of the country's external and internal trade. Investments to expand capacity should be carefully scrutinized according to cost-benefit economic criteria before being approved and implemented. A recommended list of priority investments is shown in Table 2.4. A. Transport network capacity 2.2 Nicaragua's transport infrastructure is generally of sufficient capacity for the country's short- and medium-term growth prospects. In a comparison of the road network with that of twelve other countries that are in the same region, are of a similar size or at a similar state of economic development (Table 2.1), Nicaragua ranked ninth in terms of paved roads per unit of area, fifth per US$ of GDP and eighth per capita. At the same time, the current port system dealt with much greater trade movements in the 1970's than it does today while the international airport has currently more than sufficient runway capacity for the traffic expected for the remainder of the decade. 2.3 There are two exceptions to the sufficiency of infrastructure capacity in Nicaragua's transport sector. First, existing road capacity and safety are compromised by a lack of the complementary infrastructure which ensures reliable traffic flows and improves pedestrian and non-motorized vehicle safety (e.g. shoulders, pull-offs or bus and pedestrian facilities). Second, there is a need to expand specialized port and airport facilities to handle specialized cargo, especially that related to non-traditional export commodities. 2.4 Despite its overall sufficiency in capacity, Nicaragua's transport infrastructure is in poor condition due to the economic and political situation of the last twenty years. Significant rehabilitation is necessary to avoid its deteriorating condition from becoming an obstacle to the country's economic recovery. The areas of highest priority in the short-term are port and road infrastructure, the condition of which contribute to extraordinarily high freight shipping costs. 2.5 Within these sector priorities, the economic and financial sustainability of that infrastructure which already exists and is at risk of deteriorating further should have the highest priority. Network expansion will be justified only after significant gains in economic activity have been achieved. Aviation infrastructure is currently in the least bad condition, and a jointly funded private-public expansion program underway, while overoptimistic in its long term objectives, should be sufficient to meet short-term growth needs. 9 Table 2.1: Comparison of Road Infrastructure Provision Country Paved Population Area GDP/ Roads/ Roads/GDP Roads/pop roads (million) (thou person km2 US$/person km/person (lan) km2) US$ Bolivia 1,769 7.5 1,099 680 1.61 2.60 236 Costa Rica 5,600 3.2 51 1,960 109.80 2.86 1,750 Ecuador 6,322 11 284 1,070 22.26 5.91 575 El Salvador 1,739 5.4 21 1,170 82.81 1.49 322 Guatemala 3,485 9.7 109 980 31.97 3.56 359 Honduras 2,400 5.4 112 580 21.43 4.14 444 Nicaragua 1,717 3.9 130 340 13.21 5.05 440 Panama 2,360 2.5 77 2,420 30.65 0.98 944 Paraguay 3,000 4.5 407 1,380 7.37 2.17 667 Peru 7,500 22.4 1,285 950 5.84 7.89 335 Uganda 2,416 17.5 236 170 10.24 14.21 138 Uruguay 9,792 3.1 177 3,340 55.32 2.93 3,159 Zimbabwe 12,896 10.4 391 570 32.98 22.62 1,240 Rank Ninth Fifth EiAhth Source: World Development Report, 1995 B. The road network 2.6 The condition of Nicaragua's road network results in slow travel times and high maintenance costs, raising the cost of final goods and services especially exports. The network consists of about 17,146 km of all-weather and earth roads, 75% of which are in poor condition. Of the all-weather roads, 50% are in poor condition (Table 2.2) and in need of expensive reconstruction. Many of the dry-season roads should be improved to all-weather roads, to stimulate expansion of agricultural production, particularly in the center and north west regions. During the 1980s, the condition of the road network worsened, with almost no resurfacing or reconstruction taking place. Since 1990, some rehabilitation has begun, but many further investments are needed in reconstruction. Unless swift remedial action is taken, the 30% of the network in fair condition will rapidly deteriorate to poor, more than doubling the cost of returning it to good condition. Therefore, a program of road rehabilitation which targets the most critical roads (those hindering export and agricultural growth) needs to be developed and implemented soon. 10 Table 2.2: Condition of the Road Network Surface Type Length (kIn) Good (kIn) Fair (ki) Poor (kIn) Paved 1,717 343 515 859 Unpaved All-Weather 7,152 1,430 2,146 3,576 Unpaved Dry Season 8,277 None None 8,277 Total 17,146 1,773 2,661 12,712 Source: Ministerio de Construcci6n y Transporte, Direcci6n General de Vialidad. 2.7 The slow pace of improvement in the condition of the road network is largely due to a combination of financial and institutional constraints. For example, beyond limited routine maintenance, the Government has been unable to fund any significant civil works programs in the road sector over the last five years, and the few that have been completed (the partial rehabilitation of the Managua-Leon road, one third rehabilitation of the Managua-Rama road, and improvements to some 600km of rural roads) were all heavily donor-financed. The Government's current investment plans also depend largely on donor-financing, and neglect high return maintenance investments over rehabilitation and expansion. Maintenance clearly needs to be given higher priority in the Government's road program. 2.8 The already slow pace of maintenance is further slowed by the low institutional capacity of MCT-which is overstaffed, but lacks the human and technological capacity needed for planning, monitoring and undertaking road maintenance activities. (recommendations about responsibility for road maintenance activities are developed in Section 4B, paras 4.14 et seq.) For example, the lack of basic data (road inventories, traffic volumes, axle weight information) limits the capacity of the Maintenance Division to prepare suitable and timely maintenance programs. At present, these programs appear to respond mostly to emergency situations and to political pressures coming mostly from the municipalities. To improve this situation, a major effort should be made to strengthen the data collection and its maintenance. Much of this should be achieved through the proposed technical assistance under the Public Sector Modernization Project (PSMP) and would support MCT in the design and implementation of a maintenance administration system, accompanied by training and institutional strengthening. 2.9 Although desirable in the long run, the Government's proposed transfer of maintenance activities to municipalities is not advisable at the present time, given their lack of human and financial resources. The decision to decentralize and how to do it, should be studied under the above mentioned maintenance administration technical assistance. Traffic management-related infrastructure 2.10 Beyond the condition of the road themselves, the general lack of complementary road infrastructure adds a further burden to the economy-additionally slowing traffic speeds and increasing accident rates. For example, the lack of shoulders and vehicle pull-offs on steeply graded sections, the generally poor condition of freight vehicles, and high percentage of non- 11 motorized traffic on rural roads, together have significantly slowed traffic over large sections of the road network. On an economy-wide basis the effect is significant, adding an additional cost to freight transport and, in turn, final goods prices. Targeted investments aimed at improving network speeds at critical points therefore need to be made as a second priority, once deferred maintenance has been dealt with. On an exceptional basis, some improvements can be complementary to reconstruction but it is invariably more cost efficient in the present circumstances of Nicaragua to undertake more reconstruction and less improvement. 2.11 Traffic safety is also rapidly becoming a problem in both urban and rural areas. In urban areas, a lack of traffic management infrastructure and effective planning, poor driving habits and general lack of enforcement of traffic rules has led to a dangerous mix of inappropriate behavior and inadequate design. In rural areas, the high level of non-motorized traffic on roadways, and the proximity of residential and economic activity to major thruways is a major safety issue. The situation will become increasingly critical as vehicular traffic increases faster than economic growth. C. Priority investments in roads 2.12 MCT has prioritized road investments based on a points system rather than on economic, financial and environmental evaluations. While valuable as a filter for eliminating unjustifiable projects, this mechanism is not an adequate substitute for the more objective evaluations. Some road investments are made for reasons not directly related to the transport issues. For example, part of the justification for road projects in the north and center of the country during the early years of the current administration was that these regions were particularly prejudiced during the civil war and that improvement of the road network would help their economic recovery and provide employment for those previously involved in the civil war on both sides. 2.13 However, the priorities for future road investment, at least in the short term, are clear, although they should be supported by an objective review of the network using, for example, the Highway Design and Maintenance (HDM) model or some other comparable method. The first priority for investment in the road sector should be reconstruction of the East-West and North-South export corridors. Reconstruction of both corridors would significantly reduce the cost of exporting at the same time as increasing the viability of national ports, by attracting to Corinto and Rama both national freight and that produced in parts of El Salvador and Honduras. The second priority should be complementary investment in selected rural and feeder roads, including completion of the principal production circuit that connects the export corridors and provides access to the major agricultural production region. Investment in bridge strengthening, to bring the permitted gross vehicle weight to the level of neighboring countries is also needed to increase the competitiveness of national truck operators and to avoid further damage by trucks operating beyond the design standards (see para 3.14). These three priority investments form a coherent program that would go far in eliminating the road infrastructure constraints to economic growth. Improvements to other parts of the network, such as the section Managua-Masaya, that might be suitable for private investment as toll roads, while being included in any strategic network planning, should be considered only for possible complementary public sector finance. No other road investments appear to be justified in the short to medium term. 12 2.14 In the past, the Government has attempted to implement many projects simultaneously. With inadequate finance, this has resulted in long delays in their completion, and through this, to higher costs and substantially lower benefits than those expected. It would be preferable for projects to be undertaken sequentially rather than simultaneously. This would allow available finance to be concentrated on fewer projects, and allow their faster completion at lower cost and for the benefits to be realized more quickly. It is recommended that no projects be initiated unless the finance for their completion is assured, and that a realistic expectation of the availability of future Government finance be used in madng the assessments of which projects should be initiated. East-West Corridor o Corinto -Chinandega -Leon-Managua. The Nejapa -Izapa section of this corridor was recently rehabilitated using BCIE financing and the Government's own funds. The remainder of the corridor should be rehabilitated in order to ensure reliable and cost-effective access to the port of Corinto. The section Chinandega - Managua also forms part of the North -South corridor. o Managua-Tipitapa- San Benito-Rama. The poor condition of the eastern part of the corridor represents a significant deterrent to use of the port of Rama . This road has been partially rehabilitated using donor financing and this work should be completed to reduce the cost of exports to the East Coast of the US and Europe. At currently projected traffic levels, only rehabilitation, not reconstruction, of the road appears to be economically justified at the present time. The rehabilitation would have an expected life of about five years, at which time a decision on a more costly reconstruction should be taken. North-South Corridor 2.15 This corridor comprises two sections, the northern providing access to Honduras at Guasale and the southern, access to Cost Rica at Penas Blancas o Chinandega-Guasule. This section provides access to an agricultural production area in southern Honduras. Due in part to the current poor condition of the road, products from this area are being routed to northern Honduran ports rather than to Corinto. o Managua-Pefias Blancas. This road, by way of its links with the rest of the corridor, provides access to Costa Rica from the country's most productive agricultural and most heavily populated areas. 13 Feeder and Rural Roads 2.16 MCT has identified seven "Production Circuits" to be developed and/or improved, each providing access within a principal agricultural production area and a connection between that area and a port. Although no economic evaluations have been made, it appears that high priority should be attached to two of these circuits, one linking export corridors to the coffee production area in the center of the country and the other providing access to an region near the Atlantic coast producing non-traditional exports and meat. In addition, the REMECAR program (Rehabilitaci6n y Mejoramiento de Caminos Rurales), which is being supported by the Interamerican Development Bank, provides essential complementary improvements to allow all-weather access to agricultural production areas. D. Ports Condition and coverage 2.17 Nicaragua has a total of eight coastal ports (including the river port at Rama), of which the three on the Pacific coast, Corinto, Sandino and San Juan del Sur, together handle about 85% of all port traffic. Corinto's share of international trade through Central American ports has fallen from 13% in 1985 to less than 6% in 1992, (the latest year for which full data is available), reflecting a loss in competitiveness compared with alternative ports. Despite the political and economic difficulties experienced by the countries of the region during the period between 1985 and 1993, the principal regional ports, with the exception of Corinto, had more traffic in 1993 than in 1985. Table 2.3: Traffic at Central American Ports, 1985 through 1994 Nicaragua Nicaragua El Honduras Costa Rica Costa Rica % Salvador Year Corinto Rama I Acajuta Cortez Caldera Limon Total Corinto 1985 1,012 1 1,081 2,548 489 2,145 7,996 13% 1986 1,005 1 1,856 2,498 642 2,504 8,506 12% 1987 941 2 1,783 2,714 724 2,683 8,843 11% 1988 950 0 947 2,769 769 2,950 9,221 10% 1989 746 0 1,193 2,908 770 3,424 8,795 8% 1990 804 10 1,267 2,816 781 3,634 9,238 9% 1991 663 43 706 2,765 851 3,883 9,472 7% 1992 566 55 1,301 2,809 900 4,227 9,858 6% 1993 432 36 1,503 n.a. n.a. n.a. 1994 504 54 n.a. na. n.a. n.a. Source: COCA TRAM Puertos del Istmo Centroamericano, Informe Estadistico Geogrdfico 2.18 Corinto's role in international trade has diminished to the extent that it now handles less than 40 % of Nicaragua's foreign trade. Its facilities, services and road access have failed to keep pace with the needs of its potential users. The port is overstaffed for its current and potential traffic and it lacks even the minimum facilities required for a financially viable 14 international port. Although its tariffs are not significantly higher than those of competing ports, the way in which they are applied, by imposing many arbitrary supplementary charges, results in much higher costs to users. Studies by COCA TRAM (Comisi6n Centroamericana de Transporte Maritimo) indicate that Corinto is more than 10% more costly than competing ports for containerized and bulk solid products. 2.19 Unless the overstaffing is resolved, the basic facilities are improved and charges to users reduced, Corinto will not be able to fulfill its role as a regional international port. In the short term, the only recommended investments are the renovation or replacement of the unreliable container crane and reconstruction of the container berth, damaged during the civil war. However, these investments will only provide the necessary physical conditions for the port to operate efficiently. Major regulatory and institutional changes, described in Chapters 3, and 4 would be essential complements to the physical investments. In the longer term, investments in improving the access channel will allow use of the port by larger ships. 2.20 Nicaragua's Atlantic ports are much less developed than their Pacific counterparts. Puerto Cabezas is more than 600km from Managua, which, together with its lack of basic facilities, makes it uneconomical to all but local traffic. The port of "El Bluff' (Bluefields) has no road access and extension of the road from Rama would be prohibitively expensive. The only accessible Nicaraguan port for international trade with the US east coast and Europe is the river port of Rama. about 240km from Managua. The poor condition of the road makes travel times very high, so that trucks cannot make the round trip to the port from Managua in one day. In addition, some products, especially non-traditional agricultural products, cannot be shipped through the port due to lack of appropriate storage facilities. 2.21 Despite these problems, recent private sector initiatives to operate services to Miani from Rama are becoming increasingly attractive, so that Rama now handles 10% of the volume of Corinto, demonstrating that if costs could be reduced, Rama has the potential to become an important part of Nicaragua's transport system. To facilitate these initiatives, Rama needs proper cold storage, easily accessible container storage, an adequate container crane and a reliable electricity supply. The ro-ro berth, which lacks all these facilities, has recently been concessioned to a shipping company, which intends to provide them. It is recommended that a similar policy be applied to the container berth, with a concession to the private sector for its operation and development. The bidding rules for the container berth should avoid the possibility of awarding the concession to the same operator as the ro-ro berth. Any exercise of monopoly power (through preferential operating agreements, for example) should be regulated so as to ensure the port's efficient development. If no private operator is interested in a competitive, non-exclusive concession, the berth should be administered by an autonomous agency and the necessary investments financed by commercial loans. E. fInter-oceanic "Dry Canal" 2.22 An international consortium was formed in February 1995 in Nicaragua to promote construction of a US$1.4 billion 250km inter-oceanic railway/port link. This "Dry Canal" would compete with other proposals such as a widened Panama Canal, the US land-bridge and other possible inter-oceanic corridors such as that in the south of Mexico between Coatzacoalcos and Salina Cruz, for the growing level of containerized trade between the Far East and the East Coast of the United States, by providing cost-effective routing of cargo 15 transported in a new generation of container ships which are too large for the existing Panama canal. Given the potential impact of such a project on the economic future of Nicaragua, and the apparent seriousness of the consortium members, the proposal justifies further consideration and treatment by the Government. The consortium is offering to complete all necessary prefeasibility studies at its own cost, and claims that, if the project is justified, it would be built without any need for government financing or loan or other guarantees. All that will be required will be permission to construct the project and a concession to operate it. 2.23 It is recommended that the Government take a positive but cautious approach to this proposal, encouraging the consortium to undertake its feasibility studies, but without giving any guarantees of future concessions or terms relating to any concession. In addition, all economic and financial feasibility studies should be undertaken under terms of reference and to standards compatible with those that would be required for Bank-financed projects. During the study process, the Government should create an inter-Ministerial steering committee, with technical support provided by a special unit created within the proposed new Planning Directorate of MCT, to study and make recommendations concerning the consortium's proposals. The life of this unit would be of a defined duration and should include personnel with appropriate technical skills. F. Airports 2.24 Infrastructure at the international airport in Managua is managed directly by an autonomous state controlled company, Empresa Administradora del Aeropuerto Internacional (EAAI), while airport infrastructure at the three other airfields/airports with scheduled passenger service are managed by the Director General of Civil Aviation within the MCT. EAAI is pursuing a three stage process for development of the international airport. The first stage will be to provide additional freight aircraft facilities, with the storage for freight itself to be provided by private investors. Facilities in the existing passenger terminal would also be improved and expanded. Work on a new apron for freight aircraft has already started, and is being financed out of net revenues of EAAI. The second stage will provide a new passenger terminal while the third will provide a new airport which meets full International Civil Aviation Organization (ICAO) standards. The present airport fails to meet these standards because of its severely restricted approach path to the single runway. Given the current low level of use of the airport, none of these investments, other than the provision of freight storage facilities and possible minor improvements to the passenger terminal, can be justified in the short to medium term. Both of these should be financed out of EAAI's current revenues or from commercial loans without Government guarantees. The further development of the airport would be suitable for private investment if and when sufficient demand materializes. 2.25 There are only eight other airports, all of them underdeveloped, providing for commercial air transport services. Although the 80,000 domestic air passengers in 1994 represented an increase of more than two and a half times the 1991 total, the number is still insufficient to justify any more than minimum new investment and maintenance to meet operational safety standards. This includes reconstruction of some runways and provision of basic communications. 16 G. Indicative investment plan 2.26 The indicative short to medium term investment plan that is recommended by this study would require about USS300 million over the next four years. This amount includes US$25 per year for routine maintenance of the highway network, to prevent it from deteriorating further. Unless other sources of finance are found, such as increased user charges to finance road maintenance (para 4.18 et seq) the Government will need to fund about US$143 million of the total, or almost US$36 million per year. The investments recommended total far less than the US$1 billion recently indicated by the MCT (Esquema General del Plan Nacional de Transporte, Febrero de 1995) as the cost of all desirable transport sector projects. Table 2.4a shows possible financing sources for the investments and Table 2.4b the recommended investments by sub-sector. There are three important features of the sources of finance. 2.27 First, the continued heavy reliance on donor financing has some risk as these sources are already becoming difficult to obtain. Second, the small proportion of private investment in transport infrastructure compared with that expected in other countries, a consequence of the still low credit rating of Nicaragua. The private sector will continue to invest in vehicles for commercial freight and public passenger operations and increasingly in private terminals for freight transport. Third, all projects are assumed to be financed from the sources shown, with the government contributing 20% of the amount indicated. The required US$36 million per year might be beyond the resources that the Government is able to make available. If this should prove to be the case, it is recommended that priority be given to maintenance, until such time as revenue from new user charges is available, and to starting fewer new projects rather than extending the implementation period of all the projects recommended. 17 Table 2.4a: Possible Sources of Finance for Transport Infrastructure Source US$m DANIDA 27.4 IDA 30.5 IDB 68.4 Japan 7.5 European Union 7.5 Netherlands 7.2 Government 43.0 User charges / Government 100.0 Private 8.5 TOTAL 300.0 Table 2.4b: Recommended Transport Infrastructure Investments, 1996 through 2000 Sector Investment Ongoing Cost Possible Priority or New US$m Finance Source Ports Corinto Rehabilitation of container crane N 0.2 Government High Rehabilitation of general cargo dock O 1.3 Government High Dredging access channel N 12.0 Netherlands LOW Rama Dredging of sandbar at El Bluff O 0.1 DANIDA High Provision of container crane N 0.5 Private High Provision of chilled/frozen facilities N 1.0 Private High Electricity supply N 0.2 ENAP High Sub total rts 15.3 Airports Managua: Freight facilities 0 2.0 Private High Passenger terminal modernization N 5.0 Private High Other airports N 5.0 Government Low Sub total airports 12.0 Roads East West Corridor Izapa - Chinandega (Reconstruction) N 8.0 IDA/DANIDA Low Corinto - Chinandega N 4.0 IDA High San Benito - Rama O 22.4 IDA/DANIDA/IDB North -South Corridor Chinandega - Guasale N 30.4 IDA/DANIDA High Managua - Penas Blancas 0 15.0 IDA/DANIDA High Production Circuits N 27.9 Government / IDB Low Bridge reconstruction 0 EU / JAPAN High 20.0 Rural roads (REMECAR) 0 15.0 IDB High Rural and Feeder Roads N 35.0 1DB High Routine maintenance 0 100.0 Government / User Very high charges Sub total higways 272.7 charges JEZ = Total 300.0 18 III. REGULATORY REFORM AND THE ROLE OF THE PRIVATE SECTOR 3.1 Since taking office, the current administration has attempted to privatize, liquidate or downsize most of the transport companies that were previously controlled by the State. Following privatization and the partial elimination of public control, the provision of transport services has improved, particularly trucking and urban bus services. But even in these services, and in other sub-sectors such as ports, there still persist a variety of regulations that control rates, entry and operations, creating inefficiencies or inhibiting the participation of the private sector in the provision of transport services. 3.2 This chapter examines the impact of existing regulations on the efficient provision of road, port and airport services. The chapter also identifies various policy interventions that would be necessary to increase the private sector's role in transport. To stimulate growth and sustain the reforms, the overriding objective in the transport sector must be to reduce transport costs, increase sector productivity, and make Nicaraguan exports more competitive. A. Interurban transport 3.3 The provision of interurban transport services in Nicaragua is still subject to regulations, pricing policies, and operating practices that limit the development of efficient and competitive operations. The result is operating costs that are among the highest in Central America. High input prices, such as the cost of fuel and spare parts, and limitations in access to credit are the two primary factors contributing to high operating costs. 3.4 All public enterprises that provided road transport services in the previous administration have been privatized. However, interurban road transport services remain regulated, and not all regulations make sense or are necessary for an efficient provision of services, safety, or environmental protection. Entry in both the passenger and freight markets, for example, is controlled by the need to obtain a license, annual for passenger and quarterly for freight services. Licenses are granted by MCT, through the Direcci6n General de Transporte Terrestre (DGTT). Operating licenses for interurban passenger services specify the route, the capacity and vehicle characteristics of the unit to be used and the level of service proposed by the operator, which the majority of operators do not reportedly achieve. For passenger transport, taxis and commercial cargo, licenses are limited to one per person, while for collective transport, the limit is three per person. Technical and safety regulations, however, which are more important from the operating and traffic safety points of view, are not sufficiently developed and DGTT lacks monitoring and enforcement capabilities. Freight services 3.5 The provision of freight transport services is fully private. Operators are organized in transport cooperatives. In the commercial cargo (vehicles with less than 3 tons), there are 10 cooperatives in Nicaragua. About 85% of commercial cargo trucks are in the regions of Managua (69%) and Granada (16%). By contrast, the number of trucks providing light (between 3 and 8 tons) and heavy duty (more than 8 tons) services is more evenly distributed across the main regions of Nicaragua even though Leon, Managua and Granada account for 75 19 % of the total light-and heavy-duty truck fleet. There are 94 cooperatives in the light and heavy duty segment of the freight market with a total of 1,634 vehicles. Half of the freight operators are owner-drivers while the other half own, on average, a maximum of three trucks. There is no recent data on the age of the vehicle fleet although in 1989, 50% of the freight transport fleet was more than 11 years old. 3.6 There are no substantial market imbalances in the provision of road freight services. There is, however, a degree of excess supply caused by the stagnation of economic activity between 1990 and 1993, and the inability of Nicaraguan trucks to attract traffic and compete with their Central American neighbors. Although no new licenses have been granted since 1979, agricultural exporters do not face difficulties in contracting freight services. On the other hand, a substantial amount of Nicaraguan external trade is currently moved through the competing Atlantic ports of Puerto Cort6s (Honduras) or Puerto Lim6n (Costa Rica). Importers frequently enter into agreements with maritime shipping companies, which then become responsible for transporting the merchandise from the port to the hinterland. These maritime companies, in turn, contract their services with local truckers. Thus, trucks from Honduras or Costa Rica, for example, transport and deliver their cargo into Nicaragua and then compete for backhaul export traffic, a market segment where they have a strong incentive to undercut their Nicaraguan competitors, a situation that is created by the lack of competitiveness of Nicaraguan ports. B. Main issues in interurban transport 3.7 The main regulatory and private sector issues that need to be addressed in interurban transport in the short to medium term are: * lack of competitiveness of freight operations; * vehicle weight and axle load regulations, and; * remaining controls on entry and price. Lack of competitiveness of freight operations 3.8 The lack of competitiveness of freight operators is due to high operating costs, which are determined by the high input costs (fuel and spare part costs), the lack of credit access for vehicle replacement, and outdated axle-load regulations. 3.9 The price of fuel in Nicaragua has traditionally been high compared with its Central America neighbors, but now the price differential for diesel fuel has almost been eliminated. In January 1995, the Nicaraguan prices of gasoline and diesel were US$2.60/gallon and US$1.1 1/gallon respectively, compared to US$1.50/gallon and US$1.06 in Honduras and US$1.30/gallon and US$0.97 in Costa Rica. The opportunity cost, based on the border price plus distribution and marketing costs, is about US$1.10 per gallon for both gasoline and diesel. 3.10 The tax component in fuel prices is over 100% of the ex-refinery price for gasoline but less than 20% for diesel. The supposed high price of fuel is a constant source of complaint from transport operators. In August, 1994, for example, transport operators organized in 20 cooperatives obtained from the Government a six-month subsidy of US$0.15 per gallon. The high price for gasoline could be justified on the basis of a relatively low demand elasticity and the price for diesel was not significantly higher than in neighboring countries. However, the large price differential has led to an unusually high proportion of small diesel vehicles (cars, utility vehicles and puck-ups) in the fleet. Given that the price of diesel fuel is not significantly higher than that in adjoining countries (although some hidden subsidies still exist for transport companies), and that they are all charging about the opportunity cost, there would be no justification in reintroducing a subsidy. 3.11 The hydrocarbon sector, which until very recently had had a single importer of crude oil (the State) and a single refinery company, has been characterized by inefficiencies and high costs of refined oil. The Government has recently deregulated the sector and since April 1, 1995, the import of crude oil and refined products, as well as its marketing and distribution, has been liberalized. Retail fuel prices will be calculated from an import parity formula. This reform is expected to contribute to a reduction in fuel prices, which would translate into about a 5% reduction in operating costs for trucks, given that fuel previously constituted about 20% of total costs. 3.12 The price of vehicle spare parts in Nicaragua is also very high by Central American standards. This is mainly due to the existence of a single, monopolistic concessionaire for the distribution of spare parts for each vehicle make, as well as an abundance of intermediaries, who add very little value but inflate final prices. Transport cooperatives have tried to deal with this issue in different ways. They request the Government to exempt them from taxes on fuel and spare parts, and have proposed to have an in-bond storage to be able to import spare parts and tires in bulk. Some have resorted to sending their vehicles abroad for repair, because it can be less costly than buying the spare parts for repairs at home. 3.13 High input costs are accompanied by lack of credit access. This is partly due to the instability and the complexity of interest rate structures, which favor short-term borrowing and require large collateral commitments. Current interest rates not only place the full burden of inflation and foreign exchange on the borrower, but payback periods have been shortened to the point of making borrowing for vehicles impractical. In many cases, despite the fiscal advantages of collectivism, the cooperatives themselves are seen as risky investments. In other countries, truckers cooperatives have been able to provide acceptable guarantees to commercial banks for the terms of loans to be made more accessible. The potential role of the Government is to bring the parties together to develop proposals for reducing the perceived risk of the bank's in lending to transport companies. Vehicle weight and axe load regulations 3.14 Failure to update these regulations and to make them compatible with those in adjoining countries contributes to the lack of competitiveness and market access of Nicaraguan truckers. While Honduras, Costa Rica and Guatemala apply a common 37-ton maximum vehicle weight, Nicaragua still has a maximum of only 33 tons, based on the national standards for bridge design and construction. These lower truck load limits put Nicaraguan truckers at a disadvantage with truckers from competing neighboring countries, since lack of effective controls in Nicaragua allows trucks from neighboring countries to use their roads at weights beyond the bridge design standards. As a consequence, bridge condition has deteriorated 21 quickly. A program is currently being implemented to strengthen bridges on the principal road network to allow higher loads, and studies are being made to see if the design safety margin on other bridges could be sufficient to allow some increase in loads. Application of present Nicaraguan load standards to foreign trucks operating in Nicaragua, while appearing to be a reasonable policy from a national point of view, would probably provoke retaliation from neighboring countries in respect to the operation of Nicaraguan trucks in their territory, and should therefore be approached cautiously. It is recommended that measures to strengthen bridges to permit 37-ton gross vehicle weights be undertaken as a priority, and that as the bridges are strengthened, gross vehicle weight and axle load regulations be aligned with those of adjoining countries and strictly enforced. Remaining controls on entry and price 3.15 The rationale for the current inter-urban passenger transport regulations on entry and rates is weak, being based on protecting existing operators from competition while at the same time attempting to protect users from monopoly pricing by the protected operators. It is recommended that entry be deregulated immediately and all remaining tariff controls be removed. Although operating licenses remain the ownership of the Government and therefore do not entail any property rights, in practice they are sold on the "black-market" at up to US$30,000. This high "black-market" price suggests there are significant gains to be made from liberalizing the supply-side of the interurban passenger market by a wholesale elimination of entry restrictions, with the Government moving its focus to regulation of service operation rather than entry. Interurban transport operators are reportedly in favor of complete liberalization of the market both in freight and passenger services. 3.16 Rates for freight services are largely unregulated, with the sole exception of liquid cargo transport, which is priced according to haulage distance, type of road surface and type of truck. While the distortive effect, and ultimate economic loss, of regulating liquid cargo transport is currently unknown, the deregulation effort underway in the hydrocarbon sector (removal of import restrictions on refined petroleum products) is likely only to increase the distortive effect of regulation of the transport price of liquid cargoes. There is no justification to maintain regulated rates for liquid cargo and, therefore, it is recommended that this regulation be eliminated C. Ports and maritime transport 3.17 The port system in Nicaragua is managed, operated and regulated by Empresa Nacional de Puertos (ENAP), which is also responsible for. Nicaragua's other aquatic resources, including its many lakes and rivers. Since it was established in 1980, ENAP has been restructured several times, most recently in 1990. 3.18 The current responsibilities of ENAP include practically all activities associated with port-related operations and their regulation: (a) planning, building and maintaining aquatic facilities and investments (including ports); (b) storage and handling of sea and river cargo (including stevedore services); (c) regulation of all services and private users of aquatic resources; management of rental or concession contracts related to aquatic infrastructure; and 22 (d) designing tariff structures which need the approval of MCT. Within the MCT, the Director General for Aquatic Transport (DGAT) serves as the liaison for ENAP. 3.19 The high cost and low productivity of port operations, which ultimately translate into high domestic import prices and uncompetitive exports, is one the factors severely limiting the country's economic potential, which depends on successfully exploiting the country's advantage as a producer of non-traditional agricultural exports and other goods which have a growing market potential in US and Europe. 3.20 From a policy and regulatory point of view, the following three issues need to be addressed in the short to medium term: o Lack of competitiveness of ports; o Inadequate public sector management, and; o Acceleration of the labor retrenchment process. Lack of competitiveness 3.21 Operations in the Pacific ports are characterized by low productivity and high costs. Low productivity at Corinto can largely be attributed to three factors; (a) the general slowdown in economic activity between 1990 and 1993; (b) the gradual change in the destination of trade that has started to favor exit through the Atlantic ports (following the growth of non-traditional exports), and; (c) the inability of the port of Corinto to attract cargo traffic due to its high operating costs. The inability of the port system to adapt to changing economic conditions results in high costs, mainly due to excessive labor, outdated labor practices, and inefficient and unreliable operational practices. One result has been high ship waiting times and a complex and high cost tariff system, which shippers avoid by using competing ports. 3.22 As in many other ports in Latin America before privatization, the ports of Nicaragua have very low labor productivity. The labor force, although significantly reduced in the last few years, has not fallen as fast as port traffic, so that productivity in 1994 has only passed its 1990 level and Corinto still has some way to go to reach that level. The ports of Sandino and Rama are an exception to the reduced productivity, both handling more freight with fewer staff in 1994 than in 1990. Table 3.1: Port Labor Productivity Port 1990 1991 1992 1993 1994 Tons Staff Tons/ Tons Staff Tons/ Tons Staff Tons/ Tons Staff Tons/ Tons Staff Tons/ person person person person person ENAP 1,597 2,378 672 1438 2286 629 1401 1976 709 1073 1945 552 1371 1739 788 Corinto 804 1,242 647 663 1224 542 566 1054 537 432 1035 417 504 930 542 Sandino 694 188 3,691 667 186 3586 707 170 41591 726 157 4624 759 153 4961 Rana 10 132 7611 43 127 339 55 104 529 36 95 379 54 90 544 Source: Empresa Nacional de Puertos. 23 3.23 The low productivity is in part due to outdated operating practices. The size of the stevedoring shifts, for example, is still determined by union requests rather than by the needs of the freight being handled. The problem of surplus labor is recognized not only by MCT and ENAP but also by the port unions. Several plans for dramatically reducing the workforce have foundered due more to the lack of funds to finance redundancy payments than on union opposition. The unions have also expressed a willingness to consider plans for concessioning the port of Corinto, but subject to their being given a proportion of ownership of the concession. Progress on privatization plans is crucially dependent on the cooperation of the unions, and given their present attitude, the Government should pursue with them ideas for substantially changing the way that the ports are operated. Inadequate public sector management 3.24 The range of activities of ENAP is too wide for it to be manageable and is conducive to diseconomies of scope and to the cross-subsidizing and continuation of loss making activities. In addition, ENAP's operational directives, emphasizing recovery of operating costs, provides little incentive to respond to market opportunities. For example, the almost unused oil off- loading and storage facilities at Corinto are outdated and insufficient to meet the emerging needs of a market-driven petroleum sector, but no initiatives have been taken to seek private use and management of them in the new de-regulated environment for fuel import and distribution. In light of this lack of interest by ENAP, a private sector initiative is already underway to rehabilitate an alternative site south of Corinto at Masaschapa. A similar situation exists at Rama, where ENAP has been unable to coordinate efforts to develop the port to meet private sector interests and a growing "non-traditional" sector of agricultural exporters. 3.25 ENAP's problems are due in large part to its lack of autonomy to set tariffs and undertake investments. Although ENAP is in theory an autonomous agency managed by a board with representatives of all the main parties involved (e.g., Government, private sector, unions), in practice the Government exercises financial control and is required by law to approve port tariffs and port-related investments. This publicly-controlled model of operations leads to conflicts between ENAP and MCT. ENAP needs to have enough autonomy and agility to set tariffs without Government oversight, in order to meet market needs. Acceleration of the labor retrenchment process 3.26 Improvement of productivity is the single highest priority in the port sector in the short term. Labor productivity in ENAP is low, even in comparison with other Central American ports, and the future feasibility of continued operations at the port is dependent on resolution of this issue. Corinto currently gives employment to about 850 people, whereas an increase of even 100% over the current volume of trade should require a total of no more than 300 workers. Currently, a shortage of funds limits ENAP's ability to provide redundancy payments. The urgency of the problem at the national level, however, suggests that quick action is necessary. The retums to investment in labor retrenchment are demonstrably very high. In Corinto, for example, 100 workers were given severance payments in 1994, the costs of which were almost entirely financed out of first-year operating cost savings. With the current institutional framework and market conditions, it will likely be very difficult to concession the operation of any port in Nicaragua without solving the labor issue. 24 3.27 Given the urgency of reducing labor costs, it is recommended that all potential sources of financing labor redundancy and retraining be investigated, in advance of any restructuring of ENAP or possible concessioning of port operations. Redundancy payments for service and administrative personnel at the port of Corinto, including technical assistance for the re-training and/or relocation of redundant workers, could require up to US$12 million. If no other sources are available, this could be achieved by capitalizing redundancy payments as part of a private concession process together with investment commitments by the Government to retrain or finance the social programs necessary for those employees displaced by the reform. 3.28 It is possible that the only solution to financing redundancy payments and gaining union cooperation would be to treat the issue together with privatization, with the unions or their employees being participants in the concessioning entity. So long as their involvement is not such that they become a barrier to any efficiency improvements, and the structure of their participation is such that they stand to gain from any increase in profitability of the port, the participation of the unions can be a positive and desirable measure. 3.29 However, potential port operators would be more interested in bidding for a concession if the labor redundancy issue has already been completely resolved. On a way in which this could be done is for the existing agency, in this case ENAP, to be discontinued and all its employees declared redundant. The concessionaire would then be free to reemploy those that he needs and selects. Although the cleanest solution, this also is the most costly to the Government, possibly requiring up to US$5 million in the case of Corinto. A less attractive but still feasible and less costly solution is for the concessionaire to preselect the staff he wishes to retain, and for the remainder to be declared redundant when the award of the concession is announced. In either case, the simple payment of redundancy obligations should be accompanied by retraining plans and, so far as possible, the creation of alternative employment opportunities. In the case of Corinto, this could include: (a) providing a site for the operation of a duty free zone adjacent to the port, with financial incentives for those willing to locate there immediately, and: (b) training in small scale cultivation of non-traditional agricultural products, an activity that requires small amounts of capital and is currently profitable in the region of Corinto. 25 IV. PUBLIC SECTOR REFORM AND CAPACITY BUILDING A. The scope and reform of MCT 4.1 The Ministry of Construction and Transport (MCT) still has the traditional role indicated by its title, with more emphasis on the construction of infrastructure and regulation of services, than on monitoring the operations of a liberalized sector functioning on market principles. This deficiency is in common with much of the public sector, and has been recognized by the Government as a constraint to the country's economic development. A program of reform of the public sector is about to get under way, with MCT as one of the first ministries to redefine its functions, restructure its organization and redimension and retrain its staff. This process will take at lest three years to show significant results, and, therefore, is a long term commitment by the Government to the modernization of the state. 4.2 MCT is responsible for the construction of roads and public buildings and the operation and regulation of road, sea and air transport. It is also responsible for land use planning and public housing. In addition to road construction, its transport functions relate to the promulgation and implementation of regulations relating to the safety and efficiency of operation of all means of public transport, by land, sea and air. This includes establishing tariffs for inter- and intra-urban transport of freight and passengers, authorizing licenses for the use of vehicles and vessels on particular routes, including those temporarily in the national territory. In relation to ports, MCT is responsible for their construction and maintenance, including the dredging and marking of navigation channels. Institutional structure 4.3 MCT was formed by the fusion of three ministries - a heritage that is still evident: many of its administrative functions, such as legal services, are triplicated. In addition to the inefficiencies resulting from the failure to integrate the three previous structures, the MCT still functions as a Ministry responsible for doing and controlling rather than for supervising and monitoring. There are separate Divisions for Highways (planning and execution of civil works), Land Transport (regulation of operations), Air Transport (investment and operations) and Maritime Transport (ports and waterways investment and operations as well as maritime operations) and Public Works (civil works). 4.4 MCT's investment in roads accounted for more than 60% of its total investment over the last three years, and for about 30% of total public sector investment over the same period. Despite these proportionately large capital expenditures, the road network is underdeveloped and under-maintained, indicating that alternative sources of finance are needed. However, the staff budget of MCT is distorted in the opposite sense, in that less demanding areas of activity, such as Civil Aviation, have almost the same proportion of staff as Highways (12% and 14% respectively). 26 Capacity building and human resources 4.5 The current staffing structure of MCT is derived from its highly bureaucratic regulatory function and its fusion from three independent ministries. It has a preponderance of non-productive staff, about 30% of the present total of about 630, with a similarly disproportionate number (37%) of non-administrative staff. There is an excess of higher level professional staff and salary levels are very low, even by Nicaraguan public sector standards. 4.6 The level of staff training is very mixed. At the highest levels there are several staff with post-graduate specialist qualifications, very pertinent to the tasks for which they are responsible, while at the other extreme, there are many staff without any qualification beyond secondary school. At all levels, technological support is minimal, with many administrative activities still being carried out manually, which in other countries at Nicaragua's level of development are increasingly computerized or eliminated as unnecessary. It is impossible to undertake activities that depend on computerized systems, such as the compilation and maintenance of data bases and the application of system-wide analysis and evaluation programs such as the HDM, without a significant advance in the level of available technology. Even routine tasks, such as authorizing vehicle licenses, are more efficiently carried out with technology more advanced than a pen and paper. 4.7 With a reduction of its regulatory role in respect to transport operations and in its executive role in respect to construction and maintenance, a smaller but overall more professional and better trained staff will be required. At the same time as the staff structure and numbers are being revised, changes should also be implemented in the way that staff are recruited and trained and in the level of technological support with which they are provided. Outline recommended changes are described in the consultant's report on MCT, produced in preparation for the Institutional Development Project. In parallel to preparation of the revised staffing structure, details of the retraining program and technological support should also be worked out MCT reforms 4.8 The recommended longer term change in MCT's structure would create a new Ministry of Infrastructure (MOI), more appropriate to the future regulatory needs of the sector than the current service provision-oriented MCT. The scope of MOI's regulatory functions would be expanded to include all areas of infrastructure activity within the government's sphere of interest, including telecommunications, water, electricity supply and transport. 4.9 The short term recommendations would transform MCT from an agency deeply involved in the day to day activities of the sector, to one more concerned with ensuring that the provision of services by others is closely related to the needs of the users, and preventing abuses from a more open and competitive environment. The regulatory role of MCT should be reduced to the minimum level necessary for the safe and efficient operation of services. Specification of tariffs should be relaxed in a programmed deregulation, but this should be accompanied by an increased monitoring function with supporting implementable anti-trust regulations. Implementation of regulations regarding vehicle design and safety, driver competence and exhaust emissions should be more strictly enforced, with higher penalties for lack of compliance. 27 4.10 To help in the increased indicative planning role, it is recommended that a more reliable and current inventory of infrastructure and data base of vehicles and services be established. The information for the infrastructure inventory should come from MCT itself, including a program of regular traffic counts, and the vehicle fleet information should come from the operators, but with a more rigorous quality control than is applied at present. Transport planning 4.11 In 1989, MCT produced a National Transport Plan, but it was never implemented and since then no comprehensive transport planning has been attempted. What planning is undertaken is in relation to preparing an annual investment plan for inclusion in the national budget, as exemplified in the current Esquema General del Plan Nacional de Transporte. 4.12 Under the proposed reorganization of MCT, its planning function would be emphasized with a strengthening of its sector responsibilities, staffing and budget. The first activities of the new Planning Directorate, now in the process of formation, will be to create a dynamic data base of transport statistics, the lack of which has been a severe impediment to any serious planing. 4.13 Whereas the last National Transport Plan was prescriptive in its recommendations, future planning activities will need to be more indicative, leaving detailed implementation of specific recommendations to the workings of a competitive economy. A possible exception to this form of planning would arise from the recently announced proposals to build a Canal Seco. This project would require a close coordination with economic and social sector planning if Nicaragua is to take full advantage of the opportunities it offers. B. Highway maintenance 4.14 Currently activities related to highway construction and maintenance consume a disproportionate part of MCT's budget, but this has proved inadequate to develop or maintain the network in line with the needs of an expanding and diversifying economy. It is improbable that the national budget can be relied upon to increase the funds needed for this purpose over the next five or six years, so altenative sources of financing need to be found. Organizational structure 4.15 Most highway maintenance is contracted to semi-autonomous regional Highway Construction Agencies organized in an umbrella corporation, (CERC - Coporaci6n de Empresas Regionales de Construcci6n), which in theory compete between themselves and with private contractors, but which in practice have exclusive local monopolies. The result is one of the highest maintenance costs per unit of output in the Central American region. While the CERC continues to be responsible for the majority of the few maintenance activities undertaken, genuine private contractors will find impossible to build up a sustainable work load. Given that attempts to introduce competition between members of the CERC have failed and the reluctance of MCT to contract private companies while CERC exists, the members of 28 CERC should be privatized as soon as possible. The first moves have already been taken with the abolition of one of the agencies. The agencies equipment could form part of all pool available to all road contractors, including the privatized members of CERC, on an equal basis. Similar schemes for privatizing public sector maintenance units in other countries have resulted in more maintenance being undertaken at a higher quality for the same cost. Maintenance expenditures 4.16 Road maintenance expenditures decreased 71% from US$12.8 million in 1991 to US$3.7 million in 1994 (Table 4.1). On the other hand, expenditures on road rehabilitation and improvements more than doubled during the same period. The allocated resources for maintenance are only sufficient, to cover less than 20% of the network' s minimum needs. It is estimated that between US$25 million and US$30 million is needed in routine and periodic maintenance to satisfy this minimum requirement for the full system. With the budgetary restrictions and extreme needs that exist in Nicaragua in many sectors of the economy, it is highly improbable that road maintenance will be given the necessary priority. Thus, alternative financing mechanisms must be quickly implemented in order to avoid a collapse of the road network. Table 4.1: Road Expenditures (USS millions) Work Type 1991 1992 1993 1994 US$m USsm USSm US$m Maintenance 12.8 8.2 3.9 3.7 Rehabilitation & Improvements 11.9 14.7 16.2 25.2 New Construction - 1.1 - - Total 24.7 24.0 20.1 J 28.9 Source: Ministerio de Construcci6n y Transpore, Direcci6n General de Vialidad. 4.17 The current structure of road user charges is very simple and needs to be developed to reflect much better the costs caused by different road users according to the use they make of the road network. Currently the main road user charges are the gasoline and diesel tax, which have been primarily set with a revenue-raising rationale. An attempt in September 1993 to supplement this variable charge with a fixed road user charge in the form of a vehicle ownership tax, to produce a two part tariff, designed to differentiate better between charges for buses and trucks, according to their axle-load configuration and thus road damage potential, was eventually abandoned due to social protests. In addition, there is only a coincidental relationship between revenues from user charges and expenditure on roads, with user charge revenues being considered part of the general revenue from taxation, while road expenditure is subject to the normal budgetary processes 29 User charges and revenue mobilization 4.18 Table 4.2 shows that of the revenues raised from road users at the national level (excluding circulation taxes issued and collected by municipalities), over 90% come from fuel taxes and a very small percentage from non-road use related sources such as license plates, driving permits, or traffic violations. The general level of road user charges, while sufficient to cover the current inadequate level of expenditure, is insufficient to finance the level of expenditure needed to maintain the network in an acceptable condition, which would be about double the 1991 expenditure level. A more theoretically sound comparison of charges and revenues, in which only the excess of the total fuel price over the border price was considered as a user charge, would show an even more negative result. Table 4.2: Road User Charge Revenues and Maintenance Expenditures US$ US$ US$ USS Revenue source 1991 1992 1993 1994 Vehicle license 20,900 23,140 280,567 64,314 Driving license 45,960 54,480 62,183 127,829 Traffic violations 28,780 34,400 23,183 26,071 Sub total 95,640 112,020 365,933 218,214 Gasoline tax 3,203,140 4,112,480 3,928,483 3,992,671 Diesel tax 920,000 1,302,040 863,900 1,092,414 Sub total 4,123,140 5,414,520 4,792,383 5,085,086 Total revenue 4,218,780 5,526,540 5,158,317 5,303,300 Total expenditure 12,800,000 8,200,000 3,900,000 3,700,000 Surplus/deficit -8,581,220 -2,673,460 1,258,317 1,603,300 Source: Ministerio de Finanzas y Ministerio de Construccin y Transporte. Financing of road maintenance 4.19 Experience has shown that users are more prepared to pay increased charges if they have some role in the administration of revenues generated. In addition, the establishment of a road maintenance system requires adequate funding and expenditure priority mechanisms that ensure road user accountability. The key to success on how to strengthen the financing and management of road maintenance is commercialization, a process that requires action in four complementary policy areas: (a) the creation of a sense of ownership of the road network by its principal users; (b) the securing of an adequate and stable flow of funds; (c) a clarification of responsibilities between different agencies responsible for road maintenance, and; (d) better management through the adoption of private sector management practices. 30 4.20 One practical way of making these changes operational is the creation of a Highway Maintenance Fund. It is recommended that proposals for the establishment of a Highway Maintenance Fund (HMF), financed mostly by additional user charges, in particular a fuel price supplement and fixed license charges, similar to those considered in 1993, be prepared for presentation to Congress before the end of the present Administration. Honduras has already established such a Fund as the most appropriate way of financing and executing road maintenance, and under the guidance of CEPAL (Comisi6n Econ6mico para America Latina), GTZ (Deutsche Gesellschaft Fur Technische Zusammenarbeit), German Technical Cooperation Agency, DANIDA (Danish International Development Agency) and the Bank, some other Latin American countries are well advanced in their preparations to initiate similar Funds. 4.21 The characteristics of the user charges and the HMF itself must be carefully formulated so as to avoid the many fiscal problems created by similar funds in the past Among the most economically damaging effects of poorly designed and administered road funds is the tendency to maintain expenditure on new road construction, especially when the rest of the public sector is going through a period of strong fiscal restraint, to generate large surpluses that are invested in projects that are far from being justifiable. Sometimes these funds are seen as a form of concealed taxing of "non-essential" activities such as private car travel, leading to accusations of discriminatory charging. National treasuries do not like what they see as a significant part of public revenues being generated and spent outside their control. 4.22 A new generation of HMF's have been designed to avoid these problems while still achieving the objective of securing adequate funding for a planned program of maintenance. The user charges should be proportional to the costs imposed on the road network by different classes of road user, or proportional to the benefits derived from the use of the network, so that they can be seen to be user charges and not taxes. This is best achieved by a two part charge as proposed in 1993. The level of the charges should raise sufficient revenue to finance about 80% of the costs of routine and periodic maintenance (estimated at about US$20 million per year), but not necessarily the costs of reconstruction that are a function of previous underfunding of maintenance, and definitely not the costs of new construction The remainder of the cost of maintenance (about US$5 million per year) should be contributed by the Government from general revenue, representing the interest of non-user beneficiaries of a better maintained road network. 4.23 The total revenues should be restricted to financing the maintenance activities forming part of an agreed three year rolling maintenance plan, produced by the MCT in consultation with users, preferably in the context of a HMF. Management of the HMF would best be by a Board of Directors that included a strong representation of road users, particularly trucking and bus companies, as well as MCT as representative of the Government, the single largest financial contributor to the Fund. Large road users such as bus and trucking companies are usually willing to contribute to the finance of road maintenance if they are satisfied that the funds generated will be applied where they will generate the greatest advantage to their own operations. They know that they are the principal beneficiaries of improved road maintenance and that their operating costs are reduced by a factor about three times greater than the expenditure on maintenance. A well conceived HMF would build up a surplus in its early years, while the principal maintenance activities were being established, and would be totally self-liquidating within a period of about six or seven years, so as to avoid the problem of generating large surpluses. Any continuation of the HMF beyond this time would require 31 re-enactment of the enabling legislation that established the HMIF in the first place. The passing of such legislation would depend on the perceived success of the HMF in maintaining the road network in the previous period and in avoiding the pitfalls in its management. 4.24 Management of the HMF would contract routine and periodic resurfacing on a competitive basis, from the privatized CERC or private contractors or possibly from small contractors formed by ex-CERC staff specifically for the purpose of undertaking routine maintenance work. Another possibility would be to sub-contract routine maintenance to municipalities. The performance of maintenance by contract compared to that by force account, such as the that of CERC, is so cost effective that it is recommended that it be implemented immediately by MCT, independently of progress in establishing a HMF. C. Ports Role of ENAP 4.25 The National Ports Agency (Empresa Nacional de Puertos, ENAP) was formed in 1980 by the amalgamation of the various independent autonomous port agencies. In relation to planning, ENAP is responsible for all activities other than investment and tariff approval, which are the responsibility of MCT. ENAP has full autonomy in respect to port operations and equipment and facilities maintenance, although establishment of technical standards and information dissemination is a shared responsibility with MCT. MCT's control over investments (even when financed by ENAP's internal funds) and tariffs is inconsistent with ENAP's supposed autonomy. ENAP has failed to exploit the natural advantages of Corinto as a natural Pacific regional port for Central America, and rather through lack of investment and maintenance, together with high tariffs, has caused much Nicaraguan traffic to use ports in adjoining countries. Although ENAP is an autonomous state agency, in many respects it continues to act as part of MCT. It is supposed to be financially self sufficient as far as operating costs and revenues are concerned, but has consistently produced deficits on its current account, not only overall but for each port including Corinto. Reform options for ports 4.26 A consultant's report completed in 1993 analyzed three alternatives for restructuring port responsibilities, ranging from a development of the current arrangement (modified "status quo") through moderate decentralization to "full decentralization". 4.27 The first alternative would not involve any institutional change from the present arrangements. In the second alternative, a new port agency would be created to manage the three ports with significant international freight - Corinto, Sandino and Rama - while the other ports -San Juan del Sur, Puerto Cabezas, El Bluff and the lake ports- would be transferred in their entirety to the appropriate municipalities. In relation to ports, MCT would be responsible for planning, investment approval, establishing operational standards and providing, possibly under contract or concession, common port services such as maintenance of navigation 32 equipment and dredging. The new port agency could contract or concession stevedoring services and port and warehouse operations, establish master plans, carry out marketing studies, establish tariffs and generally be responsible for port administration. The principal difference in the third alternative is that each port would be controlled by a separate agency, giving a greater degree of local autonomy and reducing the risk of cross subsidization, but diluting the available experience in port operations among the three separate companies. In both alternatives it is recommended that the minor ports in ENAP be transferred to the municipalities and that the non-port activities such as operation of passenger ferries, be privatized by divestiture. The Government has already embarked on the process of municipalization of minor ports and the separation of non-ports activities from ENAP. 4.28 The report did not consider the possible concessioning of individual ports or of the single port agency, although the concessioning of individual port activities was contemplated. Circumstances have changed since the report was written and experience from countries that have concessioned their ports is generally favorable in comparison with those that have merely created autonomous agencies. 4.29 Given the increasing competitiveness of ports in Honduras (Puerto Cort6s), El Salvador (Acajuta) and Costa Rica (Puerto Limon and Caldera), none of the evaluated alternatives would provide the conditions needed for Corinto to become more attractive for Nicaragua's external trade. Although Corinto has many advantages as a natural port, it is presently seen as less attractive than the ports with which it competes by virtue of its high tariffs, unreliable container crane and doubtful depth in its access channel. Also, for traffic to the East Coast of the US and Europe, the lower road access costs to Corinto have to be offset by the higher shipping costs that take into account the additional cost of using the Panama Canal. An essential condition for Corinto to have a chance of fulfilling its potential to become the principal Central American port on the Pacific Coast is for it to be managed by an experienced private operator. It is recommended that Corinto be administered by an autonomous port agency and that this agency be concessioned or otherwise privatized within two years of its creation. In the meantime, the agency should be free to concession all individual port activities. 4.30 A similar policy should be applied to Rama and Sandino, while administration of the smaller ports should be transferred to the municipalities, with ENAPs remaining functions transferred to MCT with ENAP being replaced by a new agency. All port tariff and investment responsibility should be vested in the port agencies and municipalities as appropriate. These changes would create the conditions under which the ports could improve their quality of service, establish tariffs more in line with what users are prepared to pay and better market their services. 4.31 The government has prepared a draft law to create the Empresa Portuaia Nacional (EPN) that will replace ENAP. Best practice experience in other countries, suggest that once the private sector has taken over the responsibility for service provision, as recommended here, a national port authority should limit its role to coordinating major infrastructure investments, guaranteeing an adequate level of service to all users, taking measures to prevent the creation of operating monopolies, regulating and managing the concession contracts, and to representing the port industry in discussions with the Government These responsibilities represent a substantial reduction from the role assigned to the new EPN, so a further recommendation is that the draft law be reformulated. 33 V. PUBLIC TRANSPORT A. Importance of public transport 5.1 Urban transport, and particularly public transport, occupies an important role in the functioning of Managua and other large cities such as Granada and Leon, and through this, on the productivity of industry and services, many of which are oriented to export activities With the current low level of motorization, public passenger transport accounts for an estimated 80% or more of all motorized trips and is provided almost entirely by private buses, with less than 8% of trips being made by taxi (Table 5.1). Lack of adequate public transport services, both in respect to quantity, quality and price, results in a high proportion of trips that would otherwise be made by bus, being made on foot. There is a negligible utilization of bicycles or simple motorized vehicles such as mopeds. Table 5.1: Modal split of passenger trips in Managua Mode of transport Percentage of tri2s Bus 61.4% Small bus 8.5% cro bus 2.2% axi 7.9% Sub total public trans ort 80.0% Private car 14.2% Other 5.8% Sub total private transport 20.0% Total trips 100.0% Source: MCTHome Interview Survey, February, 1995 5.2 The provision of urban public transport, in relation to price, quality and quantity, is seen by the Government as the most visible and pressing issue in the transport sector, with the MCT indicating that urban transport issues represent 60% of the "problems" it has to deal with. The quality of public transport services directly affect about 80% the population, and indirectly even more. A recent survey of potential bus users indicated general dissatisfaction with present services with 90% claiming that operators charge more than the authorized fare, that 80% would be prepared to pay a higher fare for a better service and that a substantial proportion (14%) have been a victim of robbery on a bus in the last year. Not surprisingly more than 75% were dissatisfied with the level of safety on board buses. In contrast, three out of four potential users were satisfied with the routes of buses. Improvements in bus services, if achieved without perceived increases in charges, would go far in improving the quality of urban life and the general welfare of the population. 34 5.3 Expenditure on public transport in most developing countries represents about 10% of the total family budget for those who use it regularly, but in low income countries this can increase to 15% if fares are not subsidized. Estimates vary from 15% to 20% for Managua, with the most likely figure being near the higher end of this range. For families with below average incomes, the cost of public transport can be up to 30% of income, while families at or below the poverty level cannot afford to use the buses. 5.4 Despite the high costs to users, operators' revenues fail to meet their total operating expenditures by about 20%. This occurs despite a relatively high utilization of vehicles, (buses carry an average of about 1,200 fare paying passengers per day). The high operating costs are largely attributable to the high costs of capital of the vehicles and spare parts, which represent about 40% of the total. Unless operators' costs are reduced, the Government controlled fare is increased or recently eliminated subsidies are reintroduced, most bus operators will soon be unable to service their loans for vehicles and/or their maintenance standards will fall below acceptable levels from a safety viewpoint B. Organization of services 5.5 The Directorate-General of Land Transport (DGTT) of the MCT is responsible for ensuring the adequate provision of passenger and freight public transport services, including urban bus and taxi services. The DGTT determines the routes that will be operated and the standard fixed fare, and is responsible for licensing buses and taxis for public use. It is now also responsible for assigning and monitoring concessions for the operation of both inter-urban and urban bus routes 5.6 Responding to pressure to improve public transport services, the system by which they were provided was restructured in 1993, with the services previously provided by the state owned operator being assigned, together with physical assets, to a small number of cooperatives. The bus fleet has recently been improved by the import of new buses from Mexico, Japan, Spain and Guatemala, allowing the retirement of most of the East German buses and converted army trucks. The fleet now comprises about 1,000 vehicles with a valid operating license of which just over 800 are believed to be in service, both figures representing an increase of 20% compared with 1994. 5.7 The financing aspects of the recent bus replacement scheme have not been as successful as hoped for, for a number of reasons. Not least in importance of these was the high import and financing cost of the buses, with the initial price being inflated by about 30% above that prevailing in the origin countries and by a further 70% by interest charges over the four year period of the loan. The former is attributable to a lack of competition among approved vehicle suppliers, while the latter is attributable to previous bad experiences of commercial banks with transport operators. Some borrowers are already defaulting on their loan payments. 35 C. Bus fares. 5.8 There is a fixed fare of C$0.85 for adult bus passengers. MCT has a standard formula that it uses to calculate operating revenues and costs and to make periodic determinations of changes in the basis fare. The following Table indicates the range of estimated values for a commercial urban bus fare for Managua using January 1995 data, with the highest of the four values (C$1.3 1) being the Bank's best estimate taking account of higher amortization costs, and the lowest (C$0.92) being MCT's best estimate: Table 5.1: Estimates of a Commercial Bus Fare in Managua Passengers/bus/day 1,200 1,500 MCT cost formula CS 1.12 0.92 Bank revision to MCT cost formulaC$ 1.31 1.05 Source: Mission estimates based on application ofMCTformula to data supplied by bus operators. 5.9 There is a serious practical constraint on raising fares. Bank estimates indicate that expenditure on urban transport represent almost 20% of the income of families that make use of public transport, and, for the third of families in the lower quartile of incomes, transport makes up more than a third of total family expenditure. If correct, these figures, which are higher than the 16% estimate of FIDEG (Fundaci6n Internacionalpara el Desafio Econdmico Global), indicate very little scope for increasing public transport fares. The principal reason why the report estimate is higher than that of FIDEG, is that the latter used average urban family incomes whereas the Bank estimate excludes the top quartile of families, as they make little or no use of public transport. 5.10 Whichever of the above estimates of commercial bus fares is correct, urgent action must be taken if the cooperatives are not to enter into financial difficulties. It is recommended that the fare immediately be increased to C$1.00. This would have little impact on passengers' family expenditure, as they invariably have to pay this amount when bus drivers claim that they have no change. The cooperatives would benefit from the increase of C$0.15 per trip, more than enough to cover MCT's estimate of a reasonable fare based on 1,500 passengers per day, but insufficient for a bus carrying 1,200 per day. Bus drivers would lose, as they keep for themselves the difference between the "official" current fare of C$0.85 and the C$1.00 that is usually proffered by the passenger. 5.11 If the higher levels of a commercial fare are considered more representative of operators' needs, further measures will be needed to prevent them defaulting on their loan payments, reducing their already low levels of vehicle maintenance, and possibly going out of business. Although an increase from the report's estimate of 1,200 passengers per day might be possible, it would be very difficult without increasing even further the already long work day (16 hours) of many drivers. 36 5.12 A reduction in the onerous level of capital costs should be a high priority measure. It is recommended that MCT encourage the formation of a users cooperative to purchase spare parts at non-monopoly prices and develop a scheme to reduce the commercial bank's perceived risk of lending to bus cooperatives, through the provision of a guarantee deposit provided by the cooperatives, the vehicle suppliers or the companies providing vehicle insurance. In the longer term, additional non-financial guarantees can be provided by the cooperatives, such as issuing certificates of competence to owners who have demonstrated satisfactory levels of managerial and financial ability and who have a financial plan for the period of the loan, who have a viable maintenance program for the vehicle and a public transport driver's certification. The cooperatives can act as loan agents for the lending bank's, reducing the bank's administration costs and increasing the probability of regular and prompt loan repayments. D. Improving the quality of the bus fleet 5.13 Although there have been significant improvements in the quality of the bus fleet, there are still many vehicles, such as converted ex-army trucks with unfixed wooden bench seats reached by a ladder over the tailboard, that do not satisfy minimum standards of safety or quality of service. All of the proposed measures for improving the financial viability of bus operators would also go some way to improving the quality of the bus fleet. An additional measure, successfully adopted in other Latin American cities, would be the introduction of a premium service at a higher quality of service (for example, with air conditioning and/or a guaranteed seat) and an unregulated fare. This could give an increased incentive to operators to buy new vehicles, which could in turn be cascaded down to regular services in about four or five years. E. Route changes and monitoring of concessions. 5.14 The ability of MCT to respond to operators requests for modifications to existing bus routes or to operate new routes is restricted by lack of data and analytical tools for planning bus routes and determining the impact of proposed changes on demand. Although bus routing was not seen as a major problem in the survey of potential passengers, there is concern among operators that significant markets are not adequately served. There is also a lack of institutional capacity and split responsibility between MCT, the municipality and the police in respect of regulation of public transport. MCT inadequately monitors and regulates the performance of cooperatives in complying with the conditions of their contract. The municipalities are responsible for providing adequate roads and traffic conditions for the operation of buses, while the police enforce traffic, driver and vehicle laws. No agency is responsible for enforcing environmental standards. It is recommended that a thorough revision be made of the method of regulating and concessioning public transport, with particular attention being made to institutional responsibilities. This should result in a better service to users, more flexible and lower cost operations and a greater contribution by urban transport to the creation of an environment that stimulates economic activity. 37 F. Urban transport planning 5.15 Planning of public transport should not be undertaken in isolation from other aspects of urban transport. Comprehensive urban transport planning requires an integration of planning of several activities - road and network development, traffic management, highway maintenance, environmental and safety issues as well as of public transport. Each of these activities has a significant impact on the performance of the others, and they are best planned and undertaken in a comprehensive framework. This is impossible under the present institutional framework, with a number of different municipal and national agencies responsible for different aspects of urban transport infrastructure and service, and no integral planning of urban transport activities in Managua has taken place. 5.16 A current proposal for financing an urban transport study through a grant from JICA has been stalled in the Ministry of Coordination of Foreign Aid for more than a year. As currently proposed, this study would have a greater emphasis on infrastructure development than on the other issues described above. A broader Integral Transport Plan would provide a basis for planning development of the road network as well as a framework for coordinating this and all the other activities listed above. The ITP would also review and make recommendations in respect to the institutional arrangements under which urban transport is planned and its services provided. The present arrangement between the Director General of Land Transport of the MCT, various dependencies of the Municipality, the Ministry of the Interior and INETER would be reviewed and revised as necessary. Similar ITP's in medium- size cities in Mexico and elsewhere have largely succeeded in bringing a more ordered context for providing urban transport infrastructure and services. Although MCT and the Municipality should exert pressure for this proposal to be acted on and the study to be initiated, a reorientation of the terms of reference away from infrastructure provision and towards institutional and operational issues should be encouraged. It is therefore recommended that an Integral Transport Plan (ITP), broader than that proposed by JICA, be prepared for Managua. p W CATALOGUERBS/FILE CONFIDENTIAL Report No: 14474 NI Type: SR