Mexico - Federal Road Modernization (Federal Roads Rehabilitation Project)

Report No. PIC2792 Project Name Mexico-Federal Road Modernization (@4) Region Latin America and the Caribbean Sector Transportation Project ID MXPA43163 Borrower Banco de Obras y Servicios Publicos (BANOBRAS) Executing Agency Secretaria de Comunicaciones y Transportes (SCT) Contact Ing. Jaime Luna Tel. (5) 519-1270 Proposed Appraisal Date January 8, 1996 Tentative Board Date March 6, 1997 1. Background. Mexico restored economic growth by substantially restructuring its economy in the mid 1980s, including privatizing a large number of state-owned enterprises, opening the economy to foreign competition and expanding the role of market forces in resource allocation. A large current account deficit, however, resulted in a major devaluation at the end of 1994, from which the country is still recovering. In order to restore trust in the economy, the Government launched an economic austerity program in March 1995 aimed at: (a) achieving a budget surplus of 4.4% of GDP in 1995; (b) limiting net domestic credit creation to a maximum of N$10 billion for 1995; (c) achieving equilibrium in the current account; and (d) restructuring N$65 billion of outstanding debt of the private sector. 2. As part of its economic restructuring program the Government has made significant moves towards privatizing some infrastructure parastatals, including telecommunications, ports and, to a lesser extent, railways, airports and energy. The Bank is supporting these actions with the Infrastructure Privatization Technical Assistance Project approved in August 1995. The Government has also undertaken important policy measures in the highway sector, including deregulating road transport services, privatizing highway construction through concessions, contracting out a significant part of highway maintenance services on the federal network and decentralizing highway administration. 3. The policy of encouraging private participation in providing infrastructure and services has led to the private sector building about 5000 km of high standard federal roads by concession. However, the low geometric design standards of the remaining federal roads, including many along important export corridors, cause slow travel time, high transport costs and high accident levels. The first two of these would help to reduce overall transport costs to Mexico's external trade traffic and improve the competitiveness of Mexico's exports in the world market. More than 50% of the federal roads need to be improved (by adding road shoulders and climbing lanes, rectifying both horizontal and vertical alignments and, in some cases, widening to four lanes) to  provide adequate capacity, levels of service and safety. Because these roads typically carry less than 3000 vehicles a day, they are not attractive for concession and the Government has to undertake the required investments with public funds. 4. The Bank has been extensively involved in Mexico's highway sector since 1960 with 12 loans. After 10 highway investment loans, the Bank has focussed the two most recent loans, the Highway Maintenance Project, Loan 2876-ME, and the Highway rehabilitation and Traffic Safety Project, Loan 3628, on addressing the need for maintenance and rehabilitation of the federal network. The proposed project, which would address the need for additional capacity, is therefore a logical follow- up to the maintenance and rehabilitation projects and the highway concession program. 5. Modernizing the federal network also requires improving the SCT's road management systems and procedures, improving multi-modal transport operations, vehicle weight and dimension enforcement, road safety as well as better incorporation of environmental impact assessment and mitigation measures into road planning and construction. The Government accords high priority to further improvement in these matters which, together with the physical improvements mentioned above, would greatly reduce the cost of transport and thereby enhance its competitive position vis a vis its NAFTA (North America Free Trade Agreement) partners. 6. Project Objectives. The project's general objective is to help meet the expected traffic growth on the federal road network and to reduce road transport system costs. More specifically, the project aims to: (a) improve the service quality of the federal road network; (b) further improve the safety on the network; (c) further strengthen SCT's capacity to formulate work programs, efficiently allocate highway funds among road activities and to implement road projects; and (d) to more systematically incorporate the assessment of environmental impact and mitigation measures into road planning, engineering and construction. 7. Rationale for Bank Involvement. The Bank's country assistance strategy for Mexico stresses: (a) the revival of growth by maintaining disciplined economic management, facilitating private sector development and removing constraints to growth, such as deficiencies in infrastructure, labor markets and the financial sector and (b) environmental sustainability. The proposed project fits into the above strategy by reducing existing and potential constraints to economic growth caused by inefficient and costly transportation on Mexico's road system, as explained in para. 3, and by helping to more systematically include environmental factors in road planning and construction. Because Mexico's ports are situated far from the production centers, reducing transit time and transport costs would have a high impact on the competitiveness of its goods in the world market. SCT would also benefit significantly from the Bank's experience in helping to improve the planning of highway activities on a comprehensive basis as has been successfully done in with Bank assistance in many other countries. 8. Project Description. The project, which would finance a four-year time slice (1996 to 2000) of SCT's Federal Roads Modernization Program, -2 -  would consist of: (1) civil works to increase the capacity of the federal network, including providing additional lanes on some road sections, building climbing lanes on others, improving horizontal and vertical alignments, providing adequate road shoulders and curbs and removing hazardous spots; (2) institutional strengthening directed at SCT and selected state highway organizations for improving management systems and procedures, training staff and reviewing the role and needs of the SCT centers in the states; and (3) further support to SCT to implement actions on road-user charges and road sector financing, to improve multi-modal transport operations, vehicle weight and dimension control, road safety and to incorporate more systematically environmental impact assessment and mitigation measures into road planning and construction. The federal roads to be included under the project would exclude those targeted, planned or potentially suitable for private sector financing. 9. Project Financing. SCT's modernization program calls for spending of about N$3-4 billion (about US$500-700 million) during 1997 to 2000, which is the program's first phase. The Bank would finance about 50; of the program, excluding taxes, and the Government would finance the rest. 10. Project Implementation. SCT would be responsible for implementing the project through its three directorates: the Direccion General de Servicios Tecnicos for carrying out the analysis for selecting sub- projects to be included in the annual programs, the Direccion General de Carreteras Federales for the feasibility, engineering and environmental studies and for contract administration and the Direccion General de Planeacion for implementing the institutional development component of the project. The project would be implemented in four years starting from September 1996. BANOBRAS would be responsible for loan administration and the supervision of the financial aspects of the project. 11. Sustainability. The sustainability of the project would be determined by: (a) adequate maintenance of the project roads after their improvement; (b) better traffic management to ensure that the expected levels of service are attained; (c) improvement in traffic policing, as a complement to removing physical road hazards, in order to ensure the expected improvement in traffic safety; and (d) the ability of SCT to more efficiently allocate available highway funds among the activities on the federal road network. Building on the results of the road-user charges study being carried out under the ongoing Highway Rehabilitation and Traffic Safety Project, the project would finance the study of alternative mechanisms for funding road maintenance, including the establishment of a road maintenance fund, financed from road-user charges. The proposed project would further help improve highway signing, introduce measures to reduce roadside friction and improve the capacity of the Federal Highway Police to remove incapacitated vehicles. Assistance for highway safety, being covered under the ongoing Highway Rehabilitation and Traffic Safety Project, would be continued and strengthened under the proposed project. Lastly, efficient systems of allocating highway funds among different road activities, already introduced successfully in other countries with the Bank's assistance, would be introduced in SCT to help ensure that available funds are spent on the highest priority activities. -3-  12. Lessons from Previous Bank Involvement. The Bank has made 12 loans to Mexico in the highways sub-sector, the first seven of which were regular project investment loans and the last five sector investment loans. These projects have contributed towards the construction and improvement of about 20,000 km of federal roads. In addition, the Bank made a loan to improve the rural roads system in the state of Chiapas and a Road Transport and Telecommunications Sector Adjustment Loan which supported, inter alia, Mexico's policy of deregulating highway transport services. The implementation of the first eight projects suffered from recurrent problems with cost overruns, insufficient counterpart funds, procurement problems and long delays in execution. The institutional strengthening components of those projects also yielded much less lasting results, mostly because they lacked the Government's ownership. Under the last two projects, the Highways Maintenance Project just completed and the ongoing Highway Rehabilitation and Traffic Safety Project, the situation has improved in the implementation of the physical components as well in maintenance planning due respectively to the introduction by the Government in 1990 of a new disbursement policy which linked budgetary disbursements to the execution of Bank-financed projects and to the Government ownership being developed during project preparation and strengthened during project implementation. These lessons are being taken into consideration in the design and the preparation of the proposed project. Delays in procurement have also been a major problem in the past Bank-financed highway projects, but, with the recent agreement by the Government to use the Bank's standard procurement documents, procurement under the proposed project should be much smoother. 13. Poverty Category. Not applicable 14. Environmental Aspects. The road improvement activities under the project could, in some cases, result in negative environmental impacts. All road improvement would, therefore, be subjected to an environmental impact assessment (EIA). Participation Action Plans would also be prepared for in those cases where resettlement will result from modernizing existing roads and in the cases of new construction. For all sub-components identified for implementation during the first year, EIAs would be carried out before project appraisal. For the remaining components, which would be selected in subsequent years, the EIAs would be carried out before the approval of the sub-component to be included in that year's program. The project should is assigned an environmental rating of "B". 17. Project Objective Category. The category for this project is Environmentally Sustainable Development (80%) and Economic Management (209). 18. Project Benefits. The project would increase transport efficiency and reduce costs on the federal road network, particularly along the major export transport corridors, and enhance the country's competitive advantage in its external trade. It would help in accommodating the rapid road traffic growth, estimated at about 10% per year, on the major corridors which will result from the NAFTA agreement. Significant, but non-quantifiable benefits would also accrue from the institutional strengthening and training components. The improvement in allocating -4 -  funds to highway activities would ensure that benefits are maximized. Strengthening SCT and its regional centers would help increase implementation efficiency and reduce delays. Finally, the improvement in environmental awareness and the capacity to incorporate environmental factors into road planning and the execution of road projects would prevent damage to the country's natural resources. The estimates of the net present values and economic rates of return for the individual investment components in the first year and preliminary estimates for the remaining project roads will be undertaken before project appraisal. 19. Project Risks. The main project risks include: (a) Reduction of Maintenance Efforts on Road Network. For the last several years, the Government, with the Bank's assistance, has concentrated its efforts on rehabilitating and maintaining the federal road network. This strategy has worked well. However, the country has reached a point where it now needs to expand road capacity as well. It must do this in a balanced way so as not to jeopardize what has been gained in terms of maintaining the existing system. There is, however, the risk that with the modernization program, insufficient resources will be allocated to road maintenance. The risk would be significantly reduced by SCT's ongoing effort to redefine the federal road program to make it about half of its current size. Also, the introduction of more efficient systems for allocating funds among all road activities should help to ensure that economic priorities are reflected in SCT's use of funds. Lastly, should the funding of maintenance become a problem, the pace of implementation of the modernization program would be slowed down to reflect the availability of funds. (b) Delays in Complementary Action to Modernize the Federal Road System. SCT recognizes that modernizing the federal road network also includes complementary actions to improve safety, traffic flow management, policing and vehicle weight and dimension control. The project would include measurable annual targets to be achieved in these areas. SCT's achievements on these would be discussed at annual review meetings which would also agree on the composition and size of the annual programs. Contact Point: Public Information Center The World Bank 1818 H Street N.W. Washington D.C. 20433 Telephone No.: (202)458-5454 Fax No.: (202)522-1500 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the Public Information Center week ending March 21, 1997 - 5 -