Document of The World Bank

FOR OFFICIAL USE ONLY Public Disclosure Authorized

Report No. 6536

PROJECT PERFORMANCE AUDIT REPORT Public Disclosure Authorized

CYPRUS FIRST AND SECOND HIGHWAY PROJECTS

(LOANS 904-CY AND 1344-5-CY)

December 9, 1986 Public Disclosure Authorized Public Disclosure Authorized

Operations Evaluation Department

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Country Exchange Rates (Cyprus Pound/US$)

First Project Second Project Appraisal year average: 2 6071 2.4371 Intervening years average: 2.6728 2.4540 Completion year average: 2.8388 1.7039 FOR OFFICIAL USE ONLY THE WORLD BANK Washington. DC 20433 USA

Office of DvetGw-Ceneal Operatmns Evaluatin

December 9, 1986

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Performance Audit Report on Cyprus First and Second Highway Projects (Loans 904-CY and 1344-5-CY)

Attached, for information, is a copy of a report entitled "Project Performance Audit Report on Cyprus First and Second Highway Projects (Loans 904-CY and 1344-5-CY)" prepared by the Operations Evaluation Department.

Attachment

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. FOR OFFICIAL USE ONLY

PROJECT PERFORMANCE AUDIT REPORT

CYPRUS: FIRST AND SECOND HIGHWAY PROJECTS (LOANS 904-CY AND 1344-5-CY)

TABLE OF CONTENTS

Paxe No.

Preface...... i Basic Data Sheet...... ,,...... 11 Evaluation Summary...... 0...... vi

PROJECT PERFORMANCE AUDIT MEMORANDUM

I. INTRODUCTION...... 1

History...... ,,...... 1 Cyprus from the 1960s to the 1980s...... 2 Bank Group Operations in Cyprus...... 3

II. THE FIRST AND SECOND HIGHWAY PROJECTS...... 4

Obj ect ives ...... 0..*. .. I...... 04*00004...... 4 Components: Planned and Actual Results...... 5 Costs and Economic Rate of Return...... 10

III. FINDINGS AND RECOMMENDATIONS...... 10

Annex 1 Project Components: Tentative Total Cost Estimates...., 13

PROJECT COMPLETION REPORT: FIRST AND SECOND HIGHWAY PROJECTS

I. Introduction and Background...... 17 II. Project Preparation, Objectives and Components...... 18 III. Project Implementation and Cost...... 21 IV. Economic Re-evaluation. o.. o...... 25 V. Conclusions and Achievements of Institutional Objectives...... 29

Annexes

1. Second Highway Project List of Studies...... 33 2. Details of Nicosia-Limassol Road Contracts

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Table of Contents (cont'd.)

Page No.

3. Estimated and Actual Cumulative Disbursements...... 41 4. New Nicosia-Limassol Highway Summary of Tenders...... 42

Figure 1 Estimated and Actual Progress and Disbursements...... 43

Appendix Comments by the Borrower on the Project Performance Audit 4...... Report1 44 map IBRD 12094 i

PROJECT PERFORMANCE AUDIT REPOrT

CYPRUS: FIRST AND SECOND HIGHWAY PROJECTS (LOANS 904-CY AND 1344-5-CY)

PREFACE

This is the Project Performance Audit keport (PPAR) on the First and Second Hi,hway Projects for which Loans 904-CY and 1344-5-CY in the amounts of US$5.4 and US$10.0 were respectively approved in May 1973 and November 1976. Both loans have been fully disbursed. Parallel financing for the Second Project was provided by the Kuwait Fund for Arab Economic Development (KD 1.13 million, or approximately US$4 million).

This document consists of a Project Performance Audit Memorandum (PPAM) prepared by the Operations Evaluation Department (OED), and of a Project Completion Report (PCR) prepared by the Europe, Middle East and North Africa Regional Office.

OED studied the documentation preserved in the Records Center and reviewed t'e project against the Staff Appraisal (SAR) and the President's Report (PR), as well as against the legal documents and the transcripts of the Executive Directors' meetings which considered the projects. Discussions on project formulation, implementation and follow-up were held with Bank staff and consultants. An OED mission visited Cyprus in February/March 1986 to secure Government views on the project and the assistance extended to the mission is gratefully acrnowledged. The draft PPAR was sent to the Government and the cofinanciers and the Borrower's comments, reflected as appropriate in the text, are reproduced as an Appendix

The PCR provides a generally adequate summary of project preparation and implementation. The PPAM has focussed on lessons that can be applied in future attempts by the Bank to assist the strengthening of road sector operations in Cyprus. ii

PROJECT PERFORMANCE AUDIT BASIC DATA SHEET

CYPRUS: FIRST AND SECOND HIGHWAY PROJECTS (LOANS 904-CY AND 1344-5-CY)

Key Project Data

Borrower Republic of Cyprus Executing Agency Ministry of Communications and Works Fiscal Year of Borrower January 1 - December 31

HIGHWAYS I HIGHWAYS II Appraisal Actual/ Appraisal Actual/ Estimate Reestimated Estimate Reestimated (US$ million)

Total Project Cost 10.5 1.7 /1 25.7 51.3 /2 Loan Amount 5.4 5.4 13 10.0 10.0 Amount Disbursed 3.4 5.4 10.0 10.0 Other External Financing - - - 4.0 Government Participation 5.1 4.5 12.1 /4 37.3 /5

Project Completion Date 06/76 08/80 10/81 09/84 Economic Rate of Return 53% - 26% 27% /6

11 Tentative sum, probably overstated (PPAM, Annex 1).

/2 Tentative sum, probably understated (PPAM, Annex 1).

/3 As a result of reallocation to Highways II (PCR, para 2.06).

/4 SAR, Second Highway Project, paras 4.14 and 4.21.

/5 Estimated total, not including outstanding claims.

/6 Figure given in the PCR (para 4.07), representing the overall first year rate of return, and calculated on the basis of provisional costs for the Nicosia-Limassol road. The costs may increase further as a result of still outstanding claims by the first contractor, but the economic justification of the project seems to be confirmed. Other Project Data

Righways I Highways II Fitat Document in the File July 1969 January 1975 Project Appraisal September 1972 June 1976 Negotiations April 1973 October 1976 Board Approval May 1973 November 1976 Loan Agreement Signed June 1973 December 1976 Loan Effective September 1973 October 1977 Final Disbursement August 1980 December 1984 Loan Closed June 1980 April 1984 PCR Received by OED August 1985

Cumulative Disbursements

First Highway Project

FY74 FY75 FY76 FY77 FY78 FY79 FY80 FY81 Estimated 1.3 3.3 5.2 5.4 Actual 0.4 0.8 1.3 1.4 2.5 5.2 5.4 % of estimated 0.0 12 15 24

Second Highway Project

FY79 FY80 FY81 FY82 FY83 FY84 FY85 Estimated 5.4 10.0 Actual 0.4 2.5 4.4 5.2 9.4 10.0 % of estimated 0.0 4 Iv

Tctal Bank Staff Time (Staff-Weeks)

First Highway Project FY72 FY73 FY74 FY75 FY76 FY77 FY78 FY79 FY80 FY81 FY82 FY83 FY84 FY85 FY86 TOTAL

Pre-Appraisal 6.7 4.1 10.8 Appraisal 46.3 46.3 Negotiations 3.0 3.0 Supervision 0.1 8.0 23.9 25.7 7.2 4.1 0.3 1.1 0.1 2.8 0.3 73.5 Other 0.6 0.6 Total Project 6.7 54.1 8.0 23.9 25.7 7.2 4.1 0.3 1.1 0.1 2.8 0.3 134.2

Second Highway Project

Pre-Appraisal 1.1 0.5 16.8 0.5 19.0 Appraisal 7.8 31.5 39.2 Negotiations 10.2 10.2 Supervision 15.1 11.9 7.9 10.6 3.2 10.1 10.9 4.0 8.5 1.0 83.3 Other 3.0 3.0 Total Project 1.1 0.5 24.6 60.3 11.9 7.9 10.6 3.2 10.1 10.9 4.0 8.5 1.0 154.6

TOTAL 6.7 54.1 9.1 24 5 50.2 67.4 15.9 8.3 11.7 3.2 10.1 10.9 4.0 11.3 1.3 288.9

Mission Data

First Highway Project

Mission Number Man- Report Date of Staff Weeks Date

Identification 05/71 1 - 06/71 11/71 2 - 01/72 Preparation 02/72 2 2 03/72 06//2 2 2 06/72 Appraisal 09-10/72 3 6 05/73 Subtotal 10T

Supervision I 02/75 2 3 02/75 Supervision II 03/75 2 2 03/75 Supervision III 06/75 3 6 07/75 Supervision IV 12/75 3 3 12/75 Supervision V 04/76 1 1 04/76 Supervision VI 06/76 3 7 07/76 Supervision VII 11/76 1 1 12/76 Supervisi i VIII 05/78 1 1 06/78 Supervision IX 03/79 2 4 03/79 Supervision X 04/80 2 4 ----- Subtotal 32 V

Second Highway Project

Mis,.ion Number Man Report Date of Staff Weeks Date

Identification 02/75 2 3 02/75 12/75 2 3 03/76 Preparation 04/76 1 1 04/76 Appraisal 06176 3 10 11/76 Subtotal 17

Superv. I 01/77 1 . 02/77 Superv. II 03/77 2 03/77 Superv. III . 11/77 2 11/77 Superv. IV 05/78 1 1 06/78 f.uperv. V 03/79 2 4 03/79 Superv. VI 03/80 2 4 04/80 Superv. VII 05/80 1 2 06/80 Superv. VIII 08/80 2 2 09/80 Superv. IX 04/81 2 5 04/81 Superv. X 10/81 2 6 10/81 Superv. XI 05/82 1 1 05/82 Superv. XII 10/82 2 3 10/82 Superv. XIII 04/83 2 2 04/83 Superv. XIV 10/83 1 1 10/83 Superv. XV 06/84 2 3 07/84 Superv. XVI 10/84 2 1 10/84 Superv. XVII 03/85 3 2 03/84 Subtotal 41

Follow-on Projects

Name Third Highway Project Loan Number 2128-CY Loan Amount US$12.20 million Loan Agreement Date June 1982

Name Fourth Highway Project Loan Numbe- 2684-CY Loan Amount US$20.0 million Loan Agrement Date May 1984 vi

PROJECT PERFORMANCE AUDIT REPORT

CYPRUS: FIRST AND SECOND HIGHWAY PROJECTS (LOANS 904-CY AND 1344-5-CY)

EVALUATION SUMMARY

Introduct.on

The long history of Cyprus is marked by political upheavals (PPAM, paras 1-3). The Bank started lending to Cyprus in 1963 to support activities leading to higher productivity and exports, to provide essential infrastructure, and to assist in attracting development capital from abroad (PPAM, para 8). The events of 1974 interrupted a process of rapid economic development which started in the 1960s and the Bank has significantly helped the Government's recovery efforts (PPAM, para 26). In 1986, the economy is active, although management of the external debt deserves careful attention (PPAM, para 7).

The First and the Second Highway Projects

Implementation of the First Highway Project was thwarted by the events of 1974 (PPAM, paras 11-12). The Second Project incorporated feasible elements of the First (PPAM, paras 14-15) and project implementation is discussed in PPAM paras 16-23 and in PCR paras 3.01-3.06 and PCR Annex 2. Serious problems were encountered in works execution (PPAM, paras 16-19): the main construction component (the Nicosia-Limassol road) experienced a delay of three years and a cost overrun of almost 89% /8 (PCR, para 3.01). However, the quality of the finished product is generally satisfactory and considerable traffic growth would lead to a satisfactory rate of economic return (PPAM, para 25).

18 The Borrower believes that "the delay and cost overrun were mainly due to: (a) the inability of the contractor to procLid with the completion of the project according to the programme of the works, which resulted to forfeiting of the contract and awarding the uncompleted project to a second contractor; (b) additional works, such as the construction of the highway to a four-lane itandard throughout, the construction of flyovers and other works which were not originally included in the contract". vii

Findings and Recommendations

The Bank ought to emphasize in its dialogue with the Borrower certain constiaining factors whose removal will contribute to the country's further prosperity (PPAM, paras 27-29). Administrative processes must be sneeded up because, in the roads sector, the tendency seems to be in the opposite direction (PPAM, para 30). 1

PROJECT PERFORMANCE AUDIT MEMORANDUM

CYPRUS: FIRST AND SECOND HIGHWAY PROJECTS (LOANS 904-CY AND 1344-5-CY)

I. INTRODUCTION

History 12

1. East and West have been meeting in Cyprus over the past seven thousand years. In mid-5000 BC, the island was colonized from Syria and Cilicia. Around 3000 BC there was an influx of Anatolians, and the first exc'anges began with the Levantine mainland. Between 1900 and 1600 BC contacts were established with the Aegean world, followed by waves of Achaean settlers. In the 800s BC, the Phoenicians established a colony at Kition. Between 700 and 600, the island came under the suzerainty of Assyria and in the early 500s it was controlled by Egypt. In 545 BC, the Cypriot kings traneferred their allegiance to Cyrus the Great and remained under Persia until Alexander established his empire. During the Hellenistic period, Cyprus was a client state of Ptolemaic Egypt until it was annexed by Augustus in 30 BC. It stayed under Roman and Byzantine rule until 1191 AD when it was captured by Richard I of England who eventually sold it to Guy de Lusignan. The Lusignans ruled the island until 1489 when it was ceded to the Venetian Republic. The Venetians kept Cyprus until 1571 when it was conquered by the Ottoman Sultan Selim. It stayed under the Turks until 1878, when Britain assumed administration of the island.

2. In January 1959, the London Conference (attended by Greece, Turkey, the United Kingdom, Greek Cypriots and Turkish Cypriots) agreed that the island would become an independent republic. In 1963, an outbreak of intercommunal fighting led to the establishment of a "Green Line" dividing communities in Nicosia. In 1964, UN forces arrived to help keep the peace and are still there. On 15 July 1974, the Greek junta inspired a conspiracy against President Makarios who fled the country. The Turkish army landed in the north, and a de facto partition took place.

3. Intercommunal talks began in 1975, but no formula has yet been found to bring the two communities together. On November 15, 1983, the Turkish Cypriot Administration declared independence, naming the area under its jurisdiction "Turkish Federated State of Northern Cyprus". So far, only Turkey has recognized it. The Government of the Republic of Cyprus controls the

/9 For additional historical information provided by the Borrower, please see the Appendix. 2 sov.thern part of the island, covering two thirds of the land area and about four.-fifths of the island's total population.

Cyprus from the 1960s to the 1980s /10

4. The main geographical features of the island are the two east-west mountain ranges of Kyrenia and Trocdos, separated by a broad central plain, which cover about half its land. The shoulders of the mountain ranges and the central plain are the principal cultivated areas. In the 1960s, most of the population lived in the capital and manufacturing center of Nicosia and the port c*ties of Famagusta, Larnaca and Limassol. In spite of political difficulties between the two communities, the First (1962-1966) and the Second (1967-1971) Five-Year Plans were largely successful and the average rate of growth for the decade (about 7.1% p.a.) surpassed the targets. Value added in agriculture almost doubled, while manufacturing and tourist and other services grew even faster. There was a high and rising rate of investment, a rapid increase of agricultural exports, and a flexible fiscal and monetary policy which both stimulated growth and maintained domestic price stability. The Third (1972-1976) Five-Year Plan proposed to continue along the lines of the preceding ones and to assist the further development of agriculture, manufacturing and tourism.

5. The extensive drought of 1973 provoked economic difficulties and dealt a blow to the balance of payments. Then, the events of July/August 1974 almost shattered the economy. In 1975 the island found itself divided into two communal zones. Some 150,000 Greek Cypriots moved south and about 45,000 Turkish Cypriots moved north. Per .apita GNP was estimated to have decreased to US$1,180 in 1975, as against US$1,460 in 1973. Both the northern and the southern parts had acute unemployment problems. Exports and imports fell by about 55% in the area controlled by the Government during the second half of 1974.

6. The Government's immediate concern was to reactivate the economy and this was accomplished by end 1978. Since then, the question has been how to achieve long-term growth with price stability and external equilibrium. The

/10 The following Bank documents were consulted for tLe preparation of this section: First Highway Project President's Report (May 6, 1973), Staff Appraisal Report (May 1, 1973), Loan Agreement (June 12, 1973). Second Highway Project President's Report (November 16, 1976), Staff Appraisal Report (November 16, 1976), Loan Agreement (December 13, 1976). Third Highway Project President's Report (April 1, 1982), Staff Appraisal Report (April 1, 1982), Loan Agreement (June 8, 1982). Cyprus: Trends and Issues in Public Finance (World Bank, July 1984). Cyprus: Country Economic Memorandum (World Bank, July 1985). Fourth Highway Project President's Report (March 20, 1986), Staff Appraisal Report (December 16, 1985). 3

Third (1979-1981) and the Fourth Emergency Economic Action Plan (1982-1986) have confronted these issues. So far, overall growth objectives have been achieved. GDP growth rate during 1982-1984 averaged slightly over 5% per annum, a decrease from the 7.6% achieved in 1978-80 but probably the highest that could be reasonably expected, given the limited scope (1% per annum) for labor force growth. An outstanding feature has been the continuing expansion of the service sector which accounted for 57% of GDP in 1983, compared to 53% in 1978. Tourism, iL particular, has continued to boom.

7. Targets relating to external equilibrium have not met with comparable success. One reason is that, export diversification notwithstanding, Cyprus remains susceptible to external shocks because of its increased dependence on foreign markets. An even more important reason Is the large budget deficits, contributing to domestic demand and imports. The deficits have been covered partly by private capital inflow and partly by external borrowing. As a result, external debt has risen from under US$150 million in 1976 to about US$1,000 million in 1985.

Bank Group Operations in Cyprus

8. When the Bank started lending to Cyprus in 1963, its objectives were clear and sound: to support activities leading to higher productivity and exports, to provide essential infrastructure, and to assist the Government in attracting development capital from other sources. The problems between the two communities always loomed in the background and after the events of 1974, the Bank has indicated that it is ready, when a political settlement is reached, to help both communities through projects designed to improve living standards of those groups left out of the growing prosperity prior to 1974.

9. Bank lending has been focussed on infrastructural improvements and on institutional strengthening. Loans have been made for power, port development, highways, sewerage, irrigation, development banking, water resources development, fruit and vegetable exports, and for agricultural research and extension. As of end 1985, sixteen loans had been fully disbursed and another eight are ongoing. Again as of end 1985, the International Finance Corporation (IFC) had made investments in a cement factory, in an asbestos cement pipe plant, in a hotel, and in the Cyprus Investment and Securities Corporation.

10. As of May 1986, the Bank had participated in six projects in the trunsport sector. These are: The First Highway Project (Loan 904-CY of 1973), the Second Highway Project (Loan 1344-CY of 1976), /11 the Third Fighway Project (Loan 2128-CY of 1982) which is intended to improve about 200 km of rural roads and to finance studies on road maintenance, the implementation of

/11 The First and Second Highway Projects are covered in this audit. 4 a rodd maintenance management system, feasibility studies, traffic management, and the rationalization of public passenger services. The project is expected to be completed in December 1986. The Fourth Highway Project (negotiated in March 1986) is intended to establish a transport planning and policy framework, implement a cost effective highway maintenance system, upgrage priority highways, and further improve highway safety. OED has audited the First Port Project (Loan 628-CY of 1969) and the PPAR (OED Report No. 1965 of March 13, 1978), concluded that the project was satisfactorily implemented with only a minor (13%) cost overrun. The Rvents of 1974, which isolated the port of Famagusta, as well as the rapid growth of international trade, led to a traffic flow through Limassol which was almost four times the volume forecast for 1976. The project has consequently been very successful, with a reestimated economic rate of return of 40%, as against 15% at the time of appraisal. Finally, the Second Port Project (Loan 1540-CY of 1978) which provided for expansion of port facilities at Limassol and Larnaca as well as for technical assistance. A PPAR on this project is under preparation.

II. THE FIRST AND SECOND HIGHWAY PROJECTS

Objectives

11. The objectives of the First Highway Project were to construct a high-priority road, to improve highway administration and to establish proper procedures for maintaining the highway system (SAR, para 4.01). The project was appraised in September/October 1972, became effective in September 1973 and was expected to be completed in June 1976.

12 Domestic transport in Cyprus has always relied on roads and, up to 1974, road transport services operated on three main axes: Nicosia-Famagusta (from the capital to the principal port); Nicosia-Morphou (from the capital to a principal agricultural area; and Nicosia-Limassol (from the capital to the second port). The events of 1974 had a dramatic impact upon both the economy and the transport network. Since the first two arteries were no longer usable, the main transport corridors became Nicosia-Limassol (from the capital to the major port) and Nicosia-Larnace (from the capital to the country's new international airport).

13. It was against this background that the objective of the Second Highway Project was formulated: "to facilitate the social and economic integration of the three most important centers: Nicosia, the capital, Larnaka, the airport and Limassol, the main port" (SAR, para 4.02). The aims were appropriate and completion of the Nicosia-Limassol highway provides adequate connection between the two cities. Preparatory work has been done and the Nicosia-Larnaca road will be improved under the Fourth Highway Project. 5

Components: Planned and Actual Results

14. The First Project consisted of the following components: (a) Construction and construction supervision uf the Nicosia-Morphou road (32 km) and about 12 km of access roads; (b) Studies (Highway planning and organization; Feasibility and engineering studies; Road user charges and vehicle weight control); and (c) Training of DPW staff. Following the events of 1974, the road construction component was cancelled, the project was amended, and the major portion of the proceeds of Loan 904-CY was drawn down in support of the Second Project (PCR, paras 2.01-2.05).

15. The Second Project consisted of the following components: (a) Construction and supervision of the first two lanes of a new Nicosia-Limassol highway (about 65 km), the first sectioas of a Limassol bypass and a connecting link to Limassol (about 10 km) and connecting and access roads between old and new highways; (b) Feasibility studies for the improvement of the Limassol-Paphos highway (about 70 km) and a connection between the new Nicosia-Limassol highway and Larnaca (about 30 km); (c) Detailed engineering studies; (d) Transport sector studies; and (e) Training of MCW staff. Project implementation is discussed in PCR paras 3.01-3.06 and in PCR Annex 2. Salient features can be summarized as follows.

Road Construction

16. Construction of the Nicosia-Limassol road was the major civil works component (PCR, paras 3.04-3.06 and Annex 2). Problems arose in the start-up period, during contractor prequalification, in the evaluation of bids, aLd in the award of the contract (PCR, 3.06). The contract was awarded after lengthy international competitive bidding to a non-Cypriot contractor. /12 Between March 1979, when the contractor commenced work, and March 1980, there was no Bank Supervision Mission. 113 Disturbing findings in March provoked a second

/12 In March 1979, a Bank supervision mission found that very considerable political problems were experienced in awarding the Nicosia-Limassol contract to a non-Cypriot contractor and these delayed the project. They had been overcome in February 1979 but had arisen again over the construction and supervision of the road works.

/13 Paras 3 and 4 of the March 7, 1980 Aide Memoire state that there was a need to rationalize authorities and duties on the supervision of the contract, but that there were controls and influences being exercised from many quarters. It further expressed the mission's conviction that the relationship between Employer, Engineer and Contractor laid down in the contract was not adhered to, that too little, or too late authority was being exercised by the Engineer, in part because of the controls and influences mentioned above. Bank 6

Supervision Mission in May 1980 which reported that "the situation on this road has deteriorated" (Aide Memoire, May 9, 1980, pars 2) /14. This, plus the fact that the construction contract was found to be 50% behind target progress, provoked a letter, dated June 24, 1980, from the Bank to the Minister of Communications and Works, urging the Government to take appropriate steps so that the contractor would draw up a new plan of work and that better supervision be instituted.

17. The latter point was particularly significant because Bank Missions found that the MCW did not supervise and manage the contract in a satisfactory manner. In an effort to overcome this, two part time advisers -- one for the Director General ("The Employer") and one for the Director ("The Engineer") -- were appointed, plus the UNDP-funded Resident Engineer on site. In addition, a team of consultants were put in place to act as advisers on the contract to "The Engineer". Under the Conditions of Contract, the duties and responsibilities of the "Resident Engineer" and of the "Engineer" are clearly defined, except that, in this case, the "Engineer" found himself unable to operate freely. The appointment of a part time adviser to the "Engineer" to strengthen his hand in the case of difficulty was appropriate, and the same could be said of the part time advisor to tte "Employer".

18. Relations between the Government and the contractor deteriorated, the contractor experienced liquidity difficulties to the extent that he was unable to perform and, in agreement with the Bank, the contract was forfeited on April 3, 1982. As of April 1986, claims submitted by the contractor have still not been settled and this renders problematic the estimation of the total project cost (paras 24-25 and Annex 1, below).

19. Bids were invited for the uncompleted works and a iew contract was signed on September 23, 1982. The PCR (Annex 2, parss 4-7) describes the complicated arrangements which preceded and followed the award of the new contract and notes (Annex 2, para 7) that the contractor offered to finarce the construction of two additional lanes between km 39.2 and km 60.0. The offer was accepted by the Government and agreed to by the Bank. However, managerial and control problems remained. Throughout the work of the first

staff also found a lack of foresight at the overall control level by the Engineer, in contrast to the PWD's field supervision, which it saw as technically competent. The mission further expressed its apprehension about the risk of agreements with the Bank and the latter's Guidelines for Procurement being contravened.

/14 The same paragraph reflects the Bank mission's views as expressed towards the Borrower that, inter alia, the authority of the Engineer was minimal; that he should use (and must be free to use) his authority in administering the contract; that, at the time, this was not the case; and that over-deliberation at nearly all administrative levels of the project was delaying the execution of the work. 7 contractor and even after the second contractor had been appointed, there was intervention on site by the "Employer", the "Engineer" (who also appointed an "Engineer's Representative" and an "Assistant to the Engineer"), the consultancy team, the MCW Control Section, the Government Auditor and, at times, the Council of Ministers. The fact that the road was completed to good standards, and was opened to traffic in September 1984, is a tribute to the sensible application of npecifications carried out by the site staff and to the contractor's good performance.

Studies

20. Studies conducted under the First Project are discussed in the PCR (para 3.02). Recent legislation permits increased maximum axle loadings. This makes it even more important that the relevant laws be observed. However, control of overweight vehicles is not as effective as it should be. At present, there is only one permanent vehicle weighing station alongside the Nicosia- Limassol highway and it is sporadically manned, because sufficient funds have not beet, made available to permit full time operation. /15 Given that legislation is in place and that the Courts have demonstrated their willingness to impose suitable penalties, the small amount of extra funding required should be provided by the Government for the effective control of vehicle weights.

21. When both the First and the Second Highway Projects were being prepared, comments were made on the division of responsibility for roads among various arms of government, /16 and studies were carried out to suggest improvementr. The changes made in the Ministry of Communications and Works (MCW) durin the two projects have been in the right direction, and the Project Unit has operated effectively. Ovdrall responsibility for the highway system continues to be shared among MCW, the Ministry of the Interior and other bodies. This is not necessarily undesirable, since the MCW does not really have the capacity to handle all rural roads in the country. Besides, small rural roads, now administered by the Ministry of the Interior, fulfill a primarily social function and the District Administration is probably more familiar than the MCW with what needs to be done in the field of rural communications. What is important is that the various bodies should agree on common standards and procedures. The Region notes that a policy has now been adopted that once standards have been agreed upon, and after a road has been shown to carry a significant volume of traffic, it is to be transferred to MCW for maintenance.

/15 The Borrower notes: "The comment that the weighing station is sporadically manned, is not correct. The weighing station operates five days a week on a 6-hour basis, covering morning or afternoon periods on alternate days."

/16 First Highway Project SAR, para 3.08; Second Highway Project SAR, paras 3.07-3.07. 8

22. Funding considerations led to the decision to build the Nicosia-Limassol highway to two-lane standard although the analysis showed that a four-lane facility would be justified, at least on part of the length. Additional finance became available and a four lane divided highway was, in fact, constructed. Bank documents note that the Kuwait Fund participation of about US$3.0 million, enabled the 75 km Nicosia-Limassol road to be constructed to four-lane standards over the 50 km for which this standard is economically justified. The same documents also note that the Bank project which was presented to the Board on November 30, 1976 and signed on December 13, 1976 was for a two-lane highway throughout but financial constraints at that time dictated the testriction of the construction to two-lane standards throughout, which made good economic sense. The preceding argument is hard to follow. Either four lanes were economically justified, or they were not. If they were, and financial constraints prevented their construction, two lanes cannot be said to make "good economic sense". Given the radical changes that took place in Cyprus after 1974, traffic forecasting imperfactions may be excused. But they must be acknowledged. Para 2 of the June 3, 1977 Note of the President to the Board on a "Proposed Change to Project Description" reads as follows: "As indicated in the President's Report (R76-266 dated November 18, 1976) for the Second Project, its main component - the Nicosia-Limassol highway - would have been justified for immediate construction with some four-lane sections. However, because external co-financing for a highway with four lanes was not forthcoming at the time, and Cyprus would have found it difficult to provide both the incremental foreign and local costs of such a highway from its own resources, the Government and the Bank agreed that the construction should be limited to two lanes, although it had been designed to include the justified four lanes when sufficient financing became available. This was the background against which the Executive Directors approved this project." It therefore seems from the above that, in this case, economic analysis has been sufficiently elastic to accommodate the volume of any available funds. On the other hand, pavement design on this road was kept to minimum standards, with the result that higher traffic flows and heavier axle loadings than anticipated 9 are now causing the problems which had been predicted quite some time ago./17 The Region notes that these lessons have been learned and new designs (e.g., Limassol By-pass and Larnaca-Nicosia Road) are significantly stronger.

Training

23. The training components included in both projects are treated only briefly in the two SARs, /18 and the PCR contains no comment on what was achieved. A training team was sent to Cyprus from a university in the United Kingdom and a series of training sessions for MCW staff was conducted. The exercise was well received and MCW staff are appreciative of the instruction given. However, there seems to have been no assessment of training needs before these courses were mounted and it is fortunate that the type and level of training offered was more or less appropriate. Particularly valuable training has been provided by the expatriate Resident Engineer on the Nicosia-Limassol road, who has built up a sound core of MCW and temporary staff able to supervise and control contract works effectively. The continuing effectiveness of trained staff would require a professionally oriented personnel policy.

/117 Para 4 of the Aide Memoire prepared by the May 1978 Supervision Mission reads as follows with respect, as the Region points out, to the old roads " Very recent traffic counts and axle load measurements on the Nicosia-Limassol road show a considerable increase in traffic, and, more seriously, a large increase in axle loadings with consequent road deterioration in recent months. The Bank would appreciate receiving as soon as possible a brief report analyzing these latest traffic and loading figures..." The record does not contain any evidence of the Government's response to this request. However, the Aide Memoire prepared by the February 1980 Supervision Mission notes the following (page 4, first paragraph): "The mission understands that on all these matters (road user charges, vehicle dimensions and road controls), the Government will submit a report to the Bank by May 1, 1980, of their proposals for discussion, not only on Government policy for road charges, dimensions and loadings but also on any revisions that might be necessary to the pavement design of the Nicosia-Limassol road. This last matter is extremely urgent." The Borrower notes: "The comment 'it is however unfortunate that the pavement design of this road was kept to minimum standards .... some time ago', should be mainly attributed to the services of the consulting firm which prepared the feasibility study (which included, inter alia, axle load surveys, traffic flow projection) and the final engineering designs."

/18 SAR, First Highway Project, para 4.10. SAR, Second Highway Project, para 4.20. 10

Costs and Economic Rate of Return

24. Although other Cypriot agencies have prepared PCRs, MCW did not prepare such a document. The PCR prepared by the Regional staff does not compare estimated and actual costs for the two projects. An attempt might have been made to provide, on the basis of reasonable assumptions when firm data are not available, some indication of what was intended, what was accomplished, and at what cost. PPAM Annex 1 is the summary of such an attempt made in the course of the audit.

25. At appraisal, the economic rate of return for the First Project was estimated at 53% (SAR, para 5.07 and Table 9). Since construction of the Nicosia-Morphou road did not take place and proceeds of Loan 904-CY were, to a large extent, reallocated to the Second Project, recalculation of an economic rate of return for the First Project would be pointless. For the Second Project, the PCR (paras 4.01-4.10) contains a re-evaluation of the first year rate of economic return of the Nicosia-Limassol road (27% as against 26% estimated at appraisal). Despite the fact that the cost estimate used (US$49.2 million) did not include the cost of consultant supervision and may be further increased, depending on the final outcome of the first contractor's claims, the road's economic justification is likely to be confirmed.

II. FINDINGS AND RECOMMENDATIONS

26. After 1974, the Bank made a crucial contribution in the mobilization of long term financing for Cyprus from other sources. The Government recognizes that given the relatively high per capita income (US$3680 in the early 1980s), Bank lending has continued so far because of the special circumstances prevailing in the country, and can be expected to taper off. Cyprus has demonstrated its ability to raise significant financing from commercial and other sources and the Bank's share in tocal debt outstanding and disbursed declined from 51% in 1975 to about 10% at the end of 1984.

27. In the road sector, the Bank has been trying to foster an efficient mechanism for planning, construction and maintenance. Improvement efforts are at times frustrated by extraneous considerations (paras 16-18, above) and this has contributed to penalties being incurred. For example, on the Nicosia- Limassol road (and notwithstanding the Region's comment that, apart from institutional factors, delays and cost increases were d.te to problems peculiar to the first contractor and major design changes, from a two lane road to a four lane divided highway), the penalties include major delays, major cost 11 increases /19, and tvebling of the Government's contribution (from US12 million (SAR, para 4.14) to US37.3 million). As far back as 1980, the Bank pointed out to the Government that these developments were likely to occur but no action was taken by Government to remove the root causes. /20

28. It is the audit's judgment that, in this specific case, the various committees set up, in accordance with Government's administrative procedures, have led to unnecessarily protracted bidding processes and contract negotiations, with resultant costs.

29. The Ministry of Communlcations and Works is adequately staffed. However, the establishment of committees does not expedite solutions. /21 As the economy becomes more integrated within the international environment, personal influence is bound eventually to lose p>wer either to delay decisions or to shift them in an agreeable direction. What is urgent now is to speed up administrative processes and to make them more responsive to the general welfare.

30. Recently, changes in contract documents have significantly reduced the powers of the Resident Engineer in controlling works. Any decision, except the most routine, now has to be referred to MCW headquarters. Considering the problems associated with decision making in the civil service, the effect of this change is that important decisions on contract control and management will not be made, or will be made after significant delays. Contractors will be able to use this situation to their advantage and the end result will be increased cost of the works for the country. The Bank should insist that in Bank-financed projects, adequate means are provided to ensure that the

/19 cf., PPAM, Annex 1.

/20 The first paragraph of the Aide Memoire prepared by the May 1980 Supervision Mission reads as follows: "...Overdeliberation at nearly all administrative levels of the project are delaying the execution of the work... Proper solutions must of course be found for contractual problems, but the time taken to find these should not impede the progress of construction... The consequences of delay are clear; the road will cost infinitely more, as a result of construction overheads and possible claims, inflation and the loss of enormous benefits to road users on this congested road. On the subject of claims, it is prudent to bear in mind that in arbitration there are generally no winners and no losers."

/21 The Borrower notes: "Th* setting up of various committees is in accordance with the Government administrative procedures and do not really aim at diffusing responsibility but at scrutinizing the various issues." 12 appropriate decisions are taken quickly on the basis of good technical advice./22

/22 The Borrower notes: "Recent changes in contract documents seem to have reduced the powers of the Resident Engineer in controlling works, and now certain decisions have to be referred to MCW headquarters. However, a committee (consisting of two Civil Engineers and a Quantity Surveyor) is working successfully by reviewing and forwarding for approval through the proper channels all variations, by fixing new rates, evaluating claims and offering independent opinion on disputes and, if needed, advising the Engineer on contractual matters. The new procedure has proved to function efficiently for quick decision making and settlement of problems." 13

ANNEX 1

PROJECT PERFORMANCE AUDIT MEMORANDUM

CYPRUS: FIRST AND SECOND HIGHWAY PROJECTS (LOANS 904-CY AND 1344-5-CY)

Project Components; Tentative Total Cost Estimates

The following estimates have been compiled from information in the SARs, from PCR data, from file records, and from information gathered during the February/March 1986 audit mission to Cyprus. Where no firm data are available, assumptions have been made and the reasoning behind them is summarized in endnotes.

Given the uncertainties surroinding the final awards to be made for the claims put forward by the first contractor of the Nicosia-Limassol road, as well as the lack of precision concerning the expenditures incurred for supervision and studies, "actual" costs should be regarded as highly provisional. 14

(US$ thousand)

HIGHWAYS I Estimated Cost Actual Cost

CONSTRUCTION Nicosia-Morphou road 7,200 433 /1 SUPERVISION Nicosia-Morphou road 430 -- /2 STUDIES Highway Planning and Organization Study /3 190 190 Feasibility Studies and detailed engineering for Nicosia-Limassol road 440 440 and for Nicosia bypass /4 460 460 Road User Charges and Vehicle Regulation Study /} 50 50 Feasibility studies of Larnaca and Limassol Ports /6 ---- 82 7 TOTAL STUDIES 1,140 1,222 TRAINING /8 35 26/9 CONTINGENCIES 1,690 ----

PROJECT TOTAL (Rounded) 10,500 /10 1,681 /11

HIGHWAYS II

CIVIL WORKS Construction of the Nicosia-Limassol road 17,040 ---- Contingencies 6,280 ---- First Contractor /12 ---- 17,730 Force Account Work /13 ---- 4,110 Second Contractor (4 contracts) /14 ---- 23,000 Additional Works ---- 500 Flyovers, junctions, etc. ---- 4,300 TOTAL CIVIL WORKS 23,320 /15 49,450 /16 CONSULTANTS' SERVICES Supervision of the Nicosia-Limassol road ) 1,560 /17 Feasibility Studies: ) Pitaillia Access Roads /18 ) ) Road better,ent program ) 2,020 ) 149 /19 and det. engineering ) ) Limassol traffic study /20 ) 146 /21 Contingencies 410 ---- TOTAL CONSULTANTS' SERVICES 2,430 1,855 TRAINING OF MCW STAFF /22 25 /23 12 /24

PROJECT TOTAL (Rounded) 25,750 /25 51,317 /26 15

Endnotes

/1 Compensation to the Nicosia-Morphou road contractor (PCR, Annex 2, Attachment 3). However, PCR para 2.06 says that $400,000 were paid for compensation.

/2 Actual cost not available. Annex 2, Attachment 3 of the PCR gives a total figure of US$1,206,202.69 for "Consultants Services". This may or may not include supervision of the very limited work that was carried out under the First Project.

13 Satisfactorily completed by consultants in 1973 and retroactively financed by the Bank from the loan proceeds (Supervision Report, June 1978). Actual cost presumed to be the same as the estimated amount.

/4 Completed (Supervision Report, June 1978). Actual cost presumed to be the same as the estimated amount.

/5 Completed. Final Report dated March 1978 (Supervision Report, June 1978). Actual cost presumed to be the same as the estimated amount.

/6 Added to the project scope when construction of the Nicosia-Morphou road was abandoned. The Revised Financing Plan, May 1980, (Annex II, Supervision Report, dated June 2, 1980) shows an estimated cost of $220,000. Study completed in November 1975. (Supervision Report, June 1978).

17 Actual cost from PCR, Annex 1.

/8 Overseas training program for PWD staff completed in December 1977 (Supervision Report, June 1978).

/9 PCR, Annex 2, Attachment 3.

/10 SAR, para 4.13, Table.

/11 Probably an overstated total, given the uncertainty surrounding actual costs of the Studies component.

/12 Work carried out between February 1979 and April 1982, when the contract was forfeited.

/13 Work carried out by PWD between April and November 1982.

/14 Work carried out between October 1982 and September 1984.

/15 For a two lane road. 16

/16 For a four-lane road. Not including outstanding claims put forward by the first contractor. Actual costs fro,, PCR, Annex 2, Attachment 1. Cypriot pounds converted to US$ at a weighted exchange rate of US$1.87 to one pound.

/17 Figure given in the Revised Financing Plan (Supervision Report, May 1980). Annex 2, Attachment 3 of the PCR gives a figure of $1,472,876.81 for "Consultants Services" without specifying what percentage went for works supervision.

/18 The Revised Financing Plan (Supervision Report, May 1980) gives a cost estimate of $390,000.

/19 Actual figure from PCR, Annex 1.

/20 The Revised Financing Plan (Supervision Report, May 1980) gives a cost estimate of $220,000.

/21 Actual figure from PCR, Annex 1.

/22 SAR, para 4.03. However, neither the table under para 4.14 nor Table 10 give any cost estimates.

/23 SAR, para 4.20. Not clear whether titis was taken into account in the SAR summary Table 10.

/24 Figure given in Annex 2, Attachment 3 of the PCR. The Revised Financing Plan (Supervision Report, May 1980) gives a figure of $30,000. No explanation in the record concerning the program reduction.

/25 SAR, para 4.14, Table.

/26 The total is understated primarily because: (a) it does not include outstanding claims; (b) lower rather than higher figures have been used for all study components; (c) lower rather than higher figures have been used for works supervision; (d) no account has been taken of "free services" provided to the project, such as UNDP financing for the Site Engineer. - 17 -

PROJECT COMPLETION REPORT

REPUBLIC OF CYPRUS

FIRST AND SECOND HIGHWAY PROJECTS

(LOANS 904-CY AND 1344-CY)

I. INTRODUCTION AND BACKGROUND

1.01 Due to the curtailment of the First Highway Project as a result of the events of 1974, and its incorporation in the Second Highway Project, this report largely treats the implementation of the two projects as one.

1.02 The strategy and practice of transport development in Cyprus was keenly influenced by the de facto geographical and political separation of the country into the Greek Cypriot and Turkish Cypriot sectors. The World Bank's participation in the transport sector has been focussed towards that part of Cyprus administered by the Cypriot Government.1 ' In 1974, the Turkish intervention made earlier economic planning operations and the major component of the appraised First Highway Project (Loan 904-CY) largely redundant.

1.03 As a result of the events of 1974 there have been significant changes in the structure of the economy and the transport system. There is virtually no traffic between the two separately administered sectors, Nicosia International Airport is closed and the former major port of Famagusta, which previously handled 80% of Cyprus' sea-borne traffic, is controlled by the Turkish Cypriot authorities and is not available to serve the whole country. Consequently, the Government has directed its efforts towards reorientating the transport system to meet the needs of the area under its control. An international airport has been developed at Larnaca and another near Paphos, mainly for tourists, was opened in 1984. Limassol and Larnaca ports have been expanded (World Bank Loan 1540-CY) to serve traffic including that previously passing through Famagusta. The highway system has had to be developed to cater for the switch of traffic away from the Famagusta/Nicosia/Morphou axis to the Nicosia/Limassol/Larnaca and

1/ The use of the term Government throughout this report should be taken to mean the internationally recognized Government in control of the Southern and Western part of Cyprus. -18 -

Paphos corridors (see Map). At the same time the intensity of use of many rural roads has increased following population shifts stemming from the events of 1974 and development efforts to make good the loss of areas now in the Turkish Cypriot controlled zone. The 1974 events aborted the Third Five-Year Plan (1972-76) and this caused the preparation of four Emergency Economic Action Plans (1975-76, 1977-78, 1979-80 and 1981-86). Judged against 4ndicators of economic growth these plans have been largely successful, and the First and Second Highway Projects (Loans 904-CY and 1344-CY) as well as the ongoing Third Highway Project (Loan 2128-CY) and the Second Ports Projects (Loan 1540-CY) have made major contributions to meeting the country's economic and bocial objectives as set out in the emergency plans.

1.04 More specifically, the Government's objectives have included:

(a) The establishment of an efficient transport system in both public and private sectors that will serve the economic development of Cyprus, including cost effective urban land use, and which will remain valid to the country's needs in the event of a relaxation in the division of the island;

(b) the introduction of an equitable system of road user charges which will provide a robust resource base for the support of highway improvement and maintenance; and

(c) the development of appropriate institutions in the highway sub-sector leading to (i) control of vehicle overloading; (ii) formation of an effective highway maintenance organization; and (iii) improvement in the sector planning and management capability of the Roads Department and in its responsiveness to transport needs.

The World Bank has supported and should continue to encourage the pursuit of these objectives.

1.05 The completion of the First and Second Highway Projects was achieved during difficult times. The Second Highway Project experienced cost apd time overruns, nevertheless, physical and institutional objectives were largely met. This was due to a great extent to the determined efforts by the Cypriot authorities and to flexibility on the part of the Bank in adjusting the uses to which loan proceeds could be applied (para. 2.06).

II. PROJECT PREPARATION, OBJECTIVES AND COMPONENTS

A. The First Highway Project

2.01 Based upon the 1966-70 Road Construction Plan prepared by the Cyprus authorities, and a review of highway sector needs by Bank staff in 1967, the possible objectives to be addressed in a first Bank highway project were identified. These were: -19 _

(a) rationalization of the roads administration (see Annex 5); including staffing and equipping the Roads Department of the Public Works Department (PWD) so that proper design and testing procedures could be undertaken;

(b) the preparation of economically based road design standards;

(c) the use of contractors, as opposed to force account, and procurement by International Competitive Bidding (ICB);

(d) the introduction of regular highway planning exercises which would lead to the development of a 10-year indicative and a 5-year detailed road investment plan and a rolling five-year road maintenance plan; these would include the study and implementation of high priority road projects which at that time included the Nicosia-Morphou and Nicosia-Famagusta ropds; and

(e) the employment of consultants to assist in implementing this program;

2.02 Before appraisal the Cyprus Government started to tackle these objectives, including the completion of a feasibility study for the Nicosia-Morphou road and the preparation of a 1971-81 Highway Investment Plan and proposals for the reorganization of the Roads Department. A Bank preparation mission, visited Cyprus in November 1969 to review preparatory work completed by Government (using consultants) and generally found that it formed an adequate basis for appraisal of an issue orientated highway project. However, Government was uncertain about requesting Bank finance, due to fears that it might be inflationary and, also, due to a reluctance to accept World Bank Guidelines on Procurement. Nonetheless, in 1970, the Government requested the Bank to prepare a highway project that would, inter alia, address the objectives listed in para. 2.01 including consultant services to assist with: (i) the design and bidding of the Nicosia-Morphou road; (ii) feasibility studies of the Nicosia-Limassol and Nicosia-Famagusta roads; and (iii) the preparation of a long term highway development plan and a review of the PWD's organization. The First Highway Project (Loan 904-CY of US$5.4 million) was subsequently appraised in September/October 1972 with an estimated cost of US$10.5 million and foreign component of US$5.4 million. It had as main objectives: (i) the institutional strengthening of the Ministry of Communications and Works (MCW) and its Public Works Department (PWD); (ii) the upgrading of the Nicosia-Morphou road; (iii) studying road user charges; and (iv) feasibility studies of a number of important roads. An important consideration was that investments should be designed to remain economically viable should the country be reunified. Unfortunately, shortly after implementation started, the reverse took place and the events of July 1974 led to the suspension sine die of the work on the Nicosia-Morphou road, the road user charges study and the feasibility study of the Nicosia-Famagusta road. After revision of the project's objectives (para 2.06) Loan 904-CY was fully disbursed and the loan closed in August 1980. - 20

B. The Second Highway Project

2.04 The construction of the Nicosia-Morphou road and the feasibility study of the Nicosia-Famagusta road were frustrated by the events of July and August 1974 which made the development and reorientation of the transport infrastructure more difficult and pressing. This was the genesis of the Second Highway Project.

2.05 The Nicosia-Limassol road feasibility study had been started under the First Highway Project and a draft study was completed in May 1975. It was suggested that the Second Highway Project should, inter alia, include the construction of this road. It was decided jointly by the Government and the World Bank that although the feasibility study showed that a large part of the road should be build to a four lane standard, initial construction should be to only two lanes due to financial constraints. As additional funds become available the road should be upgraded where this was shown to the economically viable. The project was finally appraised in June 1976 and comprised:

(a) the construction and supervision of (i) the first two lanes 1/ of the Nicosia-Limassol highway (about 75 km), (ii) the first sections of a Limassol bypass, (iii) a connecting link to Limassol (about 10 km); and (iv) connecting and access roads between the old and new highways; this, with contingencies, was estimated to cost US$23.32 million of which US$11.92 million was foreign exchange;

(b) feasibility studies for: (i) improvements to the Limassol-Paphos highway (about 70 km); (ii) a connection between the new Nicosia-Limassol highway and Larnaca (about 30 km); and (iii) detailed engineering of other economically justified road sections;

(c) appropriate (but undefined at appraisal) studies relating to the transport sector;

(d) an urban traffic study of Limassol; and

(e) training for MCW staff.

1/ The feasibility study had shown that a new road of partly four and partly two lanes was economically justitied but owing to a shortage of finance it was decided to proceed initially with only two lanes. - 21-

2.06 The appraised project had an estimated total cost of US$25.7 million. The Bank loan was for US$10.0 million which covered 39% of total project cost and 73% of the estimated foreign exchange cost and project completion was scheduled for October 1981. In November 1976 the Nicosia-Morphou road contract and Nicosia-Famagusta road study components of Loan 904-CY were cancelled and in June 1977 the World Bank Board of Executive Directors agreed to reallocate part of the proceeds of Loan 904-CY so that they might contribute to the finance of the Nicosia-Limassol road. After allowing for about US$0.4 million compensation to the Nicosia-Morphou road contractor, the proceeds of Loan 904-CY were devoted to (i) continuing the First Highway Project's studies and training objectives; (ii) design of Nicosia/Limassol Highway (Loan 1344-CY); and (iii) financing part of the construction of the Nicosia-Limassol road with about US$3.7 million and (iv) feasibility studies for port expansion at Larnaca and Limassol which provided the basis for the Second Ports Project (Loan 1540-CY).

Project Preparation by Consultants

2.07 Most work relating to preparation of both projects was undertaken by consultants, the performance of whom was satisfactory. There were no unusual problems to contend with and, hence, with the exception of highway maintenance weaknesses (para. 5.05) special loan covenants were not required.

III. PROJECT IMPLEMENTATION AND COST

3.01 The Second Highway Project, supported by the proceeds of the amended First Highway Project, (para. 2.03) was physically completed in September 1984, some three years after appraisal estimate. The closing date of the Loan was April 30, 1984. Disbursements continued for commitments made before that date so that the loan proceeds would be fully disbursed and the loan account was closed in December 1984. The original cost estimate of US$25.7 million, including contingencies, was exceeded by 88.7% to about US$47.0 million: Government met the cost increase. Final costs are unlikely to be available until complex claims relating to the Nicosia-Limassol road are resolved.

3.02 The studies under both projects, except those cancelled as a result of the events of 1974, were successfully completed and the reorganization of PWD was partly implemented.

First Highway Project Studies

(a) the Road User Charges and Vehicle Registration study re-started in January 1976 and the draft final report was prepared in September 1976. Government commented on the report in December 1976, but it was not until May 1980 that the Council of Ministers approved the progressive elimination of the subsidy on diesel fuel, and the revision of vehicle charges so that they reflected more accurately the damaging effect of different vehicle types. The implementation of this policy was agreed at negotiations of the Third Highway Project (Loan 2128-CY); _22. -

(b) the Roads Department reorganization study was completed during project preparation. The Government started implementing the study's recommendations during 1977 and has continued to develop the planning capabilities and resources of the Roads Department; and

(c) the Larnaca and Limassol ports feasibility studies were completed in April 1977 and led to the 1978-82 master plan for ports. This plan formed the basis for the Bank-financed Second Ports Project (Loan 1540-CY).

Second Highway Project Studies

3.03 Studies under the Second Highway Project (Annex 1) were successfully completed but delayed by the long time taken to agree terms of reference, to establish a short-list of consultants and to call for proposals. In most cases the "short-lists" were so long as to be unwieldy. Short-lists of about five firms would have been adequate.

(a) The study of the Nicosia-Paphos road assessed the need for improvements and, whilst certain sections were justified, it was not considered to be of high priority in the economic conditions pertaining at the time: this study is, however, being updated by the PWD under the Third Highway Project;

(b) the Limassol Traffic Study did not lead to any important changes in Limassol at the time but was instrumental in developing proposals for the Limassol by-pass which is being built under the Third Highway Project with KFAED finance; and

(c) the study of rural roads included a detailed inventory, economic analysis of proposed improvements and the introduction of a project evaluation methodology which continues to be used and developed by PWD: the results of this study provided the preparation for the rural road improvement programme in the ongoing Third Highway Project.

3.03 During implementation of the Second Highway Project several changes were made concerning the project components. The study undertaken by consultants at the request of the Government, showed that there was no immediate need to construct the Limassol by-pass. Similarly, bearing in mind the fluidity of the land-use situation and pressure on resources, it was agreed that a feasibility study of a proposed link between the new Nicosia-Limassol road and Larnaca would be premature. Consequently, these two items were dropped from the project and the funds allocated to the other studies and Nicosia-Limassol road design. The major change however, concerned the construction of the Nicosia-Limassol highway.

Nicosia-Limassol Highway

3.04 Project preparation had shown that construction of a new 75.7 km Nicosia-Limassol road, including 15.7km from Nicosia and 39.2 km from Limassol built to four lane standard, was economically justified. Since - 23 -

financing was limited, the Government and the Bank agreed that initially only the first two lanes would be constructed, and that the additional two lanes, where justified, would be built when other external financing became available. The appraisal cost estimate and implementation schedule did not take the additional two lanes into account. When the Kuwait Fund for Arab Economic Development (KFAED) agreed to participate in the finance of the road (April 1977) and the balance of Loan 904-CY was reallocated in June 1977 (para. 2.06), it became possible to increase the construction standards on priority sections to four lanes. Following contract forfeiture by the ori6inal contractor 1/ the contract was rebid and the new contractor, in addition -o completing the original scope of work, financed upgrading the remaining 20.8 km section to four lanes. The details of the evolution of the construction standards and associated costs and financing are given in Annex 2.

3.05 The major part of the project cost increase was confined to the Nicosia-Limassol road, and can be explained by: (a) the difficulties experienced by the original contractor; (b) the forfeiture of the contract by the original contractor and rebidding of the contract; (c) higher construction standards; and (d) inflationary effects of the longer construction period. Nonetheless, despite the vicissitudes that beset the construction of the Nicosia-Limassol highway, the completed project, which was opened in September 1984, is of good engineering standard. Final costs will not be available until complex claims are resolved. Estimated costs of the completed four lane road and ancillary works are Cf26.03 (US$49.45) million compared with the appraisal estimate for a two lane road of CE9.66 (US$23.28) million. The higher cost is considered reasonable in view of the additional works and the increase of about 78% in the Cyprus GDP deflator during construction. Provisional disbursement details are given at Annex 3. Although a timely and smoothly executed contract could have led to a lower final cost and a shorter construction period, the final effect of the difficulties encountered should not be exaggerated.

3.06 Implementation problems stemmed from three main sources which are discussed under the relevant headings.

(a) Start-up Delays. Experience with the First Highway Project indicated that the civil works bidding to start of construction could be completed in seven months. In view of the considered urgency of the Nicosia-Limassol road and the immediate availability of the reallocated resources from Loan 904-CY in June 1977, it was reasonable to expect that a similar period would be adequate for the Second Highway Project. Moreover, it was anticipated that the prequalification and bidding process could start immediately upon Board approval. The modifications that took place in June 1977, following the KFAED's agreement to provide parallel finance, were based on existing designs and need not have led to any significant delay. However, the bidding process did not start until March 1978 (nearly five

1/ See Annex 2, paragraph 1 for details. - 24 -

months after loan effectiveness) and, whilst bids were opened in June 1978, the contract award was not made until October 1978. The contract was signed in January 1979 and work started in February 1979, 26 months after Board approval. The actual bidding and contract award process did not take much longer than estimated at appraisal. The delays that took place between Board approval and start of the bidding process were due to:

(i) final engineering design being completed *vy the MCW 12 months later than expected thus delaying the start of the bidding process;

(ii) the Government decision to divide the road into four sections for bidding purposes required 9 months for the preparation and agreement of bid documents, which was not allowed for in the original implementation schedule; and

(iii) prequalification and advertising taking about three times longer than anticipated.

A combination of factors were responsible and should be given adequate weight in future projects. Since the Borrower had to deal with two financing agencies who, although they had similar procedures, had to be consulted at every stage delays inevitably occurred. The final engineering design was a more demanding exercise than MCW personnel were used to tackling with their resources: continued use of consultants would have helped to reduce delays. Finally, there was no clear understanding between the Bank and the MCW on the process of prequalification and the criteria to be employed; more intensive supervision missions could have helped at this time.

(b) Prequalification of Nicosia-Limassol Highway Contractors. A review of the prequalification procedure, undertaken by MCW assisted by consultants indicates that it was adequate. Thirty-eight contracting firms from 13 different countries applied for prequalification. From these, 28 were accepted and divided as follows:

Prequalified for four contracts 14 firms Prequalified for two minor contracts 6 firms Prequalified for one minor contract 8 firms

However, the ratio between annual turnover of and the value of ongoing works recorded by the bidder to whom all four contracts were eventually awarded, should have evinced some comment since it could indicate that a firm is overstretched and may have potential cash flow problems. Particular attention should be paid to this relationship in future prequalifications. - 25 -

(c) Evaluation of Bids and Award of Contract. Details of individual tenders by contract are given in the Summary of Tenders (Annex 4). The contractor, to whom all four contracts were awarded bid prices that were 30.2%, 43.5%, 33.8% and 30.6% below the engineer's estimate for contracts I, II, III and IV respectively. In addition, the contractor offered a further 4% discount. The total bid amounted to CE11,488,491 which was 27% below the second lowest bid of CE15,750,075 by an experienced local/overseas contractor. Since such a major reduction on the engineer's estimate is unusual, the capability of the contractor to carry out the work for the bid price was questioned by both the consultants who carried out the evaluation and MOW. However, although unit rates were very low it was not possible to identify any clear deficiencies. The very low price and award of the contract to a foreign company and presumed favored treatment, provoked an outcry from the Cypriot Contractors' Association. However, taking into account the fact that the contractor had been prcqualified and had put in the lowest bid, it was decided that there was no alternative to awarding all four contracts to the lowest bidder. In fact, the Bank in a letter to the MCW dated November 27, 1978, made it clear that it would only participate in the finance if the Cyprus Government made an unqualified award to the lowest evaluated bidder. Whilst this procedure was undoubtedly proper in terms of Bank Guidelines, hindsight shows that many problems might have been avoided if pre-qualification had been more rigorous and if it had been updated. More details on the award and implementation of the contracts are given in Annex 2.

IV. ECONOMIC RE-EVALUATION

4.01 The re-evaluation is limited to the new Nicosia-Limassol Road. The Second Highway Project's remaining components, whilst of institutional importance, are not appropriate for economic analysis. An economic re-evaluation of the First Highway Project would be unrealistic since construction of the Nicosia-Morphou road was abandoned shortly after it started and the loan proceeds reallocated to the Nicosia-Limassol road and the feasibility studies of the expansion of Larnaca and Limassol ports

4.02 The consultant's report of 1976 on the feasibility of building a new hi-osia-Limassol road, which provided the basis for the project, recommended the construction of the road including: (a) some immediate four-lane sections; and (b) some staged construction leading to four lanes. These recommendations were based on an analysis that assumed (i) a total construction cost of CE 16.45 million; (ii) a base year of 1976; and (iii) a three-year implementation schedule. Rates of return ranged flom 14% to 49.7% 1/ depending on the section of road and estimated traific, and first year (1981) benefits ranged from 6.3% to 55.1%, 1/ again depending on road section and traffic scenario. Accident savings were included in the benefits.

I/ It is suspected that one of these figures may be slightly wrong but the detailed calculations are not available for verifications. - 26 -

4.03 Government decided to postpone the construction of the proposed Limassol by-pass as being premature - this was reflected in the first year return which was significantly less than the 10% test discount rate. Furthermore, a decision was taken to limit the new road to two lanes initially due to financial constraints, and to build the additional lanes as finance became available. Since, however, the Kuwait Fund agreed to provide parallel financing the design was amended to include the sections of four lane road recommended by the consultant. Subsequently, the entire road was built to four-lane standard with the help of contractor finance.

4.04 In this re-evaluation we have divided the road into three sections,

- Nicosia to Dhali Junction - strongly affected by Nicosia-Larnaca and local traffic

- Dhali Junction to Skarinou Junction - essentially Nicosia and Larnaca to Limassol through traffic

- Skarinou Junction to Limassol - strongly affected by Limassol region traffic.

A comparison of 1985 forecasts of AADT in the time of the 1976 basic study and 1985 actual daily traffic counts is:

Nicosia-Dhali Dhali Junction - Skarinou Junction Junction Skarinou Junction - Limassol Vehicle Type Forecast Actual Forecast Actual Forecast Actual

Cars 4,560 8,216 3,795 3,494 4,834 5,641 Vans 1,186 3,935 988 1,734 1,214 2,417 Medium Commercial 1,417 1,542 1,300 831 1,831 1,253 Heavy Commercial 112 46- 111 318 110 547 rases 135 216 95 97 185 219

Total 7,410 14,370 6,289 6,474 8,174 9,897

This figures, inter alia, show:

(a) the growth of traffic between Nicosia and Larnaca (particularly generated by the Larnaca airport) was significantly underestimated: Limassol semi-urban traffic estimates were more accurate;

(b) the apparent underestimate for vans is partly due to these frequently substituting for cars due to certain taxation advantages;

(c) the switch from medium commercial to heavy commercial vehicles due to improvements in vehicle technology and growth in container traffic generated by Limassol port development; and - 27 -

(d) the greater than expected growth in urban and suburban bus services.

4.05 Vehicle operating costs (VOC) have been estimated for the old and new Nicosia-Limassol roads using the methodology described in the UK Transport and Road Research Laboratory's Report No. 723. These revised figures in 1984 prices are as follows:

Estimated Economic Vehicle Operating Costs for The Old and New Nicosia-Limassol Roads, 1984 Prices

Light Light Medium Heavy Cars Com.I Com.II Com. Com. Buses ------(Cyprus Cents per km)------

Old Road Fuel 1.10 1.59 1.59 2.36 3.46 2.41 Depreciation 0.94 1.17 0.87 2.98 7.11 3.69 Lubricants 0.13 0.20 0.20 0.44 0.44 0.44 Tyre Wear 0.27 0.27 0.33 1.70 5.96 0.91 Maintenance Parts 2.24 4.90 3.73 13.79 13.18 1.86 Maintenance Labor 0.56 0.75 0.75 3.24 1.31 0.35 Insurance 0.21 0.25 0.30 0.25 0.25 0.54

Sub-Total 5.45 9.13 7.77 24.76 30.40 10.20 Value of Work Time 0.91 2.63 2.63 3.28 3.38 2.34

TOTAL 6.36 11.76 10.40 28.04 33.78 12.54

New Road Fuel 1.29 1.84 1.84 2.47 3.62 2.43 Depreciation 0.94 1.17 0.87 2.98 7.11 3.69 Lubricants 0.13 0.20 0.20 0.44 0.44 0.44 Tyre Wear 0.09 0.09 0.12 1.42 4.96 0.75 Maintenance Parts 0.91 1.99 1.52 9.03 8.63 0.76 Maintenance Labor 0.30 0.40 0.40 2.27 0.91 0.15 Insurance 0.21 0.25 0.30 0.25 0.25 0.54

Sub-Total 3.87 5.94 5.25 18.86 25.92 8.76 Value of Work Time 0.52 1.59 1.59 2.22 2.22 1.59

TOTAL 4.39 7.53 6.84 21.08 28.14 10.35

% Saving 31% 36% 34% 25% 17% 18%

4.06 The estimated cost of the new road iicluding the contractor financed section is CE 26.03 million (US$ 49.2 million). The cost per kilometer for each of the three sections is estimated at: - 28 -

A. Nicosia-Dhali Junction CE 389,333 1/ B. Dhali Junction - Skarinou Junction CE 315,384 C. Skarinou Junction - Limassol CE 389,333 1/ Average CE 343,857

The divergence in cost is the result of several factors but mainly: (i) the date of the construction and effect of inflation; (ii) engineering, geophysical and terrain factors; and (iii) the incidence of intersections, connecting roads and flyovers.

4.07 Using the 1985 traffic statistics, revised VOC figures (excluding accident costs) and the construction cost estimates given in para. 4.06 the overall first year rate of return is 26.8% with the three sub-sections A, B and C yielding 45.7%, 25.3% and 31.6% respectively. The project is economically justified.

4.08 That the rates of return are higher than those estimated at the time of appraisal is understandable since the first year of project operation is some 4 to 5 years later than was anticipated at the time of appraisal. During this time, traffic grew substantially anG, consequently, benefits were also much higher.

4.09 It is doubtful that stage construction would be economically justified or technically desirable since, although the standard design capacity of 9000 passenger car units (pcu) per day on a 7 meter two-lane road can be exceeded, and frequently is, there is a rapid falling off in efficiency and an increase in VOC's. If the traffic flow on a road in the opening year is already around the 9000 pcu per day level and growing, as it was on the lowest trafficked section of the Nicosia-Limassol road, construction of a two-lane facility, even of improved geometry, would be an essentially short-term remedy. Traffic forecasting is a difficult matter at the best of times and in an unusual situation, such as obtained in Cyprus, the opportunities for error are considerable but the recommended construction programme proposed at the time of the basic study, and confirmed at appraisal, was essentially correct given the available information. However, there is now a growing body of experience that indicates that fine tuning, involved in the stage construction of major facilities, may not be the appropriate policy.

4.10 Insufficient time has elapsed to permit an assessment of the effect of the new road on road accidents.

1/ Owing to incomplete data these have been averaged although, due to earthworks, the cost/km on the section Skarinou Junction to Limassol may be slightly higher. - 29-

V. CONCLUSIONS AND ACHIEVEMENT OF INSTITUTIONAL OBJECTIVES

Highway Reorganization and Rationalization

5.01 During the preparation of the First Highway Project the structure and functioning of the Cyprus highway agencies was investigated in order to assess the organizational modifications that might lead to greater efficiency and responsiveness. The existing organization of highway agencies was found to be fragmented with little in the way of coordinated planning, and the consultant's report recommended inter alia that: (i) the administration of roads under the responsibility of the PWD and the District Administration should be centralized; and (ii) new divisions for planning design, construction and maintenance should be established in this new agency - a reorganized PWD. At negotiations, the Government and the Bank agreed on the implementation of these measures. Although the internal organization of the PWD has been improved, the maintenance and improvement of roads remains fragmented under: (i) the PWD; (ii) the District Administrations; (iii) Local Authorities (villages); (iv) the municipalities; and (v) Development Boards. This is clearly not an efficient arrangement and will be a subject to be addressed under the proposed Fourth Highway Project, following a study currently being undertaken under the Third Highway Project. Nonetheless, the two projects have achieved the goal of establishing a more efficient, robust and responsive Roads Department in PWD including the critically important Project Unit for Road Construction which has continued to function well.

Project Evaluation

5.02 Until the First Highway Project, the economic evaluation of highway works and preparation of strategy plans was not undertaken in a systematic way in Cyprus. The use of economic evaluation techniques was not a specific objective of either the First or Second Highway projects, but the need to undertake detailed feasibility studies as a prerequisite for Bank and KFAED financing demonstrated the value of this approach and encouraged active PWD participation in the consultancy studies carried out under the Second Highway Project. This has evolved further in the Third Highway Project and the PWD has developed a project evaluation division which has undertaken a large part of rural road project preparation and evaluation. This is an interesting example of progress being made in a frequently difficult area by demonstration and active Bank participation, rather than through the use of loan covenants.

Vehicle Construction and Use and Road User Charges

5.03 Urder the First Highway Project, and reiterated in the Loan Agreement for the Second Highway Project, the Government of Cyprus covenanted to carry out a study of road user charges and vehicle weight regulations system and policy. The study, carried out by the consultants, was delayed, owing to the events of 1974, but was satisfactorily completed in March 1976. It confirmed that road user charges more than covered road development and maintenance needs, but highlighted the substantial diesel fuel subsidy (over 70% of pump price) and showed that the taxation levels on - 30 - different vehicles reflected neither the traffic capacity equivalent nor the pavement damaging effects. Following consideration of the report and its recommendations the Council of Ministers, in April 1980, approved: (i) the gradual elimination of the diesel fuel subsidy; (ii) the gradual amendment of vehicle taxation rates so that they would be more closely related to the damaging effect of the diffe7ent vehicle types; and (iii) new vehicle construction and use regulations were to be introduced with an 11-ton single axle load limit which would be gradually raised to 13-tons when the road network was adequately strengthened. Although this represented significant progress there were still problems concerning vehicle overloading a year later but with the completion of new weigh-stations and vehicle testing stations under the Second and Third Highway Projects, the recommendations of the study are being increasingly and effectively implemented.

Highway Maintenance

5.05 Prior to the First Highway Project, the Cyprus highway system was maintained by force account (PWD roads) and contract (DA roads). Whilst the quality of work was generally good, limited budgets prevented sufficient work being carried out and, hence, roads deteriorated rather rapidly. The "Reorganization and Planning Study" consultants, in their report, made recommendations for improvements to highway maintenance and, during negotiations, the Government gave an undertaking that it would establish appropriate standards for routine and periodic maintenance of inter-urban roads and i.nplement these in agreement with the Bank. However, the Loan Agreement 904-CY Section 4.03 only stated "The Borrower shall cause its highway network to be maintained and all necessary repairs thereof to be carried out, all in accordance with sound engineering practices". Taking into account the maintenance situation and the understanding in paras. 3.19 and 6.02 of the SAR, the Loan Agreement wording was inadequate. It is, therefore, surprising that the Loan Agreement 1344-CY was even weaker in this respect. Consequently, the support that could be given to the Public Works Department in its efforts to obtain adequate resource allocations for highway maintenance, was limited. It was not until the Third Highway Project that the Loan Agreement specified that the annual maintenance program should be provided for "review" by the Bank, and that adequate funds would be provided to carry out this program. Thus, although highway maintenance has shown some improvement during the First and Second Highway Projects (in 1980, the maintenance budget was doubled), it is likely that this was entirely due to the initiative of the PWD and good participatory project supervision by Bank staff. It is clear that follow-up projects should pay special and detailed attention to highway maintenance and pavement management. A study addressing this is being carried out under the Third Highway Project and implementation of its recommendations will be the main institutional thrust and a major component of the proposed Fourth Highway Project, to be appraised in September 1985.

5.06 In addition to the matters discussed in para. 5.05, the particular points which the preparation and implementation of these two projects highlight, and which should be given special attention in the future are:

(a) The first Nicosia-Limassol road contract proved the need to pay very careful attention to the prequalification process. In particular, (i) the ratio between the value of the firms' recent turnovers and works on hand; (ii) a clear understanding of local laws governing contracts and the importation of equipment and personnel; and (iii) a carefully verified statement on the availability of resources, especially working capiLal and equipment. Furthermore, should the time elapsed between prequalification and contract award exceed, say, nine months the prequalification should be updated or even repeated.

(b) It may be more appropriate and cost effective, under certain circumstances, to use rather shorter strategy planning horizons than the conventional five years. For example, whilst it is reasonable to expect and to obtain a long term commitment from Government on highway maintenance, it is frequently probably not realistic to expect a detailed plan and financial commitment for more than two years at a time. Thus provision may be made in future projects for the preparation and review of two-year rolling maintenance programmes. Moreover, the same argument may be applied to some aspects of the highway improvement and investment program in a frequently changing economic situation.

(c) There is, nonetheless, a clear need to be specific over highway maintenance, and the system of execution and financing should be clearly agreed at an early stage in project preparation, paid special attention at appraisal and in the SAR and a specific maintenance provision included in the loan documents.

(d) The number and complexity of institutional objectives in one project should be limited and should form part of a long term strategy. Also, it should be expected that as the project develops, new information may come to light that may require modifications to the objectives and schedule and this should be made as easy as possible.

(e) When all the various contracts into which the highway was divided for bidding purposes are won by a single contractor, the contract should be awarded and administered as a single contract, to reduce the administrative and management efforts required for production of monthly certificates. Before forfeiture, monthly payment certificates were made for each of four contracts of the value of work done, variation in price and foreign exchange or twelve certificates per month and these had to be continued to determine the eventual obligation of the original contractor. After the contract to complete the works was awarded to the second contractor, similar certificates had to be prepared for three new contracts, or nine additional monthly certificates.

5.07 In spite of time and cost overruns, and slower than hoped for progress in improving the maintenance system, both projects largely reached their physical (excluding the Nicosia-Morphou road) and institutional objectives in an economic and cost effective way. The main civil works - 32 -

project has greatly facilitated inter-urban communications, the several studies enabled much needed ports improvements to be designed and constructed and institutional procedures which were introduced along with training permitted the preparation and appraisal of the ongoing Third Highway Projnct.

The Role and Contribution of the World Bank

5.08 The Bank's role and contribution extended beyond the provision of valuable transfer of resources at a difficult and critical time in the history of Cyprus. Probably of greater long term importance in laying the basis for a more responsive and economically oriented highway system were the institutional changes started under the project. Particularly important were,

(a) the encouragement of other financiers, in particular the KFAED, to provide additional resources;

(b) the adoption by the Cypriot authorities of international competitive bidding for civil works: however, with the exception of the case of the Nicosia-Limassol road first contract, all contracts have been won by local firms;

(c) progress towards rationalization of the Roads Department of the PWD, including greater attention being given to highway maintenance matters, although much remains to be achieved in this area; and

(d) the acceptance and use by the Cypriot authorities of economically based project evaluation techniques, even though they do not yet have the capability to undertake the analysis and design of complex projects.

These advances have been consolidated in the Third Highway Project and will be further developed in the proposed Fourth Highway Project.

Furthermore, the Government of Cyprus has now adopted a more realistic policy towards the pricing of fuels. These are no longer subsidized aAd are reviewed regularly in relation to general price levels. Consequently, there is increased incentive for the efficient operation of transport and, taken together with other modifications to the system of road user charges, the tax base for meeting highway costs has become more robust. - 33 -

ANNEX 1

PROJECT COMPLETION REPORT

REPUBLIC OF CYPRUS

SECOND HIGHWAY PROJECTS

(LOAN 1344-5-1"Y)

LIST OF STUDIES

Duration Starting Study Man-Months Cost (months) Date

Limassol Traffic Study 25 C78,000 11 October (Local: 15%) 1980 (Foreign: 85%)

Betterment Programme and 38 CE79,500 13 October Pitsillia Access Road (Local: 15%) 1980 (one project) (Foreign: 85%)

Limassol and Larnaca Ports 14.5 C44,000 5 May Feasibility Study (Local: 20%) 1975 (Foreign: 80%) 34 ANNEX 2 Page 1

PROJECT COMPLETION REPORT

REPUBLIC OF CYPRUS

FIRST AND SECOND HIGHWAY PROJECTS

(LOANS 904-CY AND 1344-5-CY)

Details of Nicosia-Limassol Road Contracts Implementation

1. The rather complicated contract history of the construction of the new Nicosia-Limassol road is presented diagrammatically in the attachment 1 to this Annex.

First Contract implementation

2. From the start of work in February 1979 to the forfeiture of the original contractor's contract in April 1982, the Nicosia-Limassol road contrLct was beset with difficulties. The critical problems were:

(a) Equipment: The contractor's low bid was dependent on expeditious project implementation, and the timely availability of his equipment was clearly critical. Two factors appeared to delay this: (i) considerable bureaucratic difficulties with the customs authorities in clearing the equipment at the port of Limassol; and (ii) possible delays in the contractor making arrangements for shipping equipment. The end result was a delay of eight months in the availability to the contractor of his own equipment. During this time not only was the progress of work slower than planned but the inconvenience and cost to the contractor of hiring equipment locally was probably considerable. It is unlikely that the precise nature of the cause of this problem will be fairly established and, under the conditions, the only obvious and practical lesson to be drawn is the importance, during prequalification and contract award, of: (a) making sure that equipment import arrangements are clearly understood; and(b) a thorough verification is made of the contractors' equipment availability at prequalification and possibly aa independent investigation as part of the contract award process.

(b) Supervision: Contract supervision was inadequate on two counts. First, it took a considerable time to establish the supervisory team, which was headed by a member of MCW assisted by two expatriate engineers and with consultants acting as advisors, and this naturally led to a diffusion of control and the slowness in problem solving. Second, although the contractual obligations of the client, engineer and contractor had been clearly laid down, these were not adhered to and the engineer had to suffer frequent political and non-professional interference which also affected proper control and problem solving. Technical supervision by the PWD was competent. From an overall point of view, the inadequacies of ANNEX 2 - 35- Page 2 supervision led to an intensification of problems and contributed to progressively later delays in project implementation, leading to considerably increased costs, claims and delayed benefits. In future, precise arrangements for project supervision shoule be made at the same time as the bidding process.

(c) Financial. Although during the first five or six months of the contract, work was delayed owing to difficulties over the importation of equipment and in the re-siting of utilities, it is unlikely to have been the only cause of the large project delays. One is led to the conclusion that a major cause was the contractor's weak cash flow due, in part, to the company: (i) being overstretched in relation to resources; (ii) having bid an unrealistically low price; and (iii) having contractual problems in other regiono. The serious position of the contract was recorded each month in the consultant/MCW progress reports but the only action taken, until the invoking of forfeiture through Clause 63, was admonition and expressions of hope that matters would improve. Should such a situation arise in the future more positive early action should be taken.

Implementation of Second Nicosia-Limassol Highway Contract

3. Following implementation of the Contract Clause 63 and the forfeiture of the contract in april 1982, it was decided that the completion of sections at the Nicosia and Limassol ends of the road would be carried out by PWD by direct labor. The estimated cost of this work was US$4.6 million in April 1982 equivalents. The work was undertaken satisfactorily.

4. The center section of about 50 km, following suitable design and bidding document modification, was divided into three separate contracts and advertised for ICB :.--ong the originally prequalified contractors. This procedure was adopted to save time. In view of the earlier experience, it may have been advisable to update the prequalification but, in the event ten firms (5 foreign and 5 local) responded and seven tenders were received in July 1982.

The engineer's estimate for these contract sections were: CE million US$ million

Km 20.197 to km 37.30 4.6 9.5 Km 37.30 to km 53.065 5.7 11.8 Km 53.065 to km 69.48 2.5 5.2 Total 12.8 26.5

The estimated contract period was 16 months and the Bank agreed to extend loan closing to April 30, 1984, and, consequently, recommended rclucing the disbursement percentage to 25% in order that the remaining US$5.7 million loan balance might be extended over the entire construction period.

5. The bidding process was completed between April and July 15, 1982 when bids were opened. It was made clear during the bidding process that whilst the successful contractor would be able to hire the original ANNEX 2 - 36- Page 3 contractor's reconditioned plant, this would not be a consideration in the bidding process and would not absolve the contractor from providing adequate plant and equipment. The lowest tender for all three contracts was a Cypriot joint venture with CE10.38 million (US$21.5 million), 19% lower than the engineer's estimate. It should be pointed out, however, that the prequalification of the local joint venture for all three contracts was conditional upon the physical and financial support of their larger international company. After evaluation of the contract award procedure the Bank confirmed that it had no objection to the award of the three contracts to the joint venture on August 13, 1982. The contract was signed on August 11, 1982 and countersigned by the international company; mobilization started immediately with work beginning within the 80-day period. Clearly useful lessons had been drawn from the first contract experience and were put to good use in this contract award.

6. Supervision of the contract, which had previously been carried out by PWD engineers with the full time assistance of a team from the consultant, supported by occasional specialists, was modified. The MCW proposed that, in view of the experience gained under the previous contract, PWD staff, aided on a full time basis by a resident engineer seconded from the British Ministry of Transport and financed by UNDP, would be fully capable of supervision and control. In addition, these staff would be used to analyze and to report on the aftermath of the original contract and its forfeiture. Consequently, the full time consultancy services were dispensed with from December 1, 1982, although arrangements were made for the consultants to provide assistance as might be required from time to time.

7. Following the award of the contract to the joint venture, the contractor suggested an increase in the proposed construction by adding two additional lanes (i.e. four in total) between km 39.2 and km 60.0 (Skarinou Junction to Dhali Junction). The suggested price of these additional works was based on net contract rates, less a discount of 5% on works up to sub-grade level. Furthermore, the contractor offered to finance these works with repayment over five years and the foreign exchange element being secured externally. The estimated cost, excluding financing costs, was CE3.0 million and the additional contract period required was to be 4 months. The Governmen' informed the Bank that recent traffic studies showed that a four-lane standard would be justified economically and they proposed, therefore, to negotiate the additional works with the contractor. The Bank, taking into account the financial terms and the Government's economic analysis, supported the Government's proposal. The contract proceeded and a re-evaluation of costs and corresponding use of loan proceeds led to the loan disbursement rate on Categories 1(a) and (b), Civil Works, being returned to the original 50%: no loan disbursements were made for the contractor-financed two lanes.

8. The contract proceeded in an orderly manner and was substantially completed and opened in September 1984. Provisional costs are given in Attachment 2 to this Annex. However, it was clear by this time that additional works relating to upgrading crossings and junctions were required and also that special arrangements would have to be made for the maintenance of this road. A program of construction of additional interchanges and underpasses to replace at-grade junctions began at Ayia Varvara (near Dhali) S37- ANNEX 2 kage4 and continued on a priority basis under direct Government financing. These were necessary to improve highway safety as the increases in traffic flows which have occurred during the extended construction period have rendered the earlier at-grade junctions outmoded. Nine interchanges/underpasses have been constructed and for the six remaining the Government intends to carry out construction when suitable finance has been obtained (currently these remaining interchanges/underpasses are included as a possible component in the proposed Fourth Highway Project). The MCW has rece-tly set up a special maintenance section whose activities will be particularly directed to the routine and periodic maintenance of the Nicosia-Limassol highway. -38 - ANNEX 2 Attachment 1

PROJECT COMPLETION REPORT

REPUBLIC OF CYPRUS

SECOND HIGHWAY PROJECTS

New Nicosia-Limassol Road Breakdown of Contract Costs

A. Contracts I, II, III and IV

Work was done on all of these sections by original contractor between February 26, 1979 and April 3, 1982 when the contract was forfeited. Net payments to the contractor were CE9.48 million spread over the four contracts.

B. Completion of Works by Force Account

Following forfeiture of the original contract certain works between kilometers 0 and 10 and 60 and 76 were completed by PWD construction urits at a cost of about Cf-2.2 million spread evenly over the two sections. This work was carried out between April 1982 and November 1982.

C. Contracts A, B, C and D

J and P/Medcon completed the new Nicosia-Limassol road, including the final two lanes and fly-overs and junctions between October 22, 1982 and September 21, 1984. The costs were:

Contract A CE3.335 million Contract B CE4.640 million Contract C CE1.825 million Contract D CE2.500 million

Additional works totalled about CEO.25 million and the cost of flyovers, junctions etc. was CE2.283 million.

D. Total Estimated Cost

Final figures will have to await resolution of the claims situation but total cost is estimated at CE26.5 million or, at a weighted exchange rate, US$49.45 million. CYPRUS

FIRST & SECOND HIGHWAY PROJECTS COMPLETION REPORT

LOANS 904 & 1344-5-CY

NICOSIA-LIMASSOL HIGHWAY-CONTRACT SECTIONS

(KMS £NO. OF TRAFFIC LANES)

-J

to l

I 94 4 ..... 4~ .

7W

Co IVFINNCE_BYKFA_)RAC I1 - 4

-

44.- -T

NOTES: MINOR CHANGE IN LENGTH DUE TO DESIGN CHANGES DURING CONSTRUCTION. CONTRACT D, ADDITIONAL 2 LANES FINANCED BY CONTRACTOR. CONTRACT IV FINANCED BY KFAED. - 40 -

ANNEX 2 ATTACHMENT 3

PROJECT COMPLETION REPORT

REPUBLIC OF CYPRUS

FIRST AND SECOND HIGHWAY PROJECTS

LOAN 904-CY

US $ 1. Civil Works (a) Nicosia-Morphou 433,416.95 (b) Nicosia-Limassol 3,734,559.36

2. Consultants Services 1,206,202.69

3. Training 25,821.00

US $ 5,400,000.00

1344-5-CY

1. Civil Works (a) Nicosia-Limassol 8,514,477.54

2. Consultants Services 1,472,876.81

3. Training 12,645.65

US $ 10,000,000.00 - 41 -AME3 - 41 ANNEX 3

PROJECT COMPLETION REPORT REPUBLIC OF CYPRUS FIRST AND SECONDHIGNAY PROJECTS Estimated and Actual Cumulative Disbursements (US$ '000)

IRO Fiscal Loan 904 Loans 904 & Loans 904 & 1344-6 Total Loans Actual Disbursements Actual Disbursement Year and SAR 1344-6 SAR Minutes of MNN 904 4 1344-5 Loan 904 Loan 1344-5 as %of Column Quarter ay 1973 11/16/76 10/29/76 10/29/76 -EIM (1- or(5

, 1973 300 Mar. 31, 1974 800 June 30, 1974 1,300

11M, 1974 1,w0 Dec. 31, 1974 2,300 Mar. 31, 1975 2,800 162 152 5 June 30, 1975 3,300 408 408 12 1975/76 Tillisu, 1975 3,800 507 507 13 Dec. 31 1975 4,300 584 584 14 Mar. 31, 1976 4 700 S84 584 12 June 30, 1976 5,200 773 773 15 197/77(904) (904) 1976 6,400 900 800 800 773 773 97 Dec. 3, 1976 1,100 1 000 1,000 1,148 1,148 115 Mar. 31, 1977 1,700 1,100 1 100 1 264 1.264 115 June 30, 1977 1,700 1,200 1,200 1,264 1,264 105 1977/78 (1344) N 1977 2,600 1,200 100 1,300 1,264 1,264 97 Dec. 31 1977 3,500 1 800 300 1,352 2,100 1,352 64 Mar. 31, 1978 4 450 3,100 450 1,352 3,550 1,352 38 June 30, 1978 5,400 4,000 650 1,352 4,650 1,352 29 1978/79 Wp-.-N, 1978 1350 4,980 850 5,750 1,378 1,378 24 Dec. 31 1978 2 700 5,400 1 400 6,800 1,659 1,659 24 Mar. 31, 1979 4,060 2,500 7 900 1,665 1 655 21 June 30, 1979 5,400 3,600 9,000 826 103 259 29 1979/80 Siiji'-Z, 1979 6 550 4 500 9,900 1,209 121 2,995 30 Dec. 31, 1979 7,700 5,600 10.900 2,379 265 4.309 40 Mar. 31, 1980 8 800 6 500 11,900 2,733 294 4,692 39 June 30, 1980 9,900 7,400 12,800 3.537 432 5,634 44 1980/81 Sep. JU, 1980 8,400 13,800 3,735 493 5893 43 Dec. 31, 1980 9,300 14 700 1 369 6,769 46 Mar. 31, 1981 9,500 14,900 1,623 7,623 47 June 30, 1981 9,700 15,100 2,498 7,898 52 1981/82 SEP. 30, 1981 9,800 15,200 2 744 8 144 54 Dec. 31 1981 10,000 15,400 2,744 8,144 53 Mar. 31, 1982 4 312 9 712 63 June 30, 1982 4,441 9,841 64 1982/83 wp-.-N. 1982 4 441 9,841 64 Dec. 31 1982 4,529 9,929 64 Mar. 31 1983 5 308 10,708 70 June 30, 1983 5,732 11,132 72 1983/84 uM, 1983 6,566 11,966 78 Dec. 31, 1983 7,288 12,688 82 Mar. 31 1984 8 347 13,747 89 June 30, 1984 9,376 14,776 96

, 1984 9,914 15,314 99 Dec. 31, 1984 10,000 15,400 100 NEW NICOSIA-LIMASSOL HIGHWAY

SUMMARY OF TENDERS (Cyprus E6s) COMPANY CONTRACT NO. I II III IV DISCOUNTS ET TOTAL OTELLO DI Bills Sub-total 2,568,867.272 16,506,906,730 3,049,029.816 7,148,147.578 for I, II and III 17,555,187.120 PASQUANTONIO Daywork Sub-total 224,825.570 1,417,424.100 281,148.040 610,045.188 for II, III, and IV 20,889,145.050 Total 2,793,692.842 17,924,330.830 3,330,177.856 7,758,192.766 for I,II,III and IV 22,264,476.010 Bills Sub-total 2,217,542.900 13,736,820.400 2,483,616.910 6,155,563.600 for I,II,and III 26,714,522.055 COSTAIN Daywork Sub-total 84,940.085 517,580.660 110,440.390 230,185.100 for II,III and IV 25,762,725.055 Total 2,302,482.985 14,254,401.060 2,594,057.300 6,385,748.700 for I,II,III and IV 25,536,690.055 Bills Sub-total 971,693.260 6,116,439,000 1,019,454.580 2,690,360.760 XEKTE Daywork Sub-total 63,845.100 382,750.500 78,746.800 173,668.000 Total 1,035.538,360 6,490,800.060 1,098,124.380 2,864,028.760 for I,II,III and IV 11,488,491.5f0 Bills Sub-total 1,290,514.025 7,980,912.500 1,382,708.000 3,456,430.000 THALIS Daywork Sub-total 78,738.050 464,045.200 95,350.160 211,930.950 Total 1,369,252.075 8,444,957.700 1,478,058.160 3,668,360.950 for I,II,III and IV 14,960,628.885 Bills Sub-total 1,397,558.200 7,669,699.500 1,601,664.100 3,369,252.500 CYBARCO Daywork Sub-total 77,081.700 459,598.200 96,054.300 207,684.600 Total 1,474,639.900 8,129,297.700 1,697,718.400 3.576,937.100 for I,II,Itl and IV 14,822,915.550 J and P Bills Sub-total 1,452,675.335 8,343,349.496 1,740,217.524 3,567,454.308 for II and III 9,983,704.870 MEDCON Daywork Sub-total 59,051.660 357,733.000 70,725.470 158,868.550 for II,111 and IV 13,222,422.672 Total 1,511,726.995 8,701,082.496 1,810,942.994 3,726,322.858 for I,II,III and IV 14,329,507.892 Bills Sub-total 1,277,020.000 HARCON Daywork Sub-total 90,514,425 Total 1,367,534.425 for I 1,367,534.425 Bills Sub-total 2,175,896.900 ZACHARIADES Daywork Sub-total 111,881.937 Total 2,287,778.837 for I 2,287,778.837 Bills Sub-total 1,415,947.500 1,552,039.350 for I 1,467,030.950 DRECA Daywork Sub-total 51,083.450 61,619.800 for III 1,613,659.150 Total 1,467,030.950 1,613,659.150 Bills Sub-total 1,420,936.700 1,305,240.400 for I 1,500,147.280 KYRON Daywork Sub-total 79,210.580 84,688.100 for III 1,389,928.500 Total 1,500,147.280 1,389,928.500 � 綢 一 匹 肥 臘 么

”叫 “ - 44- API!endix

REPUBLJC W OF CYPRUS ?*S* I of 9

M.C.W. 109/1986 MINISTRY OF COMMUNICATIONS AND WORKS Tel.: 40-2278 NICOSIA

31st July 1986

Mr. Otto Maiss Acting Director Operating Rvaluation Department World Bank 1818 H street N.W. Washington D.C. 20433 U*S*A4.

Dear Sirg

Project Performance Audit Report Cyprus First and Second Highway Projects (Loans 904-GY and 1344-5-CY) ------

Further to our letter of the same numbers dated 30th June* 1986p in connection with the above subjects please note the followings.

1. Following a careful perusal of the above Report it was found that a number of inaccuracies and controversies haves inadvertendly as I think# filtered through and. as a result$ the validity and objectivity of this Report haie been seriously damaged. It should be appreciated that certain comments referring to the administration of the Ministry of Communications and Works and the Government in generalp the relationship between the Government ane -:he Contraotort decision-making procedures and efficiency of staff, are not at all documented, no sound evidence is given for their validity, and to say the leastp they appear to be grossly biased. Even the historical and political facts have been distorted and presented in an incorrect way.

2. The attached note outlines the main points which could rectify a number of issues raised in the Report. I have no doubt that you will'give to these points your individed attention*

In view of the above I am sure that you will cause this Report to be redrafted, with a view to reflecting a move accurate performance of the first two Highway Projects which were so successfully carried out with the valuable asbistance and support of the World Bank.

Yours faithfully,

Rino Shacallis) irector General LSh/KP Apnix 45 - Page 2 of 9

MINISTRY OP COMMNCATIONS AND WORKS

CCUMENTS ON THE

"PROJECT PERFORMANCE AUDIT REPORT CYPRUS FIRST AND SECOUD HIGWAY PROJECTS -LOANS204-CY AND 1344-5-CY *

A. EVALUATION SUMARY The First and Second Highway Projects (Page vii)

Under the above heading, it is stated that "the main construction component (the Nicosia-Limassol road) experienced a delay of three years and a cost overun of almost 89 ".

The comment should have contained the explanation that the delay and the cost overrun were mainly due to:

(a) The inability of the contractor to proceed with the completion of the project according to the programme oC the works, which resulted to forfeiting of the contract and awarding the uncompleted project to a second contractor.

(b) Adlitional works, such as the construction of the highway to a four-lane standard throughout, the construction of fly-overs and other works which were not originally included in the contract.

Findings and Recommendations (Page viii)

The comments made under the above heading are not valid at all. The difficUlties faced during the early ataSes of the implei-entation of the project, were mair-ly due to the v;3akn3s of the contractor. - 46 -

Appendix Page 3 of 9

This is demoastrated in the re3ults of the Third Highway

Project, which is now in its third year of implementation with satisfactory results. This Project includes the Limassol By-Pass

(19.2 km) oC standard similar to that of the Nicosia-Limassol Highway. Appendix - 47 - Page 4 of 9

B. PROJECT PSRFORMAINCS AUDIT MrO.RANDUM

I. INTRODUCTION

Histor

Para 1

The content of this paragraph should read as follows: The first signs of civilization in Cyprus go back 8,000 years. The discovery of copper on the island in the third milienium B.C. brought wealth and trade to the island.

Settled by Mycenaean Greeis and Acheans from the Peloponnese and Greace in the 13th century B.C., Cyprus evolved into a flouri.ahing centre of Greek Civilization. The Greek settlers spread their culture all over the island and hellenized the native eteocypriots. Because of its strategic position and natural wealth it was conquered by various nations (Assyrians, Egyptians, Persians 8th cent - 132 B.C.).

Cyprus became a part of the empire of Alexander (330 B.C.). After its partition became one of the most significant parts of the empire of the Ptolemies of Egypt .(323-30 B.C.) and later it came under the Roman dominion (58 B.C.). During the Roman rule (1st cent. A.D.) Christianity was introduced to the island by St. Paul. Cyprus became a province of the Byzantine 3mpire from 330-1191 A.D. The centuries of Byzantine civilization in Cyprus have left a rich heritage of art and architecture.

At 1191 A.D. Richard I of England conquered Cyprus and sold it to the Lusignans who ruled the island until 1489 vhen it was ceded to the Vemtian Republic. In 1571 the Ottomas invaded Cyprua. This period gave Cyprus its Turkish Cypriot population which noa constitutes the 18%o of the island population. The Ottoman rule came to an end in 1878 vihen Britain assumed administration of theisland. Durin, its long history Cyprus aanaged t-) retain its lan,;ua5-e anl culture intact. Appendix - 48- Page 5 of 9

Para 2

The content of this paragraph should read as follows: In 1960 the island became an independent state which immediately after joined the UN. In 1964 in view of intercommunal Lcidents provoked with the aim to serve as an excuse for partition and in view of threats from Turkey for invasion, the Security Council with the consent of the Government of the Republic, sent a peackeeping force which is still there. On 15 July 1974, following a coup against President Makarios, Turkey invaded and occupied the 37 of the territory of the Republic of Cyprus.

Para-3

The words "its jurisdiction" in the 3rd line on page 2 must be deleted and substituted by the words "Turkish military occupation,".

Para 5

The words "by force" must be added after the word "divided" in the 3rd line and the words "into two communal zones" must be deleted. The last sentence should read as "both the Turkish occupied part of the island and the Government controlled part had acute unemployment problems".

Footnote 9 oage 5:

Regarding the statement that the Third Highway Project is expected to be completed in December 1986 and that the closing loan date is the 30th of June 1987, it should be noted that completion of the project cannot be achieved w,ithin this period owing to the fact that the implementa- tion phase of the maintenance study has now been added. This study, according to the relevant TORS, should be completed within 21 montha from commencement. Therefore, the *dinistry of Com.iunications and Works has already requested for one year extention of the loan, i.e. the closing 1-oan date ahould now be the 30th June, 1988. Appendix 49 -Page 6 of 9

II* TH1 3FIRST AND 33COND HIGH14!AY PROJECT

Para 17

The comment that "the higher management of 74inistry of Communications and Works did not supervise and manage the contract in a satisfactory manner" etc., is not true.

It would be more fair to say that tae role of the Consultant's' team regarding the implementation of the project was unclear and not particularly productive. For this reason, the "Jinistry of Communications and Works engaged a part-time consultant in the capacity of advisor to the Engineer. The Engineer and the Resident Engineer did their best to assist the Contractor to overcome his problems.

Para 19

The comment "However, managerial and control problems remained. Clear lines of responsibility and command continued to be obscured and the potential for confusion was multiplied.(17) The second contractor did not hesitate to go directly to higher levels of Government when he felt that their interventions might be beneficial to him, and technical decisions of site staff were sometimes countermanded by higher levels of MCW" is totally unacceptable. The MC W is of the opinion that the Employer /Contractor good relationship and co-operation are to the benefit of the project, and in this particular case, it proved to be so.

Para 20

The comment that the weighing station is sporadically manned, is not correct. The ,ighing station operates five days a week on a 6-hr basis, covering morning or afternoon periods on alternate days. Appendix Page 7 of 9 -50 -

Para 22

The comment "it is however unfortunate that the paveient design on this road was kept to minimum standards ...... some time ago", should be mainly attributed to the services of the consulting firm which prepared the feasibility study (which included inter-alia axle load surveys, traffic flow projection) and the final engineering designs.

Para 24

The reason why the project completion report has not yet been possible to*.be finalised, is due to the fact that the final accounts of the first Contractor have not been settled so far.

Para 28

Regarding the content of this para it stated that the tender procedure as indicated in the Bank's Guidelines which, occasionally necessitate long processes is always followed. Fu--ther, the comment that "difficult decisions tend to be indefinitely postponed", is not true.

Para 29

IvIC17 ftuld like to comment on the content of this para as follows:

The setting up of various committees is in accordance with the Govern:.ent admiistrative procedures and do not really aim at diffusing responsibility but at scrutinizing the various issues.

Para 30

DC7 would like to comment on the content of this para as follovws: Recent chan&ea in contract documents seem to have reduced the powers of the Resident Enaineer it'. controlling vorks, ind now certain deciaioni have t2 be referred to Appendix Page 8 of 9 -51 -

MOVI headquarter2. However, a committee (consisting of two Civil Engineers and a Quantity Surveyor) is working successfully by reviewing and forwarding for approval through the proper channels all variations, by fixing new rates, evaluating claims and offering independent opinion on disputes and, if needed, by advising the Engineer on contractual matters. The new procedure has proved to function efficiently for quick decision making and settlement of problems.

Para 31

The following comment, contained in the audit report is unacceptable:-

"it is required tiat key posts be filled by techn.cally competent individuals who could give unbiased advice on correct technical grounds". Key posts are indeed filled by high-caliber professionals Appendix Page 9 -of 9 - 52 -

C. PRCJCT COMPLETION REPORT

Para 1.02

The words "separation of the country into the Greek Cypriot and Turkish Cypriot Sectors", must be deleted and substituted by the words "partition of the country which was imposed forcibly by the Turkish occupation troops after the 1974 invation."

Para 1.03

In the 3rd line, the words *"two separately administered sectors", must be deleted and substituted by the words "occupied part and the Go4ernment controlled part of Cyprus". In the 6th line, the words "oontrolled by the Turkish Cypriot authorities" must be de3eted and substituted by the words "occupied by Turkey". In the 4th line on page 2, the words "Turkish Cypriot controlled zone", must be deleted and substituted by the words "occupied part of Cyprus".

Footnote on £a&e

The*words "in the control of the Southern and Western part of Cyprus", must be deleted and substituted by the words "of Cyprus".

30th July 1986

.K./ D MAP SECTION iBRD 12094R

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