Document of The World Bank

FOR OFFICIAL USE ONLY Public Disclosure Authorized

Report No. 3791b-PA

STAFF APPRAISAIL REPORT

SEVENTH HIGHWAY PROJECT Public Disclosure Authorized

PARAGUAY

April 19, 1982 Public Disclosure Authorized

Projects Department Latin America and the Caribbean Regional Office Public Disclosure Authorized

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. Currency Unit: Guarani (¢) US$1 : t 126 i1 : US$0.008 ¢ 1,000,000 : US$7,936.50

SYSTEM OF WEIGHTS AND MEASURES

1 meter (m) 3.28 feet (ft) 1 kilometer (km) : 0.62 mile (mi) 1 square kilometer (sq km): 0.386 square mile (sq mi) 1 liter (1) : 0.26 gallons

ABBREVIATIONS

CNCE National Council for Economic Coordination CPS President Stroessner City DGECP General Directorate for Execution and Budget Control DGT General Directorate for Transport DGV General Directorate for Highways ER Economic Return GDP Gross Domestic Product IBR Rural Welfare Institute MAG Ministry of Agriculture MOPC Ministry of Public Works and Communications OCPIT Office of Coordination and Integral Planning of Transport OED Operations Evaluation Department PCR Project Completion Report UCR Feeder Roads Unit UNDP United Nations Development Program VPD Vehicles per Day

FISCAL YEAR

January 1 - December 31 FOR OFFICIAL USE ONLY STAFF APPRAISAL REPORT

SEVENTH HIGHWAY PROJECT

PARAGUAY

TABLE OF CONTENTS

Page No.

I. INTRODUCTION ...... 1

A. Sector Background ...... 1 B. Bank Involvement in the Highway Subsector ...... 3 (i) Overview ...... 3 (ii) Projects Completed ...... 3 (iii) Ongoing Projects ...... 5

II. INSTITUTIONAL STRENGTHENING AND POLICY lMPROVEMENIS ......

A. General . . 7 B. The Planning Process ...... 7 C. The Highway Program ...... 8 D. Highway Financing ...... 9 E. Staffing of DGV ...... 10 F. Staffing of OCPIT ...... 11 G. Management of Maintenance Operations . . 12 (i) Maintenance and Betterment Planning ...... 12 (ii) Equipment Management ...... 13 (iii) Axle Weight Control ...... 14 H. Accounting and Auditing ...... 14 I. Perspectives for the Highway Subsector ...... 14

III. THE PROJECT ...... 16

A. Project Objectives and Components ...... 16 (i) Construction and Upgrading of Primary Roads .... 17 (a) The San Lorenzo-Eusebio Ayala Road ...... 17 (b) The Tacuara-Santa Rosa Road ...... 18 (c) The Villarrica-Numi Road ...... 19 (d) Supervision of Civil Works ...... 19 (ii) Strengthening of Sectoral Planning and DGV's Capacity ...... 19 (a) Training of DGV's Staff in Highway Engineering ...... 20 (b) Pavement Evaluation ...... 20 (c) Technical Assistance to OCPIT for Transport Planning ...... 21 (iii) Improvement of the Efficiency of Maintenance Operations ...... 21

This report is based on the findings of a mission which visited Paraguay during September 1981. The mission comprised Messrs. A. Paz-Estenssoro (Economist), Jorge Lanas (Engineer), Raul Paraud (Engineer-Consultant), and Rene Jarquin (Financial Analyst-Consultant). Mrs. M. Pokorny assisted in the economic evaluation. The report has been edited by Miss Virginia R. Foster.

This document has a restricteddistribution 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. - ii

TABLE OF CONTENTS (Continued)

Page no.

III THE PROJECT (Continued)

B. Summary of Economic Evaluation ...... 22 C. Cost Estimates ...... 22 D. Financing ...... 24 E. Disbursement ...... 25 F. Implementation, Procurement and Monitoring ...... 26 G. Risk ...... 27

IV. AGREEMENTS REACHED AND RECOMMENDATION ...... 28

TABLES

1 - Staffing Schedule ...... 31 2 Projected Routine Maintenance Expenditures (1982-1986) 32 3 - Projected Highway Network to be Routinely Maintained ...... 33 4 - Betterment and Rehabilitation Program (1982-1986) ...... 34 5 - Design Standards for Project Roads ...... 35 6 - Tentative List of Equipment Purchases ...... 36 7 - Estimated Schedule of Cumulative Disbursement ...... 37 8 - Implementation Schedule ...... 38

ANNEXES

1 - Ministerial Decree No. 615 ...... 39 2 - OCPIT's Program of Activities for 1983-1984 ...... 41 3 - Terms of Reference for Technical Assistance for Highway Engineering Training ...... 42 4 - Terms of Reference for Technical Assistance for the Management of Equipment Fleet and Workshops ...... 46 5 - Details of the Economic Evaluation ...... 50 6 - Project Monitoring Indexes ...... 59 7 - Related Documents and Data Available in the Project File ... 61

MAPS

IBRD 12831R - PARAGUAY, Main Highway Network IBRD 12832R2 - PARAGUAY, Highway Network: Bank Projects I. INTRODUCTION

Since this is a repeater project, the Staff Appraisal Report has been simplified; it includes only a general overview of the highway subsector, a description of the Bank's involvement in the subsector and details of the project components, cost estimates, financing, implementation and monitoring.

A. Sector Background i.01 During the past five years, while GDP grew at an average rate of 8.8% p.a., the transport sector of Paraguay has accompanied economic development with a relatively steady 3.3% of GDP. During the same period, transport investment has averaged 24% of fixed public sector investment and about 2.5% of GDP. Landlocked, with a primnarily high-volume/low-product- value based economy, Paraguay relies heavily for its continued economic development on its transport system and the connecting links to major ports in neighboring countries. Domestic traffic is basically attended by road transport, while foreign trade is carried by river transport (79% of imports and 39% of exports in 1979) and road transport (18% of imports and 53% of exports in 1979). Railway traffic is of minor importance. Air transport demand is growing moderately, and, although low in absolute terms, domestic services are important, particularly in regions where they constitute the only means of rapid access for passengers. An indicator of the importance of, and the need for, efficient transport is the fact that freight costs amounted to 23% of the f.o.b. value of exports and 14% of the f.o.b. value of imports in 1979.

1.02 Paraguay has steadily pursued the task of building its primary network. Main roads have gradually been upgraded to paved standards. The paved road network now totals about 1,500 km against 470 km in 1965. About 85% of the estimated 10,300 km of highways are unpaved, generally built without adequate standards and drainage systems, and are closed to vehicular traffic an average of 100 days per year during rainy periods to prevent deterioration. The rapid growth of agricultural production and the expansion of cultivated acreage have multiplied the need for betterment of feeder roads. Several rural development and highway projects include specific feeder road components. Another important step has been the creation, under the latest Bank project, of the Feeder Roads Unit (UCR) within the Ministry of Public Works and Communications (MOPC). UCR would provide the capability needed to plan and coordinate the expansion of the network of tracks and rural roads in developing areas. A Feeder Roads Coordinating Committee, including representatives from the Rural Welfare Institute (IBR), the Ministry of Agriculture (MAC) and MOPC has also been established. - 2 -

1.03 A third element of the road policy has been the buildup of road maintenance capability. Since 1960, successive prograns have supported the growth of a modest and uncoordinated maintenance department into a country- wide organization which, although still facing significant constraints, is proving capable of maintaining reasonable levels of serviceability on the main roads. Since the mid-1970s, control of overloading has been a component of the maintenance policy. The major issues currently facing the transport sector, including the highway subsector, are the lack of a comprehensive planning and management system and the shortage of trained personnel.

1.04 Transport sector planning, including highway planning, is not carried out as a systematic and continued task. Over the last 20 years, several medium and long-term transport plans and investment programs have been prepared with UNDP or Bank financing. They have provided a framework to support the basic objectives of expanding and upgrading the primary road network and, later on, to set up the maintenance system. Paraguay's trans- port system has grown in complexity and size. Expansion of the basic net- work now has to be balanced with growing maintenance and pavement strength- ening requirements and with the need for betterment of secondary and rural roads to support rapid agricultural development. The focus of the planning effort must shift from large individual primary and secondary road projects to diversified programs requiring coherent planning and programing methods. The creation, in October 1972, of the Office of Coordination and Integral Planning of Transport (OCPIT) as a sectoral planning advisory group in MOPC has initiated, with the assistance of consultants, the devel- opment of "in-house" planning capability for the transport sector. OCPIT has developed sectoral data and methodologies for projects evaluation. It has also assisted in the preparation of large projects for external financ- ing. OCPIT has, however, not been sufficiently involved in the planning and programing process itself, particularly in the selection of projects and in determining the balance between components of various programs. The next necessary step is to internalize the planning function in the modal agencies, including the General Directorate for Highways (DGV), and to coordinate physical planning and financial programing with the annual budget cycle. These are the key institutional objectives of this project.

1.05 DGV does not have a sufficient number of engineers and other professionals to upgrade its planning and programing function, to carry out its ongoing construction program for primary roads, to expand its rural roads program and to pursue improvement in road maintenance. DGV's staffing problem results from the countrywide shortage of trained professionals and the low level of remuneration for public sector employees. The lack of a well defined recruitment and personnel management system is an additional constraint. DGV has been able to alleviate the situation to some degree by "topping-up" the salaries of key personnel, a policy supported under the ongoing Bank-financed Fifth and Sixth Highway -3-

Projects. Only a handful of senior staff have civil service status; the rest (more than 90% of all engineers) cannot acquire permanent status in their jobs nor do they have social and retirement benefits. Most of them consider their work with DGV as a stepping stone toward jobs with the private sector.

1.06 Although DGV lacks the necessary planning capacity, the Government's current strategy for the highway subsector is basically sound; it supports the continued development of the primary network, the expansion of agriculture by providing access roads and the strengthening of mainte- nance. This strategy is supported by the Bank's ongoing Fifth (primary roads and maintenance) and Sixth (primary roads and feeder roads) Highway Projects. The present project would supplement and continue ongoing efforts to expand and upgrade the primary network and to perform mainte- nance more efficiently. It would also continue to support the institu- tional strenthening of DGV by building up its staff and developing its planning, programing and engineering capabilities. The formulation of specific measures to advance the two latter objectives was an important element of project preparation.

B. Bank Involvement in the Highway Subsector

(i) Overview

1.07 The Bank has been involved in Paraguay's highway subsector since 1951 when equipment to build feeder roads was financed as part of an agri- cultural project. Since October 1961, six highway projects have been fi- nanced (total lending about US$103.0 million), four of which have been com- pleted. When the two ongoing projects are completed, more than 1,200 km of primary roads will have been upgraded/strengthened, and a maintenance capacity will have been established in DGV. Four rural development projects have provided about US$16.0 million for improvement and mainte- nance of about 1,500 km of feeder roads. Besides highways and feeder roads, the Bank financed a port project for Asuncion (Loan 437-PA, US$2.75 million, 1965).

(ii) Projects Completed

1.08 Prior to the First Highway Construction and Maintenance Project (Credit 12-PA, US$6.0 million, October 1961), coordination and control of maintenance operations were largely ineffective. The 2,500-km road network did not, in fact, receive systematic and organized maintenance. Workshops and repair facilities needed urgent improvement. The First Highway Project included: (a) reconstruction and paving of the Paraguari-Encarnacion road (302 km); (b) construction of a major bridge; (c) purchase of maintenance equipment; and (d) preparation of a master plan for maintenance. However, redesigning of the road and bridge--to protect them from severe floods such as those which occurred during the final design stage in 1963--resulted in delays and higher costs. Supplementary financing proved necessary, and the Bank provided the needed support through Loan 396-PA of US$2.2 million in December 1964. Execution was further hampered by poor contractor perform- ance and by flooding in 1965 and 1966. The project was completed in 1970; its total cost came to almost 25% above the initial estimates. - 4 -

1.09 The equipment provided under the first project did help to improve maintenance operations. However, the quantity of equipment on hand was clearly insufficient to cope with the growing needs. There was, therefore, a sense of urgency to undertake further improvement of main- tenance operations. The consultant firm Brown and Root (US) was retained under the first project for the preparation of a maintenance master plan that provided the basis for developing a four-year maintenance program (1970-1973) for the continued expansion and improvement of maintenance operations. The consultants' master plan also became an effective basis for the preparation and appraisal of the subsequent Second Road Maintenance Project.

1.10 While implementation of the First Highway Project was progressing with difficulties over the period 1961-1970, the Second Road Project (construction) (Loan 443-PA, US$2.1 million, April 1966) was prepared and appraised. It provided for: (a) the reconstruction and paving of a 43-km road section (Coronel Oviedo-Villarrica)- and (b) feasibility studies for 450 km of roads in the "Plan Triangulo" /, identified under a UNDP study, and detailed engineering for about 260 km of those roads with the highest priority. The studies got under way in 1969 after substantial delays; they were completed in 1973 and provided the basis for the preparation of the Fourth Highway Project (para 1.12). The road construction work was satis- factorily completed in October 1969. Mainly because of the effects of the 1965/1966 floods and partly because of inadequate design, additional work was required, which increased total project costs by almost 25% above appraisal estimates. The Second Road Project was the subject of an Operations Evaluation Department (OED) Audit Report No. 558-PA, dated October 30, 1974, which concluded that, in spite of the overrun, the project had been completed satisfactorily and had broadly met its objectives. The Audit Report pointed out the need to base project appraisal upon detailed engineering.

1.11 The Second Road Maintenance Project (Loan 652-PA, US$6.0 million, January 1970) supported a four-year (1971-1974) highway maintenance pro- gram, which was carried out with the assistance of consultants Jorgensen- Tecnipar (US-Paraguay). Some US$5.5 million worth of maintenance equipment was purchased. A central workshop and 13 district workshops were built, and a training program for engineers, technicians, mechanics and operators was instituted. Maintenance allocations were increased throughout the project execution period in compliance with loan covenants. Although some delays occurred during execution, the project was successfully completed in 1975, and created among the Paraguayan authorities, and within the transport industry in general, a feeling of the importance, and the economic impact, of good maintenance of the road network. The OED Audit Report (No. 2023 dated April 14, 1978) concluded that the project was well justified and had broadly achieved its objectives; the training program was particularly successful. The report, however, stressed the importance of pursuing the strengthening of the maintenance organizaton, for which three important conditions were required: (a) adequate supply of spare parts; (b) systematic replacement of equipment; and (c) strengthening of DGV's

1/ The triangle: Asuncion, Encarnacion, Ciudad Presidente Stroessner. staff. Action on these three points was taken in the subsequent Fourth and Fifth Highway Projects. Generally, the project enlarged the scope of collaboration between MOPC and the Bank in the highway subsector.

1.12 The Fourth Highway Project (Loan 1059-PA, US$14.5 million, 1974) has three main components: (a) construction of the Mbocayaty-Colonia Independencia road (24 km), and the Encarnacion-Pirapo road (76 km) both to paved surface; (b) technical assistance for transport planning and project preparation and extension of technical assistance for highway maintenance; and (c) a study of the needs of the local construction industry and related MOPC practices and regulations. Financing of spare parts, tires and batteries was also included at the Government's request. This project has recently been completed (PCR of April 20, 1981). Because of contractors' lagging capacity, civil works components were completed considerably behind schedule (about one year for the Mbocayaty-Colonia Independencia road and more than two years for the Encarnacion-Pirapo road). Quality of works, however, was good, and total costs were within the appraisal estimates, including contingencies. Technical assistance to OCPIT for transport planning extended over the two-year period 1976-1977 and resulted, inter alia, in the updating of the Transport Plan and in recommendations for sector management dated May 1977. The technical assistance for highway maintenance, which was an extension of that included in the previous project, completed a study of maintenance needs in April 1977. This study served as a basis for the Fifth Highway Project.

(iii) Ongoing Projects

1.13 The Fifth Highway Project (Loan 1529-PA, US$33.0 million, 1978; with co-financing by the Bank of Nova Scotia, US$5.0 million) addresses a number of objectives: (a) upgrading and paving of the Coronel Oviedo- Tacuara road (91 km) and of the Tacuara-San Estanislao spur (7 km); works are under way and expected to be completed by late 1982; (b) resealing and partial strengthening of the Paraguafi-Encarnacion road (303 km), recently completed (October 1981); (c) strengthening and expansion of MOPC's mainte- nance capacity for the national highway network; and (d) continued strengthening of transport planning and coordination. The maintenance component of the project largely reflects experience gained under previous projects; points of emphasis are renewal and rehabilitation of road maintenance equipment, supply of spare parts, systematic traffic counting program, road inventory data including feeder roads and enforcement of vehicle weight regulations. A Project TUnit, which constitutes the present technical support of DGV regarding maintenance, was set up. Equipment, spare parts and workshop tools have already been purchased in support of an overhaul and replacement program for maintenance equipment. Traffic counters and weighing scales have been ordered.

1.14 There are several matters pending under Loan 1529-PA which have been delayed or not yet properly addressed, mainly because of procurement delays or shortage of staff. These matters were reviewed in detail at the time of appraisal of the present project and are the following: -6

(a) The Equipment Overhaul Program. The equipment units have been identified, spare parts have been purchased and an addi- tional mechanical engineer has been hired and attached to DGV's Maintenance Department. The program has started and is scheduled to be completed by mid-1983.

(b) The Annual Betterment Program (combination of maintenance and upgrading of earth roads providing improvement in drainage and gravel course). This program, which initially set a target of 5,200 km for 1979-1982, was carried out on a piecemeal basis according to immediate needs dictated by traffic growth. Beginning with the 1983-1986 Highway Program (para 2.05), DGV would systematically plan and upgrade the technical preparation of its road betterment subprogram in annual tranches. The betterment subprograms would be part of the Four-Year Highway Program.

(c) Preparation of a Set of Road Design Standards and Construc- tion Specifications for All Classes of Roads. This study has not yet been carried out because of the staff shortage. With the new staffing plan agreed in paragraphs 2.12 and 2.13, DGV should have sufficient expertise for the preparation of the design standards and specifications.

(d) Systematic Traffic Counting. Vehicles and traffic counters have been purchased; the counting program is being initiated by the General Directorate for Transport (DGT). Agreement was reached during negotiations that the resulting summary reports would be submitted to the Bank for review every six months starting from December 31, 1982.

1.15 The Sixth Highway Project (Loan 1736-PA, US$39.0 million, 1979), with co-financing provided by Lloyds Bank International (US$7.0 million), has the following objectives: (a) construction, including paving, of Route 6 from Pirapo to Route 7 (about 180 km), thus completing the triangle Asuncion-Encarnacion-C.P. Stroessner; (b) engineering and construction of about 500 km of feeder roads complementing the above improvement of Route 6; (c) establishment of a Feeder Roads Coordinating Committee and establishment and operation within DGV of a Feeder Roads Unit (UCR); (d) continuation of a program to assist MOPC's transport planning unit OCPIT; and (e) a survey of the availability of local road construction and maintenance materials and a study of the technology required to use them in road construction and maintenance; this component is under way. The project is expected to be completed by late 1985. -7-

1.16 The Second Rural Development Project (Loan 1418-PA, 1977) pro- vided US$17.7 million for construction of 99 km of all-weather and 238 km of earth feeder roads in the Itapua Department. The Livestock and Agricultural Development Project (Loan 1674-PA, 1979), also has a road component, for which US$2.5 million are provided for construction of 120 km, improvement of 120 km and a four-year continuous maintenance of about 500 km of feeder roads.

1.17 The recently approved Caazapa Area Development Project (Loan 2087-PA, 1982) provides US$12.2 million to build 50 km of a secondary road and 220 km of feeder roads.

II. INSTITUTIONAL STRENGTHENING AND POLICY IMPROVEMENTS

A. General

2.01 The proposed project would pursue and complement the sectoral objectives of ongoing projects in the following specific areas:

- strengthening of the planning and financial programing process in the transport sector;

- introduction of a Four-Year Highway Program as a vehicle to upgrade the subsector's management;

- staffing of DGV and training of its personnel and staffing of OCPIT;

- improvement in management of maintenance operations; and

- upgrading of the accounting and auditing procedures.

B. The Planning Process

2.02 As part of the recommendations of the first phase of the 1972- 1973 Transport Survey (financed by UNDP), the Government created OCPIT in 1972 as a sectoral advisory unit attached to the Minister's Office. Its principal tasks consisted basically of identifying transport projects, tentatively formulating ten-year investment programs and studying tariffs. With consultants' assistance provided under the Fourth Highway Project, OCPIT began a systematic collection of data relevant to transport planning and undertook a series of transport studies, including detailed feasibility studies for about 700 km of roads. OCPIT also examined about 3,450 km of roads for inclusion in the ten-year preliminary investment program 1977-1986, later updated to cover the 1981-1990 period. Attached to OCPIT, a UNDP-financed expert assists at present in the preparation of preinvestment studies.

2.03 On October 22, 1981, as a result of a review of planning procedures carried out in the framework of the preparation of the proposed project, MOPC issued Ministerial Decree No. 615 (Annex 1) establishing procedures and schedules whereby a four-year transport working and investment plan would be prepared and updated each year. During March/ April 1982 and henceforth every year, the transport sector agencies 2/ would prepare four-year working and investment programs and the correspond- ing financing plans in the framework of the Government's economic and sectoral policies. These programs would be sent to OCPIT, which would be responsible for determining preliminary economic priorities, taking into account the effects on the overall transport system. Once OCPIT has estab- lished the relative priorities and the resulting financial requirements, the overall plan would be sent to the Financing Programing Division, under the jurisdiction of the Ministry of Finance, to determine if the resources estimated for the sector during the period considered are consistent with the financial requirements of the transport plan. If there is need to adjust the plan, OCPIT, with the sector agencies, would carry out the necessary changes. Once the necessary adjustments have been made, the plan would be submitted to the approval of the National Council for Economic Coordination (CNCE), which is the highest authority over economic matters and is chaired by the President. The first year of the approved plan would basically define the budget. The preparation and annual updating of the Sectoral Four-Year Plan, starting with the period 1983-1986, was confirmed during negotiations. Once the four-year plan has been adjusted to take into account the financial constraints, it would be sent to the Bank for comments not later than July 31 of each year, i.e., five months before the beginning of the period covered by each annual Four-Year Program. This was also confirmed during negotiations.

2.04 The Ministerial Decree which defines the planning and programing procedures also specifies that OCPIT would prepare, and carry out jointly with each agency, a system to monitor the implementation of their Four-Year Programs. At the time of negotiations, the Government confirmed that such system would be sent for review to the Bank not later than October 31, 1982 and would start being utilized by December 31, 1982. The implementation of the new sectoral planning system would constitute the core of OCPIT's activities. In addition, OCPIT would carry out a review of pricing poli- cies, especially road user charges, and would collect and publish sectoral data. The work program of OCPIT for the period 1983-1984 is outlined in Annex 2. The work program for 1983-1984 was reviewed and agreed during negotiations, at which time the Government confirmed that OCPIT's work program would be updated periodically in consultation with the Bank.

C. The Highway Program

2.05 MOPC would prepare, starting with the year 1983, and subsequently update its Four-Year Highway Program within the newly established planning and programing procedures. The Highway Program would comprise four sub- programs as follows:

2/ General Directorate for Highways, General Directorate for Transport, General Directorate for Road Committees, General Directorate for Merchant Navy, General Directorate for Public Works, National Administration for Waterways and Ports, State Merchant Fleet and CAL Railway. (a) The road maintenance and betterment subprogram would be based on the system developed under the Fourth and Fifth Highway Projects for programing and monitoring maintenance and betterment activities, and would be the direct respon- sibility of DGV's Maintenance Department (para 2.15).

(b) The pavement rehabilitation and strengthening subprogram would be based on systematic evaluation of pavement condi- tions and on sufficiency studies. Field studies, analyses and formulation of the subprogram would be the responsibility of DGV's Engineering Department. The targets for the 1983- 1986 period and related funding requirements are shown in Table 4. These preliminary estimates would be reassessed during the preparation of the 1983-1986 Highway Program and annually thereafter.

(c) The rural roads subprogram would be prepared by the Feeder Roads Unit of DGV. This Unit would also propose policies on design standards and implementation methods for construction and maintenance. Policies concerning the feeder roads to be built within agricultural development areas are the respon- sibility of the existing Feeder Roads Coordinating Committee.

(d) The subprogram for new construction of primary and secondary roads would include the portfolio of projects which are at the stage of execution or tendering and those which have/ would have final engineering studies during the relevant period and have proved economically feasible.

Each subprogram would also include the studies (feasibility and engineer- ing) necessary to prepare the next year's program. The proposed project would assist in introducing pavement evaluation techniques (para 3.15). During negotiations, the Government confirmed that, starting from 1983, it would prepare Four-Year Highway Programs. Such programs would be sent to the Bank for review and comments by July 31 of each year, i.e., five months before the beginning of the period covered by each annual Four-Year Program. The Bank's review would focus on the balance between subprograms and the priority of various components within each subprogram.

D. Highway Financing

2.06 Highway expenditures increased substantially from an annual average of US$4.5 million over the period 1970-1972 to US$41.9 million over the period 1978-1980, an increase in real terms of about 170%. The last period is basically influenced by the Bank-financed roads of the Fifth Highway Project (para 1.13) and the Trans-Chaco road (Route 9, Section III - 135 km). Present commitments average a level of annual expenditures for the 1982-1984 period of about US$115.0 million. Of these, 44% are funds provided by external loans while the res,i of the expenditures are financed by funds from the general budget. - 10 -

2.07 Until 1976, road infrastructure expenditures were lower than road user charge revenues. Since then, and basically because of fixed nominal value fuel taxes (established in 1963), the real value of revenues from road user taxes decreased while highway expenditures increased. Revenues from user charges covered 64% of highway expenditures in 1980. In September 1981, the Government increased the taxes on vehicle fuels and, at the same time, changed the tax base from fixed to ad valorem. This measure would allow road user charge revenues to cover all current expenditures and about 80% of capital expenditures; this is an adequate level given the stage of development of Paraguay.

2.08 The transport sector is the main consumer of petroleum products, which are totally imported and use up more than 40% of the value of ex- ports. Gasoline, diesel and aviation fuel represent about 95% of the over- all consumption. The structure of petroleum product consumption has changed in the past 20 years. Diesel fuel increased its share of national consumption from about 15% to close to 60%. The trend to increase the price of gasoline relative to that of diesel has helped to change the truck fleet to more efficient diesel-powered engines. The trend has also created an incentive to increase the number of diesel-fueled cars and introduced a distortion in their contribution to finance highway expenditures. This matter will be studied by OCPIT as part of its 1983-1984 Program of activ- ities (Annex 2). Current retail prices are about US$4.20 and US$3.30 per gallon of premium and regular (blended with alcohol) gasoline respectively, and US$1.75 per gallon of diesel oil.

E. Staffing of DGV

2.09 Continuity and clear lines of authority have been recognized as key factors in advances made by DGV in construction of primary roads and in maintenance. DGV has failed, however, to acquire technical depth in spite of a number of technical assistance programs over the past ten years. Several studies for the upgrading of engineering practices and for the development of DGV's information and management systems (road inventory, survey of road construction materials, maintenance planning system, etc.) have progressed slowly or have not fully taken hold. The single most important condition for further progress in planning and management is to increase the number of engineers and planners.

2.10 The three DGV Departments (Engineering, Maintenance and Equipment and Materials) employ 33 engineers. Eleven engineers, five of whom grad- uated two or less years ago, constitute the Engineering Department respon- sible for supervision of all highway designs and construction contracts and for the force account construction of 135 km of the Trans-Chaco (Route 9) road. The Maintenance Department, which is also responsible for road bet- terment and force account construction of feeder roads, besides maintaining all the network, with five districts and 13 sections, has a total of 22 engineers, mostly inexperienced. Finally, the Equipment and Materials Department has no technical staff of university level.

2.11 The Bank-financed Fifth and Sixth Highway Projects have contri- buted to alleviate MOPC's shortage of staff. A Project Unit (para 1.13) was created to assist in maintenance operations; the Unit was initially staffed with foreign consultants who trained local counterparts. In order to retain the qualified local staff in the Unit, DGV topped their sala- ries. Another important step forward was taken when a Feeder Roads - 11 -

Unit (UCR) was created in MOPC (para 1.15) to assist in meeting the increasing demand for feeder roads. UCR started operations recently and, when fully staffed, will include four foreign and six local engineers and planners. The latter will take over UCR's operations upon departure of the consultants. Their remunerations, paid through UCR, are attractive enough to retain them.

2.12 Under the Sixth Highway Project, it was also agreed that DGV would prepare and adopt, by December 31, 1980, a plan of action, satisfac- tory to the Bank, for achieving adequate permanent staffing by June 30, 1982. The formulation of such a plan has been delayed and eventually has become one of the focal points of project preparation. The resulting staffing schedule takes into account the present and anticipated work program of each of DGV's Departments. Under the schedule, which is detailed in Table 1, DGV would increase the number of its engineers in the following way:

Situation in To be Achieved December 1981 by June 30, 1983

Engineering Department 11 20 Maintenance Department 22 30 Equipment and Materials Department - 2 Equipment Management Section 2

Total 33 54

The staffing requirements were identified on the assumption that major civil works, periodic maintenance and road designs would continue to be carried out by contract. The schedule does not include the staffing of UCR, which is specified under the Sixth Highway Project. During negotia- tions, the Government confirmed that it would implement DGV's staffing schedule. In addition, the Bank and the Government agreed to review annually, not later than July 31, starting in 1984, DGV's staffing situa- tion. Such review would include professional and para-professional staff such as mechanics, equipment operators, drivers and foremen, as well as the personnel management policies necessary to attract and retain suitable staff.

2.13 DGV would recruit among: (a) Paraguayan engineers, recently graduated 3/ from local and neighboring countries' universities; and (b) engineers, released progressively from the Itaipu hydroelectric project as civil works are completed. The recently graduated professionals would be trained on the job through a special technical assistance provided under the project. This functional training component would benefit about 40 engineers and would build up the necessary technical capability to carry out DGV's tasks on a timely basis (paras 3.12 and 3.13).

F. Staffing of OCPIT

2.14 The responsibilities of OCPIT in the framework of the new transport sector planning procedures established by the Government (paras 2.03 and 2.04) and the objectives of the present project have been substantially expanded. OCPIT's staff, which at present comprises four professionals and three university students working part time, is

3/ About 60 engineers are estimated to graduate every year. - 12 - considered insufficient to cope with the additional workload. The Government agreed during negotiations to engage two additional local professionals to strengthen OCPIT's working capacity and to have them in place not later than January 1, 1983. No problems are envisaged at this time in hiring one engineer and one transport economist, both with at least five years of experience in transport planning, as agreed during negotia- tions.

2.15 The Government and the Bank also agreed to review annually, not later than July 31, starting in 1984, OCPIT's staffing requirements and, as in the case of DGV (para 2.12), the personnel management policies necessary to attract and retain suitable staff.

2.16 The Sixth Highway Project provided for the financing of two expatriate experts--one engineer and one economist (para 1.15)--to assist in carrying out, together with the local staff, OCPIT's 1982 working program. The proposed project would provide for additional technical assistance (para 3.16).

G. Management of Maintenance Operations

2.17 DGV's capacity to execute road maintenance (para 1.03) improved over the last decade. The equipment fleet expanded considerably, provision of spare parts and workshop tools improved, and yearly budgetary alloca- tions grew in line with agreed estimates of requirements. The following figures give a perspective of the effort made by MOPC for improving and expanding maintenance operations: (a) the road network under maintenance grew from about 6,600 km in 1976 to about 7,100 km in 1980; and (b) the expenditures for these same years grew from ¢ 410.0 million to ¢ 878.0 million; in real terms, the average cost per km grew about 20%, from about US$493 to about US$592. DGV would have to continue to build up its mainte- nance capacity in line with the expansion of the network. Further improve- ment in efficiency should also be sought. The increase in the number of engineers in its Maintenance Department (para 2.12), as well as improved management of workshops and the equipment fleet, are key measures for strengthening the system.

(i) Maintenance and Betterment Planning

2.18 The basis for planning road maintenance and betterment require- ments was developed under the Fourth and Fifth Highway Projects. Consul- tants Jorgensen-Tecnipar (US-Paraguay) prepared a 1979-1982 road mainte- nance and betterment plan, district by district, based on an updated inven- tory of the road network and on the equipment, labor and materials required to carry out the plan; from these data, the budgetary allocations were established. Most of the recommendations were implemented in the district field offices, but the monitoring by DGV's central office was not carried out because of the shortage of staff. The consultants' planning system was reactivated during the preparation of the proposed project; on that basis, a 1982-1986 maintenance plan with specific targets was prepared. Yearly expenditures required for routine maintenance district by district, resulting from the updated plan, are shown in Table 2. These expenditures, broken down into labor, equipment and materials, have been calculated on - 13 - the basis of physical targets, taking into account the expected yearly changes in the length and type of surface of the network (Table 3 and Map IBRD 12831R), and should be adjusted systematically year by year according to the maintenance program to be included in DGV's Four-Year Highway Program (para 2.05). Targets for the betterment of unpaved roads are shown in Table 4. During negotiations, the Bank and the Government agreed that the latter would: (a) update and implement the Four-Year Maintenance and Betterment subprogram; (b) carry out and monitor the resulting maintenance and betterment activities; and (c) provide the yearly budgetary allocations for maintenance and betterment specified in Tables 2 and 4 to meet the minimum targets shown in Tables 3 and 4.

(ii) Equipment Management

2.19 DGV's fleet comprises about 900 units, of which about 50% are devoted to maintenance operations; the remaining 50% are used for construc- tion of a primary highway (Chaco), construction and betterment of feeder roads and other activities. The Equipment and Materials Department is basically the San Lorenzo Central Workshop (located about 13 km from Asuncion). No systematic equipment management practices are followed, and there is no updated information about equipment availability, utilization or costs of operations and repairs. The project would provide the financ- ing for a technical assistance program to improve management of the fleet and workshops (paras 3.17 and 3.18). In addition, the spare parts ware- house, located within the San Lorenzo compound, needs to streamline its control of stocks and the procedures for forecasting future needs. The Fifth Highway Project provided for the purchase of a stock of spare parts which is currently supplemented by local purchases financed from DGV's operating budget. During negotiations, the Government confirmed that it would continue to provide funds for the timely supply of spare parts and that DGV would implement a system for the control of spare parts not later than July 31, 1983. The Government also confirmed that it would (a) not later than June 30, 1983, appoint one senior mechanical engineer as head of the San Lorenzo Central Workshop, one senior engineer as head of the Equipment Management Section and two assistant engineers to the above- mentioned mechanical and senior engineers; and (b) complete the staffing of the San Lorenzo Workshop according to recommendations of the consultants on workshop and equipment management, not later than July 31, 1983.

2.20 Under the Fifth Highway Project, MOPC undertook to create a fund for the renewal of equipment in order to alleviate the serious problem caused by previous practices of bulk purchases, every four or five years, through external financing. A provision of US$1.3 million was included in the 1981 MOPC budget for equipment renewal, but the funds have not been used because DGV felt that the equipment at hand was sufficient for the present needs. Some equipment units must now be replaced, and a replace- ment program must be prepared. During negotiations, the Government confirmed that it would continue to provide funds for renewal of road main- tenance equipment, and that an equipment renewal program would be submitted to the Bank not later than July 31 of each year, starting from 1983. - 14 -

(iii) Axle Load Control

2.21 The Fifth Highway Project provided for the financing of a study of the axle load control system, the purchase of scales and the civil works for the construction of the weighing stations; the study was completed in late 1980 by consultants Protos (Brazil). Orders for the purchase of the scales have been placed, and bids for the construction of the weighing stations have been invited. The vehicle weight control system will be operating by late 1982.

H. Accounting and Auditing

2.22 The Government is preparing, through a UNDP-financed project (PAR/80/003), measures to strengthen and integrate its accounting system. During 1982, MOPC would benefit from this technical assistance, which should establish upgraded accounting procedures. During negotiations, the Government confirmed that, during 1982, MOPC would start implementing the integrated accounting system on the basis of the ongoing UNDP project.

2.23 The field of auditing is also one in which there is scope for improvement. Different administrative units within MOPC carry out some occasional internal auditing activities. This function should be central- ized within the existing General Directorate for Execution and Budget Control (DGECP) and carried out as a permanent internal auditing activity of the highway-related units 4/. Along with revised accounting and internal auditing procedures, it would be necessary to engage independent auditors to audit, annually, the expenditures of the proposed project as well as those of ongoing projects. In addition, the independent auditors would conduct an annual review of the operations of MOPC's Central Workshop and the warehouse in San Lorenzo. During negotiations, the Government confirmed that, starting with the 1982 accounts, it would engage indepen- dent auditors to audit the accounts of the ongoing Fifth and Sixth Highway Projects (Loans Nos. 1529-PA and 1736-PA) and of the proposed project and the accounts of MOPC's Central Workshop and warehouse. The relevant audit reports should be submitted to the Bank not later than April 30 of each year, starting in 1983.

I. Perspectives for the Highway Subsector

2.24 Up until about five years ago, Bank involvement in the highway subsector was primarily devoted to investments in physical facilities. Cities and towns had to be linked, and the ever-expanding road network was associated with the development of agriculture, in particular in the frontier zones where the need for increased investments in transportation was the greatest. In fact, the national highway network grew from about 800 km in 1950 to about 8,000 km in 1976. Since the early 1970s, high priority was assigned to maintenance, for which substantial assistance was provided by the Bank. In the years following the completion of the proposed project roads, investments will continue to be needed to keep pace with the fast development taking place in Paraguay's agriculture and to

4/ General Directorate for Highways, General Directorate for Transport, General Directorate for Road Committees. - 15 - better integrate the country with its neighbors. However, Paraguay's highway infrastructure and institutions remain behind those of countries with similar levels of development. Main rural areas and some urban centers are still isolated during the rainy season, thus affecting the ability of farmers to send their products to markets or to have access to essential services. About 86% of the highway network is unpaved, and over 80% has to be closed because of rain up to 100 days a year.

2.25 Following this first phase of physical expansion and maintenance, the Government has started to address institutional issues, such as intra- agency coordination, staffing of key Departments of MOPC and looking at some overall subsector planning issues. The expansion of the road network and the aging of the initial investments placed increased burdens on the road maintenance capability of MOPC. The first task to be addressed, espe- cially through the proposed project, is the continuation of the maintenance effort: by the end of the project implementation period, the highway subsector would have doubled in size in a time span of 15 years. The emphasis has so far been on maintaining primary roads; there is now a need to emphasize also the secondary and feeder road systems. Information being secured through a feeder roads survey will be essential to better organize the feeder road maintenance efforts. The recently established Feeder Roads Unit in MOPC has just become operational as a planning agency, and, later on, possibly five years from now, it will also be an executing unit. Furthermore, after completing this operation, additional support to the Unit will be needed in view of the importance of feeder roads to be included in rural development projects under preparation.

2.26 The areas in which a special effort on the institutional side will have to be achieved in the years to come, and for which the current project establishes the key foundations, are the following:

First, on the maintenance side, following the improvement of the efficiency in maintenance operations under the proposed project, through upgraded management practices (programing, budgeting and monitoring), the institutional capability would be built to subsequently expand the maintenance effort to the secondary and feeder road systems.

Second, the proposed project establishes an intra-sectoral medium-term planning mechanism. It is expected that the system would be fully operational by the mid-1980s; at that stage, the highway subsector's planning capabilities should be sufficiently well developed to prepare four-year programs based on coherent criteria and methods for subproject selection and preparation, in order to optimize intermodal investment efforts. The new plan- ning procedure will necessitate assessing the resources available for financing highway investments based on an evaluation of road user charges, pricing and other fiscal policies. This comprehen- sive approach is being started under the proposed project. At the same time, DGV should explore the introduction of construc- tion technologies better suited to the country's availability of resources. A study of road construction materials and techniques is under way, and the results are expected to be applied in the subsector by the mid-1980s. - 16 -

Third, the expansion of the Government's rural and agricultural development programs will necessitate the consolidation of mechanisms launched recently to ensure better coordination of the actions of the agencies concerned with agriculture and, therefore, the inclusion of road investments in a more explicit manner in the design of these agriculturally oriented programs.

III. THE PROJECT

A. Project Objectives and Components

3.01 The objectives of the project are to:

(a) pursue construction and upgrading of primary roads;

(b) upgrade planning in the transport sector and strengthen DGV's technical and managerial capabilities; and

(c) upgrade the efficiency of DGV's maintenance operations.

3.02 The project would consist of:

(a) civil works and related supervision services for:

- widening of a 64-km section of Route 2 between San Lorenzo and Eusebio Ayala, including the construction of two additional lanes along 30 km;

- upgrading, including paving of a 98-km section of Route 3, between Tacuara and Santa Rosa; and

- upgrading, including paving of a 28-km section of Route 8, between Villarrica and Numi.

(b) upgrading of sectoral planning and strengthening of DGV's and OCPIT's technical and managerial capabilities through:

- implementation of an annual planning and programing system for the transport sector;

- implementation of DGV's and OCPIT's staffing programs;

- technical assistance to OCPIT for transport planning; and

- training of DGV's engineers.

(c) improvement in the efficiency of DGV's maintenance operations through:

- countrywide implementation of the maintenance management system; - 17 -

- technical assistance for management of the equipment fleet and the workshops; and

- implementation of pavement evaluation metLods, including the required equipment.

(i) Construction and Upgrading of Primary Roads (Map IBRD 12832R2)

(a) The San Lorenzo-Eusebio Ayala Road (64 kni)

3.03 The San Lorenzo-Eusebio Ayala road belongs to the East-West axis and is the most important section of Route 2. It is also a connecting link between the capital city of Asuncion and nine of the 14 departments of the Eastern region and a section of the main traffic corridor between Paraguay and Brazil. Since its paving in the mid-1960s, Route 2 has become the backbone along which industrial and agro-industrial establishments have developed.

3.04 Widening and improvement of the San Lorenzo-Eusebio Ayala paved road were identified by Government and Bank staff during 1979 as high priority goals. San Lorenzo is a crossroads town, about 13 km from Asuncion, connected to the Capital City by a four-lane carriageway presently supporting traffic levels in excess of 10,000 vpd and serving what is now an urbanized area. MOPC is currently completing the extension of an intra-urban avenue from the Asuncion City limits to San Lorenzo; this additional four-lane access to San Lorenzo will alleviate the congestion on the Asuncion-San Lorenzo route. Traffic on the 27-km section from San Lorenzo to the San Bernardino junction ranges from 5,000 to 8,000 vpd. The project would bring this section to four-lane standards by the construction of a two-lane carriageway along the existing two-lane road, which would also receive substantial rehabilitation, including an overlay. From the San Bernardino junction to Eusebio Ayala (37 km), the existing two-lane road would be improved; bypasses would be built around the towns of Ypacarai and Eusebio Ayala. The topography of the area is flat except for a mountainous section (Km 45-Km 49), where four lanes are projected along 2.5 km. This road serves general traffic. Its area already has a fairly well developed network of secondary roads. No related complementary investments are planned.

3.05 The feasibility study for this project road was carried out by OCPIT and consultants SAE-EIT-CONTEC (Argentina-Paraguay) in 1980 under financing provided by Loan 1529-PA. The detailed engineering was prepared by consultants ETEL-ASTEP-EIT (Brazil-Paraguay) with financing under the First Preinvestment Project (Credit 587-PA). The design standards, shown in Table 5, were reviewed and agreed. Design speed would be 100 kph, and the pavement width would be 7.0 m for two lanes. The four-lane section would have a total width of 14.7 m, with a median separator. Pavement would consist of an asphaltic concrete carpet (6.5 cm) over a sub-base and base of crushed stone (40 cm). Shoulders would be 2.50 m wide with surface treatment over a layer of sub-base material. Preliminary estimates place the average cost per kilometer (at February 1982 prices) at around US$715,000 for the doubling of two to four lanes and US$430,000 for the improvement of the existing two-lane road. - 18 -

(b) The Tacuara-Santa Rosa Road (98 km)

3.06 The Tacuara-Santa Rosa road is a section of the only land connection to northeast Paraguay and a main link with the Brazilian rail and road systems. The existing earth road between Tacuara and Yby Yau (about 200 km) was built by the Paraguayan Corps of Engineers between 1964 and 1967. Upgrading of the road connection between Asuncion and the northeastern region has been pursued as a high priority objective since the mid-1970s. The Fifth Highway Project provides for the paving of the Coronel Oviedo-Tacuara Section (91 km), presently under construction and scheduled for completion by late 1982 (para 1013). The northeastern region is undergoing a rapid agricultural development, and the road would be instrumental in fostering the integration of the region as well as channeling an increasing volume of external trade with and through Brazil. Traffic average is presently over 250 vpd, of which over 70% are heavy vehicles. The present earth-surfaced road is closed because of rain for about 100 days per year. Its upgrading would constitute a phase in the staged upgrading of the transport corridor of northeast Paraguay. The initial feasibility study was carried out in 1977, updated by OCPIT and reviewed during appraisal (September 1981). The subject road would serve the area of the proposed Eje Norte Rural Development Project, which lies entirely on both sides of the road north of Tacuara; feeder road improvements related to this project would be included. DGV would be responsible for their implementation through UCR and would, therefore, be in a position to ensure necessary coordination, The Eje Norte Project was appraised in September 1981 and is scheduled for Board presentation by May 1982.

3.07 Final engineering of the Tacuara-Santa Rosa road was prepared in 1980 by consultants SAE-EIT-CONTEC (Argentina-Paraguay) with financing provided by the First Preinvestment Project (Credit 587-PA). Two important bridges--one over the Jejui-Guazu River with a total length of 350 m plus two spillway bridges 35 m long each, and another over the Aguaray-Guazu River with a total length of 175 in plus a spillway bridge 35 m long--were designed in 1971 by consultants TECNIPAR (Paraguay). These designs were updated as necessary by consultants SAE-EIT-CONTEC in 1980. The alignment of the project road follows the existing alignment, with the exception of two short sections totaling about 5 km, where new alignments are necessary to improve the access to the bridges. The topography is generally flat, with few rolling sections. Since the road runs through low land areas that are flooded during the rainy season, the grade is normally designed as embankment. The project area has no quarry sites for sub-base, base and surface materials. Suitable materials would have to be hauLed from distances of up to 150 kji; consequently, the cost of the pavement is high. The consultants studied various alternatives of pavement design combining materials and thickness to minimize the use of crushed stone. Finally, a 0.40 m thick pavement (0.30 m of crushed stone for sub-base, 0.06 m of asphalt concrete base and 0.04 m asphaltic concrete carpet) was adopted. A detailed review of the engineering showed that, considering the traffic level and the terrain conditions, the width and type of surfacing of the shoulders could be reduced without affecting the basic characLeristics and safety of the road. Standards would then be consistent with the standards of the previous section presently under construction (para 1.13). Cost savings of about 10% were obtained. The agreed design standards are shown - 19 - in Table 5. Design speed would be 100 kph, and the pavement width would be 6.20 m. Shoulders would be 1.50 m wide and surface-treated. Average cost per kilometer, not including major bridges, is US$328,000 at February 1982 prices. The total cost of the bridges, with cumulative length of 630 m, is estimated at about US$5,000,000.

(c) The Villarrica-Numi Road (28 km)

3.08 The Villarrica-Numi road is part of the Southern branch of the North-South transport axis which, starting at Coronel Oviedo will, in the long run, reach Coronel Bogado. The initial section, Coronel Oviedo- Villarrica (43 km), was upgraded and paved under Loan 443-PA (para 1.10), and the proposed project road will be its continuation to the south. The road provides the connecting link between the departments of Guaira, Paraguari and Caazapa and is important from the point of view of regional development. The project road was identified in 1980, and its importance was confirmed during the preparation of the Caazapa Area Development Project, which was approved by the Board in late January 1982. At present, the road carries an average traffic of about 250 vpd, of which about 60% are heavy vehicles. Since the road is earth-surfaced, it is closed, during and after rainy periods, for an average of 75 days per year. The project area is undergoing rapid development characterized by the extension of cultivated acreage and the expansion of cash crops, mainly soya and cotton. Complementary investments in feeder roads are included in the Caazapa Project; DGV would be responsible for their construction through its UCR and would, therefore, be in a position to effect necessary coordination.

3.09 The design of the road was completed by consultants Berger (US) in 1973 as part of the Bank-financed "Plan Triangulo" studies. The topography crossed by the road is flat, and only minor realignments are proposed; four minor bridges have to be constructed and four existing bridges have to be widened. The design standards for the project road are shown in Table 5. These were reviewed and agreed and are similar to those adopted for the Coronel Oviedo-Tacuara road. The engineering and cost es- timates were updated by DGV, and the economic feasibility was confirmed in a report prepared by OCPIT (April 1981). Average cost per kilometer (February 1982 prices) is US$280,000.

(d) Supervision of Civil Works

3.10 The civil works component of the proposed project would be super- vised by selected consultants, most likely foreign-local joint ventures, under terms and conditions of contract satisfactory to the Bank. This follows satisfactory arrangements now in force under the Fifth and Sixth Highway Projects and was confirmed during negotiations.

(ii) Strengthening of Sectoral Planning and DGV's Capacity

3.11 As indicated in Chapter II, the project would support specific improvements in three basic aspects of highway management and planning, i.e., (a) implementation of systematic and continuous planning for the transport sector; (b) implementation of staffing programs for DGV and OCPIT; and (c) training of staff in highway engineering. The specific - 20 - measures agreed, and the arrangements for monitoring by tlheBank, have been presented in Chapter II. The implementation of the planning and programing system, as well as the staffing of DGV and OCPIT, would be funded directly under MOPC's current budget and consequently are not project expenditures. Related technical assistance and equipment to be partly financed under the project are presented hereafter.

(a) Training of DGV's Staff in Highway Engineering

3.12 The proposed project would include technical assistance to build up, through a functional training program, the capacity of DGV's engineers. Local engineering firms would be invited by DGV to send participants to the training; they would do so on a cost-sharing basis. This component would be carried out in Paraguay during a period of about 18 months, starting in June 1983, after the planned staffing of DGV has been completed (para 2.12). All courses would have a strong practical component. Annex 3 provides an outline of the terms of reference which have been agreed with DGV and were confirmed during negotiations. Also, during negotiations, the Government confirmed that specialized consultants, satisfactory to the Bank, would be retained, not later than June 30, 1983, to prepare and carry out the training program.

3.13 It is anticipated that about 40 of DGV's engineers would participate in the program. Emphasis would be on practical and operational aspects of their tasks, including:

- maintenance management system;

- pavement evaluation and strengthening;

- feeder roads betterment;

- equipment management; and

- subsectoral planning and programing.

The training material would be prepared initially and would be revised as necessary, following the response received during the course, with a view to constitute a reference manual on DGV's modus operandi. The outline of the curriculae and the schedule of sessions, as well as their format, would be laid out and reviewed two months after the initiation of the services of the consultants. The program would be coordinated, as appropriate, with other less ambitious training activities planned by DGV, in particular audio visual training for highway maintenance staff, visits to ongoing highway works in Paraguay and/or neighboring countries and attending international conferences and seminars on specific highway matters.

(b) Pavement Evaluation

3.14 Although Paraguay is still in the process of building up its primary network, it has about 1,500 km of paved roads, some of which are more than ten years old and have experienced annual traffic growth consis- tently above 8%. Pavement strengthening and, in some instances, rehabili- tation are becoming important components of DGV's program. The project - 21 - would support the establishment, within DGV, of a pavement evaluation group to conduct a systematic survey of the existing paved network over the three years 1983 to 1985. At the time of negotiations, the Government confirmed that DGV would prepare, and furnish to the Bank, by not later than July 31, 1983, a tentative list of roads to be surveyed annually over the 1983-1985 period for possible strengthening or rehabilitation.

3.15 The project would provide the necessary specialized equipment, the vehicles and the related technical assistance. The tentative list of equipment is shown in Table 6. This equipment would be procured in early 1983. The technical assistance would be provided by the pavement special- ists who would participate in the training program for DGV's engineers (para 3.12 and Annex 3). At the time of negotiations, the Government confirmed that, no later than June 30, 1983, DGV would establish, within its Engineering Department, a Pavement Evaluation Group to conduct a condi- tion survey of existing pavement and to prepare and update the pavement strengthening and rehabilitation component of DGV's Four-Year Program.

(c) Technical Assistance to OCPIT for Transport Planning

3.16 The proposed project places upon OCPIT the principal responsi- bility for establishing a transport sector planning system, its correspond- ing financing program and the procedures by which the implementation of such plans and programs would be monitored. To enable OCPIT to fulfill its new responsibilities effectively and to carry out the agreed program of activities (Annex 2), further technical assistance in specialized fields is required. The project would provide for the financing of such technical assistance. One civil engineer and one economist would be engaged for a period of 18 months. During negotiations, the Government agreed that these specialists would be in place not later than June 30, 1983, and that they would be recruited under terms and conditions satisfactory to the Bank.

(iii) Improvement of the Efficiency of Maintenance Operations

3.17 This project component would complement and pursue ongoing actions to build up maintenance. Specifically, the improvement of manage- ment and operations of the San Lorenzo Central Workshop, the Districts' Workshops and DGV's equipment fleet would be the object of this project component. The Central Workshop has several sections (light equipment, heavy equipment, electricity, body shop, signalization, etc.) which, because of the lack of specialized management, are inefficient and uncoor- dinated; neither does any coordination exist with the Districts' work- shops. In addition, the spare parts warehouse, also located within the San Lorenzo compound, does not function properly. The control of spare parts is loose, and no policy is followed regarding maximum and minimum stock levels of fast-moving parts. Finally, a system should be established to monitor and improve equipment availability and utilization and to program the timely replacement/expansion of the fleet. This component would complement the measures mentioned in paragraphs 2.19 and 2.20 concerning the staffing of the workshop, the control of spare parts and the renewal of equipment.

3.18 The proposed project includes the financing of individual experts: two for workshop management and two for equipment management for periods of up to 24 months from about December 1982 to the end of 1984. - 22 -

The workshop specialists would also study the type of repair works that could be carried out more efficiently through contracts with dealers estab- lished in Paraguay. Additionally, the project would provide for vehicles required to support the experts and their counterpart staff. During nego- tiations, agreement was reached for engaging, not later than December 31, 1982, specialized experts, satisfactory to the Bank, to assist in the management of the workshops, particularly the San Lorenzo Central Workshop, and the maintenance equipment fleet. Related terms of reference are out- lined in Annex 4 and were confirmed at the time of negotiations.

B. Summary of Economic Evaluation

3.19 The weighted average economic rate of return for the proposed road upgrading, which accounts for about 98% of project costs, is 20.5%. Each of the three road sections shows satisfactory economic returns and first year benefits clearly above the opportunity cost of capital, estim- ated at about 12%. The following table summarizes the results of the economic analysis. The quantified benefits consist mostly of savings in vehicle operating costs. Time savings are significant only for the San Lorenzo-Eusebio Ayala road; they are of marginal relevance for the Tacuara-Santa Rosa and Villarrica-Numi roads. Generated traffic has been estimated conservatively and amounts to about 10% of normal traffic for the two latter roads.

San Lorenzo- Tacuara- Villarrica- Concept Eusebio Ayala Santa Rosa Numi

ER with Time Savings 27.5% 20.6% 17.1% ER without Time Savings 23.0% 19.9% 16.4% First Year Benefits 14.4% 13.4% 12.8% Switching Value: Costs 232.3% 96.8% 41.5% Switching Value: Benefits -69.9% -49.2% -29.3%

The sensitivity analysis suggests that the risk of unsatisfactory return is very low. The benefits would, given the competitive nature of the trucking industry, be passed on to users. Agricultural producers served by the roads would eventually reap most of the benefits since the main cash crops are marketed very broadly and are mostly exported. Annex 5 shows details of the economic evaluation.

C. Cost Estimates

3.20 The total cost of the project is estimated at US$124.0 million, with an estimated foreign exchange component of US$83.0 million (67%) and a local component of US$41.0 million (33%), which would be financed by the Government. The project costs are shown on the following page. The cost estimates for civil works of the San Lorenzo-Eusebio Ayala, Tacuara-Santa Rosa and Villarrica-Numi roads are based on completed final engineering. The cost of consultant services for supervision of construction is based on recently awarded contracts for similar services provided by joint ventures of Paraguayan and foreign firms. The cost of the technical assistance com- ponent has been estimated on the basis of average salaries and expenditures of foreign experts and the purchase of vehicles and pavement evaluation equipment on the basis of current market values. The front-end fee has been included as a foreign exchange project cost. - 23 -

PARAGUAY

SEVENTH HIGHWAY PROJECT

Project Cost Estimates

Estimated Foreign Exchange Items Local Foreign Total Local Foreign Total Component (Guaranies Millions) (US$ Millions) %

A. Construction and Upgrading of Primary Roads Civil works for: (i) San Lorenzo-EusebioAyala 1.336 3.112 4.448 10.6 24.7 35.3 70 (ii) Tacuara-Santa Rosa 1.405 3,278 4.683 11.2 26.0 37.2 70 (iii) Villarrica-Numi 293 684 977 2.3 5.5 7.8 70 (iv) Supervision of Construction 302 704 1.006 2.4 5.6 8.0 70 Sub Total 3.336 7.778 11.114 26.5 61.8 88.3

B. Technical Assistance

(i) Management of the Equip.Fleet and Workshops 14 54 68 0.1 0.4 0.5 80 (ii) Purchase of Vehicles, Office and - 14 14 - 0.1 0.1 100 Pavement Evaluation Equipment (iii) Training of Engineers 14 40 54 0.1 0.3 0.4 75 (iv) Assistance to OCPIT - 40 40 - 0.3 0.3 100 Sub Total 28 148 176 0.2 1.1 1.3

Base Cost (At Feb. 1982 prices) 3.364 7.926 11.290 26.7 62.9 89.6

C. Contingencies (i) Physical (10% of A) 333 778 1.111 2.7 6.3 9.0 (ii) Price Escalation 1.461 1.651 3.112 11.6 13.1 24.7 Sub Total 1.794 2.429 4.223 14.3 19.4 33.7

Total 5.158 10.355 15.513 41.0 82.3 123.3

D. Front End Fee - 0.7 0.71/ Grand Total 41.0 83.0 124.0 67

1! The precise amount of the Front End Fee is US$679.803 Calendar Years Local Foreign 1982 18.0% 8.5% 1983 15.0% 7.5% 1984 13.0% 7.5% 1985 12.0% 7.5% 1986-87 12.0% 6.0%

Source: Consultant Reports and Mission's Estimates

April 1982 - 24 -

3.21 The foreign exchange base cost component for civil works has been estimated by consultants at 70% in line with the estimates used for recent Bank projects. For the supervision of construction, the foreign exchange base cost component was also estimated at about 70%, assuming a substantial foreign participation. The cost per man/month of consultant services is estimated to range between US$2,500 and US$8,000 for technicians of differ- ent grades among Paraguayans and foreigners, with an average of about US$4,000 per man/month. The total number of man/months for technical assistance services is 172.

3.22 A contingency allowance of 10% has been included to cover possi- ble increases in physical quantities for civil works. The contingency for escalation of the foreign component amounts to 19% on the basis of assump- tions shown at the bottom of the cost table. The contingency for variation of local prices amounts to 40% over the implementation period, taking into account the assumptions on domestic inflation noted also at the bottom of the cost table. As a result, the foreign exchange component amounts to 67% of the total cost.

D. Financing

3.23 The proposed Bank loan of US$46.0 million amounts to 37% of the total cost, or about 55% of the total foreign exchange component. The Government would finance the local costs, totaling US$41 million (about 33%) and is also seeking co-financing for the additional US$37.0 million required to complement the financing of the foreign exchange component. The prospects for obtaining co-financing from commercial banks are favor- able and, in order not to delay project implementation on account of secur- ing such additional financing, it was found justified to proceed with the proposed Bank loan before the entire financing has been secured. It was also found important to arrange the Bank financing in a manner to encourage the early completion of the co-financing plan. To achieve this goal, the project (excluding the front-end fee) was divided into two parts, as follows:

US$ Million Equivalent Foreign Exchange Local Component Costs Total

Part A

(i) San Lorenzo-Eusebio Ayala (60 km) 24.7 10.6 35.3 (ii) Villarrica-Numi (28 km) 5.5 2.3 7.8 30.2 12.9 43.1 (iii) Supervision of Construction 3.0 1.3 4.3 (iv) Technical Assistance 1.1 0.2 1.3 Base Cost 34.3 14.4 48.7 Contingencies: physical 3.3 1.4 4.7 price 5.7 5.2 10.9 Total Part A 43.3 21.0 64.3

Part B

(i) Tacuara-Santa Rosa (98 km) 26.0 11.2 37.2 (ii) Supervision of Construction 2.6 1.1 3.7 Base Cost 28.6 12.3 40.9 Contingencies: physical 2.9 1.2 4.1 price 7.5 6.5 14.0 Total Part B 39.0 20.0 59.0 - 25 -

A total of US$82.3 million would be needed to finance the foreign exchange components of Parts A and B. Of the US$45.3 million provided by the Bank loan, US$35.3 million would be initially allocated to Part A and US$10 million to Part B. If, as it is reasonable to expect, the co-financing is confirmed, the financing plan for the whole project (excluding the front- end fee) would be: Bank, US$45.3 million, i.e, 37%; co-financing, US$37.0 million, i.e., 30%; and Government, US$41.0 million equivalent, i.e., 33%.

3.24 In the unlikely event that co-financing does not materialize, the Government would have to provide US$8.0 million necessary to meet the financing requirements of Part A (in addition to the US$21.0 million equiv- alent that it would provide for the local cost component of Part A). In that case, the Bank would, on the whole, contribute US$35.3 million, i.e., 55Z of the total cost of Part A, and the Government financing would be US$29 million equivalent, i.e., 45%.

3.25 By June 30, 1983 at the latest, the Government and the Bank would appraise the result of the effort to obtain co-financing and would review the proposed financing arrangement. Should the Government not be able to confirm that sufficient co-financing has been secured, the Government and the Bank would decide whether (a) to reduce the scope of the project to Part A and thus the Bank might cancel, from loan funds, the US$10.0 million allocated to Part B; or (b) to finance, with the Government's own resources, both the local and the remaining foreign exchange component of the entire project. The disbursement percentages would be adjusted to ensure continued Bank participation through project completion and to accommodate the requirements of co-financiers for early disbursement of their share. The above approach was confirmed during negotiations.

E. Disbursement

3.26 Until the co-financing plan has been finalized (i.e, until June 30, 1983 at the latest), disbursements under the Bank loan would be allowed only for Part A of the project; about 5% of loan funds allocated to this part are expected to be disbursed during that period. Disbursements for Part B would be made only after the finalization of the financing plan.

3.27 Disbursement for Part A of the project would be as follows:

Item % of Expenditures to be Financed

(i) Civil Works 100% of foreign expenditures and 20% of local expenditures

(ii) Supervision of Construction 100% of foreign expenditures and 30% of local expenditures

(iii) Technical Assistance and 100% of foreign expenditures and Training 10% of local expenditures

(iv) Purchase of Vehicles, Office Equipment and Pavement Evaluation Equipment

(a) Imported 100% of foreign expenditures (b) Locally Procured 90% - 26 -

Disbursements for civil works and supervision of construction under Parts A and B would be revised as appropriate after the review and confirmation of the financing plan. The combined contribution of the Bank and the co- financiers would represent 67% of the total project cost.

3.28 All disbursements of the Bank loan would be made against normal documentation. Table 7 summarizes the cumulative disbursement schedules foreseen for both Bank and co-financier funds. The total project disburse- ment profile differs from the regional subsector profile in the length of the disbursement period (one and a half years). This departure is justified on two grounds: first, large and well experienced foreign firms are expected to assume prime responsibility of the civil works, contrib- uting to timely execution and a shorter disbursement profile. Second, experience with disbursements for recently completed and ongoing highway projects in Paraguay supports shorter profiles.

F. Implementation, Procurement and Monitoring

3.29 Execution of the project would be the responsibility of MOPC through DGV and OCPIT. Contracts for civil works would be awarded through international competitive bidding (ICB) in accordance with the Bank's Guidelines for Procurement (March 1977). Contractors would be prequalif- ied, and civil works would be carried out on the basis of unit price con- tracts. The San Lorenzo-Eusebio Ayala and Tacuara-Santa Rosa roads would be subdivided into two bidding sections each, and the Villarrica-Numi road would constitute one bidding section only. Because of the relatively large size of the individual lots (between US$7.8 and 18.0 million), it is likely that the contracts would be awarded to foreign firms, with local firms par- ticipating in joint ventures or as subcontractors. Recent experiences have shown that the size of the proposed lots is attractive to foreign con- tractors (especially from Argentina, Brazil and Spain).

3.30 Contracts with an estimated cost of more than US$50,000 would be procured through ICB following the Bank's Guidelines for Procurement (March 1977). Contracts for the purchase of vehicles, office and pavement evalua- tion equipment with an estimated cost below US$50,000 would be advertised locally in accordance with DGV's regulations, which are satisfactory to the Bank. Contracts for the purchase of goods amounting to US$50,000 or less would be reviewed ex-post by the Bank, provided, however, that the aggre- gate of the contracts procured shall not exceed the equivalent of US$120,000.

3.31 Consultants for supervision of construction and technical assis- tance would be selected and engaged following the Bank's Guidelines for the Use of Consultants (August 1981).

3.32 The bidding documents for civil works have been, or are being, prepared by consultants. These documents, as well as the bidding documents and specifications for the equipment purchases, would have to be acceptable to the Bank. The tendering and contracting procedures were discussed and agreed during negotiations.

3.33 The implementation of the proposed project would be carried out in two stages (Part A and Part B), as described in paragraph 3.23. Pre- qualifications and tendering for Part A would be carried out in 1982 and - 27 - early 1983. Civil works for Part A are expected to start in early 1983. Tendering for Part B is tentatively scheduled to take place in mid-1983, with civil works starting by the end of the year. The overall project (including Part B) is expected to be completed about four and a half years after signature, i.e., by early 1987. No major difficulties are expected for the construction works since the topography of the areas crossed by the three roads is smooth and all road sections are easily accessible. The two major bridges along the northern section of the Tacuara-Santa Rosa road are the only works that would require specialized staff and equipment (para 3.07). Technical assistance services and training are scheduled over the two-year period from the end of 1982 to the end of 1984. The project implementation schedule (Table 8) was reviewed and confirmed during nego- tiations. The closing date would be December 31, 1987.

3.34 Reports on the various project components would be prepared by consultants. MOPC would prepare quarterly consolidated reports summarizing the progress of all project components and the financial situation of the project. During negotiations, the Government confirmed that reports would be sent to the Bank not later than two months after the end of the quarter starting with the first quarter of 1983.

3.35 Monitoring of project implementation would be carried out through normal supervision and would cover, besides the progress of civil works, the following indicators:

(a) the implementation of the sectoral planning and programing system through annual review and exchange of views in July of each year starting 1982;

(b) DGV's Four-Year Highway Program to be the object of annual review and exchange of views in July of each year starting 1982;

(c) the utilization and availability of the equipment fleet and the procurement, delivery and availability of spare parts;

(d) the staffing situation of DGV, including the number of engineers and para-professional personnel at the end of each semester and the number of engineers trained; and

(e) the staffing situation of OCPIT.

All of these subject indicators have been defined and are shown in Annex 6. The monitoring arrangements were reviewed and confirmed during negotiations.

G. Risk

3.36 The road construction component of the project does not present special risk. The engineering is ready, and final cost estimates are available. The assumptions underlying the economic evaluation are conserv- ative, especially concerning benefits due to generated traffic. The arrangements proposed for the finalization of the financing plan, while offering flexibility, would give the Bank the necessary discretion to adjust the project scope in case co-financing does not materialize. The - 28 - annual review of the highway program would also provide an opportunity to assess overall funding requirements (in particular, those related to the ongoing Fifth and Sixth Highway Projects) and to compare them with the level of resources available to MOPC. The relatively good performance of Paraguay in the implementation of similar components of previous projects suggests that the risks attached to the civil works components are low.

3.37 A higher element of risk is attached to the institution-building objectives of the project. The key problem of adding more engineers to DGV and planners to OCPIT has been addressed, and the undertakings from the Government are clearly spelled out and their timing specified. The increase in the number of staff would take place in the early phase of the project. The number and qualifications of the additional staff have been discussed thoroughly at all levels on several occasions. The risk affecting this undertaking has been reduced as much as possible, but it is still substantial.

3.38 While the recent Ministerial Decree (Annex 1) establishes the proper framework for planning, the development and consolidation of the system would take several years. Inadequate coordination between agencies and lack of followup are the main potential sources of difficulties and delays which would have to be dealt with during supervision.

IV. AGREEMENTSREACHED AND RECOMMENDATION

4.01 During negotiations, agreement was reached with the Government on the following:

(a) submission to the Bank, every six months, of the results of the traffic counting program, starting from December 31, 1982 (para 1.14);

(b) preparation and annual updating of Sectoral Four-Year Plans; such plans would be sent to the Bank for comments no later than July 31 of each year (para 2.03);

(c) sending to the Bank for review, not later than October 31, 1982, the OCPIT/Agencies monitoring system for the Sectoral Four-Year Plans and starting to utilize it by December 31, 1982 (para 2.04);

(d) scope of the 1983-1984 program of activities of OCPIT, and that subsequent programs would be updated periodically in consultation with the Bank (para 2.04);

(e) preparation and subsequent updating of Four-Year Highway Programs starting from 1983; such programs would be sent to the Bank for review by July 31 of each year previous to the period covered by each annual Four-Year Program (para 2.05); - 29 -

(f) DGV's and OCPIT's staffing schedule and its implementation; annual review, not later than July 31, starting in 1984, of DGV's and OCPIT's staffing situation (paras 2.12 and 2.15);

(g) engaging of two additional local professionals to strengthen OCPIT's working capacity and having them in place not later than January 1, 1983 (para 2.14);

(h) updating and implementing the Four-Year Maintenance and Betterment Subprogram; carrying out and monitoring the resulting maintenance and betterment activities; and pro- viding the yearly budgetary allocations for maintenance and betterment to meet specified minimum targets (para 2.18);

(i) continuing to provide funds for timely supply of spare parts and implementing, not later than July 31, 1983, a system for the control of such parts (para 2.19);

(j) staffing the San Lorenzo Workshop according to recom- mendations of consultants not later than July 31, 1983 (para 2.19);

(k) continuing to provide funds for renewal of road maintenance equipment and submitting to the Bank, not later than July 31 each year, starting from 1983, an equipment renewal program (para 2.20);

(1) start, in 1982, of the implementation of the UNDP-financed integrated accounting system (para 2.22);

(m) engaging of independent auditors to audit the 1982 Central Workshop and warehouse accounts and those of the ongoing and proposed projects; the audit reports to be submitted to the Bank not later than April 30 of each year, starting in 1983 (para 2.23);

(n) engaging of supervisory consultants under terms and condi- tions satisfactory to the Bank (para 3.10);

(o) engaging, not later than June 30, 1983, of consultants to carry out the training program for engineers, under terms and conditions satisfactory to the Bank (para 3.12);

(p) preparation of a tentative list of roads to be surveyed annually for possible rehabilitation and/or strengthening by not later than July 31, 1983 (para 3.14); and that, not later than June 30, 1983, DGV would establish, within its Engineering Department, a Pavement Evaluation Group (para 3.15);

(q) engaging of one civil engineer and one economist, for a period of 18 months, to assist OCPIT; these specialists to be in place not later than June 30, 1983, and to be recruited under terms and conditions satisfactory to the Bank (para 3.16); - 30 -

(r) engaging, not later than December 31, 1982, specialized experts to assist in workshop and equipment management in accordance with confirmed terms of reference (para 3.18);

(s) expediting the search for co-financing and keeping the Bank informed of the progress achieved; reviewing the proposed arrangement with the Bank by June 30, 1983. If co-financing does uot materialize, the Government would provide for the financing of local costs (US$21.0 million) for Part A, plus US$8.0 million to complete the foreign exchange component of such part; if the Government and the Bank decide to reduce the scope of the project to Part A, then the Bank may cancel, from loan funds, the US$10.0 mil- lion allocated to Part B (paras 3.24 and 3.25);

(t) bidding and contracting procedures (paras 3.29 to 3.32);

(u) project implementation schedule (para 3.33) and arrangements for monitoring of project implementation (para 3.35); and

(v) preparation of quarterly consolidated reports of all project components (para 3.34).

4.02 Disbursements for Part B of the project would be contingent upon the Government's finalization of the Financing Plan.

4.03 Subject to the above, the project provides a suitable basis for a Bank loan of US$46.0 million equivalent. The terms would be 17 years with a four-year period of grace.

April 19, 1982 - 31 - TABLE 1

PARAGUAY

SEVENTH HIGHWAY PROJECT

Staffing Schedule

Total Professional Date Number Experience

(a) For DGV's Engineering Department

Present 11 June 30, 1983 20 8 with at least 5 years

(b) For DGV's Maintenance Department

Present 22 June 30, 1983 30 10 with at least 5 years

(c) For DGV's Equipment and MIaterials Department

Present - June 30, 1983 2 1 with at least 5 years and 1 with at least 2 years

(d) For DGV's Equipment Management Section

Present - June 30, 1983 2 1 with at least 5 years and 1 with at least 2 years

(e) For OCPIT

Present 4 January 1, 1983 6 4 with at least 5 years and 2 with at least 2 years

Source: DGV, OCPIT and Mission's Estimates

April 1982 - 32 - TA3LE 2 PARAGUAY

SEVENTH HIGHWAY PROJECT

Projected Routine Maintenance Expenditures (1982-1986) (Million of Guaranies; December, 1981 Values)

Equipment Total Without With Without With Year Labor Amort. Amort. Materials Amort. Amort.

District 1

1982 110.7 117.9 270.8 14.3 242.9 395.8 1983 134.1 134.3 303.1 15.2 283.6 452.4 1984 139.8 142.0 320.0 15.5 297.3 475.3 1985 139.9 145.9 332.1 15.9 301.7 487.9 1986 150.6 158.7 363.0 17.6 326.9 531.2

District 2

1982 62.8 85.4 202.5 9.5 157.7 274.8 1983 65.2 88.7 210.4 9.9 163.8 285.5 1984 64.5 83.7 195.5 9.1 157.3 269.1 1985 68.3 88.7 207.8 9.6 166.6 285.7 1986 71.6 93.0 218.2 10.1 174.7 299.9

District 3

1982 96.8 112.8 270.6 12.4 222.0 379.8 1983 99.8 116.7 280.4 12.7 229.2 392.9 1984 103..4 123.5 296.2 13.5 240.4 413.1 1985 114.5 136.8 328.7 14.6 265.9 457.8 1986 126.3 152.4 367.6 16.6 295.3 510.5

District 4

1982 54.2 71.0 172.1 6.8 132.0 233.1 1983 57.6 75.2 182.2 7.2 140.0 247.0 1984 58.9 78.2 189.6 7.5 144.6 256.0 1985 68.3 85.4 204.2 8.0 161.7 280.5 1986 71.6 89.8 215.1 8.4 169.8 295.1

District 5

1982 22.4 38.7 61.2 8.0 69.1 91.6 1983 25.1 42.4 66.9 10.6 78.1 102.6 1984 33.6 44.4 69.6 12.5 90.5 115.7 1985 35.7 47.4 74.4 16.1 99.2 126.2 1986 38.3 51.1 80.4 17.1 106.5 135.8

Asphalt Plant

1982 11.9 11.2 31.0 35.3 58.4 78.2 1983 19.2 21.0 58.5 59.3 99.5 137.0 1984 25.1 28.8 75.3 77.8 131.7 178.2 1985 25.3 30.0 78.0 80.0 135.3 183.3 1986 26.3 30.8 79.6 83.0 140.1 188.9

Total

1982 358.8 437.0 1.008.2 86.3 882.1 1,453.3 1983 401.0 478.3 1.101.5 114.9 994.2 1,617.4 1984 425.3 500.6 1.146.2 135.9 1,061.8 1,707.4 1985 452.0 534.2 1.225.2 144.2 1,130.4 1,821.4 1986 484.7 575.8 1.323.9 152.8 1,213.3 1,961.4

Source: DGV

January 1982 PARAGUAY

SVFFNT11 HIGHWAY PROJECT

Projected Highiway Network to be Routinely Maintained (1982-1986) (kilometers)

Primary Secondary Tertiary Total Year District Paved Gravel Farth Paved Gravel Earth Paved Gravel Earth Paved Gravel Farth Total

1982 I 298 74 30 162 132 229 108 274 1.005 568 480 1.264 2.312 IT - - 136 - - 458 - - 645 - - 1.239 1.239 III 293 - - - 217 - 1.721 293 - 1.938 2.231 - 106 164 - 110 106 - 77 442 - 293 712 1.005 V 300 - 315 ------300 - 315 615 Total 891 180 645 162 242 1.010 108 351 3.813 1.161 773 5.468 7.402

1983 1 557 77 31 191 137 238 116 285 1.045 864 499 1.314 2.677 IT - - 141 - - 476 - - 671 - - 1.288 1.283 TIT 293 - - - - 226 - - 1.789 293 - 2.015 2.303 IV - 110 172 - 125 110 - 80 472 - 315 754 1.069 v 300 - 350 ------300 - 350 650 Total 1.150 187 694 191 262 1.050 116 365 3.977 1.457 814 5.721 7.992

1984 T 557 80 32 275 142 248 147 296 1.087 979 518 1.367 2.864 II 98 - 56 - - 495 - - 698 98 - 1.249 1.347 tIn 293 - - - 50 235 - - 1.860 293 50 2.095 2.438 TV - 114 179 - 130 114 - 84 491 - 328 784 1.112 V 500 - 406 ------500 - 406 90f Total 1.448 194 673 275 322 1.092 147 380 4.146 1.870 896 5.901 8.667

1985 J 493 58 33 275 148 258 147 308 1.230 915 514 1.521 2.950 TI 98 - 58 - - 515 - - 766 98 - 1.339 1.437 ITT 293 - - 50 52 244 - - 2.084 343 52 2.328 2.723 IV 102 119 183 - 135 118 - 88 510 102 342 811 1.255 V 500 - 440 ------500 - 440 940 Total 1.486 177 714 325 335 1.135 147 396 4.590 1.958 908 6.439 9.305 H

1986 1 493 60 35 275 154 269 195 317 1.420 963 531 1.724 3.218 r II 98 - 60 - - 535 - - 818 98 - 1.413 1.511 w ITI 293 - - 50 56 254 - - 2.384 343 56 2.638 3.037 IV 102 123 200 - 140 122 - 92 530 102 355 852 1.309 V 500 - 470 ------500 - 470 970 'rotal 1.486 183 765 325 350 1.180 195 409 5.152 2.006 942 7.097 10.045

Source: DGV

IOuarv 1982 PARAGUAY

SEVENTH IIIGHWAY PROJECT

Betterment and Rehabilitation Program (1982-1986) (in millions of December 1981 Guaranies)

1982 1983 1984 1985 1986 Item Unit Quantity Value a/ Quantity Value al Quantity Value a/ Quantity Value al Quantity Value a/

A. Betterment of Unpaved Roads

Embankment m3 450,000 145,3 411,000 132,6 440,000 141.6 466,000 150,2 500,000 161,2 Production and Installation of Culverts m 2,200 61,6 2,000 56,2 2,140 60,0 2,275 63,7 2,440 68,4 Gravel km 180 46,2 164 42,2 175 45,1 185 47,9 200 51,4 Wood Bridges m 180 45,0 164 41,1 175 43,9 185 46,6 200 50,0 Asphalt Carpet km 60 138,0 55 126,0 58 134,6 62 142,9 66 153,4

Sub-total (A) 436,1 398,1 425,2 451,3 484,4 w

B. Rehabilitation of Paved Roads

Asphalt Overlay km 45 135,0 74 222,0 50 150,0 20 60,0 20 60,0 Resealing km ------61 61,0

Sub-total (B) 45 135,0 74 222,0 50 150,0 20 60,0 81 121,0

Total (A + B) 571,1 620,1 575,2 511,3 605,4

Source: DGV >

January 1982 > - 35 - TABLE 5

PARAGUAY

SEVENTH HIGHWAY PROJECT

Design Standards for Project Roads

R O A D S Tacuara Villarrica San Lorenzo Santa Rosa Numi Eusebio Ayala

Design Speed kph 100 80 100

Minimum Radius of m 400 240 400 Curvature

Maximum Grade % 6 6 6

Platform Width m 10.70 9.00 12.00 (two lanes) 19.70 (four lanes)

Surface Width m 6.20 6.00 7.00 (two lanes) 14.70 (four lanes)

Shoulders m 1.50 1.50 2.50

Stopping Sight m 160 116 160 Distance

Surface Asphaltic Surface Asphaltic Concrete Treatment Concrete

Source: DGV and Consultant Reports

January 1982 - 36 - TABLE 6

PARAGUAY

SEVENTH HIGHWAY PROJECT

Tentative List of Equipment Purchases

Unit Items Price Total …------US$- a) 4 Vehicles for the experts to be hired for the workshop and e- quipment management 10,000 40,000 b) 3 Vehicles for the staff training program 10,000 30,000 c) 2 Benkelman Beams 500 1,000 d) 1 Roughnessmeter 8,000 8,000 e) 1 Vehicle for the roughnessmeter 15,000 15,000 f) Office and laboratory equipment global 6,000

Total 100,000

Source: Mission's Estimates

January 1982 PARAGUAY

SEVENTH HIGHWAY PROJECT

Estimated Schedule of Cumulative Disbursement (US$ million)

…------With Cofinancing…------Without Cofinancing ----- Techn. Assist. Civil Works + Supervision Parts A and B Total Civil Works + Supervision Part A and Equipment Total Period IBRD IBRD COFIN Subtotal IBRD-COFIN IBRD IBRD

June 83 0.4 0.4 - 0.4 o,8 0.3 0.7 Dec. 83 0.7 0.4 2.5 2.9 .6 1.8 2.5 June 84 1.0 0.4 9.5 9.9 1n.n 4.6 5.6 Dec. 84 1.2 0.4 20.9 21.3 22.5 8.1 9.3 June 85 0.4 34.4 34.8 36.0 13.6 14.8 Dec. 85 11.3 37.0 48.3 40.5 20.0 21.2 June 86 25.9 62.9 64.1 27.5 28.7 Dec. 86 38.1 75.1 76.3 34.1 35.3 June 87 42.6 79.6 80.8 Dec. 87 44.1 81.1 82.3

Assumptions: - Loan Signature: April 1982 - Effectiveness: August 1982 - Closing Date: June 30, 1988 - Start of Civil Works Delay: 2 months (March 1983) -Disbursement lag Expenditures: 3 months - Time overrun for Civil Works: 2 months per year of construction - Cofinancing: Disbursed up front on civil works and supervision for both parts A and B as soon as it is confirmed (late 1983)

Comparison with Sectoral Profile (Cumulative % of Disbursement)

Year from Approval 1 2 3 _ 4 5 6 7

Paraguay Sectoral 3.2 17.2 40.8 65.0 82.8 93.8 100 A + B 1.0 13.2 43.7 77.9 98.2 100.0 - A 2.0 15.9 41.9 81.3 100.0 - -

Source: Mission's Estimates

Al'r i I PARAGUAY

SEVENTH HIGHWAY PROJECT

Implementation Schedule

Calendar Years Items ~ 1982 1983 1984 1985 1986 l s3

PART A

Civil Works

(i) San Lorenzo-Eusebio Ayala Precalification Bidding through Contracting Mobilization and Construction _ - _ _ -

(ii) Villarrica-Numi Precalification Bidding through Contracting Mobilization and Construction _ _ _ _ - _

(iii) Supervision _ - ______

Technical Assistance and Training - ______

PART B Civil Works

(i) Tacuara-Santa Rosa Precalification Bidding through Contracting Mobilization and Construction

(ii) Supervision L

Source: Consultants' and Mission's Estimates

April 1982 - 39 -

ANNEX 1 Page 1 of 2

PARAGUAY

SEVENTH HIGHWAY PROJECT

(UNOFFICIAL TRANSLATION)

MINISTERIAL DECREE No. 615

ASUNCION, OCTOBER 22, 1981

Whereas the need to establish a system for planning and co- ordinating the Transport Sector to allow for overall development in accordance with the requirements of rapid economic growth and social progress of the country; and

Considering that the Transport Sector fulfills an important function in the process of economic development being carried out by the Government, for which the sectoral effort needs to be rationalized in order to maximize benefits; and

That the working and investment programs should be prepared following the agreed regulations and well in advance for their inclu- sion in the expenditures budget of the Nation.

The Minister of Public Works and Communications decrees:

ARTICLE 1: On March 1st of each year, each one of the agencies that forms the Transport Sector under the authority of the Ministry of Public Works and Communications (General Directorate for Highways, General Directorate for Transport, General Directorate for Road Committees, Feeder Roads Unit, General Directorate for Public Works, General Directorate for the Merchant Fleet, Electric Transport Administration, Navigation and Ports Administration, State Merchant Fleet, and President Carlos A. Lopez Railway) will submit their working and investment plans for the forthcoming four years.

ARTICLE 2: Such plans will be submitted to the Office of Coordina- tion and Integral Planning of Transport of this Ministry for their economic evaluation and determination of prio- rities; such action will be coordinated with the Ministry of Finance (Division of Financial Programing) so that financial requirements of the proposed investments are in accordance with the financial forecasts of the public sector. - 40 -

ANNEX 1 Page 2 of 2

ARTICLE 3: If the adjustment to the above-mentioned financial projections requires revisions of the original plans, such adjustment will be carried out by the originating Agency.

ARTICLE 4: The Four-Year Transport Sector Plan will be submitted annually for the approval of the Council of Economic Co- ordination; once approved, the implementation will be compulsory for all the agencies mentioned in Article 1. The first year of the approved plan will be, basically, the budget for that year.

ARTICLE 5: The Office of Coordination and Integral Planning of Transport (OCPIT) will send to the agencies a format with the methodology for preparing their plan. Such format will be followed by the agencies and will include all elements corresponding to each specific project. In addition, OCPIT will prepare, together with each agency, a program for monitoring execution of the plan.

ARTICLE 6: Transcribe this Resolution to the interested parties and send it to files.

Signed

General (Ret) Juan A. Caceres

January 1982 - 41 - ANNEX 2

PARAGUAY

SEVENTH HIGHWAY PROJECT

OCPIT's Program of Activities for 1983-1984

1. Coordination of the transport agencies' Four-Year Programs and estimation of economic returns and relative priority of major investments (US$5.0 million equivalent or more), as established by Ministerial Decree No. 615-81 (Annex 1).

2. Preparation and implementation of a continuous monitoring and evaluation system of the execution of the studies, policies and investments included in the four-year transport plans.

3. Economic and financial assessments of Government-proposed investments in railways, with an estimated cost of US$5 million or more.

4. Updating of transport costs including terminal operations for the various modes within the country and on international traffic corridors.

5. Analysis of existing traffic flows, volume and value of produc- tion, population and other basic data and forecast future traffic.

6. Study of pricing of transport services, including:

(a) in relation to roads, pricing of fuels;

(b) pricing of port and airport services;

(c) charges, taxes and duties levied on transport activities.

7. Supervision of pre-feasibility and feasibility transport studies carried out under contract.

8. Studies of technical and economic feasibility, together with the respective modal agencies, under force account.

9. Assessment of traffic management and other policies with a view toward fuel conservation.

10. Study of the energy balance by mode of transport.

11. Updating a previous study on traffic accidents on main highways of Paraguay and making recommendations about a national policy for highway safety.

April 1982 - 42 - ANNEX 3 Page 1 of 4

PARAGUAY

SEVENTH HIGHWAY PROJECT

Terms of Reference for Technical Assistance for Highway Engineering Training

1. Technical assistance has been included in the Seventh Highway Project to build up, through a functional training program, the capability of DGV's professional staff to meet the technical requirements imposed by an increasingly complex highway system.

Objectives

2. Upon a preliminary review of procedures and performance in highway engineering and maintenance, and particularly in programing, contracting and monitoring engineering design work with consulting firms, and carrying out of routine and periodic maintenance, the following major objectives have been set:

(a) to ensure that the Engineering and Maintenance Depart- ments under DGV acquire the expertise necessary to carry out the control of contracts, the supervision of preli- minary and final highway designs and the programing, imple- mentation and monitoring of routine maintenance, periodic maintenance, rehabilitation and strengthening works;

(b) to ensure that adequate engineering inputs are available in the Engineering and Maintenance Departments for pre- paring technical specifications and contract documents for highway projects and carrying out the programing and implementation of force account works; and

(c) to improve current highway design and maintenance practices.

Scope of Assistance

3. The consultants will review the functions of the Engineering and Maintenance Departments of DGV, including, but not necessarily limited to, the following:

(a) current procedures for preparing, contracting and monitoring engineering design works;

(b) current procedures for programing highway works, including maintenance; - 43 - ANNEX 3 Page 2 of 4

(c) current procedures for executing and monitoring maintenance works; and

(d) working methods of the soils and materials laboratory of MOPC.

Furthermore, the consultants will review the number and qualifications of personnel and their assignments.

4. Upon completion of their review, the consultants will report their findings to the Director General of DGV and recommend specific functional and technical training, which will cover, but not necessarily be limited to, the following:

(a) project selection, engineering for feasibility analysis and principles of planning and financial programing;

(b) pavement and highway capacity evaluations; survey work and tests required;

(c) soils and materials studies, field explorations based on both direct and indirect traditional methods, sampling techniques for different purposes and laboratory testing required for design and construction of embankments, pavements, structures and foundations. Statistical quality control and design parameters adapted to Paraguayan soils and available maaterials;

(d) pavement design; thickness, design methods and utiliza- tion of materials adapted to local conditions and traf- fic volumes and compositions;

(e) maintenance management: productivity, use and costs of equipment (this subject should be coordinated with the consultants on Equipment Management); planning and or- ganization of maintenance, supervision of maintenance contracts;

(f) review of the standards of presentation for preliminary and final engineering design and the contracting, admi- nistration and supervision procedures; and

(g) review of the procedures for identification and preparation of feeder road programs (this subject should be carried out in direct coordination with consultants assisting UCR, under DGV). - 44 - ANNEX 3 Page 3 of 4

5. Supplementing the different matters to be covered during the training, the consultants will conduct with the trainees the field work necessary to give practical content to the office training.

Staffing

6. The technical assistance will be provided by the following specialists:

(a) a highway engineer who would be the program leader and coordinator, with experience in highway administration, planning and programing (18 months);

(b) an engineer-designer with structural background and ex- perience in supervision of construction works (eight months);

(c) a maintenance engineer with experience in planning, executing and monitoring of maintenance activities (six months); and

(d) a soils and materials engineer with experience in pave- ment'design and evaluation (eight months).

It is envisaged that the technical assistance program will be carried out over a period of 18 months and will require a total of 40 man-months. All staff must be fluent in Spanish and preferably have had experience in similar training programs in developing countries. Before the end of the Program, the consultants will help MOPC to establish a Training Unit within DGV.

Executing Government Agency and Counterpart Staff

7. DGV will be the executing agency; the permanent staff of engineeers of the Engineering and Maintenance Departments will be the recipients of the assistance. DGV may consider the inclusion of staff about to graduate and engineers employed by local consulting firms with which MOPC normally has contractual relations.

Reporting

8. The consultants will be required to report to the Director General of DGV as follows:

(a) an inception report containing the consultants' findings and recommendations for a specific plan of action, including curriculae; this report should be presented two months after mobilization; - 45 -

ANNEX 3 Page 4 of 4

(b) bi-monthly progress reports during the one year period; and

(c) specific manuals or written procedures, to be issued only as supplemental to the published material used and/or available.

January 1982 - 46 - ANNEX 4 Page 1 of 4

PARAGUAY

SEVENTH HIGHWAY PROJECT

Terms of Reference for Technical Assistance for the Management of Equipment Fleet and Workshops

Introduction

Under the Seventh Highway Project, a program will be carried out by specialized consultants (firm or individuals) to assist MOPC in develop- ing and implementing road maintenance equipment and workshop management practices.

Objectives

The principal objectives are:

(i) Equipment Management:

(a) improve utilization of equipment in road maintenance;

(b) develop preventive maintenance controls;

(c) record equipment availability and utilization;

(d) record equipment operating and repair costs;

(e) plan equipment renewal and purchases;

(f) establish operator evaluation and training systems.

(ii) Workshop M4anagement:

(g) define repair activities to be carried out by force account and those to be contracted out;

(h) produce recommendations on organization, coordination and control of workshops;

(i) make recommendations regarding tool and manpower require- ments;

(j) develop and implement inspection and evaluation proce- dures;

(k) determine and establish training requirements for mechanics and other personnel; - 47 -

ANNEX 4 Page 2 of 4

(1) establish maxi-minimum spare part stock levels; and

(m) implement control on spare parts requisitioning, supply and accounting.

Scope

(a) Based on the road maintenance and betterment subprograms of each district and the total availability of equipment based on updated inventory, the consultants will reassign the equipment in order to improve the utilization, reduce costs given the physical targets or maximize the work within the budget constraints, and avoid purchases of unjustified additional units. Besides assigning the right type of equipment to each type of job, the consultants will make recommendations regarding related inputs. Particularly important will be the form in which the equipment is operated and the way in which fuel, oil, grease, and other related inputs are and should be stocked, storaged and distributed.

(b) The consultants will assess the current, if any, preventive maintenance activities carried out and the controls applied. Guidelines, when appropriate, will be developed, written in a simple manner and applied. In addition to equipment and vehicles, preventive maintenance procedures and controls should be extended to asphalt plants, crushing- stone plants and all other equipment installation related to road mainte- nance activities. A homogenous record system should be developed and implemented.

(c) For adequate management of the maintenance fleet, it is necessary to have a permanently updated inventory including location, age and condition, availability and coefficient of utilization of each unit. This information will allow, among other things, calculating capital (interest and depreciation) and operating costs, and program replacement and withdrawals from service.

(d) Records of equipment utilization, as indicated above, and of repair activities should be the basis for proper costing. The consultants must establish data requirements, forms and procedures to ensure that all costs, direct and indirect, are suitably estimated. Special attention will be given to the required detail of indirect cost calculations and the form for assigning them to programs, activities and equipment.

(e) Sound equipment management procedures with the resulting costing system, together with the Four-Year Subprogram that MOPC will have for highway maintenance, will allow higher productivity of equipment and the programing of equipment replacement and additional purchases, if necessary.

(f) The consultants will develop and implement a system to ob- jectively evaluate the performance of equipment operators. This evaluation system will allow the recommending of personnel management policies and establishing of categories according to performance and responsibility. At the - 48 - ANNEX 4 Page 3 of 4

same time, the consultants will identify training needs and will recommend and implement courses, seminars, workshops, etc., to cover the identified training demand.

(g) The consultants will review the available capacity of MOPC's workshops and that of the private sector. Based on a comparative cost analysis of repair works for road maintenance equipment, the consultants will recommend the type and level of repair works that prove economically convenient to carry out at the Districts' workshops and the Central workshop.

(h) Based on the preceding analysis and recommendations (g), the consultants will recommend and implement the organizational changes neces- sary to carry out the force account repair works effectively. Recommenda- tions will include the type of contractual arrangements that MOPC should have with the private sector repair workshops. A system will be developed and implemented for adequate control of equipment maintenance operations, whether in the field, the Districts' workshops or the Central workshop.

(i) In line with the repairs recommended to be carried out by force account and the corresponding organizational changes needed at the workshops, the consultants will determine the required repair lines, tools and manpower.

(j) The consultants will develop and implement inspection proce- dures to assess the quality of repair works and the related productivity of mechanics. Adequate records of repairs carried out on each equipment unit will allow for the programing of repair works and estimating of costs and the useful remaining economic life.

(k) Evaluation of performance of mechanics and other workshop personnel will allow the consultants to recommend personnel management practices and the corresponding responsibilities. Simultaneously, the consultants will assess the training needs and proceed to implement the courses, workshops, etc. to develop the qualified required manpower.

(1) With regard to spare parts, the consultants will recommend a system to keep the spare parts inventory permanently updated, to store daily spare parts for equipment in service, and to establish maximum and minimum fast-moving (particularly for preventive maintenance) spare part stock levels.

(m) The consultants will recommend a recording system for spare parts in each stockroom and the subsequent requisitioning, supply costing and accounting procedures. The system, if manual, should be developed bearing in mind eventual computerization.

Staffing

The technical assistance will last for two years. It is envi- saged that four experts (two for equipment management and two for workshop - 49 -

ANNEX 4 Page 4 of 4 management) will be required over the period. The equipment management specialists should be engineers with experience in the operation and management of road maintenance and construction equipment fleet. The senior equipment engineer should have at least ten years of experience, and preferably should have worked in developing countries. The second equip- ment engineer will assist the senior engineer to perform the functions outlined in the present terms of reference. Each engineer will remain in Paraguay for about two years. The senior equipment engineer will also lead the Technical Assistance Program.

The workshop management specialists should be mechanical engineers with experience in management of equipment repair workshops. The senior workshop specialist should have at least ten years of experience and preferably should have worked in developing countries. The second workshop specialist will assist the senior workshop mechanical engineer to perform the functions in the present terms of reference.

Each engineer will remain in Paraguay for about two years. All four candidates for the positions must have acceptable fluency in Spanish, ability to communicate with personnel and be willing to travel within Paraguay.

Reporting

The consultants will prepare quarterly reports addressed to the Director General of DGV on their contribution to the operations and manage- ment of the workshops and the improvement in availability and utilization of the equipment fleet. The consultants will, above all, try to effect specific practical improvements and will normally report on procedures and systems only after they have been tested and introduced.

January 1982 - 50 - ANNEX 5 Page 1 of 3

PARAGUAY

SEVENTH HIGHWAY PROJECT

Details of the Economic Evaluation

A. Introduction

1. The main objective of the project, from the point of view of fund allocation, is to provide for the construction and upgrading of three high priority sections of the primary road system: (a) the San Lorenzo-Eisebio Ayala road (64 km); (b) the Villarrica-Numi road (28 km); and (c) the Tacuara-Santa Rosa road (98 km). The first project road, although paved, has design characteristics inadequate for safe and efficient operations even for the present traffic level and composition. The other two project roads are presently earth-surfaced and closed during rainy periods. Their importance, besides constituting the sole connecting link between regions, is increased by the impact on the agricultural developments within the direct zone of influence of each road.

B. Traffic

(i) General

2. For the economic evaluation, each project road was divided into sections in which present or expected traffic differences were considered significant. In terms of traffic projections, different scenarios were considered, and one was selected. Projections in general are conservative, particularly if compared with the overall rate of growth of freight traffic in Paraguay, estimated to have been around 10-13% p.a. during the past five years. Traffic induction was estimated on the basis of transport cost reductions and avoidance of road closures in the cases of upgrading to paved standards.

(ii) San Lorenzo-Eusebio Ayala (64 km)

3. The existing San Lorenzo-Eusebio Ayala road was built in 1940, and present traffic levels exceed its capacity. Although paved, the road has low design speed, is barely 6 m wide and has practically no shoulders. Traffic counts were carried out in 1979 and, for some sections, again in 1981. The results are shown in Table 1 of this annex and, when compared with traffic figures from previous studies, show an average growth rate on the road of about 10% p.a. over the past decade.

4. Based on projections of population of the area directly served by the road and of economic activity in Eastern Paraguay, traffic was projected for each section. Total traffic was estimated as demand on the road without capacity constraints. Normal traffic was projected taking into account the contraction effect on traffic due to congention increasing over time. The average rate of growth for total traffic (normal and induced) resulted about the same on all road sections. Consequently, - 51 - ANNEX 5 Page 2 of 3 uniform rates were considered for each type of vehicle and period. Light vehicle traffic was taken to grow at 7.5% p.a. between 1986 and 1995 and at 6.2% p.a. afterward. Bus traffic, for the same periods, was considered to grow at 5.3% p.a. and 4.5% p.a. respectively, while truck traffic was taken to grow at 6.0% p.a. and 5.0% p.a., respectively. The difference between total (with project) and normal (without project) traffic was considered induced traffic.

(iii) Villarrica-Numi (28 km)

5. This section of Route 7, besides being the sole link between the regions of Guaira, Caazapa and Paraguari, will also connect with Route 6 through a secondary road included in the Caazapa Area Development Project. 1/ The Villarrica-Numi road is earth-surfaced and is closed for about 75 days a year because of weather conditions. The road will serve an agriculturally rich area with still abundant unexploited land.

6. In 1980, the road carried between 160 and 300 VPD; total traffic was assumed to grow at 5.3% p.a. over the lifetime of the project. This growth rate took into account a conservative growth estimate for the regional gross product (4% p.a.), which considered, however, the future impact of nearby agricultural projects. Table 2 of this annex shows the 1980 traffic figures and those projected for each of the two sections into which the project road was divided.

(iv) Tacuara-Santa Rosa (98 km)

7. The Tacuara-Santa Rosa is presently an earth-surfaced road which is closed for about 100 days per year because of rain. This road was divided into three sections based on traffic counts carried out in 1981. The base year traffic and that projected are shown in Table 3 of this annex. The basic assumption for the selected projection scenario was that the gross regional product would grow uniformly as GNP at an average rate of 7.5% p.a. until 1990 and from then on at a rate of 6.0% p.a., given that the strong performance shown by the Paraguayan economy (6.6% p.a. during 1971-1975 and 11.0% p.a. during 1976-1980) would continue in the future. Normal traffic is expected to grow relatively fast during the period 1983-1986, particularly as a result of traffic induced by connected ongoing projects (Coronel Oviedo-Tacuara road, due to be completed by late 1982, and P.J. Caballero-Yby Yau road, due to be completed in 1985). Average rate of growth of normal traffic, once the road is in service, is estimated at 7.3% p.a. The induced traffic is estimated conservatively and averages 12-13% of total traffic.

C. Economic Evaluation

8. All benefits, as well as costs, were valued at mid-1981 economic prices, considered in the case of Paraguay to be financial prices net of taxes and subsidies. No shadow pricing was considered necessary since unemployment is not a problem in the project areas and free market prices are a norm for practically all inputs. The quantified benefits were: (a) vehicle operating cost savings due to the upgrading of the roads and

1/ Numi-San Juan Nepomuceno-Tavai road. - 52 -

ANNEX 5 Page 3 of 3 the avoidance of road closures (for the Villarrica-Numi and Tacuara-Santa Rosa roads); (b) passenger time cost savings due to shorter travel periods and avoidance of road closures; and (c) road maintenance cost savings. Only for the San Lorenzo-Eusebio Ayala road, and because of its nature, an analysis of the impact of congestion was carried out.

9. Benefits are basically considered to accrue, in a first stage, to road users, but, taking into account the high degree of competition, they are expected to be transmitted to the rest of the economy in the form of lower priced inputs/outputs. For vehicle operating cost calculations, the methodology developed for Kenya by the Transport Road Research Laboratory (TRRL) was used. Passenger travel time savings were obtained based on speed differentials for light vehicles and buses. Speeds were also calculated following the above-mentioned TRRL methodology. From orgin-destination information, the average vehicle occupancy was obtained as well as trip motives. Benefits from eliminating road closures were obtained considering the average number of days per year that the presently earth-surfaced roads must be closed and the effects on time-related vehicle operating costs and on passengers' time value. Maintenance cost savings were based on normative activities estimated by the technical assistance consultants on maintenance for both earth- and paved-surfaced roads in Paraguay.

D. Rate of Return and Sensitivity Analysis

10. The weighted average economic rate of return for the civil works component, which accounts for about 98% of project costs, is 20.5%. Each of the three project roads shows satisfactory economic returns, and first year benefits are clearly above the opportunity cost of capital, estimated at about 12%. The following results summarize the economic analysis.

San Lorenzo- Tacuara- Villarrica- Concept Eusebio Ayala Santa Rosa Numi

ER with Time Savings 27.5% 20.6% 17.1% ER without Time Savings 23.0% 19.9% 16.4% First Year Benefits 14.4% 13.4% 12.8% Switching Value: Costs 232.3% 96.8% 41.5% Switching Value: Benefits -69.9% -49.2% -29.3%

11. The sensitivity analysis shows that the ER is inelastic to changes in costs, benefits and time value of passengers and that the risk of unsatisfactory results is very low.

12. The stream of costs and benefits for each project road is shown in Tables 4, 5 and 6 of this annex. Time savings are significant only for the San Lorenzo-Eusebio Ayala project road; they are of marginal relevance for the Tacuara-Santa Rosa and Villarrica-Numi project roads.

April 1982 - 53 -

ANNEX 5 Table 1

PARAGUAY

SEVENTH HIGHWAY PROJECT

Traffic on the San Lorenzo E. Ayala Road (64 km)

(Annual Average Daily Traffic)

Normal Sub Induced Sub Year Light Bus Truck Total Light Bus Truck Total Total

Section: km 0 - km 7

1979 3,378 1,401 2,233 7,012 - - - - 7,012 1988 7,050 2,240 4,060 13,350 950 370 160 1,480 14,830 1998 11,400 3,300 6,680 21,380 4,250 850 480 5,580 26,960

Section: km 7 - km 17

1979 2,543 1,239 1,820 5,602 - - - - 5,602 1988 5,400 1,970 3,280 10,650 320 320 140 780 11,430 1998 8,450 2,910 5,420 16,780 2,700 720 380 3,800 20,580

Section: km 17 - km 25

1979 1,958 852 1,506 4,316 - - - - 4,316 1988 4,000 1,370 2,730 8,100 320 130 70 520 8,620 1998 6,520 2,000 4,520 13,040 1,640 330 220 2,190 15,230

Section: km 25 - km 27

1979 1,362 813 1,633 3,808 - - - - 3,808 1981 1,782 890 2,029 4,701 - - - - 4,701 1988 2,980 1,340 3,000 7,320 60 120 80 260 7,580 1998 5,380 2,040 5,040 12,460 560 230 160 950 13,410

Section: km 27 - km 41

1979 1,180 700 1,500 3,380 - - - - 3,380 1981 1,539 768 1,831 4,138 - - - - 4,138 1988 2,420 1,120 2,720 6,260 240 105 80 425 6,685 1998 3,860 1,640 4,560 10,060 1,240 280 180 1,700 11,760

Section: km 41 - km 64

1979 825 337 1,158 2,320 - - - - 2,320 1981 1,136 390 1,528 3,054 - - - - " 3 1988 1,860 561 2,140 4,561 105 18 10 133 1998 3,270 864 3,600 7,734 300 39 40 379 8,11S

Source: Feasibility Study of the San Lorenzo - Eusebio Ayala Road, DGV and Tech. Assist. to OCPIT, April 1980 March 1982 PARAGUAY

SEVENTH HIGHWAY PROJECT

Traffic on the Villarrica - Numi Road (28.0 km)

(Annual Average Daily Traffic)

Normal Sub Induced Sub Year Light Bus Truck Total Light Bus Truck Total Total

1980 119 33 148 300 - - - - 300

1990 188 46 215 449 42 10 56 108 557

2000 298 64 312 674 65 14 81 160 834

Section: km 11 - km 28

1980 72 25 63 160 - - - - 160

1990 114 35 91 240 24 7 24 55 295

2000 183 49 133 365 35 10 35 80 445

Source: Feasibility Study of the Villarrica - Numi Road Project OCPIT, April 1981

March 1982

o.z (Dm m rN)u PARAGUAY

SEVENTH HIGHWAY PROJECT

Traffic on the Tacuara-Santa Rosa Road (98 km)

(Annual Average Daily Traffic)

Normal Sub Induced Sub Year Light Bus Truck Total Light Bus Truck Total Total

Section Km 0 - Km 18 1981 72 26 165 263 - - - - 263

1990 197 77 540 814 78 42 31 151 965

2000 321 126 1,165 1,612 130 68 67 265 1,877

Section Km 18 - Km 56.5 1981 51 24 139 214 - - - - 214

1990 134 64 401 599 33 27 29 89 688

2000 218 104 866 1,188 54 44 63 161 1,349

Section Km 56.5 - Km 98

1981 40 18 96 154 - - - - 154

1990 109 49 274 432 28 19 23 70 502

2000 178 80 592 850 46 31 50 127 977

Source: Updating of the Feasibility Study of the Tacuara-Santa Rosa Road, September 1981 April 1982 - 56 - ANNEX 5 Table 4 PARAGUAY

SEVENTH HIGHWAY PROJECT

Cost-Benefit Stream: S. Lorenzo - E. Ayala (Million G - Mid 1981)

Benefits Benefits Period Costs With Time Without Time

1 136.7 2 1764.7 3 2206.2 4 - 723.0 542.6 5 -28.3 819.9 614.8 6 -72.3 930.7 698.0 7 - 1065.7 799.3 8 175.6 1229.2 948.1 9 -87.6 1398.6 1049.0 10 - 1589.8 1192.6 11 -216.7 1842.2 1381.7 12 - 2061.5 1538.3 13 483.7 2314.7 1736.8 14 - 2588.5 1941.5 15 - 2896.6 2172.4 16 -72.3 3241.7 2430.6 17 -87.9 3609.4 2714.5 18 175.6 4045.2 3034.0 19 - 4512.7 3384.6 20 - 5061.3 3796.0 21 -228.6 5629.6 4222.2 22 - 6288.8 4716.7 23 7025.5 5263.1 24 1634.0 1641.3

Source: OCPIT and Mission's Estimates

November 1981 - 57 - ANNEX 5 Table 5 PARAGUAY

SEVENTH HIGHWAY PROJECT

Cost-Benefit Stream: Villarrica - Numi

(Million G - Mid 1981)

Benefits Benefits Period Costs With Time Without Time

1 297.4 2 604.1 - - 3 - 152.0 145.4 4 - 159.2 152.4 5 - 166.8 159.6 6 - 174.7 167.2 7 47.2 183.0 175.2 8 - 191.7 183.6 9 - 199.2 190.8 10 - 207.0 198.3 11 - 215.1 206.1 12 141.5 223.5 214.2 13 - 232.2 222.6 14 - 241.4 231.5 15 - 250.9 240.8 16 - 260.9 250.4 17 47.2 271.2 260.3 18 - 281.9 270.6 19 - 293.2 281.4 20 - 304.9 292.7 21 - 317.0 304.4 22 - 329.7 316.6 23 -360.5

Source: OCPIT and Mission's Estimates

November 1981 - 58 - ANNEX 5 Table 6 PARAGUAY

SEVENTH HIGHWAY PROJECT

Cost-Benefit Stream: Tacuara - Sta. Rosa (MillionG - Mid 1981)

Benefits Benefits Period Costs With Time Without Time

1 619.8 - - 2 826.9 - - 3 1519.4 4 1726.5 - - 5 -1.5 826.0 789.6 6 -1.5 915.9 873.0 7 -1.5 1004.1 957.1 8 -1.5 1074.5 1044.8 9 -1.5 1175.2 1120.6 10 211.5 1261.6 1203.0 11 -1.5 1350.8 1288.2 12 -1.5 1451.2 1383.8 13 -1.5 1557.0 1485.0 14 -1.5 1674.6 1592.5 15 637.4 1794.5 1712.2 16 -1.5 1928.9 1841.0 17 -1.5 2076.2 1982.2 18 -1.5 2237.8 2136.8 19 -1.5 2409.8 2301.8 20 -1.5 2602.7 2487.2 21 211.5 2814.0 2689.5 22 -1.5 3051.4 2917.5 23 -1.5 3300.8 3158.7 24 -1.5 3585.3 3432.7 25 -1516.4

Source: OCPIT and Mission's Estimates

October 1981 - 59 -- ANNEX 6 Page 1 of 2

PARAGUAY

SEVENTH HIGHWAY PROJECT

Project Monitoring Indexes

Planning

Quarterly progress vs programed work for each agency's subprograms and projects (studies, policies, investments); adjustments made or to be decided to meet annual targets; budget execution vs programed financial allocations.

Road Maintenance

Quarterly progress vs programed work, by District. Average monthly length during each quarter benefiting from: - surface repair, - roadside maintenance, - drainage maintenance, - structure maintenance, and - budget execution vs programed financial allocation.

Periodic Maintenance

Quarterly progress vs programed work, by District, including: - paved road kilometers resealed, - gravel road kilometers regraveled, - unsurfaced road kilometers reshaped, and - budget execution vs programed financial allocation.

Rehabilitation/ Improvement

Quarterly progress vs programed work, including: - type and extension of rehabilitation and/or improvement, and - budget executions vs programed financial allocation.

Equipment Availability b Number of dump trucks total/operational Number of platform trucks total/operational Number of other trucks total/operational Number of motorgraders total/operational Number of asphalt kettles total/operational Number of loaders total/operational Number of rollers total/operational Number of bulldozers total/operational Number of scrapers total/operational Crushing plants capacity/production Asphalt plants capacity/production - 60 - ANNEX 6 Page 2 of 2

Staffing

DGV's Department of Engineering:-Professionals required, and qualifications vs Professionals staffed, and qualifications.

DGV's Department of Maintenance:-Professionals required, and qualifications vs Professionals staffed, and qualifications.

-Operators (first category) required and staffed, by District. -Operators (second category) required and staffed, by District. -Drivers (first category) required and staffed, by District. -Drivers (second category) required and staffed, by District. -Foremen required and staffed, by District. -Day laborers, required and staffed, by District.

DGV's Department of Equpipment and Materials: -Professionals required, functions and qualifications vs professionals staffed, functions and qualifications. -Mechanics (first category) required and staffed. -Mechanics (second category) required and staffed. -Mechanics (third category) required and staffed. -Other workshop technicians required and staffed. OCPIT: -Professionals required, functions and qualifications vs Professionals staffed, functions and qualifications.

Training Program for Engineers

Quarterly progress reporting, including: - type of training, subject, number of assisting DGV engineers, number of other MOPC professionals assisting, number of assisting local consultants.

April 1982 - 61 - ANNEX 7

PARAGUAY

SEVENTH HIGHWAY PROJECT

Related Documents and Data Available in the Project File

A. Selected Project Information

1. Economic analysis of road components. 2. Working paper on the Tacuara-Santa Rosa road project.

B. Selected Reports and Studies Related to the Sector

1. Transport Sector Memorandum. Report 3626-PA. September 1981. 2. Paraguay: Analysis of Road Freight Transport and Intermodal Alternatives (Cono Sur). Report 3310a-LAC, June 1981. 3. Ten-Year Transport Plan. Technical Assistance to OCPIT, June 1980.

C. Studies and Reports Directly Related to the Project

1. Feasibility Study of the San Lorenzo-Eusebio Ayala Road. SAE-EIT-CONTEC. Technical Assistance to OCPIT, April 1980. 2. Feasibility Study of the Tacuara-P.J. Caballero Road. SAE-EIT-CONTEC. Technical Assistance to OCPIT, December 1977. 3. Feasibility Study of the Villarica-Numi Road. OCPIT, April 1981. 4. Final Design of the Tacuara-Santa Rosa Road. 5. Final Design of the San Lorenzo-Eusebio Ayala Road. 6. Guia de las Firmas Consultoras Paraguayas. 7. Proyecto de Ley Sobre el Regimen Legal de la Industria de la Construccion. 8. Computer Printouts for Calculations of the 1982 Maintenance Targets. 9. 1982 MOPC Budget.

D. SELECTED WORKING PAPERS AND TABLES PREPARED BY MISSION MEMBERS

1. Computer Printouts for Economic Calculations.

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