Document of The World Bank

FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No: 3098i-!-UY

PROJECT APPRAISAL DOCUMENT

ON A Public Disclosure Authorized PROPOSED LOAN

IN THE AMOUNT OF US$70 MILLION

TO THE

ORIENTAL REPUBLIC OF

FOR A

TRANSPORT INFRASTRUCTURE MAINTENANCE AND RURAL ACCESS PROJECT Public Disclosure Authorized

APRIL 26,2005

Finance, Private Sector and Infrastructure Department Argentina, Chile, Paraguay and Uruguay Country Management Unit Latin America and 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 EQUIVALENTS (Exchange Rate Effective February 1,2005) Currency Unit = Uruguayan Peso (UYP) UYP24.97 = US$1

FISCAL YEAR January 1 - December 31

ABBREVIATIONS AND ACRONYMS

ADT Average Daily Traffic IDB Inter-American Development Bank Initiative for Regional Infrastructure Integration in ANP National Port Administration IIRSA South America CAF Andean Development Corporation IPTI Institute of Transport and Infrastructure Planning CAS Country Assistance Strategy IRI International Roughness Index CFAA Country Financial Accountability Assessment ISA Intemational Standards of Auditing CND National Development Corporation LAC Latin America and the Caribbean National Commission for the Prevention of Road CNPCAT MDG Millennium Development Goals Accidents CREMA Contract for Rehabilitation and Maintenance MEF Ministry of Economy and Finance cvu National Road Corporation MERCOSUR Southem Cone Common Market DIVD Departmental Road Infrastructure Department MGAP Ministry of Agriculture, Livestock and Fishery DINAMA National EnvironmentalAuthority MMS Maintenance Management System DNH National Directorate of Hidrography MSP Ministry of Public Health DNT National Directorate of Transport MTOP Ministry of Transport and Public Works DNV National Directorate of Highways NCB National Competitive Bidding Organizationfor Economic Cooperation and DRMP Departmental Roads Maintenance Program OECD Development United Nations Economic Commission for Latin ECLAC OPP Planning and Budgeting Office America and the Caribbean EMP Environmental Management Plans PCU Project Coordination Unit ERR Economic Rate of Retum PSP Private Sector Participation FFRAA Special Fund for the Rice Industry PSR Project Status Report FM Financial Management QAT Quality Assurance Team FMR Financial Monitoring Reports RED Road Economic Decision Model FPTP Forest Products Transport Project SAAT Road Accident Information System FTP First Transport Project SDB Bank Standard Documents GOU Govemment of Uruguay SIIF Integrated Financial Management System Highway Design and Maintenance Standards HDM SIPLA Integrated Highway Planning System , Model ICB Intemational Competitive Bidding STP Second Transport Project ICR ImplementationCompletion Report TOCAF Financial and Administrative Control Code

Vice President: Pamela Cox Country Director: Axel Van Trotsenburg Sector Director Makhtar Diop Sector Leader Juan Gaviria Sector Manager: JosB Luis Irigoyen Task Team Leader: Jorge Rebelo/Andres Pizarro

.. 11 FOR OF'FICLAL USE ONLY URUGUAY UY Transport Infrastructure Maintenance and Rural Access

CONTENTS

Page

A . STRATEGIC CONTEXT AND RATIONALE...... 1 1. Country and sector issues ...... 1 2 . Rationale for Bank involvement ...... 10 3 . Higher level objectives to which the project contributes ...... 10 B. PROJECT DESCRIPTION...... 11 4 . Lending instrument ...... 11 5 . Project development objective and key indicators ...... 11 6 . Project components ...... 12 7 . Lessons learned and reflected in the project design ...... 14 8 . Alternatives considered and reasons for rejection ...... 15 C. IMPLEMENTATION ...... 16 9 . Partnership arrangements ...... 16 10 . Institutional and implementation arrangements ...... 16 11 . Monitoring and evaluation of outcomes/results ...... 17 12. Sustainability ...... 17 13. Critical risks and possible controversial aspects ...... 18 14. Loadcredit conditions and covenants ...... 19 D. APPRAISAL SUMMARY ...... 20 15 . Economic and financial analyses ...... 20 16. Technical ...... 21 17. Fiduciary ...... 22 18. Social ...... 23 19. Environment ...... 23 20. Safeguard policies...... 24 21. Policy Exceptions and Readiness ...... 25

This document has a restricted distribution and may be used by recipients only in the performance of their official duties . Its contents may not be otherwise'disclosed without World Bank authorization. ... 111 Annex 1: Country Background ...... 26 Annex 2: Program Background ...... 35 Annex 3: Sector Strategy...... 67 Annex 4: Major Related Projects Financed by the Bank and/or other Agencies ...... 73 Annex 5: Results Framework and Monitoring ...... 74 Annex 6: Detailed Project Description ...... 82 Annex 7: Project Costs ...... 91 Annex 8: Implementation Arrangements ...... 92 Annex 9: Financial Management and Disbursement Arrangements ...... 95 Annex 10: Procurement Arrangements ...... 98 Annex 11: Economic and Financial Analysis ...... 105 Annex 12: Safeguard Policy Issues...... 117 Annex 13: Project Preparation and Supervision ...... 126 Annex 14: Documents in the Project File ...... 127 Annex 15: Statement of Loans and Credits...... 132 Annex 16: Country at a Glance ...... 133

Map IBRD No. 33861

iv URUGUAY

TRANSPORT INFRASTRUCTURE MAINTENANCE AND RURAL ACCESS PROJECT APPRAISAL DOCUMENT LATIN AMERICA AND CARIBBEAN LCSFT

Date: April 26, 2005 Team Leader: Jorge M. Rebelo/Andres Pizarro Country Director: Axel van Trotsenburg Sectors: Roads and highways (60%); Sub-national Sector Manager: Jose Luis Irigoyen government administration (15%); Ports, waterways and shipping (15%); Central government administration (10%) Themes: Rural services and infrastructure (P);Trade facilitation and market access (S);Infrastructure services for private sector development (S);Small and medium enterprise support (S);Other rural development (S) Project ID: PO57481 Environmental screening category: Not Required 1 Lending Instrument: Specific Investment Loan Safeguard screening category: B

[XI Loan [ ]Credit [ ]Grant [ ]Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (US$m.): 70.00

RECONSTRUCTION AND DEVELOPMENT Total: 53.40 46.60 100.00

Borrower: Ministerio de Econom'a y Finanzas Colonia 1089, Piso 3, 11 100, , Uruguay Tel: 598-2-902-0863 Fax: 598-2-902-1277

Responsible Agency: Ministerio de Transporte y Obras Wblicas Rinc6n 561, Piso 8, 11100, Montevideo, Uruguay Tel: 598-2-916-0509 Fax: 598-2-916-2883

Expected effectiveness date: September 7, 2005 Expected closing date: July 3 1, 201 1 Does the project depart from the CAS in content or other significant respects? Ref. PAD A.3 ]Yes [XI No Does the project require any exceptions from Bank policies? Ref. PAD 0.7 Have these been approved by Bank management? Is approval for any policy exception sought from the Board?

V Does the project include any critical risks rated “substantial” or “high”? Ref. PAD C.5 [ ]Yes [XINO Does the project meet the Regional criteria for readiness for implementation? Ref. PAD 0.7 [XIYes [ ]No

Project development objective Ref. PAD B.2, Technical Annex 3 The project’s development objective is to upgrade the country’s transport infrastructure to a condition that facilitates the transportation of freight and passengers at a cost-efficient level of service.

Project description Ref. PAD B.3.4 Technical Annex 4 Component 1: Transport infrastructure rehabilitation (US$44.6 million, including contingencies): This component entails carrying out reinforcement, replacement, and rehabilitation works and will be subdivided into three subcomponents: Subcomponent (A) DNV managed routes (US$8.4 million, including contingencies). Subcomponent (B) CVU managed routes and bridges (US$27.6 million, including contingencies). Subcomponent (C) Transfer terminal rehabilitation (US$8.6 million, including contingencies). Component 2: Road rehabilitation and maintenance contracting - CREMA contracts - (US$24.85 million, including contingencies). This component entails carrying out rehabilitation and maintenance works in six road sub-networks covering an estimated 98 1 km of national roads through performance-based CREMA contracts. Component 3: Departmental road rehabilitation and maintenance (US$20.6 million, including contingencies). The program consists of carrying out eligible annual departmental road rehabilitation and maintenance sub-projects. Component 4: Transport infrastructure safety program (US$3.8 million, including contingencies). This component entails implementing low-cost measures and investments to increase road safety. Component 5: Transport sector management and institutional building (US$5.8 million, including contingencies). This component entails technical assistance support to enhance transport infrastructure management.

Which safeguard policies are triggered, if any? Ref. PAD 0.6, Technical Annex IO (i) Environmental assessment; (ii)Involuntary resettlement; (iii)Cultural property policy.

Significant, non-standard conditions, if any, for: Ref. PAD C.7 Board presentation: NONE Loadcredit effectiveness: NONE Covenants applicable to project implementation: - Signing of a subsidiary agreement with the CVU, by which this agency is obligated to carry out the project activities under its responsibility and provide the necessary information to the Borrower to comply with its obligations under the Loan Agreement. The signing of this agreement will take place prior to the carrying out of any works under the project within the responsibility of CVU. - Preparation of an operational manual for the execution of the program that is satisfactory to the Bank, no later than three months after loan effectiveness. - Prepare and furnish to the Bank: (i)MTOP’s annual national transport rehabilitation and maintenance plan for the corresponding calendar year no later than the 31st of December of said year, each such plan should include, inter alia, a complete description of (a) DNV’s annual road rehabilitation and maintenance investments; and (b) DNH’s annual rehabilitation and maintenance investments. The plan should also include the expenditures to be incurred in respect of said works and the source of financing of said expenditures. - Project progress reports will be prepared by the PCU on a semi-annual basis and submitted to the Bank for review. These reports should refer to progress made under the different components of the project and measure performance against the results indicators established in the results framework. - Prior to the initiation of the works under a Departmental Road Maintenance Program (DRMP) each year: (i)enter into an arrangement with the participating Departamento, setting performance targets and conditionality. - The mid-term review will focus, inter alia, on the progress made by the Borrower in the preparation and execution of MTOP’s transport infrastructure plan for 2005-2009. The Borrower will be represented at the mid-term review meeting by representatives of MEF, MTOP and OPP.

vi A. STRATEGIC CONTEXT AND RATIONALE

1. Country and sector issues

General economic context

1. Between 1999 and 2001 Uruguay endured a prolonged economic recession that ended in a deep crisis in 2002. The slowdown was prompted by several external shocks: Brazilian devaluation (1999), foot and mouth disease outbreak (2001), and weak commodity prices and oil price increases. However, it was the Argentine debt, currency and financial crisis of 2002 that triggered the crisis and output collapse in Uruguay. As a result, income inequality and unemployment rose (the latter increased from 11.4 percent in 1999 to 19.7 percent in late 2002), and the fiscal situation deteriorated (fiscal deficit increased from 1 percent of GDP in the 1990s to 4 percent in 2001). Furthermore, a sharp devaluation of the peso in 2002 worsened public debt indicators because a large share of both domestic and foreign debt was held in dollars. The fiscal pressures exerted by the crisis together with a traditionally large participation of the public sector in the provision of infrastructure services, adversely affected their delivery and consequently, the competitiveness of the economy.

2. After four years in which GDP declined by nearly 20 percent, Uruguay’s economy bounced back, growing by 2.5 percent in 2003 and accelerating further at a rate of 12.3 percent in 2004. In addition, after two consecutive years of negative growth, merchandise exports grew at annual rates of 18.1 percent in 2003 and 37.8 percent (est.) in 2004, reaching a projected value of US$ 3.03 billion (FOB value) at the end of that year.2 Now that the crisis appears to have subsided, the Government of Uruguay (GOU) intends to move forward with its development strategy by reinforcing and upgrading transport infrastructure in order to: handle the expected increase in trade with Mercosur, resuming its pre-crisis levels, and with other world regions; enhance the competitiveness of the growing forestry and agricultural sectors, which account for an important share of the Country’s GDP and exports; and increase the attractiveness of Uruguay as a distribution and logistics center for Mercosur.

3. Exports have increased considerably as a result of a good external environment and the currency devaluation. The share of exports of goods and services as a percentage of GDP has continuously increased from 21.9 percent in 2002 to a projected 29.9 percent in 2004, indicating the growing importance of export competitiveness for economic growth. Moreover, after four years of continuous decline, the value of Uruguayan exports to Mercosur countries rebounded strongly in 2003 and 2004.3

4. Transport infrastructure improvements are critical for facilitating important foreign direct investment in the forestry sector and in supporting the expansion of exports. In the last three years, agricultural production has increased significantly, while in the forestry sector, pioneer

Country Assistance Strategy for the Oriental Republic of Uruguay July 25,2002, Report No. 24410 UR. World Bank staff estimates Despite the increase, the region’s share in total exports has continued to decline, falling from 55 percent in 1998 to an estimated 24 percent in 2004. It is also important to point out that at least part of the more than doubling of the share of exports to non- Mercosur countries is likely to be maintained over time, implying a shift in the traffic through ports (see issues section)

1 investments involving some of the largest firms in the world have been made or are in progress. Eufores, a leading Spanish company, invested over US$lOO million in the development of forestry plantations, the logistical terminal of M’Bopicui and Pefiarol’s and Fray Bentos chipping plants. Botnia, a Finnish company, has recently announced an investment in a new cellulose plant in Uruguay worth US$ 1 billion (around 1 percent of GDP). The proposed plant would multiply the volume of production eight fold and generate an important increase in the demand for transport.

5. The transport sector is already an important part of the Uruguayan economy. In 2003, the value added of transport services amounted to US$ 1.09 billion, equivalent to 7 percent of the Uruguayan GDP. Road transport (freight and passengers) and waterborne transport accounted for 2.8 percent and 2.6 percent of GDP respectively. Furthermore, the transport and telecommunications and construction sectors employ 6.5 percent and 6.2 percent of the total working p~pulation.~The transport sector alone employs more than 6,300 people directly in the public agencies at the national level (ANP, Am, MTOP, and PLUNA).’

6. Transport infrastructure development can have a positive impact in economic growth and income inequality in Uruguay by enhancing the competitiveness of producers, facilitating intemational trade, and generating opportunities for growth within the same transport and logistics sector. According to a recent study by Caldero’n and Sew& (2004), even for Uruguay, whose stock and quality of infrastructure are high by LAC standards, raising the level of infrastructure development to that of South Korea (the median of the East Asia and Pacific Region), would increase Uruguay’s economic growth rate by 2.6 percentage points per year (1.7 due to greater stocks and 0.9 percent due to better quality) and would reduce the Country’s Gini coefficient by 0.06 (where 0.04 would be due to higher quantity and 0.02 to enhanced quality).6

Sector context and government strategy

7. Transport infrastructure in Uruguay consists of the road and railway networks, fluvial and maritime ports and access channels, and airports. The Ministry of Transport and Public Works (MTOP) is in charge of the sector. In the last 8 years, the MTOP embarked on a major reform for modemizing the transport sector that included: (i)reorienting the functions of transport agencies towards policy making, planning, regulation and control, rather than execution activities; and (ii) allowing for increased private sector participation (PSP) in the sector through outsourcing and concessions. On the whole, the reforms have succeeded in improving the quality of transport infrastructure and services, as may be measured by the condition of the road network and its weathering of the crisis and by the important improvements in port productivity and costs.

Roads

8. Road infrastructure. The road system in Uruguay consists of an estimated 70,732 road kilometers (km), of which 8,732 km form the national network managed by the National Directorate of Highways (DNV) within the MTOP; and 62,000 km are departmental roads.

Central ~ankof Uruguay (2000) Central Bank of Uruguay (2003) Calderdn and ServCn (2004), “The Effects of Infrastructure Development on Growth and Income Distribution”, the World Bank.

2 About 7,743 km (11 percent) of the road network is paved. The low proportion of paved roads as a percentage of the total network length reflects the fact that the level and composition of traffic do not warrant a large extension of asphalt roads in the regions outside Montevideo. When only the national or primary network is considered, the proportion of paved roads increases to 89 percent, higher than that of Argentina, Chile and . With the highest density (21.4 km per 1,000 inhabitants) and coverage (401.4 km per 1,000 km2) in the LAC region, the Uruguayan road network provides good accessibility to most locations in the country. Within the national network, there are also 778 bridges with a total length of about 60,000 meters. In 2004, the total value of national road assets (sum of the monetary value of individual road segments accounting for their present condition) amounted to US$ 2.14 billi~n.~

9. The departmental road network comprises about 62,000 km of unpaved roads, of which more than half are gravel roads with year-round accessibility, and the remainder are earth roads. Departmental governments (Departamentos) manage this network. Under the Departmental Roads Maintenance Program (DRMP), MTOP is assisting departments in coping with the maintenance backlog of their networks and building up institutional capacity at Departamentos.

10. Znfrastructure condition. Most of the road network and bridges along the national road network were built in the early part of the last century. In particular, 45 percent of all bridges in the national road network are more than 50 years old, and 75 percent of bridges are more than 25 years old. Also, as a result of the budgetary constraints imposed by the crisis, and despite the high priority given to maintenance, road condition started to deteriorate again after 2001. The percentage of the road network in very good condition dropped to 19 percent and the percentage in poor condition increased to 33 percent in 2003. Many maintenance contracts with the private sector could not be implemented and the standards of force account maintenance had to be reduced in order to meet MTOP budgetary restrictions. As a result, the value of road assets has also fallen from its peak of US$ 2.23 billion in 2000 to US$ 2.14 billion in 2004, below its median value. This indicates that, despite the consistency of the reforms and the policy of absolute priority to maintenance, the lack of investment inevitably results in a reduction in the value of road assets.

Figure 1: Evolution of the Road Network Condition and Value' r- Road network condition

1 80 i ,I 70 60 0 g 50 5 40 30 n 2080 - 2095 2060 - 2040 - 1 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

+Good/ Fair +Poor

0.65 percent below the median of the maximum theoretical and minimum admissible values as defined per ECLAC's methodology. Source: National Directorate of Highways (DNV)

3 11. Infrastructure use. International road cargo traffic reached a peak in 2000, when 3 million tons were transported across border crossings, but dropped markedly to about 1.8 million tons in 2002 as a result of the crisis. However, road cargo traffic is starting to show signs of recovery with 2 million tons mobilized in 2003. Passenger traffic in inter-urban road transport routes also increased from 16.4 million in 2002 to 18.6 million in 2003.

12. Road safety. With support from the Bank and the IDB, the GOU has implemented actions aimed at improving road safety, such as the installation of signalling and safety equipment on roads, and the development of campaigns to educate motorists on the importance of observing traffic rules. It appears that these actions have had positive results as accidents in the surveyed network (5,000 km or 58 percent of the national road network) went down from 1914 in 2000, to 1365 in 2003, while fatalities decreased from 168 to 132 over the same period. However, these numbers do not capture the high occurrence of traffic accidents in other sections of the network and in many urban municipalities (such as the Montevideo Metropolitan Region), where most fatalities take place and traffic accidents are considered a recurring public health problem.

13. Govemment strategy. The GOU road management strategy is based upon the use of performance based instruments, including: (i)private sector participation (PSP) mechanisms, such as road concessions, performance-based maintenance contracts, and maintenance micro- enterprises (see Box 1); (ii)the “Megaconcesidn”, an innovative scheme for channeling funding towards the performance-based maintenance of key sections of the network (See Box 2); and (iii) an output-based maintenance scheme for departmental roads. In the absence of dedicated funds, the first two instruments have proven to be successful in securing road user charges and channeling them toward the cost-effective maintenance of the most important sections of the road network. The GOU plans to continue with the use of these mechanisms to increase efficiency in maintenance operations and protect the funds allocated to maintenance from the volatility of the national budget and under funding of the road sector.

4 14. As for the Megaconcesidn, the GOU strategy aims at strengthening it and enabling it to raise private financing through the fiduciary trust scheme (See Box 2). The fiduciary trust has already been designed and potential investors have shown interest in the proposed financing structure and a certain tolerance for the embedded risks. The current administration is analyzing options to implement the fiduciary trust.

15. The GOU will also continue supporting the Departmental Road Maintenance Program to enhance the technical capacity and operational efficiency of participating Departamentos, increase the quality of maintenance works, and ensure year-round accessibility for key sections

5 of the rural road network. The program entails annual routine and periodic maintenance of about 9,000 and 1,500 km of roads, respectively.

16. The current administration has also emphasized the importance of improving urban mobility and eliminating the bottlenecks impeding the flow of goods through transport gateways (ports and international corridors) located within or in close proximity of urban agglomerations, particularly the Montevideo Metropolitan Area (MMA). In this respect, the GOU strategy consists of developing a master plan for the improvement of urban transport and the implementation of compatible investments in urban infrastructure, and the reorganization of cargo traffic and improvement of road access through the construction of a by-pass to the city of Montevideo and in general improving access to ports. Finally, the current administration is also seeking to scale up efforts to improve road safety, particularly through the continuation of minor infrastructure, signaling and illumination works in suburban areas.

Ports

17. Port infrastructure. The port system is composed by commercial (cargo and passengers), fishing, recreational, and specialized liquid bulk terminals. The country’s main commercial ports are: Montevideo, Nueva Palmira, Fray Bentos, Colonia, and Juan Lacaze. The GOU, through the National port Administration (ANP), owns and operates all these port installations, and has a minority participation in the new container terminal in Montevideo. The private sector owns and operates a container terminal in Montevideo, a bulk terminal at the port of Nueva Palmira and the recently inaugurated port of M’Bopicua. The National Directorate of Hidrography (DNH) at the MTOP manages small commercial, recreational and fishing ports, including: La Paloma, Piri6polis, , Carmelo, Puerto Sauce and Higueritas. La Paloma is the main fishing port, currently serving the industries established there and some naval installations.

18. Infrastructure use. The volume of cargo mobilized through Uruguayan ports has moved on an upward trend since the reform of 1993. Between 2002 and 2003, cargo traffic in Uruguay’s main ports experienced an increase of 25 percent, the largest annual increase in the last 5 years. In 2003, cargo traffic in the Uruguayan port system (Montevideo and interior ports) totaled 8.3 million tons. In terms of the volume of freight handled, the Port of Montevideo is by far the most important with 4.5 million tons mobilized in 2003. As for containers, in the same year, Montevideo handled 210,401 boxes, equivalent to 333,87 1 TEU (Twenty-foot Equivalent Units).’ The second most important port in terms of cargo traffic is Nueva Palmira with 1.3 million tons handled at the public terminal operated by the ANP. Finally, the Port of Fray Bentos handled 510 thousand tons, of which 450 thousand were forestry products bound for export markets. After three years of decline, in 2003, passenger traffic in the port of Colonia recovered somewhat, reaching 8 10 thousand passengers; while, passenger traffic in the interior ports continued on the rise, particularly in Carmelo and Nueva Palmira.

19. Infrastructure condition and safety. Some public terminals have deteriorated considerably as a result of the lack of maintenance and the postponement of necessary investments due to budgetary constraints. Some cargo terminals, such as Fray Bentos and Montevideo, need to be

Overall, the number of containers has increased by 160 percent and the number of TEUs has multiplied threefold since 1993, the year after port sector reform

6 upgraded in order to avoid capacity constraints resulting from increased demand. On the other hand, some passenger and fishing ports, such as La Paloma and Piriiipolis, are in need of urgent minor rehabilitation works, as the condition of infrastructure is becoming a significant threat to user safety. Finally, there is also need to improve land access to some ports and improve their connection to the railway and road system.

20. Government strategy. Uruguay is currently shifting from a model in which ANP owned and operated the port - a service port model - into a model in which ANP owns the infrastructure (quays, docks, storage yards) and is in charge of its management, while private firms may own the assets of the port superstructure (cranes, shed, office buildings) - a landlord port model. The new model has been largely successful in achieving higher levels of operational efficiency, reducing tariffs, and increasing private investment in port infrastructure and services, not only in Montevideo but also in the ports of the interior. However, there are still many challenges that the new administration will face, including: space and access constraints in Montevideo, infrastructure maintenance and dredging needs, the need to develop business oriented plans for the interior ports, the promotion of value added services, and the full transition of Montevideo to a landlord model.

21. Addressing these challenges will require undertaking key investments in infrastructure to avoid capacity constraints, strengthening planning and regulatory capacity in the MTOP, promoting the development of the interior ports, and encouraging a commercial orientation in partnership with the private sector to improve the supply of value-added services and increase competition. The current administration strategy aims at addressing these challenges by: (i) preparing development plans for the ports of Nueva Palmira, Fray Bentos, and La Paloma; (ii) reducing the maintenance backlog and undertaking minor rehabilitation works in smaller commercial ports; and (iii)making necessary investments to avoid capacity constraints, particularly the dredging of access channels.

Issues to be addressed by the project and strategic choices

22. Based on the economic and sector context, the main issues on which the Government requires support in order to advance its strategy, can be summarized as follows:

a) The competitiveness of Uruguay’s exports depends upon the maintenance over time of the functionality, condition, and level of integration of transport infrastructure (roads, ports and railways). The products that drive Uruguay’s economic growth (agricultural and forest products) are transport-intensive, due to their nature (high volume and low price per ton) or because production centers are relatively distant from the main export gateways. While roads continue to be a top priority, ports and railways are attaining increasing importance as extra-regional markets gain in weight and the demand for forest products transport increases. In addition, solutions to improve urban mobility (by-passes, signaling works, and urban transport systems) are also gaining importance as means to enhance access to key infrastructure that is in close proximity to cities (main road corridors and ports), maintain functionality of the main infrastructure by avoiding the interference of urban agglomerations, and improve safety. The proposed project would assist the GOU in reducing the backlog of maintenance and preserving the functionality, condition, and integration of transport infrastructure by financing: (i)the enhancement of

7 crucial transport links, (ii)the elimination of infrastructure bottlenecks; (iii)the improvement of departmental roads to ensure that rural producers have access to the main road corridors; and (iv) innovative mechanisms and management practices to preserve infrastructure assets in a cost-efficient manner. b) Recent levels of expenditure are not sufficient to ensure the adequate conservation of road assets and maintain the level-of-service attained after several years of efforts. A policy of maintenance only cannot be sustained indefinitely. The success of a policy that gives priority to maintenance was clearly demonstrated during the crisis and should continue to be the cornerstone of any road sector strategy in the country. However, a certain amount of rehabilitation is necessary to preserve the value of road assets. So far, PSP mechanisms have proven to be successful in securing road user charges and channeling them toward the cost-effective maintenance of the most important sections of the network and allowing the DNV to weather the crisis in a remarkable way. Nonetheless, in the short term, the conservation of road assets to the level attained could be jeopardized if reforms are not consolidated and the level of expenditure is not raised. The proposed project would continue to support the use of PSP mechanisms, such as CREMA contracts, as they are indispensable for improving performance and ensuring a stable flow of financing for road maintenance, even in times of budgetary constraint. The project would also provide the current administration with the resources needed to undertake key investments to preserve the value of road assets and reduce the maintenance backlog. Uruguay has a significant amount of good quality road assets, so no urgent large investments are needed. These could only be envisaged if surpluses of resources are obtained but in the short-term, all investments should aim at enhancing regional physical integration and export competitiveness.

C) The Megaconcesio'n has had positive results but needs to be consolidated to achieve its purpose of levying funds from sources other than the budget and so further stabilizing the sector. The sustainability of the Megaconcesidn will depend on its ability to secure steady financing from sources other than those of the budget, so that MTOP resources may be directed to other parts of the road network. Since its creation, the Megaconcesidn has not yet been able to raise funds from private sources. One of the reasons may be that being financed by MTOP allocations, the reliability of its financial structure is not sufficiently reassuring for private investors. The proposed project would provide steady and reliable financing to the Megaconcesidn for a short period, enabling it to attain its rehabilitation and maintenance goals, and contributing to an enabling environment that would put it in a better position to raise funds from other sources. d) Despite continued efforts, and given that Uruguay is a transit country between Brazil and Argentina, further upgrades to international corridors are still needed to eliminate bottlenecks to international road freight transport. Despite the recent crisis, it is expected that in the short term the level of trade and freight transport will resume its pre-crisis level. Therefore, remaining bottlenecks in international corridors, such as bridges or other infrastructure not meeting Mercosur standards, will translate into bottlenecks to international freight transport. The proposed project would concentrate on the rehabilitation of sections and bridges that are not up to Mercosur standards and hinder the passage of trucks of loads higher than 22 tons.

8 Agricultural development poles require adequate road access to major corridors. In recent years agricultural development poles (cattle, milk, rice, and soy bean) have emerged in different areas of the country and agricultural and livestock production has accelerated noticeably.” The diverging nature of the demands that these developments have imposed on the Departmental road network of secondary and tertiary roads has warranted an approach on two levels by the GOU. Firstly, through the design of specific programs for the maintenance of some agricultural pole networks, such as the “Cuencu Lechera”; and secondly, through continued support to the Departumentos under the Departmental Road Maintenance Program (DRMP). The variety of problems encountered in each Department, and with each type of activity due to their differing nature will require the consolidation and expansion of the capacity and ability of Depurtumentos to plan, develop, and execute specific road programs adapted to each situation. The proposed project would continue its support to the DRMP, enhancing the capacity of Departumentos to deal with specific maintenance programs for roads that support agricultural development poles. In addition, the proposed project would support the GOU in ensuring that key transfer terminals are fully prepared to handle increased demand coming from exiting and new development poles.

Future increase of freight traffic due to forest products extraction and transport will strain the capacity of existing infrastructure. At the end of 2003, the forest planted area totaled 670,042 ha, reaching the critical mass of raw material supply that makes viable industrial processing at an economically- feasible scale. It is expected that the expansion of currently existing processing plants and the establishment of new ones with foreign capital will increase the demand for transport of raw materials and finished products and cause a significant deterioration of existing infrastructure and impose high costs to the government and society in terms of transport operating costs. Overall, the traffic of forestry products in the Uruguayan port system increased by 37 percent during 2003, thus becoming the main cargo shipped. Forest products traffic increased by 15 percent in Fray Bentos, 81 percent in Nueva Palmira, and 50 percent in Montevideo; and it is expected that it will continue to increase as new chipping plants are established in the country. The port of Fray Bentos has consolidated itself as the main port for the export of wood rolls. The private sector is already responding by developing forest products terminals outside of Montevideo, such as M’Bopicua. The proposed project will support the elaboration of master plans for the ports of Nueva Palmira and Fray Bentos to increase their commercial orientation, identify current and potential bottlenecks, and propose solutions to remove them. It will also accompany future expansion of terminal capacity with minor investments in transfer terminals and do not crowd-out private sector participation, but rather seek to continue leveraging and complementing private investment. The project recognizes the private sector role in the recent developments in the port sector, and a decision framework will be used to ensure that all investment financed by the project are in line with this principle.

Despite important advances, and as the network continues to be upgraded and traffic increases, it is necessary to continue working on the improvement of road

loAccording to the Ministry of Agriculture, Livestock and Fishery (MGAP), agricultural GDP increased by an estimated 13.2 percent between 2003 and 2004, for a cumulative increase of 36 percent between 2001 and 2004.

9 safety. In 2002, 1 percent of deaths were attributed to road traffic injuries in Uruguay, compared to the average of 2.2 percent for LAC and lower to middle income countries. Although low when compared to other LAC countries, traffic accidents and mortality rates in Uruguay remain higher than those reported in the developed world. The number of road accidents and fatalities per 10,000 vehicles stand at 23 and 4.7, respectively; considerably higher than those reported for OECD countries, where on average there are around 10 accidents and between 1.2 and 2.5 fatalities per 10,000 vehicles. Moreover, road safety in Uruguay is a matter of concern as road accidents have high social cost as the leading cause of mortality among young population. Road accidents continue to be the leading cause for death in the 15-29 age group, where the rate of road fatalities per 100,000 population is around 19 percent for males. In 2002, this age group accounted for around 26 percent of road accident related deaths. The high incidence of accidents related to vehicles going off-road and collisions indicate the need to keep on working on the improvement of signalling. The proposed project would continue to assist the DNV in improving road illumination, signalling, and lane markings to reduce accidents.

2. Rationale for Bank involvement

23. The Bank has played a key role in the development of transport infrastructure in Uruguay through its support to the definition and implementation of a sector-wide reform. The transport reform process has received strong support from the Bank under the First Transport Project (FTP) -Loan 3021-UR-, Forest Products Transport Project (FPTP) -Loan 4904-UR-, and the Second Transport Project (STP) -Loan 4395-UR-, with satisfactory results.

24. In addition, Bank assistance would continue to bring global experience and best practices started under previous projects to help accelerate institutional reforms and consolidate a sound road maintenance policy through the use of innovative approaches, such as CREMA contracts. Bank involvement will also be instrumental in consolidating road management planning tools developed under the FTP and STP and introduce new ones. Finally, the contribution of the Bank is essential for ensuring stable financing for advancing reforms. The project would finance key investments delineated in the Five-Year Investment and Maintenance Plan for 2005-2009 to complement those being undertaken under the on-going projects funded by the Bank, the Inter- American Development Bank (IDB), and the Andean Development Corporation (CAF).

25. Bank involvement fits well with the programs and activities of other donors in the Country, specially the IDB. The MTOP has been able to closely coordinate both multilateral agencies support to one specific goal, whereby different activities stemming from the same plan are financed by each of the Banks. This has been particularly evident with the STP and FPTP, and the IDB’s Corridor Integration and National Roads Improvement Project (0113-OC-UR).

3. Higher level objectives to which the project contributes

26. The higher-level objective of the project is to contribute to economic growth and poverty reduction by increasing the competitiveness of Uruguayan producers through the facilitation of cost-efficient transportation services. This is a key condition for Uruguay to take full advantage of increased trade opportunities within Mercosur and with other regions. This objective is

10 consistent with the GOU’s development strategy, which stresses the importance of improving infrastructure as means to promote export-led economic growth and poverty alleviation.

27. The proposed project was part of the base case lending scenario in the 2000 CAS, which envisaged from the outset a follow up operation to the STP to consolidate and expand the reforms achieved. The CAS discussed by the Board on June 6, 2000 and subsequent progress report discussed on August 8, 2001 supported efforts to: (i)improve infrastructure service delivery to enhance competitiveness and foster economic growth; (ii)increase private sector participation; and (iii)accelerate the rationalization of public expenditure needed to sustain macroeconomic stability. The proposed project meets the above mentioned CAS objectives by: (i)arresting the deterioration of key infrastructure to reduce transportation costs; (ii)removing infrastructure bottlenecks to enhance integration with Mercosur economies and facilitate trade with other growing export markets; (ii)continue modernizing the MTOP to improve transport infrastructure management and permit the rationalization of expenditures; and (iii)increasing private sector involvement in road maintenance to enhance quality at a lower cost to taxpayers.

28. The proposed project is presented to the Board of Executive Directors together with a new CAS (FY 05-10) that seeks authorization for lending and technical assistance in support of key actions for advancing the Government’s development agenda. The main objective of the proposed CAS is to support the central goal of the new administration, which is the attainment of equitable and sustainable economic development. The proposed project is part of the pipeline included in the new CAS and its activities and higher-level objective continue to be in line with its main goals.

B. PROJECT DESCRIPTION

4. Lending instrument

29. The GOU has requested a Specific Investment Loan (SIL) for US$ 70 million to finance part of its road sector program over the 2005-2009 period. The loan will be disbursed over 6 years (2005-201 1)

5. Project development objective and key indicators

30. The project’s development objective is to upgrade the country’s transport infrastructure to a condition that facilitates the transportation of freight and passengers at a cost-efficient level of service, This will be done by rehabilitating key transport links, removing existing bottlenecks, arresting any further deterioration of infrastructure due to budgetary constraints, and improving infrastructure management and safety. The project will help to reduce transport costs and preserve the infrastructure stock in Uruguay in an efficient and sustainable manner at both the national and local levels. In general, the structure and composition of the transport industry in Uruguay is highly competitive. Thus, the net reduction in transport costs brought about by the project should translate into freight tariff reductions, ultimately reducing the price of the transported goods and stimulating higher levels of productivity and economic activity.

31. The project’s subsidiary objectives are to: (i)reduce road-user costs by removing physical constraints to permit the transit of larger and heavier vehicles and improving road safety

11 on international corridors; (ii)assist MTOP in creating the enabling environment to consolidate its ability to attract more steady and reliable funding for the maintenance and rehabilitation of transport infrastructure and enhance infrastructure management practices; (iii)improve the accessibility of rural areas so as to enhance the comparative advantages of agricultural and livestock producers and improve the integration of secondary urban centers and the rural population into the national economy; (iv) contribute to ensuring that key transfer terminals are fully prepared to serve the new demands for inter-modal freight and passenger transport.

32. The achievement of the project’s development objective will be assessed through the following key indicators: (i)percentage of the road network below the optimal level of service according to traffic volume and surface type; (ii)percentage of the road network in bad condition; and (iii)value of road assets. Intermediate results will be measured by: (i)the progress in the removal of bottlenecks impeding the transit of trucks loaded up to Mercosur standards; (ii) the average network roughness on targeted national and departmental roads; (iii)the extent of private sector participation in the sector; (iv) progress in the implementation of institutional strengthening activities; and (v) indicators measuring road safety conditions (road accident indices and mortality rates on targeted networks).

6. Project components

33. The overall cost of the proposed project is now estimated at US$100 million of which US$89.8 million correspond to the infrastructure components (90 percent) and the remaining US$9.5 million to the institutional strengthening and road safety components. The Bank would finance US$70 million (including the front-end-fee), and the GOU the remaining US30 million (see Annex 6 for a detailed project cost table). To support the stated objectives the project would consist of the following components (costs include physical and price contingencies):

34. Component 1: Transport infrastructure rehabilitation (US$44.6 million, including contingencies). This component is fundamental in restoring the service levels of strategic transport infrastructure, whose condition constrain the efficient provision of transport services, in particular, the transit of heavier and larger trucks loaded up to Mercosur standards. The transport infrastructure that has been selected corresponds to links between major economic poles and export markets and transfer terminals supporting key economic activities. This component entails carrying out reinforcement, replacement, and rehabilitation works and will be subdivided into three subcomponents:

35. Subcomponent (A) DNV managed routes (US$8.4 million, including contingencies). Consists of the: (a) rehabilitation works consisting of reinforcing the pavement structures of : (i) about 15 km between ex-national and -km 594.100 on national Route 3; and (ii)about 20 km between Rio Tacuari-Cafiada Santos on national ; these sections are part of international corridors.

36. Subcomponent (B) CVU managed routes and bridges (US$27.6 million, including contingencies). It consists of the (a) rehabilitation works consisting of reinforcing the pavement structures of (i)5 km of National , between km144 and National route 22; about 16 km of National route 1, between the km 144 and National ; and about 3 km of the La Planta Urbana de Young section on national Route 3; and (b) carrying out of reconditioning works

12 consisting of strengthening, widening or replacing the existing structures of 20 bridges located on national Routes 1, 5, 6, 7, 8, 21, 26, 28, 30 and 200 (Interbalnearia route) and the access to Montevideo.

37. Subcomponent (C) Transfer terminal rehabilitation (US$8.6 million, including contingencies). Transfer terminals have deteriorated considerably as a result of the lack of maintenance and the postponement of necessary new investments due to budgetary constraints. This component consists of minor infrastructure rehabilitation works in several terminals. These interventions are needed to adequately respond to the new demands for the inter-modal transportation of freight and of passengers. The proposed works to be financed are minor investments in several terminals. In order, to adequately address the pertinence of each proposed investment a framework to screen the candidate investments will be used. The proposed framework will include the following criteria that must be met by the investments in order to qualify for financing; (i)the individual investments must be aligned with the overall objectives of this project; (ii)the specific investments must not reduce the possibility of private participation; (iii) adequate economic evaluation; (iv) compliance with MTOP’s port environmental assessment manual.

38. Component 2: Road rehabilitation and maintenance contracting - CREMA contracts - (US$24.85 million, including contingencies). This component entails carrying out rehabilitation and maintenance works in six road sub-networks covering an estimated 981 km of national roads through performance-based CREMA contracts. The sub-networks under each contract comprise different pavement types and service conditions. The contracts to be financed under the proposed project cover six networks: (i)National route 3 (between National route 1 and Paso del Puerto, about 243 km); (ii)National (between km 97-Paso de 10s Toros, 184 km); (iii)road access to Montevideo (85 km); (iv) Canelones center west sub-network (130 km); (v) Canelones east sub-network (140 km); and (vi) tourist zone (200 km).

39. Component 3: Departmental road rehabilitation and maintenance (US$20.6 million, including contingencies). The program consists of carrying out eligible annual departmental road rehabilitation and maintenance sub-projects executed by participating Departmental Governments and partially funded by the DNV through an annual performance based agreement. The departmental road maintenance program under the proposed project entails routine maintenance of about 9,000 km of gravel roads per year, including some periodic maintenance of roads and bridges. All departments in the country, excluding Montevideo, are expected to participate in the program and it should cover at least two years of the maintenance requirements for these roads, starting from calendar year 2006.

40. Component 4: Transport infrastructure safety program (US$3.8 million, including contingencies). This component entails: (i)implementing low-cost measures to increase road safety, including roads passing through urban areas, following the experience with the Second Transport project; and (ii)acquisitions and installation of road safety elements.

4 1. Component 5: Transport sector management and institutional building (US$5.8 million, including contingencies). This component would entail: (i)assisting MTOP in the preparation of its transport infrastructure plan for years 2005-2009, including engineering and economic studies as needed; (ii)training for capacity building and provision of new tools (HDM-

13 4 model); (iii)strengthening infrastructure management, including enhancing technical capacity at participating Departamentos and supporting the preparation of master plans for regional ports; (iv) assisting MTOP in the preparation of an urban transport program through the contracting of a master plan for the Montevideo Metropolitan Area; and (v) feasibility studies, environmental assessments, and detailed design studies of the Montevideo ring-road and access roads project.

7. Lessons learned and reflected in the project design

42. The proposed project design will take into account relevant lessons learned in prior projects and the Bank experience in Uruguay and in the region. Project execution will be greatly facilitated, especially in terms of procurement, project coordination and supervision, by the experience accumulated with the design and execution of previous transport projects in the Country. More specifically, the project design builds on lessons learned from the implementation of the First Transport Project (Loan 3021-UR), Second Transport Project (Loan 4395-UR), and the on-going Forest Product Transport Project (Loan 4204-UR), several Inter-American Development Bank (IDB) operations, and Bank experience in Uruguay and in the region. The performance of the Bank and borrower in the Second Transport Project was rated satisfactorily in the Implementation Completion Report; while the last Project Supervision Report of the Forest Product Transport Project considers progress in implementation and in the achievement of the project’s development objective as satisfactory. The resulting lessons learned reflected in project design are summarized below.

43. Impact of funding constraints and fiscal policies in the pace of reform and project implementation. In the past, the decline in sector funding and uncertainties with regard to future levels of funding, forced the MTOP to slow down the implementation of various institutional initiatives that were being tested with promissory results. MTOP could not further expand activities for which there was strong interest among potential participants but an unclear ability to meet funding requirements on a timely basis. These included: the micro-enterprise program, performance agreements between DNV and some of its maintenance districts, and CREMA contracts. Scaling up these results-oriented experiences requires a more stable macroeconomic environment in which the volatility of funding decisions can be kept within reasonable margins. Although the economic crisis in Uruguay seems to have subsided, future budgetary backing can still be volatile. Therefore, the project has been designed so as to remain firmly anchored on infrastructure maintenance as the major emphasis, making the size and pace of expenditures consistent with recent historical trends. Infrastructure investments are prudent and correspond to necessary rehabilitation and periodic maintenance activities that are needed to remove bottlenecks in both roads and transfer terminals and preserve the value of infrastructure assets. In fact, the Uruguayan experience after 2001 showed that even a strict policy of prioritizing maintenance could not avoid the slight but progressive deterioration of road conditions, and that a reasonable amount of more costly rehabilitation investments is needed after a certain point in time in order to avoid a decline in road asset value.

44. Establishing minimum requirements for performance-based maintenance (CREMA) contracts to work successfully. The experience in Uruguay has shown that CREMA contracts are powerful instruments to carry out road maintenance and rehabilitation in an efficient and effective way, even in a situation of great budgetary pressure. The successful experience of MTOP in Uruguay reinforces the notion that for CREMA contracts to show their real potential, a

14 number of requirements must be given, namely: (i)regular up-to-date and accurate information on the state of the road network and definition of realistic service output standards; (ii)effective control of contract compliance; (iii)good supervision of works; and (iv) reasonable contract duration. In Uruguay, the average duration of the CREMA contracts was between four and five years, which is the minimum duration recommended in literature to reduce the risk of unsatisfactory quality in rehabilitation works. The proposed project will finance road rehabilitation and maintenance through CREMA contracts adhering to these minimum requirements.

45. Securingfinancing on apluri-annual basis. Most of the CREMA contracts in Uruguay had been part of the STP, which, as mentioned above, guaranteed stable financing for at least part of the commitments and provided an incentive for the GOU to provide the necessary counterpart funds. Even with this arrangement the execution of one CREMA contract had to be postponed due to budget constraints, and delays occurred in the payment of the local component to contractors. This uncertainty regarding budget allocations is a strong deterrent for the implementation of contractual schemes that depend on credible funding arrangements and the perception of a high risk that the government might not honor its payment commitments, will certainly be reflected in the prices and could jeopardize the success of the instruments.

8. Alternatives considered and reasons for rejection

46. The proposed project follows the approach adopted under the Second Transport Project in terms of the lending instrument, scope, and technical options. This design proved to be very successful in the country’s and sector context. Some modifications to the project’s approach were considered and rejected, as explained below.

47. Lending instrument. Given the continued partnership that the Bank has developed with the Government and the advanced state of sector reform, a Sector Wide Approach Project (SWAP) design was also considered and discussed with the GOU as an option for delivering financing to the project. Under such approach, the Bank would provide support to all activities within the GOU’s transport program and not only to particular pre-identified investments. Nonetheless, the SWAP design has the limitation of requiring compatible procurement procedures with the other multilateral institutions assisting the sector, in this case IDB. Since this is not yet the case, it was deemed that the SWAP would not be the appropriate instrument. While the SWAP was not selected as the lending alternative, investments supported under the project will be aligned with a sector strategy, which has been consolidated through previous Bank operations.

48. Project scope. The alternative of including financing for the rehabilitation of the railway sector was discarded considering that there are still resources available under the Forest Products Transport Project that are supporting this sector. It was agreed that the proposed project will not include a railway rehabilitation component, as originally envisioned, and support for the railway sector will be subject to a thorough evaluation of the Bank’s rationale for involvement in light of the recent events in the sector, the options available, and the political and economic feasibility of proposed actions.

15 C. IMPLEMENTATION

9. Partnership arrangements

49. Although no explicit partnership agreement exists, The MTOP’s infrastructure strategy has been jointly supported by the Bank and IDB through the financing provided for the execution of Planes Quinquenales (five-year programs). Following this successful precedent, MTOP requested a US$77 million loan from the IDB (UR-LOOl), approved in October 2004, to finance a program with a total cost of US$110 million. The program seeks to improve the priority corridors of the national road network to enhance competitiveness and foster regional integration. This loan supports GOU sector strategy and is in line with the Bank’s proposed project objectives, rendering it completely complementary. Overall, both loans together will cover about 50 percent of the 2005-2009 road program.

10. Institutional and implementation arrangements

50. Sector policy responsibility. MTOP has the overall responsibility for the transport sector and the policy framework for project implementation. MTOP will lead the development and implementation of the reforms and oversee the execution of the institutional strengthening component. A specialized unit within MTOP, the Institute of Transport and Infrastructure Planning (IPTI), will provide support for the analysis of policy and fiscal perspectives in the road sector.

5 1. Project implementation. MTOP, through its National Directorate of Highways (DNV), National Directorate of Transport (DNT), and National Directorate of Hidrography (DNH), will have overall responsibility for most of project execution. DNV manages the National Highway Network and coordinates the Departmental Roads Maintenance Program. The DNH is in charge of port sector policy and planning and is also responsible for a wide range of activities, including: technical studies, maintenance of navigable waterways, hydraulic works, and the construction, maintenance and administration of the ports that are not under the jurisdiction of the National Port Administration (ANP). The ANP plays an advisory role in the formulation of sector policy, and manages the Country’s main ports: Montevideo, Nueva Palmira, Fray Bentos, Colonia, and Juan Lacaze. The DNT is in charge of regulating transport services in all modes; evaluating compliance with operational, technical and safety standards; and exercising control over service providers.

52. The sub-projects to be carried out within Component 1(B) - within the Megaconcesidn - will be contracted by the CVU, as the holder of the concession contract signed between the MTOP and the CND. The CVU and the MTOP will sign a subsidiary agreement in which the CVU, as executor of the works, will explicitly adopt all commitments assumed by the MTOP as part of the loan agreement that will be subscribed for the current project (see project covenants).

53. The Departmental Roads Maintenance program will be coordinated and supervised by the DNV. Annual departmental road rehabilitation and maintenance sub-projects will be carried out by the Departamentos (Departmental Governments) who have jurisdiction over these roads. The program will be executed through the signing of annual agreements between the DNV and the participating Departamentos, in which these commit to executing maintenance works on eligible

16 roads and improving the efficiency of their maintenance operations, and the DNV with the payment of an amount in accordance with their performance.

54. Project coordination unit. The Project Coordination Unit (PCU) was established within MTOP for the execution of previous projects. The PCU has the required institutional capacity to undertake the execution of the proposed project. The Implementation Completion Report for the Second Transport Project judged that the PCU’s performance was satisfactory and that it had adequate financial reporting and auditing systems, and provided accurate and timely information.

11. Monitoring and evaluation of outcomeshesults

55. Project progress reports will be prepared by the PCU on a semi-annual basis and submitted to Bank for review. These reports should refer to progress made under the different components of the project and measure performance against the results indicators established in the results framework (see Annex 5). In addition, progress reports will include the following: (i) disbursement performance over the period covered by the report and updated disbursement calendar; (ii)updated procurement plan for activities under each of the project’s components; (iii)a description of progress achieved in the implementation of the environmental and social measures that have been taken as part of the implementation of the project; (iv) a section describing potential developments that could affect project implementation, which should consist of a review of the main risks and the impact of mitigation measures envisioned at appraisal (See section on risks).

56. For investment components, implementation progress will be measured against performance indicators measured routinely by DNV. The performance of institutional strengthening activities and results will be evaluated with respect to road management indicators regularly published by the DNV. Road safety indicators will be assessed through the Road Accident Information System (SAAT for its name in Spanish).

12. Sustainability

57. The sustainability of the project will depend on: (i)continued ownership of sector reform; and (ii)the timely implementation of rehabilitation and maintenance interventions.

58. Ownership of sector reform. The transport infrastructure sector reforms have benefited from a remarkable institutional continuity, a situation that has logically contributed to their success. Although Uruguay is renowned for its institutional stability, there is no guarantee that the new administration will feel as much ownership of the existing sector policy. Notwithstanding, the present project concept has been discussed with the new government authorities, who agreed on the project objectives and components and confirmed that the sector policy will be maintained. The general recognition of the success of the reforms introduced by MTOP, as well as the continuity of administrative and technical staff, reduce the likelihood of a major reversal in the way things are done. In addition, the need to be competitive within Mercosur, clearly perceived by the GOU, and its preoccupation with the development of new economic activities as a result of the agriculture and forestry expansion continue to be driving forces for further reform. Finally, discussions with the new administration have confirmed and

17 consolidated this project design adding new emphasis in certain subcomponents to accommodate the new administration’s approach.

59. Timely implementation. The sustainability of the project will also depend on the timely implementation of maintenance interventions to avoid a more pronounced deterioration of road assets, which may result in an unmanageable increase in maintenance needs. The project design seeks to make interventions sustainable by prioritising them according to traffic and road conditions through the Integrated Highway Planning System (SIPLA) and utilizing various approaches according to the type of network and of intervention, in order to make maintenance cost-efficient. Given that timely implementation will, to a large extent, depend on a stable flow of funding, the project design seeks to ensure the availability of funds by aligning investments with budgetary allocations for the sector under the Plan Quinquenal and supporting the promotion of increased private investment through the Megaconcesidn, as means of guaranteeing a steady flow of funds towards road maintenance.

13. Critical risks and possible controversial aspects

Level Risk Risk Minimization Measure of Risk

Lack of institutional capacity (e.g., The projects will have adequate benchmarks inability to retain qualified staff) may and performance indicators to monitor prevent MTOPDNV from achieving progress. M physical and institutional targets planned for the road sector.

Insufficient leadership, ownership, or The project objectives and components have change in priorities on the part of been discussed with the current administration, MTOP and DNV may slow down or which is committed to the implementation of M even hamper implementation of the project. project. From Components to Outuuts Project implementation delays due to The following safeguards have been (i)insufficient or untimely release of incorporated: (i)project is aligned with the counterpart funds, (ii)procurement on-going Five-Year Plan 2000-2004, also delays. Uruguay has traditionally been valid for the first year of project execution. a good but rather slow executor of The expenditures proposed are in line with Bank projects. past trends and there is a commitment to the M project by the new administration; (ii)a significant number of projects will be “bid ready” prior to loan effectiveness; (iii)the design requirements of works under the project are quite simple.

The weakness of certain The Departmental Roads Maintenance M Depurtumentos, high turn over of local Program will introduce different schemes and

18 staff, or lack of program ownership at incentives that proved successful in previous the local level, may hinder slow down projects in order to assure full participation the implementation of the activities. and ownership.

14. Loadcredit conditions and covenants

61. Effectiveness conditions. There are no effectiveness conditions.

62. Other covenants

0 Signing of a subsidiary agreement with the CVU, by which this agency is obligated to carry out the project activities under its responsibility and provide the necessary information to the Borrower to comply with its obligations under the Loan Agreement. The signing of this agreement will take place prior to the carrying out of any works under the project within the responsibility of CVU.

0 Preparation of an operational manual for the execution of the program that is satisfactory to the Bank, no later than three months after loan effectiveness.

0 Prepare and furnish to the Bank: (i)MTOP’s annual national transport rehabilitation and maintenance plan for the corresponding calendar year no later than the 3 1st of December of said year, each such plan should include, inter alia, a complete description of (a) DNV’s annual road rehabilitation and maintenance investments; and (b) DNH’s annual rehabilitation and maintenance investments. The plan should also include the expenditures to be incurred in respect of said works and the source of financing of said expenditures.

0 Project progress reports will be prepared by the PCU on a semi-annual basis and submitted to the Bank for review. These reports should refer to progress made under the different components of the project and measure performance against the results indicators established in the results framework.

0 Prior to the initiation of the works under a Departmental Road Maintenance Program (DRMP) each year: (i)enter into an arrangement with the participating Departamento, setting performance targets and conditionality.

0 The mid-term review will focus, inter alia, on the progress made by the Borrower in the preparation and execution of MTOP’s transport infrastructure plan for 2005-2009. The Borrower will be represented at the mid-term review meeting by representatives of MEF, MTOP and OPP.

19 D. APPRAISAL SUMMARY

15. Economic and financial analyses

63. The MTOP performed an economic evaluation of the road rehabilitation and bridge restoration projects included in the first year of the program, the Departmental Road Maintenance Program, a sample CREMA project, and a sample of candidate transfer terminal restoration projects. The total Net Present Value (NPV) of the analyzed investments amounts to US$ 116.9 million.

64. The DNV has performed an economic evaluation of the road rehabilitation and bridge restoration works to be executed during the first year of the program; the departmental road maintenance program; and one CREMA sub-network. The evaluation was done using the Highway Design and Maintenance Standards Model (HDM), which simulates life cycle conditions and costs and provides economic decision criteria for road construction and maintenance activities. HDM 111 was used for estimating the net benefits of each project in terms of reductions in vehicle operating costs, passenger travel time, and road maintenance expenditures.

65. At the time of appraisal, only the projects corresponding to the first year of the program were analysed. The road rehabilitation and bridge restoration projects to be executed in the following years of the program will be evaluated as soon as the respective engineering designs, now under preparation, are completed, but always before they are cleared for the bidding process. CREMA projects, scheduled to start in the second year of the program, will be evaluated using updated traffic and road network conditions before they are tendered. Finally, the economic viability of the Departmental Road Maintenance Program (DRMP) will continue to be evaluated every year as part of the annual agreements between the DNV and Departamentos, seeking to maximize its impact according to changing conditions. The DNV has the required technical capacity to conduct all these evaluations.

66. The economic evaluation of the road projects included under the first component yields a positive economic return. The road rehabilitation projects included in the first year of the program yield a NPV, at 12 percent discount rate, of US$3.6 million and an Economic Rate of Return (ERR) of 19.1 percent. Under a worst-case scenario consisting of benefits dropping 20 percent of the current level and an increase of 20 percent in costs, the road rehabilitation program still yields benefits, represented by an ERR of 14.9 percent, which indicates that there is limited risk of it being uneconomical. The bridge restoration projects included in the first year of the program yield a total NPV, at 12 percent discount rate, of US$2.8 million and an ERR of 62.3 percent. Under a worst-case scenario of benefits dropping 20 percent of the current level and a 10 percent increase in costs, the bridge restoration program still yields benefits, represented by an ERR of 46.8 percent.

67. Only one CREMA contract, covering the sub-network known as Zona Turistica (Tourist Zone) was evaluated. The evaluation of this project was possible because the Tourist Zone sub- network is currently being maintained under a CREMA contract and therefore, it is possible to determine with certainty its condition in the year 2007, when the contract will be re-tendered

20 with project resources. The Tourist Zone CREMA project has a NPV of US$4.94 million and an ERR of 34.5 percent, showing the high economic return that this type of projects yield.

68. As for the DRMP, the overall NPV of the selected maintenance strategy over a period of 15 years is US$102.1 million. The results show that, with the exception of the very low traffic sections, maintenance interventions in all other road classes are economically justified. The low- traffic (less than 30 vehicles per day) departmental road sections have a negative NPV. Nonetheless, these are roads that link small villages with the main road network and have social and economic benefits other that the ones resulting from reductions in vehicle operating costs. Given that these benefits are not captured by the HDM, the current evaluation underestimates the economic return of the proposed maintenance program. The DNV is now working on producing a new evaluation using the Road Economic Decision (RED) Model, which allows for the quantification of these additional benefits.

69. The DNH carried an economic evaluation of a preliminary sample of projects identified for the transfer terminal restoration sub-component. The evaluation was carried out using a methodology based on consumer surplus, comparing with and without project scenarios and using economic costs (adjusted market costs) and benefits that had been previously developed for the economic evaluation of the First Transport Project. The benefits considered were; (i) transfer terminal tariffs (tourism, fishing and passengers), (ii)annexes services to vessels; (iii) additional expenditure incurred by vessel occupants; (iv) expenditure by stable and occasional tourists attracted by the ports (other than the vessel occupants). The economic evaluation of the investment projects included under the transfer terminals sub-component yields a positive economic return. Overall, the identified projects yield a total NPV, at 12 percent discount rate, of US$3.6 million and an ERR of 26.4 percent. Under a worst-case scenario of benefits dropping 20 percent of the current level and a 20 percent increase in costs, all the works envisioned for the transfer terminal restoration sub-component still yield benefits, represented by an ERR of 16.5 percent.

16. Technical

70. The designs of the works to be included in the first year of the program were reviewed at appraisal and their technical and engineering viability confirmed using HDM. Projects scheduled for execution in the following years will be reviewed as soon as the required studies are completed and always prior to their approval for tendering.

71. The design of rehabilitation and maintenance works was based on sound technical criteria and is in line with international best practices. Intervention strategies were selected with due consideration to the main factors that affect pavement performance: surface condition, structural strength, traffic characteristics and climatic conditions. The selected road sections are not expected to show signs of distress and high roughness values in the short to medium term, which would warrant excessive repairs or strengthening within the next 5 to 7 years. As for the bridge restoration component, the structures unit of the DNV (UE-DNV) has developed the necessary institutional capacity for bridge management and now is fully able to identify bridges with structural and dimensional problems, supervise rehabilitation works and carry out routine and preventive maintenance.

21 72. The CREMA approach was preferred over other methods, such as road concessions, because it optimizes the choice of technology, shortens response times, reduces design and supervision demands, and can be implemented even in low traffic sub-networks. The payment schedule, based on performance standards, ensures that the network is maintained after rehabilitation for the full duration of the contract. DNV has developed cost estimates, bidding documents and technical standards taking into account lessons learned, and local contractors have accumulated sufficient experience in the supervision and execution of CREMA contracts.

73. The road segments included in the DRMP are selected according to their compliance with a set of eligibility criteria and seeking to respond to the priorities identified through the DNV’s departmental road evaluation system (Sistema de Evaluacidn Circulando-SEC). During project implementation, this system will be used to evaluate the state of the departmental network periodically and assess the need to introduce changes to rehabilitation and maintenance interventions so as to enhance the impact of the program.

74. The project’s road safety component also includes the construction of minor works, and the installation of illumination and signaling equipment, all designed on proven highway engineering practice and experience.

75. The transfer terminal sub-components only include minor repair works of existing structures, all designed on proven engineering practice and experience.

17. Fiduciary

76. Financial management and audit arrangements. Financial management design and oversight are simplified by a number of circumstances that facilitates the implementation of this new project. These include (i)the existence of a successful history of financial management in previous projects managed by the same Ministry and under the same project coordination unit; (ii)the project coordination unit is completely absorbed under the Ministry institutional arrangement, and (iii)the experienced staff actually working in the project coordination unit is likely to continue working for the new project. These issues have been considered in the FM design of the project. See Annex 7 for a complete discussion of financial management and disbursements.

77. The Ministry current financial planning, accounting and financial management structure is based on the support provided by different units, including the DNV, the DNH, the International Credit Department, and the External Finance Advisory Unit. The financial management institutional capacity is satisfactory to manage projects financed by the Bank. The Ministry’s internal control and auditing processes needs are satisfactory as well. No operational manual is in place at the institutional level and an effort has to be made to prepare a project operational manual. The project operational manual should include procurement, disbursement, financial management and internal control.

78. The Ministry’s financial management capacity will be strengthened during project implementation by improving the financial and administration information system. Bank Loan proceeds will be deposited in a special account at the Central Bank. From this Special Account, funds will flow directly to project final beneficiaries.

22 79. Procurement. An assessment of the procurement capacity of MTOP concluded that, as demonstrated by experience with previous projects, it has the required proficiency to consistently apply Bank rules for the procurement of civil works, goods and services; and that these do not conflict with the requirements established in local legislation. During the review, no critical deficiencies were detected that may potentially prevent the agency from implementing procurement according to Bank requirements. As a result, the overall procurement risk of the project is rated as low. The agreed actions to strengthen project procurement are limited to carrying out a project launch seminar, 30 days after loan signature, and conducting annual ex- post procurement reviews.

18. Social

80. The project will have a positive impact on the living standards of the country’s population through its direct effect on competitiveness, employment, and economic growth. The negative impact of the proposed project on the local population and cultural property would be minimal, as most of the proposed roadwork will consist of the rehabilitation and maintenance of already existing interurban highways and departmental roads passing through sparsely populated areas.

19. Environment

8 1. Environmental classification. The project has been classified as “Category B”, following the Bank’s Operational Guidelines [OP 4.011, as no significant negative impacts that could jeopardize the natural environment of its area of influence are foreseen. This classification takes into account the fact that the proposed project will support the rehabilitation and maintenance of existing roads, either paved (national road network) or unpaved (departmental road network), and consequently will not involve new heavy construction activities. The main aspects that have to be considered to ensure an adequate environmental management of the subprojects include: stabilizing slopes, recovering areas for the exploitation and deposit of materials, controlling existing erosion processes, and incorporating road safety measures. Prevention, mitigation andor compensation measures for these issues are straightforward.

82. Environmental assessment. The Bank’s environmental assessment focused on the main aspects agreed upon with the Quality Assurance Team (QAT) of the Bank: (i)analysis of the mechanisms established to address the issues that trigger Bank safeguards; (ii)evaluation of the environmental management capacity of the executing agency; (iii)environmental evaluation of the first package of projects in each component; and (iv) evaluation of overall compliance with the National Environmental Legislation (See Annex 11). The environmental evaluation for the road infrastructure components of the first package of subprojects was conducted by the Environmental Unit of the DNV and reviewed by the Bank as part of the project’s due diligence. Individual subprojects were evaluated using the screening methodology established in the QAT’S Guide for Rapid Environmental and Social Evaluation of Road Projects, with the purpose of ensuring that environmental and social issues were appropriately considered in their design. This assessment determined that for one of the analyzed projects an Abbreviated Involuntary Resettlement Plan was required, and the environmental risk for the remaining projects was moderate for six, and low for the remaining sixteen. None of the projects have critical

23 environmental and social risks. Therefore, the project is environmentally viable and fulfils the Bank's Environmental Safeguards Policy.

83. The environmental evaluation for the transfer terminal sub-components of the first package of sub-projects was carried out by an independent consultant on behalf of the DNH. Individual subprojects were evaluated using the screening methodology established for the project and based on the Environmental Manual for Port Sector Activities and Projects of June 1988. This Manual was developed by the National Port Administration (ANP) and approved by the Bank as part of the First Transport Project, and has been adopted by the DNH as reference until it generates its own guidelines.

84. According to this assessment, all the candidate minor rehabilitation sub-projects analyzed were categorized as having low environmental and social risks. Therefore, the project is environmentally viable and fulfils the Bank's Environmental Safeguards Policy.

20. Safeguard policies

85. Involuntary resettlement. This Policy is triggered because in a particular road section of Route 1 to be rehabilitated under the first component, needs a specific instrument to take into account a potential affectation of some properties resulting from the construction of a by-pass to Colonia Valdense. In this sense, DNV developed an Abbreviated Involuntary Resettlement Plan according to the Safeguard Policy of the Bank. This Plan has been published in the Infoshop in accordance with the Banks rules. According to the census carried out as part of the Resettlement Plan, 11 families are concerned and 14 properties - consisting of 11 housing units, 3 hangars, 1 commercial establishment, and a unit once used as a tire replacement shop - will be affected. Affected persons will be compensated for lost assets and relocation; the project files contain the general practice in Uruguay conceming the evaluation of compensation. According to the socioeconomic survey, the 63 percent of the families concerned had incomes above 5 minimum salaries, 27 percent between 2 and 3 minimum salaries, and 9 percent just under 2 minimum salaries. Four of the eleven families concerned were renting (and had not been living in the area .long), and the rest were relatively longtime residents. When interrogated on their view of the expropriation 55 percent said they will reconstruct their homes in the remainder of the property whilst 45 percent said they would move (this includes all the families that rent). The owners of the rented properties do not, according to the survey, have any particular difficulties with the potential expropriation. On the whole, the expropriation will not provoke significant resettlement as only one owner-family would relocate, while the others that will potentially relocate are renting.

86. In addition, the Environmental Assessment indicates that there is no informal occupation of the right-of-way in any subproject, needing eventual resettlement. Furthermore, with the present level of detail known for other subprojects no further resettlement is foreseen.

87. Cultural property policy. According to the new guidelines, all projects involving civil works could trigger the cultural property policy. Given this, even though there is no expectation that cultural property is in the project area, the Environmental Assessment sets forth "chance find" procedures in the case that such property is encountered.

24 Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.01) [XI [I Natural Habitats (OP/BP 4.04) [I [XI Pest Management (OP 4.09) [I [XI Cultural Property (OPN 11.03, being revised as OP 4.11) [XI [I Involuntary Resettlement (OPBP 4.12) [XI [I Indigenous Peoples (OD 4.20, being revised as OP 4.10) [I [XI Forests (OP/BP 4.36) [I [XI Safety of Dams (OP/BP 4.37) [I [XI Projects in Disputed Areas (OP/BP/GP 7.60)* [I [XI Projects on International Waterways (OPBP/GP 7.50) [I [XI

21. Policy Exceptions and Readiness

88. The project does not warrant any exceptions to Bank policies and is deemed to be ready for implementation.

* By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas

25 Annex 1: Country Background URUGUAY: UY Transport Infrastructure Maintenance and Rural Access

Transport Infrastructure, Regional Integration and Competitiveness

1. Background

During the 1990’s Uruguay experienced steady economic growth averaging 3.6 percent annual GDP per capita growth between 1991 and 1998. As a result its social and economic indicators reached fairly high levels to the extent that the 2000 CAS, citing the country’s “relatively high level of economic and social development”, contemplated a progressive reduction in Bank support and a transition to graduation. The high level of economic and social development is equally a consequence of the country’s historical development. Uruguay was already well known for its relatively high prosperity in the late 1800s.

However at the end of the decade, Uruguay entered into a severe economic recession which was compounded by several extemal shocks; Argentine crisis (2002), Foot and Mouth disease outbreak (2001), Brazilian devaluation (1999), and weak commodity prices and oil price increases. As a result, income inequality and unemployment rose (the latter rose from 11.4 percent in 1999 to 15.3 percent in 2001)”, and the fiscal situation deteriorated (fiscal deficit increased from 1 percent of GDP in the 1990s to 4 percent in 2001). Furthermore, a sharp devaluation of the peso in 2002 worsened the public debt indicators because a large share of both domestic and foreign debt is held in dollars. The fiscal pressures exerted by the crisis together with a traditionally large public sector provision of services adversely affected the provision of those services and consequently the competitiveness of the economy. By 2002, the total value of international trade among Mercosur members had decreased to US$10 billion and the road transport across Uruguayan borders had diminished to 1.7 million tons.

Table Al-1: Main Indicators of Uruguayan Economy (2002-2004)

2002 2003 2004e

Real GDP Growth -1 1.0 2.5 12.0 Gross Domestic InvestmenVGDP 11.5 13.1 15.7 CPI inflation 14.0 19.4 9.2

Exports of Goods and Services/GDP 21.9 27.3 29.9 Imports of Goods and ServicedGDP 20.3 24.2 27.4 Current Account Balance/GDP 3.1 -0.3 -0.7

Primary Balance 0.0 2.7 3.7 Overall Balance -4.6 -3.2 -2.2 Public Debt/GDP 85.0 105.0 88.8 GDP. USD billion 12.3 11.2 13.4

Source: Uruguay Country Assistance Strategy

” Country Assistance Strategy for the Oriental Republic of Uruguay July 25,2002, Report No. 24410 UR.

26 After four years in which GDP declined by a total of 17.5 percent, Uruguay grew by 2.5 percent in 2003 and 12 percent in 2004. Now that the crisis appears to have subsided, the GOU intends to move forward with its development strategy by reinforcing road and rail infrastructure so that it may handle the expected increase in trade with Mercosur, resuming pre-crisis levels, but also that it may foster economic growth related to new, growing, forestry and agricultural development poles.

2. Transport infrastructure and regional integration

Evolution and composition of trade. Trade within Mercosur has decreased in relative terms during the past three years. This has been the result of external shocks that generated a marked slowdown in economic activity throughout the region. In the case of Uruguay, the generalized economic slowdown experienced by its traditional trading partners and the growing demand from other markets in North America and Asia, has caused a relative decrease in the value and volume of trade with its Mercosur partners.

Uruguay’s exports to Mercosur countries reached a peak in 1998 totaling US$1.5 billion. After that year, the value of Uruguayan exports to Mercosur fell markedly to less than half of that amount in 2002 (see table 2). In 2003, exports to Mercosur countries accounted for only 30 percent of the country’s total exports, compared to 55 percent in 1998.

Similarly, Uruguayan imports from Mercosur countries decreased continuously in the period between 1999 and 2002. Despite the decline in imports originating from Mercosur in absolute terms, the share of the region in Uruguayan imports has increased from 43 percent in 1998 to 48 percent in 2002. As it was the case for exports, in 2003, imports from Mercosur grew again in absolute terms to a little over US$1 billion.

Table A1-2: Total and Mercosur Exports (thousands of US$)

1998 1999 2000 2001 2002 2003 Destination Value % Value % Value % Value % Value % Value % Argentina 513,564 18.54 368,683 16.48 410,721 17.86 316,355 15.38 113,332 6.09 154,915 7.05 Brazil 935,068 33.76 556,833 24.89 530,669 23.08 440,697 21.42 431,782 23.2 470,820 21.42 Paraguay 83,849 3.03 81,134 3.63 82,483 3.59 82,804 4.02 61,684 3.31 47,806 2.18 MPTCOSUTtotal 1,532,481 55.3 1,006,650 45.0 1,023,873 44.5 839,856 40.8 606,798 32.6 673,541 30.7 Other countries 1,237,147 44.7 1,230,373 55.0 1,275,571 55.5 1,217,683 59.2 1,254,150 67.4 1,524,369 69.4 TOTAL 2,769,628 100 2,237,023 100 2,299,444 100 2,057,539 100 1,860,948 100 2,197,910 100

Source: ECLAC (BADECEL)

27 Table A1-3: Total and Mercosur Imports (thousands of US$)

1998 1999 2000 2001 2002 2003 Origin Value % Value % Value % Value % Value % Value % Argentina 839,198 22.05 795,354 23.7 836,009 24.13 705,727 23.06 540,561 27.53 571,641 26.11 Brazil 793,275 20.84 651,499 19.42 666,475 19.23 625,817 20.45 389,579 19.84 459,744 21 Paraguay 16,439 0.43 14,454 0.43 15,099 0.44 18,323 0.6 13,660 0.7 10,650 0.49 Mercosur total 1,648,912 43.3 1,461,307 43.6 1,517,583 43.8 1,349,867 44.1 943,800 48.1 1,042,035 47.6 Other countries 2,157,716 56.68 1,894,009 56.45 1,947,435 56.2 1,710,071 55.89 1,019,567 51.93 1,147,565 52.41 TOTAL 3,806,628 100 3,355,316 100 3,465,018 100 3,059,938 100 1,963,367 100 2,189,600 100

Source: ECLAC ( BADECEL)

Overall, trade will continue to grow as Uruguay increases its reliance on exports as a driver of economic growth and Mercosur countries recover completely from the crisis. The value of Uruguay’s exports grew by 10 percent between 2002 and 2003; and in August 2004, it was reported that the FOB value of Uruguayan exports increased by 32 percent with respect to the same month the year before. Regional trade is expected to regain momentum as Argentina and Brazil recover from economic stagnation. In fact, cargo traffic across Uruguayan borders is once again increasing (see next section).

International road transport. As a result of the crisis, cargo traffic across borders decreased by about 26 percent between 2001 and 2002. However, in 2003, international cargo traffic (exports and imports) increased again to close to two million tons. It is accepted that this positive trend continued over 2004, as the increasing dynamism of the agricultural sector has resulted in an important surge in exports. Consequently, it is expected that traffic along international corridors and border-crossings will resume pre-crisis levels.

Table A1-4: International trade by road (tons)

2001 2002 2003 ~ Destination EXDOITS ImDorts Total Ex~orts ImDorts Total Ex~orts ImDorts Total ~~ Argentina 402,745 512,070 914,815 154,240 393,496 547,736 237,177 484,327 721,504 Bolivia 1,695 864 2,559 1,256 551 1,807 1,05 1 0 1,051 Brazil 743,519 608,666 1,352,185 679,522 434,975 1,114,497 716,115 392,2841,108,399 Chile 43,210 49,080 92,290 44,224 36,362 80,586 49,052 36,750 85,802 Paraguay 33,875 29,464 63,339 30,742 19,127 49,869 29,916 20,868 50,784 Total 1,225,044 1,200,144 2,425,188 909,984 884,511 1,794,495 1,033,311 934,2291,967,540

Source: National Directorate of Transport (DNT)

Border crossings. The most important border crossings in terms of cargo traffic are Fray Bentos-Puerto Unzue (Argentina), Rio Branco-Jaguarao (Brazil), Rivera- Santana do Livramento (Brazil) and - Chui (Brazil) -see table 5. Most of the border crossings have integrated controls and adequate infrastructure for the execution of control activities and the provision of services to cargo.

A recent study commissioned as part of the Initiative for Regional Infrastructure Integration in South America (IIRSA), found shortcomings in infrastructure and equipment at the Puerto Unzue -Fray Bentos and Chuy-Chui border crossings. According to the study, cargo that should be carried across other border crossings is deviated to these in order to avoid controls. The study also found that access routes to control

28 installations are in good condition for all major border crossings between Uruguay and its neighbours. * Finally, the average duration of immigration and phitosanitary controls is not excessive.

Table A1-5: Border cargo traffic (tons)

2001 2002 2003 Border crossing Exit Entrv Total Exit Entrv Total Exit Entrv Total 6av Bentos 233,685 500,060 733,745 146.689 360,924 507,613 175,241 406,339 581.580 ."".ilII___iI_III. I_ ."".ilII___iI_III. ___--_____._.l__.__.--- ~____. Chuy 202,590 329,794 532,384 193,494 233,961 427,455 158,782 199,912 358,694 Rio Branco 263,440 117,274 380,714 269,683 77,965 347,648 296,841 56,351 353,192 Rivera 101,132 116,302 217,434 61,910 94,062 155,972 77,725 77,558 155.283 Juan Lacaze 23,042 30,209 53,251 21,461 40,263 61,724 38,209 92,805 131,014 Bella Uni6n 57,014 35.302 92.316 50.907 20.775 71.682 68.743 46.047 114.790 Salto 89,295 34,312 123,607 64,475 29,563 94,038 81,845 31,849 113,694 Acegut4 72,111 6,352 78,463 64,703 6,102 70,805 69,797 11,595 81,392 Artigas 50,829 3,584 54,413 42,376 2,295 44,671 46.191 1.052 47.243 Pay sand6 135,212 23,651 158,863 8,025 17,017 25,042 26,996 10,158 37,154 Colonia 42,227 5,946 48,173 13,712 3,770 17,482 23,422 3,895 27,317 Total 1,270,577 1,202,786 2,473,363 937,793 886,780 1,824,573 1,063,792 937,561 2,001,353 Note: It includes exports, imports, and merchandise in transit.

Source: National Directorate of Transport (DNT)

Transport and trade facilitation initiatives. Within Mercosur, international road freight and passenger transport is regulated by multilateral agreements approved by member countries in 1995. These agreements seek to harmonize transport across borders to facilitate international trade. Among the most important decisions enacted by the Mercosur Council were the agreements for joint customs operations and common standardized customs forms. In 1991, at the first meeting of the Mercosur Council, member countries established guidelines for the transport sector, aiming at: (i)reducing transportation costs and attracting private investment in the sector, (ii)fostering deregulation of the international transport of goods between member countries; and (iii)correcting regulatory asymmetries. Subsequent agreements established reciprocity conditions, restricted transport to authorized operators on predetermined routes, established terminal and border crossing points, prohibited en-route domestic transport by vehicles of one country within another, and exempted transit goods from impodexport duties.

Bolstered by the initial result of integration efforts, major regional projects have been also considered, such as the Buenos Aires-Colonia Bridge; the Buenos Aires-Sao Paul0 Highway Axis; and the ParanfDaraguay Waterway. The decision to develop any of these projects has been delayed due to the economic crisis that swept across the region. Nonetheless, integration is receiving a new boost from new region wide efforts such as the Initiative for Regional Infrastructure Integration in South America (IIRSA for its name in Spanish).

IIRSA covers the 12 independent nations in the region, and seeks to improve physical integration through investments in infrastructure and the harmonization of institutional and regulatory frameworks in infrastructure sectors. In order to accomplish its objective, the initiative has promoted the planning of infrastructure investments according to the concept of Integration and Development Hubs (IDH). A Technical Coordination Committee composed by the Inter-American Development Bank (IDB), the Andean Development Corporation (CAF), and the Fund for the Development of the Plata Basin (FONPLATA) is coordinating the initiative.

29 So far, participating countries, including Uruguay, have approved a strategic vision for each of the Integration and Development Hubs and a preliminary selection of projects identified through a common planning methodology. Under IIRSA, there is renewed interest for projects such as: border crossing facilitation initiatives; the Buenos Aires-Colonia Bridge; and the improvement of highways connecting Brazil, Uruguay and Argentina, all of which are part of the Mercosur-Chile IDH. The development of the Parana Paraguay waterway has been established as a single IDH.

Issues. With around 90 percent of Uruguayan tradable goods transported by truck to seaports and to neighbouring countries, it is important to continue working on the upgrading of Uruguayan road infrastructure. Notwithstanding important advances in the last years, several bridges on the access routes to the international corridors through Uruguay do not have the functional and structural characteristics to accommodate larger and heavier truck loads. This situation has minimized the potential advantage of using six-axle trucks commonly used in Argentina and Brazil.

It is expected that in the short term the level of trade and freight transport will increase again. Therefore, remaining bottlenecks in international corridors, such as bridges or other infrastructure not meeting Mercosur standards, will translate into bottlenecks to international freight transport. Addressing these issues is consistent with Uruguay’s objectives of increasing its integration with neighbouring countries and consolidating itself as a transit temtory offering competitive logistical and value-added services.

3. Transport infrastructure and competitiveness

Uruguay is emerging from three years of crisis, buttressed by the impressive development of the agricultural and livestock sectors, which have traditionally played an important role in its economy, and potentially by new opportunities for economic growth originating in new sectors, such as the forestry industry. The competitiveness of these sectors constitutes a priority for the Government, as continued economic growth and full recovery from the crisis will depend on the performance of traditionally strong sectors.

Transport infrastructure and services are key factors for improving the competitiveness of the Uruguayan economy. The products that are supporting Uruguay’s economic growth are transport intensive, due to their nature (high volume and low price per ton) or to the fact that production centers are located at relatively long distances from the main export gateways. In the case of forestry products, the designation of special areas under the Government’s development program resulted in the concentration of plantations in the northern areas, far from the Country’s main ports. As a result, the cost of freight is a very important factor in making the production of forest products economically feasible. In the case of agricultural and livestock sectors, production is concentrated around development poles, which require improvements in regional roads linking them to international corridors and ports to reduce transportation costs.

a. Forestry products

Development of the forestry sector. The Forestry Law of 1987 established a new long-term policy for the development of the forestry industry in Uruguay. The main objective of this policy was to increase private investment in forestry and to take advantage of the vast lands that were suitable for this type of production through various incentives, including: tax exemptions/reductions, cost refunds, credits for plantations, duty exemptions for the import of machinery, and fiscal advantages for industrialization. As a result there was a sustained long-term growth of planted surfaces, as well as an increase in the extraction, transportation, industrialization, and export of forestry raw material.

Previous attempts to foster the development of the forestry industry had not been successful. Under the exploitation framework established under the First Forestry Development Law of 1968, between 1975 and

30 1980, only 13,883 ha were planted; while in the 1980s, only 31,074 ha were planted, mainly in the latter years. Between 1990 and 2002, however, 577,694 ha of forest were planted. Over the same period the average planting rate was over 60,000 ha per year.

The impressive development of the forestry industry over the last 15 years was based on the designation of "priority areas", consisting of regions suitable for the development of forestry and of other related economic activities. The policy of incentives provided by the government applied only in the priority areas, and thus there has been a concentration of the newly developed forest plantations in these zones. Thus, although commercial forests cover only a small part of the country in certain limited areas they are now a dominating feature of the landscape, with implications ranging from their impact on the environment to the enormous transport requirements of products that have great export potential.

The Forest transport Products Project. The forestry industry was expected to generate important volumes of cargo that had to be mobilized to processing centres and ports of export by ground transportation. As a result, a strong demand for land and maritime transport was expected. In particular, there would be an extremely high demand for the main highways and feeder roads, forcing important and costly reinforcement, paving and maintenance works. The Government sought to tackle this problem by designing and implementing an investment program aimed at facilitating the most cost-efficient way of transporting forest products to export markets.

In this context, the Government of Uruguay (GOU) asked the Bank for support in the definition of the best technical and economic alternatives, and in the financing of key investments in transport infrastructure. In response, the Bank appraised and approved the Forest Products Transport Project in 1997. As part of the preparation of this project, a major study was contracted with CSI consultants to analyse the country's forestry production and the demand that it would generate on existing transport infrastructure. The study estimated a growing demand for the transportation of forestry products that would reach 7.9 million cubic meters by 2003, and 11.8 million cubic meters in 2016. Various processing hypothesis were considered and analysed as part of the study including the production of saw wood, chips, and cellulose.

An economic evaluation conducted under the same study revealed that railway transport would be the most cost-efficient mode for transporting forestry products in the Montevideo-Rivera axis, particularly for the plantations in the Tacuaremb6 area to be exported by the port of Montevideo. Based on this result, the Project focused on investments in the railway sector, accompanied by institutional reforms to ensure that the shift of freight from road to rail would become possible through increased investments and the commercial orientation of railway operations. These objectives, particularly the rehabilitation of the railway, have not been fully achieved due to longer than expected delays in the implementation of railway sector reform and the financial crisis that affected the GOU's fiscal space. Faced with budget restrictions, the GOU opted for investing its scarce resources on the maintenance of roads, thus neglecting and delaying the railway rehabilitation in the main axis which would be used for the transportation of forest products. The railway rehabilitation is now starting slowly and should continue over the next 3 years. In addition, the project strongly contributed to the improvement of the "forest products road network" at the national and departmental levels.

Industrialization process. At the end of 2003, the forest planted area totalled 670,042 ha. Approximately 70 percent of the planted area is eucalyptus and most of the forest plantations are located in the Departments of Rivera, Tacuaremb6, Rio Negro, and Paysand6. In the same year, forestry production totalled 3.4 million cubic meters, below original estimates due to fluctuations in the world price of pulpwood. The difference between the projected and current wood production 'was the result of unfavourable circumstances in the international markets that have kept prices below original estimations,

31 and prevented production from growing at previously anticipated rates. Nonetheless and given that the cumulative area of planted forest will shortly reach the critical mass of raw material supply that makes feasible industrial processing at an economically- feasible scale, from pulp and cellulose to sawn-timber products, it can be expected that the relevant investments will be made following the expressions of interest being received from foreign and multi-national companies.

Pioneer investments have already been made or are in progress involving some of the largest firms in the world. In 2003, Eufores opened its chipping plant in Pefiarol, which started exporting chips to Spain in that same year. ENCE Group, parent company of Eufores, has invested over US$lOO million in Uruguay in the development of forestry plantations, the logistical terminal of M’BopicuB, Pefiarol’s chipping plant, and a sawmill. Eufores also plans to establish a cellulose production facility in Fray Bentos. Additionally, Botnia, a Finish company has announced a project to set up a cellulose plant in the country, involving investments of over US$1 billion. Finally, a group of Chilean and local investors are analyzing a project to develop a chipping plant and port facilities for the export of forestry products originated in the Maldonado, Rocha and Lavalleja departments.

Moreover, forest products exports (wood rolls and saw wood) have experienced a marked increase, growing from 84,703 cubic meters in 1990 to 1,173,096 cubic meters in 2002. In terms of value, forest products exports (including processed products) more than tripled between 1992 and 2002, totalling US$86.6 million in that last year. Exports of other forestry related products amounted to US$11.4 million, for a total of US$98 million.

Issues. It is expected that the expansion of currently existing processing plants and the establishment of new ones, will increase the demand for transport of raw materials and finished products. Eufores’s Pefiarol and M’BopicuB plants are already using roadways for the mobilization of inputs; while other companies, such as Tile-Forestal Oriental, are anticipating an increase in their future demand for transportation, as new cellulose plants are established along the coast with Finnish capital.

The increasing use of road infrastructure for the transportation of forestry raw materials and finished products would cause a significant deterioration of existing infrastructure and impose high costs to the government and society in terms of transport operating costs, road maintenance costs, and a worsening of road safety conditions (most roads in the country have only two lanes for handling bi-directional flows), should part of this flow not be shifted to rail. In addition, the development of the forestry sector also warrants adequate maintenance of the departmental road network, as it’s level of serviceability is crucial for providing adequate access to plantation areas and connecting them with the main international corridors.

These developments have highlighted the need to further upgrade road and railway infrastructure, consolidate institutional reforms, and promote increased private participation in the transport sector, as critical factors in ensuring that the country develops adequate transport infrastructure and services, capable of handling the expected growing volumes of cargo along roads and railways.

b. Agricultural and livestock production

Recovery and perspectives for growth. The 1999-2001 period was characterized by a sharp decrease in agricultural and livestock production resulting from the confluence of various negative factors: (i)adverse climate conditions; (ii)sanitary problems (foot and mouth disease); (iii) unfavourable market environment (drop in international commodity prices); and (iv) the deterioration of competitiveness due to constraints for accessing credit and expanding investment. Despite having experienced three years of accentuated decrease, agricultural and livestock production has increased by 25 percent in the years

32 between 2000 and 2004. In 2002, the agricultural and livestock sector rebounded strongly, growing by 6.7 percent. This trend continued over 2003, with preliminary estimates placing agricultural and livestock GDP growth above 9 percent and the total value of production at US$1.3 billion, representing around 10.5 percent of the economy. In 2003, agricultural and livestock exports of raw and processed products increased by 21.4 percent, totalling US$1.42 billion.

This surge in the sector’s rate of growth was jump started by the emergence of a favourable environment characterized by: (i)the devaluation of the Uruguayan peso; (ii)significant increases in the international price of agricultural products (Le. rice, milk, livestock, and oleaginous products); (iv) tax incentives; and (iv) the economic recovery of trading partners and renewed perspectives on trade opportunities to result from a re-launching of Mercosur. As with the forestry industry, foreign investment in the sector is pouring in, mainly from Argentina and Brazil, reflecting positive perspectives on the future performance of the sector.

Agricultural development poles. This unprecedented growth of the agricultural and livestock sectors has revolved around the dynamism of important production poles located all around the country, especially dairy products, livestock, and soy beans and other oleaginous. According to the Ministry of Agriculture, Livestock and Fishery (MGAP), agricultural and livestock exports increased by more than 30 percent in 2004, generating around US$500 million more in sales than in 2003.

Rice. The production of rice has received an important boost over the last year as a result of a significant increase in international prices and the recovery of demand in the most important market for Uruguayan rice: Brazil. The price effectively received by rice producers went up by 57 percent between the 2001- 2002 and 2002-2003 harvests, going from US$116 per ton to US$182 per ton. On the other hand, demand has picked up in Brazil, which accounts for 80 percent of Uruguayan rice exports, and where prospects indicate that rice imports would reach over 1.3 million tons, of which 1 million should come from Mercosur countries. Another positive development was the creation of a Special Fund for the Financing and Revamping of the Rice Industry (FFRAA for its name in Spanish). This fund will raise financing for the sector through the securitization of future rice exports revenue flows, allowing producers to pay off their debts and acquire fresh working capital with more convenient terms.

Between March and August 2003, exports increased 17 percent in volume and 54 percent in value, with respect to the same period in 2002, and it is expected that the planted area will have increased by 21 percent at the end of 2004. According to estimates from the MGAP, rice exports reached over 1 million tons at the end of the 2003-2004 production cycle.

Oleaginous products. The last two years have witnessed a remarkable increase in the production and export of oleaginous products, mainly sunflower seeds and soy beans. This expansion has been the result of favourable conditions in international markets, where increased demand for oleaginous products, mainly originated in China; and a decrease in the US production of soy, have driven prices up.

The planted area of sunflower and soy reached their historical maximums in 2003. The planted area of sunflower increased to 176 thousand ha, 62 percent higher than in the previous cycle, and production increased by 56 percent reaching 235 thousand tons. As for soy, the planted area increased to 79 thousand ha, rising by 173 percent with respect to the previous cycle, while production reached a record high of almost 183 thousand tons. In 2003, the volume of sunflower exports surpassed 200 thousand tons and amounted to more than US$47 million. On the other hand, soy exports increased by 218 percent, reaching 207 thousand tons and over US$40 million in sales.

Dairy products. Favourable developments in the international markets augur an expansion of milk production, which should grow by around 6 percent in the current year. Growth perspectives for 2004 are

33 positive due to increases in the international price of milk and the expansion of exports, particularly to Argentina and Mexico.

Cattle. Uruguay has recovered access to important markets that had remained closed to its exports due to the outbreak of foot and mouth disease. Uruguayan beef exports increased by 23 percent between 2002 and 2003, reaching 3 17 thousand tons, a historical high.

Issues. Agricultural development poles will require adequate transport infrastructure to take full advantage of the favourable production and market environments. The competitiveness of Uruguayan producers in these sectors will depend on the ability of the country to make the necessary upgrades to transport infrastructure and to maintain it at an acceptable level of service, so that it can handle increasing volumes of cargo in a cost-efficient manner. Given the great export potential of these sectors, departmental roads and international corridors linking production centers to land and maritime export gateways, should be prioritized.

34 Annex 2: Program Background URUGUAY: UY Transport Infrastructure Maintenance and Rural Access

I. ROAD SECTOR

A. Sector description

1. The road system

The road system in Uruguay consists of an estimated 70,732 road Kilometers (km), of which 8,732 km form the national network managed by the National Directorate of Highways (DNV) within the Ministry of Transport and Public Works (MTOP); and 62,000 km are departmental roads managed by nineteen Departmental Governments (Departamentos). With one of the highest road densities in the region (24,000 km per 100,000 inhabitants), this network provides good accessibility to practically any location in the country.

2. The national road network

Physical characteristics. About 7,743 km of the 8,732 km national road network, or 89 percent, is paved. Table 1 shows the distribution by pavement type. About 58 percent of the national network is paved with bituminous surface treatments, an intermediate cost solution suitable for low to medium traffic levels, which require periodic maintenance to keep the surfaces sealed and prevent rapid deterioration. Within the national network, there are also 778 bridges with a total length of about 60,000 meters. In an intense effort to reduce costs, improve service quality and increase efficiency, about 1,000 km of paved and 800 km of gravel roads have been decentralized to the departments since 1996.

Table A2-1: National Road Network by Pavement Type

Pavement Type Length km % Concrete 333 3.8 Asphalt Concrete 2997 34.3 Db/Sg surface 4103 47.0 treatment Asphalt seals 310 3.6 Gravel 989 11.3 Earth 0 Total 8,732 100

Traffic characteristics. Most of the roads within the Uruguayan national road network are of low traffic density, with an estimated 81.2 percent accommodating, on average, between 0 and 1,200 vehicles per day. Only a small percentage of roads, about 6 percent, handle average daily traffic (ADT) levels of at least 2,500 vehicles per day. With the cessation of the intercity passenger rail services and limited domestic airport services, nearly all (99 percent) passenger traffic is transported on the road network.

Within the last ten years, traffic levels have grown at an average annual rate of 4.2 percent. Much of this growth is attributed to greater integration within Mercosur and the subsequent increase in the transport of tradable goods. Roughly 90 percent of tradable goods are transported along the national and departmental

35 road network using trucks. These vehicles are responsible for most of the wear and tear on the system and the concomitant maintenance requirements. There has also been a significant increase in the number of automobile traffic, intercity, and tourist traffic-the latter also includes buses and similar multi-passenger vehicles. The expected increase in cross-border and tourist traffic resulting from the resurgence of Mercosur and the economies of its member countries, and the development of the forest products industry are expected to spur continuing traffic growth in the coming years.

Figure A2-1: Average Daily Traffic on National Road Network

~ 3000 , I

5 2000 :1500 CI 2 25001000 500

0 to 150 150 to 300 to 600 to 1200 to Greater 300 600 1200 200 than 2500 Average Daily Traffic

Sources: DNV, Bank Staff

Road conditions. Most of the road network and bridges along the national road network were built in the early part of the last century. In particular, 45 percent of all bridges in the national road network are more than 50 years old, and 75 percent of bridges are more than 25 years old. In the early 1990s, general fiscal constraints reduced the level of resources available for the road sector, which led to periodic maintenance neglect, an increased maintenance backlog, and a significant deterioration of the road network. To ameliorate this situation, DNV undertook a firm effort in 1995 to improve the condition of the national road network through rehabilitation and periodic maintenance, outsourcing part of the maintenance activities to private contractors and micro-enterprise firms to improve efficiency and quality. From 1995 to 2001, the percentage of roads in poor condition decreased -from 33 to 25 percent. As a result of the budget constraints imposed by the crisis, and despite the high priority given to maintenance, road condition started to deteriorate again after 2001.

Table A2-2: Evolution of the National Road Network Condition Very Good Good Fair Poor 1994 17 19 31 33 1995 13 17 27 43 1996 10 16 23 51 1997 12 14 25 49 1998 18 15 25 43 1999 21 18 33 28 2000 22 20 31 28 200 1 20 22 33 25 2002 18 20 29 33 2003 19 20 28 33

36 Figure A2-2: Evolution of the National Road Network Condition

80 70

5 60 0 2 50 0 :40 30 8 20 10

0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Year -Good/ Fair - - =Poor

Sources: DNV, Bank Staff

3. DNV management policies

Road sector reforms. In 1995, DNV embarked on a gradual, yet substantial, restructuring of its organization and its business processes to become more oriented toward performance and results. Inefficiencies relating to overstaffing and poor productivity absorbed as much as 70 percent of DNV’s maintenance budget and prevented it from being fully able to respond to periodic surges in maintenance and rehabilitation needs. To improve efficiency and resource use, in 1995, the DNV began to contract out these services to the private sector and reduce staff. As a result, an estimated 1,818 km or 23 percent of the national road network had been contracted out to private firms by the end of 1998 and about 3,667 km or roughly 42 percent by the end of 2004. In addition, between 1995 and 2003, total staff was reduced by close to 48 percent-from 3,457 to 1,810 employees. Additional reductions in the number of employees are expected during the next two to three years.

Figure A2-3: Evolution of DNV staff and network maintained by contract, 1994-2003 (in percentages)

100

80

60

40

20

0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 -Km by condition - - - Staff (% of 1995) 1

37 The on-going renewal program within DNV has enabled it to increase the efficiency of maintenance activities through staff reductions and contracting out routine maintenance works to private contractors. The legal and regulatory framework for outsourcing maintenance activities was established in September 1994 through the enactment of Decree 442/994. Road maintenance works are currently being performed by a combination of force account, traditional contracting out to the private sector, micro-enterprises, contracts for rehabilitation and maintenance (CREMA), road concessions, and the Megaconcesio'n, each of which are described in greater detail in the following sections. Roads to be maintained under CREMA, the Megaconcesio'n and traditional concession contracts involve strategic corridors and relatively higher traffic levels.

Road sector financing and expenditure. The GOU's sector financing strategy is set in the Plan Quinquenal (Five-Year Investment Plan), prepared at the beginning of each administration and approved by Congress. During implementation, the plan may be revised upward or downward to reflect emerging priorities and fiscal considerations. In general, it provides a frame of reference for the entire five year period. The administration's adherence to the Five-Year Plan for 1995-1999 and 2000-2004, reduced some of the volatility in the availability of funds for the sector in general, and counterpart funds for externally funded projects, in particular. In the last decade the funds appropriated for road investments ranged between US$60.0 to US$89.0 million per annum, reaching a peak in 1999 and with the lowest amounts during the 1991-1993 fiscal crisis. For maintenance activities, fiscal allocations remained stable, initially at around US$23-28 million, as a large portion was earmarked to cover payroll and other administrative costs under DNV force account arrangements.

From 1999 onwards, the economic crisis meant cutting down dramatically all public expenditure. So DNV had to manage its road assets with a significantly lower budget. This external shock demonstrates the commitment of DNV to maintenance prioritisation as the scarce resources were allocated to this activity; while the road investment budget decreased steadily to reach a nominal amount in 2003, the maintenance budget remained at around US$40 million in 2003. Contrasting the road expenditures of years 2003 and 1994, it can be seen that almost 100 percent of road expenditure was dedicated to maintenance in 2003 while it only amounted to a third in 1994. This was the result of almost ten years of a clear strategy in the road sector forged by steady and successful reforms.

Figure A2-4: Road sector expenditure and budget

Investments, Maintenance Expenditure and Total Budget ('000 US$)

140000 120000 100000 80000 60000 40000 20000 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

j -t Investments Maintenance --s+ Total I

38 Force account. In 2004, approximately 5,065 km of roads are directly maintained by DNV staff and equipment, based in the 10 administrative zones under the coordination of its Maintenance Division. Within this framework, most of the extraordinary and some of the routine maintenance works are performed in house, while road rehabilitation works (e.g. overlays, bridge restorations, etc.) are being contracted out to private firms. Roads maintained under force account are lightly traveled and handle less than 500 vehicles per day. In 2003, budget expenditures for this maintenance totaled US$11.8 million.

As part of the technical assistance component of the First Transport Project (Loan 3021-UR), a Maintenance Management System (MMS or SAM for its initials in Spanish) was installed in the DNV. The MMS/SAM has become a valuable tool for the systematic monitoring of performance standards and resource use by DNV’s ten maintenance districts. The MMS/SAM has allowed DNV to optimize the allocation of funds, equipment and resources for force account activities, increase accountability, and assess the cost-effectiveness of its operations. From these evaluations, the best practices are being disseminated to field districts to improve works planning, resource use, and increasing productivity in their respective road maintenance operations.

Under the Second Transport Project, DNV consolidated and improved the maintenance management system (MMS/SAM) and the integrated highway planning system (SPLA). DNV managed to improve the efficiency of its maintenance operations carried out directly or via contract due to: the systematic and effective use of road management systems, especially MMS/SAM, combined with innovative concepts, such as regular performance monitoring; the implementation of a new organizational structure with managers placed in charge of key processes; and the positive synergies resulting from the competition generated by the productivity benchmarks created as a result of private sector involvement.

Productivity targets for the principal maintenance activities directly performed by DNV were considerably improved. The four unitary costs used as productivity indicators for maintenance within the project’s results framework exceeded the project end targets by between 32 and 53 percent, and showed an improvement with respect to the time of appraisal of between 42 and 59 percent. In 2002, DNV maintained 5,263 km of its network, about 60 percent, through force account at an unitary cost of US$2,230, compared to US$3,662 in 2001. However, care has to be taken with these cost figures since the decrease between 2001 and 2002 is to some extent due to the devaluation of the national currency.

DNV has also strengthened its bridge management capacity in the course of the Second Transport Project. The department within DNV in charge of structures (UE-DNV) developed the necessary institutional capacity for bridge management and is now fully able to identify bridges with structural and dimensional problems, supervise rehabilitation works, and carry out routine and preventive maintenance. This department has recently implemented a Bridge Management System (BMS), acquired through an IDB loan, which is not yet used to its full potential mainly due to the lack of resources. The procurement procedures used by UE-DNV have been adequate and well adapted to local conditions.

39 Figure A2- 5: Distribution of Maintenance Expendituresby Type 2003

$3,4 million Periodic Maint.

Sources: DW, Bank Stafs

Although unit costs vary among zones due to varying physical characteristics, traffic levels, and weather conditions, DNV has established base unit cost parameters for maintenance works. For some works, these parameters have tended to vary among zones. This concept is highlighted in Figure 6, which illustrates the varying cost structures for selected maintenance works for each zone, .e.g. the base cost structure was set at US$195/cu and US$6l/cu for pothole filling and drainage systems, respectively. DNV is working to reduce variations in cost structures between each zone, as part of an effort to effect a generalized reduction of maintenance costs.

Figure A2-6: Average cost of Maintenance per km of the road maintained by Administration (2000 - 2003)

I , 7000 , I 6000 5000

v) 4000 €e 3 3000

2000 02001 1000 2002 0 ‘C 2003 123 4 5 6 7 8 9 10 I DNV’s zones

Traditional contracting uut of maintenance to private firms. As part of the DNV’s renewal process, routine maintenance activities have been outsourced to the private sector through performance based contracts for an estimated 350 km of national roads. Under these performance-based contracts, monthly payments are linked to the amount of kilometers maintained per year by the private sector contractor. The control and supervision of these contracts is carried out by the DNV, together with the assistance of an Advisory Committee that includes top DNV officials and two intemational experts. This mechanism has been very effective not only in assuring compliance with the agreed contract conditions and standards, but also in creating information and knowledge to improve the management of the road network. Regularly scheduled monthly inspections by DNV personnel, entailing a detailed review of a 50 meter segment for

40 each road kilometer under contract, serve to ensure the quality of works. If necessary, the DNV can also carry out non-scheduled reviews. When a private contractor is found to be in non-compliance of contractually stipulated performance targets, it is assessed daily penalties, adjusted in accordance with the type of defect and estimated repair costs.12 These penalties are imposed until the repairs are satisfactorily completed. The DNV is currently carrying out several feasibility studies for the award of additional maintenance contracts to the private sector. This program has improved efficiency in resource use and introduced new technologies in the implementation of road maintenance services.

Micro-enterprises. Until 1996, all routine maintenance and a significant portion of periodic maintenance were planned and executed by DNV staff. Overstaffing (3,700 employees served a network of 8,700 km) overburdened DNV’s maintenance budget during the early 1990s, absorbing between 60 to 70 percent of the maintenance budget and leaving little room to respond to periodic surges in maintenance and rehabilitation needs. A retrenchment program has allowed DNV to reduce the number of staff from about 3,700 employees in 1995 to about 1,810 in 2003, through a combination of non-renewal of personnel contracts, incentives for early retirement, and the creation of micro-enterprises consisting of former employees. DNV implemented a pilot program to contract out routine maintenance works with those micro-enterprises seeking to reduce the adjustment period for former employees and to improve maintenance operations. In 1995, at the start of the program, 285 km of national roads were being maintained with micro-enterprises and by the end of 2004, this figure had increased to 1,613 km. The roads in which micro-enterprises operate have ADT levels between 500 and 1000 vehicles.

Micro enterprise contracts are slightly more expensive than maintenance works undertaken through force account because of the budgetary limitations that the latter scheme has faced and that have forced the DNV to cut costs by reducing maintenance standards. Micro enterprises have been able to maintain the pre established standards and as a result, the quality of roads they maintain is generally better. In 2001, the average annual cost per km for micro-enterprises was US$3,770, compared to US$3,314 for force account. In 2002, it was US$2,693 for micro-enterprises and US$2,005 for force account. The original contracts with micro-enterprises were re-tendered in 2002 and 2003 for a three-year period, renewable for three additional years. Some of them were awarded to the original contractors, while others went to new micro-enterprises. In addition, the signaling contracts with micro-enterprises were extended and an additional one tendered for a total of 815 km.

Contracts for rehabilitation and maintenance (CREMA). Performance based contracts for the rehabilitation and maintenance of roads, or CREMAS, cover an entire sub-network, ranging from 150 to 250 km in length, rather than a single road segment. The sub-networks are selected so as to address shortcomings in the availability of road maintenance equipment and personnel at the responsible field districts and ensure an adequate level of service for roads with high traffic volumes, e.g. 1,000 to 3,000 ADTs. Each network features road sections with different pavement types (asphalt concrete, concrete, surface treatment, and gravel) and in varying physical conditions.

CREMA contracts have four to five year terms, with the first year entailing the execution of rehabilitation works and the remaining ones dedicated to maintenance activities. Rehabilitation works typically include, inter alia, resurfacing with slurry seals and surface-dressing, overlays with asphalt concrete, and reconstruction of the base and wearing course. The engineering designs of the initial works and the minimum performance requirements during the contract period, (e.g., type and maximum roughness level after completion) are prepared by DNV and are written into the CREMA contracts. Each sub-network must meet specific levels of service for routine maintenance, which are incorporated into the CREMA

l2Penalties are removed if the contractor demonstrates that: (i) it has instituted its own controls, detected the problem and is in the process of carrying out corrective measures; and (ii) has already completed the necessary works, despite DNV detection of the problem.

41 contract. The levels of service are established for each road segment and adjusted according to features, composition, and condition.

Similar requirements have been specified for bridges within a separate section of the CREMA contract. Contract performance is assessed during monthly inspections carried out jointly by DNV and the contractors. Lump-sum maintenance payments are made based on the achievement of the predetermined performance indicators. Penalties have been established to deter non-compliance. Table 3 shows typical standards under CREMA-type contracts.

Under the Second Transport Project, 123 km of the primary road network were rehabilitated and 856 km maintained under CREMA contracts, which is more than 30 percent above the original project target. In addition, DNV's strong interest in this instrument is confirmed by the fact that it used its own resources to tender three additional CREMA contracts for about 725 km. The use of these performance-based maintenance contracts allowed DNV to assure road maintenance and rehabilitation in an effective and cost-efficient manner, despite the negative economic environment.

The rehabilitation works under the CREMA contracts were carried out in a satisfactory manner and, on average, the actual costs were 94 percent of what was estimated at appraisal. The contractors respected the agreed maintenance standards without extensive use of penalty payments and DNV's supervision mechanisms resulted very adequate. In 2001, the average annual cost per km for CREMA contracts, including rehabilitation and maintenance, was US$8,640, which compares favorable with an average annual cost of US$lO,OOO in Argentina, although in this country the rehabilitation component in the CREMA contracts is bigger than in Uruguay.

In January 2003, the Bank agreed to extend financing under the CREMA component to another performance-based contract, the Access to Montevideo (km 31), which DNV started with its own funds and was experiencing difficulties in meeting its payment obligations due to the tight fiscal situation. Out of the three CREMA contracts financed by DNV with its own resources, one for about 330 km was terminated, while the remaining two will stay in force until 2005 and 2007 respectively. It should be noted that at the end of 2002 five new CREMA contracts were tendered within the framework of the Megaconcesio'n. The proposed project would also support the rehabilitation and maintenance of 981 km of the national network and estimated 798 km of the Megaconcesio'n through CREMA contracts.

42 Table A2-3: Typical Standards under CREMA-type Contracts

CA TSB Gravel Average roughness immediately after overlay/rehabilitation IRk2.0 N.A. N.A. Maximum average roughness, roads with ADT > 600: IRk2.8 IRk3.5 N.A. Maximum average roughness, roads with ADT < 600: IRk3.5 IRk4.0 N.A. Potholes Not accepted Cracking Longitudinal < 10% area N.A. Rut depths/depressions <15 mm N.A. Gravelling

Sources: DW, Bank Staff

Concession contracts. MTOP started granting concessions in 1994 for the more transited road comdors, most notably the major accesses to Montevideo, and afterwards, for other high traffic highways. The first road concession in Uruguay, which had a contract value of about US$lOO.O million, was for the Znterbalnearih Highway between Montevideo and Punta del Este. A second contract worth US$80.0 million was awarded for the western access route into Montevideo. Decree 43/997, enacted in 1997, established the underlying legal framework for the rehabilitation and maintenance of national roads through concession type contracts (e.g. BOTS) with the private sector. Concession contracts in Uruguay have a maximum operational period of 20 years before the facility is returned to the Government. The concessionaire is permitted to collect tolls on the transferred facility, under the regulation of the DNV. Additional concession contracts have been awarded to the private sector for segments along Routes 1 and 9. The total length of the network so far under this type of concession contract is 542 km Currently, DNV is carrying out feasibility studies for new concessions for Routes 5 and 8 and other segments, up to a total of additional 650 km, under similar contractual arrangements to the existing concessions.

43 Table A2-4: Tariff Rates by Vehicle Type for Concessioned Roads (in Ur$)’

Vehicle Type TarifS Automobiles Ur$95.00 Express Buses (1 passenger), Microbuses, Truck (w/o trailer) Ur$95.00 2-3 axle vehicles Ur$ 175.00 Buses (w/ passengers) Ur$ 175.00 4< axle vehicles Ur$ 354.00 US$1= Ur$30

The “Megaconcesio’n”. In the road sector it became evident that after the concessions already granted and being prepared, no road sections remained that could support a concession on the sole basis of user charges through tolls. With this in mind, the MTOP created the Megaconcesidn by separating from DNV management a sub-network of primary roads consisting of 1,272 km (15 percent of the network) and 38 bridges (17 percent of Uruguay’s bridges) and assigning its maintenance and operation to a different entity through a concession contract. The objective of the Megaconcesidn is to ensure that the most important sections of the National Road Network are upgraded up to international standards, thus facilitating international trade along strategic Corridors linking Uruguay with the main exports destinations, and promoting economic growth. The principle motivating the Megaconcesio’n is that it can serve the above mentioned objectives better than traditional administration, by securing road user charges, fostering a commercial orientation in management, and increasing reactivity in decision-making. This initiative demonstrates the strong interest of MTOP in improving the management of critical road corridors and increasing the managerial and financial autonomy of the sector.

The following corridors compose the Megaconcesidn:

Ruta 1 between Arroyo CufrC and Colonia. Ruta 2 between F. Shchez and Gral. San Martin international bridge. Ruta 3 between Arroyo Grande (sur) and Salto. Ruta 5 between Centenario and Rivera. Ruta 8 between Minas and Treinta y Tres. Ruta 9 between Pan de Anicar and Rocha. Ruta 11 between E. Paullier and Canelones (when the private concession expires).

In 2001, the concession contract was awarded to Uruguay’s Corporacidn Nacional de Desarrollo (CND), an entirely public development institution, which in turn created a special subsidiary entity: Corporacidn Vial del Uruguay (CVU), to operate the concession. The concession contract requires CVU to assure an annual spending flow of a fixed amount to be used for concession management, compulsory and maintenance works, delivery of services to users, and tolling facility operation. The concession contract also lists the compulsory works, the minimum service levels for the whole concessioned network and the penalties and fines to be applied in the event these service levels are not reached.

The Megaconcesidn is based on the principle of cost sharing, by which the State and users share the costs of road improvement and maintenance. Users pay part of the cost through tolls, while the State also provides a contribution in the form of a subsidy to make the concession viable. 60 percent of the Megaconcesio’n’s costs will be paid by road users and the remaining 40 percent by the State. Subsidies are composed by: (i)a fixed payment per km of road maintained, (ii)a subsidy for the maintenance of structures, and (iii)a minimum revenue guarantee limited in size and duration. The subsidy for road maintenance is in line with the investment levels necessary for the regular maintenance of the network

44 and will be paid during the first four years. During the same time, the contract assures CVU a minimum annual revenue of US$25 million composed of toll revenues and subsidies. From the fifth year onwards, a ceiling for annual toll revenues is established. If this ceiling is exceeded, the subsidy amount will be reduced or the agreed present value of annual spending increased. Starting in the fourth year, a subsidy for the maintenance of structures will be paid (see Box 1). CVU has the right to obtain financing through bond issuances and loans, and is allowed to outsource works and services necessary to the management of the concessioned network. To further bolster toll revenue, the GOU is currently implementing a construction program of additional toll facilities.

The implementation of the Megaconcesidn is promising. The first construction works started in December 2002, and the program has developed well during 2003. In short, the Megaconcesidn concept is a way of testing how an autonomous body could manage a sizeable portion of the road network and its improvement and operations funded through commercial instruments, which is one of the goals of DNV's modernization strategy. In this sense, the Megaconcesidn represents a big step towards the commercialization of road sector activities.

Despite the impossibility of obtaining additional financing for executing the plan as originally envisioned, there has been a remarkable progress in terms of the implementation of rehabilitation and maintenance works. In the period between December 2002 and August 2004, the CVU awarded contracts totalling US$ 90 million; of which it had disbursed a little over US$40 million. More than 339 km of roadways and bridges are being or have been rehabilitated, and 995 km of roads are being regularly maintained. The use of performance-based contracts has been particularly noteworthy, as it has improved the efficiency of maintenance works and reduced overall costs. The proposed project would support the Megaconcesidn by financing CREMA contracts to maintain and rehabilitate the sub-network during the project period, and thus reducing the GOU's subsidy required to cover the minimum annual revenue.

45 Table A2-5: DNV Maintenance, Rehabilitation, and Concession Program, 1998-2004 (by km)

Year 1998 1999 2000 2001 2002 2003 2004 I Maintenance by Force Account 7041 8,519 5366 5283 5620 5688 5065

2 Maintenance by contract I396 2334 3006 3007 2670 2602 3225 a. Microenterprise Program 690 1222 1353 1354 1017 793 1613 b. Integrated Contracts (IDB) 360 360 360 360 36010 0 0 c. Other DNV 346 346 387 3 87 346 309 309 d. CREMA contract (IBRD) Rehabilitation 29 54 40 Maintenance 406 906 906 947 68 1 484 e. Crema-Megaconcesih 819 819

3 Road Rehabilitation Works I34 352 190 252 93 I24 119 a. DNV Financed (New and rehab.) b. IDB Financed 134 283 143 182 93 49 19 c. IBRD Financed Transport I1 35 50 Forest Products 34 47 20 75 100

4 Operation /Rehabilitation and 295 295 360 442 442 442 442 Maintenance by Concession Contract Interbalnearia (Montevideo-Punta del Este) 208 208 208 208 208 208 208 Ruta 1 (Montevideo - Libertad) 87 87 87 87 87 87 87 Ruta 5 (Montevideo - Mendoza) 65 65 65 65 65 Ruta 8 (Pando - Minas) 82 82 82 82

5 Total 8,732 8732 8,732 8,732 8,732 8,732 8,732 Maintenance by private sector contract 1,691 2,629 3,366 3,449 3,112 3,044 3,667 (h): Maintenance by private sector 19.4 30.1 38.5 39.5 35.6 34.9 42.0 (%):

4. Departmental road network

The departmental road network comprises about 62,000 km of mostly unpaved roads, which constitute 88.5 percent of the entire road system in Uruguay. The majority of them are of earth and gravel materials, with roughly 8 percent paved roads, about 65 percent gravel roads with year-round accessibility, and the remainder 27 percent earth roads. Each Departmental government (Departamento) manages a portion of this network. Revenues generated from vehicle licenses and supplemental intergovernmental transfers are used to fund maintenance activities. The institutional capacity of Departamentos varies significantly and is discussed in more detail in Section 5 of this Annex.

The MTOP established a mechanism, the Departmental Roads Maintenance Program (DRMP), to gradually increase the year-round accessibility of the network and reduce the size of the deferred maintenance backlog. The program assists departments in carrying out the maintenance of about 10,000 km of roads per year and in building up institutional capacity at Departamentos through technical assistance activities. The quality of the maintenance provided is higher than what Departamentos would

46 provide in the absence of the program. Furthermore, Departamentos are required to extend quality maintenance services to a larger portion of the network, as the program covers only a fraction (about 15 percent) of the departmental road network.

Originally conceived as a five-year program, in view of its satisfactory results, the program was resumed in 1996. The Bank started financing the program in 1997 under the First Transport Project (Loan 3021- UR), with promising results, and continued its support with the Forest Products Transport Project (Loan 4204-UR) and the Second Transport Project (Loan 4395-UR). The DRMP introduced a maintenance culture at local level, which previously did not exist in most of the departments.

Table A2-6: Departmental Roads by Pavement Type, 2001 *

Pavement Type Length Km % Asphalt 4,610 8.0 Gravel 36,818 64.8 Earth 15,455 27.2 TOTAL 56,884* 100

*Not including data from the two Departamentos. The Departmental Network has a total length of about 62,000 km

The annual number of kilometers financed by the program in each department was determined by the size of the road network, population, and total area. These initial allocations are revised in September of each year and the remaining funds are reassigned based on the achievement of agreed performance targets by the departments. DNV engineers supervise the quality of completed works, mostly by force account but in some cases using contractors, and approve payments. Some departments are using similar measures within their own maintenance programs.

Due to budget cuts in 2000, the program was reduced from US$ 11 million to US$8.5 million, which resulted in only 91.7 percent of compliance with the annual target. During 2001, the program was again reestablished at its annual level of US$11 million with partial funding from Bank loans 4395-UY and 4204-UY. New budget cuts towards the end of the year reduced the program budget to US$10 million, which affected particularly the Departamentos that experienced delays in the execution of works. In that year, the program allowed to provide basic maintenance for 7,363 km of the planned 9,000 km of roads, achieving 91.3 percent of the overall target. The program continued in 2003 with an annual budget of approximately US$4.7 million, financed under the Loan 4204-UY, with approximately the same coverage as in the previous year.

Nonetheless, program design has continued to improve throughout the years by building on implementation e~perience.'~The proposed project would continue to support this program seeking to expand coverage, increase compliance with maintenance targets and provide further and more relevant assistance to Departamentos.

l3 Examples include adjustments that reflect local conditions in unit costs and construction of drainage structures to preserve road conditions.

47 Figure A2-7: Departamentos Compliance with Maintenance Targets

100

98

Q 0 96

c0 94 2 0 n 92 90

88 1996 1997 1998 1999 2000 2001 2002 2003 Year

Source: DRMP evaluation reports

5. Road management decentralization

About 1,000 km of paved roads and 800 km of gravel roads have been decentralized to the departments since 1996. There are no further decentralization plans in the short-term government agenda. Therefore, the expectations that the Government will advance in road decentralization during the implementation of the proposed project are low, because further decentralization is a political step that is decided and implemented on the basis of political criteria. Another important message is that decentralization processes are complex and require significant resources to implement them, which can be assigned now to more urgent needs, among them to prepare the way for additional decentralization in the future. Finally, before deciding to decentralize further, particular attention has to be paid to the technical and administrative capabilities of the decentralized institutions to manage the additional network for which they will assume responsibility.

Uruguay’s national network (8,732 km) is managed by DNV, of which 1,465 km are primary roads and 3,887 km secondary roads. The departmental road network (about 62,000 km) is administered by the Departmental governments (Departumento). Therefore, the tertiary network is already fully decentralized and further decentralization would have to come from the transfer of part or the entire national secondary network from DNV to the departments. In summary, the departmental network is fully decentralized, but all decision-making and management of the national network is at the central level. In the following paragraphs we will review the Departamentos institutional capacity to assume the inherent responsibilities of managing the network under their responsibility.

The institutional capacity of the departments in charge of managing the large departmental road network varies significantly. MTOP established the DRMP to assist departments in coping with the maintenance backlog of their networks and building up institutional capacity in the Departumentos (see Section 4 of this Annex). The First Transport Project (Loan 3021-UR), the Forest Products Transport Project (Loan 4204-UR) and the Second Transport Project (Loan 4395-UR) all supported the assistance of DNV to the Departumentos in building up technical skills within the departmental units responsible for roads, establishing road laboratories for systematic quality control of materials and works, and improving maintenance programming, execution and control. Compliance with the targets agreed under the DRMP increased over time- from an average of 60 percent in 1989 to about 94 percent in 2003. This program

48 demonstrated that the Depurtumentos were able to respond well to the program incentives and close monitoring exercised by DNV through its Depurtumento de Znfruestructura Vial Depurtumentul (DIVD).

The Second Transport Project also financed a study aimed at facilitating technology transfer to and institutional capacity building within Depurtumentos. The study, completed in 2001, mainly focused on institutional issues and management tools, e.g. planning, organization and execution of works and quality control; and although its results were found useful, its impact on the ground was somewhat less than expected. Some of the key elements that determine the successful implementation and sustainability of the DRMP, such as the financial aspects were left out.

Nonetheless, the scope and final outcome of the DRMP must also be seen in the light of the economic crisis, which curtailed the available resources within Departumentos and the DNV, and also in consideration of the need to respond to the expectations and immediate needs of Depurtumentos. Budget cuts reduced the scope and number of activities camed out by DIVD to mainly technical assistance (TA) and training in the fields of workshop, equipment and spare part management. Also, Depurtumentos asked the DIVD to mainly focus its TA activities on the reparation and operation of equipment and the execution of works. There was less interest for the recommendations in the field of accounting, planning, management and outsourcing and administrative decentralization.

At the end of the Second Transport Project, DIVD was trying to involve the Depurtumentos in an action plan to fully implement the recommendations of the study. In principle, it was agreed to focus on the development and implementation of basic road network management instruments (e.g. inventory and geographic information systems) and on the adoption of adequate practices for road equipment management. It should be noted that the DRMP for 2003 envisaged the possibility of dedicating parts of the budget to strengthening institutional capacity, but that the interest of Depurtumentos was limited.

In summary, the above facts demonstrate that further institutional strengthening of the Depurtumentos is needed in order for them to assume additional road management responsibilities, especially in regard to network-wide maintenance planning, resource usage and control, and increased accountability through stakeholder involvement. DIVD is in good position to assist the Depurtumentos in carrying out the maintenance and TA programs, and the proposed project would support such initiative as an important step towards developing departmental capacity to manage road assets.

As the experience in other Latin American countries demonstrates, without the political willingness at the national level, and adequate resources and institutional capability at the sub-national entities, decentralization processes cannot succeed. Once the Depurtumentos reach the level of institutional strength for managing additional roads (with higher traffic demand and superior technical characteristics than the ones they are now managing), the new government could consider further decentralization if an analysis of the process shows that, in the overall, it will result in an improvement in the quality of public service provision.

6. Roadsafety

Government program and advances. Public awareness of road safety in Uruguay has increased as a result of government efforts, supported by previous Bank and IDB programs. In September 1994, a road safety council (CNPCAT, Comisidn Nucionul de Prevencidn y Control de Accidentes de Trrinsito) was established under MTOP leadership to raise road safety awareness and coordinate efforts among the various Ministries involved. With IDB support, MTOP carried out several additional institutional actions aimed at improving coordination with other Ministries on road safety issues and developing a long-term strategy for road safety improvement. These actions included: (i)implementing a system for collecting and analyzing road accident data (SAAT for its name in Spanish); (ii)implementing a unified system at

49 the national level for registering drivers, vehicles, traffic violations and violators, and road accidents (created by Law 16.585 of 1994); (iii)carrying out a study on the transport of hazardous materials, in the context of Mercosur transport agreement signed in September 1995; (iv) providing training to road safety staff in DNV, Departamentos, Police and other private/public institutions. In addition, with support of the Bank, between 1998 and 2002, road signs and pavement markings were improved in 3,879 km of the road network and a pilot program for road safety was prepared.

Diagnostic. According to available statistics, road safety has improved in the last years. The total rate of road fatalities per 100,000 population in Uruguay is among the lowest in Latin America and the Caribbean (LAC), below the average for high income countries in the westem hemisphere. In 2002, 1 percent of deaths were attributed to road traffic injuries in Uruguay, compared to the average of 2.2 percent for LAC and lower to middle income countries. l4 The number of accidents on the surveyed National Road Network (5,000 km or about 58 percent of the total road network) and resulting fatalities have also decreased in the last four years. Accidents went down from 1914 in 2000, to 1365 in 2003, while fatalities decreased from 168 to 132 over the same period. However, these numbers do not capture the high occurrence of traffic accidents in many urban municipalities (such as Montevideo), where most fatalities take place and traffic accidents are considered a recumng public health problem.

Notwithstanding important reductions in the number of road accidents on international comdors, these continue to concentrate the highest number of injuries and fatalities in the surveyed network. However, this situation may only reflect the fact that road safety statistics are only gathered for the road network under national juri~diction.'~The majority of accidents involve automobiles, heavy trucks, and motorcycles, and are mostly related to vehicles going off road and collisions, indicating the need to continue to work on the improvement of signaling and pavement markings.

Table 7 provides some basic statistics on the level of road-related accidents based on data collected in 2003 for nearly 5,000 km of the national roads (about 58 percent of the national network).

Table A2-7: Road Safety Data for the Uruguayan National Road Network, 2003

Accidents Injuries Fatalities Total 1365 1527 132 Road accident index per 100 50.92 55.49 4.12 million vehicle-km* *Based on the following formula: Acc*lOS IAcc = 365CSum(TPD*L) The total population of Uruguay is approximately 3.2 million. Sources: DW, MTOP, and Bank Staff

According to data from the Ministry of Public Health (MSP), the rate of road fatalities per 100,000 population has decreased from 13 in 1992 to 10 in 2002. Only in the period between 1998 and 2002, the ratio of fatalities decreased by 34 percent. Table 4 provides statistics depicting the evolution of road accident mortality rates in Uruguay over the 1998-2002 period.

l4World Report on Road Traffic Injury Prevention, World Bank and World Health Organization, 2004 l5The available information on road safety corresponds to 5,000 Km, or about 58 percent of the entire road network

50 Table A2-8: Mortality caused by road traffic injury 1998-2002

Ratio of road trafic injury Number of deaths Number of deaths Year deaths to total perlOO’OOO per 10,000 vehicles number of population deaths 1998 1.6% 15.1 7.7 1999 1.4% 14.3 6.4 2000 1.2% 10.9 4.9 2001 1.3% 11.8 5.6 2002 1.O% 10.0 4.7 Sources: DNV, MSP, and Bank Staff

Issues and need for further support. Despite these important advances, and as the network continues to be upgraded and traffic increases, it is necessary to continue working on the improvement of road safety. Although low relative to other countries in Latin America and the Caribbean, traffic accidents and mortality rates in Uruguay remain higher than those reported in developed countries, such as Australia, the United Kingdom and Sweden. The number of road accidents and fatalities per 10,000 vehicles stand at 23 and 4.7, respectively; considerably higher than those reported for OECD countries, where in average there are around 10 accidents and between 1.2 and 2.5 fatalities per 10,000 vehicles.

Road accidents continue to impose very high costs on society. CNPCAT estimated that the social costs of mortality caused by road traffic injury, measured as the loss of income in the economically active population, amounted to US$162 million in 2000; while medical and other expenses (disability, family care and recovery) were around US$613 million in that same year. Moreover, road safety in Uruguay is a matter of concern as road accidents are the leading cause of mortality among the 18-35 year olds. Road accidents continue to be the leading cause for death in the 15-29 age group, where the rate of road fatalities per 100,000 population is around 19 percent for males. In 2002, this group accounted for around 26 percent of road accident related deaths.

The high incidence of accidents related to vehicles going off-road and collisions at intersections indicate the need to keep on working on the improvement of signaling. The proposed project would continue to assist DNV in working toward improving road information and lane markings to reduce road accidents.

7. Job promotion

In the mid-nineties, DNV started a program to contract out maintenance activities with micro-enterprises formed by previous DNV staff to carry out routine maintenance (see Section 3 of this Annex). At that time, DNV started a retrenchment program that ultimately reduced the number of staff from about 3,700 employees in 1995 to 1,810 in 2003. This program was developed through a combination of non-renewal of personnel contracts, incentives for early retirement, and the creation of micro-enterprises consisting of former DNV employees. The program achieved two objectives: (i)minimize the adjustment period for ex-DNV employees and (ii)improve maintenance operations. Since its creation, the micro-enterprises have acquired basic equipment units from the DNV and they have also taken advantage of special credit programs, guarantees, and technical assistance programs funded by the DNV.16Pursuant to Law 14.411, enacted in 1995, micro-enterprises can be formed under less stringent incorporation requirements and are

l6 DNV offered guarantees of up to 50 percent of the credit line if the contract was with the GOU, and a 25 percent guarantee if the contract was with an extemal party. Credit lines and guarantees were often incorporated in the total value of the contract.

51 open to skilled and unskilled personnel. The original micro-enterprise contracts had two years terms, with an option to extend services for an additional period, if performance is deemed satisfactory. After this initial grace period, the micro-enterprises compete directly for contracts on par with other private firms.

The experience with micro-enterprise programs in other Latin American countries shows that micro- enterprises (which routinely maintain roads rehabilitated under Bank's projects) have embarked on productive projects at their own initiative and risk. This has been possible due to a stable source of revenue (secured through the maintenance contracts). In those countries the micro-enterprises have acted as catalysts for other local development initiatives, with benefits well beyond the up keeping of roads and have generated additional employment opportunities. This could be the case in Uruguay, should the DNV continues to expand the micro-enterprise program for routine maintenance contracts.

B. Sector issues

1. DNV significantly affected by budgetary constraints

Despite the DNV's evident commitment to reform, experience showed that in a situation of budgetary restriction, the decline in sector funding and the uncertainties with regards to future levels of financial backing can slow down the implementation of successful institutional initiatives. The outsourcing of road maintenance has tumed activities previously considered as current expenditures into capital expenditures for the Ministry of Economy and Finance (MEF). As a result, the DNV was much more affected than other entities by the generalized investment cuts that were imposed by the government as a response to the crisis. On the contrary, for its more rigid composition (mostly government salaries and other fixed commitments), current expenditures were in a manner "protected" during the crisis. In other words, budgetary policy, especially in times of crises, may end up favoring those who have not sought cost- effective reforms and taking a bigger toll on those who have done so.

In addition, the significant reduction in staff could have allowed for an increase in the remuneration of currently existing employees. Nonetheless, salaries have remained fixed at a low level, which makes it difficult for the institution to retain and motivate qualified staff to carry out functions that are increasing in complexity (regulation and supervision, as opposed to the execution of road works). Consequently, the DNV requires support to secure the achievements of sector reform.

2. Preserving the value of road assets

The effects of the recent crisis on the road sector demonstrate how sensitive the level of service and conservation of road assets is to the level of expenditure. The reforms have been successful in as much as they have shown that despite a sharp decrease in investment over several years, the priority given to maintenance has helped to weather the crisis remarkably well. In this respect, in spite of the scarcity of funds, the share of roads in bad condition has not increased to an unmanageable proportion and the value of assets has been maintained within close range of its average level.

Notwithstanding the above, the crisis has also shown that a policy of only maintenance cannot be sustained indefinitely and that lack of investment inevitably results in a reduction in the value of road assets. A certain amount of rehabilitation, together with a policy that gives priority to maintenance of the existing network is necessary to maintain the total value of road assets. In order to be sustainable, a road management program must have a balance between investment and maintenance expenditure and take

52 into account the resources available. This balance must be found and the corresponding necessary resources secured in the long term. Future development or expansion of the road network must be considered if additional resources are available, without sacrificing the maintenance of existing road assets.

3. Need to ensure that funding is effectively directed to road maintenance

Road users pay in excess of what the Government actually spends in the sector. The latest road user charges study for the year 2001 showed that, as it had been the case in previous years, road sector revenues exceeded expenditures. The sector had an overall income of US$ 572 million and expenditures of US$ 430 million. It is estimated that revenues continue to exceed the amount actually allocated to DNV under the Five-Year Plan. This means that road user charges are being directed towards other sectors of the economy.

So far, this issue has been effectively addressed by means of involving the private sector in road asset management through the use of different mechanisms: multi-year performance based contracts, road concessions, micro enterprises, and other innovative mechanisms, such as the Megaconcesio'n. These private sector participation (PSP) mechanisms have proven to be very successful in securing road user charges and channeling them toward the cost-effective maintenance of the most important sections of the network. For this reason, it has not been deemed necessary to implement a road maintenance fund. Therefore, it is critical to continue to secure road user charges to ensure that key sections of the road network receive adequate and timely maintenance.

4. The Megaconcesio'n has been successful but requires further support

The Megaconcesidn is an innovative way, akin to Uruguayan political and cultural tradition, to secure user charges to finance a sub-network of the DNV managed road network, foster commercial management practices, and increase reactivity in decision-making. Its sustainability depends on its ability to secure steady financing from sources other than those of the budget, so that MTOP resources may be directed to other parts of the road network. Since its creation, the Megaconcesio'n has not yet been able to raise funds from private sources. One of the reasons may be that being financed by MTOP allocations, the reliability of its financial structure is not sufficiently reassuring for private investors.

Despite the impossibility of raising the necessary financing for executing the plan as originally envisioned, there has been a remarkable progress in terms of the implementation of rehabilitation and maintenance works. In the period between December 2002 and August 2004, the CVU awarded contracts totaling US$ 90 million; of which it had disbursed a little over US$ 40 million. More than 339 km of roadways and bridges are being or have been rehabilitated, and 995 km of roads are being regularly maintained. The use of performance based contracts has been particularly noteworthy as it has improved the efficiency of maintenance works and reduced overall costs.

On the issue of financing, there are still problems with the institutional commitments needed for successfully establishing a fiduciary trust to serve as a Special Purpose Vehicle (SPV) for the securitization of future toll revenues (isolating the cash flows generated by future toll collection by channeling them to the SPV, which would in turn issue securities-obligacione~negociables- backed only by those flows). Although the fiduciary trust has already been designed and established and potential investors have shown interest in the proposed financing structure and a certain tolerance for the embedded risks, the securitization deal has not moved forward due to the delay in the approval of a resolution by which the MTOP would commit to continue to allocate toll revenues to the SPV, even in the event the

53 Megaconcesidn is terminated and its assets return to MTOPs management. Future sustainability will depend on the source, reliability and steadiness of its financing.

5. Continued efforts are needed to improve regional integration

Despite continued efforts, and given that Uruguay is a transit country between Brazil and Argentina, further upgrades to international corridors are still needed to eliminate bottlenecks to international road freight transport. Despite the recent crisis, it is expected that in the short term the level of trade and freight transport will resume its pre-crisis level. Therefore, remaining bottlenecks in international comdors, such as bridges or other infrastructure not meeting Mercosur standards, will translate into bottlenecks to international freight transport.

6. Latent demand for forest products transport needs to be addressed

The expected increase in freight traffic due to forest products extraction and transport will strain the capacity of existing infrastructure. At the end of 2003, the forest planted area totaled 670,042 ha, indicating that the cumulative area of planted forest is reaching the critical mass of raw material supply that makes viable industrial processing at an economically- feasible scale, from pulp and cellulose to sawn-timber products. It is expected that the expansion of currently existing processing plants and the establishment of new ones with foreign capital, will increase the demand for transport of raw materials and finished products, causing a significant deterioration of existing infrastructure and imposing high costs to the government and society in terms of transport operating costs, road maintenance expenditures, and a worsening of road safety conditions (most roads in the country have only two lanes for handling bi- directional flows), should part of this flow not be shifted to rail.

This situation has highlighted the need to further upgrade roads and railways as critical factors in ensuring that the country develops adequate transport infrastructure and services, capable of handling the expected growing volumes of cargo. Even if forest products traffic is entirely shifted to the railway, the transportation of wood to chipping plants, collection areas, and to railway stations, will also strain the capacity of departmental and other feeder roads. Hence the importance of ensuring that the feeder and departmental network has the sufficient capacity and receives the necessary maintenance to be able to handle this traffic.

7. Expansion and optimization of Departmental Road programs

In recent years agricultural development poles (cattle, milk, rice, and soy bean) have emerged in different areas of the country and agncultural and livestock production has accelerated notably. These dynamic agricultural production areas require adequate road access to major corridors. The diverging nature of the demands that these development poles have imposed on the Departmental road network of secondary and tertiary roads has warranted an approach on two levels by the GOU. Firstly, through the design of specific programs for the maintenance of some agricultural pole networks, such as the ‘‘cuencu Zecheru”; and secondly, through continued support to participating Departumentos under the Departmental Road Program.

The variety of problems encountered in each Department, and with each type of maintenance activity due to their differing nature, will require the consolidation and expansion of the capacity and ability of

54 Departamentos to plan, develop, and execute specific road programs adapted to each situation. Furthermore, the differing nature of the “cuenca” programs and the Departmental Road Program results in multiple uncoordinated approaches to road management at the departmental level. The “Cuenca” programs are based on repairing rather than maintaining roads, with little guidance from DNV; while the Departmental Road Program is based on a planned and negotiated agreement at the beginning of the year where incentives are used to incite the Departamentos to improve performance in road maintenance, under close supervision of the DNV. This situation warrants a rethinking of the departmental road policy aiming to optimize the allocation of resources to Departamentos and maximize the impact of interventions.

In the latest road user charges study it was found that whereas the road sector has a surplus of US$130 million at the central government level; Departamentos have a deficit of US$ll3 million, which is filled by the central government. This situation raises attention to the need to improve institutional capacity at the Departmental level so as to increase impact and amplify revenue generating capacity.

8. Road safety programs have to be scaled up

Although low when compared to Latin American standards, traffic accidents and mortality rates in Uruguay remain higher than those reported in developed countries. Moreover, road safety in Uruguay is a matter of concern as road accidents are the leading cause of mortality among the 18-35 year olds. Road accidents continue to be the leading cause for death in the 15-29 age group, where the rate of road fatalities per 100,000 population is around 19 for males. In 2002, this group accounted for around 26 percent of road accident related deaths.

The DNV has developed a monitoring system (Sistema de Ana‘lisis de Accidentes de Tra‘nsito-SAAT) that is fed by on the spot police reports, that do not provide details about the final outcome of the accident, and that is limited to the national road network. The municipality of Montevideo, where presumably most accidents occur, does not report to this system. The consolidation of the monitoring system in the future would need to enhance and centralize data collection and allow for the exchange of information with urban municipalities.

11. PORT SECTOR

A. Sector description

1. The port system

The Uruguayan port system is governed under the rules and procedures established by Law 16246 and its regulations, both issued in 1992. The main features of the Law are: the institution of free competition and private sector participation in the provision of port services; the establishment of a free port regime for the Port of Montevideo; the introduction of around-the-clock provision of services; the modernization of the National Port Administration (A”),and labor reform. These principles established the framework to correct the main problems which were identified as the main causes for the deterioration of port services prior to reform.

55 Free port. The port is now a free zone where repacking, fragmentation and movement of commodities are permitted free of formal controls and taxes. In addition, the merchandise in transit through the Port of Montevideo does not lose its origin and may be redirected freely. Montevideo is the first port on South America's Atlantic coast to adopt such regime, which serves as an attraction for new traffic and provides incentives for the development of regional distribution centers.

Private sector participation and free competition. Minimal participation of the State in the provision of port services, giving the private sector the freedom to provide them. Port services can be provided by private operators with approval of the ANP, under the modalities of concession, authorization and permit. Based on the above, the authorized companies will provide freight handling in free competition.

Around-the-clock services. Port services are provided around the clock. This is a major improvement with respect to the situation before the reform, when the port would remain closed for extended periods of time.

Labor reform. The Law liberalized the market for stevedoring services, opening it to free competition. The law did not eliminate completely the pool of stevedores. Instead the stevedores where encouraged to leave their jobs with economic compensations and workers were given incentives to create their own private firms. The National Stevedoring Services Administration (ANSE) was completely eliminated in 2001. Present regulations give importance to innovations in cargo handling, loading and unloading and connected activities establishing: (i)a competitive policy and free cargo handling; (ii)the unification of the onboard and offshore duties under one direction; and, (iii)the protection of port workers through the Labor Common Rights.

2. Institutional framework

The institutional framework of the port sector in Uruguay is composed by various agencies involved in the different aspects of fluvial and maritime transport. Uruguay has gradually shifted from a model in which ANP owned and operated the port - a service port model - into a model in which ANP owns the infrastructure (quays, docks, storage yards) and is in charge of its management, while private firms may own the assets of the port superstructure (cranes, shed, fuel tanks, vans, office buildings) - a landlord port model. Under this scheme, superstructure and operations are licensed and concessionaires undertake investments.

Policy formulation. The Ministry of Transport and Public Works (MTOP), through the National Directorate of Hidrography (DNH), is in charge of policy formulation and sector planning, The DNH is also responsible for a wide range of activities including: technical studies; maintenance of navigable waterways; hydraulic works, such as coastal protection; and the construction, maintenance and administration of the ports that are not under the jurisdiction of the ANP. The ANP is an autonomous public agency, with a five-member Board of Executive Directors appointed by the Executive Power and confirmed by the Parliament. The A" is the main agency responsible for port development, in charge of applying sector policy and enforcing its regulations. It also plays an advisory role in the formulation of sector policy, and manages and maintains the Port of Montevideo, and other ports assigned to it by the Executive power, including, to date, the ports of Nueva Palmira, Fray Bentos, Colonia, and Juan Lacaze.

Navigation and security. The National Naval Prefecture (PNN) controls vessel movements, pilotage, and lights and buoys outside port limits, and provides police services at each port. Pilotage is an obligatory service for vessels in ports under the jurisdiction of the ANP and it is provided by certified pilots grouped in the National Pilotage Corporation (NPC), under the supervision of the PNN.

56 Customs. The National Directorate of Customs (DNA) conducts the physical inspection of the merchandise entering and leaving the country through the port system and charges the corresponding tariffs. The DNA has been immersed in a modernization process that included the launching of a unified information system (LUCIA) and the automation and simplification of administrative procedures. As a result of this process, the agency’s performance has improved substantially and turn-around times have been greatly reduced.

Other control agencies. The Ministry of Public Health (MSP) and the Ministry of Agriculture, Livestock and Fishery (MGAP) also intervene in the control over merchandise and enforcement of sanitary and phytosanitary rules. The Uruguayan Technological Laboratory (LATU) inspects imported foods and beverages to ensure that these comply with the country’s sanitary standards, and administers the temporary admission regime, under which imported goods can be subjected to transformation activities.

Tugboat operations. Tugboat services are provided by two private companies in an environment of free competition and under the regulation of the ANP. In general, the perception of users is that the equipment used is very old.

Port services. Port services are provided by private operators, which have responsibilities for onboard and onshore tasks. However, the ANP is still providing bulk cargo services in Montevideo through the operation of cranes for the handling of bulk and a floating crane for supporting vessels. These services are still provided by the ANP due to the apparent lack of competition in the market for the provision of these services. The National Stevedoring Services Administration (ANSE) has been completely eliminated.

3. The port system

The Uruguayan port system is composed by a relatively small number of commercial (cargo and passengers), recreational, fishing, and oil ports. The country’s main ports are: Montevideo, Colonia, Juan Lacaze, Nueva Palmira, and Fray Bentos. The most important port in terms of traffic is Montevideo. The Government of Uruguay (GOU), through the A”,owns and operates all these port installations, and has a minority participation in the new container terminal in Montevideo. Finally, La Paloma is a fishing port serving the industries established in the area. The private sector owns and operates a bulk terminal at the port of Nueva Palmira and the recently inaugurated port of M’Bopicua.

Uruguay’s main ports have received the security accreditation conferred by the International Maritime Organization (NO) for their compliance with the International Ship and Port Facility Security (ISPS) Code.

4. Facilities and equipment

Infrastructure. The port of Montevideo has 4 km of total berth length and a total land area of 75 ha. In addition, there are seven terminals located outside of the port that handle empty containers, and the Free Trade Zone (FTZ) of Montevideo, which concentrates providers of logistical services. Although the present area of the port does not constitute a constrain for the movement of current levels of cargo traffic, the ANP is working on the development of Logistical Zones (ZAL), which would allow for the free transformation of goods and transit of merchandise and improve the provision of logistical services. In addition, the firm running the specialized container terminal is also planning to expand the length of its berth. The port’s area would become 85 ha when the firm operating the new container terminal concludes

57 its planned widening and landfill works; 90 ha should quay C is constructed; and 100 ha, including the projected wood terminal.

Colonia, on the Rio de la Plata, handles freight and passengers allowing 5 m draughts. It has two wharves, a RoRo ramp and about 8,500 sq. m of covered storage. Nueva Palmira, on the Rio Uruguay is a bulk terminal, constrained by the draught of the waterway (San Pedro Channel near Martin Garcia) which is 6.5 m. It has 200 m of berth length and elevated (42,000 tons) and underground (30,000 tons) silos. Next to the port, a private company has facilities to store (between 75,000 and 50,000 tons) and mechanically loadunload grains and minerals. Fray Bentos, also on the Rio Uruguay, was built as a dry bulk terminal. It has 350 m of berth length and 6.5 m draught, constrained by depths of river passages. The port has 22,000 tons of silo capacity, and 1,100 sq. m of general cargo covered storage area. The port of La Paloma has 600 m of quays, of which 240 m are operational.

Superstructure. Currently the port of Montevideo has two gantry cranes and various mobile ones. The port of Nueva Palmira has multiple cranes and a conveyor belt for the transport of bulk. The port of Colonia has electrical ramps for the loading and unloading of vehicles. Finally, the port of Juan Lacaze also has ramps for Ro-Ro ships and ferries.

5. Traffic

Cargo truffic. The volume of cargo mobilized through Uruguayan ports has moved on an upward trend since the reform of 1993, except for a minor reversal experienced during 1999. In 2003, the Uruguayan port system (Montevideo and interior ports) had total cargo traffic of 8.7 million tons. In the last year, cargo traffic in Uruguay’s main ports experienced an increase of 25 percent, the largest annual increase in the last 5 years, along with the country’s pace of economic recovery.

In terms of the volume of freight handled, excluding crude oil and derivatives, the Port of Montevideo is by far the most important. The total traffic of the port of Montevideo in 2003 reached 4.9 million tons, including cargo moved through commercial terminals and the liquid bulk carried through the oil terminal of La Teju, operated by the state oil company (ANCAP). Overall, cargo traffic in Montevideo’s commercial terminals increased by 16 percent between 2002 and 2003. In 2003, the most important traffic volumes were related to: containerized cargo (58 percent), followed by general cargo (19 percent), and dry (14 percent) and liquid bulk (10 percent).

Table A2-9 Cargo traffic, 1999-2003 (Tons) Liquid Year Commercial Total Bulk (1) 1998 3,351,625 645,579 3,997,204 1999 3,374,633 887,802 4,262,435 2000 3,676,380 467,835 4,144,215 200 1 3,728,749 442,044 4,170,793 2002 3,849,525 518,400 4,367,925 2003 4,467,097 474,920 4,942,017 Source: ANP (1) La Teja ANCAP Terminal

58 While the relative importance of liquid bulk camed through La Teju continued declining, the preponderance of containers and dry bulk increased notably. Particularly between 2002 and 2003, dry bulk cargo increased by 48 percent and containers by 13 percent. The marked increase in dry bulk cargo can be attributed to the growing volumes of forestry products being exported through the Port of Montevideo. In 2003, the cargo of roll wood reached 148 thousand tons.

Table A2-10 Montevideo: traffic per type of cargo

Percentage 2003 2002 Cargo change Tons % Tons % 2002-2003 General 689,368 14% 694,880 16% -1% Liquid Bulk 474,920 10% 518,400 12% -8% Dry Bulk 927,457 19% 628,464 14% 48% Containers 2,850,272 58% 2,526,181 58% 13% Total 4,942,017 100% 4,367,925 100% 13% Source: ANP

As for containers, in 2003, the port of Montevideo handled 210,401 boxes, equivalent to 333,871 TEU (Twenty-foot Equivalent Units). This represents a 10 percent increase in container throughput with respect to the previous year. Overall, the number of containers has increased by 160 percent and the number of TEUs has multiplied threefold since 1993, the year after port sector reform.

Table A2-11 Montevideo container movement, 1993-2003

Number of Year TEUs containers 1993 80,887 98,382 1994 105,784 134,346 1995 137,644 178,937 1996 121,776 164,9 15 1997 143,851 20 1,964 1998 179,900 265,892 1999 164,088 250,227 2000 184,568 287,298 200 1 197,631 301,641 2002 190,970 292,962 2003 2 10,40 1 333.871 Source: ANP

The number of deep-sea and coastal shipping vessels arrived into the port of Montevideo increased from 1,688 in 2002 to 1,720 in 2003. The traffic of container ships is the most important, accounting for around 12 percent of total arrivals and 60 percent of gross tonnage, followed by coastal shipping and general cargo vessels, and oil tankers.

The second most important port in terms of cargo traffic is Nuevu Palmiru. In 2003, a total of 589 deep- sea and coastal shipping vessels arrived and 1.3 million tons were handled at the public terminal operated

59 by the ANP in the port of Nueva Palmira. The port is a very important gateway for exports, mobilizing a large volume of oleaginous crops and forestry products' exports. On the other hand, the port of Fray Bentos handled 510 thousand tons, of which 450 thousand were forestry products bound for export markets. The port also handles an important volume of barley and soy exports. Finally, the port of Juan Lacaze serves the traffic of roll-on roll-off and bulk cargo vessels and handles a small volume of oil products. The volume of cargo mobilized through this port reached 150 thousand tons in 2002.

Table A2-12 Traffic in Ports of the Interior (Tons)

Year Colonia N.Palmira (1) N.Palmira (2) F. Bentos J. Lacaze Total 1998 115,419 535,865 1,691,912 228,741 132,014 2,703,951 1999 76,920 615,295 1,615,655 232,088 97,819 2,637,777 2000 75,939 431,592 1,073,849 360,926 91,011 2,033,317 200 1 52,588 596,336 1,283,567 374,597 148,008 2,455,096 2002 21,388 838,396 1,161,956 449,285 150,726 2,621,751 2003 35,791 1,283,323 1,811,713 509,045 147,902 3,787,774 Source: ANP and Corporacion Navios S.A (1) Public port operated by ANP (2) Private terminal operated by Corporacion Navios S.A

Passenger traffic. Colonia is the busiest passenger port as a result of the frequent operation of ferry services to and from Argentina. After a marked slump in 2002, passenger traffic in the port of Colonia increased to 842,558 in 2003, showing a small recovery, but still far from pre-crisis levels. Colonia is the country's most important passenger port. The port of Montevideo reported a total of 312,498 passengers in 2003. The number of passengers moving through the port of Montevideo has continually decreased over the last 6 years from its peak of 742,000 in 1997.

6. Financial Performance

After years operating at a loss, the A" finally reported a positive net income after 2000. ANP's net income rose to around US$6.5 million in 2002 as a result of the reduction in labor and severance payment expenses, and in the operating costs of providing services that are now undertaken by the private sector. However, given that expenses are denominated in local currency and tariffs in US dollars, the marked devaluation of the Uruguayan peso has also resulted in an increase in the agency's profits. This was offset by the reduction in revenues derived from tariffs on imports, one of the most important sources of income for the A". The operation ratio has increased, reflecting the reduction in the amount of revenues generated from direct provision of services; while the working ratio has improved considerably, indicating gains originated in devaluation of the currency and payments by private concessionaires.

Table A2-13 ANP Financial Results

60 Net Income Year Operating ratio Working ratio (US$ thousands) 1998 (4,307.1) 96.6 95.0 1999 (2.68 1.2) 104.3 103.3 2000 3 14.9 103.5 98.4 200 1 5,192.0 113.5 109.2 2002 6,459.7 116.0 85.6 Source: ANP, Bank stafs

B. Sector Issues

1. Private sector participation

Private participation in port operations and services has been largely achieved. The private sector operates a container terminal in Montevideo; a bulk terminal in Nueva Palmira; and the recently inaugurated port of M’BopicuB. There are also other projects for private operations, not only in Montevideo, but also in the ports of the interior, that would serve to increase efficiency in the transport of key export products and enhance the overall competitiveness of the economy. These include the construction and operation of a new deep draft port in La Paloma in the and of a new multipurpose terminal in Montevideo. The Government has awarded a concession for the first project, but has been unable to move forward with the second.

Despite the advances made, there is still need to continue promoting private investment as means to ensure that the system will not endure capacity constraints in the future and to safeguard intra and inter port competition. Following, there is a summary of the different private participation projects in the port sector and of the outstanding issues that may affect their future performance.

Container terminal. One of the issues pending after the reform was the development of a container terminal under concession to a private sector operator. After previous failed attempts, in 2001, the GOU was able to successfully involve private investment in the port system through the concession of a specialized container terminal to Terminal Cuenca del Plata (TCP). TCP was created as a special purpose corporation jointly owned by the National Development Corporation (CND) and National Port Authority (ANP), with the objective of later involving private investment in port operations. This objective was accomplished through the incorporation of private capital into the corporation by a consortium headed by Katoen Natie Group of Belgium. The ownership share of ANP in TCP is small, with only 20 percent of subscribed capital. As a result, there are now two container terminals in the Port of Montevideo: one is operated by Montecon, a private consortium formed by 4 private companies; and the other is a specialized container terminal owned and operated by TCP.

TCP has invested around US$34 million in the expansion of the container terminal, the construction of facilities for cargo manipulation, and new equipment. TCP also completed the construction of its logistic activities headquarters, designed for the provision of value-added services. Finally, it has also committed to invest an additional US$60 million in the construction of a new quay for big draft vessels. This is a critical investment, because the terminal only has space for one vessel, which causes congestion when various ships coincide.

La Paloma port. In 2002, the government also called a tender for the construction and operation of a port for bulk cargo (wood and cereals) in La Paloma (Rocha Department). The project involved the

61 construction of a quay fit for big draft ships. The original regime included a concession for 50 years, without cannon payments -the government, however, was authorized to revoke the contract in defense of public interest. The company Puerto Gruneles S.A. from Chile was the unique bidder in the tender. The concession had not been awarded in view of some disagreements over the terms included in the offer and strong opposition from Rocha’s citizens due to the potential negative impact of the project on the local community.

After discussions between the government, the bidder, and the affected communities, an agreement was reached to introduce some changes to the original project. The most important modifications were the reduction of the concession period to 30 years, and the decision not to include the usufruct of 8 ha of land close to the urban perimeter of La Paloma. Finally, in October 2004, the government awarded the concession contract to Puerto Gruneles S.A. The initial phase of the project will have a cost of US$25 million and allow for deep draft ships (15 m) to load an estimated of 2 million cubic meters of wood per year. It is expected that wood and other bulk cargo will start being carried through this new port in around three years.

Multipurpose terminal. In 2002, the ANP called for bids for the development of a new multipurpose (bulk, general and containerized cargo) terminal in quays 8,9,10, and 11, and a new quay “C”. The project consisted of the development of an additional 300 m of quay, two new terminals (specialized and multipurpose), and the improvement of public quays where private service providers would continue to operate. The project also included the installment of new gantry cranes under the modality of permit, as a temporary measure to allow for greater intra-port competition while the new multipurpose terminal was put into operation.

Initially, the tender had to be postponed due to claims by TCP, one of the existing container operators, that it had exclusive use of gantry cranes. TCP argued that the market size did not allow accommodating another terminal and that the rules of the game were being changed affecting the retum on their investments. TCP estimated that new gantry cranes would only be justified when container traffic reached 400 thousand boxes or 550 thousand TEUs. On the other hand, AN? considered that this measure was necessary to ensure intra-port competition and increase efficiency.

In addition, by petition of one of the firms that showed interest on the project, the deadline for submissions of proposals was extended. After these delays and due to the limited interest of foreign investors, the Govemment was forced to postpone the bid indefinitely. As a result, the development of the project under its original terms is uncertain.

The AN? considers that the construction of the new multipurpose terminal is necessary for ensuring intra- port competition, increasing efficiency, and reducing the possibility of capacity constraints in the future. Therefore, the development of a new terminal with private participation will remain an issue in the coming years.

2. Crane Operation at the Port of Montevideo

In 1996, the port only had one gantry crane with poor maintenance, a situation that considerably limited its productivity. Currently, there are 2 gantry cranes and several mobile ones. Gantry cranes are operated by TCP, which also owns 6 straddle carriers, mobile cranes, and other equipment. With the two gantry cranes, TCP can move between 50 and 60 containers per hour. Montecon operates three mobile cranes for handling containers and its average rate of container movements per hour is lower. Before TCP entered the market, Montecon handled the totality of containers at the port of Montevideo. Now, Montecon and TCP have an equal participation in the market. The average price per movement is around US$lOO.

62 However, the ANP still operates a few bulk cargo cranes, on the basis that it is a service for which there is not sufficient competition in the market. A previous Bank policy paper recommended the concession of these activities to the private sector as means for the Uruguayan system to evolve into a true landlord port model. The perception continues to be that the cost of these operations is higher and their productivity lower, than what it would be the case under private management.

3. Expansion of port facilities

The port of Montevideo does not have much land available to expand its facilities for the consolidation and distribution of cargo and the provision of services to ships. The expansion of port facilities is constrained by the commercial terminals’ cohabitation with other installations, such as a naval base, coastal and deep sea fishing facilities, and ship repair shops. This is an issue that may impose restrictions to the future development of the commercial port and that should be addressed.

The last policy paper recommended the ANP to reach an agreement with the Navy to move its facilities outside of the port in exchange for a compensation to be paid by the private concessionaire interested on this land. The naval base has not been moved to another location yet. This situation is limiting the possibility of developing a prime area for handling containers adjacent to TCP’s terminal. The National Navy requests that in exchange for ceding its facilities, the ANP pays for the construction of a new naval base in the area of “El Cerro”. So far, It has not been possible to reach an agreement on the compensation.

On the other hand, the ANP has also carried out studies analyzing the demand and localization options for the development of a new fishing terminal in Montevideo. The proposed terminal would cover an area of 3.5 ha in the district of Cupurro, north of the Bay of Montevideo. The project includes the development of installations for the operation of scientific ships, a repair shop, and commercial areas. As of now, the ANP has not issued a call for bids for this project.

4. Forest products transport

The Master Port Plan of 1999 projected traffic at around 3 million tons in 2005, and between 7 and 11 million tons by 2015. The marked rise in cargo traffic would result from the expected large increase in forest products’ exports. This increase in traffic would put pressure on the already limited space of the port of Montevideo. As a response, the Master Plan included a project to develop a new forest products terminal in the port of Montevideo, in the event increases in wood trafficreach a level that overwhelm the capacity of port facilities.

However, the demand for transport of forest products did not grow as projected over the period between 1996 and 2004. In 1995, the government’s forest products transport task estimated that by 2004, total exports of forest products would reach 4.2 million tons per year, 2.2 million at Fray Bentos and 2 million at Montevideo. However, in 2003, only 450 thousand tons of forestry products were shipped from Fray Bentos and 148 thousand tons from Montevideo. The difference between the projected and current wood production was the result of unfavorable circumstances in the international markets that kept prices below original estimations, and prevented production, and thus exports, from growing at previously anticipated rates. Consequently, wood traffic did not reach the levels expected and did not create major capacity constraints.

63 However, this situation is starting to reverse as forest products exports are increasing significantly, not only at Montevideo, but also at other ports. Overall, the traffic of forestry products in the Uruguayan port system increased by 37 percent during 2003, thus becoming the main cargo shipped. Forest products traffic increased by 15 percent in Fray Bentos, 81 percent in Nueva Palmira, and 50 percent in Montevideo; and it is expected that it will continue to increase as new chipping plants are established in the country. The port of Fray Bentos has consolidated itself as the main port for the export of wood rolls.

Eufores, a Spanish forestry firm, has started shipping large volumes of wood chips to Spain and recently, for the first time, to Japan. The firm is expecting to increase its shipments to those markets in the following years. If this tendency continues, port facilities may face increased demand for storage and loading facilities. The private sector is already responding by developing forest products terminals outside of Montevideo, such as M’Bopicua and the recently awarded concession for the development of a big draft port in La Paloma.

5. Maintenance backlog in other transfer terminals

While the condition of the Port of Montevideo has improved considerably since the reform, other transfer terminals in the Country have undergone important deterioration as a result of the maintenance backlog resulting from the government’s budgetary constraints. The worsening condition of infrastructure is particularly acute in the commercial passenger ports of Punta del Este, Carmelo and Pirifipolis, and the fishing port of La Paloma. In these ports, the condition of infrastructure may lead to service interruptions that would affect the competitiveness of the tourism and fishing industries. Furthermore, in most cases, the deterioration of infrastructure is starting to compromise the stability of constructions and to threaten the safety of port users.

6. Dredging

The Uruguayan ports are mainly river ports and thus, are in constant need of maintenance dredging. Access of larger ships to the port of Montevideo and other ports may be constrained in the future by the dept of access channels and of the areas adjacent to docks. After the reform, ANP and DNH continued in charge of dredging in the port of Montevideo and other ports. Generally, the direct administration of dredging was not efficient and added to ANP’s overhead.

This situation started to change with the ANP’s decision to contract out dredging works with a private sector firm. In 2003, ANP contracted the dredging of the Port of Montevideo’s access channel and dockside with the firm Boskalis International for US$6.3 million. The dredging works took place over a period of nine months and allowed for depths of 11 m in the access channel, and 10.5 m in the dockside. However, the ANP still performs maintenance dredging using its own personnel and dredges

7. Transshipment and value-added services

The GOU development strategy relies on the country’s ability to attract transit traffic and become a provider of logistic and value-added services for other Mercosur countries. In this sense, there have been various initiatives aimed at expanding and diversifying the supply of value-added services, as well as an increase in the attractiveness of Montevideo as a transshipment center.

Value-added services. In 2002, representatives from government and private sector organizations with a stake in the provision of transport services, created a Logistical Development Commission (CDL) with the objective of promoting the advantages of Montevideo as a regional distribution center. On the other hand, there have also been private initiatives to develop logistical centers and inland freight terminals.

64 However, these initiatives have not moved forward due to the lack of direction with regards to the future role of Logistic Activity Zones (ZAL) or Distriparks and their interaction with the already established Free Trade Zones (FTZ) and inland storage facilities.

A ZAL is an area located close to a seaport and/or airport, where companies are established to perform trade and transport related value added services. In 2002, draft regulations covering the procedures for establishing and operating ZALs, the applicable tax regime and the incorporation of international multimodal transport agreements into national law were discussed in the parliament. However, a definitive agreement was not reached in consideration of the alleged excess capacity of port facilities and inland depots, and the uncertainties with regards to the role that FTZs could play in the provision of value-added services. With regards to the free port status of Montevideo, the continued control exercised by customs within port premises and the enactment of a decree limiting the amount of time that merchandise is allowed to remain in transit, may hinder the ability of the port to take full advantage of this condition.

Transshipment. The ANP is aiming at consolidating the port of Montevideo as a regional distribution center, based on its relative advantages in terms of costs and productivity. In the last three years, three maritime transport firms (Hamburg Sud, Zim, and P&O Nedlloyd) have moved their operations from Buenos Aires to Montevideo owing to its relative lower cost. In addition, during 2002, for the first time, a vessel unloaded cargo in Montevideo with destination to Buenos Aires. These developments have strengthened the vision of the port of Montevideo as a potential “mini hub” for the region.

8. Access and multimodal integration

Currently, the Port of Montevideo has 4 land accesses, of which 3 are open 24 hours a day (Colombia, Florida and Chacark). Routes 1 and 5 lead directly to the port and allow for relatively low travel times and a reliable connection to the north and west of the country. Routes 8 and 9 connect the port with the northeast of the Country, but travel times on these roadways are higher and services to cargo poorer. On the other hand, connections to the railway system are still inadequate to allow for greater utilization of this mode, which is particularly relevant for the cost-efficient transportation of forestry products.

There is a need to improve land access to the port and improve its connection to the railway and road system. The city completely surrounds the port, limiting the options available for increasing the speed, reliability and safety of land transportation to and from the port.

9. Port sector management

Port master plans. The policy note of 1996 recommended the preparation of a new master plan for the port of Montevideo and for other ports. A new study for the development of a Master Plan for the port of Montevideo, replacing the previous plan of 1988, which was financed with Bank resources, was concluded in 1999. The study culminated with the formulation of new Master Plan for the period 2000- 2015, and a strategic plan identifying critical projects to be carried out before 2005. These projects included: the expansion of the container terminal (under private operation); the dredging of the port’s access channel to 10 m; the development of a new multipurpose terminal, and the improvement of road access, among others. On the other hand, it appears that the ANP has not developed master plans for the other ports under its jurisdiction: Nueva Palmira, Fray Bentos, Colonia, and Juan Lacaze.

Quality and commercial orientation. In recent years, the ANP has focused on developing a culture of quality in port operations and in marketing a brand name for the port that is associated with it. The ANP has obtained the IS0 9001:2000 certifications for various processes and has also created a Quality

65 Assurance Committee that oversees the compliance of operations and services with the certified standards. The ANP has signed quality agreements with operators, including: berthing and container turnaround times, and services to cruise ships. In addition, the ANP has engaged in marketing activities abroad and has sought to strengthen its commercial function through the diffusion of promotional material and the development of an information system for international trade. These initiatives have increased the quality of services and contributed to enhance the positive perception of users.

66 Annex 3: Sector Strategy URUGUAY: UY Transport Infrastructure Maintenance and Rural Access

An Agenda for the Consolidation of Transport Sector Reform

In the 1990s, the Uruguayan transport sector underwent profound reforms that sought to: (i)modernize and improve service delivery; (ii)increase investment and tap into new sources of financing, by attracting private participation; and (iii)modify the existing regulatory framework, to solidly concentrate regulatory oversight, policy formulation and planning in the hands of the Government, whilst facilitating and encouraging private participation and public-private partnerships in the operation of infrastructure and service delivery. The reforms have been gradual and the Government has maintained tight control of the process, sometimes retaining public control of infrastructure operation or service delivery, where it deemed competition insufficient for a private entity to provide the required service efficiently (some port services). The government has also created public-private partnerships to promote private investment in particular activities (the port terminal in Montevideo, for example), as well as creating fully private concessions for infrastructure in roads, where the private sector was competitive and did not need subsidies or guarantees (as for road concessions). In addition, it has reorganized the railway sector, separating infrastructure from operations and setting the field for future competition in services. As an overall result, the MTOP has truly become a policymaking, planning, and regulatory body and no longer an executing agency.

These reforms have attained a differing degree of progress and consolidation depending on the sector, with roads being the most advanced and rail the least. On the whole, the reforms have made service provision more efficient, as may be measured by the quality of the road network and its weathering of the crisis. The reforms have managed to trigger significant private investment in ports, energizing the sector despite the downturn. And finally, they have managed to overhaul the rail sector consensually, transforming a structure that had become ineffectual into one that augurs new possibilities, but remains untested.

Transport infrastructure and services have considerably improved as a result of the reform. But there is still much to be done to enable the transport system to fulfill the needs and expectations of a country that bases its development strategy on its ability to expand exports and become a gateway to Mercosur, as a prime provider of logistical services. The dynamic development of agricultural, livestock and forestry production, which may increase exports by as much as 30 percent in 2004, is expected to put additional pressures on the already strained transportation infrastructure, which has lagged behind in investments due to fiscal constraints.

The following strategy presents key actions to consolidate the reform process in roads and ports.

67 A. Roads

1. Consolidate the institutional capacity of the DNV

Road sector reform has clearly been successful in streamlining business practices, aligning investments to user needs, developing a results-oriented culture, and improving cost recovery. Now that the reform has been largely accomplished, MTOP needs to support the DNV by evaluating options for the retention of qualified staff, so that they continue to carry out their regulatory and supervisory role efficiently.

2. Preserve the value of road assets

The success of a policy that gives priority to maintenance was clearly demonstrated during the crisis. This policy should continue to be the comerstone of any road sector policy. However, as previous experience shows, road policy must contain a certain level of investment so that existing road assets do not lose value and are at least maintained and rehabilitated, with some new investment. Yet the balance must respond to the availability of resources without sacrificing road maintenance. Uruguay has a significant amount of good-quality road assets, so no urgent large investments are needed, although these could be envisaged if surplus resources are available.

Investments should all aim to enhance regional physical integration and export competitiveness. This includes the required upgrades to Mercosur standards of all major international corridors and connections to ports, as well as the improvement of bridges to carry Mercosur standard loads. The foreseen boom in forest product and agricultural exports will need additional road investments, yet these decisions should be made taking into account the advantages of the railway, which can be more efficient in some corridors.

3. Ensure funds for road maintenance through PSP Mechanisms

The importance of PSP for the Uruguayan road sector is not in the level of additional investment that it can generate, as this has been very modest, but in its effectiveness in securing user charges. Currently, 42 percent of the road network managed by the DNV is maintained through contracts with the private sector under different modalities. This portion of the network is, in a way, protected from budgetary cuts and decisions to reallocate revenues generated by the sector to other areas. Multi-year contracts are in a manner protected from budget cuts because of the legal implications of breaching them, while road concessions collect toll revenue directly. As a result, user charges and sector revenues have reached this network in the right amount and in a timely manner, making all maintenance activities possible and efficient. Without this, roads would have deteriorated and more costly rehabilitation works would have been needed later on. In addition, PSP has had a great impact through providing a performance benchmark for the DNV to improve the execution of its force account activities. Consequently, the GOU should continue to rely in PSP mechanisms as a means to increase the impact of sector investment and provide a stable flow of financing for the sector, even in times of fiscal restraint.

4. Strengthen road asset management at the departmental level

The departmental road policy must be revamped to serve more roads under the ongoing maintenance program and adequately meet the needs emerging from the expansion of forestry and agricultural products traffic. Thus far, the program has been successful in maintaining key sections of the Departmental road network at adequate levels of service in a cost-efficient manner. Nonetheless, extending the program will require redirecting the focus of departmental road policy towards strengthening Departamentos’ capacities and ensuring a sufficient level of funding for road asset management at the sub-national level.

68 An option could be to pool all available financing for departmental roads, including DNV transfers (through the Departmental Road Program), the OPP-managed funds (Cuenca programs), and the parts of the Fondo de Desarrollo del Interior (FDI) that are destined for Departmental roads, to finance an expanded program under the direction of DNV. This program would continue to operate in the same way, through an annual agreement based on goals and performance indicators, that incites Departamentos to improve performance and also gives them a clear idea of the resources available so that they may carry out the necessary planning and investments for the year. With increased institutional capacity in the Departamentos, the term of these agreements could be extended to two years or more. OPP would administer the funds and DNV would continue to execute projects.

5. Support the Megaconcesio'n

The Megaconcesio'n should be consolidated and supported, so that it gains outside funding, which would allow it to attain its rehabilitation goals without tying up scarce MTOP resources. To this end, MTOP could explore mechanisms for reassuring private investors that its payments to the Megaconcesidn would be transferred routinely and without delay. The first option is the creation of a trust fund to be replenished with toll proceeds, representing the securitization of toll revenues. The fund has already been established so the instrument only requires a guarantee (in the form of a resolution) that MTOP will continue to channel toll proceeds to the fund for a certain period of time, even in the event that the concession contract is terminated and its assets revert to the DNV. A second option may simply consist in re-issuing Corporacidn Vial del Uruguay (CVU) bonds in a more favorable financial context, adding an explicit guarantee that the Government will keep to its obligations under the concession contract. In this sense, the incorporation of the road sections in the Znterbalnearia concession into the Megaconcesidn, once the former ceases to exist, will allow the CVU to generate additional toll revenue and make it more attractive for investors.

6. Continue efforts to promote road safety

Despite important advances, and as the network continues to be upgraded and traffic increases, it is necessary to keep trying to improve road safety. The high incidence of accidents related to vehicles going off-road and collisions at intersections indicate the need for better signaling and lane markings, to reduce road accidents. In addition to signaling works, a more ambitious road safety policy could be pursued, that would seek to centralize and coordinate road safety data collection, monitoring and statistics, to serve in the design and implementation of a comprehensive strategy that would include safety campaigns, specific regulations and targeted investments. This would extend the focus on road safety beyond the national road network, and provide policy makers with key information for decision-making and the monitoring of public health in the country.

B. Ports

The main challenge in the port sector is to consolidate the gains of the past: to continue to encourage the private sector to build and operate better, more productive ports, and to work with customs and other public agencies to ensure that Montevideo leverages its free port status to cement its position as a distribution and logistics center. The GOU should continue to work in the consolidation of the sector reform process, with the objective of increasing the competitiveness of the port system and of the economy as a whole. To remain competitive, the Uruguayan port system will need to adapt to the shifting patterns of the country's international trade and to changes in the maritime transport services industry worldwide.

69 First of all, it is expected that the rising production of agricultural, forestry and livestock products bound for export markets outside Mercosur will increase the demand for competitive transport services, particularly ports. This will require the development of efficient specialized terminals, not only in Montevideo, but also in other regions close to production areas. The private sector is responding by taking the initiative in developing specialized terminals for forestry and other bulk cargo.

Secondly, fulfilling Uruguay’s aspiration of becoming the logistics and distribution center for Mercosur will entail improving port infrastructure and establishing an environment conducive to the development of value-added services. The rising containerization of world trade and ever-increasing size of ships will make future terminal requirements considerably more demanding. To accommodate the mega container ships coming into service, new terminals will require a density of 1,000 to 2,000 TEU per acre, crane productivity of 200 moves per ship-hour at berth, and truck turnaround times of less than 30 minutes. In addition, water depth must be increased to between 15 and 16 meters and bigger cranes will be needed to accommodate ships with larger deck stacks. In light of the challenges faced by the sector, the following is a list of recommendations and related policy options for the GOU to consider, with regard to port development:

1. Continue to promote private sector participation

The reform proved that PSP in ports could enhance the quality and productivity of operations and reduce tariffs. It is credited with dramatically improving the performance of port operations, not only in Uruguay but also worldwide. It is recommended that the GOU continue to promote PSP by re-launching PSP projects, such as the multipurpose terminal, and Continuing work on the planning and preparation of new ones, in accordance with the sector development plans. These terminals are critical for meeting future demand for transportation services and new dynamics in the global maritime transport industry.

Foreign and national firms with extensive know-how have shown interest in participating in new projects. Consequently, the ANP should continue to partner with the private sector as a means to increase investment in infrastructure in times of fiscal constraints, and achieve the goals set in the reform of 1992. This will demand strengthening the agency’s strategic planning and regulation functions, which are critical for enhancing the impact of PSP in the sector and in the entire economy.

In addition to the construction and operation of new terminals, another opportunity for successfully involving the private sector is in dredging operations. In this respect, ANP has achieved savings by contracting out the dredging of the port’s access channel to a specialized private firm. However, the ANP still performs maintenance dredging using its own personnel and dredges. This activity could be completely turned over to the private sector. The ANP could spin off the dredging function, establish it as a corporation and sell the.business and its assets to the employees; or it could outsource the service on a concession basis. Both these options should involve the participation of existing dredging operators.

2. Consolidate the landlord port model

In the landlord port model, infrastructure is leased to private operating companies, which provide and maintain their own superstructure (quay cranes, conveyor belts, transtainers) and buildings, as required by their business. The lease paid to the port authority is often a fixed annual sum per square meter and is related to the cost of constructing and maintaining facilities. Labor is employed by the private terminal operators. In Uruguay, there has not been a full transition to the landlord port model as the ANP still operates port services either directly, as in the case of bulk cranes, or indirectly, through its participation in TCP. Alongside the transition of the port sector towards a landlord model, the role of ANP as a regulator and enforcer of competition becomes more important.

70 The GOU could continue with the progressive transition of the port sector towards a landlord model by completely separating the regulatory and operational functions vested in the ANP. The ANP should be responsible for the management of port facilities and regulation, leaving port operations to the private sector.

3. Promote competition

Intra and inter-port competition can reduce the need for regulation and generate efficiency gains and tariff reductions. Given that current traffic levels offer the possibility of having multiple terminals operating on an efficient scale, the ANP could promote further competition within the port of Montevideo. In a port handling more than 100,000 TEU a year, it is feasible to have multiple terminals operated by different companies, which can use separate berths and manage these better. At this volume of traffic, it is also possible to provide incentives for private sector operators to undertake investments in infrastructure enhancement. The current container traffic at the port of Montevideo is well above that threshold, at 33337 1 TEU, and consequently could in theory accommodate another container terminal.

Moreover, terminalization may even be implemented in situations where traffic volumes do not justify two container terminals, in what is called an overlapping competition strategy. This strategy consists of dividing port facilities into two single-berth terminals, one dedicated to container handling, and the other to break-bulk. Although most break-bulk facilities are not designed to accommodate gantry cranes, the break-bulk operator can encroach successfully on the container business. This is precisely the strategy adopted initially at the port of Montevideo with Montecdn and TCP. It is estimated that current levels of traffic could accommodate a new multipurpose terminal, which would be another way to spur this sort of competition. The multipurpose terminal would also compete in the market for containers, but maintain a large share of the bulk cargo.

4. Improve port management and commercial functions for the entire port system

Given the marked rise in traffic, increasing specialization, and the establishment of new private terminals outside of Montevideo, it would be appropriate to prepare plans for the future development of the interior ports that are under the jurisdiction of the ANP. An option would be to develop master plans for regional ports that include an investment program and give them an identity and business orientation, along the same lines of what has been done for Montevideo. In addition, the ANP could strengthen its planning capacity and its commercial orientation to improve its responsiveness to client demands and the overall competitiveness of the port system. In this sense, the ongoing activities of quality certification, marketing, and internal reorganization are headed in the right direction, and should be prioritized and extended to other ports.

5. Preserve the capacity of the port system

It is recommended that the ANP seek solutions to avoid future capacity constraints resulting from the limited space available for handling cargo onshore in Montevideo and the deterioration of key infrastructure in regional ports. As regards Montevideo, an agreement should be reached with the Navy regarding the installations that it currently owns adjacent to TCP’s terminal. In addition, the ANP should also implement the project to relocate fishing operations. Finally, the ANP should also consider other investments to upgrade the infrastructure of regional ports.

It is also important to continue with maintenance dredging to ensure that Montevideo and other Uruguayan ports are able to handle the ever-larger vessels that are being used for international trade and thus, attract greater traffic. Due to the high cost of dredging, more private sector participation in this area would contribute to alleviating the AM’s financial position and to improving the quality of operations.

71 6. Reduce the maintenance backlog and improve management of key transfer terminals

The MTOP should reduce the maintenance backlog of key transfer terminals to improve the safety of operations, prevent service interruptions, and avoid having to incur in more costly rehabilitation works in the future. To do so, the MTOP should analyze options for private sector participation in the operation of the terminals that are commercially viable, while enhancing management practices and funding for the maintenance of key terminals that need government support.

7. Promote the development of transshipment and value-added services

Despite private initiatives to create logistical centers and other positive developments, such as the attraction of new carriers, the evolution of the Uruguayan port system into a center for transshipment and value-added services will demand further action to consolidate the gains achieved with the reform and increase its attractiveness to shipping companies.

Notwithstanding localization and cost advantages, increasing competition from Buenos Aires and Brazilian ports may affect Montevideo’s ability to attract transshipment traffic. Since the number of competing facilities is growing rapidly, there is always the possibility that carriers may take their business elsewhere. Hence the importance of maintaining policies to attract transshipment traffic. Among these, the development of ZALs is key for drawing and retaining large international companies.

Expanding the supply and range of services can boost the port’s economic performance and attractiveness to existing and potential clients, strengthening its competitive position. The GOU should facilitate private initiatives to provide value-added services within port facilities. The most important actions in this respect are issuing the regulations for. ZALs; and eliminating controls on merchandise within the port of Montevideo, to establish it as a true free port.

8. Improve access to ports and inter-modal connections

It is recommended that the GOU analyze options for improving land access to the port of Montevideo and to regional ports. Improving the connection of seaports to other modes of transportation is necessary to enhance the capacity to handle ships of increasing size, which demand quick turnaround times for land transportation.

72 Annex 4: Major Related Projects Financed by the Bank and/or other Agencies URUGUAY: UY Transport Infrastructure Maintenance and Rural Access

Bank-financed

Latest Supervision Project Sector Issue (PSR) (m (DO) Improving key road and rail infrastructure and facilitating Forest Products modal integration in an environment conducive for private Transport Project S S participation, as means to reduce the transportation cost of (4204-UR) forestry products. Upgrading the capacity of road infrastructure in order to enhance the competitiveness of Uruguayan products, especially Second Transport S S within Mercosur; promoting private sector participation; and Project (4395-UR) strengthening the institutional capacity of the DNV.

Other Development Agencies

Inter-American Development Bank (IDB) Approval Sector Issue Project Year Public Sector Projects

0 Improving the main international corridors within the National Road Network in order to enhance the country’s competitiveness Road Infrastructure Program and foster regional integration; and strengthening the (UR-L-1001) 2004 institutional capacity of the DNV. 0 Improving the main corridors within the National Road Network Integration Corridors and to eliminate constraints on international traffic; and Primary Road Improvement 1997 strengthening the institutional capacity of the DNV. Program ( 1022/OC-UR) Private Sector Projects Improving access to ports in order to increase the Port of M’bopicua competitiveness of Uruguayan forestry and agricultural 2003 (UR-0142) products. Increasing private sector involvement in road rehabilitation and Montevideo Punta del Este - 1997 maintenance. Toll Highway (UR-0029)

Andean Development Corporation (CAF)

Approval Sector Issue Project Year 0 Improving the condition of the road network to eliminate “Megaconcesi6n” of existing capacity constraints on the main international 2002 National Routes export comdors leading to Mercosur countries.

73 Annex 5: Results Framework and Monitoring URUGUAY: UY Transport Infrastructure Maintenance and Rural Access

Results Framework

PDO Outcome Indicators Use of Outcome Information Cost-efficiency Basic transport infrastructure is Percentage of the road network 4ssess the impact of improved road maintained in a condition that below the optimal level of service. :onditions on the competitiveness of facilitates the movement of freight Uruguayan producers and economic and passengers at a cost-efficient Arresting deterioration growth. level of service by arresting any Percentage of the road network in further deterioration due to fiscal bad condition as determined per the restrictions, and ensuring the Road Condition Index (Indice de preservation of existing Estado-IES) infrastructure assets in the long term. Preserving the value of road assets The value of road assets is maintained equal or above the average level. Intermediate Results Results Indicators for Each Use of Results Monitoring One per Com onent ComDonent Component One: Component One: Component One:

Targeted national roads and bridges Average roughness (IRI) and road Evaluate the degree of adequacy of on international corridors (managed condition (IES) of targeted national road infrastructure to handle by DNV and within the International Corridors (IC). expected increases in the movement Megaconcesidn) have adequate of freight along principal routes. levels of service and are upgraded to Transit of trucks loaded up to Mercosur standards. Mercosur standards is permitted along

Additional km of national roads are compliant to Mercosur standards

.Component Two: Component Two : Component Two:

Roads maintained through CREMA The condition of roads maintained Measure the performance of the contracts are preserved at an under CREMAs is preserved at the program in order to identify adequate level of service. service standards specified in the potential problems and make the contracts. They include the necessary adjustments; and monitor conditions of 5 items: road surface, its impact on road condition. hard shoulder, road safety, structures, and right-of-way.

74 Component Three: Component Three: Component Three:

Percentage of the Departmental Evaluate the performance of the The departmental road network is Road Network in fair and bad Departmental Road Maintenance maintained in a good condition. condition. Program and make adjustments aimed at improving its impact. Number of Departments with road network in fair and bad condition does not increase.

Component Four: Component Four: Component Four:

Safety is improved in targeted Number of traffic accidents and Provide an assessment of the sections of Uruguay’s road network. related number of injuries and effectiveness of road safety fatalities in targeted sections of measures and identify potential Uruguay’s road network changes to increase their impact.

Component Five: Component Five: Component Five:

The capacity of the MTOP to The DNV manages the road network identify, formulate and evaluate under its jurisdiction according to MTOP to follow up on the pace of transport infrastructure projects is the Infrastructure Plan 2005-2009. implementation of the DNVs strengthened. program. Updated strategic planning tool (HDM-4) fully operational for analvsis at the network level.

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Project progress reports will be prepared by the PCU on a semi-annual basis and submitted to the Bank for review. These reports should refer to progress made under the different components of the project and measure performance against the results indicators established in the results framework. In addition, progress reports will include the following: (i)disbursement performance over the period covered by the report and updated disbursement calendar ; (ii)updated procurement plan for activities under each of the project’s components; (iii)a description of progress achieved in the implementation of the environmental and social measures that have been taken as part of the implementation of the project; (iv) a section describing potential developments that could affect project implementation, which should consist of a review of the main risks and the impact of mitigation measures envisioned at appraisal (See section on risks).

For investment components, implementation progress will be measured against performance indicators using the Highway Design and Maintenance Standards Model (HDM). The performance of institutional strengthening activities and results will be evaluated with respect to road management indicators regularly published by the DNV. Road safety indicators will be assessed through the Road Accident Information System (SAAT for its name in Spanish)

81 Annex 6: Detailed Project Description URUGUAY: UY Transport Infrastructure Maintenance and Rural Access

The project comprises five components, namely: (i)Transport Infrastructure Rehabilitation; (ii)Road Rehabilitation and Maintenance Contracting (CREMA performance-based contracts); (iii)Departmental Road Maintenance Program; (iv) Transport Infrastructure Safety; and (v) Transport Sector Management and Institutional Building. A brief description of each component is listed below:

The overall cost of the proposed project is now estimated at US$lOO million of which US$89.8 million correspond to the infrastructure components (90 percent) and the remaining US$9.5 million to the institutional strengthening and road safety components. The Bank would finance US$70 million (including the front-end-fee), and the GOU the remaining US$30 million. To support the stated objectives the project would consist of the following components (costs include physical and price contingencies):

Table A6-1

Detailed Project Costs (US$ million)

PROJECT COMPONENTS Total Bank GOU 1. Transport Infrastructure Rehabilitation 39.30 27.52 11.78 (A) DNV Managed Routes 7.40 5.20 2.20 (B) CVU Managed Routes and Bridges 24.32 17 .OO 7.32 (C) Transfer Terminal Rehabilitation 7.58 5.32 2.26 2. Road Rehabilitation and Maintenance Contracting (CREMA Contracts) 21.90 15.23 6.67 3. Departmental Road Rehabilitation and Maintenance 18.16 12.76 5.40 4. Transport Infrastructure Safety program 3.35 2.35 1.oo 5. Transport Sector Management and Institutional Building 5.62 3.91 1.71 TOTAL BASELINE COST 88.33 61.77 26.56 Physical Contingenciedl 8.27 5.79 2.49 Price Contingencied2 3.05 2.09 0.95 TOTAL COST 99.65 69.65 30.00 Front end fee 0.35 0.35 0.00 TOTAL FINANCING REQUIRED 100.00 70.00 30.00 1) 10% of the infrastructure components 2) 1.5% per year of the total Baseline cost and physical contingencies

82 Project component 1: Transport infrastructure rehabilitation (US$44.6 million, including contingencies)

This component is fundamental in restoring the service levels of strategic transport infrastructure, whose critical condition constrain the efficient provision of transport services, and in particular, the transit of heavier and larger trucks loaded up to Mercosur standards. The infrastructure to be rehabilitated corresponds to links between capitals or major economic poles or access to ports or terminals, given their relevance in achieving the project development objectives.

This component entails carrying out reinforcement, replacement, and rehabilitation works and will be subdivided into two subcomponents: Subcomponent (A): DNV Managed Routes and Bridges; Subcomponent (B): CVU Managed Routes and Bridges; and Subcomponent (C): Transfer Terminal Rehabilitation.

Subcomponent (A): DNV managed routes (US$8.4 million) entails carrying out: (a) rehabilitation works consisting of reinforcing the pavement structures of : (i)about 15 km of National Route 3, between ex- National Route 3 and km 594.100 ; (ii)about 20 km between Rio Tacum' and Caiiada Santos on National Route 18; these sections are part of international corridors.

Subcomponent (B): CVU managed routes and bridges (US$27.6 million). The Megaconcesio'n covers a sub-network of primary roads of 1272 km (15 percent of the network) and 38 bridges (17 percent of Uruguay's bridges) and is operated by the Corporacidn Vial de Uruguay (CVU), a private law corporation, entirely owned by the Corporacidn Nacional de Desarrollo (CND) The Megaconcesio'n is financed 60 percent by user charges, and 40 percent by the general government budget. The concession period is 15 years. (See Annex 2 for details). This sub-component entails carrying out: (a) rehabilitation works consisting of reinforcing the pavement structures of : (i)5 km of National Route 1, between km144 and National Route 22; about 16 km of National Route 1, between the km 144 and National Route 2; and about 3 km of the La Planta Urbana de Young section on National Route 3; and (b) carrying out of reconditioning works consisting of strengthening, widening or replacing the existing structures of 20 bridges located on National Routes 1, 5, 6, 7, 8, 21, 26, 28, 30 and 200 (Interbalnearia route) and the access to Montevideo.

The road sections selected either have developed early signs of distress, thereby requiring urgent rehabilitation to prevent further deterioration or are deteriorating rapidly and cannot accommodate the surge in heavy traffic expected from the exploitation of forest products in the respective areas. Thus, the sections complement others rehabilitated under the on-going Forest Products Transport Project.

The 20 bridges selected for reconditioning lack the minimum functional (too narrow) and/or structural (low bearing capacity) requirements to allow safe transit of the larger and heavier trucks permitted under the Mercosur transport agreements, which due to their greater efficiency dominate the transport of tradable goods. The proposed works include widening and reinforcing existing structures, and replacing five obsolete bridges to meet Mercosur standards and building seven new ones to complement the existing network. These investments would enable increasing load limits over the bridges, permitting the circulation of six-axle trucks with a total weight of 45 ton per truck (presently limited to 42 ton) and 25.5 ton per triple axle (presently limited to 22 ton). Work procedures and cost estimates permit the accommodation of traffic during construction. The bridges were selected to ensure that all existing constraints are removed from strategic exporthmport corridors. In this manner, the project would avoid that large and heavy trucks take long detours or carry only a fraction of their capacity when no detours are possible. There is ample experience in Uruguay with traffic handling in work sites during bridge widening and reinforcement initiatives. For new bridges, the designs include minor adjustments to existing alignments within rights-of-way, which will allow using the existing structures during construction.

83 Subcomponent (C) Transfer terminal rehabilitation (US$8.6 million). Transfer terminals have deteriorated considerably as a result of the lack of maintenance and the postponement of necessary new investments due to budgetary constraints. This component consists of minor infrastructure rehabilitation works in several terminals. These interventions are needed to adequately respond to the new demands for the inter-modal transportation of freight and of passengers.

In order to adequately address the pertinence of each proposed investment a framework to screen the candidate investments will be used. The proposed framework will include the following criteria that must be met by the investments in order to qualify for financing; (i)the individual investments must be aligned with the overall objectives of this project; (ii)the specific investments must not reduce the possibility private participation; (iii)adequate economic evaluation; and (iv) compliance with the port environmental assessment manual.

The candidate transfer terminals that will be considered for financing in the project support several economic activities, in particular: (i)industrial and traditional fishing; (ii)tourism; and (iii)freight and passenger transfers.

84 Table A6-2 Road rehabilitation and bridge reconditioning projects

Execution Amount Estimated Category Route Project Type (US$ millions) Period initiation (months) Compononent 1.A 3 Ex Route 3 - 584km700 Reconstruction. 3.2 15 Feb-07 DNV managed Routes 3 587km300 - 594km100 Reinforcement 1.2 15 NOV-06 18 Rio Tacuari - Caiiada Santos Overlay 4.0 15 Dec-06 Component 1.B 1 144km - Ruta 22 Additional lane 7.1 12 Jun-06 CVU managed Routes 1 Ruta 2 - 144 km000 Additional lane 2.3 18 Jun-06 3 Planta urbana de Young Reinforcement 0.5 3 NOV-06

Acc. IPasaje Sup. Con Santin C Rossi loverpass 2.0 12 May-07 IPasaie SuDerior (a determinar) lovemass 2.0 12 Mav-07

Project component 2: Road rehabilitation and maintenance contracting (CREMA contracts) (US$24.85 million, including contingencies)

This component entails carrying out rehabilitation and maintenance works in six road sub-networks covering an estimated 98 1 km of national roads through performance-based CREiMA contracts. The estimated cost of the execution of these contracts over the total duration of the contracts is US$29.9 million. The project (loan and counterpart funds) will finance a portion of the six CREMAs.

A CREMA contract is a multiyear (four to five-year) performance-based contract between DNV and a private contractor. The contract obligates the latter to undertake all phases of road rehabilitation and maintenance works as a single package, from the design and programming of works, through the execution of such works.

85 The sub-networks under each contract comprise different pavement types and service conditions. The contracts to be financed under the proposed project cover six sub networks: (i)National Route 3 (between National Route 1 and Paso del Puerto, about 243 km); (ii)National route 5 (between km 97 and Paso de 10s Toros, 184 km); (iii)Road Access to Montevideo (85 km); (iv) Canelones Center West Sub-network (130 km); (v) Canelones east sub-network (140 km); and (vi) Tourist Zone (200 km).

The works under each contract include rehabilitation of selected road sections, which do not meet the level of service stipulated in the respective contract within the first year of the contract. The bidding documents specify the location and engineering designs required for the mandatory initial works. The initial works will be measured and paid on the basis of unit prices determined through bidding. Upon completion of the initial works, the contractor canies out routine maintenance activities (e.g., patching potholes, sealing cracks, clearing roadsides, vegetation control, cleaning drainage structures, renewing signs) on the entire road network for the five-year duration of the contract. The contracts stipulate the levels of service to be met and the procedures used to survey the condition of each road segment as well as daily penalties for non-compliance with the stipulated standards, and the maximum period of time for undertaking corrective measures after non-compliance was detected. Each month, DNV staff will survey a random sample of the road network to assess the service levels attained on each road section. Maintenance works will be paid in monthly lump sums throughout the contract period, subject to deductions for non-compliance with stipulated standards.

The requirement to maintain the network throughout the duration of the contract serves as an incentive for the contractor to ensure the proper execution of the rehabilitation works to minimize future maintenance expenditures. In addition to the initial mandatory works, the contractor will be responsible for planning and carrying out all needed periodic maintenance work to ensure that the entire road network under the contract meets the performance standards stipulated in the contract. The execution of the CREMA contracts enables DNV to preserve the overall quality and structural integrity of the road networks covered, maintaining a good level of riding quality equivalent to an average of around 2.8 International Roughness Index (IRI) throughout the next five years. l7 In the future, only periodic maintenance consisting of thin bituminous overlays and resealing will be needed every 5 to 10 years to maintain a satisfactory and similar level of service.

Table A6-3 CREMA contracts

Estimated cost Contract Estimated Routes Sub-network Length Type (US$ million) Duration Initiation date 243 km Rehabilitation 3- 11 Rutas 3y 11 6.8 48 months Jul-07 and Maintenance 184 km Rehabilitation 5 Tramo de Ruta 5 5.6 48 months Jan-08 and Maintenance I 8 IAccess to Montevideo I 85 km I Maintenance I 3.1 148monthsI Jan-08 I Canelones Center-West Sub- 130 km Rehabilitation 4.6 48 months Jan-07 network and Maintenance I kanelones East Sub-network I 140 km I Maintenance I 3.1 I48 months I Jan-07 1 200 km Rehabilitation Tourist Zone 5.9 48 months Jan-08 and Maintenance

” For asphalt concrete pavements with average daily traffic (ADT) greater than 600 vehicles/day. The maximum average roughness levels permitted under the contracts vary by road class and traffic level. For asphalt concrete pavement with ADT < 600 vehicles/day the maximum IRI is 3.5, while for roads with bituminous surface treatment the limits are 3.4 (ADT > 600 vehicles/day) and 4.0 (ADT <600 vehicles/day). Roughness thresholds were defined on the basis of technical-economic considerations and can be achieved by implementing the rehabilitation and the following routine maintenance works under the contract.

86 Project Component 3: Departmental road rehabilitation and maintenance (US$20.6 million, including contingencies)

The departmental road maintenance program under the proposed project entails routine maintenance of about 9,000 km of gravel roads per year, including some periodic maintenance of roads and bridges. All departments in the country, excluding Montevideo, are expected to participate in the program and it should cover two years of the maintenance requirements for these roads starting in calendar year 2006.

To implement this component, the DNV will enter into an annual agreement with each of the participating Departumentos, which have jurisdiction over the corresponding departmental road network. These agreements will build on the experience gained under previous Bank’s projects and include, inter alia, the obligation of each participating Departamento to carry out the works over a predefined network and to improve its road management practices. The DNV’s Departmental Road Infrastructure Assistance Unit (Departamento de Infraestructura Vial Departamental -DIVD) will assist Departamentos in carrying out the maintenance, coordinate technical assistance, and monitor the attainment of coverage and performance targets.

The eligibility criteria for selection of the subprojects to be funded under the Departmental Road Rehabilitation and Maintenance component (annual departmental road rehabilitation and maintenance sub-projects as defined in the Loan Agreement) will be that: (i)no less than 60 percent of road are part of the departmental “core network” that received maintenance during the previous year, including all roads that received periodic maintenance (to avoid a quick erosion of the benefits brought by such intervention), and all roads transferred from DNV to the respective Department in previous years (former national roads) that support regional productive activities and assure basic accessibility functions ; and (ii)up to 40 percent of road subprojects may be chosen by the Participating Departamento on the basis of road and traffic conditions.

Project Component 4: Transport infrastructure safety (US$3.8 million, including contingencies)

This component entails: (i)implementing low-cost measures to increase road safety, including roads passing through urban areas, following the experience with the Second Transport project; and (ii)the acquisition and installation of road safety elements.

The proposed sub-projects are part of the continuous improvement of road safety features along major highways. These works would take place along road segments with traffic volumes above 1,000 ADTs, which rank very high in terms of the number of accidents. These road segments are part of routes 102, 101, 5, and 6 (See table 4).

Table A6-4 Targeted routes for transport infrastructure safety component

87 Specifically, the activities financed by the project will include, inter alia, the following: (i)illuminating road sections where a high number of accidents take place during nighttime; (ii)improving pavement markings and road signs along national routes ; (iii)constructing foothike paths to segregate and protect pedestrian and non-motorized traffic;(iv) acquisition of road signals and bamers (see table 5).

Table A6-5 Road safety investments

Estimated cost Description Execution period WS$ thousands)

Road safety elements 1900 Metallic bafriers 700 Feb-06 - May-06 Road signals 500 Feb-07 - Nov-07 Estimated total 3,300

The proposed improvements are expected to reduce the number of accidents in the targeted routes. The road accident index (IACC) for the road sections selected is about 406, compared to that of the surveyed national, which stands at 50.9. The number of accidents is particularly high on Routes 6 and 5. The road safety component of the project complements other on-going efforts. With IDB support, MTOP will carry out similar activities in other sections of the National Road Network and launch road safety educational campaigns.

Project Component 5: Transport sector management and institutional building (US$ 5.8 million)

This component would entail: (i)assistance to MTOP in the preparation of its transport infrastructure plan for years 2005-2009, including engineering and economic studies as needed; (ii)assistance in capacity building and installation of HDM-4 model; (iii)strengthening infrastructure management, including enhancing technical capacity at Departamentos and supporting the preparation of master plans for the interior ports; (iv) assisting MTOP in the preparation of an urban transport program through the contracting of a master plan for the Montevideo Metropolitan Area; and (v) feasibility studies, environmental assessments, and detailed design studies of the Montevideo ring-road and access roads.

Transport Planning. The project would provide consultant services to consolidate and further improve the highway planning and maintenance management systems developed under the First and Second Transport Projects. DNV established an integrated system for highway planning (SIPLA) in its Department of Investments to consolidate a variety of planning databases and activities (e.g. traffic counts, road condition surveys, bridge inventories), and analytical tools (e.g. HDM-III) into a comprehensive highway planning system. The consultant services will provide support for SIPLA to prepare transport infrastructure plan for years 2005-2009, including engineering and economic studies as

88 needed. In addition, DNV will use its computerized maintenance management system (MMS) to plan, control, and monitor its force account maintenance operations. MMS coverage will be extended to include preparation maintenance programs for the entire network and monitoring of maintenance performance under private contractual and force account arrangements.

Implementation of HDM-4. This project subcomponent aims at implementing the Highway Development Management Model (HDM-4) in DNV for network level and project level, to carry out technical- economic evaluation of maintenance and improvement options. HDM-4 will gradually replace the current HDM-I11being used by DNV for maintenance and rehabilitation works. HDM-I11 has been used for the pre-feasibility studies and economic evaluation of some of the works financed under this project.

The key changes of HDM-4 with respect to HDM-111 are the following: (i)unlimited number of representative vehicles; (ii)reduced maintenance and repair costs; (iii)changes to utilization and service life modeling; (iv) changes to capital, overhead and crew costs; (v) new fuel consumption model; (vi) changes to speed prediction model; and (vii) use of mechanistic tire model for all vehicles. And it introduces the following new features: (i)effects of traffic congestion on speed, fuel consumption, tires and maintenance costs; (ii)non-motorized transport modeling; (iii)effects of road works on users; (iv) traffic safety impact; (v) vehicle emissions impact; (vi) vehicle noise impact; and (vii) concrete pavement deterioration.

The HDM-IV is already being used by DNV at project level and will be implemented in the period 2005- 2009 at the network level in parallel with the use of HDM-111. This implementation will involve the following steps: a) definition of a working group to carry out the implementation; b) HDM-4 training and familiarization with the experience with HDM-4 in other Latin American countries, either by means of inviting experts to visit Uruguay or by the participation of DNV’s professionals on international HDM-4 events; c) review of the current survey methodology for possible improvements; d) review of the definition of new network data to be collected (roughness, deflections, etc.) and collection methods; e) network data collection at network and project levels; f) project level and network level evaluations; and g) systematization of all the process.

HDM-4 training, the redefinition of network data to be collected and a pilot data collection for selected roads will be canied in 2005 with the objective of performing the economic evaluation, with HDM-4, of the road maintenance and rehabilitation program of 2006. A full network data collection will be done in 2008 to start performing the planning and programming of maintenance works with HDM-4 starting in 2009.

Support the strengthening of Infrastructure management practices. The objective of this subcomponent is to support the GOU in the improvement of its infrastructure management practices in all transport sub- sectors.

In roads, this sub-component will assist the GOU in improving road maintenance practices at the departmental level and strengthening the technical capabilities of Departamentos personnel. The specific objectives and areas of action will be selected in consultation with the participating Departamentos in order to enhance responsiveness and encourage program ownership.

In ports, given the increasing traffic handled by regional ports and the establishment of new private terminals outside of Montevideo, the project will support the preparation of plans for the future development of the interior ports. These plans would be instrumental to develop these ports’ identity and business orientation, along the same lines of what has been done for Montevideo. This sub-component would assist the GOU by financing the studies required to develop these plans.

89 Urban transport studies. This sub-component will also assist MTOP in the preparation of an urban transport program through the contracting of an Urban Transport Master Plan for the City of Montevideo.

Montevideo ring-road. This sub-component will aim at assisting DNV with the contracting of specific consulting services to support the preparation of the Montevideo ring-road project. It may include feasibility studies, environmental and social assessments, and detailed designs of specific works.

Table A6-6 Consulting services

Montevideo Proiect

90 Annex 7: Project Costs URUGUAY: UY Transport Infrastructure Maintenance and Rural Access

Table A7-1 Local and Foreign portions of Project Costs

Local Foreign Total Project Cost By Component andlor Activity us us us $million $million $million 1. Transport Infrastructure Rehabilitation 21.62 7.68 39.30 (A) DNV managed Routes 4.07 3.33 7.40 (B) CVU Managed Routes and Bridges 13.38 0.94 24.32 (C) Transfer Terminal Rehabilitation 4.17 3.41 7.58 2. Road Rehabilitation and Maintenance Contracting (CREMA Contracts) 12.05 9.86 21.90 3. Departmental Road Rehabilitation and Maintenance 10.90 7.26 18.16 4. Transport Infrastructure Safety 0.84 2.5 1 3.35 5. Transport Sector Management and Institutional Building 2.25 3.37 5.62 TOTAL BASELINE COST 47.64 40.69 88.33 Physical Contingencies 4.31 3.96 8.27 Price Contingencies 1.58 1.46 3.05 TOTAL PROJECT COST 53.53 46.11 99.65 Front end fee 0.00 0.35 0.35 Interest during Construction FINANCING REQUIRED 53.53 46.46 100.00

'Identifiable taxes and duties are US$18.2m for Value Added Tax (23%) , and US$2.0m for COFIS (2.1%), and the total project cost, net of taxes, is US$79.07m. Therefore, the share of project cost net of taxes is 79%.

91 Annex 8: Implementation Arrangements URUGUAY: UY Transport Infrastructure Maintenance and Rural Access

Sector Policy Responsibility

The Ministry of Transport and Public Works (MTOP) has the overall responsibility for the transport sector and the policy framework for project implementation. MTOP will lead the development and implementation of the reforms and oversee the execution of the institutional component. A specialized unit within MTOP (currently the Institute of Transport and Infrastructure Planning, IPTI) will provide support for the analysis of the economical and fiscal aspects related to the transport sector.

Project Implementation

The MTOP will have overall responsibility for project implementation through its following dependencies: National Directorate of Highways (DNV), National Directorate of Transport (DNT), and National Directorate of Hidrography (DNH). DNV manages the National Highway Network and coordinates the Departmental Roads Maintenance Program. The DNH is in charge of port sector policy and planning, and is also responsible for a wide range of activities, including: the preparation of technical studies, the maintenance of navigable waterways, and the construction, maintenance and administration of the ports that are not under the jurisdiction of the National Port Authority (A").The A" plays an advisory role in the formulation of port sector policy, and manages the Country's main ports: Montevideo, Nueva Palmira, Fray Bentos, Colonia, and Juan Lacaze. The DNT is in charge of regulating transport services in all modes; evaluating compliance with operational, technical and safety standards; exercising control over service providers; collecting tariffs and user charges (i.e, licensing fees, fines); and producing sector statistics and analyses.

Project Coordination Unit

The Project Coordination Unit (PCU) was established within MTOP for the execution of the First Transport Project, Second Transport Project and the on-going Forest Products Transport Project, and will remain in charge of coordinating the proposed project. The PCU personnel have developed an important experience in the implementation of Bank financed projects. As in the past, the PCU will liaise with the unit coordinating IDB projects (as these are units within the same department) to ensure adequate coordination in implementing both projects.

The PCU has been strengthened in the context of the Forest Products Transport Project through the deployment of a new project financial management system. Furthermore, the Implementation Completion Report (ICR) for the Second Transport project judged that the PCU's performance was satisfactory and indicated that the PCU had adequate financial reporting and auditing systems, and provided accurate and timely information during project execution. Nonetheless, the capacity of the PCU will be further strengthened as part of this project with the development and adoption of an Operations Manual that will detail all procedures for disbursements, auditing, information management, and control (see Annex 9).

Supplemental Implementation and Coordination Arrangements.

Responsibility for the project implementation will fall on the MTOP on the whole. In those components where entities other than the MTOP intervene, the additional arrangements for implementation / coordination described below will be taken into account.

92 Component 1: Transport Infrastructure Rehabilitation and Maintenance

Sub-component B: CVU Managed Routes and Bridges. The Megaconcesidn was granted by the MTOP to the National Development Corporation (CND), which in turn assigned the concession contract to the Road Corporation of Uruguay (CVU), which then assumed all obligations stipulated in the contract. The works to be carried out under this sub-component will be contracted by the CVU, recipient of the cession contract, which is a public entity under the commercial law. The CVU and the MTOP will sign a subsidiary agreement in which the CVU, as executor of the works, will explicitly adopt all commitments assumed by the MTOP as part of the loan agreement that will be subscribed for the current project.

Sub-component C: Transfer Terminals Rehabilitation. This component will be implemented by the National Directorate of Hidrography, which will be in charge of preparing the projects, carrying out the contracting processes, supervising the works, evaluating its results, and reporting on the execution of the component to the Bank for the supervision of the project.

Component 3: Departmental Roads Maintenance Program

The Departmental Roads Maintenance program will be coordinated and supervised by the DNV. Annual departmental road rehabilitation and maintenance subprojects will be carried out by the Departamentos (municipal governments) who have jurisdiction over these roads. The program will be executed through the signing of annual agreements between the DNV and the participating Departamentos, in which these commit to the execution of maintenance works on eligible roads (equivalent to a part of the network under their responsibility) and the improvement of their maintenance procedures, and the DNV with the payment of an amount in accordance with the results. The program to transfer technology and strengthen road maintenance practices in the departments has been developed in consultation with the Departamentos.

Component 5: Transport Sector Management and Institutional Building

The following implementation arrangements will be taken into account:

Port Master Plans: The necessary consultant services for the development of the master plans for the Nueva Palmira, Fray Bentos and La Paloma port systems will be contracted and supervised by the DNH, within the MTOP. The DNH will coordinate the development of these plans.

Urban Transport Master Plan of the Montevideo Metropolitan Area. The National Directorate of Transport (DNT), within the MTOP, will contract the consultant services required for the elaboration of the plan, and it will lead and coordinate the development of the concept, the preparation of the terms of reference and execution of activities with a Working Group composed of technical personnel from the following entities:

0 Municipal Government of Montevideo, Municipal Government of Canelones, and Municipal Government of San Jose; in aspects related with the urban road network; 0 The DNV and the DNT with relation to infrastructure and road transport; 0 The State Railway Administration (AFE) in matters related to rail transport. 0 The Ministry of Housing, Land and Environment, in the aspects related to land management

The Working Group will be the counterpart of the technical assistance that is provided through the consultant services. The DNT will have the general responsibility for the development of the Plan.

93 Assessment of Project Implementation Capacity

The Borrower capacity to prepare and implement the proposed project was demonstrated during similar responsibilities assumed and developed under the Second Transport Project (STP) and on-going Forest Products Transport Project (FPTP). According to the ICR for the STP, the Govemment and the implementing agencies performed satisfactorily. This rating took into account that the Borrower carried out all project preparation activities in a manner that allowed the project to become effective within less than two months from Board Approval and to start commitments/disbursements very quickly.

With respect to the performance of the implementing agencies, all of them were effective in managing their respective components. DNV, in particular, was very effective in carrying out the maintenance and rehabilitation components and the delays where caused by factors outside of its control, such as the small bridge contractor market in Uruguay together with a lack of foreign interest in this sector.

94 Annex 9: Financial Management and Disbursement Arrangements URUGUAY: UY Transport Infrastructure Maintenance and Rural Access

Country Issues. A Country Financial Accountability Assessment (CFAA) was delivered to the Government in 2004. The critical issues affecting projects include the tight fiscal situation, budget and administrative processes that can cause delays in implementation. At the project level, the Bank is currently engaged with the Government to improve project financial management by: (i)improving the operation of Special Accounts held in the Central Bank; and (ii)improving and streamlining the accounting and reporting requirements.

Financial Management Assessment. A Financial Management (FM) assessment took into account the challenges presented by the Ministry of Transport and Civil Works (MTOP) financial capacity constrains, reduced budget resources and internal restructuring that affected the last decade. In addition, it also took into consideration the political changes after the presidential election that may affect public sector financial management and administrative arrangements. It involved ensuring that Project design allows for an appropriate level of transparency, facilitating oversight and control while also supporting smooth implementation. The conclusions of the FM assessment are that: (i)FM design needs to be completed on international financed projects at the national level and specifically at the MTOP, and the MTOP’s financial management capacity is crucial to maintain the actual project implementation arrangements; (ii) no specific FM risk was found; (iii)a project operational manual has to be prepared to assure the existence of a detail project management description of processes and procedures; and (iv) the MTOP’s financial management arrangements and staff have very good experience with Bank projects, allowing to implement a report-based disbursement mechanism to facilitate project management using an adequate financial planning system. It is critical that the MTOP’s financial management information system and the project operational manual be completed and strengthened soon.

Flow of Funds and Information. The flow of funds will be based on Bank Loan proceeds and will be deposited in a special account at the Central Bank. From this Special Account, funds will flow directly to the project account from which project payments will be made.

Information Systems. The project will not require a new information system to be established: Nevertheless, the MTOP will improve the existing project management information system. Even though this system is not integrated within the national government’s integrated financial management system (SIIF), it provides a very complete and comprehensive support for project implementation and can work in parallel based on automatic transfer of information to the mentioned government system.

Written Procedures. Project financial procedures will be documented in an Operational Manual, which will define the roles and responsibilities of the project coordination unit at the MTOP. A draft of this manual should be submitted to the Bank for review and should include, among other financial procedures: (i)accounting policies and procedures, including basis of accounting and chart of accounts; (ii)the reporting requirements; (iii)formats of the consolidated Financial Monitoring Reports for the program; (iv) internal controls including criteria and procedures for processing payments and transfers; (v) records management; and (vi) audit arrangements.

Financial Reportkg. The MTOP will prepare bi-annual (semesters) Financial Monitoring Reports (FMRs) in accordance with specific accounting and report formats for all Bank-financed projects. The preparation of these reports could rely heavily on the information provided by the DNV, who will be managing most project funds, as well as handling most project (especially civil works) procurement and monitoring. The MTOP’s External Finance Advisory project unit will therefore need to prepare the

95 project consolidated reports for project management and distribution to the various stakeholders, including national control entities and the Bank.

Audit. The financial statements of the project will be audited annually by the supreme audit institution, the “Tribunal de Cuentas,” acceptable to the Bank. The project financial statements audits will be conducted in accordance with International Standards of Auditing (ISA), and on terms of reference acceptable to the Bank. The FMS will clear annually the terms of reference.

Financial Management Action Plan. A Financial Management action plan has been agreed upon with the Government. The priority items are the completion of the financial management information system, and the operational manual including financial management, internal control, disbursement, monitoring and reporting procedures.

Disbursement

New Eligibility Policy. The project incorporates the Bank’s new policy on eligibility for Bank financing. This policy was approved by the Bank’s Board of Directors on April 13, 2004. To implement the policy, the Country Financing Parameters for Uruguay were approved by the LCR Regional Vice President on April 5th, 2005.

Special Account. The MTOP will manage a Special Account in the Government’s Central Bank, in accordance with applicable Bank procedures. The account will have an authorized allocation based on the approved semester financial management plan, or US$5 million of the loan amount; l8however, the MTOP will be expected to only request the amount required for planned cash needs for a six month period.

Disbursement Mechanisms and Documentation. The MTOP is eligible to use the report-based disbursement system. Based on the financial management institutional capacity strengthening process and the successful implementation of the financial information system. The Bank will disburse to the national government based on report-based disbursements sent by the MTOP. The following describes the disbursement approach for the main activities:

Bank financing would be based on a semester financial management reports. The Bank loan would finance 70 percent and the GOU would finance the remaining 30 percent of payments. This total cost includes taxes, which are eligible for financing under the Bank‘s Country Financing Parameters for Uruguay.

For works, goods and technical assistance, disbursements would follow report-based disbursement Bank procedures. Consultants would be paid from the Special Account, and financial monitoring reports and other disbursement documentation would have to be submitted for the SA to be replenished.

Use of Statements of Expenditure. Loan withdrawal applications will be supported by financial monitoring reports (FMR) for all expenditures not requiring the Bank’s prior review. The MTOP will be expected to accumulate this information and prepare the consolidated withdrawal applications.

l8The loan agreement may specify a lower initial allocation, applicable until loan disbursements reach a certain level.

96 Table A9-1 Withdrawal Proceeds from the Loan (Loan Agreement Categories)

Amount of the % of Loan Allocated expenditures Category (Expressed in to be Dollars) financed 1. Works (a) under DNV Subprojects 5,200,000 (b) under CVU Subprojects 17,000,000 (c) under DNH Subprojects 5,320,000 (d) under CREMA Subprojects 15,230,000 (e) under Annual Departmental Road Rehabilitation and Maintenance Subprojects 12,760,000 (f) under Road Safety Subprojects 1,500,000

2. Goods (a) under Road Safety Subprojects 850,ooo 70%

3. Consultants

(a) Transport Sector Management and Institutional Building 3,910,000 70%

4. Front end Fee 350,000 7,880,ooo 5. Unallocated TOTAL 70,000,000 70%

Table A9-2 Disbursement Schedule -Calendar years

Bank Disbursements US$ million CY 2005 CY 2006 CY 2007 CY 2008 CY 2009 CY 2010 Yearly 0.7 19.8 29.4 13.2 3.8 3.1 Cummulative 0.7 20.5 49.9 63.1 66.9 70.0

Table A9-3 Disbursement Schedule -Fiscal years

Bank Disbursements FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 Yearly 10.6 24.6 21.3 8.5 3.5 1.6 Cummulative 10.6 35.2 56.5 65.0 68.4 70.0

97 Annex 10: Procurement Arrangements URUGUAY: UY Transport Infrastructure Maintenance and Rural Access

A. General

Procurement for the proposed project would be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated May 2004; and “Guidelines for the Selection and Employment of Consultants by World Bank Borrowers” dated May 2004, and the provisions stipulated in the Loan Agreement. The general description of various items under different expenditure categories are described below. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time-frame are agreed between the Borrower and the Bank project team in the Procurement Plan. The Procurement Plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

Procurement of Works: Procurement for works under this project would include: (a) under the Road Rehabilitation and Bridge Restoration component, contracts to be processed mostly under NCB, and in few selected cases, under ICB. This component represents about 44 percent of the total Project cost; (b) under the Road Rehabilitation and Maintenance component, performance- based contracts, including design, execution and maintenance of civil works, which would be bid under ICB or NCB and which represent about 28 percent of the Project cost; (c) under the Departmental Road Maintenance component, small size maintenance works that are scattered over the territory of the Departments and for which construction firms are unlikely to bid, are to be executed by municipalities, under agreements with MTOP, by force account, representing about 23 percent; (d) under the Road Safety Program, provision and installation of safety devices, to be bid as NCB, representing about 4 percent percent; and, (e) under the Transport Sector Management and Institution Building, consultant services to be selected by QCBS and CQ, representing about 1 percent. The procurement would be done using the Bank’s Standard Documents (SDB) for ICB and agreed SBD, to be satisfactory to the Bank, for NCB.

Procurement of Goods: Given that most of the required goods would be included into the civil works contracts, goods contracts would be limited to the purchase of safety materials, under NCB or shopping. SDB would be satisfactory to the Bank.

B. Assessment of the Agency’s Capacity to Implement Procurement

Procurement activities will be carried out by the Ministry of Transport and Public Works- MTOP and CVU as the case may be. Within MTOP’s institutional structure, a Project Coordination Unit- PCU-is responsible for coordination and assistance to the MTOP’s area units, for all Bank-financed projects. The unit has a well-trained professional staff to provide assistance on Bank-financed procurement. Preparation and implementation of MTOP roads projects, including procurement, is carried out by the Directorate of National Highways -DNV of the MTOP, which is staffed with trained and experienced personnel. All activities under the Project will be directly monitored and controlled by the General Secretariat of DNV. Although the responsibility for the implementation of works in the Road Rehabilitation and Maintenance component is of the Corporation Vial del Uruguay, an entity with legal personality under contract with the DNV, procurement under this component will be carried out by DNV.

An assessment of the capacity of the implementing Agency to implement procurement actions for the project has been carried out by a procurement consultant, on September 30-October 1, 2004. The assessment reviewed the organizational structure for implementing the project and the interaction between

98 the Project’s staff responsible for procurement and the Ministry’s relevant central unit for administration and finance.

The Project risk regarding procurement was rated as low. The MTOP is experienced in the implementation of Bank-financed projects, with similar features as those of the Project, and consistent in the application of rules for procurement for goods, civil works and services, adhering to Bank guidelines. Regarding NCB, in the application of Tocaf the Bank should ensure that (i)the time for preparation of offers will be at least of 30 days; (ii)there will not be preference for domestic contractors; and, (iii)the process after bid opening will be confidential. Under NCB, foreign contractors should be exempted of the previous registration in the Registry of Contractors.

As a consequence of the low risk for the Project’s procurement implementation the actions agreed are limited to the carrying out of a Project Launch Seminar, 30 days after Loan signature and on ex-post procurement reviews to take place annually.

C. Procurement Plan

The Borrower has developed a tentative Procurement Plan for Project implementation which provides the basis for the procurement packages and methods. The final version of this plan is going to be agreed at Loan Negotiations and will be available at the Project’s database and in the Bank’s extemal website. The Procurement Plan, shown at the end of this Annex, will be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs aNd improvements in institutional capacity.

The recommended thresholds are: US$S4 million for civil works, US$S200 thousand for goods, U$SlOO thousand for consulting firms and US$S50 thousand for individual consultants, US$ 10 thousand for shopping for civil works, and US$ 2 thousand for shopping for goods. The Bank would prior review, all ICBs, all Requests for Proposals for consultant firms and irrespective of its value the first three NCBs, including one for CREMA contracts, and the first two shopping procedures.

D. Frequency of Procurement Supervision

In addition to the prior supervision to be carried out from Bank offices, the capacity assessment of the Implementing Agency has recommended annual supervision missions to visit the field to carry out post- review of procurement.

E. Details of the Procurement Arrangements Involving International Competition

Goods, Works, and Non Consulting Services

a) List of contract packages to be procured following ICB :

99 Table A10-1 List of Contract Packages for ICB Procurement

Domestic Review by Expected Contract Estimated Procurement Ref No P-Q Preference Bid-opening Description cost Method No No(yes-no) (priorPost) Date Rehabilitation of US$4 ICB 1 1 Prior 1 Aug 06 Route 18 base and new million pavement ICB million

CREMA US$6.8 ICB Rehabilitation Routes 3 million and Maintenance & 11 CREMA Rehabilitation US$5.6 ICB Route 5 and Maintenance million CREMA US$4.6 ICB Canelones Rehabilitation million West Sub- and Maintenance network US$5.9 ICB Rehabilitation Tourist million and Maintenance

(b) ICB contracts estimated to cost above US$4 million per contract will be subject to prior review by the Bank.

2. Consulting Services

(a) Consulting Assignments with short-lists of international firms are not required. (b) Consultancy services estimated to cost above US$lOO thousand per contract and Single- source selection of consultants for assignments estimated to cost above US$50 thousand will be subject to prior review by the Bank. (c) Short-lists composed entirely of national consultants: short lists of consultants for services estimated to cost less than US$300 thousand per contract, may be composed entirely f national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.

100 Table A10-2 Procurement Plan

Number Estimated Contract Call for Contrac Start of Section/ Terminal Type Of Amount Method Duration Bids signing Works Works terminal) (US M.) (months)

Ex Ruta 3 - Reconstruction DNV 1 584km700 3.2 NCB 15 Aug-06 Jan-07 Feb-07 managed 587km300 - Overlay 594km100 1.2 NCB 15 May-05 Oct-06 Nov-06 sections Rio Tacum' - Caflada Reinforcement Santos 4.0 ICB 15 Aug-06 Jan-07 Feb-07 Minor repairs of Repair docks and I reinforcement of interior slope 1.2 NCB 10 Aug-05 Jan-06 Mar-06 Transfer Minor repairs of Repair terminals protection walls 0.6 NCB 10 Aug-05 Jan-06 Mar-06 Minor repairs of Repair official dock 0.2 NCB 12 Jul-05 Oct-05 Oct-05 Minor repairs of Repairs docks and protection walls 1.5 I NCB I 18 I Mar-06 I Aug-06 I Sep-06 Protection wall Repairs maintenance Repairs of commercial dock and protection wall Minor repairs of Drotection walls Protection wall s maintenance works Minor repairs to official docks Minor repairs of docks 144km - Ruta 22

roadsmanaged Ruta 2 - 144 kmOOO

Planta urbana de .;- Young

Transfer Terminals I IProcuremnt Packages 1 Punta del Este 4 Carmelo ICB Jntemational Competitive Bidding 2 Piriapolis 5 Paloma NCB National Competitive Bidding 3 Colonia de Sacramento 6 Sistema de Montevideo

101 Table A10-2 (continued) Procurement Plan

Number Estimated Contract Of c:::: Contract Start of Category (route/ Section I Terminal Type Amount Method Duration Works 1 signing 1 Works terminal) (US M.) (months)

1 Arroyo Sauce Newbridge I I h New bridge 1 Arroyo Minuano 6 New bridge 1 Arroyo Riachuelo NCB 9 New bridge 8 Arroyo Sarandi - I 0.3 I NCB 6 Bicycle Route 5 Rio Yf I I 0.3 I NCB 5 Reinforcement 5 A" Villasboas 0.3 6 Reinforcement 5 A" Molles NCB 0.1 6 Reinforcement 5 Cda. La zorra 0.1 6 Mar-06 New bridge 6 A" Caneldn Grande 0.2 6 NCB Widening and 6 A" Tala cvu reinforcement 0.7 11 New bridge managed 7 A" Fraile Muerto Bridges 0.6 NCB 6 New bridge 21 A" Las Viboras 1.o NCB 12 ~ Widening and 26 Cda. Sin nombre reinforcement I 0.2 I 6 May-06 I Oct-06 I Nov-06 Widening and I I 26 Cda. Sin nombre 6 New bridge 28 A" Corrales - 0.5 6 A' YucutujB (Paso New bridge 30 Tiraponcho) 3.5 NCB 18 P. Superior con Ruta Vehicle 200 overpass 87 2.0 NCB 12 P. Superior con Ruta Vehicle 200 overpass 35 2.0 NCB 12 Oct-06 Mar-07 Apr-07 P. Sup. Con Santin C Vehicle Acc. overpass Rossi 2.0 NCB 12 NOV-06 Apr-07 May-07 P. Superior (a Vehicle overpass determinar) 2.0 NCB 12 NOV-06

-1Procurement Packages 1 Punta del Este 4 Carmelo ICB International Competitive Bidding 2 Piriapolis 5 Paloma NCB National Competitive Bidding 3 Colonia de Sacramento 6 Sistema de Montevideo

(1) The project will finance US$24.85 million of the C.RE.Mas

102 Table A10-2 (continued) Procurement Plan

Number Estimated Contract Start Section I Call for Contract of Category (route/ Type Of Amount Method Duration Terminal Works Bids signing terminal) (US M.) (months) Works

Rehabilitation R3&ll Rutas 3 y 11 and maintenance 6.8 ICB 48 Jan-07 Jun-07 Jul-07 Rehabilitation R5 Tramo de Ruta 5 and maintenance 5.6 ICB 48 Jun-07 Dec-07 Jan-08 Accesos a Mont. Maintenance R8 C.RE.MA. - Ruta 8 3.1 NCB 48 Jun-07 Dec-07 Jan-08 Contracts( 1) Mallacentra , Rehabilitation R6&ll oeste de and Maintenance Canelones 4.6 ICB 48 Jun-06 Dec-06 Jan-07 Malla Este de Maintenance Canelones 3.1 NCB 48 Jun-06 Dec-06 Jan-07 Rehabilitation Zona Tun'stica and Maintenance 5.9 ICB 48 Jun-07 Dec-07 Jan-08

-[Procurement Packages 1 Punta del Este 4 Carmelo ICB International Competitive Bidding 2 Piriapolis 5 Paloma NCB National Competitive Bidding 3 Colonia de Sacramento 6 Sistema de Montevideo

(1) The project will finance US$24.85 million of the C.RE.Mas

103 Table A10-3 Project Costs per Category and Procurement Method

Procurement Method Total Cost Category (including ICB NCB Other :ontingencies) ~

I.Works

Transport Infrastructure Rehabilitation 33.5 44.6 (23.5) (3 1.3)

DNV Managed Routes 4.4 8.4 (3.1) (5.9) CVUManaged Routes and Bridges 20.5 27.6 (14.3) (19.3) Transfer Terminal Rehabilitation 8.6 8.6 (6.0) (6.0)

Road Rehabilitation and Maintenance 6.2 29.1 Contracting (CREMA Contracts) Financed by the project 5.3 24.9 (3.7) (17.3)

Departmental Road Rehabilitation and Maintenance 0 20.6 (0.0) (14.5)

Transport Safety Works 2.4 2.4 (1.7) (1.7)

11. Goods

Transport Safety Equipment 1.4 1.4 (10 ( 1.0)

111. Services

Transport Sector Management and Institutional 0 5.8 Building (0.0) (4.0)

TOTAL 43.5 99.7 (21.4) (29.8) (18.5) (69.7)

Figures in parentheses are the amounts to be financed by the Bank Loan OthesForce account, Quality and Cost Based Selection

104 Annex 11: Economic and Financial Analysis URUGUAY: UY Transport Infrastructure Maintenance and Rural Access

Summary

The DNV has performed an economic evaluation of the road rehabilitation and bridge restoration works to be executed during the first year of the program; the departmental road maintenance program; and one CREMA sub-network. The evaluation was done using the Highway Design and Maintenance Standards Model (HDM), which simulates life cycle conditions and costs and provides economic decision criteria for road construction and maintenance activities. HDM HI was used for estimating the net benefits of each project in terms of reductions in vehicle operating costs, passenger travel time, and road maintenance expenditures.

At the time of appraisal only the projects corresponding to the first year of the program were analyzed. The road rehabilitation and bridge restoration projects to be executed in the following years of the program will be evaluated as soon as the respective engineering designs, now under preparation, are completed, but always before they are cleared for the bidding process. CREMA projects, scheduled to start in the second year of the program, will be evaluated using updated traffic and road network conditions before they are tendered. Finally, the economic viability of the Departmental Road Maintenance Program (DRMP) will continue to be evaluated every year as part of the annual agreements between the DNV and Departamentos, seeking to maximize its impact according to changing conditions. The DNV has the required technical capacity to conduct all these evaluations.

The economic evaluation of the road projects included under the first component yields a positive economic return. The road rehabilitation projects included in the first year of the program yield a Net Present Value (NPV), at 12 percent discount rate, of US$ 3.6 million and an Economic Rate of Return (ERR) of 19.1 percent. Under a worst-case scenario consisting of benefits dropping 20 percent of the current level and an increase of 20 percent in costs, the road rehabilitation program still yields benefits, represented by an ERR of 14.9 percent, which indicates that there is limited risk of it being uneconomical. The bridge restoration projects included in the first year of the program yield a total NPV, at 12 percent discount rate, of US$2.8 million and an ERR of 62.3 percent. Under a worst-case scenario of benefits dropping 20 percent of the current level and a 10 percent increase in costs, the bridge restoration program still yields benefits, represented by an ERR of 46.8 percent.

Only one CREMA contract, covering the sub-network known as Zona Turistica (Tourist Zone) was evaluated. The evaluation of this project was possible because the Tourist Zone sub-network is currently being maintained under a CREMA contract and therefore, it is possible to determine with certainty its condition in the year 2007, when the contract will be re-tendered with project resources. The Tourist Zone CREMA project has a NPV of US$4.94 million and an ERR of 34.5 percent, showing the high economic return that this type of projects yield.

As for the DRMP, the overall NPV of the selected maintenance strategy over a period of 15 years is US$102.1 million. The results show that, with the exception of the very low traffic sections, maintenance interventions in all other road classes are economically justified, with rates of retum higher than 12 percent. The low-traffic (less than 30 vehicles per day) departmental road sections have a negative NPV. Nonetheless, these are roads that link small villages with the main road network and have social and economic benefits other that the ones resulting from reductions in vehicle operating costs. Given that these benefits are not captured by the HDM, the current evaluation would tend to underestimate the

105 economic return of the proposed maintenance program. The DNV is now working on producing a new evaluation using the Road Economic Decision (RED) Model. RED is a consumer surplus model designed to help evaluate investments in low volume roads. The model not only computes benefits as a function of reductions in vehicle operating and time costs; but also computes safety benefits, and allows to add other benefits (or costs) to the analysis, such as those related to non-motorized traffic, social service delivery and environmental impacts.

The DNH carried an economic evaluation of the candidate projects for the transfer terminal sub- component globally and specifically on the minor works envisioned for the port of Punta del Este. The evaluation was carried out using a methodology based on consumer surplus and with and without project analysis using economic costs (adjusted market costs) and benefits that had been previously developed for the economic evaluation of the First Transport Project. The benefits considered were; (i)transfer terminal tariffs (tourism, fishing and passengers), (ii)annexes services to vessels; (iii)additional expenditure incurred by vessel occupants; (iv) expenditure by stable and occasional tourists attracted by the ports (other than the vessel occupants).

The economic evaluation of the investment projects included under the transfer terminals sub-component yields a positive economic return. The works in Punta del Este yield a NPV, at 12 percent discount rate, of US$4.4 million and ERR of 64.6 percent. Under a worst-case scenario consisting of benefits dropping 20 percent of the current level and an increase of 20 percent in costs, the first year projects still yield benefits, represented by an ERR of 43.2 percent, which indicates that there is limited risk of it being uneconomical. When all candidate projects are considered, the evaluation yields a total NPV, at 12 percent discount rate, of US$3.6 million and an ERR of 26.4 percent. Under a worst-case scenario of benefits dropping 20 percent of the current level and a 10 percent increase in costs, the works envisioned for all the works identified transfer terminal restoration sub-component still yield benefits, represented by an ERR of 16.5 percent.

Economic Analysis

Project Objectives and Main Benefits

The project main objective is to reduce road transport costs and preserve the transport infrastructure in an efficient and sustainable manner at both national and departmental levels. The proposed investment in rehabilitation and maintenance would: (i)reduce road-user transport costs by lowering vehicle operating, accident and travel time costs; (ii)remove physical constraints to international road transport of goods and people in the Mercosur region; (iii)allow for the provision of more reliable and safer transport services; (iv) improve the accessibility of rural areas so as to enhance the comparative advantages of agricultural and livestock producers and improve the integration of secondary urban centers and the rural population into the national economy; (v) ensure that key transfer terminals are fully prepared to serve the new demands for inter-modal freight and passenger transport. For road projects, net benefits were evaluated using the Highway Design and Maintenance Standard Model (HDM) which simulates life cycle conditions and costs and provides economic decision criteria for multiple road design and alternatives.

Main Assumptions and Methodology

Road projects. DNV estimated maintenance and rehabilitation costs in financial and economic terms (net of taxes), economic costs being on average 83 percent of financial costs; and defined vehicle fleet characteristics and unit costs for six vehicle classes, economic road user costs being on average 77 percent of financial costs. Typical economic road user costs as a function of roughness (IRI), road user costs composition, and traffic composition are given below; as well as relationship between the average vehicle fleet economic road user costs and road roughness.

106 Table All-1

Typical economic road user costs as a function of roughness, user costs and traffic

Car Pickup Bus Medium Truck Heavy Truck Articulated Truck I I User Costs per Roughness ($/vehicle-km) 2 IRI 0.24 0.21 0.90 0.56 0.74 1.11 3 IRI 0.24 0.21 0.90 0.57 0.75 1.12 4 IRI 0.25 0.22 0.92 0.60 0.79 1.17 5 IRI 0.26 0.23 0.94 0.64 0.83 1.22 6 IRI 0.27 0.24 0.97 0.68 0.87 1.28 7 IRI 0.28 0.25 1.oo 0.72 0.92 1.34 8 IRI 0.29 0.26 1.c4 0.76 0.96 1.40 9 IRI 0.30 0.27 1.08 0.81 1.01 1.46 10 IRI 0.32 0.29 1.13 0.85 1.06 1.53 Road User Costs Composition for 2 IRI (percent) Fuel & Lubricants 13% 17% 9% 15% 17% 14% Tires 1% 3% 14% 22% 36% 39% Maint. Parts & Labor 8% 16% 21% 19% 25 % 31% Crew Time 0% 0% 10% 13% 11% 7% Depreciation& Interest 60% 40% 11% 32% 11% 8% Passenger Time 18% 24% 35% 0% 0% 0% Average Daily Traffic Composition per Road Class (percent) <300 ADT 44% 19% 6% 19% 6% 6% 300< ADT 30W ADT 59% 25% 6% 6% 2% 2%

The traffic growth rates are based on a study conducted by the Infrastructure and Transport Planning Institute (IE'TI). For road rehabilitation and bridge reconditioning projects, the traffic growth rates considered were: 4 percent for light vehicles for the entire evaluation period; and 6 percent until 2008 and 3 percent thereafter for medium, heavy, and articulated trucks. For the Tourist Zone CREMA project, the traffic growth rate used for the contract period (2007-2011) is 3 percent from the date of project start. This rate is based on the evolution of Gross Domestic Product (GDP) over the last ten years and it is commonly used for the economic evaluation of road projects. The traffic growth rate used for estimating the traffic volume in 2007 with respect to current traffic is 5 percent. This rate takes into account greater rates of GDP growth in the years following the economic reces~ion.'~

The discount rate used is 12 percent. The value of time for car passengers is US$1.25 per hour and for bus passengers is US$0.54 per hour based on the consideration that 28 percent of car passengers and 70 percent of bus passengers earn income and are on work trips, and the value on non-working time is zero.

Transfer terminal projects. The methodology and criteria used for the evaluation of the minor restoration works included in the transfer terminal rehabilitation sub-component are the same that were applied in the appraisal of the First Transport Project. *' The DNH estimated the economic cost of the minor restoration works by using a conversion factor (Razon de Precio de Cuenta) of 67 percent. The conversion factor summarizes the effect of subtracting 21 percent on account of the value-added tax, other taxes and import duties, and shadow-pricing labor the nominal wage at 48 percent.

l9 The estimated rate of growth of GDP for 2004 is 12 percent. *' " Estudio de Factibilidadde 10s Puertos de Punta del Este, Pirlapolis y La Paloma" , MTOP, 1988

107 For the purpose of the evaluation, the main benefits of the transfer terminal restoration sub-projects consist of (i)the tariffs paid by users in fishing and passenger ports; (ii)the value-added of additional charges for auxiliary services to vessels that incremental traffic would generate; (iii)value-added of increased tourism expenditure from both vessel occupants and other tourist attracted to ports. For passenger terminals an average tariff of US$ 0.45 per passenger was considered. For fishing terminals, tariffs were calculated according to the average occupation rate and duration of ships in port. For tourism terminals, tariff collection was projected using the average revenue collection and reasonable assumptions on incremental traffic and the average occupation rate.

The horizon of the analysis is fifteen years and the discount rate used is 12 percent. Details of the evaluation’s methodology are included in the DNH Economic Feasibility Report included in the Project File.

Road Rehabilitation Program

The first year of the program comprises rehabilitation works consisting of reinforcing the pavement structures of (i)about 7 km between 584 km300 and 594 kml00 on national Route 3; (ii)about 20 km between Rio Tacuari and Cafiada Santos on national Route 18; (iii)4 km of the km 144-National Route 22 section of National Route 1; and (iv) about 16 km of the km 144-National Route 2 section of National Route 1.

DNV evaluated each section to be rehabilitated during the first year of the project, using the HDM IV model, with current data for road, vehicle fleet, rehabilitation characteristics, and costs. For the first road section (584 km300 - 594 kml00 on National Route 3), the with project alternative includes routine maintenance, 100 percent patching and 120 mm overlay in the year 2006; and was compared to a without project alternative consisting of routine maintenance, 100 percent patching and a 160 mm overlay when roughness reaches 6 IRI. For the second road section (Rio Tacum’ - Caiiada Santos on National Route 18), the with-project alternative includes routine maintenance, 100 percent patching, the rehabilitation: and a 100 mm overlay in the year 2006. This was compared to a without project alternative consisting of routine maintenance, 100 percent patching and a 200 mm overlay when roughness reaches 6 IRI. As for sections on Route 1, the with project alternative includes the construction of a new concrete structure (12.2 m wide and 20 cm thick) parallel to the existing road, as well as the construction of two new 8 m. wide bridges over the Minuano and Sauce rivers. The without project alternative consists of a 160 mm overlay when roughness reaches 6 IRI over the existing structure.

The overall rate of return of the rehabilitation program is 19.08 percent with a net present value of US$3.6 million. Assuming that there is an increase in 20 percent in agency costs, the rate of return reduces to 16.9 percent and the net present value to US$2.76 million. A 20 percent reduction in benefits reduces the rate of return to 16.9 percent and the net present value to US$2.13 million. Table 2 presents the main section characteristics and corresponding results.

108 Table All-2 Road Rehabilitation

and 6.8 7.0 BT 4.0 1.2 17.1 0.09 594km100 I (Route 3) I Rio Tacuari - CaAada 19.7 7.1 BT 4.5 1.0 lsantos I I I 1 1 675 Reconst. 3.74 189.9

2,453 Widening 2.96 592

2,453 Widening 7.47 476.1 (Route 1) I TOTAL I 15.28 I 323.77

Bridge Reconditioning Program.

The 20 bridges selected for restoration lack the minimum functional (too narrow) and structural (low bearing capacity) requirements to allow safe transit of the larger and heavier trucks permitted under the Mercosur transport agreements, which due to their greater efficiency dominate the transport of tradable goods. The proposed works include widening and reinforcing existing structures, and replacing obsolete bridges to meet Mercosur standards.

The bridge reconditioning projects to be executed during the first year of the program were evaluated by DNV estimating the road user benefits of the bridge improvements in terms of savings in vehicle operating costs and time costs. The base case without project considers weight restrictions on the bridges implying that only light vehicles, with gross vehicle weight less than 15.0 tons can circulate. In contrast, heavy vehicles are forced to use alternative routes with an average increase in travel distance of 30 percent, or reduce their loads by transferring some of the cargo to other vehicles, which results in an estimated 40 percent increase in truck traffic. The with project case considers structural strengthening and widening or construction of new bridges that eliminate travel restrictions and allow the passage of 45 tons trucks as mandated by the MERCOSUR accord of 1993. The economic evaluation results are given on the table below.

109 Table All-3 Bridge reconditioning

A" Molles 5 1,060 Renforcement 0.15 89.85 0.65 Cda. La Zorra 5 1,060 Reinforcement 0.15 89.85 0.65 A" Fraile Muerto 4 465 New bridge 0.61 25 0.6 A" Las Viboras I 21 I 716 I New bridge I 1.01 I 17 I 0.17 2.21 I 62.31 I 2.72

Transfer Terminal Program

The comparison between economic benefits and costs yielded positive results for the identified sub- projects. Only the works identified for the Punta del Este Port yield a NPV, at 12 percent discount rate, of US$4.4 million and ERR of 64.6 percent. All the sub-projects identified yield a total NPV, at 12 percent discount rate, of US$3.6 million and an ERR of 26.4 percent. The difference between the rates of return of the first year sub-projects and the overall sub-component reflects the large incidence of the benefits expected from the restoration works in Punta Del Este (included in the first year).

Sensitivity analyses were also camed out to determine the robustness of these results by varying both benefits and costs. Under a worst-case scenario consisting of benefits dropping 20 percent of the current level and an increase of 20 percent in costs, the first year projects still yield benefits, represented by an ERR of 43.2 percent, which indicates that there is limited risk of it being uneconomical. Similarly, under a worst-case scenario of benefits dropping 20 percent of the current level and a 20 percent increase in costs, the works envisioned for transfer terminal restoration sub-component still yield benefits, represented by an ERR of 16.5 percent.

The results are summarized in the following table:

Table All-4 Transfer Terminal RehabilitationProgram

110 CREMA Program.

The contracts to be financed under the proposed project cover five sub-networks: National Route 3 (between National route 1 and Paso del Puerto, about 243 km), National Route 5 (between km 97 and Paso de 10s Toros, 184 km), road access to Montevideo (85km), Canelones center west sub-network (130 km), Canelones east sub-network (140 km), and the “Tourist Zone”, Regions I1and X (200 km). CREMA projects, scheduled to start in the second year of the program, will be evaluated using updated traffic and road network conditions before they are tendered. If this program is implemented, during the first five years, all road sections will not reach roughness levels higher than the allowable roughness stipulated by the CREMA contracts. These levels were set based on a study done by DNV on defining optimal levels of service for different road classes based on economic considerations (See table 5).

Table All-5 CREMA Program Maximum Allowable Roughness

Surface I Traffic I RoughnessLimit I Asphalt Concrete ADT < 600 3.5 IRI Asphalt Concrete ADT > 600 2.8 IRI Surface Treatment ADT < 600 4.0 IRI Surface Treatment ADT > 600 3.5 IRI

Only one CREMA contract, covering the sub-network known as Zona Turistica (Tourist Zone) was evaluated. The evaluation of this project was possible because the Tourist Zone sub-network is currently being maintained under a CREMA contract and therefore, it is possible to determine with certainty its condition in the year 2007, when the contract will be re-tendered with project resources. DNV determined the economic justification of each section to receive periodic maintenance or to be rehabilitated (investment activities) under the CREMA contract for the Zona Turistica, using the HDM-I11 model, with projected data for the year 2007 for road conditions, vehicle fleet, and rehabilitation characteristics and costs. Sections to receive only recurrent maintenance were evaluated to assess if the road condition over time will always be below the allowable limits. The evaluation was made to ensure that all proposed works are economically justified and that all roads will not exceed the maximum roughness levels stipulated on the contract during the first five years.

The table below presents the main section characteristics, the financial costs of the estimated periodic and rehabilitation works, and the corresponding results. The overall rate of return of the sample CREMA project is 34.5 percent with a net present value of US$4.93 million. All sections are economically justified with a net present value greater than zero.

111 :San Carlos- 1.2 7.0 CA 2.2 455 4 mm seal 0.01 5.60 22.9 0.01 3.10 Rote 39:Route 9 - 4 8 k600 28.9 7.1 TB 3.0 455 Patching 0.77 26.64 46.9 1.38 3.25 Route 39:48k600 - 7 1k600 23.0 6.3 TB 3.2 455 Patching 0.57 24.91 52.6 1.20 3.30 Route 39:7 1k600 - AIGUA 18.2 6.1 TB 3.2 455 Patching 0.49 26.98 45.9 1.02 3.59 Route 60:P.Azucar - A.P.AzucN 16.5 7.0 TI3 3.0 455 RoutineM. -______3.17 Route 60:A.P.Azucar - Limite Deptal) 13.0 7.0 TB 3.6 455 Routine M. --- ___ --- ___ 3.17 Route 60:Limite

Departmental Roads Maintenance Program

The economic evaluation of the Departmental Roads Maintenance Program was done through the analysis of a matrix of road classes. For the purpose of this evaluation, the viability of the subprojects included in the program was verified using the HDM model. Nevertheless, the low traffic volume of these roads makes more suitable for their analysis the Road Economic Decision Model (RED), soon available in Spanish, which will be used in future analyses. DNV collected road characteristics for a sample of the maintenance program network (642.6 km) and defined sixteen road classes based on road traffic and

112 visually estimated road condition. These characteristics were later extrapolated to the 9,000 km covered by the program each year. The table below presents the statistics and traffic breakdown of unpaved departmental roads for both the sample and the program.

Table All-7 Matrix of Departmental Road Classes

Program network 1 IRk5 I5< IRk 10 1 10< IRI < 15 1 IRI > 15 1 TOTAL IPERCENT I TPDA< 30 I 1,817 I 2,000 I 746 97 4,6601 52%

70 < TPDA < 150 775 576 202 0 1,552 17% TPDA > 150 140 197 0 0 338 4% TOTAL. 3,231 4,024 1,375 370 9,000 100% PERCENT 36% 45% 15% 4%

The base maintenance activities, consisting (for all road classes) of routine maintenance, regravelling every 5 years and two gradings per year, were evaluated using the HDM-I11model and compared to other maintenance options. The proposed maintenance program ensures all-weather accessibility and, as shown on the table below, is economically justified for all road classes with traffic above 30 ADT, yielding a network net present value of US$102.1 million.

Table All-8 Departmental Road Maintenance program

Grading Frequency (days) / NPV (US$M) IRk5 I 5

I I 37.7 I I 47.4 I I 12.2 I I 4.9 I TOTAL NPV US$102.1 million I

The economic analysis suggests that a more flexible maintenance program, varying the frequency of gradings and regravelling thickness as a function of road class, yields higher economic benefits without

113 increasing the level of funding. Therefore, when programming the activities of each municipality, DNV adjusts if necessary the base frequency of gradings and regravelling thickness by identifying the maintenance needs of each road; making sure that all roads are graded at least once a year. During project implementation, the DNV will review the periodic maintenance standards to define variable intervention levels (based on traffic and road conditions) to further enhance the economic impact of the program.

Overall Project Benefits

The total NPV of the first year road rehabilitation and bridge restoration projects, the sample CREMA project, the works identified for the transfer terminal rehabilitation sub-component, and the DRMP add to US$116.9 million. The table below presents a summary of the overall project benefits.

Table All-9 Overall Project Benefits

Bridge Reconditioning 2.7 62.3 Transfer Terminal Rehabilitation (sample selection of candidate projects) 3.6 SamDle CREMA- Tourist Zone 4.9 ;::: Departmental Road Maintenance Program 102.1 I I TOTAL 116.9

Financial analysis

Road sector budget

The GOU’s sector financing strategy is set in the Plan Quinquenal (Five-Year) Investment Plan, prepared at the beginning of each administration and approved by Congress. During implementation, the plan may be revised upward or downward to reflect emerging priorities and fiscal considerations. In general, it provides a frame of reference for the entire five year period. In the past, the administration’s adherence to the Five-Year Plan for 1995-1999 and 2000-2004, reduced some of the volatility in the availability of funds for the sector in general, and counterpart funds for externally funded projects, in particular. The proposed project is aligned with budget appropriations already approved for 2005. According to national budgetary procedures, the appropriations for year 2005 are the same as those set in the Five-Year Plan for 2004. This linkage of project investments with the five-year plan, and the new administration’s adherence to this plan will ensure the timely availability of counterpart funds for project implementation over 2005.

Over the last decade, the funds appropriated for road investments and maintenance ranged between 41.8 and 137.8 million per year, with the lower amount corresponding to the 2002-2003 fiscal crisis and the higher ones to 1998-1999, just after the approval of the Second Transport and Forest Products Transport projects. The projections for the DNV’s road investment and maintenance program for 2005 envision a budget of US$ 45.8 million. This figure excludes the funds allocated to the Departmental Road Maintenance Program (DRMP), since these transfers are funded outside of the DNV’s budget. The proposed project will support part of the DNV’s overall maintenance and rehabilitation program for years 2005-2009. The program will be financed through external borrowings (mainly IDB, IBRD, and CAF) and domestic funds assigned from FIMTOP and Treasury.

114 Table All-10 Road Investment and Maintenance Budget 1994-2004 (US$ thousands)

I Item 1994 I 1995 1996 1997 1998

!8,587.C 3 1,367.0 30,875.0 6,315.0 8,323.0 8,282.0 10,908.0 16,341 .O 9,553.7 6,873.2 5,212.4 15,307.3 I !9,274. 33,951.r !6,869.I 42,2 75.0 4 7,2 16.0 ?8,057.I 17,707.i A- +I

17,423.E 56,380.0 67,040.0 13,637.0 29,832.3 5,988.5 12,776.; bilitation works I 7,667.0 5,003.0 4,526.0 8,266.0 6,933.0 10,494.0 8,016.9 352.9 1,222.3 351.0 655.0 1,937.0 3,562.0 4,069.0 6,109.0 2,379.6 368.1 1,102.7 1,196.0 730.0 795.0 889.0 1,559.0 1,717.0 1,046.5 757.7 616.3 aintenance by contract 0.0 0.0 1,989.0 6,067.0 28,660.1 7,592.7 9,339.3 ::: ::: 5,983.0 3,985.0 0.0 0.0 10.0 11,285.7 1,032 (6,366. 47,241.r io, 664.I 73,082.G 81,590.C 98,024.0 69,935. < ?6,345.6 6,088.. vestment ExDenditure j 0.0 0.0 0.0 0.0 0.0 0.0 I 0.0 io, 664.I 73,082.G 81,590.I i )7,533.( 115,357A 128,806.1 )7,533.( 115,357.( 128.806.1

Road sector financing

The latest road user charges study for the year 2001 showed that, as it had been the case in previous years, road sector revenues exceeded sector financing needs at the National level. The sector had overall revenue of US$572 million and financing needs of US$430 million. Revenues continue to exceed the amount actually allocated to DNV under the Five-Year Plan. This means that road user charges are being directed towards other sectors of the economy. In 2001, the revenue generated through road user charges at the Central Government level amounted to US$350.15 million, 3.6 times the amount allocated to the DNV for road investment and maintenance.

So far, this issue has been partially addressed by means of involving the private sector in road asset management through the use of different mechanisms: multi-year performance based contracts, road concessions, micro enterprises, and other innovative mechanisms, such as the Megaconcesidn. These instruments have proven to be very successful in securing road user charges and channeling them toward the cost-effective maintenance of the most important sections of the network. For this reason, it has not been deemed necessary to implement a road maintenance fund. Therefore, it is critical to continue to secure road user chargers to ensure that key sections of the road network receive adequate and timely maintenance.

On the other hand, in the latest user charges study it was also found that whereas the road sector has a surplus of US$130 million at the central government level, Departamentos have a deficit of US$113 million. This estimation excludes the financing provided by the Central Government through the

115 Departmental Road Maintenance Program (DRMP). Therefore, what Departamentos need for new investment and the maintenance of urban and rural roads is greater than the revenue generated by vehicle registration charges.

Table All-11 Road user charges (US$ million)

National level I Sector revenues I Required financing 1 Difference 1996 540.20 401.31 -I I I I 138.89 I 1999 582.35 498.85 83.50 2000 650.83 450.03 200.80 2001 572.41 429.68 142.73

Central Government Sector revenues Required financing Difference 1996 383.48 216.12 167.36 1999 320.41 266.25 54.16 2000 382.90 226.98 I 155.92 2001 350.15 217.91 I 132.24

Departamentos Sector revenues Required financing Difference 1996 156.72 344.88 -188.16 1999 261.98 388.40 - 126.12 2000 267.93 344.64 1 -76.71 2001 222.26 335.76 I -113.50

116 Annex 12: Safeguard Policy Issues URUGUAY: UY Transport Infrastructure Maintenance and Rural Access

1. Introduction

The proposed project includes the arrangements needed to ensure an adequate management of environmental and social impacts. At the beginning of the due diligence process, the Quality Assurance Team (QAT), identified the environmental and social requirements needed to comply with the Banks Safeguards Policy.

The environmental assessment focused on the following aspects that were agreed with the QAT Team: i) review of the Bank’s Safeguard Policies triggered by the Program and establishment of adequate mechanisms to address related issues; ii)environmental assessment of the first package of sub-projects in each component; iii) evaluation of the environmental management capacity and instruments of the executing agency; and iv) compliance with the local environmental legislation.

As part of the environmental and social assessment of road projects, the National Directorate of Highways (DNV) applied the Guidelines for Environmental and Social Safeguard Issues in Road Projects, developed by the Bank’s QAT team. This Guide was applied for the fist package of sub-projects in each component of the Program: Component 1: Road Rehabilitation and Bridge Restoration (10 sub-projects); Component 2: Departmental Road Program (3 sub-projects); and Component 3: CREMA program (9 sub- networks).

For the transfer terminal restoration projects, mainly minor repairs in port terminals, the National Directorate of Hidrography (DNH) applied the guidelines established in the Environmental Manual for Port Projects and Activities, developed by the National Port Administration (ANP) with support from the Bank, as part of the Forest Products Transport Project. The environmental and social screening procedures established in the Manual were applied to all projects identified. This initially consisted of the preparation of environmental and social profiles (Fichas) for each of the individual projects.

Additionally, the evaluation focused on the institutional arrangements for dealing with environmental and social issues at the executing agency. The analysis of the DNV’s Environmental Unit resulted in the identification of two activities that should be carried out in order to improve its institutional capacity to address social and environmental issues. These activities include: updating the current Environmental Manual and developing a plan for strengthening environmental and social management in the DNV. With regards to the DNH, the institutional strengthening activities identified include the creation of an environmental unit and the implementation of a plan for strengthening the environmental management.

Finally, as part of the environmental and social due diligence, a field trip was made to ascertain the status of some of the first year road projects.

The Environmental Assessment Report for Roads (DNV projects) and the Environmental Assessment Report for the Transfer Terminals sub-component (DNH projects) with all annexes were published in DNV’s website in Spanish and were sent to the Bank’s Infoshop following Bank disclosure policy.

2. Environmental impacts

The Program supports minimum rehabilitation and maintenance works on existing roads and transfer terminals. No new construction works are contemplated under the projects, but in particular cases, there

117 will be widening of existing roads or construction of a second lane on the original right of way (component 1). Minimal environmental impacts on the natural surroundings and the population are to be expected. It is important to note, that the transfer terminal restoration and road safety works will bring benefits resulting from their positive contribution to improving safety and reducing potential risks to human health for both infrastructure users and for the general population as a whole.

However, some activities related to the execution of these works could potentially generate environmental and social risks, and are to be clearly identified in order to implement measures to prevent, and/or mitigate the potential negative impacts.

a. 'Activities that could generate environmental and social impacts

Prior to the execution of works:

0 Selection of sites for setting up camps, assembling equipment, and borrowing and depositing materials; 0 Transportation of fuel and lubricants.

During execution:

0 Transportation of fuel and lubricants; 0 Management of fuel and lubricants used for equipment and asphalt plants;

0 Management of machinery; 0 Operation of asphalt plants may produce atmospheric contamination; 0 Construction activities interfere with traffic and may create safety hazards; 0 Dragging of unused materials to final disposal areas; 0 Elimination of solid waste from construction camps and working sites.

After works are completed: . Recuperation of borrowing sites, when justified; . Management of material or waste deposition sites; . Reforestation of affected areas. b. Identification of potential environmental and social impacts

Waste and/or contaminants: During the rehabilitation and maintenance works, atmospheric emissions may occur due to the following activities: a) Operation of machines and equipment, resulting in gas emissions caused by the combustion of petroleum derivatives; b) explosion of material banks;.c) dragging of material.

Solid waste: The contaminants that may be produced during the execution phase include: waste from materials and residual products from machinery such as filters, used repositions, pneumatics, oil deposits, and rubbish, among others.

Noise and/or vibrations: The use of machinery and equipment during the phase of work execution, explosion of material banks and the improvement of the road network, may cause levels of noise that could affect workers and other populations located along the highways.

Visual contamination: The lack of environmental criteria during the execution of works, for example, during the final deposition of waste materials on the roadside, can alter the landscape.

118 Protected areas: The execution of works under areas declared under a specific environmental protection regime or in zones of high environment sensitivity requires a comprehensive management strategy for the entire area. The crossing of protected areas is not projected.

Reestablishment of environmental losses: Whenever it is justified, resources directed towards the reestablishment of environmental losses occurred in the past, which currently affect the road (zones of material explosions, affected bodies of water, among others), could be introduced as part of the project’s investment.

Slopes stabilization and eroded zones: Certain physical and environmental characteristics of the zone that could affect the continuity of traffic flows could be improved, in particular those with stability problems as a result of erosion processes.

Traffic interruptions in the work areas. Some works could affect traffic on existing roads and areas adjacent to transfer terminals. However, the proposed works only entail temporary and controllable interruptions.

3. Environmental assessment

The project’s main component refers to the rehabilitation and maintenance of existing roads transfer and the restoration of some bridges and transfer terminals. Given the type of works being considered, the proposed project does not entail significant environmental and social impacts that could endanger the natural surroundings of its area of influence, where the main works will take place. The project also foresees reconditioning works that in some cases may present potential risks for the natural surroundings. Nonetheless, the impact of these projects can be dealt with by following adequate environmental management practices. Given the above, the project has been classified as “Category B”, following the Banks Operational Manual [OP 4.011

This categorization takes into account the fact that works will be developed on existing transport infrastructures, without altering their physical conditions, and as a result, their potential impacts can be easily identified and mitigated with adequate environmental and social management. It is worth mentioning that the main socio-environmental impacts occurred in the past, when roads and transfer terminals were constructed. With the current rehabilitation and maintenance works, the environmental conditions will be enhanced, through complementary works such as drainage, signaling, reestablishment of environmental losses, among others.

The environmental assessment of the project focused on three main areas: a) environmental assessment of the sub-projects to be financed by the Bank over the first year of the project; b) assessment of the DNV’s environmental and social management capacity and related instruments; and c) compliance with environmental legislation.

a. Environmental evaluation of the first package of projects

During the evaluation process, some roads and bridges were visited in order to obtain a general idea of the type of projects and their potential environmental and social risks. Drawing from this information and with the support of the DNV’s Environmental Unit, the Guidelines for addressing the Environmental and Social Safeguard Issues in Roads Projects (developed by the QAT team) were applied to perform a quick environmental assessment of each project included in the first package. This Guide includes a checklist of environmental and social issues in a project profile form, as a way to incorporate the Banks Safeguard Policies within the due diligence process. During project preparation, the Environmental Unit developed its own version of the environmental and social assessment profile form initially developed by the QAT

119 team, with the purpose of adapting it to the particular characteristics of Uruguay’s environmental legislation. During the pre-appraisal mission, the changes made to the profile form to make it compatible with the local environmental legislation were reviewed.

Component 1: Transport infrastructure rehabilitation and maintenance

With regards to the road rehabilitation and bridge restoration sub-components, 10 sub-projects were selected during the assessment process (2 sub-projects within the Megaconcesio’n; and 2 road and 6 bridge sub-projects outside of the Megaconcesidn). In the case of road sub-projects, interventions include the repaving of exiting structures, as well as widening. The assessment concluded that there are five sub-projects are classified as level 2 (moderate environmental and social risk); and five sub-projects are classified as level 3 (low environmental and social risk). The projects classified as level 2, require Previous Environmental Authorization (Autorizacidn Ambiental Previa-AAP) and the corresponding Environmental Assessment (EA); while the sub-projects classified as level 3, do not need previous authorization according to the Uruguayan legislation, but require the application of the Road Environmental Manual. The results of the environmental assessment for each of the sub-projects analyzed under the first component are presented below:

Table A12-1 Road Rehabilitationand Bridge Restoration

Sub-project 1 Typeofworks Reinforcement Km 585 - Km 594 I

Rio Tacum’ - Cda. Santos I Overlay Ruta 2 - Km 144 I Widening Widening Km 144 - Ruta 22 I New bridge Minuano Bridge

Reinforcement Villasboas Bridge Reinforcement Molles Bridge I Reinforcement Level 3 La Zorra Bridge I

Las Viboras Bridge I New bridge

120 they do not pose a threat t

environment, its biodiversi ation and its cultural diversity.

The involuntary resettlement policy is triggered because in a particular road section of Route 1 to be rehabilitated under the first component needs a specific instrument to take into account the potential affectation of some properties resulting from the construction of a by-pass to Colonia Valdense. As a result, DNV developed an Abbreviated Involuntary Resettlement Plan according to the Safeguard Policy of the Bank. According to the census carried out as part of the Resettlement Plan, 11 families are concerned and 14 properties will be affected; consisting of 11 housing units, 3 hangars, 1 commercial establishment, and a unit once used as a tire replacement shop. Residential units and commercial establishment will be compensated for lost assets and relocation; the project files contain the general practice in Uruguay concerning the evaluation of compensation. According to the socioeconomic survey, 63 percent of the families concerned had incomes above 5 minimum salaries, 27 percent between 2 and 3 minimum salaries, and 9 percent just under 2 minimum salaries. Four of the eleven families concerned were renting (and had not been living in the area long), and the rest were relatively longtime residents. When interrogated on their view of the expropriation 55 percent said they will reconstruct their homes in the remainder of the property whilst 45 percent said they would move (this includes all the families that rent). The owners of the rented properties do not, according to the survey, have any particular difficulties with the potential expropriation. On the whole, the expropriation will not provoke significant resettlement, only one owner-family would relocate, the others that will potentially relocate are renting. This Plan has been published in the Infoshop according to the Banks rules, and has been published in the DNV website in its original version and its revised version, following the Bank's disclosure policy.

There is no informal occupation of the right-of-way in any subproject, needing eventual resettlement. Furthermore, with the present level of detail known for other subprojects no further resettlement is foreseen, and the Bank will not finance additional sub-projects requiring resettlement.

During the pre-appraisal mission, it was confirmed that all of the projects classified as level 2 have Environmental Assessments and the respective certification issued by the Environmental Authority (Direccio'n Nacional de Medio Ambiente -DINAMA).

With regards to the transfer terminal rehabilitation sub-component, a sample of minor restoration works was evaluated. Given that works mainly consist of the reinforcement and maintenance of existing structures, the evaluation concluded that all of the projects were level 3 and consequently they only

121 required the use of the Environmental Manual by selected contractors. The results of the environmental assessment for each of the sub-projects analyzed under the first component are presented below:

Table A12-2 Transfer Terminal candidate sub-projects

As for the Departmental Road Maintenance Promam, the profile form was applied to a sample of three projects located in the country’s different eco-regions with the purpose of identifying the potential environmental and social risks that maintenance interventions in each of these zones would entail, in accordance with Bank Guidelines. Since this component only involves the rehabilitation and maintenance of existing rural roads, all the sub-projects analyzed were classified as level 3 (low level of environmental and social risk).

Table A12-3 Departmental Road Maintenance Program

socio- No Region Lkpta Type of works environmental Requirement risk level 1 Agricultural Colonia Minor maintenance Level 3 Follow Manual

31 Wetlands I Rocha [ Minor maintenance Level 3 I Follow Manual

As for CREMA sub-proiects, the environmental and social assessment profile was applied to 9 projects of the road network.. The analysis concluded that all projects have a level 3 (low environmental and social risk). The execution of this component will begin in the year 2007. The results of the environmental analysis of each of the subprojects of the first component are presented below:

122 Table A12-4 CREMA Sub-projects

Sub-project I Type of works I Risk Levell Requirement I

b. Evaluation of the environmental and social management capacity

Unlike several institutions in Latin America, the Environmental Unit of the DNV is composed of a group of people whose responsibility is to watch over the environmental and social management in each of the stages of the project cycle. That is, there is not a physical representation of the Environmental Unit, but it works virtually in each of the stages where the project has to be revised. This particular modality has worked well in the last years, however experience shows that certain areas of the DNV are better prepared to incorporate environmental and social considerations than others, therefore causing an imbalance in the treatment of these issues throughout the project cycle. In this sense, the DNV is developing a series of initiatives directed at enhancing the technical capacity of its officials, including training activities and the implementation of changes in the organizational structure aimed at improving environmental and social management.

The DNV will receive important resources in the short term from the IDB to strengthen its environmental and social management capacity. A full-time consultant will be hired to develop a series of activities that will definitely contribute to an improvement in the environmental and social management capacity within the institution, in particular, the updating of the Environmental Management Manual.

In regards to management instruments, the DNV has an Environmental Management Manual, developed in 1998. During the evaluation of the project, this document was revised with the objective of identifying some aspects that could be updated to improve the instrument. The protection of cultural and physical heritage and the consideration of the environmentally friendly right of way methodology were identified as aspects that may want to be included in the manual. It was agreed that these aspects will be considered for incorporation in the Manual’s updating to be camed out by the consultant to be hired as part of the IDB program, in accordance with Bank policies.

Also, as mentioned earlier, during project preparation, the Environmental Unit worked on its own version of the environmental and social assessment profile form, which was initially developed by the QAT team, with the purpose of adapting it to the particular characteristics of Uruguay’s environmental legislation. c. Compliance with environmental legislation

The bidding documents mention the need to comply with environmental norms and laws imposed by the National Environmental Authority (DINAMA).

123 In the case of the level 1 and 2, all of the projects proposed have the corresponding environmental studies and permits, strictly complying with the Environmental Manual which is an integral part of the bidding documents.

Level 3 projects do not require specific environmental permits but must adhere to the environmental legislation through Environmental Manual which is an integral part of the bidding documents.

It is important to note that in the bidding documents specific environmental requirements will be included to be complied by the contractors such as environmental permits or other environmental and social instruments that the Environmental Authorities deem pertinent.

3. Environmental management plan

When the project is classified as level 1 or 2, each of the Executive Projects (detailed engineering studies) must include an Environmental Management Plan (EMP). This Plan is based on guidelines provided in the Environmental Manual and the environmental legislation.

The EMP for the construction phase must include all specific environmental management measures for activities directly or indirectly related to construction, identified in the bidding documents, such as: selection of camping sites, lending of materials, paving platforms, inputs required for work completion, land movements, crosses on water pathways, storing of combustibles, plague insecticides, paints and grease removers, management and disposition of solid and liquid waste, and the phase of abandonment.

Once the segment of the road has been opened to traffic, the EMP for the maintenance and operation phase and bidding documents should contain all the environmental management measures directly or indirectly related to maintenance and operation, such as: the cleaning of road zones, reparation of holes and roadside, sealing of road fissures, and others.

The EMP’s objective is to detail the site of the works and the procedures and methodologies to be implemented during the construction and control phases, guaranteeing that works will be carried out with minimal environmental impacts. The EMPs may include the following sections:

EMP’s action plan The Action Plan includes the whole set of measures that will guarantee the elimination, prevention or control of the environmental risks detected in the EAs. A detailed study of the measures required for mitigating these impacts and protecting vulnerable recipients is essential for the formulation of this plan.

EMP’s contingency plan A Plan for attending emergencies will have to be developed, including (but not restricted to) spilling of chemical products, combustibles, lubricants, etc.

EMP’s follow-up and monitoring plan A Plan for follow-up and monitoring ensures the adequate implementation of the actions identified in the Action Plan. This instrument is essential for the supervision of each project by the Environmental Unit and the Bank. The EMP must include a budget to implement the measures identified. It also must include the persons responsible for implementing each one of the activities and their corresponding schedule.

4. Environmental and social viability

In this context, taking into account that a series of actions directed towards ensuring the introduction of

124 the environmental and social dimension into the project in a comprehensive manner were undertaken, it is concluded that the project is viable from an environmental and social point of view and that it complies with the Bank’s Safeguard Policies.

It is important to highlight the relevance of developing a permanent follow up and monitoring strategy during project execution so as to ensure the adequate implementation of the measures identified and guarantee an appropriate environmental and social management of projects.

125 Annex 13: Project Preparation and Supervision URUGUAY: UY Transport Infrastructure Maintenance and Rural Access

Planned Actual PCN review 08/03/2004 Initial PID to PIC 0911Of2004 09/07/2004 Initial ISDS to PIC 0911 012004 09/07/2004 Appraisal 0311412005 031 1412005 Negotiations 0411212005 0411212005 BoardRVP approval 06/07/2005 Planned date of effectiveness 09/07/2005 Planned date of mid-term review 09/07/2007 Planned closing date 0713 1/20 11

Key institutions responsible for preparation of the project:

DNV, DNH, MTOP, World Bank

Bank staff and consultants who worked on the project included:

Name Title Unit Jorge M. Rebelo Task Team Leader and Lead Transport Specialist LCSFT AndrCs Pizarro Co-Task Team Leader and Senior Transport Specialist LCSFT Daniel Pulido Economist, Junior Professional LCSFT JosB Maria Alonso-Biarge Lead Highway Specialist Consultant LCSFT Rodrigo Archondo Highway Specialist TUDTR Emilio Rodriguez Procurement Specialist LCOPR Luis Schwarz Sr. Management Specialist LCOAA Marco Zambrano Social and Environmental Specialist Consultant Reynaldo Pastor Senior Counsel LEGLA CCsar Quiroz Peer Reviewer ECSIE Aurelio MenCndez Peer Reviewer LCSFT

Bank funds expended to date on project preparation (US Dollars):

1. Bank resources:192,000 2. Trust funds: 3. Total: 192,000

Estimated Approval and Supervision costs:

1. Remaining costs to approval: 12,000. 2. Estimated annual supervision cost: 80,000.

126 Annex 14: Documents in the Project File URUGUAY: UY Transport Infrastructure Maintenance and Rural Access

STAFF REPORTS

Previous projects

Project Appraisal Document. Second Transport Project (Loan No. 4395-UR). Oriental Republic of Uruguay. Report 18374-UR.August 26,1998

Project Appraisal Document. Forest Products Transport Project (Loan 42040). Oriental Republic of Uruguay. Report No. 16398-UR. June 2,1997.

Staff Appraisal Report. First Transport Project (Loan 302 1-UR). Oriental Republic of Uruguay. Report No. 7290-UR. November 23. 1988.

Implementation Completion Report on a Loan to the Oriental Republic of Uruguay for a Second Transport Project. Report No. 28235. May 10,2004.

Implementation Completion Report on a Loan to the Oriental Republic of Uruguay for the First Transport Project. Report No. 18031. June 19, 1998.

Sector Notes

Economic Notes. A Reform Agenda for the Uruguayan Transport Sector. Rebelo, Jorge. August 1996.

Transport Policy Notes, 1996-2004 and beyond. Rebelo, Jorge; Pizarro, AndrCs; Pulido, Daniel; Martinez, Juan Pablo.

Uruguay Infrastructure Policy Notes. Pizarro, Andres, Pulido, Daniel, Velez, Carlos, Durand, Philippe, November 2004.

Uruguay Road Maintenance and Rural Access Project, Potential Bank Support to the Megaconcesidn. Pulido, Daniel, June 2004

Country Assistance Strategy

Draft Country Assistance Strategy for the Oriental Republic of Uruguay. Report No. 31804-UY. March 24, 2005.

Country Assistance Strategy Progress Report for the Oriental Republic of Uruguay. Report No. 24410. July 25, 2002.

127 Other Staff Reports

The Rural Sector and Natural Resources in Uruguay. Report No.24409-UR June 2002.

Uruguay Poverty Update. Report No.26223-UR. June 2004.

Sources of Growth Study Concept Paper (Draft). December 1,2003.

Public-Private Infrastructure Advisory Facility (PPIAF). Port Sector Reform Toolkit.

Draft Uruguay Public Expenditure Review. Efficiency, Equity and Affordability in Infrastructure. 2004

MTOP REPORTS

Project preparation and implementation reports

Asesoria de Financiamiento Exterior MTOP-Banco Mundial. Plan de Implementacidn del Proyecto de Mantenimiento de la Infraestructura de Transporte y Acceso Rural. 30 de marzo de 2005.

Direccidn Nacional de Hidrografia (DNH). Analisis de Prefactibilidad Econdmica (Terminales de Transferencia). 1 de abril de 2005.

Direccidn Nacional de Hidrografia (DNH). Reporte de Evaluacidn Ambiental de las Terminales de Transferencia. 1 de abril2005.

Direccidn Nacional de Hidrografia (DNH). Plan de Rehabilitacidn, Mantenimiento y Mejora de Obras Portuarias, Periodo 2006-2010: Descipcidn de Estudios y Obras. Marzo 2005.

Direccidn Nacional de Vialidad (DNV). Reporte de Evaluacidn Ambiental-Componente Vial. Revisado 3 1 de marzo de 2005.

Direccidn Nacional de Vialidad (DNV). Proyecto de Mantenimiento de Infraestructura de Transporte y Acceso Rural - Reporte de Evaluacidn Ambiental. 18 de marzo de 2005.

Direccidn Nacional de Vialidad (DNV) y Direccidn Nacional de Topografia (DNT). Proyecto Mantenimiento Infraestructura de Transporte y Acceso Rural - Plan de Reasentamiento Involuntario Abreviado. 25 de noviembre de 2004. Revisado 1 de Abril de 2005

Direccidn Nacional de Vialidad (DNV). Estudio de Pre-Factibilidad Te'cnico - Econdmica, Ruta 18: Rio Tacuari - Caiiada Santos. Agosto 17,2004.

Direccidn Nacional de Vialidad (DNV). Programa: Transporte III Estudio de Pre-Factibilidad Te'cnico- Econdmica, Contrato de Mantenimiento Zona Turistica (Regional 2 y 10).

Direccidn Nacional de Vialidad (DNV), Gerencia de Programacidn - Departamento Planificacidn. Estudio de Pre-Factibilidad TCcnico - Econdmica, Ruta 18: KOTacum' - Caiiada Santos.

128 Direcci6n Nacional de Vialidad (DNV). Gerencia de Construcciones, Dpto. de Infraestructura Vial Departamental. Programa de Mantenimiento de la Red Vial Departamental, Anteproyecto de Mantenimiento de 9.000 Km. de Caminos Rurales. Septiembre de 2004.

Corporaci6n Nacional para el Desarrollo. Contrato Mega Concesi6n.

Other Reports

Administraci6n Nacional de Puertos (A”),Plan Maestro del Puerto de Montevideo, 1999.

Consorcio CSI-HAECON, Proyecto de Gesti6n Maritima Costera, 2002

Direcci6n Nacional de Transporte (DNT), Anuario Estadistico del Sector Transporte, Rep6blica Oriental del Uruguay, 2003.

Direcci6n Nacional de Vialidad (DNV), Dpto. Seguridad en el Transito, Divisi6n Conservaci6n. Anuario Estadistico de Transito 2003.

Direcci6n Nacional de Vialidad (DNV) Departamento de Gesti6n del Mantenimiento, Divisi6n Conservaci6n. Indicadores de Gesti6n 2003. B. Carnales, Mieres, Gatto, Shchez. Abril 2004.

Direcci6n Nacional de Vialidad (DNV). Dpto. Gesti6n del Mantenimiento, Divisi6n Conservaci6n. Informe de Gesti6n por Administraci6n Aiio 2003, Periodo 1997-2003. Abril2003.

Direcci6n Nacional de Vialidad (DNV). Dpto. Gesti6n del Mantenimiento, Divisi6n Conservacibn. Indicadores de Gesti6n 2003. Abril2004.

Direcci6n Nacional de Vialidad (DNV). Republica del Uruguay. “Rendici6n de Cuentas 1998”.

Direccidn Nacional de Vialidad (DNV). Gasto Total por Tarea, Aiio 2002. 30 de agosto 2004.

Direcci6n Nacional de Vialidad (DNV). Gesti6n de la Red Vial en la Republica de Uruguay. 1998.

Direcci6n Nacional de Vialidad (DNV). Licitaci6n Pliblica Intemacional No. /98. Mantenimiento por Contrato en Zona VII. Tom0 1.

Direcci6n Nacional de Vialidad (DNV), Organo de Control de Contratos, Divisi6n Conservacibn. Contratos de Mantenimiento por Niveles de Servicio, Informe a Julio 2002.

Direccidn Nacional de Vialidad (DNV). Plan de Mantenimiento de la Red Vial Departamental. Noviembre 19, 1999.

Direcci6n Nacional de Vialidad (DNV). S6lido como la Roca (“pero sin perder jamas la temura”). 5 Aiios Haciendo Obras 1995 - 1999.

Direcci6n Nacional de Vialidad (DNV). Una Visi6n de la Red Vial en el Aiio 2000. A. Aguerre. 1998.

MTOP. Plan Quinquenal de Transporte y Obras Publicas, Periodo 2000 - 2004. Propuesta Presupuestal. Agosto 2000.

129 MTOP. Memoria Anual de la Presidencia de la Republica. 2002 y 2003.

MTOP. Direccidn Nacional de Vialidad. Diseiio de un Modelo de Planificacidn, Ejecuci6n y Control del Mantenimiento Vial en las Departamentos del Interior. Informe Final, Resumen Ejecutivo. 2002.

MTOP. Direccidn Nacional de Vialidad. Presupuestos, Mantenimiento por Contrato, Contratos de Rehabilitacidn y Mantenimiento (CREMA). May 2000 & 2001.

MTOP. Servicios Construccidn de la Red Vial Nacional, Rendicidn de Cuentas 2001.

OTHER

ANETRA, Asociacidn Nacional de Empresas de Transporte Carretero por Autob6s. ANETRA 20 Aiios 1983 - 2003. Octubre 3 1, (2003).

Banco Central del Uruguay, Area de Investigaciones Econdmicas. Informe Trimestral de Coyuntura. Noviembre 2003.

Banco Interamericano de Desarrollo (BID). Integracidn de la Infraestructura Regional Sudamericana (IIRSA). “El Comercio por Modo Carretero entre 10s Paises del Cono Sur, Anexo Estadistico”. 2002

Banco Interamericano de Desarrollo (BID). Integracidn de la Infraestructura Regional Sudamericana (IIRSA). El Comercio por Modo Carretero entre 10s Paises del Cono Sur. Diciembre 2001.

Banco Interamericano de Desarrollo (BID). Proyectos Aprobados - Uruguay. Noviembre 20,2003.

Comisidn Econdmica para Amkrica Latina de Naciones Unidas (CEPAL). Base de Datos de Comercio Exterior (BADECEL).

Comisidn Econdmica para Amkrica Latina de Naciones Unidas (CEPAL). Base de Datos de Transporte Intemacional (BTI).

Comisidn Econdmica para Amkrica Latina de Naciones Unidas (CEPAL). Balance preliminar de las econom’as de Amkrica Latina y el Caribe 2004

Comisi6n Trinacional del Eje Vial del Con0 Sur, Argentina - Brasil - Uruguay. Estudio de Factibilidad Eje Vial del Con0 Sur Parte Uruguaya. Resumen Ejecutivo.

Corporacidn Vial del Uruguay. Programa de Emisidn de Obligaciones Negociables Tkrrninos y Condiciones Ira Serie. Febrero de 2003.

Iniciativa para la Integraci6n de la Infraestructura Regional Sudamericana, (IIRSA), Facilitacidn del Transporte en 10s Pasos de Frontera, 2003.

Ministerio de Ganaderia, Agricultura y Pesca (MGAP). Boletin Estadistico Forestal, 2003 y 2004.

130 Ministerio de Ganaderia, Agricultura y Pesca (MGAP), Oficina de Programaci6n y Politica Agropecuaria. Anuario 2003.

Ministerio de Ganaderia, Agricultura y Pesca (MGAP). Memoria Anual de 1 a Presidencia de la Rep6blica 2003.

Universidad Aut6noma de Valencia, " Evaluacidn de 10s Principales Puertos de Amkrica del Sur" , Iniciativa para la Integracidn de la Infraestructura Regional Sudamencana (IIRSA), Corporacidn Andina de Foment0 (CAF), 2003.

131 Annex 15: Statement of Loans and Credits URUGUAY: UY Transport Infrastructure Maintenance and Rural Access

Difference between expected and actual Original Amount in US$ Millions disbursements Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Ong. Frm. Rev’d PO77172 2003 UR Structural Adjustment Loan 151.52 0.00 0.00 0.00 0.00 50.00 -51.52 0.00 PO78726 2003 UY Public Services & Social Sectors SAL 151.50 0.00 0.00 0.00 0.00 100.00 50.00 0.00 PO80263 2003 UY SSAL 151.52 0.00 0.00 0.00 0.00 50.00 -51.52 0.00 PO81495 2003 UY Public Services & Social Sectors SSAL 101.02 0.00 0.00 0.00 0.00 75.00 25.00 0.00 PO74543 2002 UY FOOT & MOUTH DISEASE - ERL 18.50 0.00 0.00 0.00 0.00 5.03 -13.47 -13.47 PO70937 2002 UY- Basic ED3 42.00 0.00 0.00 0.00 0.00 34.74 6.96 0.00 PO70058 2001 UY PUBLIC SERVICES 6.00 0.00 0.00 0.00 0.00 5.09 2.79 0.00 MODERNIZATION TA PO63383 2000 UY APL OSE MOD&REHAB. 27.00 0.00 0.00 0.00 0.00 19.47 19.47 -0.60 PO39203 1997 UY FOREST PROD.TSP 76.00 0.00 0.00 0.00 5.00 25.30 30.30 0.00 PO08177 1996 UY POWER TRNMSN & DISTR 125.00 0.00 0.00 0.00 0.00 46.25 46.25 0.00 Total: 850.06 0.00 0.00 0.00 5.00 410.88 64.26 - 14.07

URUGUAY STATEMENT OF IFC’s Held and Disbursed Portfolio In Millions of US Dollars

Committed Disbursed IFC IFC - FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic. 1985 Azucitrus 0.00 1.95 0.00 0.00 0.00 1.95 0.00 0.00 2002 Conaprole 20.00 0.00 10.00 0.00 20.00 0.00 10.00 0.00 1995 Consorcio Aerop. 0.55 0.00 2.16 0.00 0.55 0.00 2.16 0.00 2001 UMontevideo 4.79 0.00 0.00 0.00 3.09 0.00 0.00 0.00 Total portfolio: 25.34 1.95 12.16 0.00 23.64 1.95 12.16 0.00

Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic. 2002 Conaprole 0.00 0.00 0.00 0.02 Total pending commitment: 0.00 0.00 0.00 0.02

132 Annex 16: Country at a Glance URUGUAY: UY TransDort Infrastructure Maintenance and Rural Access Latin Upper- POVERTY and SOCIAL America middle- Uruguay-. i3 Carib. income Development diamond' 2002 I Population, midyear (millions) 34 527 331 Life expectancy GNlpercaplta (Atlasmethod, US$) 4,370 3280 5,040 GNI (Atlas method, US$ brlliOnS) 148 1,727 1668

Average annual growth, 1996-02 Population (%) 07 15 12 GN I Laborforce (%) 11 22 18 per Most recent estimate (latest year available, 1996-02) capita Poverty (%ofpopulation belo wnationalpoveriyline) Urban population (%of totalpopulation) 92 76 75 Life expectancy at birth (pars) 75 71 73 .L Infant mortality (per 1000 live births) D 27 8 Child malnutntion (%of children under5) 9 Access to improvedwater source Access to an improved water source (%ofpopulation) 98 86 90 Illiteracy (%ofpopulationage 54 2 n 7 Gross pnmary enrollment (770 f school-age population) D9 Do n5 -Uruguay I Male ID D1 x)6 .-. Upper-middle-incomegroup Female x)9 P8 D5 I KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1982 1992 2001 2002 Economic ratios' GDP (US$ billions) 91 e9 18.6 P3 Gross domesttc InvestmentlGDP 88 154 0.5 I Trade Exports of goods and services/GDP #3 20.4 tB7 Gross domestic savingslGDP 168 162 P3 Gross national savings/GDP #6 x).?

Current account balancelGDP -26 -0 1 -2.8 Domestic Investment Interest paymentslGDP 20 16 22 32 savings Total debVGDP 290 355 523 85.5 Total debt servicelexports 305 188 360 329 Present value of debt/GDP 532 Present value of debtleqmrts 240 9 Indebtedness 1982-92 1992-02 2001 2002 2002-06 (average annualgro bth) -Uruguay GDP 27 12 -34 -x) 8 -n3 Upper-middle-incomegroup I

lgS2 lgg2 Growth of investment and GDP (%) ("of GDP) Agriculture 11.0 8.8 6.4 20 Industry 29.4 32.8 26.6 .. 10 Manufacturing 8.8 24.8 16.6 0 Services 59.6 58.4 67.0 .10

Private consumption 67.5 722 742 " -20 General govemment ConSUmptiOn 15.7 116 0.5 Imports of goods and services li.3 8.6 20.0 - -GDI &GDP - 1982-92 1s92-02 Growth of exports and imports (X) (average annualgro wih) ~griculture 1.4 0.9 -5.1 15 Industry 2.1 0.5 -5.6 .. x) Manufacturing 2.3 -0.4 -6.2 .. 5 Services 3.4 3.1 -18 " 0 Private consumption 3.4 3.2 -2.7 .. -5 2 General government consumption 2.1 2.1 -13 .. .x) Gross domestic investment 1.6 1.9 -7.7 -Exports &Imports Imports of goodsandsewices 5.9 5.6 -7.7 - d

133 Uruguay ~~~ ~ ___ PRICES and GOVERNMENT FINANCE 1982 1992 2001 2002 Inflation (Oh) Domestic prices I (%change) Consumer pnces 00 68.4 4.3 18.3 Implicit GDP deflator 182 59.6 5.3 18.8 Government finance (%of GDP, includes current grants) Current revenue 7.4 19.8 20.8 97 98 99 00 01 0 Current budget balance 2.3 -2.7 -2.6 -GDP deflator -CPI Overall surplus/deficit 0.7 -4.4 -3.4

TRADE 1982 1992 2001 2002 Export and import levels (US$ mill.) (US$ millions) Total evorts (fob) 1,023 1,703 2,060 2,040 Meat 290 383 57 5P Vegetables 152 181 292 289 T Manufactures 435 923 967 957 Total imports (cif) 116 2,058 3,061 2,261 2.5W Food 69 188 279 206 Fuel and energy 115 260 469 347 Capital goods 286 742 824 609 0 96 97 98 99 W 01 02 Evort price index (?995=00) 88 82 90 Import price index(l995=00) 98 92 91 m Exports Inports Terms of trade (7395=WO) 90 89 99 I

BALANCE of PAYMENTS 1982 1992 2001 2002 (US$ millions) Exports of goods and services 1,537 2,558 3272 3,066 Imports of goods and services 1,586 2,515 3,675 2,860 Resource balance -48 43 -403 206 Net income -97 - 187 -115 -202 Net current transfers 29 43 39 Current account balance -235 -9 -50 Financing items (net) -182 198 1,030 Changes in net reserves 4i7 -189 -518 1,082 Memo: Reserves including gold (US$ millions) 1,050 3,341 2,259 Conversion rate (DEC. local/US$) 1.39E-2 3.0 t3.3 21.3

EXTERNAL DEBT and RESOURCE FLOWS 1982 1992 2001 2002 (US$ millions) ,Compositionof 2002 debt (US$ mill.) Total debt outstanding and disbursed 2,647 4,571 9,706 6,532 IBRD 85 521 544 498 IDA 0 0 0 0 1 G:l,600 A:498 Total debt sewice 513 524 1,476 2275 IBRD D 75 m 99 IDA 0 0 0 0 Composition of net resource flows Official grants 0 e 6 Official creditors 41 147 114 379 Private creditors 201 150 478 -31 Foreign direct investment 0 0 318 0 0 Portfolio equity 0 I E 227 World Bank program 0 76 52 0 Commitments 1 A. l8RD E- Bilateral Disbursements 22 74 65 29 B-IDA D-Othermultilateral F-Private Principal repayments 7 45 73 75 G - Short-teri

134 135

IBRD 33861

58° 57° 56° 55° 54° 53° This map was produced by the Map Design Unit of The World Bank. URUGUAY The boundaries, colors, denominations Bella Unión and any other information shown on this map do not imply, on the part of TRANSPORT INFRASTRUCTURE MAINTENANCE B Artigas The World Bank Group, any judgment B on the legal status of any territory, or Cuareim 3 AND RURAL ACCESS PROJECT any endorsement or acceptance of Sub- R such boundaries. component ARTIGAS COMPONENT 1: ROAD REHABILITATION AND BRIDGE RESTORATION A B. Brum A SUB-COMPONENT A: ROAD SECTIONS OUTSIDE THE MEGACONCESSION Belén Z SUB-COMPONENT B: ROAD SECTIONS WITHIN THE MEGACONCESSION Rivera B SUB-COMPONENT B: BRIDGE RESTORATION Arapey I ° 31° A COMPONENT 2: CREMA SUB-NETWORKS 31 Constitución L

3 N Tranqueras AIRPORTS PORTS I 5 MAIN ROADS Salto SALTO RIVERA SECONDARY ROADS Dayman T Minas de Corrales B RAILROADS RIVERS Tacuarembó Vichadero N Tacuarembo DEPARTMENT BOUNDARIES Aceguá Quebracho 26 TACUAREMBO Ansina INTERNATIONAL E BOUNDARIES ° 32° 3 32 PAYSANDU 26 8

G Queguay Grande Paysandú CERRO LARGO Melo

R 5 Negro B B 26 Uruguay San Fraile Muerto Río Branco

A Gregorio de San Javier RIO NEGRO Polanco Sub- Young La component Paso de A Los Toros Paloma Rio Negro 8 Reservoir Tupambae 3 DURAZNOB Vergara Nuevo Berlin Negro Santa Clara de Olimar 33° B 33° 5 TREINTA Y TRES B Fray 14 Pueblo del Carmen Treinta y Très Bentos Merín Mercedes 14 Lagoon B Cebollatí Sarandí del Yí Soriano SORIANO 14 José P. Varela

Dolores Trinidad B 14 2

José E. Rodo 8 Chuy 53° F. 3 FLORES Nueva Palmira Sanchez A.Gallinal B 5 14 La BOLIVIA Ombues de Coronilla Carmelo Lavalle 2 San ROCHA 34° LAVALLEJA Velazquez 34° FLORIDA Mariscala Florida BRAZIL Sub-component B Casupa COLONIA José Fray 25 de Mayo Marcos CHILE PARAGUAY Nueva Aigua Tarariras Helvecia San José SAN JOSESan Rosario 11 de Mayo Ramon B Santa Lucia Tala Colonia del B Sacramento 1 B E. Santa Lucia Minas 9 Río Paullier B Jaun I Canelones Santa Rosa B Montes Rocha Lacaze de la 11 San Jacinto 8 URUGUAY Libertad MALDONADO Sauce Solis de Mataojo ARGENTINA 1 Soca Pan de La Paloma Plata Las Piedras B Montevideo Pando Azucar 9 B Atlantida San Carlos MONTEVIDEO B CANELONESPiriápolis Maldonado MONTEVIDEO 0 1020304050 35° Punta del Este 35° KILOMETERS

° ° ° ° ° 58 57 56 ATLANTIC OCEAN55 54 ATLANTIC MARCH 2005 OCEAN