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World Bank Document PROJECT INFORMATION DOCUMENT (PID) CONCEPT STAGE Report No.: AB977 Project Name UY Road Maintenance and Rural Access Region LATIN AMERICA AND CARIBBEAN Sector Roads and highways (75%); Sub-national government administration Public Disclosure Authorized (15%);Central government administration (10%); Project ID P057481 Borrower(s) REPUBLIC OF URUGUAY Implementing Agency Ministry of Transport and Civil Works Environment Category [ ] A [X] B [] C [ ] FI [ ] TBD (to be determined) Safeguard Classification [ ] S1 [ ] S2 [ ] S3 [ ] SF [ ] TBD (to be determined) Date PID Prepared June 14, 2004 Estimated Date of Appraisal October , 2004 Authorization Estimated Date of Board January, 2004 Approval 1. Key development issues and rationale for Bank involvement Public Disclosure Authorized Background Uruguay’s historically high level of economic and social development relative to the region, was further improved in the 1990’s due to a stint of steady economic growth during that period, where the average annual growth rate between 1990 and 1998 reached 3.6%. Many Millennium Development Goals had been attained or seemed attainable, and the Bank even envisioned the possibility of gradual disengagement. However, Uruguay entered into a severe economic recession which was compounded by several external 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% in 1999 to 15.3% in 2001)1 , and the fiscal situation deteriorated (fiscal deficit increased from 1% of GDP in the 1990s to 4% in 2001). Furthermore, a sharp devaluation of the peso in Public Disclosure Authorized 2002 worsened 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 has adversely affected the provision of those services and consequently the competitiveness of the economy. As a consequence, the Government of Uruguay (GOU) had to adopt urgent measures to address the crisis; these measures aimed at dealing with the liquidity pressures affecting the banking system, and ensuring the sustainability of public finances over the medium term. They included : (i) a large fiscal adjustment in public expenditures aiming to reduce the fiscal deficit, (ii) switching to flexible exchange rates, (iii) a rapid resolution of the banking crisis, (iv) enhancing competitiveness by adjusting the exchange rate and increasing private participation in areas dominated by the State, and (v) enhancing the efficiency of social spending. The Ministry of Transport and Civil Works (MTOP) as any other Ministry suffered the consequences of the crisis by seeing its budget drastically reduced. Therefore, it had to design a strategy which would have the highest return for its investment and maintenance budgets. Public Disclosure Authorized 1 Country Assistance Strategy for the Oriental Republic of Uruguay July 25, 2002, Report No. 24410 UR. MTOP Sector strategy before and after the crisis During the 1990’s and particularly from the mid-nineties onwards, the GoU adopted a broad agenda of reforms aimed at reducing the size of the central administration, redefining the areas where government participation was required, rationalizing public expenditures, eliminating monopolies, and enhancing the competitiveness of the national economy. Within this framework, in 1996 the MTOP prepared with Bank’s assistance an Agenda for Reform2 of the sector where it designed a clear sector strategy whereby it sought to radically modify infrastructure management and maintenance policies in order to increase the efficiency of the limited resources allocated to the sector, recognizing that infrastructure maintenance and expansion should be closely linked to the budget available. It, consequently, placed utmost priority on maintenance and rehabilitation of existing roads by defining a basic priority national road network, which was indispensable to serve its national and international integration goals. As well as an investment program to upgrade the most important links of this basic road network at a pace consistent with its funding capabilities. The areas of action adopted by MTOP for modernizing the transport sector fell into three general categories: (i) reorganizing transport agencies by reorienting their functions towards policy making, planning, regulation and control rather than execution activities; (ii) improving regulatory, institutional and financial frameworks to allow for increased private sector participation and better access to sustainable sources of funding; and (iii) incorporating greater private participation through outsourcing and long-term concessions to improve efficiency and quality in the delivery of transport services. At the same time the MTOP, conscious of the need for external financing, sought IBRD and IDB financing to support programs which would allow: (i) the rehabilitation of the basic road network and main roads of the secondary network; (ii) the improvement of the port of Montevideo and other secondary ports such as Fray Bentos and Nueva Palmira; and (iii) the rehabilitation of some links of the railway network. Since the Minister who started the Reforms stayed in office for the last ten years, there was a consistent pursuit of the vision, strategy and reforms laid out by him from the outset. Moreover, there was a remarkable continuity of MTOP staff, particularly in the roads department, which assured some stability in the management of day-to-day operations.. This continuity allowed the indispensable time necessary to carry out some of the agenda for reform. It can be said that the reforms sought were largely achieved and the infrastructure rehabilitation in roads and ports was also substantially advanced. In the railway sector a major reform was undertaken but the actual infrastructure rehabilitation was delayed by the impact of the crisis which forced the Ministry to prioritize the scarce funds available between road and rail. The private sector responded by investing in facilities such as the Port of M’bopiquá and by seeking to establish more manufacturing facilities in Uruguay rather than exporting raw materials. When the crisis hit Uruguay, MTOP redefined its short-term goals as follows: (i) give preference to ongoing maintenance and rehabilitation contracts for the basic national network to arrest any major deterioration in its main corridors; (ii). defer any investments even those supported by loans, such as some new roads or the rail rehabilitation, unless there was a short-term need to prevent an existing bottleneck such as the access to a port of export or a major agricultural pole;(iii) reallocate some of those loan funds to road maintenance of the primary and departmental road networks,; (iv) Seek private sector participation to leverage existing resources and increase the off-budget operations either with concessions or other forms of long-term private sector participation such as CREMA contracts. 2 Rebelo, Jorge. “A Reform Agenda for the Uruguayan Transport Sector”. Country Department I, Latin America and the Caribbean Region. August. 1996. The on-going strategy, despite the stringent reduction of funds during the crisis, produced some impressive results thanks to the adoption of a variety of pragmatic approaches implemented to address all the issues faced (concessions, Megaconcession, maintenance contracting, micro-enterprises, and improved force account maintenance) : Concessions From 1994, MTOP granted concessions on the highways that had traffic levels which justified a self- sustained private operation. In general, those are the sections nearest to Montevideo on the main highways accessing it. Around 600km have been conceded and another 600km are under study, the performance and management of the concessions has been successful. These concessions also helped in tolling international transit traffic using those corridors. Megaconcession It became evident that in addition to the private concessions already granted, 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 Megaconcession; which is a sub-network of primary roads of a total of 1272 km (15% of the network) which was conceded for 15 years to the Corporación Nacional del Desarrollo (CND), a public corporation, and the business relationship was based on a standard concession contract that stipulated the works that the concessionaire should carry out and the level of service that should be maintained during the concession. In return, the concessionaire would finance itself from tolls collected and a government monthly payment, which is composed of (i) a fixed payment per km of road maintained, (ii) a subsidy for the maintenance of structures, and (iii) a minimum revenue guarantee. Road Management at National Level. Until 1996, all routine maintenance and a significant portion of periodic maintenance were planned and executed by DNV staff. Overstaffing overburdened DNV’s maintenance budget during the early 1990s, absorbing between 60 to 70 percent of the maintenance budget for personnel and administrative costs, leaving little room to respond to periodic surges in maintenance and rehabilitation needs. With the reforms, DNV started to contract out maintenance initially supported by GTZ and IDB. With
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