Document of The World Bank

FOR OFFICIAL USE ONLY FILE COPY Public Disclosure Authorized

Report No. 2449

PROJECT PERFORMANCE AUDIT REPORT

PHILIPPINES FIRST HIGHWAY PROJECT (LOAN 731-PH) Public Disclosure Authorized

April 2, 1979 Public Disclosure Authorized Public Disclosure Authorized

Operations Evaluation Department

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

- i - FOR OFFICIAL USE ONLY

PROJECT PERFORMANCE AUDIT REPORT

PHILIPPINES FIRST HIGHWAY PROJECT (LOAN 731-PH)

Table of Contents

Page No.

PREFACE 11

PROJECT PERFORMANCE AUDIT BASIC DATA SHEET 111

HIGHLIGHTS iv

PROJECT PERFORMANCE AUDIT MEMORANDUM 1

I. Introduction 1 II. The Project 1 III. Points of Interest 2 IV. Conclusions 6

ATTACHMENT I: PROJECT COMPLETION REPORT

I. Introduction 7 II. Project Preparation and Appraisal 7 III. Project Implementation and Cost 9 IV. Performance and Organization of Borrower 17 V. Economic Reevaluation 21

Tables

1. Cotabato-Digos Road - Government Funds Requested, Released and Disbursed for 1976 23 2. Cotabato-Digos Road - Contract Costs 24 3. Description of Roads and Construction Costs 25 4. Consulting Services 26 5. Project Components of Costs 27 6. Schedule of Disbursements 28 7. Traffic Volumes on Cotabato-Digos Road 29 8. Traffic Growth, Road Sections Open to Traffic by Year, and Savings in Vehicle Operating Cost 30

ATTACHMENT II: GOVERNMENT'S COMMENTS 31-34

Map

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.

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PROJECT PERFORMANCE AUDIT REPORT

PHILIPPINES FIRST HIGHWAY PROJECT (LOAN 731-PH)

Preface

This is a Project Performance Audit Report on the Philippines First Highway Project, for which Loan 731-PH for US$8.0 million was closed, fully disbursed, in June 1976. The report consists of a Project Performance Audit Memorandum prepared by the Operations Evaluation Depart- ment (OED) and a Project Completion Report (PCR) prepared by the East Asia and Pacific Regional Office.

The memorandum is based on the PCR and discussions with Bank staff members familiar with the project; the transcript of the Executive Directors' meeting of April 6, 1971 has been read and project documents and files have been reviewed. The project was visited during an OED mission to the Philippines in March 1977 in connection with the Consul- tants' Services Study.l/ The audit has been delayed because extensive re- visions in the PCR were required. The Government's comments on the draft PPAR have mostly been reflected and a copy of the comments has been in- cluded as Attachment II.

The audit memorandum agrees with the main conclusions of the revised PCR but presents a more critical review of some aspects of the proj- ect and amplifies on others which appear to be of particular significance.

1/ Study of the Role and Use of Consultants in Bank Group Projects, Report No. SecM77-865, dated December 8, 1977.

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PROJECT PERFORMANCE AUDIT BASIC DATA SHEET

PHILIPPINES FIRST HIGHWAY PROJECT (LOAN 731-PH)

KEY PROJECT DATA

Original Actual or Item Plan Current Estimate

Total Project Cost (US$ Million) 15.8 192 1.4l/ Overrun (2) Loan Amount (US$ Million) 8.0 8.0 Disbursed ) 8.0 8.0 Caneld ) 1/31/79 0.7 Repaid to0,8 0.8 Borrower's Obligation )7.3 8.4 2/ Date Physical Components Completed 9/74 8/75 3/ 80 3/ Proportion Completed by Above Date ()- 20 3/ Proportion of Time Overrun (%) - Economic Rate of Return (W) 18 15 Institutional Performance Average Average

Cumulative Estimated aid Actual Disbursements (USs Million) 1972 1973 1974 1975 1976

(i) Estimated 2.6 6.0 7.5 8.0 8.0 (ii) Actual 1.3 3.6 4.9 5.9 8.0 % of (ii) to (i) 50.0 60.0 65.3 73.8 100.0

OTHER PROJECT DATA

Original Actual or Item Plan Revisions Current Estimate

First Mention in Files - - 1/28/63 Government's Application - - 4/25/63 Negotiations - - 2/ -/71 Board Approval - - 4/06/71 Loan Agreement Date - - 4/14/71 Effectiveness Date - - 7/23/71 Closing Date 5/15/75 6/30/76 6/30/76 Borrower Republic of the Philippines Executing Agency Bureau of Public Highways Fiscal Year of Borrower July 1 - June 30 Follow-on Project Name Second and Third Highway Projects Loan Number Loans 950-PH and 1353-PH Amount (US$ Million) 68.0; 95.0 Loan Agreement Date 12/12/73; 1/12/77

MISSION DATA

Date Month/ No. of No. of of Full Item Year Weeks Persons Man-weeks Report

Identification n.a. n.a. n.a. n.a. 11/62 Preparation 9/63 2 1 2 10/63 Preappraisal 8/69 2 1 2 9/69 Appraisal 7/70 2 1/2 3 7 1/2 10/70 Supervision I 12/71 2 2 4 2/72 Supervision II 4/72 2 2 4 5/72 Supervision III 8/72 1 1 1 9/72 Supervision IV 12/72 2 2 4 1/73 Supervision V 6/73 1 2 2 7/73 Supervision VI 5/74 2 1 2 6/74 Supervision VII 12/74 2 1 2 1/75 Supervision VIII 5/75 1 1 1 7/75 Completion 3/76 1 1 1 4/76

COUNTRY EXCHANGE RATES

Name of Currency (Abbreviation) Peso (P) Appraisal Year Average Exchange Rate: US$1 = P 6.12 Intervening Years Average US$1 - P 6.56 Completion Year Average US$1 = P 7.35

1/ Depending on whether outstanding claims will be settled. 2/ Includes US$1.2 million for exchange adjustments. 3/ Does not refer to the entire project. About 20% of the highway construction work was delayed by civil disturbances.

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PROJECT PERFORMANCE AUDIT REPORT

PHILIPPINES FIRST HIGHWAY PROJECT (LOAN 731-PH)

Highlights

The main purposes of the project were the reconstruction of 160 km of road in the southern part of the Philippines and the provision of technical assistance to strengthen the Department of Public Highways. The project was supported by a Bank loan for US$8.0 million. Most of the road has been constructed as planned, but completion of some sections was delayed due to civil disturbances in the project area. The techni- cal assistance has been successfully implemented.

The project had a cost overrun of about 30% and a time overrun of some 20% (the latter excluding the works which had to be deleted from the original construction contract and are now being completed by the Government). Civil disturbances in the project area have contributed to a lower than anticipated traffic growth, but the road still makes a use- ful contribution to the economic development of the area it traverses. The reestimated economic return is 15% against 18% estimated at the time of appraisal.

Points of particular interest are:

- apparent weaknesses in the Bank's communications with the Government have led to less than optimal use of foreign assistance for road improvements (paras 6, 17);

- the need for continued Bank supervision until the project has been fully completed (paras 8, 16);

- the successful introduction of local consultants (paras 9, 10, 11);

- progress on the introduction of adequate road main- tenance and axle load control has been slower than expected (PCR, paras 4.07-4.13).

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PROJECT PERFORMANCE AUDIT MEMORANDUM

PHILIPPINES FIRST HIGHWAY PROJECT (LOAN 731-PH)

I. Introduction

1. Transport in the Philippines, which has a land area roughly the size of Italy, is complex, because the country consists of some 7,000 islands. A transport survey carried out in 1968, financed by the UNDP with the World Bank as executing agency found that of the primary transport flows for goods 57% went by road transport, 41% by maritime transport and 2% by railway, while 82% of passenger transport went by road. Difficult terrain and poor soil conditions for road buil ding have imposed constraints on the development of road transport.

2. To date the Bank's assistance in financing the transport sector has involved six loans: two port projects (Loan 290-PH for US$8.5 mil- lion in 1961 and Loan 939-PH for US$6.1 million in 1973); one inter- island shipping project (Loan 1048-PH for US$20 million in 1974); and three highway projects (Loan 731-PH for US$8.0 million in 1971, Loan 950-PH for US$68.0 million in 1973 and Loan 1353-PH for US$95.0 million in 1977). Performance on the First Port Project, which included procure- ment of dredging equipment, was unsatisfactory, due to inadequate opera- tion and maintenance of the dredges, and some US$1.1 million of the loan was cancelled. The subject of this audit is the second transport project in the Philippines. The other projects are still being implemented.

II. The Project

3. The purpose of the project was to assist the Department of Public Highways (DPH)1/ with the implementation of a highway construction and improvement program and to strengthen their organization. The project comprised construction of a 160 km long highway on the southern island, Mindanao, linking Cotabato with Digos, at an estimated appraisal cost of US$5.9 million, and consultants' services totalling US$6.9 mil- lion for construction design and supervision, technical assistance to DPH and preparation of a next project. Including interest during construction and contingencies, the estimated project cost was US$15.8 million (for de- tails, see PCR, Table 5). The Bank loan which was signed in April 1971 financed US$8.0 million, while the UNDP was to contribute US$1.9 million towards technical assistance.

4. Performance under the project was mostly satisfactory: road con- struction was generally of good quality, consultants' services were effec- tive and the technical assistance has helped the DPH to improve their opera- tions. However, the covenants on road maintenance and axle load control

1/ This Department was renamed the Ministry of Public Highways (MPH) in the spring of 1978. - 2 -

have not been fully implemented. Road construction has been affected by civil disturbances which required the contractor to revise the construc- tion schedule and ultimately led to deletion of part of the works from the contract to the value of nearly 20% of the original contract amount (PCR, paras 3.03 and 3.09). Due to some additional works, extra costs as a result of the civil disturbances and price escalation, the revised contract has suffered a cost overrun (expressed in local currency) of 26%, which could increase to as much as 67% if all claims now under arbitration are awarded to the contractor (see PCR, Table 2). Based on information available to date. it anears that the works which were deleted from the original contract and are now being completed by another contractor and by force account will cost more than four times the original contract amount. The cost overrunl/ on the total project will be 24%-35% (depending on how much of the outstanding claims will be awarded). Excluding the works which were deleted from the original construction contract, the project had a time overrun of about 20%, much of which was due to unforeseeable circumstances. The road makes a useful contribution to the area it traverses but traffic has grown less rapidly than expected because of security problems in the project area. The reestimated economic return is 15% against 18% estimated at the time of appraisal.

III. Points of Interest

Inadequate Communications between the Bank Group and the Government during Project Preparation

5. Even though the Bank Group had been lending to the Philippines since 1957, the first loan for highways was signed only in April 1971. A considerable amount of preparatory work was carried out, in the form of a UNDP-financed transport survey, started in September 1968, for which the Bank was executing agency. Feasibility studies for construc- tion or reconstruction of national highways were also financed by the UNDP and were carried out by the same consultants who did the transport study. Detailed design for 925 km of road, selected from the feasibility studies, was financed retroactively from the first highway loan.

6. When the Bank agreed to the retroactive financing for detailed engineering, it was with the understanding that investments for all these roads would form part of the Bank's first highway loan. It was also with this in mind that the appraisal mission started work, only to discover a few days before leaving the Philippines that the Government had en- tered into an agreement with the Government of Japan for the latter to supply construction equipment and some materials for work on 765 km

1/ Comparing all costs in US dollars, using an exchange rate of P 6.6 to US$1, representing the average value of peso during the period. - 3 -

out of the 925 km which were supposed to be included in the Bank project. Consequently, the Bank project covered only 160 km of road construction. It has not been possible to obtain a clear picture of the reasons for this unusual communications gap. However, it appears that a better dialogue between all parties concerned could have led to greater bene- fits for the Philippines. Road construction with the Japanese-supplied equipment was done by using small contractors and may have helped to stimulate the local contracting industry. But, as the PCR (para. 4.18) points out, the end product was of rather poor quality and, judging from the experience gained under che projecc, iL seems that better roads would have resulted if they had been executed under the Bank project. The highways concerned are of national importance and expected to carry heavy traffic volumes. If the Bank had been consulted on the matter, the alternative of using the Japanese equipment for construction of other less heavily travelled roads could perhaps have been considered.

Delays in the Completion of the Project Road

7. As pointed out earlier, due to civil disturbances in part of the project area, a section of the road was deleted from the construc- tion contract. In March 1975, the Government gave assurances to the Bank that the road would be completed as soon as security conditions in the area permitted. The remaining work consisted of reconstruction of sections of the old road, paving uf bridge appruaches and corrections of pavement failures in those parts of the road which were not included for complete reconstruction.

8. Two years later, in March 1977, an OED mission visited the proj- ect road, which was found to be mostly in satisfactory condition. How- ever, little progress had been made on completion of the works which were deleted from the original construction contract. In part, this was due to still somewhat uncertain security conditions, but it also appeared that the authorities had not assigned the work the highest priority. Actually, the mission found that no arrangements had been made at all for reconstruction of a 10 km section of the road. A contributing factor to this lack of progress was that the East Asia Projects Depart- ment did not continue with regular supervision (i.e, other than making ccasional inquirias o the status of the work in connection with supervision of subsequent projects) in spite of the fact that only the original construction contract but not the entire project had been completed. Early completion of the entire road was the more important since, without this, there was a risk that, under extreme weather condi- tions, traffic would be impeded due to the uncompleted links. Lately, the East Asia Projects Department has resumed their supervision of the project road and progress is being made towards its completion.

The Successful Introduction of Local Consultants

9. The attached PCR discusses the role of consultants in the project, which was generally satisfactory (PCR, paras 3.22-3.31). A point which seems to deserve more emphasis than it has been given in the PCR is the increasing involvement of local professional staff. As pointed out in the PCR, construction supervision of the project road was the responsibility of expatriate consultants, but, at the Govern- ment's request, part of the supervision staff consisted of DPH en- gineers. The latter, however, did not come fully under the consul- tants' jurisdiction, which led to a difficult working relationship.

10. Even though the above-mentioned approach was not entirely successful, there was still a strong feeling in the Philippines that local engineers should play a more important role. In 1972, when design work financed under the project in preparation for the Second Highway Project was to be undertaken, the Government and local consultants insisted on a more significant role by Filipino engineers. The Bank was receptive to this idea and it was agreed that foreign firms would be invited to submit proposals in joint ventures with local firms, ex- cept for the design for the expressway section for which, due to its complexity, only a foreign firm (Norconsult) was considered. Contracts for detailed engineering covering 613 km of highway were awarded to foreign/local joint ventures, while a DPH design team designed an addi- tional 79 km (PCR, Table 4);l/ all design teams were assisted in varying degrees by the coordinating consultants (see para. 12). The introduction of local consultants in this field was generally successful and the same joint ventures were awarded contracts for subsequent construction super- vision. Under the Second Highway Project, design work by local consul- tants was taken one step further by inviting local firms only, but with the stipulation that they were expected to propose expatriate personnel whenever local skills were not available. This new approach appears to work satisfactorily and the necessary expatriate staff have been in- cluded. For feasibility studies and technical assistance to DPH, fi- nanced under the Third Highway Project, foreign consultants are still employed by the Government, because for this work available local skills are too limited.

11. In the Philippines, several reasons can be identified why the change to using local consultants for design and construction super- vision of civil works could be quite rapid, which may not always apply to other countries. Most important of these are the large number of engineers available; the relative ease of the Filipinos to work jointly with expatriates; and the fluency in English of educated Filipinos.

1/ One contract was with Norconsult/DCCD (Norway/Philippines) covering 157 km of road and is not covered by the PCR table, because it was financed retroactively from the second highway loan, even though it was awarded during the same period as the other contracts. - 5 -

The Need to Assist DPH with the Administration of World Bank-Financed Contracts

12. Where the project included several contracts for highway de- sign, a need existed for the coordination of such aspects as design standards and contract conditions. Since DPH appeared to have insuf- ficient staff for this work, it was decided to use consultants. Nor- consult was selected to carry out this task, in addition to the design contract for the expressway which had been awarded to them. The firm was already familiar with all roads.to be designed, since they had car- ried out the feasibility studies.

13. The coordination work, however, was not very successful. Fac- tors which contributed to the weakness of the coordinating role were that little extra time had been allotted for this function in addition to the regular design work and that Norconsult lacked authority over the other consultants. Seen in retrospect, a better solution may have been to assign the coordinating task to the Kampsax/Berger team which was providing technical assistance to DPH at that time. Their task al- ready included, among others, assistance to improve DPH's organization and highway planning, and a review of design standards; the coordinating work would therefore have well fitted into their assignment.

14. From the above experience, it became clear that some form of assistance to DPH for the administration and coordination of World Bank- financed contracts was essential and that a different approach had to be devised. The matter became especially urgent with the Second Highway Project approaching, which was to include numerous consulting and con- struction contracts. A solution was found in the creation in DPH of a special IBRD Projects Office, which started operations in the second half of 1973, but was financed under the Second Highway Project. This office, for the first two years, was headed by an experienced Bank staff member who was seconded to DPH; the same person has subsequently acted as advisor to his Filipino successor. The effort has been successful in expediting Bank projects and ensuring that the Bank's rules were properly interpreted. This arrangement has also made a substantial con- tribution to the feasibility of using local consultants, since a qual- ified and impartial outsider could assist with the evaluation of local skills. A main contribution to the success of the Special Projects Of- fice was the availability of a competent expatriate, who enjoyed the confidence of the Secretary, DPH, and was accepted in a line function in DPH. DPH staff have also made a substantial contribution to the work of the Office. The institution of a Special Projects Office has been very useful; however, out of necessity, this Office had to undertake various functions which properly belong to regular units of DPH and the attempts to transfer these back have only recently led to results. A lesson to be learned from the above experience is that special offices created to assist in project implementation can be very useful but should be designed to be self-eliminating to avoid that -they become a permanent entity in the organization. - 6 -

IV. Conclusions

15. The project has been mostly successful and problems during implementation were largely due to the civil disturbances in the proj- ect area which could not have been foreseen at the time of appraisal. These have contributed to higher costs and lower traffic growth, but as a result of the oil price increase, vehicle operating savings on the new road have also increased and the project's reestimated economic re- turn is still satisfactory at 15%.

16. Progress on the road section which had to be eliminated from the original construction contract due to the civil disturbances and was to be completed by the Government has been slower than necessary. This experience points at the need to continue full supervision by Bank staff until the entire project has been completed.

17. At the time of appraisal apparently no definite understanding existed between the Bank and the Government on the roles of the Bank and other aid donors in the financing of the road reconstruction program. This points at weaknesses in the Bank's dialogue with the Government in formulating the development program and the need for better coordination between aid donors in order to optimize the use of foreign assistance.

18. The tranefer cf r oili f enginering and construction supervision from expatriate consultants to local firms and the rapid in- crease in local staff employed provide a good example of the possibili- ties in this field. However, the example will have to be handled with care, as the favorable conditions prevailing in the Philippines may not always exist elsewhere. - 7 - ATTACHMENT I

PHILIPPINES

PROJECT COMPLETION REPORT

FIRST HIGHWAY PROJECT

I. Introduction

1.01 The Philippine Transport Survey (PTS), carried out by consultants, Metra International/Sauti (France/Italy) in 1968/70, was financed by UNDP with the Bank acting as executing agency. This study recommended improvement of about 6,000 km of the national road network which then comprised just over 18,000 km of roads. The First Highway Project was a direct result of that study, representing the Bank's first involvement in the highway subsector in the Philippines.

1.02 The major component of the First Highway Project was the improve- ment of the Cotabato-Digos Road (160 km) on the island of Mindanao. This road provides the only overland link between eastern and western Mindanao, the second largest Philippine island. The road also serves high-potential agricultural areas, which prior to implementation of this project, were effectively isolated each year during the rainy season.

1.03 The project also included consulting services for detailed engineer- ing of this road and of 765 km of other roads on Luzon (portions of the Pan-Philippine Highway) which were later constructed through Japanese bilateral aid. In addition, the project included feasibility studies of about 1,140 km of other high priority national roads on Luzon and detailed engineering of those sections found to be economically feasible. These economically feasible road links formed the basis for the Second Highway Project (Loan 950-PH). Technical assistance to the (then) Bureau of Public Highways (BPH) was also included, for improvement in road maintenance operations and organization. The loan also included capitalization of interest during construction.

1.04 Although the loan amount was completely disbursed by April 1976, the work on some sections of the project road has not been completed due to civil disturbances in the area. For this reason, the full economic impact of the project foreseen at appraisal has not yet been realized.

II. Project Preparation and Appraisal

2.01 Subsequent to its identification as a high priority project in the PTS, the economic feasibility of improving the Cotabato-Digos Road was con- firmed in a subsequent feasibility study. Detailed engineering was then carried out by a consulting firm, Renardet-Sauti-ICE (Italy), beginning in February 1970 who also undertook the detailed engineering of the Lucena-Legaspi and Cabanatuan-Tuguegurao sections (765 km) of the Pan-Philippine Highway under the same contract. Renardet-Sauti-ICE (Sauti) provided only a few expatriates who occupied the key staff positions on the design team. The majority of the staff were seconded from BPH to Sauti for the duration of the design effort.

2.02 Originally, the Government had indicated that construction of this 765 km portion of the Pan-Philippine Highway would be part of the proposed project. Detailed design of these two road sections was therefore agreed - 8 -

to by the Bank, costs to be retroactively financed. During appraisal, however, the Government informed the Bank that these two road sections would be constructed with Japanese bilateral assistance instead. Nevertheless, the loan included the foreign exchange costs of the detailed engineering for these two roads which, at the time the loan was made, had been completed.

2.03 At the Government's request, the consulting services providing feas- ibility studies of another 1,140 km of national roads on Luzon and the technical assistance to BPH for improvement of its administration, organization and road maintenance operations were financed by UNDP, with the Bank acting as executing agency. The feasibility studies identified about 700 km of high priority roads found to be economically feasible for which detailed engineering was later performed under this project and financed by the Bank. These roads were later constructed and/or improved under the Second Highway Project (Loan 950-PH).

2.04 The project consisted of:

Part I: Items financed by the Bank Appraisal Cost Estimate /1 US$ million

(a) Construction and improvement of the Cotabato-Digos road (160 km) 7.1

(b) Consulting services for:

(1) detailed engineering of 925 km of road including (a) 1.5

(2) construction supervision of the Cotabato - Digos Road 1.0

(3) Detailed engineering of 700 km of roads resulting from feasibility studies performed under this project ((d)(1) below) 2.6

(c) Interest during construction 1.2

Subtotal (I) 13.4

Part II: Items financed by UNDP

(d) Consulting services for:

(1) Feasibility studies (1,000 km) 1.1 (2) Technical assistance 1.3

Subtotal (II) 2.4

Total Project Cost (Appraisal) 15.8

/1 Appraisal cost estimates were determined on the basis of detailed engineering. Estimates include contingencies. - 9 -

2.05 Particular covenants in the Loan Agreement required, inter alia, that the Borrower:

(a) implement certain interim reorganization measures /1 as agreed with the Bank during the time the technical assistance consultants were preparing their final recommendations;

(b) formulate, within one year after the date of the Loan Agreement with the aid of the technical assistance consultants, a program satisfactory to the Bank to provide adequate maintenance funds for the national road network and for the improvement of its highway maintenance operations; properly maintain and repair all highways in its national highway system; and provide all necessary funds, equipment, workshop facilities, labor and other resources required for these purposes;

(c) review, in consultation with the Bank, the need for the provision of further consultants' services to BPH prior to the completion of the technical assistance services being provided under this project;

(d) take all necessary steps to ensure that the dimensions and the axle loads of vehicles using the highways in its national highway system do not exceed limits appropriate to the design standards of the highways.

2.06 The project was financed by a loan of US$8.0 million to cover the foreign exchange costs of Part I of the project, including US$1.2 million for capitalization of interest charges during construction. UNDP agreed to help finance the foreign exchange cost of Part II of the project, estimated at US$1.9 million. The local costs of the project, estimated at US$5.9 million equivalent, were to be met by the Government and no particular difficulties in funding were anticipated.

III. PROJECT IMPLEMENTATION AND COST

Construction of the Cotabato-Digos Road

3.01 The Cotabato-Digos road traverses some of the richest agricultural areas (rice and corn) in the Philippines as well as connecting the two main cities and administrative centers on Mindanao, Cotabato and Davao. Improve- ment of the road was expected to provide year round access to areas previously isolated each year during the rains when some sections of the road became impassable (see map 3189 attached).

/1 These involved: reorganization of BPH's headquarters and regional structure; separation of construction and maintenance functions within the district organizations; establishment of regional and district workshops; introduction of maintenance planning; reduction of staff; and institution of a training program. - 10 -

3.02 After contract documents had been completed by the Consultants and prequalification of interested contractors completed, bids were let in late 1971 on the basis of International Competitive Bidding (ICB) in accordance with Bank guidelines. Subsequently, the contract for the improvement of the Cotabato-Digos Road was awarded to Philippine Rock Products Inc. (Philrock), a local firm. The contractor was given notice to proceed on March 6, 1972. The construction period was originally 900 days but was extended twice by a total of 439 days to allow for:

(a) loss of time due to suspension of works at the Cotabato end caused by civil disturbances;

(b) delays due to financial problems caused by sharp increases in the prices of fuel, materials and equipment and the nonavailability of spare parts and certain basic materials (such as cement and steel) following the oil crisis in late 1973; and

(c) unusual weather conditions.

3.03 The construction began well and continued on schedule for about 6 months. Then civil disturbances began in Mindanao, particularly in Cotabato Province, and the situation deteriorated rapidly. Martial Law in the Philippines was declared on September 21, 1972. Despite the difficult situa- tion, the contractor continued to perform satisfactorily until the personal safety of his employees became threatened. Following serious civil disturb- ances around Cotabato City in early 1973, works were suspended by order of the Government, effective from March 9, 1973. On March 22, 1973, the contractor was instructed to commence works from the Digos end of the road where condi- tions were considered safe.

3.04 From that time on, progress not only fell behind but steadily deteriorated until the contractor was 40% behind the original schedule in April 1974. Several revised progress schedules were drawn up but they were not maintained. The contractor had a claim for suspension of works outstand- ing from September 1973 and, in addition, he was severely affected by the sharp increase in prices in early 1974 for which no provision for compensation had been made in the conditions of contract. He was obviously in dire financial trouble; he was in debt to his suppliers, his line of credit had been cut off and full payments were now required in advance by suppliers. To make matters worse there was an unusually long rainy season.

3.05 Although the Government and its consultants were at fault in not dealing promptly with his claims, the contractor too was at fault in not having enough working equipment on the site, especially for hauling. His financial reserves were not adequate to cover this situation and he had to reduce his production in order to keep his cash flow to a minimum until financial relief was in sight. After about a year, in September 1974, the contractor was paid about P 3.6 million as compensation for damages suffered because of suspension of works which represented only a partial settlement of - 11 - his claim. Price adjustments were also agreed from May 1, 1974. The con- tractor was not satisfied with the Engineer's award on his claim for suspen- sion of works and he further contended that he has suffered loss as a result of the deletion of the unfinished works in the section of the road affected by civil disturbances. He gave notice that the dispute be referred to arbitration and proceedings are currently underway.

3.06 Construction progress improved but the contractor continued to adopt a policy of minimum investment in this road as opposed to the construc- tion of the Las Pinas - Tagaytay Road financed under the Second Highway Project (Loan 950-PH) which he won in August 1974. He principally lacked hauling and compacting equipment. Due to the continued civil disturbances, in February 1975, the Government deleted 69 km of the road from Philrock's contract. The reduced amount (91 km) of the road works was completed in August 1975 and the period of warranty commenced on August 29, 1975.

3.07 Overall, the work completed by Philrock is of good to very good quality. Except for some minor centerline crackling on one section, the concrete pavement is in very good condition and shows no signs of structural cracking or distress. The shoulders are in surprisingly good condition considering that meaningful routine maintenance has started only recently. Drainage facilities and structures also show good quality construction but require maintenance attention to avoid deterioration.

3.08 After completion of the road works under contract to Philrock in August 1975, the road was handed over to the Department of Public Highways (DPH) /1 for maintenance. The 69 km of road deleted from Philrock's contract was to be completed by the DPH through force account. Due to increased costs, the Government and the Bank agreed that Bank financing would be used only for a 34.5 km section of road left unfinished by Philrock due to deletion from the contract. Subsequently, the DPH awarded a negiotated contract for the comple- tion of roadworks on this section to another local contractor, Liberty Construc- tion and Development Corporation, who began work in February 1976. The Government agreed to complete the balance of the unfinished work on the rest of the 69 km deleted section through force account, using its own funds and some work has been accomplished.

3.09 As of October 1978, only about 80% of the 69 km deleted portion had been completed although work began in the summer of 1975. Conditions are still unsafe and it is uncertain as to when all the remaining works will be completed. Each of the four sections into which the work was divided is discussed below:

Section 1 (3.77 km)

3.10 The work consisted of completing the base, pavement and shoulders throughout the section. All work was completed in late 1975 by administration (force account) under Region XI; /2 the quality is generally fair.

/1 The Bureau of Public Highways became a full Department in May 1974.

/2 The DPH has 13 regional offices throughout the Philippines. These "Regions" are responsible for construction and maintenance of the national roads in their jurisdiction. - 12 -

Section 2 (2.18 km)

3.11 Work in this section also consisted of base, pavement and shoulders to be done by force account by Region XII, but as of October 1978, very little work had been accomplished. Necessary funds were included in the 1976 and 1977 budgets but funds released were substantially less than requested and no allocation was made to this section as priority was given to Sections 3 and 4 because of the relatively large amount of work necessary in those sections and the long construction periods expected for those sections (see Table 1). The Ministry of Public Highways (MPH) Region /1 (Project Office) estimates that all work can be completed within one year after funds are made available. The 1978 budget contained funds for this section. However, of the p 7.845 million released during 1978, only P 188,000 was applied to this work, the balance be- ing used to pay outstanding contractual obligations. Section 3 (28.82 km)

3.12 The net length of construction in this section was about 10 km and consisted of reshaping and recompacting the base, concrete paving and shoulders. The work is being done by force account by Region XII. No funds were allocated to this section in 1976 (see Table 1) as priority was given to outstanding obligations to Philrock under the original contract and to Section 4 which contains the bulk of work required to complete the deleted portion. Because of the very substantial budget cut in 1977, only P 3 million of the more than P 13 million required was allocated with the result that only about 2 km of base and concrete paving and somewhat less shoulder work had been completed as of early 1978. The 1978 budget contains funds for this work and some monies have been released. The quality of completed work is fair. The Region estimated that 8-10 months will be needed to finish all work after the release of all of the needed funds; this estimate seems reasonable provided that the security situation improves.

Section 4 (34.50 km)

3.13 This work was awarded through negotiation to a local contractor, Liberty Construction and Development Corporation (Liberty), in November 1975 at a price of P 14.97 million. Although the section is 34.5 km long, only about 6 km of base reconstruction and paving was required with shoulder work extending through most of the section. The contract period was 9 months but several extensions have been granted because of alleged bad weather and peace and order problems. Work is presently (October 1978) about 97% completed and is of fair to good quality. Total cost to date including extra work and price adjustments is P 17,130,106.

3.14 The contractor suffered from a serious cash shortage as he had been paid only P 1.80 million out of P 6.95 million earned through 1977 due to the Government's financial difficulties in 1976 and 1977. This situation contrib- uted heavily to the delays in completing the work. Payment has now been made but unsafe conditions preclude further work at present to bring the project to 100% completion even though funds are available in the 1978 budget.

/1 The Department of Public Highways became a "Ministry" in May 1978. - 13 -

3.15 Since the closing of the loan on June 30, 1976, the responsibility for monitoring progress has been undertaken by the Bureau of Construction and Maintenance (BCM) of MPH in Manila. However, no periodic status or progress reports had ever been submitted by the two MPH regional offices involved and consequently, MPH headquarters remained unaware of the situation. The responsible MPH headquarters staff did not investigate the situation until early 1978 when they visited the site in an attempt to ascertain the state of affairs. The Bank, mainly due to the unsafe security conditions in the project area, could not supervise the project as'clo8ely as would have been desirable.

Construction Contract Data and Costs

3.16 Contractor: Philippine Rock Products, Inc. (Philrock) Nationality: Philippines Contract Award: February 5, 1972 Mobilization Period: 2 Months Commencement of Construction: April 5, 1972 Original Completion: September 22, 1974 Revised Completion: December 5, 1975 Actual Completion: August 29, 1975 Contract Sum (Bid): Y 39,310,550.00 (US$ 5.8m) Total Paid to April 1978: Y 40,843,321.94 Claims under Arbitration: Y 13,194,645.46 Maximum Possible Contract Cost: P 54,037,977.40 a!

a! Assuming all outstanding (about P 8 million) price adjustment claims are granted and some portion of other claims are approved, the total contract cost will vary from about P 49 million to P 54 million.

3.17 Data on the final cost of construction under the contract with Philrock is shown in Table 2. Some of the contractors claims are still in arbitration so it is not possible to know the final contract cost at this time. Table 2 also shows the final cost of construction supervision by Sauti but no data are available on the cost.of supervisory staff furnished by the DPH.

3.18 The estimated value 1/ of the works executed by Philrock is slightly higher than the bid sum despite a reduction in the original scope of works of about 18%. 2/ The increase in cost is due to:

(a) an increase in quantities of about 13% of the workd;

(b) substantial increases in prices in fuel, materials and equipment since the oil price increase in late 1973; and

1/ Not including outstanding claims. 2/ On the basis of the original bid sum, reduced by works eliminated from the contract and not including extra works or quantity overruns, the cost overrun would be 26%. - 14 -

(c) compensation paid to the contractor for damages suffered by him in respect of (a) loss of time due to imposition of curfew following declaration of martial law in September 1972, (b) loss of time due to civil disturbances early 1973; and (c) suspension of works, demobilization at the Cotabato end and remobilization at the Digos end.

3.19 The final construction cost for the approximately 69 km deleted from Philrock's contract is also not known as portions are not yet completed. The current MPH estimate (see Table 3) for the 4 sections into which the work was divided is:

Section 1, 3.77 km - P 1,500,000 Section 2, 2.18 km - 1,001,170 Section 3, 28.82 km - 13,300,000 Section 4, 34.50 km - 17,130,106

P 32,931,276

As shown in Table 2, the contract value of remaining work on the 69 km deleted was about P 6.9 million but the above estimate is well over 4 times that amount./1 Admittedly, the contract value is based on prices bid before the oil crisis but even the most generous price adjustment should no more than double or triple the contract cost. It was not possible to ascertain the reasons for such a large increase. The cost for Section 4, the only one of these sections which is being partly financed by the Bank, is based on a negotiated unit price contract with a local contractor. The estimated cost for the other sections, being carried out by force account, has been determined by the MPH regional offices involved.

3.20 Total project cost, including the force account work but excluding unsettled contractor's claims, is expected to be about US$20 million equiva- lent (including UNDP-financed consulting services for about US$2.4 million) compared to the appraisal estimate of US$15.8 million equivalent, an increase of 27%. Contractor claims may increase this total cost substantially. Details of project cost are shown in Table 5.

3.21 Cumulative disbursements were between 50-74% of the appraisal estimate for any quarter. Disbursement virtually came to a standstill in 1973 because of the suspension of works but increased later in 1974. All loan funds had been disbursed by April 6, 1976. The loan closing date had been extended from May 15, 1975 to June 30, 1976. The schedule of disbursements is shown in Table 6.

/1 Government's revised estimate as of late 1975 was P 10.106 million. Using this amount as base, the contract cost more than tripled. - 15 -

Consulting Services

3.22 General. Data concerning consulting services (including UNDP- financed Road Feasibility Studies and Technical Assistance) are given in Table 4. All consulting services financed under the project were completed on schedule except for the construction supervision of the Cotabato-Digos Road which was extended by over one year because of the problems mentioned in paras.3.03 to 3.06 above. The UNDP-financed Road Feasibility Studies were completed on schedule. The UNDP-financed Technical Assistance Services had not been completed by the end of the contract period and an extension of two months was allowed, during which time terms of reference were prepared for a new contract to be financed under the Second Highway Project (Loan 950-PH). The revised terms of reference included the preparation of a Five-Year Road Maintenance Program. This work was completed in April 1976. All consulting services were carried out satisfactorily except for a few problems in connec- tion with the construction supervision of the Cotabato-DigGs Road and the UNDP-financed Technical Assistance.

3.23 Construction Supervision. Sauti, the consulting firm that had carried out the detailed engineering for the project road, was appointed to supervise its construction as well. They began their work in September 1971 and completed their contract in September 1974 when MPH took over the balance of the supervisory work. Their performance was mixed; the technical supervision of the project road was excellent (as reflected by the quality of construction) but there were some shortcomings in contract administration.

3.24 During the period when the works were suspended at the Cotabato end and resumed at the Digos end, the contractor's output fell off due to inade- quate financing, lack of equipment and poor management. This situation could have been partially reversed by more active involvement and cooperation from the consultants. The general feeling among MPH staff who were connected with this project was that the consultants did not fully cooperate with the contractor in the beginning to improve his performance and were slow in alerting MPH concerning current and prospective problems.

3.25 However, this assessment of the consultants' performance should be judged against the background of several important circumstances. First, the supervision agreement made Sauti fully responsible but specified that they provide only key staff with all other engineers, inspectors and surveyors being MPH personnel. At the start, many of those MPH staff exhibited no loyalty to Sauti and quite often refused to perform overtime work or duties outside their specialty by citing Government regulations, lack of compensation, etc.

3.26 This was also one of the first Philippine highway projects where the contractor was required to meet fully the specifications and conditions of contract. As this was a substantial departure from normal procedures in the past, it naturally led to considerable friction between Sauti's staff and the local contractor in the early months of construction. Finally, the project area is quite undeveloped with attendant difficult living conditions and the peace and order situation along the majority of the road deteriorated continuously to the point where personal safety was often questionable during a greater part of the construction period. - 16 -

3.27 In addition to these basic problems, Sauti's initial attitude towards the assigned MPH staff was one of considerable uncertainty about their competence, with the result that there was no delegation and all decisions and approvals were made by the expatriates. This increased the tension in the consultant's ranks and, because there were delays to the work inherent in such a system, it provided the contractor with frequent opportun- ities to complain. However, things began to improve after the first few months due mainly to a change in Sauti's Resident Engineer and to mediation efforts by MPH Headquarters. Although the ideal consultant/contractor team effort was never established fully, a fairly smooth running consultant team developed.

3.28 During the early months of construction, Sauti's staff had a tendency to apply the specifications in a very rigid manner regardless of possible alternatives which might produce acceptable end results. This also improved considerably after the change in Resident Engineer but it added to the initial consultant/contractor friction which never completely disappeared.

3.29 Technical Assistance. Technical assistance was to be provided to the MPH to improve its administration, organization and road maintenance operations. Kampsax/Berger (Denmark/USA) was appointed for an initial period of two years to carry out this assignment. During the first year, the consultants were required to formulate a comprehensive reorganization scheme for the (then) BPH to facilitate implementation of improved project planning, execution, and maintenance operations. During the second year, the consultants were required to assist the BPH to carry out the consultants' recommendations. At the end of the contract period in August 1973, the consultants had not completed the implementation phase of their technical assistance. The major constraints to the progress of the consultant's work arose from the following:

(a) the inability of the BPH to move unilaterally on a reorganization program since it had to await a general government reorganization;

(b) the fact that July 1, 1973 was the earliest date by which the changes in the law relating to the Highway Special Fund could be put into effect; and

(c) the drain on resources that resulted from the aftermath of the Central Luzon floods created a lack of special financing to execute the pilot areas road maintenance and equipment program.

3.30 The consultants' own performance was satisfactory. During the course of their work they accumulated a wealth of information which was later found to be very useful to DPH staff in performing their functions. However, the consultants' progress reports, while acceptable, sometimes required clari- fication and amplification. The consultants continued their work under new terms of reference and a contract financed under the Second Highway Project (Loan 950-PH) which placed emphasis on road maintenance and included the formulation of a Five Year Maintenance Program for the period FY76-80 and the preparation of a road maintenance manual. The consultants satisfactorily completed their work in May 1975. - 17 -

3.31 Feasibility Studies and Detailed Engineering. The detailed engineer- ing of 925 km of roads in Luzon (including the project road) was carried out by Sauti (Italy) prior to appraisal of the project (in early 1971) and included in the loan for retroactive financing. The UNDP-financed feasibility studies covered about 3,140 km of national roads on Luzon and were satisfactorily completed in 1972. The studies found about 700 km of these roads to be feasible and with Bank concurrence, the Government appointed consultants to proceed with the required detailed engineering. Under this project, the detailed engineering of the 700 km of roads was completed satisfactorily in late 1973 and about 600 km of these roads were constructed or improved under the Second Highway Project (Loan 950-PH).

IV. Performance and Organization of Borrower

General

4.01 During the project period, major events took place in the country beginning with the declaration of Martial Law on September 21, 1972. The entire Executive Branch of the Government was reorganized and performance generally has improved.

Organization of Ministry of Public Highways (MPH)

4.02 The old Bureau of Public Highways, the agency responsible for the execution of the project, has been completely reorganized and, in May 1974, it was upgraded to Department status. It has since become a Ministry along with the other Government Departments. The reorganization was based on a report published in March 1973 by the Presidential Commission on Reorganization and on recommendations by the UNDP-financed Technical Assistance consultants, Kampsax/Berger (Denmark/USA).

4.03 The new organization includes the implementation of certain interim measures which were agreed with the Government during negotiations. The measures were aimed at separating the administrative and technical functions, reducing the number of divisions, dividing construction and maintenance responsibilities and strengthening the regional offices.

4.04 In September 1973, a Special Projects Office was established in DPH to administer and supervise Bank-financed projects. It was headed by a Bank staff engineer on secondment to DPH until July 1975 when his place was taken by his Filipino deputy. In October 1976, he returned to serve as an advisor for a two-year period.. There has been considerable improvement in the channels of communication between the Government, Consultants and Contractors. The office is also making the Minister aware of procedural delays within MPH which are affecting project execution.

Highway Maintenance and Axle Load Control

4.05 The budgeting procedures for highway maintenance have been greatly improved by the adoption of the Kampsax/Berger recommendations. A Highway Special Fund /1 as recommended by the consultants, was established in

/1 All special funds were abolished in May 1976. - 18 -

July 1973 to provide adequate funds for the maintenance of the national and provincial road networks. Allocation of maintenance funds is now based on a formula which relates maintenance costs to road length, surface type, width, traffic levels and length and type of bridges. A portion of the funds is supposed to be devoted to maintenance engineering to enable the technical requirements to be determined.

4.06 Maintenance expenditures have increased to a high level since the recommendations by Kampsax/Berger were adopted by MPH. In FY73, P 336 mil- lion was spent on maintenance, about 100% higher than the appraisal report projections. Due to the problems created by the oil crisis in 1973, expendi- tures slumped to P 209 million in FY74, still about 30% higher than forecast. In FY75, expenditures rose to a record level of P 384 million. However, physical execution of road maintenance is very far from being satisfactory. In order to assist the Government to implement the Five-Year Maintenance Program recommended by the Consultants, provision was made under the Third Highway Project (Loan 1353-PH) for the construction of workshops, for the procurement of maintenance equipment and spare parts and for the provision of technical assistance. The Government also undertook in a Side Letter (dated January 1977) to the Loan Agreement to allocate maintenance funds in accordance with an agreed program.

4.07 Despite the increased emphasis on proper maintenance on the part of the Bank and the inclusion of funds in the Third Highway Project (Loan 1353-PH) to assist in improving maintenance capabilities, lack of attention to mainte- nance continues to be a serious problem. On numerous occasions during field inspections, the Bank missions pointed out the complete lack of routine maintenance to MPH officials who invariably offer the following reasons: shortage of funds; lack of equipment; and the need to use maintenance funds for emergency repairs. However, the real reason for inadequate past routine maintenance appears to be a lack of interest at all levels of MPH personnel and the failure of Headquarters and Regional management to monitor this important activity. An additional reason is the diversion of maintenance funds to new construction, calamity repairs and other uses. Shortage of maintenance funds is no longer a valid excuse as almost all funds requested in 1977 and 1978 have been released on schedule.

4.08 In view of the continued lack of progress on the Five-Year Mainte- nance Program included in the Third Highway Project the Bank's appraisal mission in October 1977 recommended that the processing of the proposed Fourth Highway Project be held in abeyance pending tangible progress on road mainte- nance and restoration work. Subsequently, the Bank insisted that the MPH define its maintenance/restoration work more clearly in an action program which the MPH then was to implement with the help of consultants. As of October 1978, some progress had been made with indications that the MPH now was attaching much more importance than heretofore to its maintenance opera- tions. Accordingly, the Bank decided to proceed with the processing of the Fourth Highway Project, continuing to stress the importance of proper mainte- nance. - 19 -

4.09 With respect to the maintenance work on the project road, the northern 132 km is the responsibility of Region XII with headquarters in Cotabato and the southern 24 km falls under Region XI in Davao. Considerable maintenance effort was observed in Region XII although much of it has obviously started only recently under pressure from the Bank for improved performance. The quality of work is generally good and, except for short stretches of old pavement and the sections still under construction, the road in Region XII is in good condition. There is little evidence, however, of past maintenance effDrts cn the Region XI sectinn, a"d rnniA =nA ontinme- deterioration, espe- cially of the old concrete pavement sections, may be anticipated if maintenance efforts are not undertaken without delay.

4.10 A permanent weighbridge installation is planned at Simuay Junction near Cotabato. All funds needed for comprehensive, country-wide axle load control and traffic counting programs were included in the MPH 1978 budget request. However, construction of the weighbridge installation has been delayed and the control and enforcement program has not yet begun. Addition- ally, there has been no use on this road of the portable loadmeters distributed to the Region during 1977. MPH cited civil disturbances as an additional complicating factor.

4.11 The seriousness of the failure to comply with the implementation of an agreed axle load control Drogram had been brought to the attention of the MPH by the Bank missions in 1977-78. Since then the MPH has been making efforts to implement the program by conducting seminars and workshops with all Regions and expects to begin a country-wide program before the end of 1978.

Extent of Damage Done by Overloaded Trucks

4.12 There is no evidence that overloaded trucks have caused any damage to the new concrete pavement and structures on this project. However, there are signs of major pavement distress on many of the sections where existing pavement was incorporated into the project. This distress is particularly evident on the 16 km of old concrete pavement north from Digos, on some short sections of concrete pavement built by the Army Engineers about 8-9 years ago in Sections 3 and 4 still under construction, and on some portions of the 8 km of existing asphalt pavement in the Kidapawan/Makilala area. The old concrete pavement is very badly cracked in most cases with considerable spalling of the crack edges and there is rutting and washboarding on portions of the asphalt. Also on the southern 16 km there is serious pavement settling and cracking at the abutments of 4 bridges. At some sites, asphaltic materials had been placed in the settled areas but this has been pounded out by traffic.

4.13 No test pits or core borings have been made in the distressed areas so it is not possible to pinpoint the causes of failures and settlement. The reasons could be due to one or a combination of the following factors: improper compaction of subgrade, inadequate base, understrength pavement and overloaded vehicles. The Regional Directors have agreed to carry out the investigations needed to determine the causes of failure and then to program needed repairs. - 20 -

Improvement Work Designed Under the Project but Constructed with Japanese Financed Equipment

4.14 The First Highway Project financed detailed engineering of the Cagayan Valley road in central and northern Luzon and the main national road through the Bicol Region in Southern Luzon in addition to the Cotabato-Digos Road in Mindanao. Only at appraisal was it learned that these first two roads were part of the Philippine-Japanese Friendship Highway (PJH) for which the Japanese had agreed to furnish construction equipment and bridge steel. Work on the PJH started in January 1971 and at present the total project is claimed to be completed.

4.15 The PJH project was divided into some 60 separate contracts for competitive bidding but the qualifications of most bidders were not really checked and a very large number of contracts were awarded to incompetent contractors at prices which often bore no relationship to real costs. The result was poor quality of work, numerous bankruptcies and long delays. This was not the result of poor design (except in isolated cases where foundation problems exist) since the same design standards were used on all roads (includ- ing the Cotabato-Digos Road). The Cotabato-Digos road was generally constructed to the prescribed standards and specifications and is, by comparison, a good and safe facility. The fault appears to lie in lack of planning and organiza- tion, inadequate prequalification procedures, poor or non-existent supervision of bidding and construction activities and lack of proper management at all levels.

4.16 Field inspections on the road sections for which all contracts have been reported complete revealed that with a few exceptions, the quality of work is poor. Most of the concrete pavement has very bad riding qualities and a significant portion has already cracked badly indicating understrength concrete, inadequate base, poorly compacted subgrade, or a combination of all. Perhaps the most serious deficiency on all but a few sections of the PJH inspected is the lack of proper shoulders. On many contracts no shoulders were built at all and on most others the material was merely dumped and bladed without any compaction or selection of proper materials, particularly on the surface. The result is extensive erosion, in some cases leading to pavement failures, and very dangerous driving conditions caused by a vertical drop at the pavement edge, often up to 10-12 inches in depth. Very inadequate routine maintenance is compounding the problems. Thus, the improvement of the PJH roads designed under this First Highway Project cannot be classed as an unqualified success.

Undertakings in the Loan Agreement

4.17 All undertakings have been complied with except for: (i) the maintenance of parts of the project road completed before the suspension of works in 1973 and handed over to the MPH for maintenance; and (ii) control of axle loads. Axle load control has only recently been instituted under the Second Highway Project (Loan 950-PH), some five years behind the time originally envisaged. - 21 -

4.18 Some stretches of the project road from the Cotabato end were completed before the suspension of works in 1973. Since then no maintenance work appears to have been done until recently (para. 4.09). Because of insecure conditions in the area, workers leave early to return to their homes and this has had an adverse effect on maintenance operations. The Minister, MPH, has promised to monitor future maintenance works on the project road and has undertaken to insure the performance of adequate maintenance in addition to repairing damaged parts of the road.

V. Economic Reevaluation

5.01 The primary objectives of the project were to:

(a) reduce transport costs on the project road which is the only east-west link in central Mindanao; and

(b) improve the highway organizational set-up and its operations, particularly for road maintenance;

With respect to the objective, (a), the new road clearly reduced transport costs although its full impact has not yet been realized due to continuing unrest in the influence area. It is difficult to predict when the unrest will end, although 1980 was assumed to be the year when all road sections are to be completed and peace and order will be restored. The economic reevaluation quantifies only the benefits from reduced vehicle operating costs from what they were at the time of appraisal. The rate of return estimated during appraisal was 18%, as compared with an ex-post return of 15%. A 10% increase in cost, as a result of awarding of contractor's claims under arbitration, woule yield a 14% return. A 20% reduction in benefits would yield a 12% return, while a combined 10% increase in cost and 20% reduction in benefits would yield only 11%.

5.02 The VOC savings on bus and truck traffic account for 65% of the total benefits. This is a reasonable estimate considering the potentially rich agricultural area the road serves. Despite the unsafe conditions in the influence area, the growth in log, rice and corn traffic has been substantial. If peace and order are restored by 1980 at which time project completion is anticipated, the ensuing years should witness rapid growth in all types of traffic, with a gradual tapering of growth rates between 1985-99.

5.03 The estimated traffic growth rates for 1975-79 are modest for jeepneys and buses with a 2% annual growth rate but much higher for cars and trucks with 6% annual growth. These growth rates are lower than those anticipated during appraisal due to continuing civil disturbances. However, once the conflict is over, high traffic growth rates ranging from 6-10% are expected in the early 80's (see Table 8). These estimates are based on the national averages adjusted for expected population and income growth and increase in agricultural production anticipated in the influence area of the project road. The benefits accuring in the years, 1975-79, have been calculated only for the portions of the road completed or expected to be completed in a particular year (see Table 8). - 22 -

5.04 The above analysis, however, suffers from the lack of a firm data base, particularly with regard to the estimated vehicle operating costs on the new road. Mainly due to the unsafe conditions in the area, the Bank staff was unable to obtain reliable information either from MPH or the expatriate consultant who is assisting the Planning and Project De- velopment Office of MPH. An alternative was to assume that the vehicle operating costs on the project road would be the same as those estimated in 1977 for the improved General Santos-Digos road which has similar physical characteristics and design standards. The available 1977 vehicle operating costs were adjusted for inflationary factors based on the GNP de- flators supplied by the National Economic Development Authority of the Philippines in order to obtain 1975 prices.

5.05 An additional weakness in the data base lies in the traffic estimates. Although the 1976 traffic data were given to the Bank mis- sion as "actual", the mission was unable to review or verify them in the absence of back-up data or articulation of assumptions underlying the government estimates. Moreover, weighted averages for the traffic volumes on the six sections of the project road could not be obtained due to the lack of data concerning the lengths of these sections. Consequently, the traffic volumes adopted for the reevaluation are overall averages. In view of these weaknesses, the results of the economic reevaluation must be considered as preliminary: when complete safety in the entire project area has been restored, more reliable data must be obtained to make a re- vised economic analysis.

5.06 The objective of strengthening highway administration and opera- tions, referred to in (b), has not yet been very successful. This is a long-term objective which the Bank is continuing to pursue under the on- going Third Highway Project and the forthcoming Highways IV. Some of the problems on maintenance and implementation of road restoration work have been discussed in para. 4.07 above.

Conclusion

5.07 The project was well conceived and justified considering the fertile land it traverses on an island which is still the frontier of the country. The full economic and social impact of the road needs to be re- evaluated based on improved data when the present conflict is over. -23 - TABLE 1

PHILIPPINES

LOAN 731-PH - FIRST HIGHWAY PROJECT

PROJECT COMPLETION REPORT

COTABATO-DIGOS ROAD

Government funds requested, released and disbursed for 1976 (July 1975 through December 1976) and 1977 (January through December 1977).

Year Requested Released Disbursements (P million) (P million) (P million)

1976 25.00 12.17 3.20 to Philrock 8.00 to Liberty (Section 4) 0.97 to Region XII for expenses 12.17

1977 21.54 4.85 /a 1.80 to Liberty (Section 4) 3.00 to Region XII (Section 3) 0.05 to Region XII for expenses 4.85

/a The original release by the Budget Commission was for P 10 million of which P 6.95 million was allocated for payments to Liberty Construction Corpora- tion and P 3.05 million allocated to Region XII. But in May 1977, the Budget Commission recinded the release and only the actual expenditures by MPH up to that date (P 4.85 million) were included in the revised release. - 24 - Table 2

PHILIPPINES

LOAN 731-PH - FIRST HIGHWAY PROJECT

PROJECT COMPLETION REPORT

COTABATO-DIGOS ROAD

A. CONTRACT WITH PHILROCK

1. Original Contract Cost P 39,310,550.00 2. Deleted Contract Amount 6,914,186.01

3. Remaining Amount After Deletion (1 - 2) 32,396,363.99 4. Extra Works 893,523.31 5. Overruns 3,994,280.00 6. Total Contract Amount (Item 3+4+5) 37,284,167.30 7. Payment Made on Suspension Claim 3,559,164.64 8. Total Paid to Contractor (Item 6+7) 40,843,321.94 9. Claims, Including Price Adjustment 13,194,645.46 10. Total Possible Contract Cost 54,037,977.40

B. FORCE ACCOUNT

Section 1.- Limits: Km 139+236.94 to km 143+006.29 - P 1,500,000 Net Length: 3.769 kms Section 2.- Limits: Km 143+006.29 to km 145+181.66 - P 1,001,170 Net Length: 2.174 kms Section 3.- Limits: Km 145+181.66 to km 174+000 - P13,300,000 Net Length: 28.82 kms

C. CONTRACT WITH LIBERTY CONSTRUCTION CORP. (Section 4)

Limits: Km 174+000 to Km 204+496 - P14,969,000 Net Length: 34.496 kms Extra Work and Price Adjustments - P 2,161,106

Total P17,130,106

D. SUPERVISING CONSULTANTS SERVICES (SAUTI CONTRACT)

1. Original: Foreign $ 586,000.00 Local P 628,000.00 2. Additional: Foreign $ 208,875.00 Local P 272,000.00 3. Total: Foreign $ 794,875.00 Local P 900,000.00

Total (US$ Equivalent) $ 931,239.00 PRILIPPINES

LOAN 731-PH - FIRST HIGHWAY PROJECT

PROJECT COMPLETION REPORT

ROADS

Estimated Estimated or Item Description Length (km) Contractor Actual cost /a % completion actual com- (P) as of Oct.' 7 8 pletion date

A. Cocabato-Digos Road 1. Original contract less deleted portions 90.73 Philippine Rock Products, Inc. 40,843,322 100 Sept. 1975

2. Section 1 3.77 DPH Region XI (Force Account) 1,500,000 100 Dec. 1975

3. Section 2 2.18 DPH Region XII (Force Account) 1,001,170 30 Dec. 1979

4. Section 3 28.82 DPH Region Ill (Force Account) 13,300,000 70 June 1979

5. Section 4 34.50 Liberty Construction & Dev. Corp. 17,130,106 97 Dec. 1978

Total (A) 160.00 73,774,598

B. Philippine-Japanese Friendship Highway lb 1. Lucena-Legaspi Road 390.00 I 1 60 separate local contractors n.a. 95 n.a. /c 2. Cabanatuan-Tuguegarao Road 375.00 1

Total (B) 765.00

/a Actual final costs will not be known until after all construction is completed and after all presently disputed claims have been settled. It is not known when these final settlements will occur. Right-of-way costs are not included. Costs shoun are estimated as of April 1978. Unsettled contractor's claims are not included.

lb Detailed design was financed by the Bank under this loan but construction costs were financed by the OECF (Japan).

c Work began in 1971.

Note: n.a. - not available PHILIPPINES

LOAN 731-PH - FIRST HIGHWAYPROJECT

PROJECT COMPLETIONREPORT

CONSULTINGSERVICES

Original Actual Estimated Pee, lb Actual Description of Length Description fees I Contract omencement completion completion Local Forelg -Totalfee Local Foreign em- Total fee Consultant/designer Nationality roadlcompoont (km) of services signing 'f services date date (P) exchange (US$) (P) change (US$) (US$)

A. Iless Financed by IBRD 1. SAUTI Italy Cotahato-Digos Road 160 Detailed engineering Cabanatuan-Tuguegarao Road /d 375 Detailed engineering 021--/70 121--/70 n.a. 12/--/70 4,200,000US$ 750,00 1,386,000 4,750,00O/e 750,000 1,470,000 Luena-Legaspi Road /d 390 Detailed engineering

Subtotal (1) 925

2. SAUTI Italy Cotabsto-Digos Road (160 km) Construction 09/24/69 09/--/71 09/22/74 09/30/75 393,000 US$ 680,300 739,545 900.000 794,875 931,239 supervision 3 NORCONSULT Norway Manila North Exprecsway Extenhion 60 Detailed engineering 05/03/72 05/03/72 06/--/73 06/--/73 2,110,000 NKr 6.131,000 1.299,500 2,100,000 932,127 1,250,310 4 BERGERIEDCOP 11SA/PhtL, Manila North Road 200 Detailed engineering 09/27/72 09/08/72 07/--/73 07/--/73 2,549,586 US$ 233,026 619,326 2,500,000 292,038 670,826 5 SAUTI/CERTEZA Italy/Phil. Taytay-Calamba Road 150 Detailed engineering 07/31/72 08/16/72 07/--/73 07/--/73 1,770,430 US$ 217,780 486,027 1,800,000 157,714 430,440 6 SAUTI/F.F. CRUZ Italy/Phil. Olongapo-Gapan Road 106 Detailed engineering 07/03/72 08/16/72 04/30/73 04/--/73 1,530,889 US$ 142,322 374,275 1.800,000 134,176 406,900 7, DPH DESIGN TEAM Philippines Las Pinas-Tagatay Foad Detailed 36 engineering) 06/16/72 06/16/72 05/30/73 04/30/73 - Sto Tomas-Batangas - - 600.000 - 90,910 Road 1-' ' -- ;

Subtotal (3 - 7) 595

Total (A) 1,520 B. Lama Financed by UNDP 1. NORCONSULT Norway Feasibility Studles I 1,140 Feasibility studies 06/24/71 08/01/72 07/31/72 12/31/72 717,760 US$ 680,121 788,871 701,400 681,350 787,623 of priority roads on Luzon Island 2. KAMPSAX/BRRGER Denmark/USA Technical Assistance - Technical Assistance 06/22/71 08/12/71 08/12/73 10/31/73 886,000 US$ 1.341 922 1,476,164 1,418,582 1,341.922 1.556,859 to BPH for improve- ment of administra- tive, organiza- tfonal and mainte- nance systems, methods and practi-

/ O her (minor) road sections were designed by DPU Regional Design Offices. Costs are not included. /b Estimates as of April 1976. Conversion of local costs In Pesoa to foreign exchange may not he accurate due to fluctuations In exchange rates period covered. Average exchange rate during intervening during the years was approximately US$1.00 - P 6.60. /c All claim are not yet settled and therefore figures are still subject to change. Conversion of local costs accurate due to fluctuations in pesos to foreign exchange may not be in exchange rates during the period covered. /d Later constructed with Japanese financial assistance. /n Does not include costs of (in-kind) inputs provided by DPH.

Notes: n.a. - not available. - 27 - Table 5

PHILIPPINES

LOAN 731-PH - FIRST HIGHWAYPROJECT

PROJECT COMPLETION REPORT

Project Components and Costs (US$ million)

Appraisal Appraisal estimate Actual cost length Foreign Foreign I Item Description (km) Local exchange Total Local /a exchange Total Overrun

A. 1cems rinanceu Dy Sank 2 1. Construction and improvement of Cotabato-Digos Road 160 2.6 3.3 5.9 7.5 3.7 11. /b 90

2. Consulting services: (a) Detailed engineering of 925 km /c of roads 925 0.7 0.8 1.5 0.7 0.8 1.5 - (b) Construction supervision of Item I above 0.3 0.6 0.9 0.1 0.8 0.9 - (c) Detailed engineering (about 700 km If) resulting from Item D (1) below 700 1.1 1.2 2.3 1.3 1.5 2.8 22

Subtotal (A) 1,785 4.7 5.9 10.6 9.6 6.8 16.4 55

B. Contingencies 1. For Item A (1) above - Physical (10%) - 0.2 0.3 0.5 - - - - Price (11%) - 0.3 0.4 0.7 - - - 2. For Item A (2) above - Physical (10%) - 0.2 0.2 0.4 - - -

Subtotal (B) 0.7 0.9 1.6 - - -

C. Interest During Construction

Subtotal (C) - 1.2 1.2 - 1.2 1.2 /d

Total of Items Financed by Bank (A to C) 5.4 8.0 13.4 9.6 8.0 17.6 /e 31

D. Items Financed by UNDP 1. Feasibility studies (1,140 km) 1 0.3 0.7 1.0 0.1 0.7 0.8 2. Technical assistance for administrative and operational improvement of BPH - 0.2 1.0 1.2 0.2 1.4 1.6

3. Contingencies (10%) - - 0.2 0.2 - - -

Total of Items Financed by UNDP [Subtotal (D)] 0.5 1.9 2.4 0.3 2.1 2.4 -

Total Project Costs (A to D) 5.9 9.9 15.8 9.9 10.1 20.0 27

/s Conversion of local costs in pesos to US$ may not be accurate because of fluctuation of exchange rate from US$1.00 - P 6.12 at commencement of project to US$1.00 - P 7.35 at the end of 1975; and to US$1.00 = P 7.40 at the end of 1977. Average exchange rate during intervening years was approximately US$1.00 = P 6.60.

/b Excluding unsettled contractor's claims (about P13 million). See Table 3.

Ic Including the 160 km Cotabato-Digos Road and 765 km of the proposed Pan-Philippine Highway.

Id Interest was capitalized only up until June 30, 1976, the time of the final withdrawal from the loan account (closing date), and totaled US$1,197,490.14 or about US$1.2 million.

/e Actual final costs will not be known until after all construction is completed and also after all presently disputed claims have been settled. It is not known when these final settlements will occur. Right-of-way costs are not included. Costs shown are estimated as of October 1978.

/f Revised to about 600 km after appraisal of the Second Highway Project (Loan 950-PH). Construction and/or improvement of these roads was included in the Second Highway Project. - 28 - Table 6

PHILIPPINES

LOAN 731-PH

PROJECT COMPLETION REPORT

SCHEDULE OF DISBURSEMENTS (US$ million)

Actual Disbursements IBRD Fiscal year Appraisal Actual Total as a Percentage of and Quarter Estimate Disbursement Appraisal Estimates

1972 1 1.3 2 1.6 0.8 3 1.7 0.8 4 2.6 1.3 50%

1973 1 3.2 1.6 2 4.3 2.5 3 5.4 3.2 4 6.0 3.6 60%

1974 1 6.5 3.8 2 6.9 4.4 3 7.2 4.4 4 7.5 4.9 65%

1975 1 7.5 4.9 2 7.7 5.2 3 7.8 5.7 4 8.0 5.9 74%

1976 1 6.4 2 6.6 3 8.0 4 - n.a.

Original Closing Date 5/15/75 Actual Closing Date 6/30/76 - 29 - Table 7

PHILIPPINES

LOAN 731-PH - FIRST HIGHWAY PROJECT

PROJECT COMPLETION REPORT

Traffic Volumes on Cotabato - Digos Road

Average Annual Daily Traffic % Composition Appraisal Actual Appraisal Actual Estimate Traffic Estimate Traffic Road Section 1976 1976 1976 1976

1 * Cars 220 170 15 27 Jeepneys 530 175 36 28 Buses 190 113 13 18 Trucks 531 168 36 27

1,471 626

2 * Cars 187 204 20 23 Jeepneys 215 233 22 27 Buses 198 135 21 15 Trucks 355 303 37 35

955 875

3 * Cars 116 217 11 23 Jeepneys 311 426 29 46 Buses 321 98 30 11 Trucks 334 181 30 20

1,082 922

4 Cars 107 295 14 34 Jeepneys 182 70 25 8 Buses 154 152 21 18 Trucks 298 346 40 40

741 863

5 Cars 79 488 5 37 Jeepneys 553 380 31 29 Buses 315 131 19 10 Trucks 817 313 46 24 1,764 1q12

6 Cars 243 221 17 34 Jeepneys 264 50 19 8 Buses 341 14 24 22 Trucks 582 230 40 36

1,187 642

* Road Sections affected by civil disturbances. - 30 - Table 8

PPILIPPINES

LOAN 731-PH - FIRST HIGHWAY PROJECT

PROJECT COMPLETION REPORT

Traffic Growth, Road Sections Open to Traffic by Year, and Savings in Vehicle Operating Cost

(I) Fstimated Traffic Growth

Years Cars Jeepneys Buses Trucks

1975-1979 /a 6% 2% 2% 6% 1980-1984 10 6 6 9 1985-1989 8 4 4 8 1990-1994 7 3 3 6 1995-1999 6.5 2.5 2.5 5

(II) Lengths of the Road on Which Benefits were Calculated

Years Length open to traffic

1975 100 km (4 months only) 1976 100 km (full year) 1977 130 1978 145 1979 155 1980-1999 160

(III) Vehicle Operating Costs on New Road in 1975 Prices /b

Pesos/km (excluding taxes)

Cars 0.419 Jeepneys 0.410 Buses 1.137 Trucks 1.385

(IV) Savings in Vehicle Operating Cost (Percentage reductions from appraisal estimates)

Percentage reductions on new road

Cars 25.0 Jeepneys 15.5 Buses 24.5 Trucks 26.0

/a EstLmated from vehicle population data for 1972-76. The number of buses and jeepneys registered in the region actually declined by about 2 or 3% per year. /D Estimated vehicle operative costs in 1977 have been adjusted to derive the 1975 prices based on the GNP aeflators supplied by the National Economic Dcvolopment Authority. - 31 - ATTACHMENT II

COMENTS ON THE WORLD BANK'S PERFORMANCE AUDIT REPORT ON PHILIPPINES FIRST HIGHWAY PROJECT (Loan 731-PH)

I. General

Since the Performance Audit Report (PAR) was principally based on the Project Completion Report (PCR), the herein com- ments are made on both the PAR and PCR.

In general, we disagree with the impression given by both the PAR and the PCR that only on projects where the World Bank was involved that the quality of work was more than satisfactory.

The Ministry of Public Highways, in all its projects, has been consistent in adopting the standards on either planning, de- signing or construction. All its projects have been executed strictly in accordance with the Standard Specifications, regard- less of whether these projects are with foreign assistance or not. These specifications have for their bases the AASTHO and ASTM stan- dards. Admittedly, however, in some isolated cases, there may be considerable lapse in management or supervision of the projects due to lack of trained personnel. The depletion in the local pro- fessional staff was mainly due to the shifting of some trained men to the private sector for more lucrative considerations. However, the Ministry, in its attempt to remedy the shortcoming, is training its technical force.

Government's Furthermore, we disagree to the statement that some Filipino comments re- engineers had gained valuable experience in Vietnam. Long before flected in the inception of World Bank assistance, this Ministry's engineers Audit had already the occasion of working with the US Bureau of Public Memorandum Roads, the PHILCUSA, the ICANEC, and the Foreign Loan Division, which entities had played vital role in the successful implemen- tation of Philippine Highway Projects. Besides, there are ample local technical schools or training grounds that have been sources of successful professionals, particularly in lines of engineering.

II. Specifics

New cost data (a) Page 2, Paragraph 4, Lines 13 through 17 - Based on informa- incorporated tion available to date, it appears that of the works which in PCR were deleted from the original contract, only a gap of 7.4 kilometers remain to be completed plus a 40 meter slip sec- tion deleted from the negotiated contract with a local con- tractor and all programmed for p 10.5 million. On comple- tion, therefore, the deleted portion will cost approximately 3 times the revised consultants' estimate based on original contract price as of 1971. 32 - ATTACHMENT II Page 2

New cost data Page 2, Section (2.18 Km) - Only 1.001 million was released incorporated for this section so that completed work came up to the base in PCR only. Of the money released late in 1978 amounting to P 7.845 million, only P 0.188 million went to the Region for current program and rest was used to pay obligation on completed ne- gotiated contract.

New cost data Page 2, Section 3 (28.82 Km) - For the P 3.0 million re- incorporated leased for this section, the portion from Km 150+300 to in PCR Km 174+000 was completed. This leaves an uncompleted por- tion from Km 145+181 to Km 150+300 plus the unfinished por- tion of Section 2 for a total gap of 7.4 kms proposed at P 10.5 million.

Nwcoporatd Page 2, Section 4 (34.50 Kmn) - The contract was completed incroae and accpeted December 9, 1977 for R 17,130,106.00.

Government's (b) Page 4, PAR, Paragraph 10 - The MPH Design Team was not comments re- particularly assisted by the advisory consultant but worked flected in under the same conditions as the other design consultants Audit under the overall coordination of a foreign consultant. Memorandum For technical assistance and feasibility studies, foreign consultants are assisted by MPH counterpart staff.

Government's (c) Page 5, PAR, Paragraph 14 - If the Special Projects Office comments re- is considered to be a success, this could not only be attn- flected in buted mainly to the availability of a competent expatriate. Audit The fact that said office is basically staffed with person- Memorandum nel of expertise cannot also be totally discounted.

(d The particular covenants in the Loan Agreement (Philippines First Highway Project) relative to Highway Maintenance (2.05-a, 2.05-b, 2.05-c) were already complied with (with assistance from KA,SAX/BERGER Consultant of the Philippines Highway Technical Assistance).

Specifically, the following were already implemented with assistance of Kaipsax/Berger Consultants of the Philippines Highway Technical Assistance:

Comments largely 1. Reorganization of the Maintenance Organization at reflected in the Headquarters, Regional and District/City levels. PCR,, paras 4.05 to 4.11 2. New method of allocating Highways Maintenance Fund via the EMK method.

3. New Highway Maintenance system incorporating modern management techniques in planning, execution and control of maintenance operations.

4. Extension of the contract of Kampsax/Berger of the extended Philippines Highways Technical Assistance.

5. Hiring of BCEOM Consultant in connection with the implementations of the Five-Year Maintenance Program. - 33 - ATTACHMENT II Page 3

Government's (e) Page 16, Paragraph 3.15, Lines 7 and 8 - After peace and comments re- order conditions in the project site improved, BCM staff flected in (Construction) investigated and compiled data on the proj- the PCR ect and reported on its findings 20th February 1978.

Page 17, Paragraph 3.19 - Modify the table to read as follows:

Table Section 1 3.66 Km - P 1,500,000.00 *modified " 2 2.28 Km - 1,001,170.00 " 3-a 23.70 Km - 3,000,000.00 " 3-b 5.12 Km - (10.50 million) " 4 34.50 Km - 17,130,106.00

P 32,931,276.00

Government's At the termination of Philrock contract, consultants sub- comments re- mitted a revised estimate of the deleted portion at original con- flected in tract price as of 1971 amounting to P 10.106 million with govern- the PCR ment subsidized cement priced at P 2.00/bag. In the estimate pre- pared for said deleted portion using the MPH Standard items of work with corresponding increase in quantities and prices of mate- rials as of 1975 for Sections 1 and 4; 1976 for Section 2; 1977 for Sections 3-a and 3-b, the total cost amounts to P 32,931,270.00.

The completion cost therefore comes to about 3 times the original,

(f) 4.14 - Work on the Cagayan Valley Road and Manila South Road projects are now 100% completed and at present, satisfactorily supply the travelling needs of numerous and countless commuters from the provinces of Cagayan, Isabela and Nueva Vizcaya in the north including Nueva Ecija and Bulacan in Central Luzon and the Bicol Provinces in the south in transporting their goods to Manila.

On these points, 4.15 - The quality of work in the projects cannot be classi- the PCR's view fied as poor but at par if not better than other projects differs from undertaken under other source of funding. This is so since that of the their construction were governed under the same Standard 'Government Specifications and supervision were in accordance with the standard set by the Ministry. It is worth emphasizing the fact that released funds for construction/engineering are being done only after approval of the Organization Diagram and it is a must that construction/engineering funds are released only after the approval of the Organization Diagram of Personnel who are to supervise the construction. These personnel of the Region, together with periodic inspection of key men from the MPH Central Office complete the super- vision of the construction. As to delay in the construction, this cannot be imputed to the incompetency of contractors. It is more due to the oil crisis which consequently abnormally - 34 - ATTACHMENT II Page 4

increases the cost of construction materials and the construction cost, thus offsetting the contracting funds of the contractors. If may be worth mentioning that adjustments to offset the effect of these price increases were availed by contractors too late such that the projects are almost completed.

On these points, 4.16 - While it cannot be denied that concrete cracks the PCR's view do exist along these routes which is quite natural for differs from all types f conta work, tho ^rars not-d along these that of the routes were at road sections concreted some 10 or 20 Government years ago which had been treated as exceptions to the projects undertaken by PJHL. This is also true for road sections along these routes without proper shoulders. These are projects undertaken under the BOND issued some 15 years ago. Other sections within the projects under- taken under the First Highway Project without sufficient shoulders were planned, programmed and provided with proper shoulders which, however, were left undone due to non-acquisition of sufficient right-of-way. These problems are being remedied lately but lack of funds hampered our progress.

it c- theefore be crncluded that in spite of some minor defects noted, these defects are minimal if we consider the total length of roads and bridges undertaken. The quality of work can favorably compare if not better with other construction works of this type. Considering the benefits and praises heard from those who directly utilize and benefit from these roads constructed which added immensely to the development of commerce in these areas plus the savings of almost 50% of travel time, we can only conclude the success of these roads improvement program.

Government's (g) The report has some critical remarks on our axle-load control comments re- program. This is composed of portable loadometer surveys flected in and permanent weighbridges for enforcement purposes. On the PCR the project road, we have two permanent weighbridges, one at Digos which will be operational for some time. Results will appear in the PPDO Progress Reports for the 3rd and 4th quater of 1978 and in a separate report to be submitted in March 1979.

For the portable loadometer surveys will continue in 1979 on 116 stations per semester. Refer to PPDO Progress Re- port for the 4th quarter of 1978 which also contains the schedule for the 1979 Program. - ..22124 KOREA

SINA SHANGHAll 3c Aparri REPUBLIC

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