Document of The World Bank FL FOROFFCIAL USE ONLYFI E C P

Public Disclosure Authorized ReportNo. 125 3b-HO

STAFF PROJECT REPORT Public Disclosure Authorized SEVENTH HIGHWAYPROJECT

HONDURAS

November 10, 1976 Public Disclosure Authorized Public Disclosure Authorized Latin America and the Caribbean Projects Department

This documenthas a restricteddistribution and may he used byrrecipients only In the performanceof their officia duties. Its contents may not otherwisebe disclosed without World Bank authorization. Currency Fquivalents Currency Unit = Lempira (L) IJS$1.00 = L 2.00 L = US$0.50 L l,000,000 = US$500,000

Fiscal Year

January 1 - December 31

System of'Weights and Measures: Metric

Metric British/US Equivalent

1 meter (m) = 3.28 feet 1 kilometer (km) = 0.62 mile 1 square kilometer (km2) = 0.336 square mile 1 hectare (ha) = 2.47 acres 1 metric ton (m ton) = 2.205 pounds

Acronyms and Abbreviations

ADT - Average Daily Traffic BR - Brown and Root (Consultant) CAB-I - Central American Bank for Economic Integration COHDFFOR - Gorporacion Hondurena de Desarrollo Forestal CONSUPLAN - Consetjo Superior de Planificacion Economica DGH - Directorate General for Highways DGIT-N - Directorate General for Highway Maintenance DGT - DirectorateGeneral for Transport ENP - Impresa Nacional Portuaria FAO - Food and AgriculturalOrganization FNIT - FerrocarrilNacional de Honduras HTH' - Howard IIunphreys,Keeble and Partners (Consultant) IDB - Tnter-American Development Bank MCOPT - Ministerio de Comunicaciones, Obras Pblicas y Transporte SIECA - Secretaria Permanentltdel Tratado de Integracion Fcon6mica Centro Americana USAID - US Agency for internationalDevelopment vpd - Vehicles per day FOR OFFICIAL USE ONLY

STAFF PROJECT REPORT

SEVENTH HIGHWAY PROJECT

HONDURAS

TABLE OF CONTENTS

Page No.

INTRODUCTION AND SUMMARY ...... i -xiv

I. THE TRANSPORT SECTOR ...... 1

A. The Distribution of Economic Activity ...... B. The Transport System ...... 2 C. Transport Planning and Coordination ...... 5

Table 1.1 - Areas of Major Valleys ...... 8 Table 1.2 - Urban Population Centers - 1974 ...... 9 Table 1.3 - Honduras Natonal Railway - Traffic and Finance 1970-1975 ...... 10 Table 1.4 - Dry Cargo Traffic at Principal Ports - 1970-1975 ...... 11 Table 1.5 - Passenger and Cargo Traffic and Major Airports 1965-1973 ...... 12 Table 1.6 - Public Investments in Transport 1973-1975.13

II. THE ROAD TRANSPORT INDUSTRY ...... 14

A. The Road System ...... 14 B. The Transport Industry ...... 15 C. Regulations and Policies ...... 22 D. Future Trends ...... 24

III. THE HIGHWAY SUBSECTOR ...... 27

A. The Highway Network ...... 27 B. Bank Assistance in the Highway Subsector ...... 27 C. Traffic Growth and the Road Transport Industry ...... 28 D. Highway Administration ...... 30 E. Highway Planning and Financing ...... 31 F. Highway Engineering ...... 32 G. Highway Construction ...... 32 H. Highway Maintenance ...... 33

This report has been prepared by Messrs. Robert Burns (Economist), Carlos F. de Castro (Transport Specialist), Raul Paraud (Engineer), and Luis Enrique Pinilla (Engineer) and has been edited by Miss Virginia R. Foster.

This document has a restricteddistribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without Would Bankauthorization. Table of Contents (Continued)

Page No.

Table 3.1 - Development of the Highway Network 1964-1974 ...... 36 Table 3.2 - Vehicle Registration 1964-1974 ...... 37 Table 3.3 - Highway Expenditures 1970-1975 ...... 38 Table 3.4 - Road User Charges and Highway Expenditures 1970-]974 ...... 39

IV. THE PROJECT ...... ,.,.... 40

A. General Description ...... 40 B. Cost Estimates ...... 45 C. Financing ...... 47 D. Implementation ...... 48 E. Disbursements ...... 50

Table 4.1 - Design Standards for Project Highways .. 51 Table 4.2 - Tentative List of Maintenance Equipment Included in the Project ...... 52 Table 4.3 - Summary of Construction Costs ...... 53 Table 4.4 - Estimated Schedule of Disbursements .... 54 Annex to Chapter IV -- Project Implementation Schedule 55

V. ECONOMIC ANALYSIS ...... 56

A. Civil Works ...... 56 B. Road Maintenance Equipment ...... 61

Table 5.1 - Actual and Proposed Cropping Patterns for Irrigated Areas of the Guayape Valley 62 Table 5.2 - Current Levels and Mix of Road Traffic 1976 ...... 63 fable 5.3 - Traffic Projections ...... 64 Table 5.4 - Cost and Benefit Streams Talanga- Juticalpa ...... 65 Table 5.5 - Cost and "Benefit Streams Juticalpa- Catacamas ...... 66 Table 5.6 - Road and Vehicle Operating Characteristics ...... 67 Table 5.7 - Vehicle Operating Cost ...... 68 Table 5.8 - Farm Size Distribution in the Municipios of Talarnga and Juticalpa in 1965-1966 69 Table 5.9 - Current and Future Backlog of Road Maintenance with Current Expenditure 70 Table 5.10 - Reconstruction Costs of Roads not MIaintained 71

VI. AGREEMENTS REACHED AND RECOMMENDATION ...... 72 Table of Contents (Continued)

ANNEX

Related Documents and Data Available in the Project File

CHARTS

IBRD-15878 - Organization Chart of the Ministry of Communications, Public Works and Transport IBRD-15879 - Organization Chart of the Directorate General for Highways IBRD-15880 - Organization Chart of the Directorate General for Maintenance of Highways and Airports

MAP

IBRD-10395-RI - Honduras - Main Highway Network

This report is based on information provided by the Government, by the UK consultant Howard Humphreys, Keeble and Partners; by the US consultant Brown and Root and local individual consultants; and on the findings of an appraisal mission to Honduras in February 1976 consisting of Messrs. Robert Burns (Economist), Carlos F. de Castro (Transport Specialist), Raul Paraud (Engineer) and Luis Enrique Pinilla (Engineer). Additional reports and data related to the project available in the Bank are listed in the Annex.

STAFF PROJECT REPORT

SEVENTH HIGHWAY PROJECT

HONDURAS

INTRODUCTION AND SUMMARY

A. The Transport Sector

Background

1. The Honduran transport system is dominated by roads and road trans- port. Because distances are short and the terrain rugged, railways are non- competitive, except in the northern coastal strip where specialized banana railways operate. Road transport carries 86% of the freight tonnage and 96% of the passenger traffic in the country. The primary road network connects the two principal cities, San Pedro Sula in the north, and the capital, Tegucigalpa, in the south, and is designed to service, what were historically and still are, the most important agricultural areas, the Sula and Choluteca Valleys and the Atlantic coastal strip.

2. Aside from infrastructure to serve the banana industry, major devel- opment of the transport sector began only in the mid-fifties with construction of the Inter-American highway in the southern part of the country; a modern all-weather road between Tegucigalpa and San Pedro Sula was not completed until 1970. Modernization of the principal port, Puerto Cortes on the Atlantic, did not begin until the creation of a National Port Authority in 1965; and, with Bank assistance, a deepwater Pacific Coast facility is only now being con- structed at San Lorenzo. Investment in transport infrastructure increased significantly in the 1970's, and highway projects are now planned, or under construction, to complete most of the country's primary highway network; when completed in the early 1980's, these projects will provide modern all-weather access to the increasingly important agricultural and timber areas of eastern Honduras, including the rich Aguan Valley in the north, the Guayape Valley and the Olancho forest reserve in central Honduras, and the Danli area in the south. The improvement and expansion of the feeder and access road system, to which the Government will be giving increasing emphasis over the next five years, will mean that the country will, for the first time, have an internal transport network adequate to serve its most important productive areas.

Highways

3. Because of the topography of Honduras, road construction, in general, has been difficult and expensive; nevertheless, the road network grew from about 3,200 km (110 km paved) in 1960 to about 6,100 km (1,240 km paved) in 1975. In addition to the principal roads mentioned in the preceding paragraph, - ii -

the primary system includes a road southwest from San Pedro Sula to the El Salvador border and a road along the north coast to La Ceiba. The country's secondary and tertiary road system is not yet well developed.

4. The road transport industry, operating in an environment of virtually no regulation, expanded rapidly in the decade from 1964 to 1974. During that period, the vehicle fleet grew from 16,000 to 43,900, an increase of 174%. The most notable growth occurred in the number of trucks, which increased by 230%. The road transport industry is generally adequate in the sense that it does not constitute a serious bottleneck to the development of other sectors of the economy. However, the poor organization of the local trucking market and the large discrepancy in managerial and financial resources between small domestic operators and the large international operators has led to a partitioning of the industry in which Honduran truckers have not had access to lucrative international traffic. This situation, together with the serious problem of overloading of trucks, led to enactment of a revised Land Transport Law (February 1975) which permits the detailed regulation of road passenger and freight traffic. At present, the Government is restricting its regulatory activity to passenger transport and a gradual program of control of truck loading, but it is now considering what is feasible and desirable in other areas; so far it has refrained from imposing regulations that might harm what to date has been a reasonably adequate truck and bus industry.

5. The Ministry of Communications, Public Works and Transport (MCOPT) is in charge of planning, designing, constructing, and maintaining all roads in the country, except for a few being built by the Honduran Forestry Devel- opment Corporation (Corporacion Hondurena de Desarrollo Forestal, COHDEFOR) for forestry development. MCOPT's highway activities are carried out through two Directorates: the Directorate General for Highways (DGH), which plans, designs, and supervises construction of roads; and the Directorate General for Highways and Airports Maintenance (DGHM), which maintains the road network. All major construction works are implemented by contracts awarded after competitive bidding. Some minor improvement works and construction of a few feeder roads, totaling an average yearly investment of about US$1.5 million equivalent, are performed by force account. A research program is currently being carried out with Bank assistance to determine the appropriate labor- capital mix for constructing such roads. Government-financed works are normally supervised directly by DGH staff, while externally financed construc- tion works are supervised by consultants. Despite considerable technical assistance over recent years, DGH is still heavily dependent upon consultants for implementation of major projects and still requires additional technical assistance, particularly to improve the quality of its professional staff. High staff turnover which results from low civil service salary levels has been the major factor in limiting the effectiveness of past training programs. Recently, civil service salaries have been increased somewhat, and there has been greater staff stability. Additional measures will be taken to provide MCOPT with qualified, experienced staff.

6. Highway maintenance continues to be the most serious problem in the transport sector, accentuated by the overloading of trucks, particularly in the timber industry. DGHM carries out routine maintenance by force account - iii - through its seven maintenance districts. Each district has its own technical staff, equipment and repair facilities, and two main workshops are located in Tegucigalpa and San Pedro Sula, but the facilities in these, as well as in the other district workshops, are inadequate. MCOPT has received assistance from several international sources for improving and strengthening its maintenance operations and for the purchase of maintenance equipment. In spite of this assistance, routine maintenance is deficient, and more equipment is needed to replace wornout units, many of which are 15 years old or older. The inadequacy of road maintenance has been due to insufficient annual budgetary allocations, the use of maintenance equipment for works other than maintenance and lack of trained staff over the past two years. However, there have been substantial increases in the maintenance expenditures for maintenance and equipment renewal. Also, the installation of 12 weighing stations has recently been completed, and regulations for controlling truck weight and dimensions have been enacted. Thus, the Government will shortly be in a position to enforce load limits which should, over time, reduce deterioration of the country's major highways.

7. Although the development of a local construction industry was encouraged by the impetus provided by the road construction program of the early 1970's, the industry still faces a number of problems, caused mainly by its deficiency of technical and managerial skills and the uneven level of highway works; improvements in these and other related areas are therefore needed. Honduras has no restrictions on foreign contractors, who normally submit bids and obtain contracts for major construction works.

8. During the 1970-1975 period, about 70% of highway investments were externally financed. All local funds are provided through the normal budgetary process, and there is no road fund or earmarking of user charges. Road users are currently paying taxes and user charges at about L 18 million annually, of which fuel taxes account for more than L 12 million with annual road maintenance expenditures of about L 12.0 million. This is considered generally adequate. However, with increased maintenance expenditures expected in the future, appropriate adjustments will be required. The precise nature and level of these charges will be one of the issues to be considered in a Highway Master Plan Study to be prepared under the project.

Transport Subsector other than Highways

9. The railway system comprises three narrow-gauge lines, all located in the north and designed originally to serve the banana plantations in the Sula Valley, the northern coastal strips, and the upper Aguan Valley. The Government-owned railway, Ferrocarril Nacional de Honduras (FNH), with a total length of 114 km of main line, runs from the Atlantic port of Puerto Cortes to San Pedro Sula and into the upper Sula Valley; it hauls sawn timber and banana exports and agricultural imports, mainly rice. The Tela Railway, recently acquired by the Government, operates over 179 km of main line, serving the banana plantation areas of the eastern side of the Sula Valley and part of the coastal strip. The Standard Fruit Company Railroad still operates over 157 km of main line and serves the banana plantations of the - iv - north coastal strip as well as the upper Aguan Valley. Its gauge is different from that of the other two, thus precluding interconnection. Consideration is now being given by the Government to reconstruction of an abandoned Aguan Valley rail line to haul bananas produced by the Isleta agrarian reform settlement and other producers to the proposed port at Puerto Castilla.

10. The port system includes Puerto Cortes, Tela, La Ceiba and Puerto Castilla on the Atlantic coast and a shallow draft port, San Lorenzo, on the Pacific; the latter is currently served by lighterage but is being developed into a deepwater port under the Bank-financed Second Port Project (Loan 767-HO). All ports are operated by the Empresa Nacional Portuaria (ENP), an autonomous Government organization which was highly successful in developing the port of Puerto Cortes and which was subsequently given control of all ports in the country. Puerto Cortes remains the principal port and accounts for about two-thirds of all dry cargo movements of the country. It has adequate capacity and a good operating record. Puerto Castilla is the least developed and as yet carries no significant traffic. It is, however, the natural outlet for the Aguan Valley and is a crucial infrastructure element for the valley development plan. The Bank has recently appraised a project to improve facilities at Puerto Castilla to serve prospective exports of agricultural products, timber, and, eventually, paper from a proposed paper mill in the lower Aguan Valley at Corocito.

11. Honduras has two major airlines; between them they provide adequate domestic and international service. The Villeda Morales airport at San Pedro Sula has a good runway of 2,800 meters; the Toncontin airport at Tegucigalpa is less satisfactory, with only 1,980 meters of runway; it is barely adequate for modern jets. However, traffic levels are so low that a major expansion of the Toncontin Airport will not be economically feasible for many years to come. With the completion of the road between San Pedro Sula and the El Salvador border and that between Tegucigalpa and San Pedro Sula, private automobiles and a good intercity bus and truck service have captured a large portion of the earlier air traffic, and domestic air traffic generally has declined steadily since the peak year of 1970.

Transport Planning and Coordination

12. Responsibility for highway planning lies with MCOPT. The main bases of the highway investment plan are: (a) a long-term highway master plan, which was prepared almost ten years ago; and (b) a long list of proposed projects which reflect a variety of local interests as well as national development priorities. Some of these projects have well prepared engineering and economic feasibility studies associated with them; some others are integral parts of larger agricultural and forestry development plans and have received attention only in terms of preliminary engineering analyses and cost estimates. Still others are merely lines on a map. The main deficiency of the present "plan" is that it is not feasible in terms of finances or implementation capacity. Perhaps the most critical need is to attach a realistic cost estimate to each project in the current plan and to phase these projects, subject to realistic forecast of fund availabilities. The immediate result of such an effort would be the realization that very difficult decisions are required concerning priorities. Such an exercise is within the capacity of the MCOPT staff and would allow them to focus their limited planning resources on a core of projects instead of dispersing them over a large number, many of which are of low priority. The economic analysis of projects is reasonably well understood within MCOPT, and, with some help, the road investment program could be put on a sound economic basis. The data and analytical requirements of such an exercise are modest, and past Bank assistance has been helpful in improving the data base and the techniques of project analysis. The benefits of such assistance are potentially large, and the effort should be continued, bearing in mind the severe personnel constraint in MCOPT and the consequent need to keep the effort modest and feasible.

13. Port planning is the responsibility of ENP, a semiautonomous organi- zation that operates and plans all of the ports of the country. Its manage- ment has been good and is not subject to frequent change, thus allowing the development of a rolling five-year plan that includes economic, engineering, and financial analyses, most of which are done by the port staff itself. The inclusion of a cash flow analysis in the five-year plan avoids the most serious deficiency of the highway plan and effectively integrates the annual budget exercise for the ports into a longer term plan.

14. Both railway and airport planning are of minor importance due to stagnant or declining traffic, and major investments in these modes are not anticipated. The possibility of a short, specialized banana railway to serve the Aguan Valley and the possible improvement of the airport in Tegucigalpa (largely because of safety considerations) would require specialized planning expertise, but this can be obtained through consultants.

15. The formal transport coordination mechanism involves both MCOPT and the Consejo Superior de Planificacion Economica (CONSUPLAN), attached to the President of the Republic, which works with the Ministry of Finance in harmonizing the transport investment proposals of the various modes. For this purpose, CONSUPLAN prepares both five-year national investment plans and an annual operational plan for the public sector. However, because of CONSUPLAN's shortage of staff and the relative independence of the Ministries, the basic coordination effort now takes place between MCOPT and the Ministry of Finance.

B. The Project

Project Objectives

16. The main objectives of the project are:

(a) To provide an economic and safe road connection between the northeastern part of thie country, the consumption centers and the export outlets;

(b) To determine the complementary investments needed for the development of the Guayape Valley; - vi -

(c) To assist in the preparation of an updated highway investment program to serve as a basis for annual budget decisions;

(d) To assist in the improvement of highway maintenance opera- tions;

(e) To achieve institutional improvements for a smoother operation of the Highway Department; and

(f) To improve the management and operational capacity of the local construction industry.

Project Description

17. To support the above-mentioned objectives, the proposed project contains the following basic elements:

(a) Reconstruction, including supervision, of the Talanga- Juticalpa-Catacamas road;

(b) A study for an integrated development program for the Guayape Valley;

(c) Preparation of a Highway Master Plan;

(d) Purchase of maintenance equipment, including spare parts, workshop, and laboratory equipment;

(e) Technical assistance for training the staff of the Directorates of Highways and of Highway Maintenance, including fellowships; and

(f) Technical assistance to the local construction industry.

18. The Talanga-Juticalpa-Catacamas road is part of the main link between Tegucigalpa and the northeastern section, usually referred to as the "Olancho Region". The present gravel road serves as an outlet for forest exploitation in the mountainous area to the north and connects the third largest valley of the country (the Guayape) to the main population centers; it was constructed almost 20 years ago and, because projected traffic volumes at that time were low, it was constructed to minimal standards with steep grades and sharp curves in order to keep the investment costs reasonable for what was essen- tially a penetration road. Current traffic volumes (about 400 vpd, 50% being heavy trucks, on the most trafficked section) make it impossible to maintain the gravel surface to appropriate standards, and vehicle operating costs are high. Reduced grades and a paved surface will greatly reduce vehicle operating costs and stimulate production in the area of influence of the road. Recon- struction of the Tegucigalpa-Talanga section is currently nearing completion, partly financed by Loan 896-HO. Reconstruction of the Talanga-Juticalpa- Catacamas section to extend the Tegucigalpa-Talanga works to Olancho will be the major component (85% of total cost including contingencies) of the proposed project. - vii -

19. The Talanga-Juticalpa section of the proposed project crosses rugged terrain, while the topography along the Juticalpa-Catacamas section is generally flat; the latter section passes through the Guayape Valley, the area with the most potential for increased agricultural production in the zone of influence of the proposed road works. A joint IBRD/IDB/USAID Agricultural Rural Sector Study indicates that, to achieve this potential, a development program should be undertaken which should include irrigation and feeder road infrastructure; agricultural credit, extension, and marketing facilities; and a progressive land reform and settlement policy. Although some information is available regarding the valley, there is a need to update and supplement it in order to develop a project in the area. The Government has advised the Bank that it wishes to give priority to preparing and undertaking a rural development project for the Guayape Valley. An IBRD/FAO Cooperative Program mission, which visited Honduras in September 1976, has concluded that there is potential for a rural development project to benefit small farmers and agrarian reform settlements. The IBRD/FAO Cooperative Program will assist the Government in preparing terms of reference acceptable to the Bank for project preparation studies to be financed under the proposed loan.

20. Unless the scarce planning, financial, and implementation resources of the country are focused on a feasible, time-staged road investment plan, the annual budget exercise will continue to be unrelated to longer term con- siderations. The collection of basic data for a Highway Master Plan is being carried out under the ongoing Sixth Highway Project (Loan 896-HO). The pro- posed project provides for preparation of a Highway Master Plan based on these data, and the focus under the proposed project will be on a realistic effort within the personnel constraint of MCOPT so that the planning process can be continued with MCOPT staff alone at the end of the period of technical assistance. It is proposed that the consultants who prepared the preliminary work for the Highway M4aster Plan be retained to assist in the actual prepara- tion of the plan. To achieve this continuity, a small amount of retroactive financing will be required.

21. A number of organizations have attempted to support the development of road maintenance in Honduras, and some progress has been made, particularly in changing the structural organization of DGHM, so that it is generally appro- priate. Much remains to be done, however, and the proposed project includes financing for urgently needed maintenance equipment as well as further tech- nical assistance. The technical assistance will take the form of the devel- opment of a pilot maintenance district with the help of consultants. Personnel from the other maintenance districts will then have access to training experi- ence within an actual functioning operation in Honduras. The consultants will, in addition, assist MCOPT in specifying the equipment to be purchased under the proposed project. It has been agreed that the two main maintenance equipment repair shops in Tegucigalpa and San Pedro Sula will be improved in a manner satisfactory to the Bank prior to the disbursement of funds for equipping them. The level of expenditures for highway maintenance and for equipment renewal during the 1977-1980 period has also been agreed. Further, in order to reduce road damage caused by overloaded vehicles, it has been agreed that weight and dimensions regulations for all vehicles which are satisfactory will be enforced beginning not later than June 30, 1977. - viii -

22. The local road construction industry faces a number of problems gen rated in part by the industry itself and in part by the Government's treatment of it. These problems (mainly a deficiency in the firms' technical and managerial expertise and a lack of regulations for dealing with the industry by Government agencies such as eventual delays in payments to the contractors) have been identified by the Bank, and the project includes a technical assistance component to finance a study to make recommendatiuns designed to remedy the present shortcomings of the industry. It has been agreed that the Government will enter into a cooperation agreement, acceptable to the Bank, with the Camara Hondurena de la Industria de la Construccion, the local construction industry association, to provide for the participation in these studies.

Project Cost and Financing

23. The total estimated cost of the project is US$51.2 million equivalent, as detailed on the following page: - ix -

US$ Million FEC Local Foreign Total %

(a) Road Reconstruction, including Right- of-Way 10.1 21.0 31.1 68

(b) Supervision of Construction (522 man-months) 1.2 1.3 2.5 50

(c) Study of an Integrated Development Program for the Guayape Valley (33 man-months) 0.1 0.5 0.6 80

(d) Preparation of a Highway Master Plan (56 man-months) 0.1 0.3 0.4 80

(e) Procurement of: - Maintenance, Workshop and Laboratory Equipment 0.3 2.2 2.5 90

- Spare Parts - 0.3 0.3 100

(f) Technical Assistance to MCOPT (65 man-months) 0.1 0.3 0.4 80

(g) Technical Assistance to the Local Construction Industry (20 man-months) - 0.1 0.1 80 /1

Total Base Costs 11.9 26.0 37.9 68

(h) Contingencies: Physical (about 10% of Item a) 1.0 2.1 3.1 Price Adjustments (about 27% of base costs) - For Civil Works 3.0 6.3 9.3 - For Equipment Purchases - 0.3 0.3 - For consulting services 0.3 0.3 0.6

TOTAL 16.2 35.0 51.2 68

/1 Local costs amounting to about US$20,000 not shown because of rounding of figures.

The cost estimate is based on the assumption that reconstruction works will be carried out by foreign contractors with some local participation; that equipment will be procured abroad; that the Highway Master Plan, technical assistance and study of the valley will be carried out by foreign consultants with some local participation; and that supervision of construction will be carried out by local consultants with some foreign participation. Physical - x -

contingencies have been estimated at 10% of the construction costs, and price adjustment contingencies have been estimated at 12% p.a. for 1977-1979 and 10% p.a. for 1980/81 for the reconstruction works, 8% p.a. for the equipment and 6% p.a. for the consulting services. The unit costs for road construction vary between US$134,000 and US$223,700 per km (excluding contingencies), depending on terrain conditions. Consultant services and technical assistance are estimated at an average of US$5,000 per man-month.

24. The foreign exchange component of the project, estimated at US$35.0 million (about 68% of project cost), will be financed by the proposed loans with disbursements scheduled to take place from March 1977 through December 1981. All local costs, estimated at US$16.2 million equivalent, will be met from Government budgetary allocations. The current assessment of the Honduran economy indicates that sufficient local revenues will be available to finance the present project.

Project Implementation

25. Project implementation will be the responsibility of MCOPT, except for the Guayape Valley study which will be the responsibility of the Ministry of Natural Resources. Implementation will commence in 1976 and is scheduled for completion by mid 1981. Civil works are expected to be implemented over a period of about four and a half years, beginning in early 1977 and ending in mid 1981. Acquisition of right-of-way will be handled by MCOPT before construc- tion contracts are let; existing legislation is adequate for the acquisition.

26. The preparation of a Highway Master Plan, the technical assistance to MCOPT and to the local construction industry, and the study of an inte- grated development program of the Guayape Valley are scheduled to commence in mid 1977, after the selection of suitable consultants, and to be completed by mid 1979. Agreement has been reached on a detailed implementation schedule of the project. In order to strengthen the MCOPT staff, it has been agreed that, as a condition of effectiveness, MCOPT will establish a project unit consist- ing of three engineers and two administrators, acceptable to the Bank, which will be responsible for carrying out the project. Also, MCOPT will prepare by June 30, 1977, a plan acceptable to the Bank for providing incentives designed to assist in recruiting and retaining qualified personnel. Included in this plan will be provisions for fellowships to be granted to MCOPT person- nel who will be attached to highway authorities abroad or to specialized consultants; in either case, attachments will be for short periods in order to avoid disrupting the operations of the Highway Directorates.

Procurement

27. The civil works will be carried out by contracts awarded through international competitive bidding in accordance with the Bank's "Guidelines for Procurement"; prospective bidders will be prequalified. MCOPT proposes that, for bidding purposes, the works be divided into four lots and bids be invited on a "package" basis, whereby the contractors may bid separately for - xi - each of the four lots or for any combinations thereof; contracts will be awarded on the basis of the lower of (a) the lowest evaluated bid for the four lots and (b) the lowest combination of evaluated bids for each lot. The estimated cost of each lot varies between US$5.5 and US$9.5 million, and it is likely that the contracts will be won by foreign firms in joint venture with local firms or subcontracting part of the works to local firms.

28. Road maintenance and workshop equipment will be procured through international competitive bidding in accordance with the Bank's "Guidelines for Procurement". In bid evaluation, consideration will be given to the need for standardization of equipment, which is especially important in a country such as Honduras, with a modest economy, limited facilities for repairs and a scarcity of qualified mechanics and operators. Items (e.g., tools, workshop equipment) that cannot be grouped in packages of at least US$30,000 and will not: in the aggregate exceed the equivalent of US$300,000 will be advertised locally and procured in accordance with local procedures which are acceptable to the Bank. Local procedures will also be applied for the purchase of urgently needed spare parts and laboratory equipment which only a few special- ized firms supply up to an aggregate of US$300,000.

29. The consulting services will be carried out by qualified consul- tants acceptable to the Bank and engaged by the Government under terms and conditions satisfactory to the Bank.

Disbursements

30. Disbursements will be made at 68% of construction costs representing the foreign exchange costs of construction and for the actual foreign exchange costs of equipment; for consulting services, the disbursement percentages will reflect the foreign exchange costs of the different types of services required (para. 23). Any funds remaining in the loan account after project completion will be used for the purchase of additional maintenance equipment. Retroactive financing for about US$40,000 is contemplated for payment of consulting ser- vices (para. 20).

Economic Evaluation

31. The economic evaluation considers, in quantitative terms, the pro- posed investments in (a) civil works and (b) maintenance equipment. The other components are dealt with in qualitative terms.

Civil Works

32. For the economic evaluation of the investment in the proposed civil works, the benefits have been assumed to be savings in vehicle operating costs from (a) improved surface condition and (b) length reduction of the road sections. Benefits accruing to normal and generated traffic have been esti- mated as separate benefit streams and include time savings only for professional drivers and helpers on buses and trucks (the savings account for no more than 3% of the total benefits). - xii -

33. Traffic projections for normal traffic were based on recent traffic counts, past trends, and consideration of the future of the lumber industry in the area. The most recent traffic counts (1976) indicate that traffic on the Talanga-Juticalpa section averages 400 vpd, of which 50% are heavy trucks. For the Juticalpa-Catacamas section, the figures are 380 vpd, with 32% heavy trucks. For the past ten years, traffic on these two sections has been growing at about 5% per year, and the evaluation assumes that traffic will continue to grow at this rate until 1986, when the most accessible timber areas will have largely been exhausted. There is little information on the sustainable yield of timber from the area, and it may well be that timber traffic after 1986 will remain constant or even decline. It is expected, however, that the growth of normal traffic will, on a conservative basis, proceed at 4% after 1986 even without very substantial increases in the rate of growth for agri- cultural traffic from the Guayape Valley. However, if integrated development of the Guayape Valley materializes (para. 19), it should raise the economic return on the project.

34. Generated traffic has been estimated on the basis of reasonable estimates of demand elasticities, and unit benefits for generated traffic have been assumed at half those for normal traffic. Reconstruction of the road is expected to yield a 28% increase in bus traffic and a 17% increase in truck traffic in the year after its completion, with subsequent growth rates the same as those for normal traffic.

35. The economic evaluation shows that the reconstruction of the road will be well justified and appropriately timed. Based on an economic life of 20 years, a construction period of four years for the first section and three years for the second section, the economic return for the road reconstruc- tion element of the project has been estimated at 15%, with a first year return of 13%. Separate analysis of the Talanga-Juticalpa section indicates an economic return of 16%, with a first year return of 14%. For the Juticalpa- Catacamas section, the economic return is estimated at 11%, with a first year return of 9%. The greatest element of risk for this project is the traffic projection. The conservative estimate of growth after 1986, based on the declining importance of lumber traffic and the slow development of the Guayape Valley, reflects this risk. A sensitivity analysis indicates that, with variations of the major cost (+15%) and benefit (-15%) streams, the recon- struction will still yield an economic return of at least 13%.

Distribution of Benefits

36. An analysis of the organization of bus and trucking operations in the area, together with information on land tenure patterns, provides a general indication of the distribution of the savings in vehicle operating costs.

37. The common carrier bus operations in the area, which account for 7% of vehicular traffic on the Talanga--Juticalpasection and 16% on the Juticalpa- Catacamas section, are generally organized on a cooperative basis, both for scheduling purposes and for protection of the operators' interests; buses are privately owned, and entry into the market is free. The operators may try to - xiii - maintain tariffs at current levels after the road is completed, but this wil be difficult because other operators, perceiving profits, will enter tilemarket, thus increasing the frequency of service. Even if current tariff levels are maintained, the effects of inflation will mean a reduction in effect, and most of the savings will eventually be passed on to bus riders who come from the lower income groups. Of total project benefits, it is estimated that those accruing to bus riders will be about 5%.

38. Cost reductions for owners of automobiles and pickup trucks which account for approximately half of vehicular traffic will, in general, go directly to the owners, who are usually the most affluent elements of the population. These benefits are estimated at 13% of the total.

39. Truck operating costs will be influenced by the improved surface and gradients, and reduction in these costs will be responsible for 82% of the total benefits of the investment even though trucks represent only 50% of vehicular traffic on the Talanga-Juticalpa section and 32% on the Juticalpa- Catacamas section. About 35% of the trucks haul timber, and savings attribut- able to this traffic will account for 29% of total benefits of the investment. These benefits will initially be passed on to sawmill owners who serve as middlemen in the lumbering operation, contracting for trucking at the lowest possible rate in a competitive market. The recent takeover of the lumber marketing operation by the Government will, however, allow eventual capture of the benefits by COHDEFOR through truck tariff agreements and price adjust- mentEs for the sawmill outputs. A truck tariff agreement, which is currently being negotiated, will make it possible for the Government to implement weight restrictions without major tariff increases on the project roads and will allow the state to benefit in the form of longer life for the roads and reduced maintenance costs.

40. Truckers carrying agricultural commodities in the area are competi- tive, and operating cost savings should be passed on to shippers in the form of lower tariffs. Larger farmers, who hold over 40% of the land in the Guayape Valley, will benefit the most initially since they are geared to commercial production. However, there are many small holders in the valley (under 50 ha), and recent (1976) figures indicate that progress on land reform is being made there. Sixty-six agrarian reform settlements with about 1,400 families have been established. Depending on how far the policy is carried out, more peasants are likely to gain control of valley land, and the implementation of a rural development project will enable them, and exist- ing small holders, to increase their share in the benefits of the road. Since agricultural trucking benefits are estimated at 53% of the total benefits of the civil works investment, progress on land reform and the development of a project for the valley will be important determinants of the distribu- tion of benefits from the project.

Maintenance Investment

41. Based on an analysis of the entire road network, it has been deter- mined that the level of maintenance expenditure in Honduras is not sufficient - xiv - to keep the current road network at a reasonable standard, and premature re- construction and high vehicle operating costs have been the result. Con- sideration of the present backlog and the future net additions to the main- tenance load indicates that the current expenditures of approximately L 11.0 million per year should be stepped up to about L 19.0 million by 1979. The economic analysis carried out was designed to determine whether the expendi- ture of an extra L 8.0 million per year for maintenance will be well justi- fied, since the Bank contribution will be a part of this increase. This stream of extra expenditures was compared only with the estimated annual savings in avoided reconstruction costs and yielded a benefit-cost ratio of 1.7 over a 15-year period. As is the case with most investments in an ade- quate maintenance program, the expenditure is well justified, and the Bank contribution to the overall program will yield a satisfactory return.

Studies and Technical Assistance

42. Benefits from the studies to be carried out under the project and from the technical assistance have not been quantified. These elements, however, are clearly justified since they will assist the Government in determining investment priorities in the subsector, in preparing a program of complementary investments in the area of influence of the road and in improving operations in the transport sector as a whole.

C. Conclusions

43. The proposed road reconstruction is one of the links of the primary road network that has been developed, for the most part, during the last ten years. It will provide efficient access to one of the largest valleys in the country and to the southern part of the Olancho forestry reserve. Access from the north coast is unlikely to be completed in less than ten years, making the project road the sole outlet for products from this area. While COHDEFOR has a program under way for managing the forest reserve, the develop- ment of the Guayape Valley is less certain, and the proposed study of the valley will ensure that the Government will have the necessary information regarding the practicable potential of the valley and the investments and institutions required to realize that potential.

44. The investment in maintenance equipment is a part of a larger pro- gram that is well justified economically and should be of very high priority. The specified loan conditions are designed to ensure that all actions necesary to the effective execution of this program will be taken . The technical assistance associated with the maintenance component of the loan is designed to improve the implementation capability of the road maintenance organization, while the covenants and agreements are designed to ensure that the maintenance program receives the priority it deserves.

45. The other technical assistance elements are designed to help streng- then the planning and implementation capability of MCOPT, an organization that must be improved if it is to deal effectively with the more demanding and sophisticated planning requirements of the future and to improve operations of the local construction industry. I. THE TRANSPORT SECTOR

A. The Distribution of Economic Activity

1.01 Although Honduras is the second largest country in Central America, it is estimated that only 17% of the land area is suited for agricultural use. The rest of this mountainous country, with thin soils and steep slopes, is best suited for forestry and other extensive uses. The good agricultural land is concentrated in four widely separated major river valleys, ten smaller valleys, and the northern coastal strip. The four major valleys are the Aguan, Sula, Guayape, and Choluteca (Table 1.1). Coffee is produced in the hilly areas between 700 and 1,200 meters above sea level. Cattle breeding occupies many rich valley areas where big holdings dominate. Banana plantations are located in the two most important Atlantic valleys, the Sula and the Aguan. Hardwood and softwood forest production is grouped around the proposed project's zone of influence, spreading to the north and southeast.

1.02 The capital and largest city, Tegucigalpa, had a 1974 population of 280,000, while the second largest city, San Pedro Sula, had a population of 200,000. Additionally, there are five departments in the country with urban populations of less than 50,000 but more than 20,000 (Table 1.2). San Pedro Sula has emerged as the industrial center of the country, with an estimated 55% of the 1970 manufacturing activity. Together, the two largest cities were estimated to account for 80% of the manufacturing output of the country in 1970.

1.03 The Sula Valley and the nearby northern coastal strip have dominated the agricultural and industrial development of the country. Located in the extreme northwest, the valley attained a distinct, almost self-sufficient, regional economy centered on the city of San Pedro Sula, itself about 60 km from the Atlantic coast and from the main port of Puerto Cortes. To the south, facing the Pacific coast, is the Choluteca Valley, of considerable historical importance but having less rainfall and, therefore, less potential than the Sula Valley. The largest of the valleys, the Aguan, like the Sula, faces the Atlantic coast in the northeast, but is isolated from the rest of the country; it has excellent soils and good rainfall and is destined to play an important role in the future shape of the transport system (para. 1.10). The Guayape Valley is located in the center of the country to the west of Tegucigalpa. Its future development and efficient connection with the capital are among the basic objectives of the proposed project.

1.04 An understanding of the valley-centered regional economies of Honduras is essential to an understanding of past and future transport devel- opment strategies. A complicating factor is the transport network required for exploitation and management of the largest natural resource in the country, namely the softwood forests in the north central mountainous areas, where road building is extremely costly and intensive agriculture not possible or even desirable. According to forestry experts, most of these areas should be left as reserve, and managed to provide a sustained growth of timber for export and domestic purposes, rather than be cut and tilled. In the western mountains of Honduras where the timber has been removed, the peasants farm the - 2 -

steep slopes and thin soils and manage to provide a subsistence type of agriculture with no real hope of increased living standards unless they gain access to the rich valley lands, which have generally been controlled by a few families. For this reason, agrarian reform has become a leading political issue of the country, and a comprehensive agrarian reform law has been enacted.

B. The Transport System

(i) Highways

1.05 Honduras is essentially a unimodal country dominated by roads and road transport; the distances are short and the terrain rugged, making rail- ways non-competitive, except in the northern coastal strip where specialized banana railways continue to operate. The Superior Planning Council (Consejo Superior de Planificacion Economica, CONSULPLAN, para. 1.19) estimated that road transport carries 86% of the freight tonnage and 96% of the passenger traffic in the country. The primary road network is centered around the cities of San Pedro Sula in the north and Tegucigalpa in the south. Important agricultural areas, with the exception of the Aguan and Guayape Valleys, have access to the major urban areas over all-weather roads.

1.06 While notable progress has been made in development of a primary road network in Honduras, attention is now shifting to development of secondary and tertiary roads. Local roads to serve the traffic within the main valleys have been constructed, but they have not received the mainte- nance attention that such lower standard roads require. Feeder roads into the mountainous farming areas, where the poorest peasants live, are costly to construct and maintain, and the prDspect of large increments in agricultural production in these areas is small. The low standard road network required for management and exploitation of the forestry reserves will provide for the limited agricultural activities in the forested areas, but the western areas of the country, where the forest has been stripped, will continue to have serious problems of access. (The Road Transport Industry and the Highway Subsector are discussed in full in Chapters II and III.)

(ii) Railways

1.07 There are three small, narrow gauge rail operations in the country, all located in the north and designed originally to serve the banana plan- tations in the Sula Valley and the northern coastal strips. They total 450 km of main and branch line and 750 km of sidings and spurs. The Govern- ment-owned railway, Ferrocarril Nacional de Honduras (FNH), runs from the Atlantic port of Puerto Cortes to San Pedro Sula and along the upper Sula Valley, with a total length of 114 km of mainline. It hauls sawn timber as well as agricultural imports ancl exports. Until recently, FNH showed a profit. Large investments to repair the damage of Hurricane Fifi in 1972, however, and the reduction of banarLa shipments from damaged plantations led to a deficit operation of about US$0.5 million per year for the last two years (Table 1.3). The Tela Railway operates over 179 km of mainline and serves the - 3 - pl^rLtation areas of the eastern side of the Sula Valley and part of the coastal strip. It has access to both Puerto Cortes and the specialized banana pier at the port of Tela. It was owned and operated by the United Brands Company in Tela, but has recently been acquired by the Government. Since both these lines are of the same gauge (1.07 m), their rolling stock is compatible. The Standard Fruit Railroad operates over 157 km of main- line and serves the banana plantations on the coastal strip between Tela on the west and Balfate on the east. The specialized pier at the port of La Ceiba is the outlet for banana exports. Since the line is a 0.91 m gauge, there is no connection to the other railroads. A branch line from the coastal strip through rugged terrain and into the upper Aguan Valley is the only access, apart from the sea, that it has with the rest of Honduras. Negotia- tions have been initiated to make the Standard Fruit Railroad a Government operation also. FNH will then control all the rail operations in the country. With captive banana traffic and a simple operation, there should be no trouble in keeping costs down and tariffs at appropriate levels so that Honduras does not develop a rail deficit problem.

(iii) Ports

1.08 On the Atlantic coast, from west to east, are the four ports of Puerto Cortes, Tela, La Ceiba and Puerto Castilla. On the Pacific coast, there is a deepwater anchorage at Amapala on the island of El Tigre with lighter service to the shallow draft mainland port of San Lorenzo. The ports are operated by the Empresa Nacional Portuaria (ENP), a semiautonomous Government organization that was highly successful in developing the port of Puerto Cortes and was subsequently directed to take over the operation of all the ports in the country.

1.09 If liquid cargoes are excluded, the ocean-borne foreign trade of the country has fluctuated between 1.5 and 2.0 million tons per year for the last five years, with tonnage reductions in 1974 and 1975 due to Hurricane Fifi (Table 1.4). There is a large imbalance in tonnage entering and leaving the country, with export tonnages almost three times import tonnages. Bananas and timber dominate dry cargo export flows. In 1975, bananas were 38% of export cargo by weight, while timber was 30%. Import tonnages are more evenly distributed among machinery, foodstuffs, fertilizer and grain.

1.10 Puerto Cortes is the principal port of the country, accounting for 1.0 million tons, or 68%, of dry cargo flows in 1975. La Ceiba followed with 16%, most of which consisted of bananas. San Lorenzo carried 9%, most of which was timber, while Tela accounted for 7%, again mostly bananas. Puerto Castilla as yet carries no traffic of any significance. Puerto Cortes will continue to be the main port of the country since it faces Europe and North America, serves the better developed Sula Valley, is well sheltered, has good facilities, and is well connected by road to the rest of Honduras and other Central American countries. La Ceiba is likely to decline in importance when the banana plantations are better linked by road, and perhaps rail, - 4 - with the future port at Puerto Castilla. According to a recent consultants' report, the timber pier at La Ceiba is deteriorating, and a decision to replace it will have to be made in a few years; La Ceiba is not well sheltered and does not provide adequate depth for modern ships. A new port will soon be required at Puerto Castilla to handle the Aguan Valley imports and exports as well as the output from the timber and chip mill planned at Corocito. The Bank has recently appraised a project to improve facilities at Puerto Castilla. This is only one of the infrastructure requirements associated with the development of the Aguan Valley. A new port at San Lorenzo on the Pacific, financed by Bank loan 767-HO (1971), is under construction and is scheduled for completion in late 1977; it will eliminate the need for the present lighterage services. San Lorenzo will continue to serve as a major timber outlet and will handle the expected sugar and molasses exports from the Choluteca Valley.

(iv) Air Services

1.11 Honduras has two major airlines offering both domestic and inter- national service. The larger is SAHSA, a private airline with headquarters in Tegucigalpa. It has a fleet of 14 planes for domestic services (DC-3, DC-6, Convairs, etc.,), and a Boeing 737, its major revenue earner, for international service to New Orleans, Managua, San Jose and Panama. The 737 calls at both Tegucigalpa and San Pedro Sula, offering service between these two points. The second airline, TAN, operates a 737 out of San Pedro Sula and offers service to Miami and Mexico City, calling at Tegucigalpa and La Ceiba en route. TAN also operates three smaller aircraft for domestic service. It is privately owned and recently acquired a majority share in SAHSA, effecting a merger of sorts; so far, the operations of the two have not been consolidated. In addition to the two above-mentioned main airlines, there is at least one local airline (Aerovias Nacionales de Honduras) operating DC-3 aircraft, which provides regular domestic service to 20 cities, including the bay islands in the Caribbean Sea. There are also a number of "bush pilot" services that provide access to a large number of airstrips in isolated sections of the country.

1.12 The Villeda Morales airport at San Pedro Sula has a good runway of 2,800 meters. The Toncontin airport at Tegucigalpa is less satisfactory, with only 1,980 meters of runway, barely adequate for modern jets, and is considered a hazardous facility. A new airport at Tegucigalpa is a perennial issue, the rationale being that the capital should have a safe international airport facility. The low level of traffic would not, however, lead to financial viability.

1.13 With the completion of the Western Highway and the road between Tegucigalpa and San Pedro Sula, domestic air traffic has declined steadily since the peak year of 1969 (Table 1.5). Private automobiles and a good intercity bus and truck service have diverted a large portion of air traffic, especially on the Tegucigalpa-San Pedro Sula segment. C. Transport Planning and Coordination

1.14 Responsibility for highway planning lies with MCOPT, and this Ministry is subject to the usual pressures of a public works department that presides over a relatively large investment and maintenance budget affecting all parts of the country. The main bases for highway investment planning are: (a) a long-term highway network master plan, which was prepared almost ten years ago; and (b) a long list of proposed projects which reflect a variety of local interests as well as national development priorities. Some of these projects have well prepared engineering and economic feasibility studies asso- ciated with them; others are integral parts of larger agricultural and forestry development plans and have received attention only in terms of preliminary engineering analyses and cost estimates. Still others are merely lines on a map. The biggest deficiency regarding the present CONSUPLAN plan (para. 1.19) is that it is clearly not feasible in terms of finances or implementation capacity, and there is an urgent need to develop a program that is realistic enough to be of use in the annual budget exercise when the Ministry of Finance and MCOPT make the difficult decisions about project funding. Perhaps the most critical need is to attach a realistic cost estimate to each project in the current plan and to phase these projects, subject to realistic budget constraints. The immediate result of such an effort would be the realization that very difficult decisions are required concerning priorities. Such an exercise is within the capacity of the MCOPT staff and would allow them to focus their limited planning resources on a core of projects instead of dispersing them over a large number, many of which are of low priority. The economic analysis of projects is reasonably well understood within MCOPT, and, with some help, the road investment program could be put on a sound economic footing. The data and analytical requirements of such an exercise are modest, and past Bank assistance has been helpful in improving the data base and the techniques of project analysis. The benefits of such assistance are poten- tially large, and it should be continued, bearing in mind the severe personnel constraint in MCOPT and the consequent need to keep the effort modest and feasible. The proposed project will make an important contribution to the continuation of the transport planning effort by providing for the financing of a new Highway Master Plan.

1.15 Port planning is the responsibility of the National Port Authority (ENP), a semiautonomous organization that operates and plans all ports in the country. Unlike MCOPT, it is not subject to pressures from diverse local interests and generates many of its financial requirements through a system of port charges. Because of the limited number of ports in the country, it also avoids the problem of attempting to implement too many projects. Its management has been good and is not subject to frequent change, allowing the development of a rolling five-year plan that includes economic, engineering, and financial analysis, most of which is done by the port staffs themselves. The inclusion of a cash flow analysis in the five-year plan avoids the worst deficiency of the highway plan and effectively integrates the annual budget exercise for the ports into a longer term plan. The orderly environment of the port planning operation, together with fringe benefits such as subsidized housing and a training program, allows ENP to attract and retain competent staff and to upgrade younger staff. 1.16 The Honduran National Railway (FNH) is also a semiautonomous organi- zation that will eventually be in charge of operating all three narrow gauge railways. It is a stable operation with little traffic growth, specializing in moving bananas to the Atlantic ports. As such, its planning operation is essentially financial and involves projection of revenues and operating expenses. The capital budget is small and has not required sophisticated engineering or economic analyses. The proposal to reconstruct the old rail line from the upper Aguan Valley to the proposed new port of Puerto Castilla is the only serious new project on the horizon, and consultants will be hired to do the studies. The current planning staff is small but has been adequate to date.

1.17 Airport planning is the responsibility of MCOPT, but receives little attention from that Ministry. With distances so short and incomes so low, road transport cut deeply into domestic air traffic as the road network expanded in the 1970's, obviating the need for planning new investments in domestic airports.

1.18 The two modes that receive most of the transport investment in Honduras are roads and ports, and they are the subjects of continuous planning activity. Highways, which control by far the largest budget, accounted for 72% of the 1975 budget expenditure for transport. In the same year, ports accounted for 20%, rail 6% and airports 2% (Table 1.6). To speak of a trans- port plan for Honduras is to speak, therefore, of an independently produced port plan and a highway investment plan.

1.19 The formal transport coordination mechanism involves both MCOPT and CONSUPLAN. CONSUPLAN, which is a quasi-ministry, was originally intended to work with the Ministry of Finance in harmonizing the transport investment proposals of the various modes and to ensure that such proposals support the national development effort. CONSUPLAN is supposed to deal with intersectoral considerations as well as intrasectoral ones, such as those within the transport sector. It has published both a national development plan and an annual operation plan for the transport sector. In the last year, the division within CONSUPLAN that dealt with transport matters became ineffective with the departure of key personnel and advisors, some of whom went to the MCOPT planning unit, and the basic coordination effort now takes place between MCOPT and the Ministry of Finance. This is a realistic move which recognizes that there are simply not enough qualified personnel to staff both the MCOPT planning unit and the transport division within CONSUPLAN.

1.20 Since intermodal considerations are not generally of major concern and highways dominate the transport picture, the budget decision for highways is the major transport investment decision. The coordination required among roads, airports, and the semiautonomous railroads and ports is handled through ad hoc meetings and the personal relationships of the heads of agencies, all of whom know and see one another frequently. -7-

1.21 With an adequate, independently produced port plan and no serious problem of intermodal coordination, the major task remaining is to formulate a highway investment program that reflects both national priorities and con- straints; this has never been achieved through past efforts of CONSUPLAN or MCOPT. Technical assistance under the ongoing Sixth Highway Project (Loan 896-HO) has been aimed at developing a suitable data base and technical skill that would allow such an exercise to be carried out. The proposed project includes a component for financing the preparation of a Highway Master Plan and is the logical extension of the current technical assistance effort. TABLE 1.1

HONDURAS

SEVENTH HIGHWAY PROJECT

Areas of Major Valleys (BackgroundInformation)

Valley Area Km2 % Total

Aguan 2,288 22.6 Sula 1,841 18.2 Guayape l,155 11.4 Choluteca 973 9.6 Agalteca 605 6.o Paulaya 582 5.7 Comayagua 534 5.3 La Masica, Este 388 3.8 Siria 364 3.6 Talanga 329 3.2 Nacaome 322 3.2 Yoro 271 2.7 Jamastr,|rn 261 2.6 Danli-El Paraiso 214 2.1

Total 10,127 100.0

Source: Agricultural/RuralSector Survey: Honduras IBRD/IDB/AIDDecember 1975, Table 1 of Annex 1

April 1976 -9-

TABLE 1.2

HONDURAS

SEVENTH HIGHWAY PROJECT

Urban Population Centers - 1974 (Background information)

1974 Urban Department Population (000's) Main city or town

Francisco Morazan 286.4 Tegucigalpa

Cortes 219.0 San Pedro Sula

Atlantida 57.9 La Ceiba

Yoro 45.3 El Progreso

Comayagua 35.6 Comayagua

Choluteca 34.4 Choluteca

Olancho 23.7 Juticalpa

Other 122.7

Total Urban 825.0

Total Rural 1,828.9

Total National 2,653.9

Source: Current Economic Position and Prospects of Honduras, IBRD Draft Report May 3, 1976

August 1976 - 10 -

TABLE 1.3

HONDURAS

SEVENTH HIGHWAY PROJECT

Honduras National Railway: Traffic and Finance 1970-1975

Net Total 1/ Operating Cargo Total Operating Surplus (Metric Revenues Expenses Deficit (-) Year Tons) Passengers (1000 Lempiras) (1000 Lempiras) (1000 Lempiras)

1970 510,359 106,769 4,130 2,753 1,377

1971 591,010 102,948 4,146 3,661 485

1972 546,724 76,051 3,410 3,624 - 214

1973 619,378 78,452 4,069 3,659 410

1974 446,348 92,991 3,264 4,277 - 1,013

1975 339,745 98,561 2,380 3,631 - 1,251

1/ Includes depreciation and debt service

2/ Estimate based on eleven months figures

Source: Ferrocarril Nacional de Honduras

August 1976 - 11 - TABLE 1 .14

HONDURAS

SEVENTHHIGHWAY PROJECT

Dry Cargo Traffic at Principal Ports 1970-1975 (Thousands of Metric Tons)

1970 1971 1972 1973 1974 l975

Puerto Cortes 880 1080 1069 1169 1013 1015

Tela 210 315 250 206 215 102

la Ceiba 366 369 374 381 313 236

San Lorenzo 128 82 206 209 168 134

Total 1584 1846 1899 1965 1709 1h87

1/ Excludespetroleum and molasses

Squrce: Trafico de Carga y EstadosFinancieros por los Anos 1976 al 1980. Empresa Nacional Forturaria,Febrero 1976

April 1976 - 1z -

TABLE1.5

HONDURAS

SEVENTHHIGHWAY PROJECT

Passenger and Cargo Traffic at Major Airports 1965-1973

Tegucigulpa San Pedro Sula Total Year Passengers Cergo Passengers Cargo Passengers Cargo (l,oo) (l,000 lbs) (1i,00) (1,C0O lbs) (1,OOC) (1,OOC lbE)

1965 113 11,151 78 8,795 191 20,21[6 1966 125 12,955 109 11,339 23L 24,29L

1967 133 1)4,927 112 10,397 245 25,32)4

1968 168 15,15L4 137 11,601 305 26,755

1969 181, 18,121j 167 17,578 351 35,702

1970 213 18,381 200 16,65)4 k13 35,035

1971 17L4 15,855 150 15,306 32L 31,161

1972 152 11,336 109 11,602 261 22,938

1973 1kc3 10,199 10,31,8) 2L6 20,CILO

Source: Estadisticasde Transporte Aerpo 1973-7hi Direccion General de Aeronautica Civil, MCOPT, MIay 1975

April 1976 - 13 - TABLE 1.6

HONDURAS

SEVENTH HIGHWAY PROJECT

PublicInvestments in Transport1973-1974-1975

Mode Amount (1,000 Lempiras)

1973 1974 1975

Roads.1/ 19,800 23,400 34,700

Ports 5,293 15,649 9,433

Railroads 304 297 3,057

Airports 1,769 1,168 872

Total 27,193 40,514 48,062

6ources: j MCOPT

2/ Plan Operativodel Sector Transporte 1976 CONSUPLAN

April 1976 - 14 -

II. THE ROAD TRANSPORT INDUSTRY

A. The Road System

2.01 From the point of view of transport, Honduras has four basic road corridors:

(a) The National Central corridor, which extends from Choluteca on the Pacific to Puerto Cortes on the Atlantic, running through Tegucigalpa (the capital) and San Pedro Sula (the major industrial center).

(b) The Inter-American corridor, which runs along the Pacific Coast from the border of El Salvador to that of Nicaragua.

(c) The Northwest corridor, which runs from San Pedro Sula through Santa Rosa de Copan and Nueva Ocotopeque and continues to the Guatemalan and El Salvador borders at Agua Caliente and El Poy respectively.

(d) The Central American corridor, which runs eastward through Tegucigalpa and Danli, linking the National Central corridor with the border of Nicaragua at Las Manos. This corridor was proposed by the Honduran Government as part of the Pan-American Highway and is due for completion by November 1976.

The above-mentioned four corridors cross Honduras south to north and west to east with the main purpose of carrying and distributing national and inter- national traffic, thereby servicing the various economic regions through a mediocre secondary road system in the west and an incipient secondary system in the east.

2.02 Additionally, four major road projects, designed to open the un- populated eastern regions, are in various stages of study, project prepara- tion, or implementation:

(a) Santa Rosa de Copan-La Esperanza-Masaguara-Siguatepeque, which links the National Northwest corridor with the National Central corridor from west to east, proposed by the Honduran Government as part of the Inter-American Highway.

(b) San Pedro Sula-La Ceiba-Puerto Castilla, which runs eastward and links the two most important valleys in the country, the Sula and the Aguan, situated along the Atlantic Coast.

(c) Tegucigalpa-Talanga-Juticalpa-Catacamas (the Sixth and proposed Seventh Bank projects). - 15-

(d) Talanga-Porvenir-Yoro-Olanchito-La Ceiba, which runs northward through the vast softwood forests of the mideastern region to La Ceiba on the Atlantic, and parallel to the National Central corridor.

2.03 The above existing and programmed road investments will still not cover the potentially rich eastern region, which accounts for one-third of the Honduras territory, and, if benefits of the main network are to filter to the rural areas, secondary and feeder road programs in the eastern half of the country are essential as a complementary effort to the main road programs.

B. The Transport Industry

General

(i) Freight Transport

2.04 There are three types of operators in freight transport:

(a) Individual Operators: This group dominates the transport of domestic freight (70% to 80% one-truck owners). These operators, engaged in the seasonal transport of lumber, grain, and general cargo, operate to and from main urban centers and agricultural regions and use the worst road sections; conse- quently, they have the highest vehicle operating costs. They compete most actively for cargo and return loads, often operating at cost level, and occasionally at below-cost level; they over- load their vehicles from 30% to 60%, are at a disadvantage when seeking financing (with interest rates of 18% to 25% p.a.) and, finally, are under pressure from sawmills and commodity purchasers to reduce rates. To improve the profit margin, they often become middlemen by buying the commodities they transport from farmers and lumbermen and distributing (general merchandise and bulk) through depots.

(b) Regional Operators: This is a small group (about 13 companies with three to 40 trucks each) which works in the Central American transport market, faces price and commodity control from foreign owners, and is being pushed from below by the competition of individual operators searching for expansion. Regional operators have more sophisticated equipment (over 15-ton truck units or over 24-ton truck and trailer units), benefit from the better road network of main corridors, and, consequently, have lower vehicle operating costs. - 16 -

(c) Roll-on/Roll-off Operators: This group dominates the international freight transport. Two USA (Miami) based companies--Coordinated Caribbean Transport (CCT) and Chester, Blackburn & Roder (Pan- American Mail Lines)--utilize vessels of their own or operated under legal waivers by FLOMERCA (Flota Mercante Centro-Americana). Through agreements on pricing, market distribution and route utilization, these companies keep control of the USA originated and destined, general commodity cargo. With an average of 80 trailers per week through Puerto Cortes (2,000 tons/week - 108,000 tons/year), the operation appears profitable; it has no connection with the Honduran economy, except for the US$.57/vehicle mile subcontracting rates paid to individual truckers for the traction of their trailers, when such owners are not US-controlled agents. This situation of freight transport adversely affects distribution of benefits from a national viewpoint insofar as benefits largely accrue to interests outside the country.

(ii) Passenger Transport

2.05 Passenger transport firms are better organized, spreading competi- tion among themselves and accounting for service and maintenance of vehicles. Rates usually take depreciation costs into account. Less-than-economical "bus-taxi" type service is now directly confronted by these better organized firms. Some of the first draft regulations under the new Transport Law (para. 24) will restructure rates and tariffs on suburban and urban passenger trans- port. The Government will also implement a review of passenger transport licenses and will give attention to the quality of service rendered. Rural passenger transport, in areas where feeder roads are in poor condition, is operated by cooperatives using converted pickup vehicles; nevertheless, the standards of this service seem to be adequate for rural needs. Security of all passenger services is poor, and the implementation of adequate regulations to increase security is of top priority within the Bank-financed technical assistance program being conducted by the consultant TAMS-Cerna y Maier (Sixth Highway Project, Loan 896-HO). The flat fare, regardless of distance, for urban transport services in Tegucigalpa and San Pedro Sula presently leaves peripheral urban zones with marginal services and is also due for review. The Government is taking a firm stand on passenger transport tariff regulation as a result of the new law.

Marketing

(i) Freight Transport

2.06 An evaluation of the industry's ability to organize the sale of services must focus on the two most important groups of transported products and on the directions in which such products flow in order to reach the main markets. - 17 -

(a) Agricultural produce and lumber from peripheral zones to main urban centers, and/or storage areas, and/or export points

2.07 Agricultural production is scattered throughout the country, with emphasis on the main productive valleys; coffee is produced in the hilly areas between 700 and 1,200 meters above sea level. Cattle breeding occupies many rich valley areas where big holdings dominate. Banana plantations are located in the two most important Atlantic valleys, the Sula and the Aguan. Hardwood and softwood forest production is grouped around the proposed project's zone of influence, spreading to the north and southeast.

2.08 Services are dominated by individual transport, with the exception of banana plantations served by rail. Simple marketing methods, based on the dual character of the transporter acting as middleman, typify the marketing of services except in the transport of packed meat from the proposed project area, where one of the few well-organized, medium-sized refrigerated transport companies operates profitably and competes successfully in the inter-American market. To market agricultural production better and to protect their own geographical areas or commodities, transport men group themselves into coop- eratives which do not accomplish any marketing or tariff regulating functions; however, through agreements between cooperatives, they offer their members return load possibilities, carrXing general cargo from mnain centers to rural areas.

2.09 Pricing and transport tariffs follow supply and demand, and carriage is therefore seasonal according to demand. Insufficient silo storage capacity in the country has greatly influenced the instability of grain prices, and the consequent price of transport in 1975, by lowering the price of corn from a forecast (Banco de Fomento) L 15 (US$7.50) per 100 kg to a low of L 9 (US$4.50). The same seasonal supply and demand oscillations affect the transport of lumber from production areas to sawmills, and of sawn wood from sawmills to Corporacion Hondurena de Desarrollo Forestal (COHDEFOR) depots or ports for export. Here again, the usual practice is for the transporters to buy lumber from forest owners or contractors and to sell it to sawmills; in turn, saw- mills sell the sawn product to COHDEFOR. This marketing process causes sawmills to be the focal point for price policy with the result that the price of transporting a cubic meter of timber from Tegucigalpa to San Lorenzo dropped from L 101.46 (US$50.88) in 1973 to L 84.80 (US$42.40) in 1975, in spite of the fuel increase.

2.10 These primitive marketing practices and organization, the absence of break-bulk terminals and the tight control of the purchasing monopolies over both producers and transport middlemen, are reflected in the poor standard practices of the industry, in the lack of preventive maintenance, in frequent bankruptcies and change of ownership of vehicles and in one-way overloading practices; eventually they have a negative impact on the filtering of benefits to lower levels of population and on the condition of roads in all areas. Recommendations for improvement of this situation are being made in the analysis of the Road Transport Industry in Central America, which is now being prepared. - 18 -

(b) Manufactured and processed goods from Central American processing centers and from the USA's main cargo center in Miami, to the main urban centers

2.11 The main processing industries in Central America are located in Guatemala, El Salvador and Costa Rica, and marketing and tariffs of transport services for the end products are dictated by the transport companies in the countries where the product originates. Competition is therefore strong for the small nucleus of Honduran firms working the national and regional trans- port market, and return loads are scarce because of the absence of efficient cooperatives at the regional level and the unequal export-import flow of goods. The establishment of sales offices at the regional level through a Central American common market return load system would be a definite improvement in this middle sector of the transport industry marketing. Appropriate recom- mendations for coping with the problem are proposed in the analysis of the Road Transport Industry in Central America.

2.12 The main flow of manufactured products from the USA enters Central America through the roll-on/roll-off system operated by Miami-based companies. Puerto Cortes is the natural port of entry for Honduras, Nicaragua and, in normal conditions, El Salvador. A good return load system, created through an efficient office network in Honduras and within the region, ensures that meat, wood and other agricultural products are returned to Miami for distri- bution. The marketing ability and practices of the two companies involved in the Central American runs, their important financial investment in equipment and terminals, the efficient sales coordination throughout the USA, the agree- ments in force with US operators, and the underdevelopment of the Honduran transport industry, as well as its difficult financial resources and primitive marketing organization, make competition in this field very unlikely. Rates and tariffs are the same as those set by the Federal Maritime Commission in the USA.

(ii) Passenger Transport

2.13 The transport of persons, often combined with the transport of freight in rural areas, has a more fluid and natural marketing pattern based on the quality of service. Competition is keen among the one-owner minibus licensees in urban areas, although services seem to be adequately priced and the number of operators seems to match the service demand. Cooperatives tend to regulate rural transport and protect geographical areas from new entries, but their full impact is to be noted more in the internal organization of the cooperatives and the consequent improvement of services. Within inter-urban transport, certain lines and regions have particularly attractive price escalations; for example, one of the two licensed companies performing services to and from Tegucigalpa and the project area is able, through accurate service, cost and personnel control, coupled with an aggressive sales policy and excel- lent tariffs, to depreciate vehicles every two to four years, keep preventive maintenance, and still have 40% profit before taxes. - 19 -

Organization of the Transport Industry

(i) Legal Types of Association and Administrative Structures

2.14 Types of association change according to different segments of the industry. There is no type of association found at the individual operator level other than the cooperative type. Cooperatives protect groups of truckers in certain territories and commodities against outsiders in their zones of influence. Limited companies or corporations are common among truckers oper- ating the national or inter-American markets, and limited companies are also the most usual type for commodity operators engaged in the carriage of fuel and bulk products. Administration at the cooperative level is simple, all matters being handled by the association itself. A rudimentary paternaliqtic type of management, with more up-to-date personnel organization, can be found at the limited company level. Methodology and managerial transport practices, accurate accounting, truck coordination, preventive maintenance practices, etc., gain ground gradually among private companies and are being used by some limited companies.

(ii) Service Organization

2.15 Two particular service areas not described in the general classifi- cation of industry are subcontracting and commodity contracts. Subcontracting is widely used among brokers and roll-on/roll-off operators; in some cases, it is a simple way to mask foreign ownership. It is done on a mileage basis and has an impact on the number of bankruptcies since it leaves the individual truck owners unprotected in case of breakdown or deterioration of equipment. The commodity contract is also peculiar inasmuch as it too influences entries and bankruptcies; commodity producers and/or purchasers (cement factories, oil distributors, sawmills) agree on a contractual basis for periods up to one year to furnish loads of a specific type and over a specific route. Owners find financing (two years at rates of about 18% to 25% p.a.), on the face value of their contracts, to purchase equipment from importers. If contracts are dis- continued, as the case is presently with oil and cement, truckers are left with an unpaid vehicle and no load to carry.

(iii) The Vehicle Fleet

2.16 Seventy to ninety percent of the fleet is composed of 5-10 ton flat bed, two-axle vehicles. A gradual change is now under way to replace this type of transport with equipment more suited to the new roads under con- struction. Since registration of freight vehicles has not yet been imple- mented, it is hard to give an accurate account of the situation. All equip- ment engaged in inter-American transport and all the roll-on/roll-off equip- ment is of higher tonnage capacity, and most of it is of the truck and trailer type units.

(iv) Operating Practices

2.17 Preventive maintenance is unknown at the individual operator level. The usual life span of vehicles is up to five or six years, depending on - 20 -

routes and care. Bus passenger companies and companies operating at national and inter-American levels have occasionally organized preventive maintenance and replacement of depreciated equipment. In one case at least, vehicle replacements (engine units) were imported regularly to be assembled locally. Depreciation takes three to five years. Import taxes on spares are 25%, while import duties on trucks are higher.

2.18 Overloading is a general practice, and current rates and tariffs take overloading for granted (see chart at the end of this Annex). Lumber carriers interviewed within the project area had an overload factor from 30% to 60%. Grain truckers assume an overloading of 20% to 40%. General cargo compa- nies operating truck and trailer units had an overload factor of 20% to 30%. On commodities such as grain and lumber, and due to the nonexistent return load organization, overloading occurs one-way only, from product areas to main centers, as may be the case in the area of the proposed project. This influen- ces road conditions, taking a heavy toll on one side of the road. The Govern- ment can influence overloading by assisting the main commodity purchasers in negotiating tariffs (lumber, grain) with sawmills and grain distributors in such a manner that benefits, which are excellent at the level of the commodity distributors or purchasers, filter down to the lower levels of the transport industry. The poor condition of road surfaces also encourages overloading, making travel time uneconomical for the normal vehicles used (5 to 10 ton units). The proposed project will cut traveling time from Tegucigalpa to Juticalpa in half, allowing truckers to increase the number of trips at a much lower cost.

(v) Institutional Organization

2.19 Transport documentation at the national and international levels is unified in accordance with the Central American Common Market Agreement. However, a wide gap exists in the implementation of procedures at the national level. Customs stations are slow and ill-informed, interpretation of regula- tions is subjective, and there are no commonly established customs procedures. Usual documents include the Poliza de Transito (International Bill of Lading), the proforma invoice, and the inventory. Usual procedures include custom seals and an accompanying customs man while the vehicle is in transit (custodio).

Distribution of Benefits

2.20 Benefits from road construction and improvement affect mainly the road transport industry in the area, the population living in the road's zone of influence, the marketing of produce from the road's zone of influence, and the development of the road's zone of influence. If benefits are to be passed down to the lower levels to affect the marginal population and to complement social and agricultural development, programs must be carried out, at the farm level, for feeder roads, transport recovery and improved marketing. Benefit distribution in the various strata of the Honduras transport and farming economy has the following pattern. - 21 -

(i) Individual Owner Transport

2.21 Due to the control of the marketing of lumber and grain by sawmills and grain banks 1/, benefits of road projects in rural areas are gradually absorbed by those monopolies unless a strong pricing policy on the Government side is implemented as a complement to road improvement. Considering the prevailing conditions in the project area, benefits will directly affect both farming communities and trucking cooperatives, but they will not affect the marginal population in the area without complementary investment.

(ii) National and Inter-American Transport

2.22 Distribution of benefits in this segment of the industry follows a rather more traditional pattern. Better tariff structures and a healthier competition allow benefits to filter down with better fluidity. It is impor- tant to note, however, that the high percentage of heavy vehicle traffic of foreign ownership in certain corridors (e.g., 80% foreign owned between Puerto Cortes and San Pedro Sula, 90% foreign-owned between the El Salvador and Nicaragua borders along the Pacific, and 67% foreign-owned between Puerto Cortes and the Nicaraguan border through Tegucigalpa) means that a high per- centage of benefits accrue to interests outside the country.

(iii) Roll-on/Roll-off

2.23 No net benefits are left in the local industry by this operation which accounts for 100% of the manufactured commodities entering Honduras via truck trailer units through Puerto Cortes. Unless the local industry organizes itself to compete by means of better-organized sales at the international level, a matching trucking organization inland, better terminals and/or a free zone distribution area, it will have very little chance of participating directly in this business.

Problem Areas

(i) Underdevelopment of one-half of the country eastward, where a high percentage of production originates, and the lack of processing industries in situ causes low volume of input traveling eastward, high volume of cargo traveling westward, return load difficulties, and low load factors.

(ii) Insufficient and/or poor feeder and penetration road systems east- ward cause overcrowding of main areas open to commodities, depopu- lation of other rural areas, poor land utilization in zones of influence parallel to main roads, and excessive vehicle operating costs for lumber and grain transport.

1/ Banco de Fomento and Fanalco (Association of Agricultural Cooperatives) are the main grain purchasers in Honduras. - 22 -

(iii) Poor return-load organization causes low load factors and rentability.

(iv) Ill-distributed benefits from the marketing and distribution of lumber, sawn wood and grain cause subsistence level operations for 75% to 85% of the industry and encourage overloading.

(v) Inter-American tariff and marketing control from Guatemala causes low profitability for the Honduran trucker, return load difficul- ties from Central American countries, difficult growth of the transport industry and consequent transition of ownership from one-owner/one-truck to several-trucks/one-owner level.

(vi) USA operators' control of the most profitable area of business causes underdevelopment of the transport industry, sales and marketing inability at the international level and a very high percentage of heavy vehicle use of road infrastructure in favor of foreign operators.

(vii) Expensive financing causes bankruptcies and industry instability.

C. Regulations and Policies

The Transport Law

2.24 The final revised version of the draft, prepared in 1973, received important modifications between January 27, 1976 and the day of its approval on February 23, 1976 in several cabinet meetings subsequent to the examination of the draft by the Chief of State. The following parts of the law merit comment:

(i) Article (1) qualifies the transport of persons or freight as a specific service controlled by the State; it will, therefore, leave an opening for future implementation, making this law a tool for control or a channel for persuasion, according to Government policy;

(ii) Articles (8) and (9.c) are new additions and give wide freedom to the State to regulate freight transport;

(iii) Article (4.a.b.) makes provision for duty exceptions on imports of vehicles and spares when in the interest of public service. The same provisions apply to materials and equipment to operate transport terminals;

(iv) Articles (5), (6) and (2:3)deal with international transport under the principle of reciprocity and acknowledge the Central American Agreement on Traffic Regulations (approved December 29, 1958); - 23 -

(v) Articles (18) and (23) regulate the minimum national capital required for newly established companies (51%) with foreign participation and the formalities required;

(vi) Delineation of freight and passenger services is now adequate;

(vii) The law points to several areas where draft regulations will follow:

(a) International transport of persons or freight

(b) Urban and road traffic

(c) Passenger and freight terminals

(d) Organization of the Consejo Nacional de Transporte (National Advisory Council for Transport)

(e) Entries and permits, national and international, and charges to be levied on new permits

(f) Special permits for transport of passengers

(g) Transport of explosives, fuel, and otherwise dangerous articles

(viii) The Directorate General for Transport (DGT) of MCOPT is working with consultants TAMS-Cerna y Maier on implementation of the preceding regulations, as well as others.

The Policy

2.25 The present policy of MCOPT is to regulate passenger transport fully and to regulate freight to a limited extent. Communications between industry and the Government will be channeled through the proposed Consejo Nacional de Transportes (Chapter III, Articles 12 and 15). However, behind the various modifications of the present law lies the project of thoroughly modifying the transport structure by the creation of a Government-controlled Empresa Nacional de Transporte. This, if done in accordance with the project pre- sented by the Empresa Nacional Portuaria (ENP), would not favor the present problem areas of the Honduras transport industry, but would create a monopoly for the service of few. 1/

Enforcement of Regulations on Weight and Dimensions of Vehicles

2.26 DGT, with financial help from CABEI, has built and equipped 12 permanent vehicle weight control stations which are operational and are

1/ The first draft for the National Road Transport Company was published by ENP in July 1975. - 24 - located along the National Central corridor (para. 1) with the exception of two scales located at the border with Guatemala in the Northwest corridor and at La Ceiba on the northern coastal road. DGT has undertaken an education campaign for road users as a first step before full enforcement,and allowing time after the issue of the new transport law, for the negotiationsnow under way between COHDEFOR and the sawmills to materialize into a new tariff structure under which the ultimate beneficiarieswould be the mass of individual truckers now performing services for the lumber industry. Since anything affecting transport is a very sensitive economic and political issue, the situation is being carefullyreviewed, and it is difficult to set a date for its final enforcementsince the Government has made no commitments so far. In any case, the Government is moving in the right direction for compliance with section 4.03 (b) of Loan Agreement 896-HO regarding action to be taken for enforcement of regulationson weights and dimensions of vehicles.

D. Future Trends

Rates and Tariffs

2.27 On a first appraisal of the rate structure, it seems logical that the three sectors of the industry in which the main differences of profitability are to be found should start reducing their gap as soon as the small trucker is able to compete for loads at the customer level, terminalsor ports, by means of better access roads. These advantages and, in addition,better equip- ment and facilitiesand his own better organizationwill give the small trucker an incentive to perform preventivemaintenance and also to improve his quality of service; thus, he will transfer a better share of profits from the commodity groups and internationalfirms to himself. Geographicaldistribution of the present road investments,plans for developmentof access roads in rural area, and the Puerto Cortes developmentshould have an impact on the above process.

Inter-Americanand InternationalCoordination

2.28 ENP, supportedby the Government,has laid out plans for the formula- tion of a national transport company conceived with the purpose of gaining ground in the Central American market. Such a project would be welcomed by the Honduras transport economy if the project could be integrated within the present industry and could encouragevertical movement across the various stratas and improvementof marketing. On a wide scale, the main complaints by the transportindustry are:

- No participationin the productiveand important international trailer transportmarket.

- Minor participationin the potentiallyproductive Central American market.

- Absence of an organized network of road terminals. - 25 -

- Absence of a nationwide sales and management organizaiton to coordinate efforts at a private level.

- Absence of sound financial policies in transport industry investment.

Sales Promotion, Management and Transport Coordination Organization at the National Level

2.29 The need to cope with the above problem areas and the need to integrate the industry in an effort to improve transport would point, with slight variation, to a compromise between the public sector's idea and the needs of the country to the formation of a national company with mixed public and private sector participation dedicated to the organization, management and promotion of transport and transport sales, with control over free zone and terminals, ability to establish sales offices both at international (Miami) and inter-American levels, to contract cargo and subcontract transport, obtain and promote finance of equipment among associate members, bill out and collect revenues, and, an general terms, administer for the benefit of many the poten- tiality of the present market. Tentative conversations along this line have already started with the Government and public sectors in order to assess the organizational structure of the projected company and the terms of integration of the industry needs with the institutional proposals. - 26 - pi*= to Chabter II REPU8LtCA DE HONDURAS ~MSITEODE , ,WU iCiO, C tUMLCAS,MAS Y TRANSPORE DIRECCIONGENERAL DE TRANSPORTE PESOS Y DIMENSIONES MAXIMAS DE LOS VEHICULOS DE CARGA CONFORME AL ACUERDO CENTROAMERICANO SOBRE CIRCULACION VIAL. PESO TiPO DE VEHICULO PESO TIPO DE VEHICULO TOTAL TOTAL

1 l 1 e-2 P ~~~~~T3-S2 12.0-T 33.0-T

In.I3 n mInOm nlOm. 4000 8000 4000 7250 7250 7250 7250Kg

C-3 :rC21tR 18.5-T |=34.5-T ; \. 3.Sm lil.§Om.TUlqu. 1 39 nsi0,, 4000 7250 7250Kg 4000 8000 8000 72o 750Kg.

~~~~2-SI~T-S _ 20 O-T 41.0-T

Culue+ l.3^^z.Cn.3.7ni rw lOn. 4000 8000 8000 Kg. 4000 7250 7T0 8000sa 0 T250

T2-S2TT2-SI R2 !26.5-T f i+360-T 'i

aIqar in. 35 m Om 4000 8000 725 7250 Kg 4000 8000 8G0 8000 Kgs ______Iinirimo128 m Maxinmo183m I I*T3-SIC

26.54 N..96.v.W-cla ea-gado 6 dmv.a.cqd0 .. c.d.rd i

MIn35 16351M ANCPIO 2:0 .. 60o

400O 7250 7250 8000Kge ALTO 3 60 - 250 p..

| iat ) iX l | LOitGITUO

I A:,| C 21 R2 | C-2 Co00 m 33 00 pe. 28.0-T C-5 1 00 3 600 pNo -3T 14 0 .. 4 00 pnD,

9 4000 8000 8000 8000 Kg n fOiCe0 co .bl..O.dn *- V. 04 OaIo0P600643 rd - - redo e 1 30 .i N ,q.- F '. i.0obpoldrd mds d. I 0C0 .9 d

| 8 i C3R 2 RO2r .Tn. sO deldh ivdt.io

|34.5-T E.I...... to,C... 0. co eoto1i COori -

MlmS5 f I 3I. | IdiaPOnd*. d060.., -d0 1 O lS 4000 7250 7250 8000 8000 Kg

PARA fP'FNER GU I N .LES , L_- iPLICAR -OiN P .SA 2.2 - 27 -

III. THE HIGHWAY SUBSECTOR

A. The Highway Network

3.01 The total length of the road network in Honduras in 1974 was about 6,140 km, of which 1,240 km were paved (Table 3.1). A major effort to expand the road network was started in the mid-1950's;by 1960, there were about 3,230 km of roads, of which only 110 km were paved. The very rough topography of the country, characterizedby several mountain ranges,makes the develop- ment of the road infrastructuredifficult and expensive. The productive areas are located along the valleys, most of which are served by good roads; there are road connectionsbetween the major population centers and with the neigh- boring countries,although some parts of Honduras, mainly in the sparsely populated east, have few roads. The backbone of the network is the north-south road, which runs between the ports of San Lorenzo and Puerto Cortes, passing through Tegucigalpaand San Pedro Sula; most of the primary system radiates from this road. Highway projects planned and under constructionare expected to complete the primary highway system within the next few years; all produc- tive areas will then be served by good all-weatherprimary roads. Such roads, in order to fulfill their developmentpurposes, will have to be supplemented by a feeder road system; the Government is aware of this, and the emphasis is now being shifted toward the expansion and improvementof the feeder road system. The Bank, through Loan 896-HO (Sixth Highway Project), is assisting in such expansionby financing technical and economic studies for about 330 km of feeder roads and reconstructionof about 80 km of these roads. IDB and USAID are also assisting in the financingof studies of feeder roads in pro- ductive areas.

B. Bank Assistance in the Highway Subsector

3.02 This will be the seventh highway project for Honduras financed by the Bank Group. In 1955, a loan of US$4.2 million (135-HO) was made to finance the establishmentof a road maintenance organization. Three years later, a loan of US$5.5 million (195-HO)was made, primarily to reconstruct the main roads between San Pedro Sula and Puerto Cortes, and between Teguci- galpa and the Inter-AmericanHighway. This project also included the construc- tion of bridges on the Western Highway between Chamelecon and Santa Rosa to make the highway passable during the rainy season. All work under these projects has been successfullycompleted.

3.03 The first IDA Credit of US$9 million (1-HO) was made in 1961 to finance (a) improvementsof sections of the Western Highway between Chamelecon and Santa Rosa to gravel standard and the constructionof an extension to the highway from Santa Rosa to the El Salvador border; (b) constructionof feeder road connectionswith the Western Highway; (c) strengtheningof the highway maintenance organizationinitiated under the first loan; and (d) a highway - 28 - transportation survey to prepare a long-term road investment program. The survey was carried out by Stanford Research Institute, and the report was issued in 1962. The extension of the Western Highway was completed in 1964, and other construction works were completed in 1967.

3.04 In 1965, a credit of IJS$3.5 million (71-HO) and a loan of US$6 million (400-HO) were made to finance reconstruction of the North road from Tegucigalpa to Potrerillos; works were completed in 1971. In 1967, a loan of US$8.6 million (495-HO) was made to finance (a) reconstruction of the remaining sections of the Western Highway and paving over its full length; and (b) feasibility studies for feeder roads and for the Tegucigalpa- Juticalpa road. Feasibility studies were completed in 1970, and reconstruc- tion and paving works were completed in 1972. Finally, in 1973, a loan of US$18.8 million (896-HO) was made to finance (a) reconstruction of the Tegucigalpa-Talanga Road, (b) improvement of a secondary road and 80 km of feeder roads, (c) economic and technical studies for about 330 km of feeder roads, (d) technical assistance for transport planning and (e) a training program for the staff of the highway department. The reconstruction of the Tegucigalpa-Talanga Road (the main project component) is scheduled for com- pletion by December 1976; all other project items are at various stages of progress. The total amount of highway loans and credits provided by the Bank Group has thus totaled US$55.6 million equivalent.

C. Traffic Growth and the Road Transport Industry

3.05 Road transport expanded rapidly in the decade from 1964 to 1974; during that period, the vehicle fleet grew from about 16,000 to 43,900 (Table 3.2), an increase of about 174%. The most notable growth occurred in the number of trucks, which increased by 230%. Such increases led the Government to enact a revised Land Transport Law (February 1976), which permits the regu- lation of freight and passenger transport, in order to organize the transport industry within Honduras and to improve its competitiveness within the context of the overall Central American Region.

3.06 At present, the road freight transport industry comprises three classes of operators:

(a) Independent owner (individual) operators (70 to 80% of truck ownership) dominate the transport of local freight; they are not organized as a group, usually overload their vehicles, and operate at subsistence level; competition among them is keen;

(b) Regional operators (about 13 firms with three to 40 trucks each) operate in the Certtral American transport market; they are better organized as a group and their operation is profit- able; and - 29 -

(c) Roll-on/roll-off operators dominate international freight transport. Primarily, two Miami-based US firms utilize a pool of vessels and operate under various Central American waivers and flags.

3.07 Passenger transport is better organized than freight transport and is very competitive; in general, it is a profitable operation.

3.08 Overall, the truck fleet can absorb the freight transport demands, although seasonally there are surpluses or shortages of truck capacity. The impact of the industry on the economy of Honduras, the market served by each class of operator and other characteristics of the industry are detailed in Chapter II.

3.09 The February 1976 Land Transport Law proposes the creation of a "Consejo Nacional de Transportes" (National Council for Transport) as an advisory body for all transport matters; this Council is already operational. The Directorate General for Transport (DGT) within MCOPT, assisted by consult- ants (TAMS (US)-Cerna y Maier (Honduras), para. 4.10), financed under the ongoing Sixth Highway Project, is helping in the preparation of regulations for implementing the law. At present, it is MCOPT's policy to regulate passenger transport only.

3.10 Overloading of trucks is a widespread practice, and current rates and tariffs assume a degree of overloading which is estimated by DGT to be between 30 and 60%. DGT is in charge of the enforcement of vehicle weights and dimensions and, with assistance from the Central-American Bank for Economic Integration (CABEI), has built 12 weighing stations along the main routes. Information on overloading is now being collected through these stations, but the enforcement of regulations governing weights and dimensions has not yet started; DGT has undertaken an education campaign for road users as a first step before enforcement, which is expected to be put into effect by mid-1977. Overloading is caused mainly by timber trucks. At present, the tariffs are dependent upon substantial overloading if the truck owners are to make a profit. When truck loading is controlled, appropriate adjustments have to be made on these tariffs, and COHDEFOR is considering a revision of the price it pays to the sawmills for the timber so that the increase will be passed on to the truck operators. A complicating factor is that, by Honduran standards, the present axle load limit of 8 tons is low, and a study to determine to what extent this limit could be increased is being carried out by SIECA (Secretaria Permanente del Tratado de Integracion Economica Centro Americana) for the benefit of all Central American countries. During negotiations, the Bank obtained assurances from the Government that it will implement, not later than June 30, 1977, the enforcement of regulations regarding weights and dimensions of vehicles, not only on the project road (Talanga-Juticalpa- Catacamas), but also in the country as a whole. - 30 -

D. Highway Administration

3.11 MCOPT (Chart No. 15878) is in charge of planning, designing, con- structing and maintaining all roads in the country, except for a few roads being built by COHDEFOR for forestry development purposes. MCOPT's highway activities are carried out through two general Directorates: the Directorate General for Highways (DGH, Chart No. 15879), which designs and constructs roads, and the Directorate General for Maintenance of Highways and Airports (DGHM, Chart No. 15880), which maintains the road network.

3.12 About 65 engineers of MCOPT are engaged in highway works; some 40 of them are in the field. Because of the uneven allocation of funds for major highway design and construction works from year to year, MCOPT normally engages consultants for design and supervision of construction. DGH coordinates the consultants' activities from the Central Office in Tegucigalpa. Maintenance works are carried out by force account by the Directorate General for Mainte- nance through seven maintenance districts.

3.13 In June 1970, consultants Brown and Root prepared a Road Inventory. Consultants TAMS-Cerna y Maier, engaged under Loan 896-HO for assistance in transport planning, are reviewing the methodology used and will recommend pro- cedures for preparation of the updated inventory. However, since MCOPT has neither the staff nor the facilities for preparing such an inventory, the consultants to be engaged under the proposed project for the preparation of a Highway Master Plan (para. 4.10) will, among other tasks, produce an updated Road Inventory as one of its basic components.

3.14 Under Loan 400-HO and Credit 71-HO (North Road Project, February 1965) and Loan 896-HO (Sixth Highway Project, 1973) the Government agreed to carry out a number of reforms in highway administration, such as improvement of road maintenance practices, strengthening of the planning unit and creation of a civil service system. Because of the practice of removing most of the high and middle level officials from office with every Government change, very few of these reforms were effected; recently, however, only limited changes in personnel have been observed. In addition, the Inter-American Development Bank (IDB) financed the services of individual consultants for the design of highways and bridges, maintenance operations and economic studies, and the Bank is assisting in the improvement of transport planning. The recent reduction in the movement of DGH personnel, together with the assis- tance provided by IDB and the Bank, has resulted in a general improvement of highway administration. Further improvements are expected as a result of the implementation of the consultants' recommendations on highway maintenance and transport planning and through the training program to be financed under the proposed project (paras. 4.11 to 4.13). The MCOPT building is being expanded to accommodate the additional staff and services.

3.15 One of the problems confronting MCOPT is that of the low salary scales for Government officials, which causes an exodus of qualified or trained personnel. Because of the financial and political implications, the revision of salary scales for t:he public sector is generally not an - 31 -

easy task; however, MCOPT has agreed to prepare a plan of action for engaging and retaining qualified personnel, including bonus payments and other incen- tives. During negotiations, the Bank obtained assurances from the Government that it will prepare, by mid 1977, a plan of action for recruiting and retain- ing DGH and DGHM personnel in service and that it will discuss with the Bank the steps to be taken for implementing the plan.

E. Highway Planning and Financing

3.16 As indicated in paragraphs 1.14 and 1.18 through 1.21, the current highway planning process is deficient in several areas. Despite the efforts made under previous Bank-financed projects, traffic data are not collected regularly by MCOPT; however, consultants have carried out traffic counts for feasibility studies, and DGT conducts sporadic traffic counts on the main roads. The situation is expected to improve substantially soon, when the counting stations located at the 12 weighing stations start to operate by the third quarter of 1976; traffic counters are now installed at the weighing stations, but counts are not yet regularly taken. The technical assistance for transport planning being provided under Loan 896-HO is helping MCOPT in establishing a proper data collection system and in the further evaluation of the data.

3.17 In 1972, CONSUPLAN prepared a six-year investment program (1972- 1977) totaling about L 290.0 million (US$145.0 million equivalent), of which about 80% was to be devoted to road improvement. Subsequently, CONSUPLAN prepared a revised program covering the 1974-1978 period; however, the effects of Hurricane Fifi and the COHDEFOR road program have made this plan obsolete and it has not been revised. All of these investment programs are, in fact, listings of projects, including their description and preliminary cost esti- mates, but they do not include any economic analysis. The Highway Master Plan to be financed under the proposed project will provide a good basis for selecting priority projects within the highway subsector.

3.18 During the 1970-1975 period, about 70% of highway investments were externally financed. However, all allocations pass through the normal budget- ary process, and there is no road fund or earmarking of user charges. Road users are currently paying taxes and user charges at about L 18 million annually, of which fuel taxes account for more than L 12 million with annual road maintenance expenditures of about L 12 million. This is considered generally adequate for pricing of intercity roads infrastructure. However, with increased maintenance expenditures expected in the future, appropriate adjustments will be required. The precise nature and level of these charges will be one of the issues to be considered in a Highway Master Plan Study to be prepared under the project. - 32 -

F. Highway Engineering

3.19 DGH has a set of geometric design standards for road construction which takes into account the type of terrain and the traffic; these standards have been coordinated with those agreed upon for the five Central American countries. When major construction is to be carried out, as in the case of the proposed project, the consultants are asked to adjust the design standards to the specific project. Although soil investigations were insufficient in the past, the use of seismographic methods has been established recently, and the results have been provided to the contractors for their estimating.

3.20 DGH undertakes some design for minor improvements or for feeder roads, but design is more usually carried out by consulting firms. There are at least five competent local consulting firms, and these are widely used by DGH; there are also three joint ventures of foreign/local consulting firms that are active in highway works and that have permanent offices in Honduras; with the increased activity and strength of the local firms, the foreign firms are being progressively phased out.

G. Highway Construction

3.21 DGH is responsible for road construction works; all major works are carried out by means of contracts awarded after competitive bidding. Some minor improvement works and construction of a few feeder roads, totaling an average yearly investment of about L 3.0 million equivalent, are performed by force account. Government-financed works are normally supervised by DGH staff, while externally financed construction works are supervised by consult- ants.

3.22 The local road construction industry is facing a number of problems generated in part from the industry itself and in part from the Government's treatment of the industry. Such problems are mainly:

(a) A deficiency in the firms' technical and managerial expertise;

(b) The fluctuating load on the industry derived from the uneven flow of funds for highway works, adversely affecting the industry investment decisions;

(c) MCOPT's delays in payments to the contractors; and

(d) Lack of regulations for dealing with the industry by Government agencies. - 33 -

A review of the industry and of Government policy and practices vis-a-vis the industry is needed, and a study to help in diagnosing the present short- comings of the industry is included in the proposed project (para. 4.14).

3.23 The Honduran Chamber of the Construction Industry has registered some 11 local firms specialized in highway works with working capacities ranging from US$50,000 to US$500,000 per year; in addition, there are a number of small firms that carry out minor bridge, culvert and earth works. There are also about four foreign and joint ventures of local/foreign firms with permanent offices in Honduras that normally submit bids and obtain contracts for major construction works. Honduras has no restrictions regarding foreign contractors bidding for Government-financed contracts. Contractors may import equipment and materials free of customs duties, but the equipment must be reexported upon completion of contracted works; if it remains in the country, customs duties must be paid.

3.24 Registration and prequalification of local and foreign contractors are normally required for highway works. The "Colegio de Ingenieros Civiles" maintains a register of contractors, and, for the submission of bids, a certif- icate of registration from the "Colegio" is required. This rule applies to both local and foreign contractors, and, so far, the latter have not had any problems regarding their registration.

H. Highway Maintenance

3.25 DGHM performs routine maintenance by force account through its seven maintenance districts. Each district has its own technical staff, equipment and repair facilities. The two main workshops are located in Tegucigalpa and San Pedro Sula, but the facilities in these, as well as in the other district workshops, are deficient. DGHM recently awarded a contract for the construc- tion of a new building within the compound of the Tegucigalpa workshop to improve its operations; however, the workshop equipment, in general, is old and needs replacement.

3.26 DGHM has a staff of about 40 engineers and a labor force of about 1,800; a detailed programming of works, district by district, was established recently, and an evaluation of this new system was carried out in May 1976. A problem arose recently regarding the equipment, part of which, by order of senior Government officials, had been used for works other than maintenance; under pressure from DGHM staff to stop such misuse of equipment, MCOPT decided to create a special unit with its own equipment and resources to carry out these other works. Since the proposed loan would finance maintenance equip- ment (para. 4.08), the Bank obtained assurances from the Government during negotiations that the Bank-financed maintenance equipment will be used solely for maintenance purposes. - 34 -

3.27 MCOPT has received assistance from several sources for improving and strengthening its maintenance operations and equipment. Initially, the Bank, through Credit 1-HO (Western Highway Extension Project, 1961), assisted MCOPT with the financing of consulting services and maintenance equipment totaling about US$1.0 million equivalent; however, because of the shortage of budgetary allocations for routine maintenance and for the replacement of wornout equipment, maintenance deteriorated. The MCOPT authorities have recently tried to correct this situation, and some progress has been made: (a) in 1971, IDB provided US$2.6 million to finance consult- ing services and mai-tenance equipment; (b) in 1972, DGHM was reorganized as a separate depar nent within MCOPT in order to increase the efficiency of maintenance operations; (c) in 1973, the US Export-Import Bank provided US$1.2 million for the same purpose; and (d) in February 1976, the Government purchased maintenance equipment through a supplier's credit that amounted to US$1.3 million equivalent. In spite of such assistance, more equipment is needed to replace wornout units, many of which are 15 years old and over. The present project will provide US$2.8 million for this purpose (para. 4.08).

3.28 Through financing provided under IDB Loan 291 SF/HO, consultants were engaged in 1971 for the following:

(a) improving the accounting and administrative operations of highway maintenance (carried out by consultants Peat, Marwick, Mitchell Co.);

(b) reorganizing warehouse operations and the control of stocks and expediting the supply methods (carried out by the individual consultant Eng. E. Escobedo); and

(c) reorganizing the Highway Maintenance Directorate to improve its field operations and making an analysis of equipment needs (carried out by the individual consultant Eng. A. Sanchez Araya).

Some of the recommendations of these studies have been implemented, but one of the problems at present is the slowness of the method used for importation of emergency spare parts; as is the case for all Government supplies, such procurement must be made through a Central Supply Office in Tegucigalpa. Discussions are being held for expediting these supply procedures, and, in the meantime, DGHM has been provided with a revolving fund for emergency purchases. - 35 -

3.29 As can be seen in Table 3.3, the yearly expenditures for mainte- nance have been rather erratic, but, starting from 1974, they were increased substantially; for 1975, expenditures amounted to L 10.7 million, and for 1976, the allocation is L 12.0 million. These figures show the growing importance that MCOPT gives to highway maintenance. For the forthcoming years, however, these amounts should be increased to allow for operation of the equipment to be purchased under the present loan; the following estimates of minimum requirements for highway maintenance and for equipment renewal for the period 1977-1980 were agreed during negotiations:

Minimum Level of Expenditures

Years Highway Maintenance Equipment Renewal … ------Millions of Lempiras ------

1977 14.0 1.4 1978 16.0 1.5 1979 18.5 1.7 1980 21.0 1.9 -36 - TABLE 3. i

HONDURAS

SEVENTH HIGHWAY PROJECT

Development of the Highway Network 1964-1974 (in kilometers)

Year Paved Gravel Earth Total

1964 382 1,805 1,408 3,595

1965 407 1,852 1,380 3,639

1966 407 1,928 1,713 4,048

1967 416 1,978 1,955 4,349

1968 472 2,120 1,976 4,570

1969 622 2,102 2,004 4,728

1970 745 2,162 2,033 4,940

1971 1,168 2,988 1,433 5,589

1972 1,228 3,028 1,490 5,746

1973 1,228 3,225 1,490 5,943

1974 1,240 3,406 1,490 6,136

Source: MCOPT

March 1976 - 37 - TABLE 3.2

HONDURAS

SEVENTH HIGHWAY PROJECT

Vehicle Registration1964-1974

Year Total Cars Buses Trucks-Various

1964 16,002 8,759 1,217 5,909 117

1965 18,797 10,273 1,526 6,682 316

1966 21,609 11,786 1,784 7,871 168

1967 22,560 12,042 1,704 8,784 30

1968 24,748 11,c45 1,982 11,617 104

1969 27,527 12,254 2,198 12,950 125

1970 28,706 12,630 2,296 13,492 288

1971 30,614 13,765 2,066 14,755 28

1972 34,421 15,293 2,420 15,116 1,592

1973 39,940 17,617 2,654 17,921 1,748

1974 43,934 19,379 2,920 19,727 1,f908

/1 Including small pickup widely used in Honduras which,for statisticalpurposes,are classified as trucks.

Source: MCOPT

March 1976 - 38 -

TABLE 3.3

HONDURAS

SEYENTHHIGHWAY PROJECT

Highway Expenditures 1970-1975 /l (L millions)

Year Studies Construction Maintenance Administration Total

1970 0.9 37.8 4.5 0.9 44.1

1971 - 36.7 3.6 0.7 41.0

1972 04 18.3 3.9 0.2 22.8 1973 0.7 19.88 0.6 25.9

1974 0.7 23J4 9.1 0.8 34h0

1975 2.2 34.7 10.7 L08 48.4

/1 Includes local and foreign financing. 72 The 1976 maintenance allocation is L12.0 million.

Source: MCOPT

August 1976 - 39 - TABLE 3.4

HONDURAS

SEVENTHHIGHWAY PROJECT

Road User Charges and HighwmayEpenditures 1970-74 (L Millions)

Revenues - Expenditures -

Year Fuel Tax Others Total Construction Maintenance Others Total

1970 8.7 -1.9 10.6 37.8 4-5 1.8 44.1 1971 9.5 4.1 13.6 36.7 3.6 0.7 41.0 1972 12.1 3.7 15.8 18.3 3.9 o.6 22.8

1973 13.1 4.6 17.7 19.8 4- 8 1.3 25.9 1974 12.4 5.4 17.8 23.4 9.1 1.5 34.o

/1 Source: Contaduria General de la Repuulica

/2 Source: MCOPT, March 1976

April 1976 - 40 -

IV. THE PROJECT

A. General Description

4.01 The proposed project consists of:

(i) Reconstruction (including paving) of the primary road be- tween Talanga and Juticalpa (about 114 km);

(ii) Reconstruction (including paving) of the secondary road between Juticalpa and Catacamas (about 41 km);

(iii) Purchase of maintenance and workship equipment, including spare parts and laboratory equipment;

(iv) Consulting services for:

(a) preparation of a Highway Master Plan (about 56 man- months);

(b) technical assistance to the General Directorates of Highways and of Highway Maintenance, including an on-the-job training program for engineers, super- visors and technicians as well as fellowships abroad (about 65 man-months);

(c) technical assistance to the local construction industry (about 20 man-months);

(d) study of an integrated development program for the Guayape Valley (about 33 man-months); and

(e) supervision of construction of items under (i) above (about 522 man-months).

The project is expected to take about four and a half years (1977-mid 1981). Some of the above-mentioned consulting services could have been eligible for financing by the United Nations Development Program (UNDP), but the Indicative Planning Figure for the relevant period is fully committed and there are no funds available for this purpose in the Special Fund.

(i) Road Reconstruction Works

4.02 The road reconstruction works have been divided into two sections (Talanga-Juticalpa and Juticalpa-Catacamas) because the sections have differ- ent volumes and composition of traffic, and, consequently, have different design requirements and construction periods; the Talanga-Juticalpa section has the higher volume of traffic and of heavy trucks. - 41 -

4.03 The proposed works are, in effect, a second tranche of the recon- struction of the Tegucigalpa-Talanga-Juticalpa-Catacamas corridor (Map IBRD- 10395-RI); reconstruction of the first tranche (Tegucigalpa-Talanga) is being financed under the Sixth Highway Project (Loan 896-HO) and is expected to be completed in late 1976.

4.04 The Talanga-Juticalpa-Catacamas road, when reconstructed, will facilitate transport of the production from the Olancho region to the capital (Tegucigalpa). The proposed road generally follows the alignment of an existing two-lane gravel road which has a poor riding surface, sharp curves and steep grades and which passes through numerous villages. The road is not suitable for the present heavy traffic, and the Government has allocated a high priority within its investment program to the proposed reconstruction works. Several realignments are proposed to improve the standards of the road and to bypass the villages.

4.05 The feasibility study for the Tegucigalpa-Talanga-Juticalpa road was prepared by UK consultants, Howard Humphreys, Keeble and Partners (HHK), with financing provided by CABEI and the UK Government. It was completed in 1971 and updated by MCOPT in late 1975. Detailed engineering for the road was prepared by the same consultants and was completed in 1973; it has been reviewed by MCOPT and the Bank and found to be generally satisfactory. For the Juticalpa-Catacamas section, the feasibility study was prepared in 1974/ 1975 by US consultants, Brown and Root, with financing provided by the Bank (Loan 896-HO); detailed engineering was completed in late April 1976. The design standards for the two road sections are acceptable and are indicated in Table 4.1.

4.06 The proposed reconstruction works will start at the bridge over the Dulce River at the outskirts of Talanga, which is the terminal point of the Tegucigalpa-Talanga road, now under construction. Three major bridges (60, 70 and 100 m span) and nine minor bridges with spans ranging from 10 to 30 m will be built and three existing bridges widened. Because of the various traffic and topographic conditions, the Talanga-Juticalpa road has been subdivided by the consultants into three subsections; the Juticalpa-Catacamas part is considered as one section. For bidding purposes, the same bidding units have been considered (para. 4.29):

Talanga-Juticalpa Length

(a) Talanga-Guaimaca 32 km

(b) Guaimaca-Guayape River 34 km

(c) Guayape River-Juticalpa 48 km

Juticalpa-Catacamas 41 km

Total 155 km - 42 -

The topography of the first three subsections varies from mountainous to roll- ing; the alignment climbs and descends between 600 m and 1,000 m above sea level, following the valleys whenever practicable. For the Juticalpa-Catacamas section, the topography is generally flat, crossing agricultural lands of the Guayape Valley, one of the most fertile valleys of the country. Seasonal agri- cultural traffic and local traffic use the road, as well as lumber traffic originating from the forest exploitation around Dulce Nombre de Culmi.

4.07 The proposed road will be a two-lane carriageway, with adequate river crossings; three towns along the route (Guaimaca, Campamento and Juticalpa) will be bypassed. The design standard allows for design speeds from 40 to 100 kph according to the topography of the terrain (mountainous, rolling or flat) with a 7.30 m wide pavement between Talanga and Juticalpa and a 7.00 m wide pavement between Juticalpa and Catacamas.

(ii) Purchase of Maintenance and Workshop Equipment Including Spare Parts and Laboratory Equipment

4.08 In spite of the fact that budgetary allocations for highway main- tenance have been substantially increased during the last few years, and that the DGHM organization is working fairly well, the present annual budget of MCOPT provides little money for the purchase of new highway maintenance equipment. The Bank, IDB, CABEI and the US Export-Import Bank have provided ftnds for the purchase of such equipment (para. 3.27); these sources of funding are irregular. The result is that DGHM is operating a substantial quantity of old and obsolete maintenance equipment with very high repair and maintenance costs, resulting in part-time and ineffective service. In 1975, MCOPT, assisted by local consultants, prepared a study of maintenance needs which takes into account the status and age of the equipment now in use and proposes a progressive replacement of wornout units, considering also the time needed for improvement of the repair facilities and progressive increases in the yearly budgetary allocations. The tentative list of a first tranche of maintenance equipment now required is shown in Table 4.2, and its total estimated cost is about US$2.0 million. The same above-mentioned consultants prepared a tentative list of workshop equipment now needed for improving the repair facilities in the two main workshops at Tegucigalpa and San Pedro Sula with a total estimated cost of US$400,000. The consultants to be engaged for the training program (paras. 4.11 and 4.12) will assist DGHM in preparing the final lists of maintenance and workshop equipment to be purchased, as well as the specifications, and will also assist in analyzing proposals and awarding contracts. The soils and materials laboratory equipment being used in the two main laboratories (Tegucigalpa and San Pedro Sula) is old and wornout, and, if a proper control of highway works is to be maintained, it should be supplemented with additional units in order to perform efficiently. MCOPT has prepared a list of the equipment required, totaling about US$100,000, which will be provided under the proposed project. The list was reviewed by the Bank and found satisfactory. The proposed project includes an amount of US$2.8 million to finance all the above-mentioned purchases, including spare parts, as follows: - 43 -

Items

(i) Maintenance Equipment US$2,000,000

(ii) Workshop Equipment 400,000

(iii) Laboratory Equipment 100,000

(iv) Spare Parts (about 15% of (i)) 300,000

Total US$2,800,000

4.09 In order to reduce equipment repair costs and to improve mainte- nance operations in general, the Bank, during negotiations, obtained assurances from the Government that it will: (a) improve, by late 1977, the repair facilities at Tegucigalpa and San Pedro Sula, including the disposal of the old units which are now stockpiled in these workshops (disbursements for the purchases of workshop equipment will not be made until the facilities have been completed and cleared to the Bank's satisfaction); and (b) provide the necessary funds for highway maintenance. The tentative yearly minimum level of expenditures for highway maintenance and equipment renewal for the 1977-1980 period were also agreed during negotiations (para. 3.29). Since the facilities in the present main laboratories are not adequate for the installa- tion of the new equipment to be purchased, the Bank obtained assurances from the Government during negotiations that, by late 1977, adequate facilities will be provided for the installation of the Bank-financed laboratory equip- ment. Disbursements for the purchases of laboratory equipment will not be made until the facilities have been completed to the Bank's satisfaction.

(iii) Consulting Services

(a) Preparation of a Highway Master Plan

4.10 The major planning effort in the transport sector has to be concen- trated on preparation of a highway investment program that reflects both national priorities and constraints (para. 1.21). Neither CONSUPLANnor MCOPT's Planning Office have the staff or facilities for preparing such a program; the investment programs prepared so far comprise a listing of projects, including description and preliminary cost estimates, but do not indicate priorities of investments based on economic analysis (para. 3.17). Consultants TAMS-Cerna y Maier, engaged under the ongoing highway project (Loan 896-HO) to provide technical assistance for transport planning, have developed an improved data base for planning in the highway subsector and have laid the basis for the preparation of a Highway Master Plan. It is proposed that the same consultants be retained to assist in the preparation of the Master Plan. To achieve this continuity, retroactive financing for about US$40,000 will be required. The proposed project provides for the preparation of such a plan, which will include up- dating of the Road Inventory (para. 3.13). During negotiations, the Bank obtained assurances from the Government that the Plan will be carried out through terms of reference and by consultants satisfactory to the Bank. - 44 -

(b) Technical Assistance to the General Directorates of Highways (DGH) and of Highway Maintenance (DGHM)

4.11 The improvement of MCOPT's highway operations requires not only the purchase of additional maintenance, workshop and laboratory equipment (para. 4.08), but also the strengthening of the capabilities of its per- sonnel through a training program which will cover such areas as design, supervision of construction, highway maintenance and soils and materials testing and control. The proposed project includes a technical assistance component that will provide on-the-job training for MCOPT engineers, super- visors and technicians; the training will be conducted in Honduras by special- ized consultants and will also include fellowships abroad for such personnel.

4.12 Under Loan 896-HO, the Bank provided US$150,000 to finance a train- ing program for highway supervisors and technicians and for fellowships abroad. The program, which was carried out with the assistance of US consul- tants, Roy Jorgensen Associates, Inc., was completed in late 1975, but was limited to audio visual courses and fellowships for highway maintenance personnel; a review, during appraisal, of the training needs showed that train- ing in other areas as well as on-the-job training is required. DGH personnel will be trained in design, supervision of construction and laboratory controls, while, for DGHM personnel, an on-the-job training program in one maintenance district (possibly San Pedro Sula) is proposed; if successful, the experience gained from on-the-job training could be extended on a nationwide basis. During negotiations, the Bank obtained assurances from the Government that the program will be carried out through terms of reference and by consultants satisfactory to the Government and the Bank.

4.13 The training abroad for highway engineers and technicians will be carried out through the specialized consulting firm that will conduct the technical assistance program or, alternately, through other Latin American Highway Departments where advanced techniques are applied. The personnel to be sent abroad for training will be selected by MCOPT, in agreement with the Bank, and will be sent in small groups so that the limited technical forces of DGH and DGHM will not be seriously affected and the normal opera- tions of these Directorates will not be disrupted. The fellowships to be granted under the proposed project will constitute one of the incentives to be provided in the plan of action to be prepared by the Government (para. 3.15) for recruiting and retaining MCOPT personnel. The number and duration of fellowships will be determined in consultation with the Bank.

(c) Technical Assistance to the Local Construction Industry

4.14 The factors that adversely affect the development of an efficient local construction industry in Honduras have been noted in paragraph 3.22. The proposed project includes a technical assistance component directed toward making the industry more efficient and will confront the problem from two standpoints: (a) the structure and methods of the industry itself; and (b) the handling of the industry by Government agencies. As regards the industry, the technical assistance will be carried out by MCOPT in coordi- nation with the Honduran Chamber of the Construction Industry and will cover - 45 -

areas such as bidding, cost control, financial planning and management, site operations and equipment management. During negotiations, it was agreed that the Government will enter into a cooperative agreement with the Chamber to provide for the participation in the proposed technical assistance program. As regards the Government, assistance will be provided to MCOPT in the areas of prequalification and bidding procedures and their evaluation and contract management. During negotiations, the Bank obtained assurances from the Government that the proposed technical assistance program will be carried out through terms of reference and by consultants satisfactory to the Government and the Bank. The program is expected to be completed in about one and a half years (early 1977 to mid 1978).

(d) Study of an Integrated Development Program for the Guayape Valley

4.15 In order to determine some of the complementary investments required to develop the area of influence of the Talanga-Juticalpa-Catacamas road, the proposed project will provide for the financing of a study of an integrated development program for the Guayape Valley. This valley, which is the third largest in the country (after the Aguan and Sula Valleys), has a good potential for intensive agricultural development. The Juticalpa-Catacamas section of the road to be reconstructed under the project runs along the Guayape Valley. The increased agricultural production of the valley will be an important source of future traffic for the improved road. The IBRD/IDB/USAID Agricultural Rural Sector Study indicates that, to achieve this potential, a development program should be undertaken which should include irrigation and feeder road infrastructure; agricultural credit, extension, and marketing facilities; and a progressive land reform and settlement policy. Although some information is available regarding the valley, there is a need to update and supplement it in order to develop a project in the area. The Government has advised the Bank that it wishes to give priority to preparing and undertaking a rural develop- ment project for the Guayape Valley. An IBRD/FAO Cooperative Program mission which visited Honduras in September 1976 has concluded that there is potential for a rural development project to benefit small farmers and agrarian reform ?settlements, and the cooperative program will assist the Covernment in prepar- ing terms of reference acceptable to the Bank for project preparation studies to be financed under the proposed loan.

(e) Supervision of Construction

4.16 Because of MCOPT's limited staff, supervision of construction will be carried out by a consulting firm. This arrangement is working satisfac- torily for the Tegucigalpa-Talanga section (Loan 896-HO). During negotiations, assurances were obtained from the Government that it will engage consultants satisfactory to the Bank prior to the start of the road construction works.

B. Cost Estimates

4.17 The total cost of the project is estimated at US$51.2 million, including contingencies and right-of-way acquisition. The foreign exchange component is estimated at US$35.0 million equivalent, or about 68%. Details of the project costs are given below: -46- LempirasMillions US$ Millions Foreign Exchange Local Foreign Total Local Foreign Total Component A. Civil Works

(i) Reconstructionof the Talanga-JuticalpaRoad 16.4 34.6 51.0 8.2 17.3 25.5 68

(ii) Reconstructionof the Juticalpa-Catacamas Road 3-6 7.4 11.0 1.8 3.7 5-5 68

SUD Total 20.0 42.0 62.0 10.0 21.0 31.0

B. Right-of-Way 0.2 - 0.2 0.1 - 0.1

C. Purchase of Maintenance and Workshop Equipment Spare Parts and Laboratory Equip- ment o.6 5.0 5.6 0.3 2.5 2.8 90

D. ConsultingServices

(i) Preparationof a High- way Master Plan 0.2 o.6 0.8 0.1 0.3 0.4 80

(ii) Technical Assistance to two MGOPT ni.rectorates 0.2 0.6 0.8 0.1 0.3 0.4 80

(iii) TechnicalAssistance to the Local Construction Industry - 0.2 0.2 - 0.1 0.1 so -

(iv) Studr of an Integrated DevelopmentProgram of Guayape Valley 0,2 1.0 1.2 0.1 0.5 o.6 80

(v) Supervision of Construc- tion of Item A above 2.4 2.6 5.0 1.2 1.3 2.5 50

Suo Total 3.0 5.0 8.0 1.5 2.5 4.0 Total Base Costs 23.8 52.0 75.8 11.9 26.0 37.9

E. Contingencies (i) Physical (10% of Item A) 2.0 4.2 6.2 1.0 2.1 3.1 68 (ii) Price Adjustment(about 27% of base costs) /1 6.6 13.8 20.4 3.3 6.9 10,2 68

Sub Total 8.6 18.0 26.6 4.3 9.0 13.3

Grand Total 32.4 70.0 102.4 16.2 35.0 51.2 68

/1 Price adjustmentrates as follows: US$ Equivalent /2 Local cost For civil Works 1977-1979 12% 9.3 componentof about For civil works 1980-1981 10% US$20,000 not shown For equipment purchases 1977-1978 8% 0.3 because of rounding For consulting services 1977-1901 6% 0.6 of figures. Total 10.2 - ~ - 47 -

4.18 The construction cost for the Talanga-Juticalpa road was esti- mated originally by consultants HHK and updated recently by MCOPT on the basis of detailed engineering; for the Juticalpa-Catacamas road, it was estimated by consultants Brown and Root on the basis of completed detailed engineering. The unit prices used for estimating the costs are the same as those proposed in recent biddings (1976) for similar works. The foreign exchange cost of construction has been estimated at 68%, based on the assump- tion that works will be carried out by foreign firms in joint venture with, or subcontracting part of the works to, local firms. Table 4.3 gives a breakdown of construction costs for the two project roads.

4.19 The costs for the road maintenance and workshop equipment, includ- ing spare parts, and for the laboratory equipment have been estimated on the basis of detailed lists prepared by MCOPT, including local preparation and delivery charges but excluding import taxes. The foreign exchange component has been estimated at 90% of total costs.

4.20 The costs of consulting services have been estimated on the basis of the number of man-months required for these services. The foreign ex- change component has been estimated at 80% for the preparation of the Highway Master Plan, the study of the Guayape Valley and the technical assistance to MCOPT directorates and to the local construction industry, assuming that the services will be carried out by specialized foreign consulting firms with some local participation. The cost of fellowships abroad is included in the cost of technical assistance. For the supervision of construction, the cost has been estimated on the basis of similar services being carried out in Honduras; its foreign exchange component has been estimated at 50%, reflecting the nature of the work, which involves field surveys requiring local middle- level technicians and specialized workers. The local consulting industry has been developing recently, and there are several local firms able to carry out a substantial part of the services with assistance from, or in joint venture with, foreign firms. A total of about 690 man-months is required for carrying out all consulting services with an average of US$5,000 per man-month.

4.21 A contingency allowance of 10% of construction costs has been in cluded to allow for increases in quantities. The contingency allowance for price escalation has been estimated at 27% of project costs, assuming a 12% increase per annum for 1977 to 1979 and 10% per annum for 1980/81 for local and foreign costs of civil works from the time of bidding to project completion; for consulting services, a 6% increase per annum has been included to cover possible cost increases of these services during project execution; for the equipment, an 8% increase per annum was included during the estimated period between placing orders and delivery at site.

C. Financing

4.22 The foreign exchange component of the project, estimated at US$35.0 million, will be financed by the proposed loan (US$28.0 million from Bank funds and US$7.00 million from Third Window funds) with disbursements scheduled - 48 - from March 1977 to December 1981. The remaining costs, including right-of-way acquisition, will be met from Government budgetary allocations. The Govern- ment does not foresee any problem in allocating the necessary resources for carrying out project works, and the current assessment of the Honduran economy confirms that sufficient local revenues will be generated for the public investment program, including the present project. During negotiations, assur- ances were obtained from the Government that the necessary allocations will be provided on a timely basis for the execution of project works.

D. Implementation

(i) Responsibility for Project Implementation

4.23 Implementation of project elements will be the responsibility of MCOPT through: (a) the Directorate General for Highways for construction and supervision of highway works, for the purchase of laboratory equipment for the part of the technical assistance program that concerns the Directorate and for the technical assistance to the local construction industry; (b) the Directorate General for Maintenance of Highways and Airports for the purchase of maintenance and workshop equipment and spare parts and the part of the technical assistance program that concerns the Directorate; and (c) the Ministry of Natural Resources for the study of the Guayape Valley.

4.24 Because of the shortage of qualified personnel and the additional workload resulting from the implementation of the proposed project, DGH staff must be strengthened and a new unit will be established within MCOPT; the additional staff required, as estimated by DGH, consists of three engineers and two administrators acceptable to the Bank. Such additional staff will coordinate project implementation, and the new unit will control the present and similar future projects. The additional staff will be engaged and paid by MCOPT as part of its institutional improvements. During negotiations, the Bank obtained assurances from the Government that DGH staff will be increased by at least three experienced highway engineers and two administrators to assist in the implementation of the proposed project. The establishment of the new unit will be a condition of effectiveness of the proposed loan.

(ii) Expropriation

4.25 Expropriation of the necessary land will be performed by MCOPT before the construction contracts are let; existing legislation is adequate for this clearance. During negotiations, assurances were obtained from the Government that it will make the necessary arrangements for clearing the land prior to the start of the construction works of the Talanga-Juticalpa-Catacamas road.

(iii) Project Implementation Schedule

4.26 Construction of the Talanga-Juticalpa road is expected to be carried out over a period of four years, between mid 1977 and mid 1981. For the - 49 -

Juticalpa-Catacamasroad, the constructionperiod is estimatedat three years (mid 1977-mid 1980). MCOPT has already invited for prequalification of contracting firms, and bids are expected to be invited in late 1976.

4.27 The preparation of the Highway Master Plan is expected to be im- plemented over a period of about one year (early 1977-early 1978). The technical assistance for the Directoratesof Highways and of Highway Mainte- nance is expected to be implementedover a period of one-and-a-halfyears (early 1977-mid 1978). For the technical assistance to the local construction industry and the Guayape Valley study, the implementationis expected to be made over a period of one-and-a-halfyears (early 1977-mid 1978).

4.28 The tentative implementationschedule for the major activities of each project component is shown in Annex 1 to this chapter; during negotiations,the Government and the Bank discussed and agreed on this schedule.

(iv) Procurement

4.29 The constructionof the Talanga-Juticalpa-Catacamasroad will be carried out by contracts awarded through internationalcompetitive bidding in accordance with the Bank's "Guidelinesfor Procurement";prospective bidders will be prequalified. MCOPT proposes to divide the works into four bidding units: Talanga-Guaimaca,Guaimaca-Guayape River, Guayape River-Juticalpaand Juticalpa-Catacamas(para. 4.06). MCOPT proposes to invite bids under the "packaging" system, whereby contractorsmay bid for each of the four sub- sections separatelyor for any combinationthereof; contracts will be awarded on the basis of the lower of (a) the lowest evaluated bid for the four sub- sections or (b) the lowest combinationof evaluated bids for each subsection. The estimated cost of each subsectionvaries between US$5.5 and US$9.5 million, and it is likely that the contractswould be won by foreign firms in joint venture with local firms or subcontractingpart of the works to local firms. Considerationwas given to the possiblity of subdividingone of the subsections (Juticalpa-Catacamas)into a number of small units to give an opportunityto the local contractors to obtain contracts,but this possibilitywas not pursued because: (a) the local firms are now busy carrying out highway works for the Bank and IDB and most of these firms do not have paving equipment; and (b) MCOPT has an administrativeproblem in managing numerous small contracts. The bidding and contractingprocedures for the constructionworks were discussedand agreed during negotiations.

4.30 The very high volume of excavation (about 5.0 million m 3) makes the civil works unsuitable for labor intensivetechniques; therefore, for this road, in spite of an estimatednational unemploymentrate of 8%, the Government does not favor substitutionof labor for equipmentbecause of a substantially longer constructionperiod, higher financial cost and lower quality of work. Consequently,civil works will be carried out by an appropriateequipment-labor mix based on market prices of inputs. A research program entitled "Development and Implementationof AppropriateLabor-Intensive Technologies for Construc- tion and Maintenance of Rural Access Roads in Honduras" is currentlybeing carried out through consultants,with Bank assistance,to determinethe appro- priate labor-capitalmix for constructionand maintenance of low standard roads. - 50 -

4.31 The road maintenance, workshop and laboratory equipmeuLtwill be procured, generally, through international competitive bidding in accordance with the Bank's "Guidelines for Procurement." However, in bid evaluation, consideration will be given to standardization of equipment, which is espe- cially important in a country such as Honduras, with a modest economy, limited facilities for repairs and a scarcity of mechanics and operators. Orders for less than IJS$30,000up to an aggregate US$300,000 could be purchased on the basis of local bidding. Competitive bidding in accordance with local proce- dures or local shopping will be appropriate for the purchase of some spare parts, laboratory equipment and because the advantages of international competitive bidding will be clearly outweighed by the delays and the administ- rative costs involved.

4.32 The consulting services will be carried out by qualified and experienced consultants engaged by the Government under terms and condi- tions satisfactory to the Bank.

E. Disbursements

4.33 Disbursement of loan funds will be made as follows:

(a) 68% for the reconstruction works to cover the estimated foreign exchange of construction costs;

(b) the actual foreign exchange costs (CIF-Honduras ports) for road maintenance and workshop equipment, spare parts and laboratory equipment and 90% of locally procured imported items; and

(c) 80% for the consulting services for the Highway Master Plan, for the technical assistance for the Highway Directorates, for the study of the Guayape Valley and for the technical assistance to the local construction industry and 50% for the supervision of construction.

4.34 A tentative disbursement schedule is given in Table 4.4. Any funds remainina in the loan account after project completion could be used for the purchase of additional maintenance equipment. Retroactive financing for about US$40,000 is contemplated for payment of consulting services (para. 4.10).

4.35 Disbursements from the Bank loan (US$28.0 million) and from the Third Window loan (US$7.0 million) will be made prorata in the ratio of 4:1. A condition for disbursement for the purchase of workshop and laboratory equipment will be that the Bank should be satisfied with the facilities to be provided by the Government for the installation of such equipment. 5l - TABLE 4.1

HONDURAS

SEVENTH HIGHWAY PROJECT

Design Standards for Project Highways

Terrain Flat Rolling Mountainous

Talanga-JuticalpaHighway

Design speed (lkn/h) 100 70 50 Pavement width (m) 7i3C) 7.30 7.30 Lanes (no.) 2 2 2 Shoulders (m) 1.85 1.85 1.85 Minimum horizontal radius (m) 300 100 60 Maximum gradient (%) 4 6 8 Width of right-of-way (i) 40 40 40 Design loading for Dridges (AASHTO)1/ HS - 20 - 44 Pavement type- design axle load = 8 ton Asphalt concrete carpet- 5 ca thick

Juticalpa-CatecamasHighway

Design speed (km/h) 90 60 40 Pavement width (m) 7.0 7.C0 7.0 Lanes (no.) 2 2 2 Shoulders (m) 1.50 1.50 1.50 Minimum horizontal radius (m) 280 100 50 1"i:ximurngredient (%) 4 6 8 'ThiOthof right-of-way (m) 40 h0 4C Design loadingfor bridges (LASHTCt HS - 20 - 44 Pavement type-design axle load = 8 ton Douole surface treatment

1/ American Associationof State Highway and TransportationOfficials

Source: MCOPT and donsultants

AuRust 1976 TB52- 4. 2 HONDURAS

SEV,Th. HIGHWAYIPROJECT

Description Number

Self-Propelled Vibrating Rollers (3-4 tons) 6

Vibrating Rollers (5-6 tons) 1

Rubber Tired Roller (4-8 tons) 2

Rubber Tired Rollers (11-12 tons) 2

DIsera (5 - 7 tons, 60-70 HP) 5

Wheel Loaders (1.5 to 2.5 m3) 8

Dump Trucks (5 m3 ) 27

3ff-the-roadDump Trucks (10 m3 ) 3

Asphalt Distributors (3,700 1.) 2

Asphalt Distributors (5,400 1.) 1

IWter Tank Trucks (5 tons) 2

Flat Trucks (5 tons) 3

Asphalt Transporters (1,500 1.) 1

Self-Propelled Road Sweepers 1

Self-Propelled Chip Spreaders 1

Jaw Crusher (50 x 90 cm) 1

Vibrating Screening Plants 1

Electric Diesel Groups 180 kw 2

Electric Diesel Groups 5-8 kw 3

Tractor Truck (40 tons) 1

Trailer with Electric Group 2

Concrete Mixer (0.3 m ) 2

Priming Unit (540 1.) 3

Asphaltic Surface Heater 3

Motorgraders 150-160 HP 5

Source: I4COPTand Eission EstimateS

Anri I 1970 - 53 -

HONDURAS

SEVENTH HIGHWAY PrOJECT

Summary of ConstructionCosts (Excluding contingencies)

US$'000_

A. Talanga-JuticalpaRoad (114 kIm)

(i) Clearing and Gruboing 370.0 (ii) Earthworks 10,670.0 (iii) Base and Surface 9,410.0 (iv) Dr2inage 2,530.0 (v) Bridges 1 ,60c.c (vi) Signalization 100.0 (vii) Miscellaneous 820.0

Total 25,500.0

Average cost per hInUS$ 223,680.o0

B. Juticalpa-CatacamasRoad (41 km)

(i) Clearing and Gruboing 60.0 (ii) Earthworks 1,690.0 (iii) Base and Surface 2,290.0 (iv) Drainage 700.0 (v) Bridges 510.0 (vi) Signalization 50.0 (vii) Miscellaneous 200.0 Total _ 5,500.0

Average cost per km US$ 134,146.00

Source: MCOPT and mission's estimates

August 1976 - 54 - 'UhLE 4,4

HONDURAS

SEVENTHHIGHiAY PROJECT

Estimated Schedule of Disoursements

Cumulative Disbursements IBRD Fiscal Year at end of Querter and End of Quarter US$'00C Equivelent

1976/77 Mrerc31, 19-77 0,1CC, Jujne30, 1977 C,5Co

1 977/76 Septer.oer 30, 1977 1,500 DeceTrmoer 31, 1977 3,000 March 31, 1978 5,000 June 30, 1978 7,000 1978/79 September 30, 1978 9,500 Decemoer 31, 1978 12,500 kl rch 31, 1974 15,000 June 30, 1979 18,500

1979/80 Septemoer 30, 1979 21,500 iDecember 31, 1979 24,500 March 31, 1980 27,000 June 3(0, 1980 29,000

198c0/81 September 30, 1980 30,500 December 31, 1980 32,000 March 31, 1981 33,000 June 30, 1981 34,000

1981/82 September 30, 1981 34,500 December 31, 1981 35,000

Source: Mission's estimates

Assumptions: Loan signature: December 1976 Prequalification of contractors: October 1976 Invitations to bid: November 1976 Award of contract: March 1977 Commencement of construction works: Mid 1977 Completion: Talanga-Juticalpa Road: Mid 1981 Juticalpa-Catacamas Road: Mid 1980

November 1976 Qr

......

......

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......

......

......

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......

......

......

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- 56 -

V. ECONOMIC ANALYSIS

A. Civil Works

(i) The Regional Economy

5.01 The Talanga-Juticalpa-Catacamas road serves three distinct functions: it provides general access to a large area of the country northeast of Teguci- galpa, usually referred to as the "Olancho" region; it serves as an outlet for the timber cut in the mountainous area to the north of the road; and it connects the third largest valley of the country (one with high agricul- tural potential) to the population centers. From Talanga to Juticalpa (114 km), the road passes through rugged country and the small Guaimaca Valley. Juticalpa is situated at the lower end of the Guayape Valley and had an estimated population of 38,100 in 1974. From Juticalpa, the road passes along the entire Guayape Valley, 41 km, to the town of Catacamas at the other end. Beyond Catacamas, military engineers have constructed a 60-km road through rugged terrain up to the logging town of Dulce Nombre de Culmi. The existing gravel road to Catacamas was constructed almost 20 years ago and made possible the development of commercial agriculture and logging in the area. Cattle raising, however, dominates the agricultural scene, and a successful meat packing operation for export has been set up at Catacamas. The relatively high cost of transporting the processed meat to the port of Puerto Cortes can be borne by this high value commodity. Lower value commodities, such as corn and beans, are more affected by the price of transport although, in the past, itinerant truckers from as far as El Salvador have come to the Guayape Valley to buy surpluses.

5.02 In 1972, a study was made of the irrigation potential of the Guayape Valley, which indicated that a shift to irrigated intensive agriculture would change the land use patterns dramatically. In the irrigated areas, pasture and fallow land would drop from the present 83% to 20%. Bean acreage would rise from 2.6% to 15% of the cropped area. Coffee, cotton, yucca, rice, tobacco, and bananas would rise from virtually nothing to significant portions of the irrigated area (Table 5.1). Many of these commodities are of high unit value and could be exported considerable distances; the construction of a paved road will reduce transport costs and make their production attractive.

5.03 While land use in the Guayape Valley is almost certain to become more intensive in the future, the outlook for the timber industry in the adjoining mountains is less predictable. Until 1974, when COHDEFOR was created to manage the country's forest resources, the private sector was allowed to exploit the timber reserves of the country almost at will, and the annual harvest of pine has been increasing by approximately 5% per year. The most current estimates of the sustained yield of the national pine reserves indicate that the present annual harvest is greater than the annual regeneration. It takes about 40 years to produce commercial saw timber, and, at present rates, the reserves will be cut in 32 years, leaving an eight-year gap in production

- 57 - before new timber becomes available (assuming that reforestationis carried out). If the 5% growth in the harvest continues for the next 10 years, the reserves can disappear in about 20 years, leaving a 20-year gap in produc- tion. 1/ While commercial loggers are confident of a continued growth in timber production in the area (8% annual growth rates are commonly assumed), they clearly are not considering longer term issues. Assuming that COHDEFOR will eventuallybe able to control and manage the timber resources in a responsibleway, it must be assumed that timber traffic on the road cannot, or at least should not, rise much above current levels and that eventually it will stabilize at a level supported by a sustained yield.

(ii) Current and Projected Traffic

5.04 For purposes of analysis, the road has been considered as two sections, the 114-km Talanga-Juticalpasection and the 41-km Juticalpa- Catacamas section. For Talanga-Juticalpa,there are comparable traffic counts dating to 1964. A straight line fitted to the data for the last 12 years indicates a historical average annual compound rate of growth of traffic of about 4.4%. For the Juticalpa-Catacamassection, comparable counts since 1968 indicate a trend line growth rate of 5.7% per year. Current trafficvolumes on the Talanga-Juticalpasection average approximately400 vehicles per day; 50% of them are heavy trucks. For Juticalpa-Catacamas, the average 1976 traffic flow is estimated at 380 vehicles per day, with 32% heavy trucks (Table 5.2).

5.05 The most recent surveys indicate that approximately40% of the trucks are empty on return, and that from 23 to 45% of the loaded trucks are carrying lumber, giving some indication of the importance of this commodity to the local economy.

5.06 The basic determinants for the traffic projection are: historical information, a general feeling concerning the future of the lumber industry (para 5.03), the agricultural potential of the Guayape Valley (para 5.02), and the need to consider the risks and uncertaintiesassociated with the projections. The scenario adopted to consider these factors is a growth rate in normal traffic (traffic that would use either the old or new road) approxi- mating the historical average of 5.0% per annum until 1986. After 1986, a 4.0% per annum growth rate is assumed reflecting the lack of growth of the timber harvest and no extra-ordinaryeffort to use the Guayape Valley for intensive agriculture. Vigorous land reform efforts and complementaryinvest- ments in irrigation,extension services,marketing, credit, etc. would change this modest growth trend considerably,and traffic could be expected to increase at a greater rate under favorable conditions. For the generated traffic that would move only with the existence of the improved road, a price elasticity of demand for cargo transportof -0.25 was applied to the reduction in operating costs of trucks with the new road. For passenger traffic, a demand elasticity of -0.50 was used in conjunctionwith the reduction in bus

1/ Based on the recent IDB/FAO (CLIFF) Mission study of the Agro-Forestal Potential of the Olancho Region. - 58 - operating costs. The higher figure for buses reflects the fact that passenger travel in Honduras is a "superior" good in an economic sense and that factors other than an improved road are required to bring forth new truck traffic. With these assumptions applied to the vehicle operating cost savings, the amount of traffic generated when the road opens is estimated at a 28% increase in bus traffic and a 17% increase in truck traffic due to the con- struction of the new road. Traffic is estimated to increase from approxi- mately 400 vehicles per day for both sections in 1976 to about 1,400 vehicles per day in the year 2000 (Table 5.3).

(iii) Costs and Benefits

5.07 The Talanga-Juticalpa section is estimated to cost US$28.0 million, net of taxes but including physical contingencies, and to require a four-year construction period. The figure for Juticalpa-Catacamas is US$6.0 million, with a three-year construction period. The timing of the investment expen- diture is indicated in Tables 5.4 and 5.5.

5.08 To maintain the existing gravel road in good condition will, given present traffic and its growth over the planning period, require constant organized effort and the expenditure of L 2,800 growing to about L 3,500 an- nually on each kilometer. Current annual maintenance expenditures are approx- imately L 1,200 per km, which accounts for the poor surface and high vehicle operating costs. This analysis assumes that, even without a new road, main- tenance expenditures will not exceed L 2,000 per km and that the surface will remain in poor condition. Even with adequate finance, it is doubtful if the gravel surface could be maintained to a high standard with so much traffic. With the new paved road, the major surface maintenance effort will be a seal coat every five to seven years, plus the usual ditch and culvert maintenance. This is estimated to cost approximately L 2,500 per km per year. Thus, there will be no maintenance saving with the new road, but rather an additional cost of L 500 per km per year. The net additional cost is included as a cost stream in Tables 5.4 and 5.5.

5.09 The chief quantifiable benefits are the reduction in vehicle operating costs for the project traffic and a 13.2-km shortening of the Talanga-Juticalpa section. For normal traffic, the full difference in operating costs is taken as a benefit. For generated traffic, one-half the difference in operating costs with and without the investment is used. This is a crude but feasible approach for estimating benefits of generated traffic, recognizing that unit benefits to traffic that will move only with the completion of the new road will be less than those for normal traffic (otherwise it would have moved on the old road), i.e., less than 100% but certainly greater than zero; hence the adoption of 50% as a best estimate. Vehicle operating costs for the traffic in question depend on type of vehicle, road surface, average gradients and curvatures, and the average speed of the vehicle (Table 5.6). Value of time for passengers and the drivers of light vehicles is not included in the estimate of operating costs; only the time of the drivers and helpers is considered (approximately 3% of total costs and benefits). The operating costs over the two sections for the three classes of vehicles considered - 59 -

(light vehicle, bus, and truck) are given for both the existing and the proposed roads in Table 5.7. The benefits accruing to normal and generated traffic are shown as separate benefit streams in Tables 5.4 and 5.5.

(iv) Economic Evaluation

5.10 The overall economic evaluation of the Talanga-Catacamas road in- vestment indicates that reconstruction is well justified and appropriately timed. As the table below indicates, assuming an economic life of 20 years and a construction period of three to four years, the economic return would be 15%, with a first year benefit of 13%; variation of 15% in the major cost and benefit streams yields a rate of return no lower than 13%.

Road Section Assumption Rate of Return First Year Benefits

Talanga- (Base Cost 15 13 Catacamas (15% Increase in (i.e., the (Construction Costs 13 _ whole civil (15% Reduction in total works) (Benefits 13 _

(Base Cost 16 14 (15% Increase in Talanga- (Construction Costs 14 - Juticalpa (15% Decrease in (Benefits to normal (traffic 14 -

(Base Cost 11 9 (15% Increase in Juticalpa - (Construction Costs 10 Catacamas (15% Decrease in Benefits (to normal traffic 9

A separate analysis of the Talanga-Juticalpa section yields a rate of return of 16% with a first year benefit of 14%. For Juticalpa-Catacamas, the rate of return is 11% with a first year benefit of 9%.

(v) Distribution of Benefits

5.11 The distribution of benefits of reduced user costs revolves around two issues: the portion of cost reductions that truckers and bus operators pass on as tariff reductions, and the economic status of the shippers and travelers who use the services. Cost reductions for owners of automobiles and pickup trucks would, in general, go directly to the owners, and these people are usually the most affluent elements of the population. Benefits to this class of users represent approximately 13% of the total accruing to the road investment. To the extent that pickup trucks serve as common carriers of - 60 - freight and passengers, the benefits of reduced operating costs would be passed on to users in the same way as they are passed on to users of common carrier buses and trucks (paras. 5.12 and 5.14).

5.12 The common carrier bus operations in the area are organized mostly on a cooperative basis. Buses in the cooperatives are privately owned, and each owner participates voluntarily. A major benefit is the coordination of departure schedules, allowing each member to have access to the peak hours on a regular basis. While operators must have a Government license, entry into the market is not difficult. After the road is constructed and bus operating costs drop by as much as 50%, the operators, rather than reducing tariffs, would undoubtedly try to maintain tariffs at old levels but this would be difficult because other operators, perceiving profits, would enter the market, thus increasing the frequency of service. Even if current tariff levels are maintained, the effects of inflation would mean a reduction in effect, and most of the savings should eventually be passed on to bus riders who come from the lower income groups. Benefits to this class of users represent approximately 5% of the total benefits of the project, assuming their time is of no value.

5.13 The situation of timber haulers is complicated. Truck operating costs will decrease on the new road, and savings will, in general, accrue initially to sawmill owners since this type of trucking is competitive. As much as 29% of the total benefits of the project fall into this category, and sawmill owners have been a relatively affluent group. With timber trucks frequently overloaded by as much as 50%, the forthcoming Government control of axle loads will reduce unit trucking revenues, requiring, under normal circumstances, tariff increases. With the large savings in operating costs anticipated, it is not clear that tariff increases will be required, and the new road will reduce the unpleasant implication of load restrictions since the savings in operating costs will tend to offset the reductions in revenues due to smaller loads. The savings in road maintenance costs due to the weight restrictions are an independent set of benefits not associated with the proposed road investment although the new road, for reasons given above, will make the imposition of the restrictions easier.

5.14 Of particular interest is the situation for truckers of agricultural commodities. The trucking industry has been generally competitive in the past, and, unless the recently passed transport regulatory legislation changes this situation, savings in trucking costs should be passed on to the shippers be- cause of the competition. With the completion of the paved road between Tegucigalpa and San Pedro Sula in 1971, for instance, trucking tariffs dropped as much as 50%. Of more relevance is the economic status of the shippers of agricultural surpluses. Table 5.8 indicates the distribution of farm sizes in the municipalities of Talanga and Juticalpa in 1965-1966. In Juticalpa, 49% of the total farm land was controlled by only 2% of the farms, all of which were 350 hectares or greater in size; 67% of the farms controlled only 10% of the land, and all of these farms were less than 14 hectares in size. The situation was similar in Talanga. Under these circumstances, the bulk of agricultural surpluses of the Guayape Valley are controlled by a few - 61 - families. Thus, the benefits of better prices for agricultural surpluses would also tend to go to a few families. This is not to say that the small farmers would not benefit also, but, rather, that their share of the total trucking benefits would be small compared to their numbers. Since agricul- tural trucking benefits are estimated at 53% of the total, this is an impor- tant consideration in determining the ultimate beneficiaries. Current pressures for land reform are high, and progress is being made. Recent information for the Guayape Valley indicates that approximately 1,400 families have been organized into 66 settlements or "asentamientos". To the extent that peasants continue to gain access to the valley land and organize the marketing of their surpluses, they too would share in the benefits of the investment.

B. Road Maintenance Equipment

5.15 MCOPT is currently allocating approximately L 11.0 million per year for road maintenance. It is estimated in a recent study, however, that this amount can provide maintenance for only 70% of the current MCOPT road network of 5,532 km. In order to handle the entire network, it is estimated that approximately L 15.7 million per year are required. In addition, the planned construction of new roads by 1979 would require that the maintenance expen- ditures reach approximately L 18.5 million per year, when the network to be maintained would be expanded to 6,500 km. At issue here is the question of whether the extra allocation of L 7.5 million per year is an efficient use of resources and whether the amount of L 5.4 million provided under the proposed project for maintenance and workshop equipment, including spare parts, would be part of an economically justified maintenance program.

5.16 The maintenance program costs and benefits are considered on an annual basis. Both benefit and cost streams are smooth and continuous. For this reason, the benefit-cost ratio is a more meaningful measure of the goodness of the program than of the economic return. The benefits accruing to the extra level of maintenance expenditure are the avoidance of premature reconstruction of existing roads and the reduction of vehicle operating costs on sections not previously maintained. Tables 5.9 and 5.10 indicate the current and future maintenance deficit and the associated reconstruction costs if maintenance expenditures continue at current levels. It is estimated that failure to increase the maintenance allocation will lead to a capital expen- diture of L 12.5 million per year for premature reconstruction. Since the annual cost of the improved maintenance effort is estimated at L 7.5 million over a 15-year period, the benefit-cost ratio at any discount rate, consider- ing only avoided reconstruction costs, is 1.7. If savings in vehicle operating costs were included, the benefit-cost ratio would be much higher. It is further estimated that equipment purchase costs are only 20% of the total maintenance costs, the balance being materials, wages, fuel, and spare parts. This implies an annual investment in new equipment for the total maintenance program of L 3.7 million (US$1.9 milion). The amount of US$2.7 million provided under the proposed project would therefore finance a full year's purchase of maintenance equipment plus some urgent deferred purchases. As is the case with most investments in an adequate maintenance program, the expenditure is well justified. - 62 - TABLE 3.l

HONDURAS

SEVENTHHIGHWAY PROJECT

Actual and Proposed Cropping Patterns for Irrigated

Areas of the Guayape Valley

Percent of Cropped Area Percent of Cropped Area CroP Without Irrigation With Irrigation

Pasture 56.9 20 Maize 10.6 10 Beans 2.6 15 Coffee 1.2 10 Cotton 1.2 10 Yucca 0.1 20 Rice 0.8 20 Tobacco 0.1 15 Banana 0.2 15 Plantain 0.3 0 Fallow 26.0 0

Source: IBRD/IDB/AIDAgricultural/Rural Sector Study Annex 8 December 1975

Original source: Consultores Latino Americanos Asociados (CLASS), Lima, Estudios de Prefactibilidadde Irrigacion, 1972.

April 1976 TABLE 5.2 - 63 -

HONDURAS

SEVENTHHIGHWAY PROJECT

Current Levels and Mix of Road Traffic 1976 (vehicles/day)

Talanga-Juticalpa

Vehicle Type Number % of Total

Light Vehicles 172 43

Buses 28 7

Trucks 200 5°

Total 400 100

Juticalpa-Catacamas LightVehicles 198 52

Buses 61 16 Trucks 122 32 Total 380 100

2/ Light vehiclesinclude, in additionto autos,pickup trucks, which are an importantform of passengerand freighttransport.

Source: For Talanga-Jut.icalpa,1976counts by MCOPT For Juticalpa-Catamas,1976counts by Brown & Root Consultants

April 1976 - 64 - TABLE 5.3

HONDUJRAS

SEVENTH HTl"HWAl1PROJECI

Traffic Projections (Vehicles/day)

Year Tal nga-Juticalpa _ JuticalpaCatac4ma Normal Generated / Total Normal Generated TTotal

1976 400 400 380 - 380

1980 486 - h86 462 93 555

1981 511 108 619 485 98 583

1985 621 131 752 590 119 709

1990 763 161 924 724 146 870

1995 928 196 1124 881 178 1059

2000 1129 239 1368 1072 216 1288

2/ Traffic mix assumed at 50% trucks, 7% buses, and 431 light vehicles for all years for normal traffic.

2/ Traffic mix assumed at 32% trucks, 16% buses, and 52% light vehicles for all years for normal traffic.

3/ Generated traffic based on vehicle operating cost saving of Table 4.7 and elasticitiesof +.25 for trucks and +.50 for buses and light vehicles.

Source: Mission Estimates

April 1976 HONDURAS

SEVENTH HIGHWAY PROJECT

Cost and Benefit Streams Talanga-Juticalpa (1000 Lempiras)

C o s ts B e_n e f i t s _ Operating Cost Operating Cost Distance Distance Total Year Construction Additional Saving Saving Saving Saving Costs Maintenance Normal Generated Normal Generated Benefits .______Costs Traffic Traffic Traffic Traffic

1977 8400 _ _ _ - 1978 16800 _ _ _ - 1979 19600 _ l _ _ 1980 11200 _ _ _ - 1981 - 57 6838 634 1243 116 8774 1 1982 - 57 7179 665 1305 121 9216 > 1983 - 57 7538 698 1370 127 9679 m 1984 - 57 7915 733 1438 134 10166 1985 - 57 8311 770 1510 141 10677 1986 - 57 8727 809 1586 148 11214 1987 - 57 9076 841 1650 154 11664 1988 - 57 9439 874 1716 160 12133 1989 - 57 9816 909 1784 166 12620 1990 - 57 10209 946 1856 173 13127 1991 - 57 10617 983 1930 180 13655 1992 - 57 11042 1023 2007 187 14203 1993 - 57 11484 1064 2087 194 14774 1994 - 57 11943 1106 2171 202 15367 1995 - 57 12421 1150 2258 210 15984 1996 - 57 12917 1197 23)48 219 16626 1997 - 57 13)43)4 124)4 2)4)42 227 17293 1998 - 57 13972 129)4 25)40 237 17987 1999 - 57 14530 1346 2641 246 18709 2000- 57 ~~~~~15112 1)400 27)47 256 19459 .

Source: Mission estimates August 1976 - 66 - TABLE 5.5

HONDURAS

SEVENTHHIGHWAY PROJECT

Cost and BenefitStreams Juticalpa-Catacamnas (1000 Lempiras)

C O S S B E N E F I T S Year Construction Additional Operating Cost Operating Cost Costs Maintenance Saving Normal Saving Generated Costs Traffic Traffic

1977 2420 1978 6050 1979 3630 _ _ _ 1980 - 21 1139 93 1981 - 21 1195 97 1982 - 21 1255 102 1983 - 21 1318 107 1984 - 21 1384 113 1985 - 21 1453 118 1986 - 21 1526 124 1987 - 21 1587 130 1988 - 21 1650 135 1989 - 21 1716 140 1990 - 21 1785 146 1991 - 21 1856 152 1992 - 21 1930 158 1993 - 21 2008 164 1994 - 21 2088 171 1995 - 21 2171 177 1996 - 21 2258 185 1997 - 21 2349 192 1998 - 21 2443 200 1999 - 21 2540 208 2000 - 21 2642 216

Source:Mi8sion estimates

April 1976 - 67 - TABLE 5..6

HONDURAS

SEVENTHHIGHWAY PROJECT

Road and Vehicle Operating Characteristics

Talanga-Juticalpa

Existing Road Proposed Road

Average Gradient % 5-7 0-3

Average Degree of Curvature 10-20 4-19

Light Vehicle Speeds (km/hr) 32 64

Bus Speeds (km/hr) 32 56

Truck Speeds (km/hr) 16 40

Juticalpa-Catacamas

Existing Road Proposed Road

Average Gradient % 3-5 0-3 Average Degree of Curvature 3-16 4-22

Light Vehicle Speeds (km/hr) 40 64 Bus Speeds(km/hr) 40 56

Truck Speeds (km/hr) 24 40

Source: Consultants Studies and Mission Estimates

April 1976 - 68 - TABLE 5.7

HONDURAS

SEVENTHHIGHWAY PROJECT

1/ Vehicle Operating Cost (Lempirasper vehicle-km) Talanga-Juticalp

VehicleT_ype / _Existing Road Proposed Road Saving

Light Vehicle 0.18 0.09 0.09

Bus 0.39 0.17 0.22

Truck 0.80 0.27 0.53

Juticalpa-Catacamas

VeheExistingRoad Proposed Road Saving

Light Vehicle 0.16 0.09 0.07

Bus 0.36 0.17 0.19 hi Truck 0.58 0.27 0.32

1/ Includes value of time for driver and assistant on bus of 2.43 Lempira per hour. For a truck: 3.64 Lempiras per hour for a driver, assistant,and 1.8 laborers.

j Light vehicle costs assume mix of 50% autos and 50% pickups.

3/ Bus costsassume mix of 55% smallbuses and 45% large.

v/ Truckmix is 55% 3.5 ton, 35% 15 ton, 10% 18 ton.

Source: TAMS User Cost Model for Honduras with adjustmentto 1976 prices

April 1976 - 69 - TABLE 5.8

HONDURAS

SEVENTHHIGHWAY PROJECT

Farm Size Distribution in the Municipios

of ralanga and Juticalpa in 1965-66

Talanga

Farm Size Percent of Percent of Total (Hectares) Total Area Number of Farms

O - 1 34.o 90.8

14 - 70 22.7 7.9

70 - 350 14.4 1.1

Over 350 29.9 0.2

Juticalpa

Farm Size Percent of Percent of Total (Hectares) Total Area Number of Farms

O - 14 10.3 66.5

1 - 70 21.8 26.3

70 - 350 19.1 4.9

Over 350 48.8 2.3

Source: Agricultural/RuralSector Study Honduras IBRD/IDB/AIDVolume III December 1975

Original Source: 1965-66 AgriculturalCensus

April 1976 - 70 - TAbLE 5.9

HONDURAS

SEVENTHHIGHWAY PROJECT

Current and Future Backlog of Road Maintenance

With Current Expenditure Levels

(km) (km) (km) Total Item Paved Gravel Dry Weather (km)

Current Road Network 1,232 3,278 1,022 5,532

Current Maintenance/- 862 2,295 715 3,872

CurrentDeficit 370 983 307 1,660 FutureAdditions /2 268 522 178 968

TotalFuture Deficit 638 1,505 485 2,628

/1 With the currentlevel of expenditureit is estimatedthat only 70% of the required maintenance level is achieved. /2 1976-1979 estimated net additions to the road network.

Source: Justificacion Economica para la Adquisicion de Equipo de Conservacion de Carreteras, SCOPT, Febrero 1976, and mission estimates

May 1976 - 71 - TABLE5.10

HONDURAS

SEVENTHHIGHWAY PROJECT

Reconstruction Costs of Roads Not Maintained

Reconstructioi6 13 Useful Life & Annual Cost Allowable- with Reconstructioni- Maintenance Li (Millions) Neglect Maintenance Cost TYpe of Road Deficit (Em) (Lemp/Km) (yrs-) (yrs.) (Million Lemp.)

Paved 638 50.0 8 20 4.0

Gravel 1,505 24.0 5 20 7.2

Dry Weather 485 8.0 3 20 1.3

Total 2,628 - - - 12.5

/1 From Taole 4.9

/2 Assumesreconstruction cost is equal to 20% of initialconstruction cost.

/3 Mission estimatea of numoer of years withoutmaintenance before reconstruction is required.

A4 The averageage of the road networkis assumedat 5 years, leaving15 years of usefullife for the period of analysis.

15 Equalsthe maintenancedeficit times the reconstructioncost dividedoy the allowableperiod of neglect. Source: Same as Table4.9 - 72 -

VI. AGREEMENTS REACHED AND RECOMMENDATION

6.01 During loan negotiations, agreement was reached on the following principal points:

(a) To implement, not later than June 30, 1977, the enforcement of regulations on weight and dimensions of vehicles, not only on the project road but in the country as a whole (para. 3.10);

(b) To prepare, by mid 1977, a plan of action for recruiting and retaining highway personnel and discuss with the Bank the steps to be taken for implementing the plan (para. 3.15);

(c) To use the Bank-financed maintenance equipment solely for maintenance purposes (para. 3.26);

(d) To improve, by late 1977, the equipment repair facilities of Tegucigalpa and San Pedro Sula, including the disposal of the old units that are stockpiled in these workshops (paras. 3.29 and 4.09);

(e) To provide the necessary funds for highway maintenance (para. 4.09);

(f) To provide, by late 1977, adequate facilities for installation of the Bank-financed laboratory equipment (para. 4.09);

(g) To engage consultants, under terms of reference and conditions satisfactory to the Bank, for the preparation of the Highway Master Plan (para. 4.10); for the technical assistance to MCOPT's Highway Directorates (para. 4.12); for aid to the local construction industry (para. 4.14); for the Guayape Valley development study (para. 4.15); and for supervision of construction (para. 4.16);

(h) To provide the necessary budgetary allocations on a timely basis for the execution of project works (para. 4.22);

(i) To establish a new unit within the Directorate General of Highways with at least three experienced highway engineers and two adminis- trators to assist in the implementation of the proposed project (para. 4.24);

(j) To make the necessary arrangements for clearing the land prior to the start of the construction works on the Talanga-Juticalpa-Catacamas road (para. 4.25); and

(k) To carry out project works according to an agreed imple- mentation schedule (para. 4.28). - 73 -

6.02 A condition of effectivenessof the proposed loan is that MCOPT has establisheda new unit consisting of at least three additional engineers and two administratorsto carry out the implementationof the project (para. 4.24).

6.03 A condition for disbursementfor the purchase of workshop and laboratory equipmentwill be that the Bank should be satisfiedwith the facilities to be provided by the Government for the installationof such equipment (paras. 4.09 and 4.35).

6.04 Provided that the foregoing conditions are met, the project provides a suitable basis for a loan of US$35.0 million equivalent, includingUS$28.0 million from Bank funds and US$7.0 million from Third Window funds, to the Republic of Honduras. The loan from Bank funds will be for a term of 20 years, including a four-and-a-halfyear grace period; for the Third Window funds, the term will be 25 years, includinga seven-year grace period.

November 10, 1976 - 74- ANNEX Page 1 HONDURAS

SEVENTHHIGHWAY PROJECT

Related Documents and Data Available in the Project File

I. General Reports and Studies in the Sector and Suo-Sector

1. Decree No. 173 - Classification of Road Network and Regulations for Acquisition of Right of Way - May 1959

2. Honduras - Self Help Feeder Roads Program - USAID, November 1964

3. Programa de Inversiones Puolicas de Desarrollo y Reconstruction 1975-1979 - CONSUPLAN,December 1974

4. Ministerio de Comunicaciones, Obras Publicas y Transportes - Memoria del Ano 1974, October 1975

5. Estudio Sobre la Situacion del Transporte Terrestre International de Carga en Honduras - SIECA, July 1975

6. Estudio de Incrementos en el Costo de Transporte de Madera Como Resultado del Control de los Pesos y Medidas de los Vehiculos de Transporte por Carretera - COHDEFOR,September 1975

7. Preliminary Feasioility of Developing Site at Puerto Cortes for Free Zone or Other Use - TAMS-Cerna y Maier, October 1975

8. Evaluacion de Inversiones - MCOPT,December 1975

9. Presupuesto General de Ingresos y Egresos Para 1976 - December 1975 10. Draft of the Agricultural Rural Sector Study - Three Volumes - IBRD/IDB/USAID, Decemoer 1975 11. Land Transport Law - Honduras Government, February 1976 12. Plan Operativo del Sector Transportes - CONSUPLAN,1976

13. The Agro-Forestal Potential of the Olancho Region - IDB/FAO - 1975

II. General Reports and Studies Relating to the Project 14. Volumes de Transito en Las Carreteras de Honduras - Brown and Root - 1971

15. Feasibility Study of the Tegucigalpa-Talanga-Juticalpa Road - Howard., Humphreys, Keeble and Partners, January 1971

16. Layout Plans of the Talanga-Juticalpa Road - Howard, Humphreys, Keeble and Partners, 1973 - 75 ANNEX Page 2

17. Report on the Final Engineering of the Tegucigalpa-Juticalpa Road - Howard, Keeble and Partners, November 1973

18. Especificacionespara la Construccionde Carreteras y Puentes - Direccion General de Caminos - MCOPT, 1974

19. Diseno Geometrico de Carreteras - EspecificacionesCentro Americanas

20. Diseno Geometrico de Caminos - EspecificacionesHondurenas - MCOPT

21. Feasibility Study of 330 kn of Feeder Roads to the Tegucigalpa- JuticalpaRoad - Three Volumes - Brown and Root, 1975

22. Addendum to the Feasibility Study of 330 km of Feeder Roads - Brown and Root, 1975

23. FeasibilityStudy of the Juticalpa-CatacamasRoad - Brown and Root, 1975

24. Updating of the Feasioility Study of the Talanga-JuticalpaRoad - Sectoral Planning Office - MCOPT, 1975

25. Economic Justification for the Purchase of Highway Maintenance Equipment - Local Consultants/Directorate of Highway Maintenance of the MGOPT, 1975

26. Constructimn Magazine - The Honduran Chamoer of the Construction Industry, January 1976

27. Bulletin on Policies of the "Colegio de Ingenieros Civiles de Honduras", 1976

28. Organization Charts of the MCOPT and of the General Directorates of Highways and Highway Maintenance - MCOPT, February 1976

29. Updated Cost Estimates and Typical Cross Sections for the Talanga-Juticalpa and Juticalpa-Catacamas Roads prepared by MCOPT for the First Road and oy Brown and Root for the Second Road, February 1976

30. Updated Traffic Counts on the Talanga Juticalpa and Juticalpa Catacamas Roads prepared by MCOPTand by Brown and Root respectively, Feoruary 1976

31. Aide Memoire prepared in Honduras on the Proposed Project - IBRD, February 1976 - 76 - ANNEX Page 3

III. SelectedWorking Papers, Tables, Drawings and Maps preparedby Bank Staff or its Consultants

32. Informede Programacion - Programa de Asesoria - TAMS-Cerna y Maier, 1975

33.- AlcanceGeneral de los Serviciosde Consultoriapara la Preparacionde un Plan MaestroVial de Honduras- TAMS-Cerna y Maier - March 1976

3a. Paper on Highway Maintenance Management and Construction Training - Roy JorgensenAssociates, Inc., March 1976

35. Working Papers related to the Economic Justification to the Talanga-Juticalpa-Catacamas Road and the Purchase of Maintenance Equipment - IBRD Staff 1976

36. Working Papers related to Cost Estimateof the Project - IBRD Staff and Consultants - 1976

May 1976 HONDURAS SEVENTH HIGHWAY PROJECT ORGANIZATION CHART OF THE MINISTRY OF COMMUNICATIONS, PUBLIC WORKS AND TRANSPORT

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