Y~~~~~ ~~RESTRICTED iijLwt11' ; fl,: Fiport No. TO454a This report was prepared for use within the Bank and its offiliat2d organizations. Public Disclosure Authorized They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Public Disclosure Authorized APPRAISAL OF THE NORTH ROAD PROJECT HONDURAS Public Disclosure Authorized January 18, 1965 Public Disclosure Authorized Projects Department CURRENCY EQ.UIVALEiNTr U.S. $ 1. 00 = 2 Lempi:;fao HONDURAS APPRAISAL OF THE NORTH ROAD PROJECT Table of Contents Page No. SUmvIARY i I. INI'RODUCTION 1 II. BACKGROUND 1 A. General 1-2 B. Transport in Honduras 2-3 C. The Highway System 4 D. Highway Administration and Maintenance -5 E. Highway Expenditures and Receipts 5 F. Transportation in the Development Plan 6 III. THE PROJECT 6 A. Description 6-7 B. Design Standards 7 C. Execution 8 D. Cost Estimate and Financing 8-9 IV. ECONOMIC JUSTIFICATION 9 A. Introduction 9 B. The Zone of Influence 9-10 C. Reduction in Transport Costs 10-11 D. Other Benefits 11-12 V. CONCLUSION AND RECOiTENDATIONS 12 List of Tables: 1. Motor Vehicles Registered, 1953-63; Forecast for 1967, 1972. 2. Expenditures on Highways, 1957-63. 3. Design Standards. 4. Estimated Cost of North Road. Chart: Organization of the Highway Department. Map: The Road Network. HONDURAS APPRAISAL OF THE NORTH ROAD PROJECT SUMMARY i. The Government of Honduras has asked the Bank and IDA to help finance completion of the North Road from Tegucigalpa, capital of Honduras, to San Pedro Sula, its most important commercial center. The Government has also asked the Inter-American Development Bank to participate in the financing of the road. ii. The project consists of the construction of a 202 km two-lane bitu- minous surfaced highway between the Rio del Hombre and iotrerillos. It would replace a narrow, winding gravel road, with sharp curves and steep grades. The sections between Tegucigalpa and Rio del Hombre and between San Pedro Sula and Potrerillos are already being improved to satisfactory standards. iii. The cost of the project is estimated at US$23.6 million equivalent, including contingencies. The estimate is based on final engineering of all but one small section of the road. The foreign exchange component is about 60 percent. The Government expects to finance about 20 percent of the project costs (US>h.7 million) and has asked the Bank, IDA, and IDB to share the remainder. It is proposed that the Bank and IDA contribute half of this remainder and the IDB the other half. iv. All contracts for construction will be awarded on the basis of international competitive bidding. 3xecution of the project will be the responsibility of the Ministry of Communications and Public Works. The pro- ject will impose a very heavy workload on the Ministry so that outside con- sultants will be retained to finalize plans and contract documents, to assist in the awarding of contracts and to supervise the execution of the project. v. The North Road was given the highest priority in the 1963-72 highwtay program developed in a study by Stanford Research Institute under a previous IDA credit. The traffic on the existing road already exceeds 400 vehicles and is growing rapidly. The new road will sharply reduce transport costs; this is particularly important to the economy of Honduras since a very large proportion of these costs are direct foreign exchange costs. The rate of return on the investment is about 20 percent, which is clearly satisfactory. vi. Agreement has been reached during negotiations on the use of consultants, design standards, the strengthening of highway administration practices and enforcement of traffic regulations, increased allocations fo.' road maintenance, and provision of local funds for the project. vii. Subject to the Government obtaining the necessary additional financ- ing for the project from IDB, the project provides a suitable basis for a Bank loan and IDA credit totaling US`9.5 million equivalent. The Bank loan would be for US$6 million for 25 years including a grace period of 6 years, while the IDA credit would be for US&,3.5 million on the usual terms. HONDURAS APPRAISAL OF THE NORTH ROAD PROJECT I. INTRODUCTION 1. The Government of Honduras has asked the Bank and IDA to help finance completion of the North Road from Tegucigalpa to San Pedro Sula. The Govern- ment has also asked the Inter-American Bank to participate in the financing of the road. 2. This vould be the fourth highway loan or credit by the Bank and IDA to Honduras. A loan of US$4.2 million (No. 135-HO) was made in 1955 to finance the establishnent of a maintenance organization. A loan of US$5.5 million (No. 195-HO) was made in 1958 primarily to reconstruct the San Pedro Sula- Puerto Cortes and Southern roads and to build bridges on the Western Highway (see Map); all work has been successfully completed. The first IDA credit of US,9 million (No. 1-HO) was made in 1961 to finance (a) an extension of the lestern Highway to El Salvador; (b) feeder roads to connect with the Western Highway; (c) further strengthening of highway maintenance operations initiated under the first loan; and (d) a highway transportation survey to establish a long-term investment program. The Western Highway extension has been completed, and the feeder roads are being constructed. The survey, carried out by Stan- ford Research Institute, was finished in 1962. 3. The performance under all ofithese loans and the IDA credit has been satisfactory. All construction was carried out on schedule to proper stand- ards and within the cost estimates. A maintenance organization has been estab- lished, maintenance has improved and further improvements are suggested in this report. The assistance of consultants, which has been required under all loans, has been most beneficial. 4. This report is based on (a) the Stanford study, (b) a feasibility and final engineering study of the North Road by Brown & Root Overseas, Inc., consultants to the Honduran Ministry of Communications and Public W,forks, (c) documents prepared by various Government agencies, (d) the findings of a Bank appraisal mission to Honduras in September, 1964, and (e) the results of negotiations held in Washington in January 1965. II. BACKGROUND A. General 5. Honduras is located in the center of the five Central Anerican republics. It is the second largest of these republics, with an area of 43,000 sq. miles (112,000 sq. km). It has a population of 2.1 million, which has been growing rapidly at slightly more than 3 percent annually. 6. Honduras' gross national product has been growing by 4-5 percent annually in recent years and is now-i approaching US$450 million equivalent; the per capita income is about US)210, which is the lowest in Central America. The transport and communications sector has accounted for about 7 percent of Honduras' national product in recent years; it has been increasing slowly but is still relatively low and reflects the fact that the transport network is relatively undeveloped. 7. Geographically, Honduras is the most mountainous country in Central America. The terrain is exceptionally rugged and crossed by many rivers and streams. This has made the construction and maintenance of a transport net- rork difficult and expensive and thus has hindered the country's economic development. B. Transport in Honduras 8. Honduras has three railway lines extending nearly 1,200 km. Two of the lines are owned by two fruit companies and are used primarily to ship bananas from their plantations to Caribbean ports and to transport imported supplies for their own use. The National Railways, owned and operated by the Government, has only about 130 km of line. All three lines are located on the north coast in areas adjacent to the major port cities; they serve only a very small sector of Honduras. Nevertheless, they handle about one- half of the country' s inter-city freight traffic, reflecting the importance of the banana traffic. 9. The difficult terrain and the related lack of a good highway net- work have made air transport very important in Honduras. A number of com- munities rely largely on air service for their contact with the outside world. Airlines, using DC-3 and smaller planes, serve 28 communities, nearly all receiving regularly scheduled service. The most important routes are the triangle between Tegucigalpa, San Pedro Sula and La Ceiba. Total air traffic has declined somewhat in recent years, primarily because of improve- ments in the highway network. 10. There is no inland water traffic in Honduras because the rivers cannot be made navigable. Water transport serving Honduran ports on the Caribbean and Pacific coasts, and providing most of the foreign trade vital to Honduras, is complementary rather than competitive with internal road and rail transport. Completion of the Tegucigalpa-San Pedro Sula road will further enhance the importance of the port at Puerto Cortes, for which a Bank loan is currently under consideration. 11. The highway transport industry is the backbone of Honduras' domestic transportation system. It has expanded rapidly in the last 10 years. The motor vehicle fleet has tripled between 1953 and 1963 from about 5,500 to 16,700 vehicles, an annual increase of nearly 12 percent (see Table 1). Since vehicle capacity is also increasing, the freight carried has expanded even more rapidly. Of the fleet, nearly Lo percent are trucks and 13 percent buses. This high proportion of commercial vehicles reflects in part the Government's policy of promoting their use, rather than that of private cars, by lower license fees and import duties and lower taxes on diesel fuel than on gasoline.