DOMINICAN REPUBLIC NATIONAL HIGHWAY PROJECT

Public Disclosure Authorized Document of The World Bank Report No. 15670 Public Disclosure Authorized STAFF APPRAISAL REPORT DOMINICAN REPUBLIC Public Disclosure Authorized NATIONAL HIGHWAY PROJECT November 15, 1996 Public Disclosure Authorized Infrastructure and Energy Operations Division Country Department III Latin America and the Caribbean Regional Office

CURRENCY EQUIVALENTS ( as of 02/96 ) Currency Unit = Dominican Peso D$ = US$ 0.08 US$1.00 = RD$12.58 FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES 1 gallon = 3.785 liters 1 mile = 1.6120 kilometers 1 pound = 0.453 kg ACRONYMS AND ABBREVIATIONS USED APD - Dominican Port Authority BOO - Build, Operate and Own BOT - Build, Operate and Transfer CEA - State Sugar Board DARE - Department for Administration of External Resources DCCT - Department for Control of Earth Excavation DGFO - General Directorate of Works Monitoring DGM - General Directorate of Road Maintenance DGPP - General Directorate of Planning and Programming DGTT - General Directorate for Land Transport (SEOPC) DRS - Directorate of Norms and Regulations EA - Environmental Assessment EIRRs - Economic Internal Rates of Return FHRMP - Fifth Highway Rehabilitation and Maintenance Project GDP - Gross Domestic Product HIP - Highway Investment Plan ICB - International Competitive Bidding IDB - Inter-American Development Bank NCB - National Competitive Bidding ONAPLAN - National Planning Office ONMV - Road Maintenance Agency OTTT - Technical Office of Land Transport PCT - Project Coordinating Team SEOPC - Secretariat of State of Public Works and Communications

DOMINICAN REPUBLIC NATIONAL HIGHWAY PROJECT LOAN AND PROJECT SUMMARY Borrower: Implementing Agency: Beneficiary: Poverty Category: Loan Amount: Terms: Commitment Fee: Net Present Value: Dominican Republic. Secretariat of State of Public Works and Communications (SEOPC). SEOPC. This project does not specifically address poverty reduction. It is not included in the Program of Targeted Interventions. Nevertheless, it includes programs and policies that enhance growth, thereby creating employment and reducing poverty. It will also contribute to improve access of rural areas to market and services and to form and strengthen small enterprises that will be involved in routine maintenance contracts, which will benefit low-income communities from their employment under those contracts. US$75 million. Standard amortization term, grace period and interest rate for fixedrate US dollar single currency loan with an expected disbursement period of 3-6 years. 0.75 percent on undisbursed loan balances, beginning 60 days after signing, less any waiver. All subprojects will meet eligibility criteria that assess institutional, environmental and technical factors (including the sustainability of the investments) as well as economic benefits. The economic criteria establish a benchmark minimum rate of return of 12 percent, based on a cost/benefit analysis. The economic analysis of the civil works subprojects yields a net present value of US$99.3 million and a prorated internal economic rate of return of about 24.5%. Financing Plan: See para. 2.8. Environmental Classification: B

Map: Project Identification Number: IBRD-27393 DO-PA-35722 Vice President: Director: Division Chief: Task Manager: Shahid Javed Burki Edilberto Segura, LA2DR Paul Isenman, LA3DR Martin Staab, LA2 Peter Ludwig, LA3IN Jose Maria Alonso-Biarge, LA3IN

DOMMICAN REPUBLIC NATIONAL HIGHWAY PROJECT Table of Contents 1. ECONOMIC AND SECTOR SETTING... 1 ECONOMIC SETTING... 1 TRANSPORT SECTOR OVERVIEW... 1 ROAD TRANSPORT... 4 PREVIOUs BANK INVOLVEMENT IN THE TRANSPORT SECTOR...... 11 2. THE PROJECT... 12 PROJECT JUSTIFICATION... 12 RATIONALE FOR BANK INVOLVEMENT... 13 PROJECT OBJECTIVES... 13 PROJECT DEscRIPTIoN... 14 ENVIRONMENTAL ASSESSMENT... 16 PROJECT COSTS AND FINANCING... 17 EcoNoMIcEvALUATIoN... 18 PROJECT SUSTAINABILITY... 21 3. PROJECT IMPLEMENTATION... 21 PROJECT ORGANIZATION AND MANAGEMENT... 21 MONITORING, REPORTING AND BANK SUPERVISION... 23 PROCUREMENT... 24 DisBuRsEMENTs, ACCOUNTING AND AuDITs... 27 PROJECT BENEFITS... 29 PROJECTRISKS... 30 4. AGREEMENTS REACIIED AND RECOMMENDATION... 31 ANNEXES... 33 MAP: IBRD-27393 This report is based on the findings of preparation missions that visited the Dominican Republic in February and August, 1995, and of an appraisal mission in February 1996. The missions were composed of Messrs. Jose M. Alonso-Biarge (Task Manager, LA21N/LA3IN), Peter Gyamfi (Transport Specialist, LA2IN), John Halpern (Operations Officer, LA2IN), Aurelio Menendez (Transport Economist, LA3IN), Rodrigo Archondo-Callao (Consultant, TWUTD), Angel Gonzalez Malax-Echevarria (Consultant, Auditing, Accounting and Financial Management) and Dorian Villalba (Local Consultant, SEOPC). The team in the SEOPC was led by Mr. Daniel G6mez (Project Coordinator, SEOPC). Peer reviewers are: Messrs. Jose L. Irigoyen (LA3IN) and Antti Talvitie (OEDD3). Mr. Martin Staab (LA2IN) was the responsible Division Chief until April 1, 1996. Mr. Peter Ludwig (LA31N) is the present Division Chief. Mr. Edilberto Segura (LA2) was the Department Director until March 15, 1996. Mr. Paul Isenman is the present Department Director. Mr. Shahid Javed Burki is the Vice President, Latin America and Caribbean Region.

DOMINICAN REPUBLIC NATIONAL HIGHWAY PROJECT 1. ECONOMIC AND SECTOR SETTING EcoNOMIc SETrING 1.1 After vigorous economic growth from the mid-1960s to the end of the 1970s, Dominican Republic's economy deteriorated sharply during the 1980s. GDP per capita decreased from US$1,290 in 1982 to US$774 in 1990 (an annual decrease of about 7% compared with the 6% annual growth in the 1970s). During that period unemployment rose from 18% to 25%, the external debt rose to 63.6% of GDP, international reserves decreased sharply and inflation rose to about 100%. To address this economic situation, the Government started implementing an economic stabilization program in mid- 1990, based on a shift towards the free-market system. This included continued liberalization of the currency exchange rate, which has reduced inflation to less than 10%, increased international reserves significantly and enabled the country to clear all arrears to the international financing institutions. GDP has also grown at about 4% per year over the five years since the program started. 1.2 The economy badly needs further improvement as a large percentage of the population of 7.5 million continues to live below the poverty level. Any strategy for improvement should, however, take into consideration the substantial structural changes in the economy since the 1970, namely the shifting of the economic backbone from the primary sector, i.e. sugar, ferronickel, etc., to the tertiary sector, with dramatic growth in tourism, industries in the free trade zones (mostly garments and pharmaceuticals) and small service enterprises which currently account for about 60% of GDP. Such a strategy would emphasize: (a) completing the fiscal measures and freemarket drive undertaken under the 1990 stabilization program, (b) improving the basic infrastructure necessary for energy, transport, agriculture, education and health, (c) implementing a philosophy of governance that would shift the government's role from operating productive assets, directing industry and economic processes to that of monitoring, regulating, setting policy and standards and creating enabling conditions for strong private sector participation and for economic development. The sustainable development of the tertiary sector would depend very heavily on an adequate transport system, particularly roads, which are the backbone of the transport system. TRANSPORT SECTOR OVERVIEW 1.3 General. DR's sustainable economic development relies heavily on the transport system to provide efficient access to tourism growth poles, free trade zones and markets for primary agricultural production and mining output. The imputed costs of transport, which depends upon the physical condition of the infrastructure and the efficiency of the transport industry, has a very significant incidence on the sale price of goods. In the DR, the cost differential for a heavy truck on a road in good condition compared to one in a bad state could be as high as US$0.16 per km,

-2 - which translates into a transport cost difference of between 12% and 18% for an average truck trip and between 2% and 4% in the final cost to the consumer. 1.4 Transport Infrastructure. DR's transport infrastructure is generally adequate both in extent, quantity and in providing access to the 48.442 km2 of surface area and its 7.5 million population. The provision of new facilities is therefore generally not of high priority in the immediate to medium-term. The system, which consists of some 5,000 km of highways, 14,000 km of rural roads, 1,700 km of railways for transporting sugar cane, 15 commercial ports, of which 3 are major ports, and 7 intemational airports, 8 domestic airdromes and 29 landing strips, require maintenance, rehabilitation and improvement due to insufficient maintenance in the past. 1.5 Transport Operations. Road transport is the dorninant mode for domestic transport both for goods and passengers (about 95% for goods and 100% for passengers), railways account for 5% of cargo (3.9 million tons per year, mostly sugar cane), domestic air transport and all other modes are almost null for both, cargo and passenger mobility. Road transport operations are Table 1.1 Vehicle Fleet and Ownership I/ Cars 117,193 210,000 234,100 5.6 Jeeps 5,140 24,410 29,469 9.9 Pickups & Vans 40,127 113,430 133,358 8.4 Buses & Minibuses 9,136 26,510 30,227 6.8 Trucks (2 Axles) 24,696 23,089 22,423-1.4 Trucks (Multiaxle) & Trailers 2,409 9,450 10,819 7.0 Total 198,701 406,889 460,396 6.6 Population (Thousands) 5,713 7,708 8,067 2.3 Motorization 3/ 34.8 52.8 56.7 3.6 Source: Direcci6n General de Rentas Internas Notes: 1/ 540,000 motorcycles not included 2/ Estimated 3/ Per 1,000 inhabitants 95% handled by the private sector while rail transport is 60% govemment-owned. The road vehicle fleet in circulation is about 460,000 vehicles, growing annually at 6.6% compared to a population growth of 2.3%. The vehicle ownership rate of about 57 vehicles per 1000 inhabitants is high for countries with sirnilar GDP. 1.6 Sea and air transport are the dominant modes for intemational freight and passengers respectively. International freight traffic (about 9 million tons in 1994) is 97% transported by sea, of which 85% corresponds to imports, 9% to exports and 6% to in transit cargo. In the last 10 years, freight traffic by sea increased at 14% per annum. The economy is highly dependent on imported petroleum and its derivative products (40% of the total imports). Air passenger transport increased at a rate of about 4% between 1985 and 1994. During 1994 almost 2 million

international passengers visited the Dominican Republic using mainly Las Americas and Puerto Plata international airports for regular and charter flights, as weli as Punta Cana and La Romana airports for tourist charter services. International air transport is handled by two domestic airlines companies and several foreign carriers. The Government is studying several offers from external air carriers to concession the services and routes of the Dominican Aviation Company, the national carrier, which is no longer operating under huge financial losses. 1.7 Institutional Set-Up. The Secretariat of State of Public Works and Communications (SEOPC) has responsibility for overall transport sector management. In practice, however, SEOPC's action is mainly concentrated on the roads sub-sector, for which it is responsible for planning, maintenance, rehabilitation and construction as well as for the control of road traffic signalization and issuing of driver's licenses. SEOPC's organizational structure for roads has been improved during the implementation of loans 2609-DO and 33 50-DO and now is generally adequate, except for certain weaknesses in financial management and internal audit functions (see paras. 1.9 and 1.10). 1.8 The Directorate of Road Maintenance, a weak institution within SEOPC, is receiving technical assistance financed under the ongoing Loan 3350-DO to revise its structure and improve management practices. The Dominican Port Authority (APD) administers the five principal ports, the Directorate General of Customs administers seven and two are in private hands. The Government is transferring the responsibility for all ports to APD. The final objective is for APD to concession all port operations to private operators. The Directorate General of Civil Aviation handles the regulatory aspects of civil aviation while the Commission on Civil Aviation is responsible for the administrative and policy aspects. In the rail sub-sector, the State Sugar Board (CEA) is responsible for the 1,014 km owned by the Government while the private sector manages its own 675 km. Other entities which intervene in transport sector matters include: (a) the Technical Office of Land Transport (OTTT), which plans and oversees urban transport, (b) the National Planning Office (ONAPLAN), which integrates the transport sector plans with the national plan; (c) the Secretariat of Industry and Commerce (SEIC), which participates in transport tariff setting and (d) the local authorities, on issues involving the exploitation of minerals, quarries and other facilities in their areas. 1.9 Financial Management. During project preparation a broad revision of SEOPC's administrative structure was performed, as the entity in charge of project execution. Special attention was given to the organization and the functions of the SEOPC's General Directorate of the Administration and its three basic functions: Accounting, Budget and Treasury. Annex 1 presents the conclusions regarding the administrative systems and the financial management structure of the SEOPC. The Inter-American Development Bank (IDB) has financed an external consulting work covering the financial management and institutional and administrative processes. The recommendations of the work were found acceptable and should be implemented during the life of the proposed project. 1.10 Particular reference is made in Annex 1 to the structure, functions, dependency, terms of reference and working program of the Internal Audit Unit. Under the model recommended during project appraisal, the internal audit function and unit could be renamed Internal Performance Audit. A highlight of the recommended structure and organization is the

-4 - establishment in that unit of two complementary groups of professionals: one for the financialadministrative aspects, and the other for the economy, efficiency, effectiveness, engineering and environmental follow-up, including field visits of projects' execution. 1.11 Government's Transport Sector Policy and Investments. The Government's transport sector policy and strategy for 1995 and beyond are outlined in a Policy Letter sent to the Bank (Annex 2). The following sections summarize key aspects of government policy. 1.12 It is government's policy to promote competition among road transport operators. The Government only intervenes in the setting of road-user charges, road safety and vehicle inspection, axle load controls and setting of passenger fares. Axle load enforcement is being improved under the ongoing Loan 3350-DO, which is studying the possible reduction in the current 13-ton single axle load limit, designing a system of axle load control and purchasing weigh bridges to control axle loads. Further Government involvement in the transport sector is mainly limited to urban passenger transport, for which it sets tariffs, licenses operators and assigns routes and frequencies. There is minimum interference in freight transport and inter-urban passenger services. 1.13 Full cost recovery is a high priority. In the roads subsector, the Government has ensured and will continue to do so that sufficient revenues are raised through road user charges to cover, at least, road maintenance and rehabilitation. Previously, those charges were inadequate when the price of gasoline was low. For ports, the Government's policy is to concession port operations to the private sector to make them financially self-sufficient. For railways, the Government has abandoned lines when their traffic levels have made their operation uneconomic. For civil aviation, the Government is examining offers from foreign airlines to operate the routes and services of the uneconomic state-owned carrier. 1.14 The Government's sector policy also aims to complete reconstruction of the entire highway network, eliminating bottlenecks in that network and improving maintenance; it also gives high priority to constructing those roads necessary to integrate the tourist areas on the northern and eastern shore with the rest of the transport network. 1.15 Over the period 1989 to 1995, transport sector investments have accounted for between 13% to 21% of total public sector investment. Roads have received over 90% of the transport investments, mostly for reconstruction and rehabilitation of interurban roads and for construction of city streets. ROAD TRANSPORT 1.16 General. Roads are the backbone of the transport system. Internal cargo traffic consists mainly of exports of commodities to the ports (sugar, coffee, cacao and minerals) and transport of agricultural products from the central regions to Santo Domingo and of industrial and consumer goods from Santo Domingo to the rest of the country. Tourist centers depend heavily on road infrastructure for improving its quality of service and expansion.

1.17 Road Network. The road network under the responsibility of the SEOPC totals about 19,000 km (August 1995), of which 5,000 km are highways and the rest rural roads being rehabilitated or reconstructed with IDB financing. The highway network is relatively extensive. No significant new construction is required, except for a few links to connect some tourist areas to the highway network and the elimination of some bottlenecks in the trunk network to reduce traffic congestion and improve road safety, both matters of concern in the present situation. At present, the Government is financing the widening to four separate lanes of the Duarte highway between Santo Domingo and Santiago (the two largest cities in the country), at a cost of about RD$3,000 million (US$234 million) and starting the reconstruction of about 300 km of the highway bordering Haiti, between Montecristi, in the north, and Jimani, in the south. The reconstruction of this highway, which is strategically very important, will also improve access to rural markets in a region of the country with high incidence of poverty. 1.18 Network Condition. The most recent information on the network condition (Table 1.3) indicates that 81% of the paved highways (3,831 km) are in good or fair condition. Out of the 19% in poor condition, 14.3% is under rehabilitation to be completed by 1997 and the remaining 4.7%, will be reconstructed under the proposed project. About 70% of the unpaved highway network (1,222 km), is in poor condition and in need of rehabilitation or reconstruction. The SEOPC is studying the economic feasibility of paving highways with more than 150 vehicles per day, a threshold generally accepted as generating economic rates of return of 12% and above. Based on this criterion, the Government has already contracted paving of 189 km of the network. Table 1.3.- Hi2hway Network (M..U, 1995) (* - w... ~~~~~~~~~~~~~~~~~~~~~~~... ::... g :. 08 - Total 5053 2118 42 1359 27 1576 31 Paved** 3831 2118 55 992 26 721 19 Unpaved 1222 0 367 30 855 70 Trunk Network 1147 702 61 329 29 116 10 Paved 1147 702 61 329 29 116 10 Secondary Network 2309 858 37 615 27 836 36 Paved 1491 858 58 329 22 304 20 Unpaved 818 0 286 35 532 65 Tertiary Network 1597 558 35 416 26 623 39 Paved 1193 568 48 335 28 300 25 Unpaved 404 0 81 20 323 80 Including urban sections in medium and small cities ** 545 Km. under rehabilitation by contract 1.19 Traffic. The average traffic volume in the highway network is: 1280 vehicles per day (vpd) with the following distribution: 2,650 vpd in highways with pavement of asphalt or cement concrete (2,108 krm); 370 vpd in highways with surface treatments (1,723 km); and 193 vpd in unpaved highways (1,222 km). About 15% of the vehicles are trucks in all surfaces. Traffic growth in the period 1986-1994 was respectively 3.9%, 2.6% and insignificant per year. These figures show a network with medium-high traffic as an average, which is consistent with the size, economic activity, population and relatively short travel distances (125 km on average).

-6-1.20 Axle Loads. Maximum axle loads were established in 1976 at 13,000 kg for single axles (four wheels) and 19,500 kg for tandem axles (eight wheels), with a provision for a reduction of these maxima for axles with fewer wheels. The limits are high compared to those in other Latin American countries, but are consistent with Bank sponsored research in developing countries, which shows that the optimum for the economy as a whole is set in the range 12-13 tons for single axles. To control vehicle axle loads, the ongoing loan 3350-DO finances construction of permanent weighing stations and acquisition of additional mobile weighing scales, which are starting to operate. On the other hand, the number of two-axle trucks, the most generally overloaded and damaging to the pavements, is decreasing at a rate of 1.1% per year, while the number of multiple axle-trucks is increasing, as a consequence of the exemption by the Government of some tariffs for this type of truck. 1.21 Road Administration. Planning, engineering, construction and maintenance of roads are the responsibility of the SEOPC. Those tasks are performed by four directorates: planning (Direcci6n General de Planeamiento y Programaci6n-DGPP), engineering (Direcci6n General de Carreteras-DGC), construction (Direcci6n General de Fiscalizaci6n de Obras-DGFO) and maintenance (Direcci6n General de Mantenimiento-DGM). In addition, there is a department for policies and preparation of bidding documents (Direcci6n de Reglamentos y Sistemas-DRS) another for management of external resources (Direcci6n de Administraci6n de Recursos Externos-DARE) and a legal advisor, reporting directly to the Secretary of State. The Advisor to the Secretary of State is the General Coordinator for the implementation of projects with external financing. He is assisted by a local consultant in the case of the Fifth Highway Rehabilitation and Maintenance Project (FHRNP - Loan 3350-DO). Details of the structure of the road administration are included in Annex 3. 1.22 The quality of SEOPC's engineers is reasonable, although better pay in the private sector resulted in the past in high staff tumover. To prevent this, the SEOPC allows to skilled staff outside employment after working hours as a supplement of their salaries. This solution, while successful in retaining staff, cannot be considered satisfactory because sometimes is difficult to separate in time and content both activities, so reducing the quality and capacity of that staff for carrying out his official activities. Therefore, the mentioned solution should be provisional until a civil service reform and/or a road agency is implemented, allowing to pay skilled staff competitive salaries with those in the private sector. 1.23 Environmental Management. The Department for the Control of Earth Excavation (DCCT), the environmental unit within the SEOPC, was established by law in 1971. The DCCT is responsible for monitoring environmental pollution and entrusted with protecting the ecology and environment through prevention of indiscriminate excavation. Its specific tasks are the following: (i) regulate excavation permits to prevent indiscriminate excavation and destruction of agricultural areas, beaches and rivers; (ii) document environmental implications of every request for excavation; and (iii) monitor earth excavation works after permits are issued and stop excavation works which are improperly executed and impose fines on violators. 1.24 At present, SEOPC's capability to address environmental issues associated with roads and other transport projects is weak. The DCCT has not fully developed the capabilities and technical experience to effectively address environmental concerns in the sector and is understaffed and

- 7 - without a clear role in the day-to-day environmental functions within SEOPC. An Action Plan for strengthening the DCCT was agreed during project appraisal, which includes: (i) technical assistance to implement proposed functions and procedures; (ii) special studies such as an ecological sensitivity map for road infrastructure; (iii) equipment including vehicles, computers, and geographical information systems; and (iv) training program for the DCCT. The proposed project would support this Action Plan (see para. 2.6, d), which is also supported by the IDB Rural Roads Project. 1.25 The new environmental responsibilities of the DCCT would also include the following: (i) advising the SEOPC on environmental concerns in the transport sector; (ii) incorporating environmental objectives into feasibility and design studies; (iii) establishing environmental policies and procedures for road and other transport projects; (iv) ensuring compliance with the Environmental Manual for Road designers and Contractors prepared during project preparation (see para. 2.7); (v) ensuring that all bidding documents and contracts contain the appropriate environmental conditions; (vi) monitoring environmental factors and maintaining a database; (vii) keeping appropriate records of the costs associated with monitoring and training activities of the Unit; (viii) designing and maintaining the records based on which the quarterly and annual reports would be prepared; and (ix) establishing basic internal administrative controls on the activities and follow-up of the consulting work. The SEOPC will provide the necessary funds in the budget to operate the strengthened DCCT. 1.26 Budget. The SEOPC budget is approved annually by the Congress. Budget allocations to the transport sector have varied between 12% and 20% of total Government expenditures in the period 1989-94. While this aggregate level was reasonable, insufficient funds were allocated to routine maintenance. This was due to the emphasis put on the reconstruction and rehabilitation programs. Since these programs are well advanced, in the future expenditures will be reallocated in favor of road maintenance and stricter application of economic criteria for the selection of road investments. 1.27 Construction Industry. Construction is being carried out by contractors, both local and foreign, frequently in joint- ventures. In the past, most government contracts were awarded to private contractors who did not have adequate experience nor the capacity to carry out the works at adequate standards. Prequalification of contractors and packaging of contracts comprising 50 km or more, introduced under Loan 3350-DO, have substantially contributed to speed-up completion, improve quality and enhance competition, leading to satisfactory implementation of civil works. Furthermore, the contractors of the works under that loan have become fully familiarized with Bank's bidding requirements and documents for contraction of civil works. The Loan 3350-DO also finances a study on the local construction industry (including local branches of foreign firms) and its capacity with respect to the implementation of the proposed project. The study, once completed, will be incorporated into the Project File. A preliminary report shows that the capacity is far enough to carry out the SEOPC's investment and maintenance programs during the project period. 1.28 Private Sector Participation. Public/private partnerships in the road sector has been successfully practiced to finance some access to tourist areas mostly in the eastern coast, which is the most important tourist development pole in the country. Legislation is being prepared to

- 8 - make possible a new form of public/private partnership in the road sector (concessions of construction, maintenance and operation of toll roads, bridges and tunnels and other related infrastructure to the private sector under BOT or BOO schemes). Once this legislation is approved, it is expected that future major investments in high traffic highways will be financed with a substantial contribution by the private sector. A preliminary study of widening the highway Santo Domingo-Las Americas Airport-San Pedro de Macoris, which links the capital with its international airport, the third port in the country and the most developed tourist area, and subsequent maintenance by toll road concession is being financed under the Loan 3350-DO. The proposed project would finance a similar study for the Santo Domingo San Cristobal-Bani highway (para. 2.6). 1.29 Operations and Maintenance. The entire network is publicly owned and operated, but all construction works (including new construction, reconstruction and rehabilitation) and all programmable periodic maintenance for the highway network are contracted to the private sector. This policy, combined with effective supervision by independent consulting firms and the major effort of the Government in recent years to rehabilitate the highway network has resulted in substantial improvement in the network condition. Nevertheless, as part of the proposed project monitoring, reporting and supervision plan, the project would introduce engineering (technical) auditing. This is an innovation to ensure consistency in work supervision, develop capacity within the SEOPC to monitor work quality, evaluate the results of the introduction of routine maintenance by contract and support annual and midterm reviews of the physical performance of the project. 1.30 Maintenance has been traditionally carried out by the SEOPC under force account. The implementation of Loan 3350-DO initiated a change in this practice and now periodic maintenance for the highway network is contracted out. Routine maintenance planning and control has substantially improved under technical assistance financed under the ongoing Loan 3350-DO. However, routine maintenance execution continues to be carried out by force account. The proposed project includes a pilot program to introduce routine maintenance by contract and to foster contracting out 100% of all programmable maintenance by year 2001 (see Table 1.4). Under this pilot program, small enterprises will be encouraged to participate in maintenance with SEOPC's equipment rented by the contractors, if necessary. Emergency works will continue to be carried out mostly by force account. The increase in maintenance by contract will also allow a substantial reduction in the number of SEOPC unskilled staff (see Annex 3). Table 1.4.- Maintenance Execution (1996-2001) Year }... 'RD im$. 1996 0.0 0.- 4,870.7 89,590,669 4,870.7 89,590,669 1997 1,000.0 17,111,546 3,902.7 63,099,799 4,902.7 80,211,245 1998 2,000.0 32,075,712 3,054.7 44806,722 5,054.7 76 882434 1999 3,000.0 47,240,226 2,051.7 29,812,770 5,051.7 77,052,996 2000 4,000.0 60,389627 1,052.7 15,021,533 5,052.7 75 411,160 2001 5,059.7 74,679,165 2/ 4374,122 5,059.7 79,053,287 1/ Values in 1995 RDS (lust=12.5 RD$) 2/ Only emergencies with the assistance of small contractors.

-9-1.31 Highway Investment Plan. The SEOPC has prepared a four-year (1997-2000) Highway Investment Plan (HIP), which will be annually reviewed and agreed with the Bank, including the following programs: (i) reconstruction or rehabilitation of the highways that will remain in deteriorated condition at the end of 1996 and need rehabilitation or reconstruction; (ii) widening of some sections with high traffic volumes and high rate of accidents; (iii) construction of bridges and by-passes of some cities, to eliminate bottlenecks and improve road safety; and (iv) completion of the widening to four divided lanes of the Duarte (Santo Domingo-Santiago) highway, under construction with government financing. The total cost of those programs is about US$325 million, of which the Government will finance US$250 million, or US$62.5 rnillion per year, which is in line with the amounts spent in the last ten years. The proposed project will help the Government to finance the first three programs. 1.32 Maintenance Programs. Maintenance planing has been practiced since 1990, allowing the SEOPC to prepare annual maintenance budgets, based on measures of expected work performance. Prior to that time, the budgets approved have been in accordance with those proposed by the DGM, but the amounts finally spent were below the approved ones and there was no control on the activities in which they were actually spent. The situation has substantially improved since the beginning of the implementation of the Maintenance Management System (MMS) under technical assistance financed by the ongoing Loan 3350-DO, which is starting to produce positive results. 1.33 During the preparation of the proposed project, the Highway Maintenance Programs for 1997-2000 were prepared, with the assistance of the consultants implementing the MMS. A summary of those programs is presented in Annex 3. The programs were prepared considering a level of maintenance defined by a set of quantity standards with modifying factors according to pavement condition, surface type, climatic regions, pavement age and policies (e.g. manual or mechanical execution). The length of the network considered under maintenance each year was the total of the highway network, excluding the part of the network in reconstruction during the project period. The highways under reconstruction were included in the program of routine the first year after completing their reconstruction and in the program of periodic maintenance after four years. 1.34 The total maintenance budget for 1997-2000 is US$51 million, of which US$24 million is for routine maintenance and US$27 million for periodic maintenance. One pilot program for routine maintenance by contract and one program for highway resurfacing with new technologies, introduced under Loan 3350-DO, have been prepared with selected works from the maintenance programs and would be financed by the proposed project. 1.35 Road Financing and User Charges. Traditionally, all vehicles collectively have generated more than sufficient revenues to finance road maintenance and rehabilitation. The main source of those revenues has been taxes on petroleum products (91% of the total) and import duties for vehicles and parts (7.5%). During the 1980s, because of a lag in adjusting the prices of gasoline and diesel, those revenues totaled only RD$14 million in 1989, significantly less than the RD$60 million required just for highway maintenance and rehabilitation. The situation was drastically reversed in 1990 with the Government raising the price of fuel products leading to their

- 10-1995 level of RD$13.50 (US$1.04) per gallon of diesel and RD$20 (US$1.54) for gasoline. At this level, revenues from the fuel taxes amount to about US$300 million per year and are four times the total annual road expenditures for construction, reconstruction, rehabilitation and maintenance in the next five years (about US$75 million per year). 1.36 Road Fund. The maintenance expenditures will stabilize at around US$13 million per year when the whole highway network is in good condition and all programmable maintenance is contracted in year 2001. Rehabilitation needs will stabilize at around US$17 million, an amount substantially lower than in the past seven years. To ensure that adequate funds will be allocated to maintain and rehabilitate the highway network, making sustainable the gains achieved under previous operations (particularly under Loan 3350-DO), the FHRMP has assisted the SEOPC in designing and implementing a dedicated road fund with an initial provision of around US$30 million equivalent per year, including salaries and administrative and operational expenses. The proceeds of a road tariff, consisting of vehicle license fees, road tolls and a levy from the current price of fuel, would be deposited into the road fund to be implemented during the project period. Once the road fund is operative, it could also be progressively expanded to cover rural and urban road expenditures for roads already rehabilitated or reconstructed. 1.37 The rationale for introducing the Road Fund is based more on the need to reinforce the political independence of the resources for road maintenance and incorporate the oversight of users over the timely application of those resources, rather than to generate the funds needed for road maintenance and rehabilitation. These funds already come from the revenues collected from fuel taxes and therefore, the implementation of the Fund will not have fiscal implications nor will divert revenues from other purposes; it will just redirect the funds from the general budget to the Fund. In that respect, drafting and passing the legislation to establish the Road Fund is as important as defining the road tariffs, mechanisms for road users participation, cost accounting methods and other technical details that will make the fund work or fail in the long run. In addition, developing a constituency for road maintenance--already taking place as the reconstruction program is completed and contracting out of maintenance works expands--will be formalized through their participation in the Road Fund. The manner to incorporate this constituency, the mechanisms for the functioning of the Road Fund, the composition and the level or resources to be incorporated into it, and the necessary legislation, are all part of the technical assistance financed by the FHRMP (see Annex 3). 1.38 Road Agency. The road fund would be managed by a new road agency to be called "Oficina Nacional de Mantenimiento Vial" (ONMV), which would ensure: (i) an effective organization structure and reporting requirements; (ii) adequate staffing, with competitive salaries; and, (iii) adequate internal systems/controls and streamlined procedures. The ONMV would be managed by a representative board of management, including representatives from the public and private sectors and road users. The aim of a representative board of management is to win public support for the necessary road spending and to ensure that funds are spent in line with perceived needs of users and beneficiaries. The proposed project would support the implementation of both the road fund and the agency (see para. 2.6, d). Although the intention is to establish the fund and the agency under a new legal framework, it may prove feasible to establish them under existing administrative procedures within the current legal framework. The new legislation or the existing administrative procedures should provide for: (i) the creation of a

road fund which will finance the cost of maintenance and rehabilitation of roads within the Borrower's road network; and (ii) the creation of a new road entity (ONMV) which will operate such financing mechanism. PREVIOUS BANK INVOLVEMENT IN TBE TRANSPORT SECTOR 1.39 Previous Bank Experience. The Bank's past involvement in the road transport subsector dates back to 1973, when it acted as the executing agency for the UNDP-financed Highway Rehabilitation and Administration Study. Between 1976 and 1985, three highway projects were financed under Bank loans, totaling US$65 million, to improve the condition of some 320 km, or about six percent of the highway network. Those projects were: the First Road Maintenance and Reconstruction Project; the Emergency Road Reconstruction Project; and the Second Road Maintenance and Reconstruction Project. 1.40 In 1986 the fourth operation, the Third Road Reconstruction Project (Loan 2609-DO, US$35.8 million) was approved. It provided financing for: reconstruction of 150 km of highways that were started under Loan 1784-DO, and about 60 km of other high-priority highways; purchase of road maintenance equipment and spare parts; consulting services for construction supervision; a transport planning study; and assistance in training the pavement division staff of DGPP and in organizing workshops and stores. Generally, the project was executed as planned and completed on December 31, 1993. Annex 4 provides details on the implementation of these four operations. 1.41 Lessons Learned. In general, the projects' scope was appropriate for the country's needs, but their implementation was beset by problems which delayed their completion. Most of the roads were finished almost on schedule. However, the completion of some reconstruction works took longer than originally scheduled. In retrospect, the problems with these roads could have been avoided had more attention been given during project preparation to avoid repetition of problems previously experienced by the SEOPC, namely, starting project implementation with inadequately prepared engineering and bidding documents, deficient planning and programming for the execution of the road works initially included in the project, and inappropriate awarding of works to unqualified contractors. 1.42 The lessons learned confirm that to ensure successful implementation of Bank's projects it is necessary, during the project preparation stage, to emphasize the need for uncompromising quality of engineering designs and bidding documents, and contracting qualified contractors and consultants. Other issues which should have been addressed concerned the Borrower's sense of ownership of some project components (in particular planning studies) and its commitment to support and achieve the agreed project objectives for those components by providing the required human and financial resources and logistic support. On the other hand, the Third Road Reconstruction Project, demonstrated in its second half of implementation, the benefit of maintaining an open and productive dialogue with the Borrower, which resulted in a more intensive involvement of SEOPC's higher level staff in the execution of the project, facilitating the project's successful implementation.

- 12-1.43 Ongoing Project. The Fifth Road Rehabilitation and Maintenance Project (Loan 3350- DO, US$79 million, 1991) was declared effective on December 2, 1992. The project comprises: (a) rehabilitation of about 830 km of roads and supervision of these works; (b) a technology transfer program on pavements, including technical assistance and civil works; (c) bridge and workshop rehabilitation; (d) equipment rehabilitation; (e) acquisition of road signaling materials, maintenance equipment and scales for vehicle weight control; and (f) technical assistance for training, road maintenance management, an urban transport study, a local construction industry study and engineering services for road design. 1.44 Past lessons learned have helped to ensure successful implementation. Prequalification of contractors and bidding documents were agreed at negotiations; International Competitive Bidding (ICB) procedures were applied to all civil works of the road rehabilitation program; engineering designs and bidding documents were prepared well in advance of the bidding process; and the open dialogue with the Borrower continued. As a result, procurement is already completed; the contract for the pavement technology transfer program (a major component) and technical assistance in highway management are satisfactorily underway; compliance with loan covenants and the Action Plan is acceptable; and about 75% of the loan is already disbursed. 1.45 However, the proceeds of the Loan will only reach to finance about 70% of the highway length originally programmed to be rehabilitated. The main reasons for this reduction are cost increases for civil works, due to higher unit costs and the additional road deterioration that took place since the project was appraised and, above all, the upgrade of most of the works from rehabilitation to reconstruction. On the other hand, the SEOPC rehabilitated more than 900 km in the same period with local funds, which is more than the length finally not financed by the loan. The technology transfer program, a single component and the biggest contract of the project (including about 500 kms of highway resurfacing) is being implemented as planned and within the resources allocated in the Loan. The Loan Closing Date, December 31, 1996, was extended to December 31, 1997 on November 4, 1996 to allow completion of already advanced contracts. 2. THE PROJECT PROJECT JUSTIFICATION 2.1 Completion of the modernization of the highway network and removal of important bottlenecks in the highway network are essential to the development of the major sources of economic growth (tourism, industries in the free trade zones and small service enterprises). 2.2 Maintenance neglect between 1980 and 1986 led to a badly deteriorated road network, which could only be corrected by rehabilitation or reconstruction. The first step in that direction was the reconstruction program financed by Loan 2609-DO (para. 1.40). Reconstruction and rehabilitation of the highway network has continued, financed by the Government with local funds and by Loan 3350-DO. This loan (para. 1.43) also extensively introduced periodic maintenance by contract, a program of pavement technology transfer and technical assistance in maintenance management, setting the grounds for a solid maintenance environment and preventing the repetition of the mistakes in the past.

- 13-2.3 As a result of the investments in reconstruction and rehabilitation during the past seven years, the highway network condition has improved to the point that, when the ongoing project is completed, only 169 km of paved highways will remain in poor condition and need rehabilitation. At present, with no significant new construction required, with the exception of a few links to connect some tourist areas to the highway network, the emphasis has to be put in: (a) eliminating bottlenecks in the trunk network (widening some sections that are insufficient for the high traffic volumes they carry, and replacing some bridges and urban sections with insufficient geometric and structural conditions); (b) completing the reconstruction of the highway network; (c) consolidating the important technical and institutional gains achieved under previous operations (particularly under Loan 3350-DO); and (d) ensuring sustainability of investments made with the support of this and past Bank loans, avoiding the repetition of past mistakes, particularly maintenance neglect. The necessary actions to achieve all these goals require sustained support to the SEOPC and this is the origin and justification of the proposed project, preparation of which was initiated in November 1994, with resources ofthe Loan 3350-DO. After this project, no new Bank's loans should be necessary to finance direct investment in the highway network. Future projects may include support for private financing of new links in the highway network, institutional development of the future road agency and measures to improve urban transport in major cities. RATIONALE FOR BANK INVOLVEMENT 2.4 The proposed project is consistent with the Country Assistance Strategy (CAS) presented to the Board on April 4, 1995. The CAS emphasize the importance of supporting the Government's rehabilitation and reform program to refurbish infrastructure and foster private sector development. The project would play an important role in removing bottlenecks to the main engines of development growth, tourism and free trade zones. It is also in line with the Government's strategy in the transport sector that has so far focused on reconstruction and maintenance of key links of the highway network. Improvements in maintenance management and consolidation of new pavement technologies introduced under the FHMRP would also be pursued. The benefits from the rehabilitation works would be maintained in the long term by assuring a well-executed maintenance program and setting up a dedicated organization to efficiently plan and carry out the program. This program would be totally contracted out by the end of the project period, under procedures and guidelines established before project effectiveness with technical assistance provided by the ongoing project. Achieving all those objectives requires continuing Bank assistance. Furthermore, the dialogue between the Government and the Bank during the implementation of the two previous loans and the preparation of this project have resulted in stronger emphasis on maintenance and institutional development, and this should also be continued. PROJECT OBJECTIVES 2.5 The proposed project has two broad objectives, equally important: The first objective is to improve transport sector s contribution to the development of major sources of growth, and improve access to markets. This will be achieved by eliminating bottlenecks in the trunk network, continuing the reconstruction of the paved highway network and improving safety.

- 14- The second objective is to consolidate the gains in the institutional capacity of the SEOPC under Loan 3350-DO to maintain the road network in a stable condition without confinual donor support and enforce new pracftces andpolicies started under that loan. This will be achieved by: (a) strengthening the capacity to implement maintenance programs; (b) improving the quality of pavements using the technologies transferred under the FBIRP; (c) introducing routine maintenance and signalization by contract and strengthening the domestic private construction industry, (d) implementing a road fund managed by a new road agency (ONMV) that will ensure adequate and timely release of funds to carry out maintenance programs, and (e) strengthening budgeting, accounting and auditing procedures. The project would also support the capacity of the Government to establish the strategy for further development of tourist poles, private sector participation in highway financing and urban infrastructure plans in major cities. PROJECT DESCRIPTION 2.6 To achieve the above objectives, the proposed project finances a program of civil works, and a program of institutional strengthening, including the acquisition of some vehicles and office equipment, consulting services and training. Both programs are essential to the project because a small project on institutional strengthening would be scarcely attractive to the Borrower and would not guarantee the completion of the programs financed under previous loans. On the contrary, without the institutional strengthening component would be difficult to ensure the sustainability of the gains, both physical and institutional, achieved so far. Therefore, the project consists of the following components: Under the program of civil works: (a) Civil Works i) Widening eisting highway sections to four divided lanes (28.3 km in total to eliminate congestion in some highway sections with high-volume traffic (about 10,000 and more vehicles per day) and high percentage of trucks (over 20%). The following sections will be included in this component: Santiago-Navarrete, in the Duarte highway (20.3 km); Santo Domingo-San Isidro, in the Mella highway (6.3 km); and Bajos de Haina-Acceso Refineria in the Sanchez highway (1.7 km). The list and cost for these works are given in Annex 5, Table A5.1A. The corresponding engineering designs and economic analysis have already been completed. ii) Construcdon of three new bridges (564m in total) and deck widening of an eing one (102 m), where existing bridges are bottlenecks in the network. The three new bridges are the following: a) over the Bani River (150 m), in the city of Bani, in the Sanchez highway, b) over the Higuarno River (261 m), in the city of San Pedro de Macoris, in the east coast highway; and c) over the Dulce River (153 m), in the city of La Romana in the east coast highway. The deck widening corresponds to the bridge over the Yaque del Norte River (102 m) in Montecristi. The list and cost for these bridges are given in Annex 5, Table A5. 1B. The second and third new bridges mentioned above will be completed with new