The World Bank

FO1R OMCLAL USE ONLY

Report No. 6111

PROJECT COMPLETION REPORT

PERU

LIMA-AMAZON TRANSPORT CORRIDOR PROJECT

(LOAN 1196-PE)

March 24, 1986

Latin America and Caribbean Regional OfficeTransportation 2 Division

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

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TIE WORLD BANKWahIngton D.C. 20433

USA.

0 d O dtwGnuaOpswm bivgm

March 24, 1986

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Completion Report on Peru Lima-Amazon TransportCorridor Prolect (Loan 1196-PE)

Attached, for information, is a copy of a report entitled"Project Completion Report on Peru Lima-Amazon Transport CorridorProject (Loan 1196-PE)" prepared by the Latin America and CaribbeanRegional Office. Under the modified system for project performanceauditing, further evaluation of this project by the Operations EvaluationDepartment has not been made.

Attachment

This document has a icted distibution and may be used by ripents only in the peformanceof thiur offica dutis Its contents may not otherwie be dislosed without World Baek autboriation.

FOR OFFICIAL US ONLY

PERU

PROJECT COMPLETION REPORT

LIMA-AMAZON TRANSPORT CORRIDOR PROJECT (LOAN 1196-PE)

TABLE OF CONTENTS

Page No.

PREFACE iBASIC DATA SHEET IiHIGHLIGHTS v

I. INTRODUCTION III. PROJECT PREPARATION, APPRAISAL AND NEGOTIATIONS 2III. PROJECT IMPLEMENTATION 3IV. COST ESTIMATES AND DISBURSEMENTS 15V. FINANCIAL PERFORMANCE: PORT COMPONENT 16

VI. INSTITUTIONAL DEVELOPMENT 19VII* ECONOMIC REEVALUATION 21VIII. ROLE OF THE BANK 22

IX. CONCLUSIONS 22

TABLES

1. Estimated Costs of the Project 252. Road Component: Actual, Appraisal and Reformulation Costs 263. Road Component: Contract and Cost Data 274. Port Component: Actual, Appraisal and Reformulation 28

Estimates of Project Costs5. ENAPU - Forecast and Actual Port Traffic 296. ENAPU - Forecast and Actual Income Statements, 1976-1982 307. ENAPU - Forecast and Actual Balance Sheets as of 31

December 31, 1975-10828. Forecast and Actual Project Ports Traffic 329. Forecast and Actual Income Statements and Project Ports, 33

1978-198210. Lima-Pucallpa Road Traffic Flows 3411. Representative Vehicle Operating Costs .3512. Economic Rates of Return: Appraisal Estimates 36

ANNEX

I. Implementation of Oroya-Huanuco Road Works 37

MAP

IBRD 11304 (PCR)

This document ha a stricted distibution and may be used by .Iplnts only in the pefomnceof their oici dutis Its contents may not otberwise be discokd without World dUnk authorlhtion.

PM

PROJECT COMPLETION REPORT

LIMA-AMAZON TRANSPORT CORRIDOR PROJECT (LOAN 1196-PE)

PREFACE

The following Is a Project Completion Report on Peru's Lima-AmazonTransport Corridor Project for which Loan 1196-PR in the amount of US$76.5million was approved by the Executive Directors on December 30, 1975. Theloan closed on February 28, 1985. Some 93% of the loan amount (US$70.8million) had been disbursed from the loan account at its closure.

This Completion Report was prepared by the Bank's Latin America andthe Car".bbean Reglonal Offlce and is based on Information obtained from LACInformation Center, Staff Appraisal Report No. 659a-PE, staff supervisionreports, and data on project costs collected from the Ministry of Transportand Comunications.

In accordance with the revised project performance reportingprocedures this report has been read in the Operations Evaluation DepartmentCOED) but the project was not audited by OED staff. The draft CompletionReport was sent to the Borrower for comments; however, none were received.

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PROJECT COMPLETION REPORT

LIMA-AMAZON TRANSPORT cORRIDOR PROJECT (LOAN 1196-PE)

BASIC DATA SHEET

Actual/Cirreat

Item Original Plan Estimate

Total Project Cost (USSmillion) 128.7 126.1 1/Overrun (%) -2

Loan Amount (US$ million) 76.5 76.5Disbursed (US$ million) 70.8Cancelled 2/ 3.2Outstanding to cancel 2.5

Economic Rate of ReturnRoad Component (Z) 23 20Port Component (2) 22 12

Dates Physical Components CompletedRoad Compo'nent June 1980 June 1985Port Component December 1978 March 1982

Financial Performance Below TargetInstitutional Performance Below Target

Other Project Data

First mention on Files August 1973Appraisal May/June 1974Negotiations June 1975Board Approval December 30, 1975Loan and Project Agreements May 27, 1976Effectiveness August 18, 1976Closing Date December 31, 1980 February 28, 1984Borrower Republic of PeruExecuting Agency Ministry of Transport and CommunicationsFiscal Year of Borrower January 1 - December 31

1/ Cost of scaled down project.

2/ As of February 28, 1984.

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PERU

PROJECT COMPLETION REPORT

LIMA-AMAZON TRANSPORT

MISSION DATA

No. of Man/ Date ofItem Month/Year No. of Days Persons Days Report

Identification August 1973 8 1 8 10/26/73Preparation June 1974 10 6 60 5/6/74Preappraisal January 1975 10 2 20 2/7175Appraisal March 1975 10 2 20 5t22/75

(Grey Cover)12/15/75

Total 108

Supervision I July 1976 10 3 30 816/76Supervision II September 1976 7 2 20 9/21/76Supervision III October 1976 4 1 4 11/5/76Supervision IV January 1977 7 2 4 1/21/77Supervision V February 1977 5 4 20 4/14/77Supervision VI Junn 1977 11 4 44 7/14/77Supervision VII August 1977 5 1 5 8/26/77Supervision VIII September 1977 10 1 10 10/13/77Supervision IX October 1977 10 3 30 1/5/78Supervision X March 1978 13 3 39 4/27/78Supervision XI April 1j78 10 2 20 5/8/78Supervision XII May 1978 11 4 44 9/15/78Supervision XIII June 1978 3 1 3 7/12/78Supervision XIV September 1978 11 3 33 11/16/78Supervision XV November 1978 14 2 28 1/8/79Supervision XVI January 1979 10 2 20 2/27/79Supervision XVII March 1979 15 3 45 7/23/79Supervision XVIII July 1979 5 2 10 10/25/79Supervision XIX October 1979 4 4 40 12/15/79Supervision XX November 1979 8 3 24 1/7/80Supervision XXI April 1980 3 1 3 5/12/80Supervision XXII May 1980 8 2 16Supervision XXIII September 1980 10 2 20 1/28/81Supervision XXIV November 1980 10 4 40 12/29/81Supervision XXV May 1981 11 6 66 7/15/81Supervision XXVI November 1981 5 1 5 1/6/82Supervision XXVII June 22, 1982 10 1 10 8/23/82Supervision XXVIII August.1982 3 1 3 9/17/82Supervision XXIX October 1982 8 2 16 12/6/82Supervision XXX February 6, 1983 5 2 10 3/30/83Supervision XXXI August 1983 4 2 8 9/14/83Supervision XXXII November 1983 3 1 3 11/18/83Supervision XXXIII April 1984 3 3 9 5/11/84Total Tff

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PERU

PROJECT COMPLETION REPORT

LIMA-AMAZON TRAEPORT CORRIDOR PROJECT (LOAN 1196-PE)

COUNTRY EXCEANGE RATES

Name of Currency (Abbreviation) Soles (SI.)

Year Exchange Rate

Appraisal Year 1975 US$1 S/. 451976 561977 841978 1561979 2251980 2891981 4221982 6981983 1,6291984 3,404

PERU

PROJECT COMPLETION REPORT

LIMA-AMAZON TRANSPORT CORRIDOR PROJECT (LOAN 1196-PE)

HIGHLIGHTS

The main objective of the project was to improve access along theLima-Amazon transport corridor through the improvement of several sectionsalong the Central Highway, construction of feeder roads, and construction orImprovement of three amazon river ports. The project, after considerabledelays in initiating the road works, was reformulated in 1979, with the scopeof the road works reduced and a road maintenance component added. Theproject was largely completed some five years behind schedule.

The project experienced extremely difficult implementation problemslinked to deficient engineering; progressively weakening MTC technical andmanagerial capacity, resulting from low compensation and professional staffleaving government service; lack of counterpart funds, exacerbated bydifficult economic conditions experienced over the course of the project;complex bureaucratic procedures which hampered procurement of goods andservices, and later, the resolution of contractual disputes; and, in thelatter years of the project, redirection of MTCts efforts to areas affectedby the natural disasters of 1983. Because of these problems, work on somesections of the Central Highway are still under execution. Despite theseproblems, the project did succeed in significantly Improving access to thevery important corridor from the coast to the central mountains and theAmazon region beyond. The ex-post economic evaluation indicates that theroad component, with an overall economic rate of return of 201, was welljustified. The port component, though still justified, had a lowerreestimated rate of return thaa expected at appraisal (12% as compared to a22% appraisal estimate) because of higher costs than anticipated.

The institution-building components of the project were not fullysuccessful. The road maintenance component was not given the attention itdeserved by the Government, which was busy tackling problems in its roadconstruction program. The port financial performance was below target.While studies related to institutional and financial reform in the portsubsector were completed successfully, the recovmendations have not beenfully implemented. Future projects should use the progress made under thisproject as a stepping-stone to full implementation of these reforms.

PERU

LIMA-AMAZON TRANSPORT CORRIDOR PROJECT - (Loan 1196-n.)

PROJECT COMPLETION REPORT

-. INTRODUCTION

1.01 Peru's topographical, geological and climatic cond.'tions make theprovision of transport facilities extremely difficult. The transport net-work reflects these difficulties and has shaped the country's geographicdevelopment accordingly. In the nineteentb century, several isolatedrailways were built by private interests to connect mining areas in theSierra with coastal ports. Even today, railways and ports are highlyspecialized and operate mainly as transport systems for the export ofminerals. Highways, coastal and river navigation and, much more recently,civil aviation have played a more important role in integrating the country,but the lack of an adequate transport network remains one of the mostdifficult problems confronting Peru.

1.02 The highway network totals close to 64,500 km of which about 7,000km are paved and 12,600 km have gravel surfacing. Road development has,since 1970, been concentrated on pavti- and improving some of the moreheavily used roads and gradually extending the system. The backbone of thePeruvian road network is the Pan-American Highway, an all-weather asphalt:-oad 2,675 km long, running the entire length of the country along the coast(MAP IBRD 11304 (PCR)). The highway system is still in a very early stageof development, and the few roads connecting the coast with inland areas aregenerally low standard, unpaved and sometimes, particularly in the CentralAndes and Selva regions, little more than rudimentary dry weather tracks.The importance for the country's economic integration of the major roadconnection from the coast to the inland areas, and the Amazon basinnavigable river network, can scarcely be exaggerated. This road, some 800km in length, is the Central Highway, which starts from Lima, crosses thehighest range of the Andes to La Oroya, continues across a high plateau andother mountain ranges, and eventually emerges from the Andean foothills toreach Pucallpa on the headwaters of the Amazon river system. The mainelements of the project reviewed in this report consisted of paving thesection of. the Central Highway between La Oroya and Huanuco, rehabilitatinga paved section between San Mateo and Morococha, and improving the riverports at Iquitos, Pucallpa and Yurimaguas.

1.03 The Bank has been closely involved with the highway subsector inPeru since 1955. Highway development has to date been' promoted by eightloans totalling US$185.5 million. Five of these loans (Loans 271-PE,US$5.5 million, 425-PE, US$33 million, 1025-PE, JSA26 million, 1196-PE,US$76 million and US$93 million, 2091-PE) have supported construction andimprovement of different sections of the Central Highway. All the loanshave helped-Lo finance feasibility studies and detailed engineering designs,as well as providing for studies, technical assistance and equipment withthe objective of increasing efficiency in the highway subsector.

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II. PROJECT PREPARATION, APPRAISAL AMiD NEGOTIATIONS

2.01 A Bank transport sector missioa visited Peru In September-October1972 to update information on the sector and to review Government strategyfor development of the transport system. The content of the proposedproject was based on the findings of that mission.

2.02 Previous Bank loans in 1960 and 1965 had each financed the cons-tructlon of sections of the Lima-La Oroya-Pucallpa road. During implementa-tion of the Oroya-Aguaytia Road Project (Loan 425-PE, 196X), extraordinarilydifficult geological and climatic conditions caused large cost overruns, andthe Borrower and the Bank agreed in 1969 to reduce the scope of the originalproject to match available funds. These works were divided tnto threephases:

Phase I: works to gravel standard under Loan 425--PE;

Phase II: paving of the Huanuco-Aguaytia and resealing of theNeshuya-Pucallpa sections under the Loan 1025-PE(1974); and

Phase III: paving of the La Oroya-Huanuco and Aguaytia-Neshuyasections and rehabilitation of the San1Mateo-Morococha sections under the Lima-AmazonTransport Corridor Project (Loan 1196-PE).

2.03 Under Loan 1196-PE, in addition to these main road improvements(about 384 km), 110 km of feeeer roads leading into the corridor were to beconstnucted, road maintenance equipment purchased and consultants engagedfor construction supervision.

2.04 The project also included complementary construction of portfacilities in the river ports of Pucallpa and Yurimaguas, the expansion ofthe port of Iquitos and purchase of port cargo-handling equipment,improvement of street access to the port, and procurement of hydrologicalcraft and equipment to establish a number of measuring stations in theAmazon River system. Financing was provided for consulting services, thepreparation of feasibility studies and detailed engineering of transportfacilities which could form the basis for future projects, and a regionaldevelopment study in the Selva Central area.

2.05 The total project cost, including contingencies, was estimated atUS$128.7 million equivalent. The proposed loan would finance an estimatedforeign exchange component of US$69.4 million (54%). The remaining costswere to be met by the Government. The proposed loan also included someretroactive financing of studies required to complete the preparation of theproject and US$7.1 million to cover interest during construction (Table 1).

2.06 Execution of the project was expected to take about fouryears. Responsibility for the road component was placed under the GeneralDirectorate of Land Transport (GDLT). The General Directorate of WaterTransport (GDWT) was responsible for port construction and improvement.Both Directorates belong to the MTC. After construction, road maintenancewould be done by GDLT, but river port maintenance and operation were to be

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carried out by Empresa Nacional de Puertos (ENAPU), an autonomous agencyreporting to the NTC. For this reason, in addition to the Loan Agreementwith the Government, there was a Project Agreement wlth ENAPU. Administra-tive and organizational problems in both directorates required the appoint-ment of a special coordinator to ensure -the efficient execution of thisproject.

2.07 The project was the thirte-.th Bank transport project in Peru. Itwas appraised in May/June 1974, and subsequent to completion of thecomplementary studies recommended by the appraisal mission, was negotiatedin Washington, D.C. on June 9-13, 1975. A loan of US$76.5 million wasapproved on December 30, 1975, was signed on May 27, 1976 and becameeffective on August 18, 1976. The original closing date was December 31,1980.

III. PROJECT IMPLEMENTATION

3.01 The principal points affecting project implementation are treatedIn this report under four main subheadings (i) highway construction and con-struction supervision, (ii) highway maintenance equipment and technicalassistance; (iii) river port construction and hydrological equipment; and(iv) other consulting services and studies. Since the scope of the work tohave been executed under (i), (ii) and (iv) above was markedly affected bythe 1978-1979 reformulation of the project, at a time when work had barelystarted, the reformulation is treated as a preface to the implementationhistory.

A. Reformulation of the Scope of the Project

3.02 The start of road work contracts financed under Loan 1025-PE wasbarely startiog when the project was appraised. Work on Loan 1025-PE wasdelayed by about a year, and execution of the contracted works werecompleted about two years later than scheduled, with a 76X increase incost. The delays and the cost increases affected the initiation ofroadworks under this project since MTC did not have the capacity or funds toundertake additional work concurrently with the then ongoing works. Onlythe port element made any progress. Not until mid-1978 was the firstroadwork, the 40 km San Mateo - Morococha road section, contracted, by whichtime the need to reformulate the project had already become apparent anddiscussions with the Government were underway.

3.03 The 1978 investment budget was insufficient to finance localcounterpart costs for more than a limited portion of project's unstartedroadworks, with little prospect of increasing investment budget levels inthe following few years. Under these conditions it was estimated that theproject roadworks would not be completed before 1985. Road maintenance wasalso seriously under-budgeted and needed first call on any additional fundswhich might become available. It was, in consequence, agreed with NTC andthe Government that the scope of road improvement would be reduced bydropping the lowest priority road section and that funds thua released wouldbe used to provide interim support for road maintenance (especially withregard to equipment) as well as covering the increased costs (due toinflation) of the construction of the remaining civil works. In addition,

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as a step towards eventually preparing another project for financing by theBank, which would provide more extensive support for road maintenance, thepreparation of a nationwide study of road rehabilitation needs and provisionof technical assistance to MTC's Equipment Service (SEM). The specifics ofthe reformulation and actions required of MTC and the Government are listedbelow, d comparison of estimated costs of the project as appraised and asredefined is shown in Table 1.

B. Reformulated Project Components and Required Actions

(i) Roads

3.04 The reduced construction component of the project required post-poning the upgrading of the Aguaytia-Neshuya road. Only reconstruction oftbree decrepit single-lane bridges in this road were retained under thereformulated project. The Borrower agreed to prepare and carry out a pro-gram of routine and periodic maintenance of this road, pending its eventualupgrading. The road works that remained ir the project after reformulationwere: gi) rehabilitation and strengthening of San Mateo-Morococha road; (ii)improvement of La Oroya-Cerro de Pasco-Huanuco road; (iii) construction ofthe Pucallpa port access and streets; and (iv) minimum essentialimprovements of the feeder roads.

(ii) River Ports

3.05 The construction and Improvement of the river ports continuedunder the project with Increased costs to be covered by part of the fundsmade available by the elimination of the Neshuya-Aguaytia road component.

(iii) Road Maintenance Program

3.06 With the exception of supporting cost increases in remaining civilwork' and the costs of additional studies (para 3.07), the funds released bythe reformulation of the project were to be dedicated to support the roadmaintenance program for the years 1979-1982, which had been prepared underthe two previous highway projects. This program contained specific measuresto strengchen the management practices of MTC and SEM; and en estimate offunds needed to provide SEM with an adequate budget to cover the costs ofoperation, maintenance and repair of a balanced equipment fleet, and tocarry out the Road Maintenance Program. Under the reformulated project, keyimprovements necessary to strengthen maintenance and equipment managementand to assure the availability of resources needed for the program, wereconfirmed. They included, in particular:

(a) Equipment and spare parts. The Project included a program forreplacement and overhaul of existing equipment and the addition ofsome new units needed for road maintenance. The reformulatedproject also included the acquisition of spare parts necessary foroverhaul of salvageable units, for major repairs and to set upstocks and tools and repairs to workshops.

(b) Budgetary and Ornanizational Requirements. Specific estimates ofrecurrent budgetary requirements for the duration of the RoadMaintenance Program (1979-1982), including provisions for SEM's

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materials, labor and overhead expenses were agreed with MTC andthe Government. Agreement was also reached on measures toadequately segregate, at the departmental level, maintenancerespcnsibilities from other MTC responsibllities. Strengtheningof central planning, programming and monitoring of NTC'smaintenance activities was also agreed.

(iv) Technical Assistance

3.07 The ref6rmulated project also provided technical assistance foradditional engineering studies and for strengthening SEM's managementpractices. Specif$cally:

(a) the preparation of final engineering design for the Morococha-LaOroyn road, an extension of the San Nateo Morococha road which haddeteriorated and which urgently needed reinforcement andreconstruction;

(b) the identification and preparation of a nationwide roadrehabilitation program, for the period 1981-1985, which wouldinclude the accumulated backlog of deferred periodic maintenance;and

(c) the provision of consulting services to assist SEM in planning therehabilitation, maintenance and renewal of its equipment fleet, aswell as organizing the warehousing of spare parts stocks, andimproving Its accounting and equipment leasing systems.

C. Project ESxecution History

3.08 Execution of the project after the 1978 reformulation wasaffected by three significant events:

(a) two changes in MTC's top management; the first in July 1979 whenthe Minister was replaced, followed in a few months by theresignation of the vice-minister; the second a year later whennational elections returned a new government to power. In eachcase the changes caused delays in the start of contracts;

(b) the floating of the Peruvien "Sol de Oro" in the last quarter of1978, which resulted in rapid devaluation and inflation, for whichprovision had not been made under the ongoing contracts. This, ata later date (1980-81) was aggravated by.overvaluation of the solwhich led to artificially high construction prices, in dollarterms, which in turn affected decisions regarding the sufficiencyof loan funds; and

(c) severe financial problems and inability of MTC to meet paymentsdue to its contractors, starting in mid-1982, as a result offinancial mismanagement and overspending of its budget during thefirst half of CY82.

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(i) Highway Construction and Supervision

3.09 The following paragraphs provide a summary of the timing and dura-tion of contract execution, the problems encountered and the factors whichaffected contract costs.

(a) San Mateo-Morococha Road

3.10 The first roadwork to be contracted in September, 1978 was 40kilometers of pavement reconstruction on the San Mateo-Morococha section ofthe Central Highway. The section includes the highpoint of the road(elevation 4,843 m) at the Ticlio pass. A joint venture of internationaland local consultants was selected in November 1976 and contracted in May1977 to update the design of the road (Phase I) and supervise construction(Phase II). The engineering and design update focussed, in particular, onthe reasons why existing pavement had suffered rapid deterioration and onproviding in the design of the new pavement structure for the almost dailyfreeze and thaw conditions in the area. The time allowed to the consultantfor the update, as well as the budget, were Insufficient to allow for aspainstaking geotechnical and soils studies as are needed in the difficultconditions which can occur in the high Andes. Inadequate provision forsubterranean water conditions along 6 km of the highest sections of the roadcertainly contributed to the failure of pavement, that to date has not beensuccessfully repaired. In addition, the time allowed to resurvey the roadwas not provided for. The updated design was made on existing plans whichlater frequently proved to be inaccurate. For paving work this normallywould not have been of major importance, but when cost increases required anaddition In the contract ceiling amount, Peruvian Government requirementsnecessitated considerable additional survey work to accurately locate bothnew and existing road elements. This led to delay in obtaining anauthorized contract Increase, which also delayed work.

3.11 Inoitations to bid for the road reconstruction work were publishedin April 1978, the award was made in August 1978 and the contract signed inSeptember 1978. Work which officially started in November 1978 wasscheduled to be finished by June 1980. The completion date was laterextended to January 1981.

3.12 The main problems which arose during construction came late In thecourse of this contract. In late 1979 two problems developed on the upperreaches of the road: (i) groundwater seepage from the road bed andsideslopes required the addition of permeable rock fill under the subbase;and (ii) low temperatures, frequent temperature changes and bad weatherslowed paving operations. When work should have resumed after the 1980rainy season, the contractor put forward a proposal to change the pavementto Portland Cement Concrete and delayed remobilization for paving untilJuly/August when MTC decided in favor of the Consultant's recommendation tocomplete the bituminous pavement. Only one of the two asphalt finishers,however, returned to the project in sound operating condition, causingjointing problems at-the center line of the road. Meanwhile, the onlyborrow pit for base material on the project, was running out of suitablematerial. Mechanical stabilization of base material, failed to keep up withrate at which pit and run material was changing, and about 4 km ofsub-standard base was placed. The first course of pavement constructed on

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this base soon failed under traffic. An improved base-mix was used betweenMorococha and Abra Anticona, which performed better, while the failed basewas re-excavated, and additional crushed stone was added prior torecompaction. However, too much time had been lost to complete paving workIn 1980 before the start of the wet season. About 4.5 km remained to bepaved.

3.13 MTC informed the Bank in December 1980, that with the concurrenceof both the contractor and the consultant, the contract would be terminated,to avoid standby costs, and that the 4,5 km would be completed by forceaccount in 1981. MTC also failed to complete construction however. MTC'eefforts were stopped by diversion of personnel and equipment to cope wlthserious slide damage along the same highway closer to Lima. The slides weretriggered by unusually heavy rains on the western slopes of the mountainrange but once the equipment was removed, MTC's efforts were neverrestarted. The road section remains passable but in poor condition.

3.14 The supervison of this contract was not entirely satisfactory.The consultant's contract contained no provision for cost escalation sincethe Sol exchange rate, at the time, was officially controlled and theInflation rate was lower. When the Sol exchange control was lifted, in thefall of 1977, rapid devaluation and high inflation ensued. MTC was a longtime finding any mechanism to increase payments to the consultant, Inconsequence project supervision staff was kept minimal and even withadjustmeuts the consultant's remuneration remained low. MTC's management ofthe consultants also was generally negative in nature with too much effortdevoted to establishing fault on the part of the firms and/or contractor,and too little effort in helping solve the technical problems.

(b) Huacamayo, Huipoca and Chio Bridges

3.15 The next work to be contracted was the replacement of the threeold bridges on the Aguaytia-Nashuya road. In January 1979 the Bank agreedto direct contracting of these structures with the contractor who was stillworking near Aguaytia on the last road contract financed under the precedingloan (1025-PE). The negotiated prices were reviewed by comparison withprices on similar bridges constructed as part of the improvement of theHuanuco to Aguaytia road section, and found to be satisfactory.

3.16 The bridge construction contracts were signed in February 1979.Construction proceeded on schedule and work was completed by September1979. Contracts for the bridge approaches were signed in August 1979 andwork was concluded by the end of September. Supervision was performed byMTC departmental staff.

3.17 The only problem in connection with the bridge replacementoccurred after construction when erosion due to rainfall runoff began to eataway the appproach fills behind some of the abutment winpgalls andthreatened to encroach on the paved roadway. In spite of a request by aBank mission for corrective measures, no action was taken by MTC. On asecond visit while passing the site, the Bank mission was told that theneeded repairs were no longer MTC's responsibility since a recentreorganization had decentralized maintenance responsibility and the road hadpassed to the jurisdiction of ORDELORETO. The contractor undertook therepair on his own account.

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(c) Pucallpa Streets

3.18 A design for street improvements in the town of Pucallpa,including the proposed ring road for heavy traffic to the port area, wasprepared in early 1977, by a local consultant to the Ministry of Housing. ABank mission reviewed the design In Peru in July 1977, found it far toocostly and requested MTC to review the proposed standards. No further workon the project was undertaken for a period of about one year while MTC'sattention was focussed on problems related to ongoing works and otherproject components. In November 1978 a revised desigu was reviewed in thefield and again a number of modifications were requested by the Bank as wellas a thorough review of the proposed drainage provisions.

3.19 In early 1979, MTC requested, and the Bank agreed, to the workbeing performed by force account, since the Ministry of Housing wassimultaneously starting a program of urban improvements (including a waterdistribution system and sanitary sewers) which could give rise to delays ofa contract for pavement construction. As part of the agreement, MTC engageda supervising consultant for quality control and certification of workperformed. Payment was based on established unit prices which were reviewedby the consultant.

3.20 Actual work did not start until November 1979. The projectduration had been estimated at 12 months, but actually lasted two years andthree months. The major cause of delay was in obtaining roadway withutility installation completed and therefore in condition to be paved. Workwas completely halted, several times, for lengthy periods. Bank missionsserved to promote contacts between the ministers of MTC and Housing, so asto obtain some cooperation and coordination between work being performed.

3.21 The local consultant, supervising the works, performed well butwas inadequately supported by MTC. MTC support was largely delegated to thedepartmental engineer who had no authority over the activities or prioritiesassigned by Ministry of Housing work supervisors. MTC and the Ministry ofHousing never did succeed in defining and establishing a practical system ofcoordination at the field level or some other subordinate level in the twoMinistries.

(d) La Oroya - Huanuco Road

3.22 The major portion of the civil works retained in the reformulatedproject consisted of completing and paving the La Oroya to Huanuco section(240 km) of the Central Highway. The original detailed engineering for thisroad had been prepared in the early 1960's and most of the road platform hadbeen constructed under a previous Bank financed project (Loan 425-PE).

3.23 Selection of consultants to update detailed engineering andthereafter supervise construction for both this section of road and for theAguaytia to Neshuya road section was started in 1977 (pre-reformulation).Proposals were received from six international/national consultingengineering consortiums in Jv'y 1977. MTC evaluated the proposals, madepublic the results of the evaluation, then disqualified the selectedconsortium on an alleged technicality. The disqualified consortium beganseeking a legal injunction. MTC revised its position and annulled the

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proceedings on the grounds of an irregularity in the request for proposals.The Bank expressed its concern regarding the delay which was inevitablyresulting from this process and its effect on final construction costs inview of the accelerating rate of inflation in Peru.

3.24 Revised versions of requests for proposals and terms of reference

were sent to the Bank in February 1978. Bank comments regarding terms ofreference were given to MTC's chief of design in March 1978, after a jointfield inspection. These stressed the need for greater emphasis ongeotechnical, soils and drainage aspects to avoid construction problemswhich had arisen under the previous project. The timing for contractingconsultants remained uncertain while the project was being reformulated.

3.25 After the reformulation in 1979, MTC proposed that rather thanrequesting new proposals, the contracts be negotiated with the sameconsortium of international and local consultants who were completingsupervision of work under the previous loan and with a group of localconsultants who had all had previous supervisory experience oninternationally financed roadworks. The Bank agreed to this proposal andtwo contracts were negotiated.

3.26 The period allowed for design review was again too short eventhough at the insistence of the Bank it was lengthened from 3 to 5 months.Problems arose when the international/national consortium began proposingextensive construction of tunnel-shelters designed to pass mud flows(huaycos) over the tunnels so as to avoid road blockage when these phenomenaoccurred. These and numerous additional bridges were estimated to almostdouble the resulting cost of construction and could not be justified at thelevel of traffic using the roads, completely disregarding recommendationsfor less costly solutions prepared as part of a Geotechnical Study, financedunder the previous loans. MTC's engineering department, however, supportedthe consultant's proposal. The Bank insisted that the original designconcepts be retained. MTC senior engineers reviewed the situation andreduced the tunnel and bridge sites to four. The Bank agreed to financeonly one tunnel as a pilot model to determine how effectively they wouldperform and to see what difficulties might be encountered. TIhe tunnelactually has performed well but was lengthened to twice the original lengthdesigned.

3.27 The start of prequalification of contractors was also subject tolengthy delays due to a requirement in Peruvian regulations governingcivil works contracting which required international firms to joint venturewith local firms or sub-contract at least 51% of the contracted work toPeruvian firms. Since this requirement had been introduced after the dateof the loan agreement, MTC legal advisors said that it overruled theprovisions of the loan agreement. Discussions on this matter and a searchfor a solution lasted throughout 1978. It was eventually decided to issuethe requested prequalification internationally without stipulating thiscondition, with the Ministry of Economy and Finance engaging to support MTCIn obtaining an exception to the regulation, should qualified foreign firmspresent themselves, unassociated. Invitations to prequalify were issued inJune 1979. Only one foreign firm expressed interest and presented theirdocuments in joint venture with their own Peruvian subsidiary. Ten groupsof associated contractors were prequalified by the end of July 1978.

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3.28 Bids were invited on four lots in October 1979. Awards were madeto low bidders in January 1980 but the signing of the contracts were delayeduntil April 1980 by an Internal investigation and review ordered by the newMinister, which eventually confirmed that the bidding and evaluationprocedures were in order. Notice to proceed was given in May 1980. Bids onthe remaining two lots (V ald VI) were invited as soon as the review of theearlier bid awards had been concluded, and awards on these lots were made inOctober 1980 with notice to proceed being given in the same month (Lot V)and in mid-September (Lot VI).

3.29 A number of problems arose during construction due to (a)technical difficulties related to site conditions and high altitude (about75 km of the road runs at elevations of over 4,000 meters above sea level);(b) design defects; (c) failures in contract management and supervision; and(d) lack of timely payments to the contractors. The main problems aresummarized, by contract, below. Further details are given in Annex 1.

3.30 Problems encountered on Lots I, II and V were relatively minor.Delays were mainly attributed to design deficiencies, resulting in changesduring construction. Lots III, IV and VI were more problematic, and in factthe later two are still not completed.

3.31 Lot III ran into serious technical problems resulting in failureof the initial sections paved. This failure was attributed to deficientdesign and quality of work, and insufficient control by the contractor andsupervisor. The contract experienced considerable delays as the problem wasdebated between MTC, the supervisory consultant and the contractor. TheBank responded by twice sending a pavement specialist to analyze theproblem. Nevertheless, agreement was not reached on how to proceed untilJuly 1982. Once the work was reinitiated, it proceeded well, and therevised pavement mix design resulted in good quality pavement. This Lot wascomplete seven months behind schedule.

3.32 Work on Lot IV was started in May 1980 and was incomplete as ofFebruary 1985, when the Loan closed. Work on this section progressed welluntil mid-1981. Then work was stopped until a pavement solution was foundfor Lot III, and never restarted at full rate. The contractor blamed thepoor progress in delays in receiving from MTC technical solutions forproblems which arose and arrears in payment by MTC, including compensationfor the time lost when paving was halted. The problem was exacerbated bythe fact that the contractor's bid prices had been low as the job had beenbid when work was scarce. The contractor's work programming was poor andinsufficient personnel were assigned. Then in 1981, many new road projectswere initiated and the contractor received more lucrative contractselsewhere. By mid-1982, MTC began to have trouble making payments, thecontractors on this and other jobs exhausted their credit. The contractdisputes led to eventual paralysis of work on this lot. In 1983 a solutionwas found and work resumed. However, payments continued to be delayed andthe work progressed only sporadically. By February 1985 all but 2 km of theroad was completed. The remaining works ar- to be completed by forceaccount.

3.33 Lot VI experienced difficulties similar to those experienced underthe other contracts. Problems were initially linked to slow mobilization onthe part of the contractor, and then to MTC's financial difficulties which

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resulted in payment delays. By the end of 1983 the eontract was only 80%complete, and virtually no progress has been made since then. Work stoppedcompletely in December 1984 due to a shortage of funds. The remaining works(estimated at about US$1.5 million) may be included under a revised Loan2091-PE. This revision Is currently under discussion between the Governmentand the Bank.

(e) Construction Supervision

3.34 Supervision of construction of Lots I and II by the consortium oflocal consulting firms, started weakly. The firms eventually replaced thedirector with one of the resident engineers and cooperation between thecontractors and consultants improved. With this, inspection and qualitycontrol also improved as joint efforts were made to resolve problems.

3.35 On the other lots the inspection by the international/nationalconsortium was of mixed quality. Although the consortium was directed bythe team leader of the international firm, who had considerable previousfield experience on works financed under earlier Bank loans, theorganization which was adopted did not function well. The internationalfirm staffed the inspection for Lots V and VI, with each local firm staffingone of the other projects. Back-up provided to the local firms was mainlyadministrative. The lack of adequate materials control staff and facilitieson Lot III was never covered by the international firm, when their localpartner was unable to find suitably qualified staff who were willing to workin the zone. On Lots V and VI, the first resident engineer used theauthority delegated to him to make changes up to 5% of contract value, toorder construction of additional retaining walls. Many of these had beeneliminated from the plans as a result of an inspection by a MTC commissionwhich reviewed the differences between the recommendations of the Geotechni-cal study and the solutions proposed by the consultants. As a result, whenadditional work was really needed later, his successor had difficulty inobtaining timely approval of changes from MTC and eventually from theController General's office, who have to approve increases of item over 10%(no credit being allowed for reductions in other work items).

3.36 The relationships between MTC and their supervising consultantswere in general less than satisfactory. MTC appointed a field coordinator,to work with the cot.sultants so as to avoid delays in making decisions whichhad given trouble on previous loans. The objective had been to have a MTCrepresentative who could join with the supervising consultants and th'econtractors in the process of resolving problems, and who could takedecisions and give approvals on the behalf of MTC. Unfortunately, theengineer selected for this post did not make a constructive contribution.

(f) Feeder Roads

3.37 The two feeder roads under the project were never improved. Inlate 1981 a verification of the rate of cost escalation on the projectconstruction contracts was made in connection with the preparation of theEighth Highway Project (Loan 2091-PE). In US dollar terms prices hadescalated 30% in the previous 12 months. Even under an apparentlyconservative assumption that the future rates of escalation would decrease,it appeared that loan funds would barely suffice to continue participation

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in the-ongoing contracts. In consultation with MTC it was agreed that MTCwould improve the feeder roads using force account and its own funds,leaving the loan funds for the payment of contracted works. As a result ofthe ensuing financial crisis, MTC never started this work.

(iii) Highway Maintenance Equipment end Technical Assistance

(a) Procurement

3.38 Purchases of maintenance equipment, spare parts and workshop toolswere made under the project in four tranches. The first purchase made inAugust 1977 was in the amount of US$150,000 for spare parts fordump-trucks. The second tranche was to cover procurement of 46 vehicles, 35equipment units, and workshop tools. Bids were invited in October 1977,received in December 1977 and the evaluation was completed in March 1978.All bids were rejected for 5 types of vehicles, when 4 of the 5 dealersfailed to meet several legal/administrative bid requirements, and no awardswere made on 4 types of equipment due to insufficient or non-responsivebids. The remaining equipment was awarded to nine suppliers for about $2.6million. The bids for worlshop tools were also rejected as the proposalswere far too costly (about 30% in excess of estimated cost), generallybecause the suppliers were quoting on substantially better tools thanrequired. The third tranche consisted of rebidding of items not awarded in1978. Four suppliers were awarded contracts in the total amount of US$1.4million, in April 1979. Workshop tools were also rebid and 6 contracts wereawarded in October 1980, in the total amount of US$675,000. A fourthtranche of maintenance equipment was agreed with the Bank and bids wereinvited in 1980 resulting in awards to two suppliers in December 1980, inthe amount of US$1.9 million.

3.39 Bids for Geotechnical equipment, after long delays due to the lowpriority accorded to geotechnical work by MTC management, were taken in1982. All bids were rejected due to insufficient bids being received. Itwas agreed with the Bank to use international shopping which required aspecial resolution from Government. This was obtained in late 1982 but withthe heavy flooding in northern Peru in early 1983, all MTC's funds andefforts were concentrated on the emergency requirements. In late 1983, withthe loan closing date approaching the matter resurfaced. A legal opinionwas required as to the validity of the 1982 resolution in 1983. By the timethis was obtained, the fiscal year was over and no spending authority hadteen provided in the 1984 budget.

3.40 A final tl.-anche of spare part and workshop tool procurement alsofell victim to lack of spending authority. Bids were evaluated in December1983 but MTC management elected to try to purchase vehicles rather thanspares with the small amount in the 1984 budget allocated to equipment.Bids for additional workshop tools were received in October 1983 but had tobe rejected as none complied with the short delivery date allowed by NTC inorder to try to receive the tools before the loan closing date. It was thenproposed that funds from 1196-PE be used to finance spare parts and toolsbid under Loan 2091-PE which were essentially the same as those which wereto have been included In the final tranche of Loan 1196-PE. The loan was tobe extended to February 28, 1985 to allow for the time needed to receivelegislative approval to utilize funds from 1196-PE to finance items bid

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under 2091-PE, for contraction of these items and delivery. By the time thelegislative approval was received and the Bank extension of the closing dateapproved, it was too late to order the spare parts in the 1984 budget year.As a result, the spare parts and workshop tools were not ordered. They willbe rebid and financed under 2091-PE.

(b) Equipmeut Overhaul

3.41 Lists of equipment selected for overhaul were reviewed bytechnical assistance consultants to SEM and Bank consultants. The programrepaired and overhauled 43 units of equipment and 40 dump-trucks, but workwent slowly for lack of sufficient mechanics. Various measures werediscussed with MTC management regarding contracting additional mechanics butthere was a fear that disparity in pay between contracted mechanics andSEM's mechstnics would lead to morale problems and loss of SEM staff.

3.42 The second phase of the overhaul program of another 55 units neverstarted due to spare parts acquisition being halted (3.50). In addition,after the change in Government in 1980, a reorganization of MTC resulted indisbandment of the equipment service with its role changed to a stafffunction. Control of equipment and workshops was assigned to individualdepartments. Central spare parts stocks were distributed to the departmentsbut no clear guidelines were formulated to clarify how the workshop systemwould function or what level repairs can be undertaken in whichdepartments. Only 7 of the departmental workshops have space and facilitiesfor major repair.

(c) Technical Assistance

3.43 As part of the reformulation, technical assistance was provided toSEM to help organize and control equipment overhaul, improve management andaccounting for spare parts procurement, storage and distribution, as well asto improve management of the equipment fleet. An international consultantwas contracted and started work in July 1980. The technical assistancelasted 18 months and produced a number of recommendations but made littleprogress in having them implemented. In the latter six months internaldisagreements in the consulting firm led to removal of the project managerand no suitable replacement was provided, prompting termination of thecontract in January 1982. It was agreed between MTC and the Bank that a newfirm would be contracted to assist with implementing recommended proceduresand adapting them to the revised organization, but although terms ofreference were agreed, there was no further action taken by MTC.

(ill) River Ports

3.44 The original completion date for the river ports was 1978. Theworks, however, did not get started until mid-1977, almost a year after lcaneffectiveness. Iquitos was the first port to be undertaken, but due to somedesign changes for the floating dock, completion was postponed severaltimes. Another delaying factor was a large quantity of unsuitable materialwhich had to be removed before foundations fo- %.ie land-side installationscould be made. The work was finally Inaugurated in May 1980, but was notformally taken over by ENAPU until much later due to a dispute concerningextra costs and problems with the decking. Due to the high temperature in

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this area, the original asphalt paving had to be substituted by timberdecking on the floating steel dock. Additional portable conveyors and aseparate mooring buoy also provided for additional through-put capacity.The final cost of work at this port was US$12.3 million which was 50%greater than the appraisal estimate.

3.45 Conceptual design changes for Pucallpa and some design changes forYurimaguas also delayed the start of these ports until December 1979 andNovember 1979 respectively. The design changes for Pucallpa essentiallyconcerned the access bridges and the number of pontoons in the dock whichinitially was three and ultimately was increased to five. Despite this, thelowest bid was only 5% above the engineers' estimate for Pucallpa. TheNaval Shipyard, SIMA, was subcontractor for all floating pontoons, the largeones made in Iquitos and the smaller ones for Pucallpa brought in by roadfrom Lima. The work in the Pucallpa port was finished in March 1982 withoutfurther major problems, but at much higher cost due to inflation. Theseworks cost a total of US$10.8 million, 157% and 93% greater than theappraisal estimate.

3.46 The Yurimaguas floating dock was based on reconditioned surpluspontoons from the previous dock in Iquitos. Unfortunately, thereconditioning required more steel than expected and the lowest bid was 26%higher than the consultant's estimate. In part, those bids also reflectedthe perception of contractors that working at Yurimaguas was likely to bemore difficult and expensive due to its isolated location and lack offacilities. The final cost (US$4.0 million) was 122% higher than theappraisal estimates. The work was finished in March of 1981. Due to thelack of equipment and administrative staff, actual operations did not startuntil October 1981. Of concern is the fact that the port is isolated fromthe main Huallaga river part of the year. The port was located on the quiettributary Paranapura instead of the Huallaga river since the fast-flowingHuallaga would create hazards for mooring of river craft. Unfortunately, attimes a sandbar builds up by the Huallaga partly blocking the Paranapura-Erosion on the Huallaga river bank is so rapid, however, that this prob: amay be alleviated in a few years time. The problem is currently beingstudied by MTC.

3.47 Concerning cargo handling and floating equipment, an inordinateamount of time passed between Bank approval of awards and final procurementdue to MTC procurement procedures. In addition, for work boats, delays inawards were so long that finally a new bidding had to be carried out aftermajor redesign of the boats, reducing cost from about US$229,000 toUS$89,000. Some of the hydrological equipment could not be purchased forsimilar reasons. After much delay, cargo handling equipment was receivedmore or less in line with original cost estimates.

(iv) Consulting Services

3.48 In addition to construction supervision, this loan originallyincluded funds for several studies: Aguaytia-Neshuya detailed engineering; astudy of the strategy for coastal transport; Ambo-Huacho feasibility study;Selva Central rural development study; a study of the investment planningfor ENAPU S.A.; and a feasibility study of six airports along theLima-Iquitos corridor. At the time of reformulation of the project, the

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major additions were the road rehabilitation study and the technicalassistance to SEM. In addition, final design for the Morococha-La Oroyaroad was included.

3.49 Of these various consulting services, the Aguaytia-Neshuyadetailed engineering was quickly finished. The feasibility study for theAmbo-Huacho road was originally intended to be financed as part of thisloan. However, following a request by MTC to carry out the study with Itsown forces, the Bank agreed to make the funds, previously alloted forfinancing of the study, available for financing of detailed engineeringinstead. Similarly, the study of the feasibility of various alternatives ofcoastal traffic was completed largely by MTC'a own staff. This CoastalCorrido,r Study proceeded slowly with individual foreign consultants givingsome assistance.

3.50 The Regional Study of the Selva Central was carried out in severalstages. The prefeasibility stage was carried out largely by MTC staff. Theprefeasibility stage was completed in May 1980 and the feasibility stage waslargely completed in 1983. Five specialized consultants on the subjects ofsoils, forestry, ecological Impact, airships and shallow river transportwere provided on short term basis. The river transport consultancy,although selected, was never contracted due to administrative and financialproblems. The Regional Study of the Selva Central became a basis forseveral projects to be financed by International lenders, including theBank, KfW, USAID and IDB.

3.51 The ENAPU study carried out by CENIP (para 6.01) faced no majorproblems but has so far had limited impact. The airport feasibility studywas the foundation for the Aviation Development Project (Loan 1963-PE).

3.52 The road rehabilitation study did not start until November 1981due to a lengthy process of preparing terms nf reference for a type of studywhich was an entirely new concept to MTC. The delay was aggravated by thechange of Ministers in 1980. Prequalification of international/localconsultant joint ventures and selection of a firm took most of 1981. Theservices were delayed when NTC decided to purchase special pavement testingequipment rather than having the consultant do so, which resulted inequipment not being available when needed (some never was purchased). Theconsultant adapted his work program well and succeeded in introducing thecomputer programs as well as other technical innovations.

IV. COST ESTIMATES AND DISBURSEMENTS

4.01 A summary comparison between appraisal estimates and actual orfinal estimated costs is shown in Tables I through 4, and is summarizedbelow. Table I shows the changes as a result of the 1978 reformulation ofthe project; Tables 2 and 3 give details regarding the road component whileTable 4 gives details on the river port costs.

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SAR Actual Cost or Actual as aRoad Construction Estimate 1/ Current Estimate 2/ Percent of SAR

(US$ millIon) --(X-

San Mateo-Morococha 5.9 9.0 153La Oroya-Huanuco 51.2 64.2 125Pucallpa Streets 3.2 2.1 66Feeder Roads 2.0 0.0 -Aguaytia-Neshuya 29.7 0.6 2

Road Maintenance Equipment 5.5 8.7 158

Consulting Services 11.3 11.0 97

River Ports & Equipment 19.8 30.5 154

Total 128.6 126.1 98

1/ Including Price and Physical Contingencies.-/ Excludes works dropped from the project.

4.02 Loan funds were reallocated twice, as follows:

Original ReallocatedLoan Agreement M 1~979 January 1981

(US$ thousands)

(1) Civil Works 35,100 30,300 47,000(2) Road Equipment 4,000 9,900 10,500(3) Soils Laboratory 200 300(4) Cargo Handling Equipment 4,200 4,200 4,200(5) Hydrological Equipment 500 500 600(6) Consulting Services 5,400 7,200 6,800(7) Interest 7,100 7,100 7,100(8) Unallocated 20,200 17,100 0

76,500 76,500 76,500

4.03 The loan closing date has been extended three times, first fromDecember 31, 1980 to December 31, 1982 and then to December 31, 1983. InDecember 1984, US$3.2 was cancelled and the loan extended to February 28,1985 to cover equipment and spare parts purchases. As of February 28, 1985,US$70.8 million had been disbursed, or 93% of the original loan amount.

V P FINANCIAL PERFORMANCE PORT -COMPONENT

5.01 The Empresa Nacional de Puertos (ENAPU) is in charge of maintenanceand operations of existing facilities while the Direccion General deTransporte Acuatico (DGTA) is responsible for port construction andimprovements. The project objectives regarding port financial policies wentbeyond the three river ports and extended to the overall financial situationof ENAPU.

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5.02 There were three financial covenants in the Project Agreement:

(a) ENAPU, by December 31, 1976, to revise, on the basis of anongoing costing study, its tariff structure so as to enable itto earn an annual rate of return of at least 6%;

(b) Iquitos, to achieve a working ratio of 140 in 1976, 120 In 1977and 100 in 1978, a~nd thereafter;

(c) the three project ports, as a whole, to achieve a working ratioof 100 in 1979 and improve-thereafter.

None of the targets agreed upon have been met, and it is unlikely that theconditions (b) and (c) will be met in the foreseable future. The followingparagraphs outline the financial performance of ENAPU as a whole and thethree project ports.

A. ENAPU

5.03 ENAPU's financial position varies significantly from theappraisal forecast, with shortfalls in the financial results experienced inevery year except 1979. The main reasons behind the shortfalls as comparedto appraisal expectations are (a) lower than expected port traffic; and (b)inadequate tariff adjustments to offset the effects of inflation. Trafficpeaked in 1975, and then fell dramatically until 1980. Dry cargo fell by 40%between 1975 and 1980, totalling only 58% of forecast levels by 1980. Liquidcargo in that year reached only 44% of forecast levels. Traffic improvedafter 1980, then fell again in 1983 (Table 5).

5.04 ENAPU'a failure to meet the financial targets set out atappraisal was also due to the failure to make needed tariff adjustments in atimely manner. The Bank relied on an UNDP advisor, at that time employed byENAPU, to improve the cost accounting system, and to relate more closelycosts and tariffs. Despite the Bank's insistence, proposals made by ENAPU toadjust tariffs periodically in relation to the increase of expenditures(resulting mainly from inflation) were not always approved by Government,which seemed convinced that any significant increase in port charges,particularly on cargo imports, would have an immediate effect on consumerprices. Nor have efforts to relate tariffs more closely to costs been fullysuccessful.

5.05 The above factors are reflected in ENAPU's income statements forthe period 1975-80, given in Table 6. Except when tariffs were ddjusted, thefinancial results were less favorable than anticipated. The operating andworking ratios targets were generally not met, and the rate of return targetwas met only in 1979. In 1982 and 1983, ENAPU's financial position improvedsomewhat. Table 7 shows ENAPU's balance sheets as of December 31, 1975-1983,comparing forecast and actual figures. Notwithstanding its weak earnings'position, ENAPU's financial situation is still basically sound.

5.06 In response to unclear port financial policies and in the unwieldyrelationship between Government and ENAPU (e.g., the separation ofre.ponsibility for construction and operations), it was agreed at loannegotiations that a study would be carried out, not later than December 31,1976, to determine the appropriate financial policies for ENAPU, including

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payment of dividends to the Government, use of concession fees from privateports aud servicing of debt incurred by Government for port construction.The etudy was carried out by ENAPU and completed i. July 1978. No action onthe study was taken, and consequently the practical effect of the study hasso far been very limited. This ts regretable since ENAPU's Institutionalframework was amended in 1981 and the opportunity to streamline the financialrelationship between Government and ENAPU has been missed. By LegislativeDecree in 98 dated May 29, 1981, ENAPU became ENAPU-Peru, S.A., a SociedadAnonima, subjected to private corporate law, although fully Government owned(para 6.02).

B. PROJECT PORTS

5.07 Contrary to the overall trend affecting ENAPU over the period1977-1983, traffic at Iquitos and Pucallpa have generally exceeded theappraisal forecast; a comparison of appraisal projections and actual trafficvolumes is given in Table 8. ENAPU only started handling traffic atYurimaguas in late 1981, and has only kept sporadic tr&ffic statistics forthat port with only one full year of traffic statistics available.

5.08 Notwithstanding a favorable traffic trend, the financial results atIquitos and Pucallpa are most disappointing. Details of the income accountsfor the project ports are in Table 9. Section 3.03(a) of the ProjectAgreement provides for Iquitos to acbieve a working ratio of 140 in 1976, 120in 1977, and 100 in 1978 and thereafter. Actual performance wassubstantially worse than forecast, as shown below:

ACTUAL 1975 1976 1978 1979 1980 1982 1983

Working Ratio 164 - 443 579 578 357 172Operating Ratio 176 428 502 635 714 441 205

For 1983, compliance with Section 3.03(a) of the Project Agreement would haverequired a 70% increase in Iquitos' operating revenue. Such an increasewould have been unlikely as it conflicted with government policy ofassistance to the Selva Region.

5.09 The Project Agreement also provides for the three project ports, asa whole, to achieve, as from 1979, a working ratio of 100, and improvingthereafter. Actual performance has been below appraisal expectations, andif current trends continue, this target will not be met in the future.

5.10 At a management meeting preceeding loan negotiations, the financialcovenant to be applied to the project ports was discussed in detail. Theconsensus was that, notwithstanding the Government's policy to subsidizepublic services in the Selva Region, financial objectives should be set andquantified. It was nevertheless accepted that such objectives would be lowerthan those usually required for port operations by the Bank; hence, thecovenant was based on the working ratio. Actual results now show that,although modest, the objectives were too ambitioQs, as they ran counter thepolitical determination to continue subsidizing the port services in theSelva Region.

4-.

C. AUDIT

5.11 Section 3.02 of the Project Agreement makes provision for ENAPU tohave Its accounts audited annually, by independent auditors acceptable to theBank, by not later than four months after the end of each year. The accountsfor 1975, 1976 and 1977 were audited in a timely manner while there weredelays with accounts for 1978, 1979 and 1980.

VI. INSTITUTIONAL DEVELOP1ENT

A. Port Institutional Development

6.01 In 1968, with the abolishment of the National Port Authority, theGovernment divided responsibilities in the port sub-sector; DGWT in MTCbecame responsible for port planning, design and construction, while ENAPUkept responsibility for port operations and maintenance. This division, acommon feature in the transport sector in Latin America, always raises aproblem of coordination. While accepting the institutional set-up, the Bankfelt that It would serve a useful purnose for the Government to study theways and means to increase the participation of ENAPU in port planning,design, and construction. The Government agreed, and Section 4.07(a) of theLoat Agreement made provision for:

(a) the carrying out of the study by June 30, 1976;

(b) exchange of views between the Government and the Bank on theconclusions of the study; and

(e) the carrying out of a plan of action prepared on the basis ofsuch conclusions.

There was strong opposition to the study In some Government spheres anddelays were incurred. To strengthen the case and overcome resistance, theBank agreed to finance 100t of the cost of the study. After substantialdelay, the study was carried out in 1979 by CENIP (Centro Nacional deProductividad). The study was of high professional quality; its mainconclusion was that ENAPU should be given direct responsibility for portinvestment, while MTC should deal with policy issues, inter-sectoralcoordination and review of ENAPU's planning and implementation decisions. InApril 1980, the Bank informed the Government and ENAPU that it supportedCENIP's conclusions and requested their comments. This request has sincebeen repeatedly addressed to Government and ENAPU but to no avail; MTC isawaiting ENAPU's comments and vice-versa. The issues are politically -sensitive and none of the institutions involved wants to take a stand. It Isobviously difficult for them to comment on proposals which may curtail theirfunctions and responsibilities. No clear-cut decision has emerged so farfrom the CENIP study.

6.02 By Legislative Decree of May 29, 1981, ENAPU became ENAFU-Peru, S.A.,subject to private corporate law. The decree confirms the responsibilitiesof ENAPU as being the administration, operationas, equipment and maintenanceof ports, but adds that ENAPU can undertake port construction, If soauthorized. This change, which is a timid implementation of the CENIP

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study's conclusions, is encouraging but It requires to be better defined.Indeed the new institutional set-up now provides for two organizations - MTCand ENAPU - to construct ports, and unless their respective responshillityis clearly set, confusion, and ensuing waste, is unavoidable. Progress ofthe project under review was already adversely affected by infrequent andinadequate interaction between DOWT and ENAPU; the situation would be worseshould both organizations have overlapping respotsibiLity in portconstruction.

6.03 Section 4.08 of the Loan Agreement made provision for theGovernment to appoint, within MTC, a project coordinator to coordinate allproject activities. An office for coordination and supervision wasestablished with adequate secretarial staff; the project coordinator wasgiven high ranking administrative status. Five coordinators have beensuccessively appointed during project execution, but not always of adequateprofessional level and their action has been for all practical purposeslimited to monitoring progress of the projects. Section 4.08(c) of the LoanAgreement requires preparation of a report containing an evaluation of theposition of project coordinator and the need of such position for thesufficient execution of the project. Such a report was completed but it didnot have any significant impact.

B. Highway Maintenance

6.04 An important objective of the Lima-Amazon Corridor Project was tocontinue the process of improving highway maintenance started under earlierloans. The Loan Agreement contained specific covenants requiring theBorrower to carry out a special nationwide road maintenance program based onthe recommendations of a consultant's study financed under the two previousloans, including the prompt provision of funds, facilities, services andother resources required. Another covenant required the Borrower to prepareand carry out a plan of action to revise existing practices regarding therental of maintenance equipment. The project reformulation expanded theproject's emphasis on improving road maintenance by including an equipmentoverhaul and replacement program and specific actions to be taken to improvemanagement of maentenance activities (para 3.07).

6.05 The progress made in introducing improved maintenance managementand carrying out improved maintenance has been below expectations, limited bythe few staff available to work on introducing recommended proceduralimprovements, Insufficient budget allocations and lack of serviceableequipment. Only the first phase of the overhaul program was carried out.Additional complications arose from frequent institutional chauges,replacement or reassignment of staff trained In new procedures; attempteddecentralization without clear delineation of responsibilities and continuingdepletion of technical and managerial expertise due to low compensationlevels and uncertain career prospects. The dismantling of SEM in 1981 was aregressive move rather than an advantage. At the same time, it must be notedthat the latter part of the project implementation period coincided with aseries of emergencies (flooding, landslides on major highways) which requireddiverting scar-e human and financial resources from the implementation of theplanned maintenance program.

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VII. ECONOMIC REEVALUATION

A. Road Component

7.01 The road component was justified at appraisal on the basis ofquantifiable benefits accruing to road users, primarily reduced vehicleoperating costs. The appraisal estimate of the economic rate of return(ERR), not including time savings, was over 30% for the San Mateo-Morococharoad section, and 23% for the La Oroya-Huanuco road section. The estimatedERR for the Pucallpa street improvements was 18%, and for the feeder roads10-18%. Finally, the Aguaytia-Neshuya section had an estimated ERR of 9%.During project reformulation, the scope of works on this latter section waschanged to provide only for construction of three critical bridges.

7.02 In the ex-post economic reevaluation, only vehicle operating costswere considered. For those sections of the La Oroya-Huanuco road not yetcomplete, it was assumed that these would be finished by end 1985. On theSan Mateo-Morococha road, some 4.5 km of road which was never properlyfinished was considered to be in poor condition both with and without theproject (para 3.13). Average traffic on most of the road sections is lowerthan projected at appraisal, due to the difficult economic situation whichPeru has faced since 1977 (Table 10). For the purposes of the reevaluation,a lower rate of traffic growth was assumed (4% p.a.) as compared to appraisalestimates (6-8.5% p.a.). In the reevaluation, the real cost increases causedby construction delays and design changes were compensated by the fact thatthe latest available vehicle operating costs estimates for Peru are higher Inreal terms than the appraisal estimates (Table 11). The estimated ex-posteconomic rates of return for the road components are 35% for the San MateoMorococha road, 18% for the La Oroya-Ruanuco road and 24% for the Pucallpastreet improvements (Table 12).

B. River Ports

7.03 At appraisal, the main benefits included In the economic analysisof the river ports were (a) reductions in shipping costs because of betterutilization of barges and other river craft; (b) reduced labor costs; and (c)reductions in cargo damages. The appraisal estimated ERRs were 24% forIquitos and Pucallpa and 17% for Yurimaguas. These same types of benefitswere considered In the ex-post evaluation. Port traffic was assumed to growat 6X p.a., as compared to appraisal estimate of 6.4-7.2% p.a. While stillacceptable, the ex-post economic rates of return for the Pucallpa and IquitosPorts are at 13% and 12%, respectively, below appraisal estimates, despitethe fact that traffic has generally met appraisal expectations (Table 8).The lower than expected results are attributed to higher real costs of theseworks. Traffic at the Yurimaguas port, based on very weak data base (onlyone full year of statistics are available) appears to be below appraisalestimates. This, combined with real cost increases, led to shortfalls atthat port, with an ex-post ERR of only 6%. Nevertheless, because theYurimaguas port represents only 14% of total river port costs (and 3% oftotal project costs) the overall port ex-post ERR is still an acceptable 12%(Table 12).

7.04 With the high proportion of buses and particularly trucks on theproject roads and the competitive nature of transport industry, it is likely

-22-

that the transport cost savings will be reasonably well distributed betweentruck and bus operations on one hand and the travellers and shippers on theother. Since this Central Highway is one of the main transport links of thecountry, transport cost reduction and reduction of road closures is lmportantfor consumer prices for certain commodities in Lima as well as for theagricultural development of the Eastern Piedmont and the large areas servedby the Amazon River system through Pucallpa.

VIII. ROLE OF THE BANK

8.01 The Bank made important contributions in the identification andpreparation of this project, advocating the merger of what essentiallystarted as separate projects in two different subsectors. The fact thatvirtually all subsectors, except railways, were influenced by the project ledto better coordination of transport investment. The multi-modal nature ofthe project, along with difficulties resulting from weak MTC management,inadequate counterpart funds and technical problems, required, however, amajor supervision effort over some seven years, with an average of 100staffdays per year.

8.02 The Bank responded to the difficult implementation problems withflexibility, as evidenced by the reformulation of the project in 1979. TheBank was also instrumental in expanding the project's focus with regard toroad maintenance. Even though that aspect of the project ultimately provedto be less successful than had been anticipated, the emphasis on roadmaintenance was, and continues to be, of high priority in the sector.

8.03 In its supervision of the project, the Bank took an active interestin assisting MTC solve the numerous technical problems encountered. Forexample, the Bank engaged pavement specialists to assist in the problemswhich arose in the La Oroya-Huanuco road. Even though the Bank's advice wasnot always acted upon in a timely manner, the Bank's intervention wasultimately useful. The Bank also persisted in urging the adaptation of moreflexible and less costly designs in Peru's geologically unstable areas. Inaddition, the Bank played a useful role in breaking impasses in projectexecution by working with the highest levels in MTC and other governmententities to simplify extremely complex bureaucratic procedures.

8.04 Although Bank supervision of the institution-building aspects ofthe project was also relatively intense, the impact of Bank dialogue on theseissues was below target, particularly with regard to development of roadmaintenance, and strengthening of ENAPU's role in port infrastructureplanning. In this regard, it appears that the weakness of these i=qtitutionswas underestimated.

IX. CONCLUSIONS

A. Achievement of Project Objectives

9.01 This project, despite the considerable difficulties in itsimplementation, represents an important contribution to the provision ofaccess from the coastal region to the Central mountains and finally to the

- 23 -

large tropical rain forest areas of Peru. The project suffered from itsInception from lack of counterpart funds and implementation capacity,exacerbated by the extremely difficult economic conditions experienced overthe course of the project. Nevertheless, the ex-post economic evaluation ofthe project indicates that the project was justified, even taking intoaccount the long implementation delays and cost increases. The roadcomponent has an estimated ex-post economic rate of return of 20% and theport component 12%.

9.02 The project has been less successful in achieving its institution-building objectives. With regards to port issues, the studies which were tolead to the rationalization of responsibilities for port planning andconstruction and of ENAPU's financial policies were successfully completed.However, the recommendations of the studies were only partially implemented.While the 1981 changes on ENAPU's institutional framework set the stage for amore rational approach to port planning and operations, an unwieldyrelationship between ENAPU and MTC persists. In the road component, progressin strengthening road maintenance under the project was disappointing. Theroad maintenance program suffered from inadequate staffing, frequentinstitutional and personnel changes, and insufficient budget authorizations.Indeed, MTC's management capacity overall declined over the course of theproject as declining real compensation levels resulted in high leveltechnical staff leaving MTC. It should be noted that these largely exogenousproblems were common to all components of the project.

9.03 The financial performance of the port project was also belowtarget, both in terms of ENAPU's financial results and those of the projectports. The shortfall in ENAPU's performance was caused in part by trafficshortfalls which would have been difficult to foresee at appraisal, but alsowas due to failure to raise tariffs in a timely manner. In retrospect, theBank's ability to engage in constructive dialogue through this projectregarding ENAPU's performance was limited by the fact that ENAPU was not theborrower, and that the project ports were, from ENAPUt's perspective, a fairlyminor part of its operations. With regard to the project ports, the Bank wasaware of, but probably underestimated, the Government's resistance to raisingtariffs at the project ports in order to meet the financial targets.

9.04 Under the project, studies regarding infrastructure requirementswere successfully completed. One has led to a Bank rural development projectand a second, on road rehabilitation, will form the basis for the next roadsproject.

Lessons

9.05 Several lessons can be drawn from this project. These have alreadybeen useful for the design and implementation of the Eighth Highway Project,Loan 2091-PE. These are:

(a) institutional capacity: MTC's capacity (financial, technical,managerial) to implement the project, particularly the roadcomponent, should have been more carefully assessed. Given thedifficult experience in earlier projects on the Central Highway,this project should have been delayed until works under Loan1025-PE were well underway. Future Bank projects have, and should

- 24 -

continue to have as a primary objective, institutional andcompensation reform which is essential if MTC Is to overcome thedecline in capacity experienced over the course of the project;

(b) Status of Proje:t Preparation. Even though the final engineeringfor the road components had been completed before projectappraisal, it had to be updated. Given the known techuiealdifficulties involved in the construction of the Central Highway,this updating should have been completed prior to loan approval, inliue with current practice. Final engineering should also havebeen completed for the ports prior to loan approval. The tlmeallowed for updating of the studies was insufficient, and this ledto design deficiencies. These factors contributed to time and costoverruns and eventually to the contract disputes; and

(c) Port Institutional and Financial Improvements foreseen under theproject may not have been realistic, given the relatively minorrole played by ENAPU. While increasing ENAPU's role would mostlikely not have been possible at the time, the 1981 institutlonalreforms will make it possible for ENAPU to be a borrower in futureport projects, thereby greatly increasing the opportunity to engagein a constructive dialogue with it on port issues.

PEBU

PROJECT coPLIo RBEPOB

LIMA-A0AZO1 TRANSPORT CORRID0R PROJECT (LOAN 1196-PE)

Eatimted Costs of the ProJect

(US5 millions)

erolect as Appraised I1975) Reformulated Project (1979)

Local For. Total Part Local For. Total Part S

A. Civil Works

(i) Improvemenct of the Lima Pucallpa RoadfIncludiag Pucailpa streets loading to the port) 31.1 28.4 59.5 28.4 23.0 21.0 44.0 21.0 48

(ii) Feeder road improvements 1.1 1.2 2.3 1.2 0.8 0.7 1.5 0.7 48(iii) Comstructiom: Pucallpa and lurimaguas Ports 2.2 2.0 4.2 2.0 2.9 2.8 5.7 2.8 49(iv) Improvement:.Iqnitos Port 2.1 3.5 5.6 3.5 6.2 5.8 12.0 5.8 48

Sub-Total-Civil Works 36.5 35.1 lF 35.6 3. 3 2.9 30. 63.2 3.3 48B. Equipment

(i) Road maintenance equipment and spare parts 0.4 4.0 4.4 4.0 1.0 9.9 10.9 9.9 91(i-a) Soils exploration: laboratory equipment - . - - - 0.2 0.2 0.2 100(ii) Cargo handling. fire fighting and dredging equipment - 4.2 4.2 4.2 _ 4.2 4.2 4.2 100(iii) Hydrological equipment t 0.5 0.5 0.5 - 0.5 0.5 0.5 100

Sub-Total - Equipment 4 8.7 9.1 8.7 1.0 14.8 15.8 14.8 94

C. Consulting Services

(1) Feasibility study and engineering of Neshuys toAguaytia Road (115 oss) 0.2 0.3 0.5 0.3 0.1 - 0.1 - 0

(1i) Supervision of items A(i) and (ii) above 1.5 1.8 3.3 1.8 1.7 1.9 3.6 1.9 53(iii) Econouie and financial study for A(iii) and (iv) above) 0.3 0.4 0.7 0.4(iv) Supervision of items A(iit) and (iv) above) 1.6 1.5 3.1 1.5 48(v) Hydrological study 0.2 0.3 0.5 0.3 m(vi) Feasibility studies htaebo-hAbo Road, Coastal Corridor

and regional developmaet study 1.6 2.3 3.9 2.3 1.o 2.3 3.9 2.3 59(vii) Preinvestment study for airports 0.2 0.3 0.5 0.3 0.2 0.3 0.5 0.3 60(viii)Pinal design and feasibility analysis of Morococha to

La Oroya Road (including La Oroya bypass) - - - 0.2 - 0.2 0.1 50(ix) Batiovride road rehabilitation study - - - - 0. 2 0.8 1.0 0.8 80(x) Technical assistance to the Mechanical Equipment Service - - 0.1 0.3 0.4 0.3 75

Sub-Total - Consulting Services 4.0 5.4 9.4 5.4 5.7 7.1 12.8 7.2 56

D. Contingencies

(a) PhyaicalRoadvorks (items A(i) sad (ii)) 4.8 4.4 9.2 4.4 7.1 6.5 13.6 6.5 48River port works (items A(iii) and (iv)) 0.4 0.6 1.0 0.6 2.5 2.3 4.8 2.3 48

(b) ExPected Price IereasesCivil works (itemes A(i) and (ii)) 1 1 5.7 11 8 S.7 48

(items A(iii) and (iv)) 12.5 12.0 24.5 12.0 1.1 1.1 2.2 5.7 48Equipment (Items B(i) and (i-a)) 0.1 0.7 0.8 0.7 88

(items B(1) and (iii)) 0.2 1.7 1.9 1.- - - - -

Consulting Services 0.5 1.5 2.0 1.5 0.8 0.8 1.6 0.8 50Sub-Total - Contingencaies 18.4 20.2 38.6 20.2 19.5 17.1 36.6 17.1 47

PROJECe TOTAL 59.3 69.4 128.7 69.4 59.1 69.3 128.4 69.4 54

502 Interest during construction 7.1 7.1

Loan Amount 76.5 76.5

IERU

FJWECf aOMUvriN ReE

wor-mmm mw w aXRIvam Rx0EC (Loan 1196-WE)

Road CnPoent: Actual, Appasal ad Refwulation Pro ject CostsC~$ milons)

a/ 1/ E b/ Atual as a rcent ofAct-al Costs Appraise] ml atesm Refonlti Esae Total Costs Esttmated at

vRoject 2MMM local Forel Total Local Farei Total Loal Foreign Total 1 Piroject Refo_

1. Civil wrks

(a) LimEa-PcaUlpa Road c/ 39.5 34.4 73.9 46.4 42.5 88.9 .1 32.6 68.7 83 108(b) Feeder Roads 1.1 0.9 2.0 1.7 1.5 3.2 1.2 1.1 2.3 63 87

Sub-Total 40.6 35.1 75.9 48.1 44.0 92.1 37.3 33.7 71.0 82 107

2. Rod MIntenave &jupietnt 0.4 8.3 8.7 0.5 5.0 5.5 1.1 10.8 11.9 158 73

3. Conaltitg Services

(a) &nimerIng ard Supervison 2.6 2.7 5.3 2.1 2 .7 4.8 2.0 2.2 4.2 110 126(b) Selva Ontral Study 0.2 0.1 0.3 2.0 2.9 4.9 1.9 2.7 4.6 6 7(c) Airport Stady 0.2 0.2 0.4 0.3 0.4 0.7 0.3 0.3 0.6 57 67(d) Ibr _ h-0royaStudy 0.1 0.0 0.1 - - - 0.2 - 0.2 - 50(e) Rad el a Stay 0.1 0.5 0.6 - - - 0.2 1.0 1.2 - 83(f) SM TechdcalAsdstance 0.1 0.5 0.6 - - - 0.1 0.3 0.4 - 150

Sub-Total 3.3 4.0 7.3 4.4 6.0 10.4 4.7 6.5 11.2 70 65

m FA!. P XJSCo 44.3 47.4 91.9 53.0 55.0 108.0 43.1 51.0 94.1 85 98_ _ _=_ - = _ _=r

a/ Estimates for road sections twt yet complete; see TaW 3.R I1dies yiWcal wad price nrti . ' sc/ nzldrgRAp streets.

pEuFR03c COULEIOE SEP0?

LIMA- O OUAS0 0ORR20 P3033 (tLOWAN 19Pn)

go" c _nomat Contract and coat Data

(All tount. in VSttC0)

Contractor Completion Data Aooraiel Ratleee. atuated or project Itw oot eor Con pat lot. Original 1/ Refor. (1979) Contract Actual Coat &=k Cos,

Coneeanat CSd ontr ct Actual (1976) tota Bank Value local ForelPn TotAl Coner. R1.1.

CIvIl vowS (l4pu" load)

San sleteo- _c@cocU Z.C.C.C.-Villosa Aaoc. 9/05/78 6/02/80 4/01 4.170 7,00 (3,390) 5,250 5.49B 3.474 8,972 3.474 94

1. oroye-LS Cus cacerae4ruce Aoc. 4130180 5S21/82 3/83 6.05 6,003 4,643 20.64 4*43 10U. 88k Cte10,mpre twiertt-816o AaeOc. 4130/80 5/21/82 12182 18.000 15,500 (7.440) 6.632 6,496 5.009 11,505 5uAJ I0t0

111. dayre-Cerro da Paco Comap$-Me taco. 4/30/00 S/21/J2 12162 7.854 5.032 4.101 9.13 I C 0V. Cmt de ?& c.* aoA Txom-Villasal Oc. 4/30150 S/21/82 12185 9,607 6.653 sA620 12.473 ,.620 esV. eaa-_ctc Vera Outerre1/ 10/16180 10/25/82 2/83 IS,590 17,500 (8,400) 6 731 4.015 3.255 7.270 3.255 It0

VI. I.C.C.Q.-Calulto-4N Us. 10/16/80 10/25/82 12/85 9,495 7.321 5.33 13,154 5.033 Sl

5-k 48tb epprochs Ve 9attarre, 0216-23/79 0/31/79 10/79 - 1.000 (480) 617 362 273 635 273 100

aln Steteate 3LT.C. 11/15/79 11115/80 9181 1,370 3.0O0 (1.440) 2.173 1.043 1,09B 2,141 1.098 10D

let lloa IbR r Coulated - - - 2.300 1.500 -V) -

CiVow ub-TOrAL 44.430 45.500 (21.840) 42,623 33,306 75,929 35.306

WD -_ wm

let fpre Pat. el.g Rap. S.A. 08/10/77 - 2/78 ISO 7 IS0 157 I50 100lot e isW t Tbane8 9 Suppller 07/25/78-08/04/78 - 2/79 4.400 4.400 (4.400) 2,610 104 2.610 2.714 2.610 1002ad Uquitnt Trulis 4 SuppltAra 04/24/79 - 12/79 1.412 57 1.412 1.469 1,412 1003rd 3qudp t _tao0w Diin.l del " era S.A. 07/23/SO - 2/81 - 6.500 (5.900) 919 37 919 956 919 1O02nd SOa" Paxt" 2 Suppliers 12/ /8O - 6/81 2.257 Jo0 1.062 1.970 1,062 )O0lot WorliaSp Toole 6 SuplI9r 10/ /82 - - - - 25 675 700 675 LO1totoehical 3qupmnet Not cpleted - - 200 (200) - 02nd Uorkap Toole I tot compl*eted o

Not"Oof 891-TOAL 4.400 11,100 (10,100) 338 7.628 7f968 7,628 -

couatno Sion od

Son lotao-Noocooba Cia. S1lsttt*r 05/19/77 11/19/79 /1lo0s/ 430 226 247 473 247 1000roytaOy C.R.C. 07/02/79 10/81 5/82 t1239 646 762 1.40B 762 zooNhmyre-Somc, C.t.C. 07/16/79 I0/S] 10/82 3.300 3,600 (1.900) 3,061 1.076 a.360 2,456 123o0 10oP lpa Street. .O.S. 11/05/79 11/S0 10/83 120 104 132 236 132 ItOFood= oa. - - - 150 50 200 0 0

ro ea-Nar C.N.C. 04/11/79 8f79 8/79 Included Il Superiion 203 126 42 168 86 tooNoabrta-o co C.I.C. O4/19 9/79 12/79 tncluded JA Suervialun 471 293 12 488 26s 100Cbtln-0pon L8AC 10/t0/78 5/79 7/79 63 35 12 47 28 10081o seoo.AYM 5O.. 10/10/78 5/79 7/79 3.90 3.900 (2.300) 45 2S 10 38 20 100

Sealv Central St18 tC/Coo.lt. 10/79 - 12/81 - 195 74 249 52 g0Arport St"ids CAIN-APS-LAO-UX 5/23/77 4178 2/80 seo sc0 (300) 436 221 205 426 205 100

ococe.ory Study C.P.s. 6/15/8so 2/8 3/8I - 200 (200) 130 63 21 84 10 1oog"d 2ahmbilittattoan Sy - - 12/81 - 1.00o (800) - 130 471 600 471 2o0

go8 Toceca AS ai.tance lanardet 6/10/80 3/82 4/82 - 400 (300) 928 87 520 607 520 ID

UT.Tl SWF-S4. 7 600 (5 700) 3,380 4.121 7?.Y0 4,178

A W 56,530 66.200 (37.6W) 45.112

70WJW Casy WM 9 9 9 co"tnpml" ~~~~~~~~~~~~~~~~~~25.000 27.400 (15,510) 6.524

" aOc.t 81 C )25,00e2.530 93.60 (5150) 46.341 45,064 S 1.405 513645

Project Tota (tned C _onet) 21.290 34,800 (18.200) 16.020 18.710 34.730 17.755tntert 0o4r Coeetructmn_ (7,100) - -

lAR 1196-l TlotA 102,820 128,400 (76,450) 62.361 63,774 126.tS5 76.500

If no" omly te costa of project elemnts retained to the reformiaeted loa Wtth contaSgencia. allocated on a percentas bet.

U**-wm 1¢ 1 a I mwr=(Loan 1196-)

lrt Ccunt: Acttal, Appraisa ! ef t £tki*es of Pajet CuomO($ mulons)

Ac:/ 5/ AptPl as a e drtofActual Costs spria alue eoulatfam Esthimate Total Ousts Beti,mtsd at

PRita- M22M icai Egd- Thtia Local Forig Total Locgal b Fbv4pPruject Rdos1etf(X) (2)

1. CLVl kbt

(a) Iqlttos 6.2 6.1 12.3 3.1 5.1 8.2 86 8.1 16.7 150 74(b) Yurguus 2.2 1.8 4.0 1.0 0.8 1.8 1.3 1.1 2.4 222 167(c) RualUpa 5.6 5.2 10.8 2.2 2.0 4.2 2.7 2.9 5.6 257 193

s9frJtal 14.0 13.1 27.1 6.3 7.9 14.2 12.6 12.1 24.7 191 no

2. Crgo 1fliig lpaum dI - 3.4 3.4 - 5.0 5.0 - 4.2 4.2 68 80

3. 1ydvologkcl Craft adEquLpudnt - - - - 0.6 0.6 - 0.5 0.5 -

4. Cmuutir Sevsces b/ 1.9 1.8 3.7 0.3 0.6 0.9 1.6 1.5 3.1 411 119

mm PALPI= OC T 15.9 18.3 34.2 6.6 141 2D.7 14.2 18.3 32.5 165 1(5--- _- _ - _- _ -

al Ioc122I1M owsial amK price omtiremcies.

Stuy of MM ad MC fbncla mtand civi wrks desig aid spevsim.

Source: mcr, Cltanta ain Bs* records.

PERU

PROJECT COMPLETION REPORT

LIMA-AMAZON TRANSPORT CORRIDOR PROJECT 0LOAN 1196-PE)

All ENAPU Ports: Forecast and Actual P6tt Traffic(Metric Tons 000)

DRY CARGO LIQUID CARGO TOTAL CARGOForecast Actual Act/For Forecast Actual Act/For Forecast Actual Act/For

1975 6,975 8,630 124% 7,185 8,100 113X 14,160 16,730 118%1976 7,380 7,494 102% 7,760 8,490 109% 15,140 15,984. 10611977 7,805 6,284 81% 8,380 7,000 84% 16,185 13,284 82%1978 8,250 5,963 72% 9,050 6,901 76Z 17,300 12,864 74%1979 8,745 5,357 61% 9,775 6,402 65Z 18,520 11,759 65%1980 9,140 5,291 58% 10,555 5,710 54% 19,695 11,001 56% v1981 .* 7,414 * 0^ 6,705 .. . 14,1191982 so 8,680 .. .. 4,721 .. .. 13,4011983 .. 6,988 .. .. 5,744 .. .. 12,732 .,

,, Forecast not made after 1980..

PERU

PROJECT COWPLETION REPORT

LIMA-AMAZON TRANSPORT CORRI WOR PROJECT (LOAN 1196-PE)

ENAPU - Forecast and Actual Income Statements 1976-1983(S/. million)

1976 1978 1.979 1980 1981 1982 1983Forecast Actual Forecast Actual Forecast Actual Forecast Actual Actual Actual Actual

- -_ - --

Operating Revenue 2,405 2,210 3,376 5,086 3,794 9,943 4,139 17,063 31,336 63,932 134,060

Working Expenses 2,030 2,110 2,739 3,980 3,052 6,912 3,345 16,455 30,025 56,666 110,918Depreclation 224 408 288 .727 328 1,397 360 2,275 2,464 5,105 17,500Operating Expenses 2,254 2,518 3,027 4,707 3,380 8,309 3,705 18,730 32,489 61,771 128,418

Net Operating Revenue 151 (308) 349 379 414 1,634 434 (1.667) (1,153) 2,161 5,642

Non-Operating Revenue 155 176 174 516 184 1,166 196 1,633 299 (2,934) (14.825)Net Revenue 306 (132) 523 895 598 2,900 630 (34) (854) 773) (9.103) c

Interest 60 49 120 340 117 557 113 577 208 1,796 12,466 °

Profit Before Tax 246 (181) 403 555 481 2,243 517 (611) (646) 1,023 3,283Tax 249 1,08-6Profit After Tax 246 (181) 403 306 481 1,157 517 (6111 (646) 1,023 3,283

Working Ratio 84 95 81 78 80 70 81 94 96 89 83

Operating Ratio 14 114 90 93 89 84 90 110 104 97 96

Rate of Return (%) 4.1 (7.4) 6.0 3,1 6.0 8.6 6.0 (5.0) (1.0) 1.8 1.0

PB11

Pan= C RBPORS

LDNA - AWAZN UB I COSZO PROJZCT MPA 1126-WE)

SIIU* - Porecet aso Actual Elane het. of Deeember 31. 197S - I982

(SI. million)I 9 5 1 9 7 6 1 9 77 1 9 7 8 9 7 9 19 98 1 1982Forecoat Actul Forecast Actual loreca Actual Forecast FoReast Actal Forecast Aetual Forecast Actl Actal

Current Meeto 978 1,118 1.045 1,173 1,271 1,672 1,507 2,453 1,554 4,830 1,910 6,541 6,768 9,130 22,068Lez Curret LizabiUties 148 214 160 382 172 562 184 790 197 .000 210 1,636 2.959 3.039 6.753NMt Current A0t 485 1 , 0 9 9 II 17 28 1. 113 i i T35T 23,700 5,105 3,809 6--09 15,315 x ,Oros F1xsd Aeet. 5,370 5,172 6,470 7,344 7,470 17,610 8,750 25,671 10,250 44,133 10,950 78,214 118.388 130,187 246,610 'Le" Accx4d Deprecatton 1 517 1 587 1 741 2 561 1 995 6,930 2 283 11.276 2 611 20 478 2 911 35 599 50.415 53.484 91.f947Fe meto i use 33 4 6 8W ti0 14,395 76,703 I 5.6Vork n-Prtore 355 375 455 294 405 - 355 1.473 505 2.3t3 358 210 3.185 4,927 7,818 ViTotal Not Pd 4tets 3 9 60 5 184 S 077 25 8 6S2I 868- 2$ 978 8 337 42.825 71.150 841630 1 6 ,8TOAL AM 1§-i K9 l .2 .8 i{I ffV7i j;4- 8.145 1531 9.501 y i 10.0 M 74.967 87;721 .la" Toro Debt 894 477 1,579 767 2,145 1,014 i,128 1,466 2,503 1,725 2,S22 4,386 i4.803 1'.750 36,564GoveCrnat squity 4,138 4,151 4,238 5,173 4,238 10,828 5,018 15,978 5,518 25,989 5,518 43,059 60,164 74,971 141,232Retained aina I/ 6 236 252 (92) 596 - 999a 1 480 1 094 197 405 -RTotal Equity 4-17E-4F34 SUI .01 16c03 IW- 27 0W3 7,515 740,64101.232TOTA L TIABILMS 5.038 48S64A 6,06W9 6.97f 11.842 8.1 17.531 901 I 10037 4790 4.967 7 1 7.7Oqwrent Ratio 6.6 5.2 6.5 3.0 7.4 3.0 8.2 3,1 7.9 2.4 9.0 4.5 2.3 3.0 3.3Iebt/tquity Ratio 18/82 10/90 26/74 13/87 31/69 9/91 26/74 8/92 26/74 6/94 25/75 9/91 21/79

11 AcreTNAd Forecost, 1Anna in Actual.

2/ Otber no-urn sato.

PERU

PROJECT COMPLETION REPORT

LIMA-AMAZON TRANSPORT CORRIDOR PROJECT (LOAN 1196-PE)

Forecast and Actual Project Ports Traffic 1/(thousand tons)

I QU I T O S P U C A L L P A Y U R I M A G U A SForecast Actual Act/For. Forecast Actual Act/For. Forecast Actual Act/For.

1976 160 264 165% 104 136 131% 31 - -

1977 170 243 143% 113 157 139% 35 - -

1978 181 201 111% 122 170 139% 39 - -

1979 193 216 112% 130 188 145% 43 - _

1980 205 248 121% 139 154 111% 50 - -

1981 218 258 118% 149 115 77% 53 - -

1982 232 287 124% 160 166 104% 56 38 21 68%

1983 - 231 - - 190 - - NA -

1984 - 251 - - NA - - 03 -

1/ Excluding petroleum in bulk21 1981/82 traific3/ Estimated

PERU

PROJECT COMPLETION REPORT

LIMA - AMAZON TRANSPORT CORRIDOR PROJECT (LOAN 1196-PE)

.orecast and Actual Income Statements of Project Ports 1978-1982

(SI. million)

1 9 7 8 1 9 7 9 1 9 8 0 1981 1982

Forecast Acttzii Forecast xActual Forecast Actual Actual

Iguitos

Revenue 51.5 28.3 53.4 42.6 55.3 85.6 267.1 1,145.8Working Expenses 51.5 125.4 53.4 246.8 55.3 494.8 953.3 1,969.0

Depreciation 25.2 16.6 25.2 23.8 25.2 116.2 22S.9 377.9

Operating Expenses 7642.0 78.6 270.6 80.5 611.0 1l79.2_ 2346.9

Net Operating Revenue (25.2) (113.7) (25.2) (228.0) (25.2) (525.4) (912.1) (_>201.1)

Non-Operating Rev.(Net) 4.0 108. 4.5 36.5 5.0 24.6 ( 20.6) 229.8

Income (21.2) (102.9) (20.7) (191.5) (20.2) (500.8) (932.7) (9713)

Working Ratio too 443 100 579 100 578 3!7 172

Operating Ratio 149 502 147 635 146 714 441 2a05

Puca11F2

Revenue 30.4 32.9 35.2 - 262.0

Working Expenses 31.7 1.7 32.9 3.1 34.6 7.7 11.0 :ao.oDepreciation 33.6 _ 33.6 33.6 - 96.0

Operating Expenses 65.3 1.7 ____6.5 3.1 68.2 7.7 -i27-6.0

Net Operating Revenue (34.9) (1.7) (33.6) (3.1) (33.0) (7.7) - ( 14.0)Non-Operatiag Rev.(Net) _ _0.1) _ (0.1) - -

Income (34.9) (1.8) (33.6) ) (33.0) (7.7) ( 14.0)Working Ratio 104 _ 100 , 98 - 68

Operating Ratio 204 - 202 - 194 - .. *5

YurimaguabRevenue 13.5 15.1 17.4 0.8 28.0Working Expenses 14.0 15.0 15.5 39.9 125.0

Depreciation 7.4 7.4 7.4 9.1 55.0

Operating Expenses 21.4 22.4 22-.-9- 49.

Net Operating Revenue (7.9) (7.3) (5.5) 48.2) 0 I )Non-Operating Revenue (Net) 0.2 -

Income (7.9) (7.3) (-. -84 (152- 0

Working Ratio 104 100 89 4,987 446

Operating Ratio 159 148 132 6,125 643

- 34 -

PERU TABLE 10

PROJECr COMPLETION REFORT

LIMA-AMAZON TRANSPORT CORRIDOR PROJECT (Loan 1196-PE)

Lima-Pucallpa Road Traffic Flows(AADT)

1973 1978 1982Appraisal Appraisal

Actual Actual Estimate Actual Estimate

San Nateo-Morococha 1,900 1,459 2,480 2,299 3,072La Oroya-Desvio Tarma 1,500 946 2,260 n.a. 3,105Desvio Tarma-Cerro de Pasco 620 502 910 665 1,238Cerro de Pasco-Salcachupan 530 n.a. 710 n.a. 913Salcachupan-Ambo 350 442 470 510 605Ambo-Ruanuco 650 642 850 846 1,094Aguaytia-Neshuya 230 117 300 850 a/ 408

a/ 1981

Source: MTC

- 35 -

PERU TABLE 11

PROJECT COMPLETION REPORT

LIMA-ANAZON TRANSPORT CORRIDOR PROJECT (LOAN 1196-PE)

Appraisal and Latest Estimated Vehicle Operating Costs

Appraisal LatestWithout With Unit Without 'With UnitProject Project Benefit Project Project Benefit

- -- 1982 soles/vehicle-km --

Car 36.3 29.0 7.3 89.8 64.2 25.6Truck 150.0 102.5 47.5 394.0 257.2 136.9Bus 178.5 114.5 64.0 415.3 272.8 142.4

~- --- -1982 US cents/vehicle-km --

Car 3.7 2.9 0.7 9.1 6.5 2.6Truck 15.2 10.4 4.8 39.9 26.1 13.9Bus 18.1 11.6 6.5 42.1 27.6 14.4

- 36 -

PERU TABLE 12

PROJECT COMPLETION REPORT

LIMA-AMAZON CORRIDOR PROJECT (LOAN 1196-PE)

Economic Rates of Return: Appraisal

Estimates Compared with Completion Estimates

Percent Appraisal Completionof Total Estimate EstimateInvestment Rate of Rate of

Project Component Costs (%) Return (%) Return (%)

Road Sections

San Mateo-Morococha 7 30 35La Oroya-Huanuco 51 24 18Pucallpa Streets 2 18 24

Ports

Iquitos 10 24 13Pucallpa 9 24 12Yurimaguas 3 17 6

- 37 -

PERU ANNEX 1Page 1

PROJECT COMPLETION REPORT

Lima-Amazon Transport Corridor Project (Loan 1196-PE)

Implementation of Oroya-Huanuco Road Works

Lot I - Oroya - La Cima (36 km)

1. This 24 month contract, which started in May 1980 was finallycompleted in March 1983. In relative terms, the problems whieh arose wereminor. Redesign made during construction Included: (i) relocation of about1 km of an irrigation canal and waterproofing the canal to stop seepagewhich was affecting the road; (ii) realignment of a portion of the road toeliminate two grade crossipgs of the Oroya to Cerro de Pasco railroad; and(iii) addition of a multiple arch, used as a tunnel for the railway, toeliminate a third grade crossing. In all,,additional work increased costsabout 20%, while total contract cost rose about 55% in US dollar terms dueto inflation and the effect of the Government's restraint on devaluation ofthe Sol in 1981 toward 1982. Delay in completing the project was alsoattributed to lack of realistic programming by the contractor, insufficientequipment and, in particular inadequate crushed aggregate productioncapacity (always a problem in Peru).

Lot II - La Cima - Huayre (40 km)

2. This also was a 24 month contract which started in May 1980 andwas completed in December 1982, seven months late. Serious deficiencies inthe design, particularly as regards borrow sources, unforseen removal ofunsuitable materials and inadequate consideration given to the highwater-table along parts of the road caused considerable delay at the startof the contract. After one year the contract was only 20% complete. MTCwas slow to take any action. Only after a Bank mission in May 1981 arrangedfor NTC to meet with representatives of the contractor and superJisingconsultant and then to send a commission to review disputed problems in thefield did the problems get resolved. After that, there was no major problemin execution of the work except some fine cracking of the pavement, in partdue to using vibrating compaction of the asphalt concrete. Several lengthysections had to be sealed to correct these defects. In the early stages ofthe contract, difficulties in expropriation of property and buildings alsohampered work. Many property owners had no legal title which made itlegally impossible for MTC to compensate them. This was eventually solvedby adding a compensation item to the construction contract which enabled thecontractor to pay the compensation. Cost increases due to changed workquantities amounted to about 35% of initial contract value while total costsincreased 68% due to inflation.

Lot III - Huayre - Cerro de Pasco (41.2 km)

3. Also a 24 month contract which started in May 1980, this contractran into serious technical problems on pavement construction. The

- 38 -

ANNEX I

contractor was the best organized of the six and the first to start pavingin mid-1981. With 36 km of binder course asphalt concrete in place, seriouscracking failures began to appear with less than two months traffic usage.The supervisory consultants attributed the failure to the high parafincontent of PETROPERU's asphalt, recommending that HTC Import better asphaltfor work at high altitudes. A Bank mission consultant, with considerablepaving experience, accompanied MTC officials in assessing the nature of theproblem, and concluded that large number of factors contributed to thepavement failure. Among the more important:

- highly rigid mix design, poorly suited to site conditions;- insufficient fines in the mix (less than specified);- insufficient compaction of some of the subgrade and/or base;- particularly poor compaction of culvert and structure backfill;- placement of ashphalt concrete at unacceptably low ambienttemperatures; and

- questionable sufficiency of asphalt concrete compaction.

Examination of records also indicated an lnsufficient control by both thecontractor and supervisors in particularly difficult site conditions. Giventhe nature of other deficiencies, the effect of the parafin content in theasphalt cement was open to question, but could not be considered as themajor cause of pavement cracking. Remedial measures which were discussedwith NTC and the supervising consultants, included preparation of a lessrigid mix design with the addition of mineral filler, improved constructionpractices, permitting placement only at acceptable ambient temperatures, andimproved site control. It was also suggested that replacing cracked binderor sealing and varying the surface course thickness should be undertakenbased on measured pavement deflections. An early decision concerning themix design was important since Lots IV, V and VI all had been given the samemix specification and the contractors had then been'instructed not to startpaving until confirmation of revision by MTC of the mix designs had beenreceived.

4. Again MTC made no progress in resolving the matter and thesupervising consultant continued to cite the poor quality of the asphalt,whlle the contractor was limited to sealing operations. A Bank consultant(pavement specialist) was sent to Peru in May 1982 to assist MTC inresolving the problem. After visits to the site and considerable additionallaboratory tests, he prepared a report containing a series ofrecommendations for improving the mix characteristics, which substantiallyconfirmed earlier recommendations and suggested additional measures underthe ongoing contract, to facilitate avoiding a recurrence of the crackingproblem. MTC staff were advised that it would probably be difficult toimplement all the measures but that implementing just a few would givesatisfactory results, while each additional measures would further improvepavement quality and durability. At the time of arrival of the next missonin late June 1982, the only action taken by MTC had been to send copies ofthe report to the contractors and consultants. A meeting was arrangedduring the mission with all concerned to catalyze a solution. During themeeting it was agreed that all the more basic steps could be implementedwithout problem. A follow up meeting between MTC staff, the contractors andsupervising consultants began immediately to prepare new mix designs foreach Lot. Paving operations resumed by mid-July. However, 3 months of theseason most suitable for paving had been lost.

- 39 -ANNEX IPag-e 3-

5. In spite of MTC's severe financial problems which began to show inmid-1982 and resulted in long delays in making payments to contractors, thiscontract proceded rapidly to conclusion. The contractor paying strictattention to the recommendations which had been made and working with a newmix design, produced the best pavement of the lots located at high alti-tude. MTC's materials division assigned inspectors to make good the lack ofqualified personnel on the part of the supervising consultant. Increases Inwork quantities were less than 10% and final total contract costs were about16% above original contract price. The latter low figure is due to a designchange in pavement dimensions which reduced the real cost of the contractualworks by 10 below the value of the original contract.

Lot IV - Cerro de Pasco - Huariaca (57.5 km)

6. This was the fourth 24 month contract which was started in May1980 and was paralyzed and incomplete as of February 1985 when the loanclosed. Progress was satisfactory until mid-1981. However, the contractorwas underequipped and the lack of crushing capacity began to have negativeeffects. The contractor rented an MTC crusher as a second unit which neverperformed very well, and eventually installed a third unit. Insufficientdump trucks became the next problem. A Bank mission requested MTC to stoprenting trucks from this contrator for other projects, which MTC wasperforming by force account, and to insist these be sent to this project.After the stop which was placed on paving (which had just started) due tothe difficulties on Lot ITI, work was never restarted at full rate. Thecontractor blamed his delay on delays by the supervision and MTC inproviding him with technical solutions for some problems at a number oflocations along the road as well as arrears in payment by MTC. He also wasseeking compensation for paving equipmeat which was idled when paving washalted. Payment delays were also aggravated when the supervising consultantrefused payment on items where workmanship was unsatisfactory.

7. At the bottom of the difficulties .ere several interrelatedfactors. The projects had been bid at a time when work was scarce, and thecontractor's prices were low. The road section was difficult to work sincethere was only one suitable quarry located near one end of the project,which meant long transport distances. The contractor's programming was poorand he had insufficient supervisory personnel at the site, so work qualitysuffered. Meanwhile, with the change of Government in 1980 many new roadprojects were started and both members of the contractor joint venture wereawarded contracts at better prices in other parts of the country. There wasreduced interest in sending more equipment to a less rewarding job. Inmid-1982, MTC began to have trouble meeting payments on all its contractsand enormous sums of money began to be owed to contractorg. The contractorsexhausted their credit and in many cases were unable to continue financingthe work. MTC refused to extend the contract period, claiming there wasinsufficient justification, which resulted in cost escalation payments beingcalculated with the indices of the last month in which the contract was inforce. This aggrevated the payment problem and the contractor requestedthat the contract be cancelled. Work came to a virtual standstill, whilethe arguments continued.

8. In the first months of 1983, the Bank informed MTC that it was notin agreement with prequalifying the contracting firms responsible for the

- 40 -

ANNEX 1Page 4

two paralyzed contracts (Lc s IV and VI) for more work, due to be bid underthe Eighth Highway Project (Loan 2091-PE), unless these contractors hadresumed work on a satisfactory schedule. By April 1983 agreement had beenreached between MTC and the contractors on measures to permit resumption ofwork. A solution was found to the problem of extending contract durations,the contractors were to be paid advances on remaining work to providefinancial liquidity and work resumed in June 1983. Progress was made for afew months until MTC again fell behind on payments due to lack of fundsresulting from the severe drain of funds required for emergency work aftersevere flooding in the Northwest. Progress slowed to short periods of workwhenever payments for previous months were received. By December 1984, allbut 2 km had been completed. The remaining works will be carried out byforce account.

Lot V - Huariaca - Independencia (17.2ka)

9. This contract, one of the two last ones to be bid, and started inOctober 1980. Also a 24 month contract, it was finished in February 1983about 3 months late. The principal difficulties on this contract revolvedaround the question of what solutions would be used at the numerouslocations where huaycos (annual mud-slides) discharge across this section ofroad. The bids were taken on designs which included more bridge and tunnelwork than the Bank was prepared to finance. The consultants eventually maderevised designs to reflect the recommendations of the Geotechnical study,but in some instances applied these poorly so that in a few cases, the paveddips did not perform as well as they should have. In mid-1983 MTCinstructed the contractor not to pave a 5 km section of the road, where theMinister decided that the Government would construct additional tunnels andbridges without Bank financing. However, this woulu have required a newcontract so when MTC's financial problems surfaced, the idea was abandonedand the contractor was instructed to terminate the work under his contract.This was the principle cause of delay. Work by the contractor was generallyproblem free. Additional work (mostly walls) increased costs about 17% butthis was compensated by deductions in other structures so the contract wasfinished at a total cost of about 8% above origin l contract value, in USdollar terms.

Lot VI - Independencia-Huanuco (47.8km)

10. Started in November 1980 with a 24 month contract period, thiscontract should have been the easiest to complete yet was never finished.The road for most of its length runs at an altitude of 2000-2500 meters,free of the problems which characterized most of the other contracts. Thecontractor's work program from the start was very slow and the equipmentmobilization plan in particular failed to provide for timely mobilization ofcrushing plant and asphalt plant. In spite of repeated urging by Bankmissions, plant mobilization was left until 1982 and almost as soon aspaving started MTC's financial difficulties began to delay payments. As wasthe case on Lot IV, the contractors proved unable to finance continuedoperations and work, dwindled to a small trickle throughout 1982. Financialconstraints prevented the contractors from purchasing asphalt and cement insufficient quantities, so workforces were reduced to match the rate ofpurchase of materials.

- 41 -ANEX IPage 5

11. After the official date for contract completion the problem ofprice adjustment for cost escalation arose (para 3.41) and was not resolveduntil the meetings in early 1983 (para 3.42). "' though MTC agreed to pay anadvance in order to restart the work, the actual payment was not made untilJuly 1983. In addition, for this contract, MTC had agreed to pay PETROPERUdirectly for the asphalt which would be needed. In fact, only a part of theline of credit for asphalt was paid to PETROPERU and once this-amount wasused up (September 1983) the contractor again was held up for lack ofasphalt. By the end of 1983 the contract was about 80% complete.

12. Bank missions advised MTC management of the urgency of completingriver protection works and walls, on which the contractor was progressingvery slowly due to his reduced workforce, not only to permit paving to becompleted, but also to avoid possible damage to the road platform. At somelocations, excavation work which had been started for protective wall foot-ings in 1982, and abandoned when the contract slowed down, had provokeddamage to the road platform during the 1983 rainy season (January-March).Lack of timely action contributed to severe damage over several kilometersof the road, in the unusually heavy rains during the first quarter of 1984.Work stopped in December 1984 on this lot due to a shortage of funds, withabout 80% of works completed.

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