Docut of The World Bank FOR OFICIAL USE ONlY MTCROFICHE CO)PY Report No. :P- 5839 HU Type: (PM) Title: ROADS PROJECT No. P-5839-nU Author: BLACKSHAW, P. Ext.:32443 Roomr:H7 087 FDept. :EMTIN MIIOAD1M AND RECMMDATION OF THE PRESIDENT OF THE INRNTIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXEcTVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$90 MILLION TO THE REPUBLIC OF HUNGARY FOR A ROADS PROJECT DECEMBER 3, 1992 This documt has a restricted distribtion and may be used by reeipients only in the performance of ther ofcial duties Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EOUIVALENT (as of June 1992) Currency Unit = Forints (Ft.) Forint 1 = US$0.0133 Forints 75.0 = US$1.00 WEIGHTS AND MEASURES Metsic Sys-Nm USyst 1 meter (m) = 3.2808 fet (ft) 1 kilometer (km) = 0.6214 mile (mi) 1 squae kilometer (m) = 0.3861 squae mile (mr2) 1 metric ton (m ton) 0.9842 long ton (ig ton) 1 kilogram (kg) = 2.2046 pounds (lbs) ABBREVIATIONS BKV - Budapest Transport Company BOT - Build, Operate and Tnnsfer CMEA - Council for Mutu Economic Assistance EC - European Community ECE - Economic Commission for Europe ERR - Economic Rate of Retum FYR - First Yea Retun GDP - Gross Domestic Product ICB - Inentional Competitive Bidding IDTA - Institutional Development Technical Assisnce IS - Inenational Shopping KTI - Hungarian Istitute of Transport Science LCB - Loc Competitive Bidding LID - Limited Intenanal Bidding MAHART - Hungarian Shippin Company MAV - Hungarian State Railways MALEV - Hungarian Airways Company MTCWM - Mnistty of Trnmsport, Commnications ad Water Management M-0 - Budaest By-pass (motorway) NBH - National Bank of Hungary p1m - Passengtr Kilometer PHARE - EC Prgram to Assis Centra and Easter Europe PMS - Pavemet Management Systam RP - Revolving Fund BMCD - Road M gn t Coornation Directorate RTD - Road Transport Division TEM - Tas-European Motorway tkm - Ton-Kilometer VOLAN - Domestic and Irnational Road Freight Company FISCAL YEAR January I to December 31 FOR OMCIL USE ONLY HUNGARY ROADS; PROEC Loan and PrQject Summary Borroer: Republic of Hungary Executing Agen: Ministry of Transport, Communications & Water Management Amount: US$90 millicn equhialent Terrns: 15 years maturity with 5 years grace at the Bank's standard variable interest rate. Financing Plan: LQQI Foreign IDToa --e==--US$ million- World Bank 0.0 90.0 90.0 Govemment 70.7 0.0 70.7 Grant finandng . O0.4 Total 70.7 90.4 161.1 Economic Rate of Retum: About 20% Stff Aoraisal Report: Report No. 11392-HU, December 3, 1992 Map No.: IBRD 24044 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be discloset without World Bank authorization. REORT AN EOMM OFNH PERU M QF 33 IEa1RNAME DA FORREOECMN UmOLDM IQ TM EXECrIMTV DIRE1rRS ON A PROPOSED T,AN IN AN AMOQUN EQOIMALE TO USS9 N TO= RIEPUBIfIC OF HUNGARY EQKRQA ESTQI 1. I submit the following report and recommendation on a propos4 loan to the Repulibc of Hungary for the equivalent of US$90 million, in support of a Roads Project. MTe loan would have a term of 15 years, including a grace period of 5 years, at the standard variable interest rate. 2. awkzrounW: Hungary has made substantial progress over recent years in implementing market-oriented reforms in the -tran t sector. Entry to the road transport industry has been liberaled. The prvate sector now accounts for 32% of road ton-kn, compared with 6% in 1986, and is ped toaccount for virtualy 100% wihin a ew years. Road freght taiffs have been deregulated, and the level of cost recovery from road users has inesed significantly, in accordance with a covenant under the ongoing Second Thnsport Project (Loan 3032-HU). Subsidies to the railways and to public tnsport have been reduced by about 30% in real terms. Intenational competitive bidding has been introduced for major roadworks, and local competitive bidding (with the partcpation of foreign conactors via joint ventures with commerialized former force account maintenance units) is now used for 60% of road strengthening works. 3. Both the commercial and private vehicle fleets have approxmatey doubled over the past decade, and taffic on the trnk and main roads of the national system continued to grow at an average rate of 5% per annum through the 1980s, despite the difficult macroeconomic condifions. These conditions however have constrained road expenditures, which in recent years have been about one-third below the level of the early 1980s. This has not only precluded any significant modeization or augmentation of the network, but has also resuted in a serious deterioration of the surface condition and load-baing capacity of the existg roads and bridges. A quarter of Hungary's national roads (Jlalf of them with taffic over 1,000 vehicles per day) are rated -uneven and distressed" and another 50% are "uneven with some distres". Government is therefore planning to increase total road exenditures by about 60% compared with 1991, and within this total to more than double expendit on road and bridge rehabilitaton. These increas would restore roads expenditure to the same proporton of GDP as applied in the early 1980s. About 80% of proposed roads expendites between 1993 and 1996 would be financed from road users (who also male substantial contributions to genea revenues), and the government is mobilizing funds from the inteaional financing agencies for the remaining 20%. 2 4. Tiohs Involvemnt in the Se first Transport (Rail/Road) Project (Lan 2557-HU, 19oS, US$ 75 million) provided assistance to railways (MAV), road infrastructue and a pastaa trucidng company. The Loan closed in Septmber 1991, three months behind schedule; cosu (in US $) were less than the appraisal estimate, and the project achieved its principal objectives, although the railways' financial performance deteriorated (due to substantial traffic losses associated with macroeconomic restructuring and decline of trade within the former CMEA). The Second Transport Project (Lom 3032-RU, 1989, US$95 nmilion) included follow-up assstance in the same three sub-sectors covered in the fist prect and added some limitid asisun to the Budapest Public Transport Company (1KV). There were some initial delays in implementation (disbursement lag 51%), but most components are now proceeding ily. The principal policy and instituia accomplishments of these two projects have been: (a) major improvements in the planning, budgedng and implementation of roads projects, particularly the intmduction of competitive bidding into road works; (b) the partial pnivatizadon of road maintenance units (a process which is continuing); and (c) the initiatior of a more commercial apprach to managing the railways and urban public transport, though this is a slow process and much more remains to be done. 5. The main lesson from the ongoing project is that railway reform cannot be accomplished by 'tinkering at the margin' with the existing organization, and that a substantial restructuiing is required; the Bank is discussing with Hungarian officials a possible new operation based on this pnnciple. Another lesson has been that the impact of training would be increased if it is linked to specific institutional objectives, and forms part of an integrated package with consulting services and technical asdstance. This exeience has been drawn on in formulating the institutional component of the proposed project. 6. Rationale for Condnued Bank : During the preparation of the proposed project, the Bank promoted a balanced expenditure and financing plan, which provided the framewok for effective participation by EEB and EBRD via parallel projects. A continued presence via the proposed project v,ill consolidate and extend the policy and institutonal improvements noted in para. 4. There will be an increase in the proportin of road works put out to tender, and the pavement managem nt systems and associated engieeng- economic plaming tools will be furiher developed, and their applcation exnded. The Bank will also bring a focus to improving certain environmental procedures, and to addressing a mounting road safety problem. 7. Relation to Country Assistance Stategy: The Bank's stategy for Hungary is to support poLicies and invotMents aimed at restoring economic growth and social development as the country proceeds with its transition to a market-oriented ecoomy. The proposed project would support this strategy by expanding the volume of work for the privating consuction industry, reducing transport costs, and addressing the social problem of rising road fatalities. 3 8. Priect MiOhjecd: 'The prcipal objectives of the poposed project are to (a) enhance the efficiency of public expenditure on roads by supporting continued impovement in management, planning and pgmmng techniques and in selected technical areas, and by increaing the proportion of work camed out by competitive conacting; (b) address the bacldog of reablitation works; and (c) improve road safety. 9. Pg: The project would include (a) road and bridge rehabilitation; (b) road maitenance equipment to replace obsolete equipment for functions the national roads administtion will continue to perform itself; (c) a road safety program; and (d) technical assistance and training focussed on particular institutional development objecdves. 10. Im: MTCWM's RTD would be responsible for maging project implemntation and will select the oramzations responsible for directly managing road and bridge works, including the praaton of bid documents, contctor qualification and bid evaluation in addition to normal site supervision. AU road and bridge works will be procured through local competitive bidding procedures, as used under the ongoing project, which are atisfctory. Most equimnent would be procured by ICB. 11. Agrod Actios: During negotiations, agreement was reached on the following OrniSmaftte: (a) that Hungary would complete a strategic medium and long term road maintenance plan by December 31, 1993; 0b) to increase the prportion of surfice dressing work carried out by competitively awarded contracts to 40% by 1995; (c) a core road expenditure plan for 1993-96 (comprsing maintenance and rehabiitation of roads and bridges, road safety measures and debt service); (d) joint review of each year's total road expenditure and financing plan, in advance, and an agreement that no major new commitment will be enterd into which does not yield an ERR, of at least 12%; (e) to nmaintain a system of road user taxation such that each vehicle class pays the road costs attributable to it; (t) details of the 1993 road and bridge rehabilitation programs, and aangmts for the Bank's prior reviw of each subsequent year's program; and (g) that as a condition for disbursing any of the loan proced for road safety, Hungary would prepar an integrated Road Safety Program satisctory to the Bank 4 12. E viomental Cmdcn mn na: The project has a B rating. Hungay's strict environmental reg ons will serve to mitgate any potential negative impacts, which will be minor. Ali civil work will be within existing rights of way and involve no land acquiiton Because the road works are predominany strengthening with only limited widening, there is little implication for earthwork effects on slope stability and erosion, and to the etent that this issue arises eisting procedures in Hungary are state-of-the-art Environmental regulaions on other constructon activities are smilaly strict, and are embodied in an agreed mitigation plan. The project will have some favorable effects. Improvements to the condition of roads and brdges should lower vehcle emissions by reducing the need for variatons in vehicle speed and for detours, and the road safety component aims to reduce accidents. 13. : The road and bridge rehabilitaton comonents, which account for 80% of project costs, will reduce vehicle operating costs and avoid the need for more epensive subsequent reconstructiontrenewal. The maintenance equipment will replace obsolete 20-year old equipment used in futnctions that the roads aditation will need to contnue to prform itself, rather than contract out. The safety program will aim to reduce Hungary's road fatalities, which have increased 80% since 1987 to a rate which is 2-4 times that of westen Europe. The technical assistance component will improve the effeciveness of roads adminion and expenditure, pardculrly in maintece. 14. RWisk: The specific project risks are mindmal. Hungary has a good implementato record under the two previous projects, and the sub-pojects are all of a smlscale (works usually completed within a year), so there is litl risk of major impltaton delays or cost overus. The EtRs are based on modest assumptions of traffic rowth (usually 5% per annum), so they are not sensitive to this assumption. The fact that the final annual progam wil be detmined at the beginning of each yea fter minimis rss, as it allows the composiiion of the pwgamns to be adjusted to any unexpected changes in the pace of road and bridge deion. 15. The more substantial riscs relate to broader sector issues, specificaly that: (a) Hungary might over-extend its road expenditure plans, as a result of a perception that it has to undetake substantidal investment to 'catch up' to Western Europe; and (b) that recent progrss in obtaining an adequate financial contribudon from road users, especially heavy vehicle, might be undermine by resistance from the trucking lobby to future increases that wi be necessary to offset te effects of inflation. The actions described in para. 11(c) to (e) are directed at minimizing these r. 16. EMMmoaft: I am safisfied that this loan would comply with the Ardcles of Agreement of the Bankc, and I recommend that the Executive Directors approve the proposed operton. Lewis T. Preston Prdsident December 3, 1992 Washington, D.C. SCHliDVL A ROADS PR4OMfl Estimated CssandFiacn Loaw Foreign Total -U~US$ million - Esimated Costs: Road Rehabilitation 45.0 45.0 90.0 Bridge Rehabilitation 7.0 10.0 17.0 Maintenance Equipment 2.5 10.0 12.5 Road Safety Program - work 2.5 2.5 5.0 - equipment 1.1 4.5 5.6 - Waining & technica ass. 0.1 0.4 0.5 Technical Ass. & Taining 0.7 3.0 3.7 Contingencie 29iQ 2L2 TOTAL 70.7 90.4 161.1 Iancingflan: World Bank 0.0 90.0 90.0 Government 70.7 0.0 70.7 Giant financing f-QQ QA4 O Total 70.7 90.4 161.1 -x~~~p- ]ROADS PRO.lECr PROCURENT METHOD (US$ millon) CONMPNENT IQB LCSB OTHR N.R.. -TYA 1. Works 1.1 Road (-) 110.0 - - 110.0 Rehabiliaon - (55.0) (-) (-) (55.0) 1.2 Bridge (-) 21.0 - - 21.0 Rehabilitation - (12.7) (-) (-) (12.7) 1.3 Safety - 5.5 - - 5.5 Improvemets (-) (2.8) (-) (-) (2.8) 2. Goods 2.1 Maintenance 10.7 - 0.5 2.8 14.0 Equipment (10.7) (-) (0.5) (-) (11.2) 2.2 Safety Equipment 4.5 0.5 1.2 6.2 (4.5) (-) (0.5) (-) (5.0) 3o. o s,TA & 3.1 IDTA - - 2.74 - 2.7 ( ) (-) (2.3) .( (2.3) 3.2 Locai Roads - - 1.2 - 1.2 IIDTA ()-) (1.0) ()(1.0) 3.3 Safety 0 0.5 GRAND TOTAL 15.2 136.5 5.4 4.0 161.1 (15.2) (70.5) (4.3) (-) (90.0) Notw Fwes in pu_sthe are reqxWs amouts financed by the Bank Loa NBF. - not Bank *inad a/ cot ichde ontds, axzes and dutes b/ Tm and dute" c/ Ssa*s doU be pu ured an accordaee wth Wodd Bak* Odelne U4e of Conutans by Word Ban Browms ad by te SW du 1 as nAgwA (Wah , D.C, Augut 1991). 4/ A 4wzmat* 50% c _tt sdvci contats, 35% tining and 1S% echrW assistan */ A75% con_sultantservice contracts 25% tingo Sshedule B Page 2 of 2 DISBURSEMENTS Disbursements will cover: - 50% of e tures on works items 1.1 and 1.3 - 60% of worls item 1.2 - for goods, 100% of foreip expenditures, 100% of local expenditures ex-fatoy or 75% of local expenditures for other items procured localy - 100% of expenditures for consultant services and training. ESTIMATED DISBURSEMENT SCHEDULE (LUS$ million) iBRD FY 1993 1994 1995 i226 192 Anmal 17 25 25 15 Cmulatdve 8 25 50 75 90 ULa ~~C HUNGARX ROADS LfflaC Timetable of Key Proje&t Pocessing Steps (a) lime taken to prepare: 13 months (b) Prepre by: RTD, with Bank assistance (c) Bank identification mission: March 1991 (d) Appraisal mission departed: April 20, 1992 (e) Negotiations: Movember 1992 (t) Planned date of effectiveness: Pebruary 1993 (g) Relevant PCR and PPAR: PCR on Transport (Road/Rail) Project (Loan 2557-HU), March 1992 Pas I of 2 THE STATUS CIF BDNK MUP OPERATIONS IN EUIaA A. STA?DS 0F DM11 LOANS A/ (As of Sptamber 30, 1992) uis Killian Loan Fiecal (Lesg Caneollations) No. Yea Borr Project Loan Undisbursad Sixteen Loas Fully Disbursed, including six B-Loans 1.302.9 Of Which: BALm. SECALs and Proaram Loa 2965 1988 Republic of Hungary Xd. Sector Adjustmunt Loan 200.0 3328 1990 N.t'& Bank of Hungary Structural Adjustment Loan 1 I 20 Total Fuly Disbursed SAL, SCAL and Ptogram Loas 400.0 Loanu Under Disbursemet: 2697 1986 Republic of Hungary Power 64.0 22.64 2700 198S NatII Dank of Bungar Ind. Restrecturing I 100.0 11.24 2709 198e Nat'l Bank of Hunsary Id. Eneray Conservation 25.0 3.62 2634 1987 Nat'l Bank of Bungary nd. Restructuring II 150.0 39.34 2847 1987 RapubUe of Hungary Telecommunications 70.0 5.71 -2936 1S88 Nat'l ank of Hungary Agroprooesatng Modernisation 70.0 27.36 2986 1988 Nat'l Bank of Hungary Technology Devlapment 50.0 17.73 3020 1989 Nat'l Dank of Bungary Ind. Restructuring IT 140.0 101.97 3032 1989 RepubUe of Hungary Tr anport IT 95.0 52.54 3055 18S Nat'l Bank of Hungary Energy Development (Conaerv.) 10.0 7.06 3056 1989 Nat'l Oil & Gas Trust Energy Development (Oil & Gas) 100.0 66.67 3191 1990 Nat'l Bank of Hungry Pinancial Systms Modernis. 66.0 39.22 3229 1990 Nat'l Bank of Bungary Integrated Agricultural Zxport 100.0 23.57 3264 1991 Bungarian Teleom. Co. TSlecounications TT 150.0 138.40 3313 1991 RBpublUc of Niagary Human Resources Development 150.0 137.85 3347 1991 W/ Nt'l Boank of Bungary Structural Adjustment Loan II 250.0 75.00 3459 1992 if Nat'l Dank of Hungary Enterprise Reform Loan 200.0 130.02 3509 1993 Nat'l Dank of Hungary Product Market Developmeat _lQO O 100.00 Total 3,392.9 S Of which Repaid 4284 Total now held by the Bank 2,064.5 Total Ammut Sold 0.0 Of which Repid: 0.0 Total undisbursed 1j1S9 S4 gq )v The status of these projects is described in a saper-ta report on all Bank/IDA financed projects in xecution, which is updated twice yearly and eirculatud to th Ex cutive Directors on April 30 and October 31. S SL/SCAL Loan. a' Includes the 0200 jillion SOO operation which as approved by the Executive Directors in July 1990. THE SATtUS OF BANK GROUP OPERATIONS IN RUNGARY B. SJATEMENt OF IFC INVESTNENTS (As of September 30, 1992) Gross Comitments F!scat Type of ......US # MIllIon----- Year Oblifor Business Loan EcuItY Total 1987 UNIC Bank Commercial Banks - 3.23 3.23 1987 Agroferm Prepared Animal Feed 6.55 2.70 11.25 1988 Glass Wool Glass 8 Glass Products 3.44 1.39 4.83 1969 6tass mool Non-Metallte Mineral Products - 0.14 0.14 1989 Dunastyr Pleastc Naterials 28.64 3.76 32.40 1990 Dexter Nold Plastic Materials 2.97 0.94 3.91 1990 fFN Securities Market 7.50 7.50 1990 FHI Securities narket 0.04 0.04 1990 Tetra Pak Paper Containers/Boxes 7.40 3.11 10.51 1991 Budapest Bank Multi-Purpose Banks 27.39 - 2.39 1991 Magyar Suuki Notor Vehictes 34.87 6.52 41.39 1991 HmB Investmmnt/Merchant Banking - 1.48 1.48 1992 Glow Wol Glass 8 lon-Metalli Mineral - 0.50 0.50 1M FANIC Insurance Companles - 2.53 2.53 1992 Unichank Commercfal Banks 10.00 - 10.00 1992 Euroventures Hun. - 2.78 2.78 1992 Vestal Commications 15.00 - 15 Totat Gross Commitments 138.27 36.60 174.87 Less: Cancellations, Terminations, Exdhange AdJustments, Repayments, write-offs and Sales 10.52 ..6 162 Total Comitaments Held by IFC 127.75 JLD 158.59 Total Undisbursed 612 anL 6L Total Outstanding 665 2. 51 M:ASCIIEDD\RlGARY.SEP Novahber 23, 1992 q MAP SECTION I HUNGARY ROADS PROJECT CZECHOSLOVAKIA UKRAINE To KoA* | URBAN AREAS ; wROADS PROPOSED FOR REHABIuTTON * SELECrE TOWMS MAIN NATIONAL ROADS _ _ < 0 COUNTY CAPALS -- SELECtED SECONDA ROADS * NATIONAL CAPITAL MOTOrWAYS - COUNTY BOUNDAIUES INTERNATIONAL BOUNDARIES AUSTR D I)EAc2=l To Gru~~~~~~~~~~~~~~oNo m \~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~T sa M "/X OlsI AUTR Pcn m a RvdYUOMANIArie X .. . .. .. .. . . / S~~~~~~~~~~~~~~~~~~~ok