RESIRICTED

Report No. PTR-59a

This report was prepared for use within the Bank and its affiliated organizations.They do not accept responsibility for its accuracy or completeness. The report maynot be published nor may it be quoted as representing their views.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

INTERNATIONAL DEVELOPMENT ASSOCIATION

APPRAISAL OF

A ROAD RECONSTRUCTION PROJECT

EARTHQUAKE AREA)

PERU

August 24, 1970

Transportation Projects Department

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CurrencY Eanvalentat

Currency Units - SolesSole 1 - US$0.026Solea 38.7 - US$1.00

Units of Weights and easuwes: Metric

Metric:i US &2uiralentg

1 Idlometer (kim) 0.62 Pu.2es (ad)1 meter (m) - 3.28 feet (ft)1 square kilaeter (sq kim) 0.386 square miles (sq mi)1 metric ton (m ton) - 0.98 lg ton

- 1.1 US short ten

Abbr6viations and Acronym

MTC - ItLnistry of Transort and ComicatuciosPC - Peruvian CorporationUNDP - United Natians Development rograane

PERU

APPRAISAL OF A ROAD RECONSTRUCTION PROJECT(EARTHQUAKE AREA)

Table of Contents

Page No.

SUMMARY AND CONCLUSIONS ................................. i

1. INTRODUCTION ............................................ 1

2. BACKGROUND .............................................. 2

A. Economic Setting ....... ............ 2B. Transport Conditions ......................... . 3C. The Effect of the Earthquake .................. 3

3. THE PROJECT ............................................. 5

A. Feasibility Study and Detailed Engineering 6B. Road Construction ............................. 6C. Technical Assistance .......................... 8D. Local Cost Financing .......................... 9S. Disbursement Schedule ......................... 9F. Procurement and Disbursements ............. 9G. Execution ........ ............................. 9

4. JUSTIFICATION ................................... 10

5. RECOMMENDATIONS ......................................... 11

TABLES

i - Preliminary Disbursement Schedule2 - Tentative Cost Estimates

MAPS

1 - PERU2 - Callejon de Huaylas Area

This report was prepared by Messrs. E. Schaefer (consultant) and Mr. H.J.Van Helden (transport advisor to the Transportation Projects Department).

SUMMARY

i. Shortly after the earthquake of May 31, 1970, the Government ofPeru asked the Bank's help in financing rehabilitation, the total cost ofwhich may amount to several hundred millions of dollars.

ii. A Bank mission visited Peru a few weeks after the event, andidentified a road project for improved access to and within the Callejonde Huaylas, a valley high in the Andes which is the area most heavilyaffected by the disaster. Access to this valley had been difficult evenbefore the earthquake; of the three possible routes, one was a cumbersomerail and road combination, and the two other access roads were well belowstandard for existing traffic. The railway section of the first route isnow destroyed and will not be rebuilt; the other roads, although now pass-able again for traffic, have deteriorated further because of many land-slides caused by the earthquake. Reconstruction and improvement of someor all of the access routes is of high priority.

iii. Before the most economic road solution to provide access can bedefined, a feasibility study must be made, and the selected solution en-gineered in detail.

iv. In view of the special circumstances, the US$30 million loan isbeing made at an earlier stage than usual, so as to assure the Governmentthat Bank funds for construction of the selected project will be availablewhen the studies are completed. The loan will cover: (a) 80% of the costof consultants for the feasibility and detailed engineering studies, and ofconsultants to help the highway department improve its overall maintenanceand betterment operations; (b) 67% of the cost of the road reconstruction(still to be defined), for wnich an amount of about US$22 million is ten-tatively set aside in the loan; and (c) US$5 million for capitalized in-terest and commitment charges over a five year period. Disbursement forconstruction will not be made until a project has been agreed between theGovernmnent and the Bank and has been adequately prepared. The total costof the project is estimated (very tentatively) at almost US$37 millionequivalent (exclud 4ng capitalized interest and other charges); the foreignexchange costs of this will be about US$20 million equivalent.

v. In the event the amount set aside for reconstruction proves to bein excess of that needed for the project selected, the balance would be usedfor another high priority road project in Peru, to be selected by agreementbetween the Government and the Bank.

vi. Development of the economic potential of the Callejon de Huaylaswas earlier impaired by unfavorable transportation conditions. Improvedaccess to and within the area will help revitalize the economy of theCallejon, upon which are dependent the half a million people who sufferedmost severely from the earthquake.

- ii -

vii. Road conditions in Peru are unsatisfactory in general. Because ofinadequate budget allocations for road maintenance, the system has deterio-rated in recent years, and a serious maintenance backlog now exists. Tohelp the highway department improve its maintenance and betterment opera-tions, technical assistance to this department is included in the project.

viii. Because of the special circumstances, a 30 year term including a10 year period of grace would be suitable.

PERU

APPRAISAL OF A ROAD RECONSTRUCTION PROJECT (EARTHQUAKE AREA)

1. INTRODUCTION

1.01 The Government of Peru has asked for the Bank's help in financ-ing the rehabilitation of the Peruvian economy following the recent earth-quake disaster. A Bank mission visited Peru from June 17-27, 1970 toidentify a priority project which would contribute to restoring and im-proving living conditions in the area most affected by the earthquake.The mission concluded that financing a project to reconstruct and improvethe main roads leading to and within the Callejon de Huaylas, a valleyhigh in the Andes, would help meet the Government's request.

1.02 Feasibility and detailed engineering studies will be requiredbefore the optimum solution for improved road access and its cost can bedetermined. In the special circumstances, a procedure is proposed where-by the Government is assured, through a loan made at an earlier stagethan would be usual, that the Bank will make funds available for theeventual project. The loan will cover:

Feasibility and detailed engineering studies US$1.8 million

Technical assistance to the Highway Departmentfor maintenance and betterment operations 1.2

Road reconstruction, including supervision by con-sultants 22.0

Capitalized interest and commitment chargesover a five year period 5.0

30.0

1.03 The Bank has made a total of ten loans to Peru for transporta-tion projects, and problems have been experienced with a number of them.Loans of US$2.5 million and US$6.575 million were made in 1952 and 1958respectively (57-PE and 208-PE) for expansion of the port of Callao. Al-though delays were encountered because of difficulties with contractorsand others, the projects produced good facilities. US$3.1 million (373-PE)was lent in 1964 for the port of Paita and US$9.1 million (446-PE) in 1966for the port of Pisco; both projects have been virtually completed. Since

January 1970 all ports have been managed by a Port Authority created alonglines agreed with the Bank. Two loans (190-PE and 334-PE) totaling US$28.25million were made in 1958 and 1963 to the Peruvian Corporation, a privatecompany which owns and operates the country's most important railways (para.2.04). The project was successful from both physical and economic points

- 2 -

of view, but interference with wage and rate policies by the previous Gov-ernment caused continual financial problems for the Corporation. The fi-nancial position of the Corporation, though still unsatisfactory, has how-ever improved in the past year. Four road loans have been made, namelyUS$5 million and US$10 million for road maintenance in 1955 and 1961 re-spectively (127-PE and 300-PE); US$5.5 million in 1960 (271-PE) for theAguaytia-Pucallpa road; and US$33 million in 1965 (425-PE) for the La Oroya-Aguaytia road. The Aguaytia-Pucallpa road is located between the Selvaand the foothills of the Andes. Soils and climatic conditions (rainfallof up to 6 meters annually) are extremely difficult, and no previous ex-perience was available to draw from in designing and executing the road.The road was only 80% completed when loan funds were exhausted in 1967;at that time the Government was not able to raise funds to continue theworks. Extensive failures are continuing to occur in the work done and upto US$8 million has been estimated for the cost of repairing and completingthe highway. The Government has recently initiated legal proceedings a-gainst the consultant, the contractors and highway department officialsfollowing the report of an investigating committee. The Bank has requestedthe Government to ensure that all impediments delaying the repair and com-pletion of the road are expeditiously removed. Difficulties were alsoencountered with the La Oroya road; until recently the Government was notable to make adequate budgetary provision for the work and, furthermore,the cost of this road was seriously underestimated. An understanding wasreached with the Government in 1969 to scale down the project to the fundsavailable by deferring part of the improvements for a year or two. (Seememorandum to the Executive Directors of November 14, 1969, dealing withthe problems). The road maintenance projects were initially successfulbut in recent years maintenance has deteriorated, mainly because of shortageof budgetary funds.

1.04 The Government is conscious of the need to strengthen its planningin the transport sector. It has applied to the UNDP for financing of atechnical assistance project, which would provide a team of some 10 trans-portation experts to work within the planning division of the Ministry ofTransport and Communications. It is expected that the Bank will be askedto be Executing Agency for this project. The Government also recognizesthat road maintenance and betterment operations must be improved and there-fore an amount of US$1.2 million for technical assistance is included inthe proposed loan.

1.05 This report is based on findings of the above Bank mission, con-sisting of Messrs. E. Schaefer (consultant) and H. J. Van Helden, transportadvisor to the Transportation Projects Department and author of this report.The report was edited by Miss Soifer.

2. BACKGROUND

A. Economic Setting

2.01 Peru is the third largest country in Latin America, with a popu-lation of 13.6 million in an area of 1.3 million sq km (slightly larger

-3-

than the countries of the European Common Market combined). Bordered byEcuador and Colombia in the north, Brazil and Bolivia in the east, andChile in the south, it has a Pacific coastline of 2,250 km (Map 1). TheAndes, one of the world's highest mountain ranges, closely parallel thecoast over its entire length and divide the country into a narrow coastalregion (Costa), the mountains (Sierra) and eastern plains (Selva). Becauseof the extreme ruggedness of the Andes, access to valleys in the Sierra andthe Selva plains is extremely difficult and costly. Lima, the capital andthe country's commercial center, is on the coast.

B. Transport Conditions

2.02 The Pan-American Highway, between the mountains and the coast,is the country's main surface route. Many small ports along the coastaccommodate coastal shipping and fishery; the latter is one of the country'stwo main sources of foreign exchange earnings, the other being copper.Callao, 11 km from Lima, is the main port and handles about 4 million tonsannually. A very high percentage of trade is sea-borne. The Pan-AmericanHighway, which connects Peru with Ecuador and Chile, and the road and raillinks with Bolivia, which carry relatively little traffic, are the onlyinternational land transport connections.

2.03 Many roads (mostly low grade) run from the Pan-American Highwayinto the Andes; only a few roads connect the Sierra with the Selva, whichhas a widely scattered population. There are a few river ports on tribu-taries of the Amazon River, the mouth of which is on the Atlantic Ocean,some 3,400 to 4,300 km distant.

2.04 A number of railways exist of which only those owned and operatedby the foreign-owned Peruvian Corporation (PC) are of real importance. Ofthe PC system, one line connects Lima with an important mining area nearCerro de Pasco and another connects the port of Matarani in the south withBolivia, via a steamer service across Lake Titicaca. Less important isthe 168 km line crw-tEed and operated by the Santa Corporation, which runsfrom Chimbote to Huallanca and La Galgada in the Andes mountain range.

2.05 About 60% of the country's inland freight traffic and over 90%of passenger traffic is carried by road; coastal shipping carries about30% of dom-estic freight. Road conditions, however, are poor. Road con-struction is costly, partly because of the extremely difficult topographyand the unstable soil conditions. In addition, road maintenance has beenneelected in recent years, due largely to the lack of adequate budgetaryallocations. Of the 50,000 km road network, only 10% is asphalted, 16%is gravel, and 74% is unpaved earth; only 25% of the network is all-weather.

C. The Effect of the Earthquake

2.06 The earthquake of May 31, 1970, was one of the worst disastersin the history of Latin America. About 1,400,000 people were affected, andthe official count now reports some 30,000 dead, 20,000 missing and 150,000

- 4 -

injured. The epicenter was about 380 km northwest of Lima, at a distanceof about 50 km from the coast, opposite the port of Chimbote. The earth-quake affected an area of 77,000 sq km extending 700 kms along the coastfrom south of Lima to the port of Trujillo and 110 kms inland.

2.07 The effects of the earthquake were threefold: (a) avalanches ofice, stone and mud, which covered whole towns and villages, and disruptedpower supply and communications; (b) tremors, which caused homes and build-ings to crumble and slides to block roads; and (c) compaction of subsoils,causing ground water levels to rise and flood areas near the coast. Thearea of greatest damage is in the Department of Ancash, between the townsof Pativilca and Chimbote on the coast and the Cordillera Blanca, a branchof the western Andes. Especially hard hit was that part of the Santa Rivervalley known as the Callejon de Huaylas, which is flanked by the CordilleraBlanca to the east and the Cordillera Negra to the west.

2.08 The main accesses to the Callejon de Huaylas were the Santa Rail-way and two low-grade roads from the coast (Map 2). The railway, built inpart almost a hundred years ago, was damaged by the earthquake. The mainline is being repaired for light traffic, but not the branch from Chuqui-cara to Huallanca in the Callejon de Huaylas, which was destroyed. Presentplans are to abandon this branchline and eventually to replace the wholerailway by a road. The two roads are the 149 km Casma-Huaraz and the 207km Pativilca-Huaraz, which were both damaged. Crews have cleared slidesand have repaired structures and the roads are open again, but only forsingle-lane traffic on many sections.

2.09 Both roads start at the Pan-American Highway and ascend theCordillera Negra through a series of sharp curves with roadways whichnarrow to an effective width of only one lane in many places. They weretracks which had been gradually improved over the years; the alignmentsfollow contours to minimize earthmoving. The surface is compacted clay(with gravel in some areas) but some sections have no surfacing at all.The Casma-Huaraz road crosses the Cordillera at a 4,200 m pass and de-cends to Huaraz (altitude 3,120 m). Near the coast it has 30 km ofasphalt pavement, in poor condition. The Pativilca-Huaraz road followsthe valley of the Pativilca river and climbs sharply to Lake Conococha(altitude 4,080 m) by means of a dangerous zigzag. Both roads, alreadydangerous before the earthquake, are now even more hazardous. Beforeconsiderable amounts are spent on further upgrading to better charac-teristics, location studies are needed to see whether better alignmentscan be found.

2.10 The 106 km section between Huallanca and Carhuaz in the Callejonde Huaylas has suffered the most damage. It follows the Santa River, con-necting the towns of Huallanca, Caraz, Yungay, Carhuaz and Huaraz. Theavalanche which buried the towns of Yungay and Ranrahirca partially des-troyed the section north of Carhuaz, and it is now proposed to relocatethis entire section. The 30 km section between Carhuaz and Huaraz, whichis still open to traffic, has two lanes and a compacted clay and gravelsurface.

2.11 The Callejon is an intensively cultivated valley, and is veryattractive to tourists because of its great scenic beauty and pleasantclimate; however, access has always been difficult. To avoid the danger-ous Casma or Pativilca roads, many travellers from Lima went via the Pan-American Highway to Chimbote (417 km north of Lima), then 140 kms via theSanta Railway to Huallanca, and then by the Callejon road to their destina-tion in the valley. Before the earthquake, average daily traffic was 200vehicles between Pativilca and Huaraz, 160 vehicles between Casma and Huaraz,and 300 vehicles on the Callejon road between Huaraz and Carhuaz. The SantaRailway carried 240,000 passengers and 36,000 tons of freight in 1967;about half of this traffic was between Chimbote and Huallanca. Passengertraffic has been stable in recent years, but freight traffic declined sharp-ly from a high of 154,000 tons in 1958.

2.12 A feasibility study of the Chimbote access route was made byconsultants (TUDOR-CIASA, US/Peru) in 1966. They recommended a program forreplacing the Santa Railway with a highway, beginning with the inland branch-es of the railway. This recommendation seems even more applicable to pre-sent conditions now that the Chuquicara-Huallanca branch has been destroyed.On the other hand, few people live in the area traversed by that branch, andthe power plant in Huallanca can be reached by a service road. Improvementof the Pativilca and/or Casma roads may be expected to lead to higher traf-fic volumes on these roads since both roads provide a much shorter connectionwith Lima.

2.13 Present information is insufficient to justify a selection ofthe best route or routes into the Callejon. A study is needed to comparethe costs and benefits of three possible access routes from Chimbote, Casmaand Pativilca, and to determine the appropriate standards for each of theseroads, which all go through extremely difficult terrain.

3. THE PROJECT

3.01 The project can best be defined as: "To improve access to andwithin the earthquake disaster area, the Callejon de Huaylas." It consistsof three parts:

I. Feasibility study and detailed engineering of the main roadsleading to and within the Callejon de Huaylas, subdivided into:

(i) a feasibility study, including location studies ofthe most difficult sections of all three routes;and

(ii) detailed engineering of the road or roads selectedas a result of the feasibility study.

- 6 -

II. Reconstruction and improvement of the selected road(s), in-cluding supervision by consultants and, possibly, such otherhigh priority roads as may be agreed between the borrower andthe Bank.

III. Technical assistance for the Highway Department to improvemaintenance and betterment operations.

A. Feasibility Study and Detailed Engineering

3.02 The scope of the feasibility study will be to prepare prelimi-nary cost estimates for each of the three possible routes and to comparethe costs and benefits of each route or combination of routes, takingaccount of various possible alternatives for design standards. To providea sound basis for decision making, the study should include about 270 kmof location surveys to determine the best engineering solution for thefollowing sections:

(a) Chuguicara-Carhuaz (126 km)

The advantage of relocating the highway on the CordilleraNegra side of the valley is to be investigated.

(b) Chacchan-Huaraz (65 km)

This section of the Casma-Huaraz road has dangerouslysharp curves and steep grades. The case for a bettersolution for crossing the Cordillera Negra should bestudied.

(c) Chasquitambo-Lake Conococha (80 km)

The present location of this section of the Pativilca-Conococharoad is unsatisfactory. A more gradual ascent to Lake Cono-cocha should be sought.

3.03 The cost of the feasibility study, including location studies,is estimated at US$700,000. The cost of the detailed engineering of theChimbote road, the Casma road and the Pativilca road is estimated at US$1million, US$500,000 and US$800,000 respectively. Detailed engineeringwill be started when the best access route (or routes) has been selectedby the Government in agreement with the Bank on the basis of the feasibi-lity study recommendations. It is unlikely that major improvements ofall three routes will prove justified and therefore, only part of theabove amounts will be needed for engineering (Table 2).

B. Road Construction

3.04 The mission made the following rough construction cost estimatesusing the Peruvian second category highway standards as a basis. The fea-sibility study will aim at establishing more economic standards for theseroads:

Pativilca-Huaraz Road (207 km)

Estimates were based on a 6 m asphalt surface and shouldersvarying from 0.75 to 1.20 m, depending on topography. Sinceannual rainfall in the mountains is 760 mm (occurring duringfive months), and only 15 mm on the coast, it was assumed thatonly the mountainous sections would be surfaced with asphaltconcrete, while the first 70 km from Pativilca would have a

double surface treatment. Taking recoverable sections ofthe existing road into consideration, the cost would be aboutUS$22 million.

Casma-Huaraz Road (149 km)

The same standards were assumed as for the Pativilca road.The first 30 km, starting from Casma, are asphalt paved,and since the surface is in poor condition it was assumedthat a double surface treatment would be applied in thissection. For the rest of the road, only a new crushedrock base course would be provided. Taking usable portionsof the existing road into consideration, the cost would beabout US$11 mdllion.

Carhuaz-Huaraz Road (30 km)

This portion of the Callejon road will have more traffic thanany of the access roads, due to the local traffic in the valley.A 6 m asphalt concrete surface was assumed and 1.8 m shoulders,although it may be desirable to increase the width of the roadsurface to 6.6 m and the shoulders to 2.4 m. The cost of thisroad section would be about US$4 million.

Chimbote-Carhuaz (216 km)

The cost of the Chimbote-Carhuaz road was not examined in asgreat detail, but assuming similar conditions and standards,the cost of an asphalt surfaced road would be about US$26million.

3.05 Recommendations as to the composition of the project are to be madein the proposed feasibility study, which will probably suggest a combinationof major and minor improvements of more than one road or road sections. Itis tentatively assumed that a construction project costing about US$30 millionwill result from the study. Assuming that the foreign currency cost of thefeasibility study and detailed engineering would amount to about US$1.8 mil-lion, and that of technical assistance to the Highway Department about US$1.2million, about US$22 million of the US$30 million loan (of which US$5 millionis for capitalized interest and commitment charges over a five year period)would be left for participation in the cost of the construction element of

- 8 -

the project. Since it is not feasible to estimate the actual cost of super-vision by consultants before the size of the reconstruction project is known,supervision costs and an unallocated item are considered to be included inthe above US$22 million (see Table 2).

3.06 For previous road construction projects in Peru the foreigncurrency component was estimated at 50%; the Bank contribution for thelast road project (425-PE) was 60%, which included some local cost financ-ing. Because of the special circumstances, a Bank contribution of 67% ofconstruction cost is now proposed. If the above US$22 million is more thanneeded for improved road access to the disaster valley, the balance would(subject to agreement between the Government and the Bank) be used for someother high priority road project elsewhere in Peru. In this connection theGovernment is drafting a five-year highway investment program, and has a-greed to seek the Bank's comments thereon before formally adopting it.

C. Technical Assistance

3.07 It is proposed to provide in the loan US$1.2 million for a tech-nical assistance program, estimated to cost US$1.5 million. Road conditionsare poor in general, and well below the standards expected in a country atPeru's stage of development. Under previous loans, the Bank has financedassistance by consultants to the highway department for improving its organi-zation and maintenance operations, but much of the effect of this assistancehas been dissipated by the lack of budgetary funds for maintenance in recentyears. The Government had neither the funds nor the administrative capacityto undertake an ambitious road construction program without neglecting main-tenance of the existing network. Because of inadequate planning and design,there were heavy cost overruns on new road projects, leading to further diver-sion of funds from maintenance to construction. As a result, the consultants'recommendations could not be implemented, much equipment became idle due tolack of spare parts, and asphalt pavements deteriorated because of neglectedmaintenance. A serious backlog in road maintenance exists.

3.08 The Government intends to limit new construction starts for someyears in order to complete on-going works, and to introduce a sound mainte-nance and betterment program for existing roads. To achieve this, furthertechnical assistance to the highway department is needed, initially atheadquarters and then, in addition, in the field. To avoid spreading thetechnical assistance too thinly, assistance in the field will be limited totwo pilot zones, to be selected and agreed upon between the Government andthe Bank once the consultants have made their recommendations. The Govern-ment plans to spend more on road maintenance, and has agreed that within fiveyears its maintenance budget will have reached a level adequate to meet themaintenance requirements determined on the advice of the consultants.

- 9-

D. Local Currency Cost Financing

3.09 On the basis of the rough cost estimates mentioned above, thecost of the project to the Government would be less than US$12 million;namely US$450,000 for studies, about US$300,000 for subsistence and otherlocal currency costs for the technical assistance team, and one third ofUS$33 million for construction, including supervision and an unallocateditem. In addition to providing for maintenance needs (para 3.08), theGovernment has given assurances that adequate funds for the project willbe set aside in the budget. The annual expenditures in local currencyfor the project should, assuming a continuation of the improved fiscalprogram, be within the financial means of the Government.

E. Disbursement Schedule

3.10 Because of uncertainties as to what project will eventually resultfrom the studies, the disbursement schedule, presented in Table 1, is onlytentative.

F. Procurement and Disbursement

3.11 Construction contracts will be awarded on the basis of inter-national competitive bidding, in accordance with the Bank's guidelinesfor procurement. Bids will not be invited until detailed engineering ofthe road(s) selected on the basis of the feasibility study is completed,and agreement reached between the Government and the Bank as to what theconstruction project will be; until then loan disbursements will be limitedto studies and technical assistance. It is proposed that loan disbursementscover 80% of the consultants' costs for such studies and assistance and 67%of expenditures on reconstruction, including supervision by consultants.Because reconstruction work will not start until feasibility study andengineering have been completed, commitment charges related to reconstruct-ion will not accrue for the first year.

G. Execulton

3.12 Until recently, management of the transport sector in general,and of the department responsible for highways in particular, left muchto be desired. Over the last year the new Government took the first stepsto improve the situation by bringing all the various subsectors togetherunder the newly constituted Ministry of Transport and Communications (MTC),by increasing maintenance outlays, and by concentrating on completingongoing priority works. Within this new Ministry, the General Directoratefor Land Transport will be responsible for execution of the project. TheGovernment will select consultants for studies, supervision of constructionand technical assistance, subject to Bank concurrence. Terms of referencefor the studies have already been agreed with the Government.

- 10 -

4. JUSTIFICATION

4.01 It is not possible to present a quantitative economic analysis ofthe proposed project at this time. The feasibility study and detailed en-gineering must be completed to obtain reasonably firm cost estimates. In-formation in the following paragraphs provides some qualitative support thatan economically justified project will emerge from the studies.

4.02 The Callejon de Huaylas is part of the Ancash administrative de-partment, with its capital, Huaraz, located in the center of the worstaffected disaster area. The 1970 population of the department is estimatedat 750,000, of which about 500,000 live in the Sierra, about 200,000 inChimbote on the coast (this town has also been very heavily damaged) andthe balance in other small coastal towns. In the Sierra there is somesmall-scale coal mining, but most people are employed in agriculture. Muchof this is only subsistence farming, partly due to poor land communicationswith potential markets in Lima, Chimbote and other coastal towns.

4.03 Because of unfavorable climatic conditions along the coast, withan annual rainfall of only 15 mm and very little sunshine, coastal townsmust be supplied with foodstuffs from elsewhere. The valley has a goodclimate, with abundant sunshine and an annual rainfall of about 0.75 m.Produce grown includes fruits, barley, maize, wheat, potatoes and othervegetables. There are also cattle pastures and some forestry. Goodpossibilities exist for improved small-scale irrigation, and there areindications that agricultural production could expand to serve marketsoutside the Sierra if land transport conditions were more favorable. Be-cause of the poor road conditions, however, transport costs in the Sierra,and between the Sierra and the coast, are among the highest in the coun-try, about three times those prevailing on asphalted roads on the coast.Rail tariffs to Chimbote are lower, but the distance from Carhuaz via thatroute to Lima is 200 km or 50% longer than via the Pativilca road.

4.04 The pleasant climate and beautiful scenery are also favorablefor the development of tourism. Mountain climbing and skiing already attracttourists to this "Peruvian Switzerland", as do the many hot springs claimedto have medicinal value. There are also interesting folklore and archae-logical monuments. The further development of tourism is hampered by poorland communications.

4.05 In 1965, Renardet/Sauti (consulting engineers, Italy) recommendedstarting improvements of the Casma-Huaraz road and the Pativilca-Huaraz roadin 1967 and 1970 respectively; however, their suggested standards were muchlower than those now being considered by the Government. Both roads werescheduled in earlier drafts of the present Government's development plan tobe undertaken in 1973 and 1972, respectively. The scheduling did not, ofcourse, take account of the complete disruption of the Carhuaz-Huallanca-Chimbote route. There is now no obvious case for giving the highest priorityto the restoration of this connection with the valley. Huallanca is a

- 11 -

town of only 5,000 people, and few people live in the gorge traversed bythe railway. Although construction of a road may be justified, the questionis to what standards such a road should be built. The fact that the nowdestroyed railway was already there before motorized road transport existed,may well have delayed improving the other access roads. To select the eco-nomically optimum solution, the access problem should now be reviewed as awhole.

4.06 Selecting the most economic design standards for Andean terrain isa major problem. An important aspect of the proposed feasibility study is toselect economically acceptable design standards for each possible route.

4.07 Notwithstanding unsatisfactory alignment and physical conditionof the Pativilca and Casma roads, even before the earthquake these roadscarried some 200 and 160 vehicles daily. Because of the many landslidescaused by the earthquake, driving conditions have greatly deteriorated. Inaddition, the previous railway traffic will divert to the above roads, andmuch of this diverted traffic will remain. Induced traffic will also resultsince improved roads will encourage agricultural production in the Callejonde Huaylas area. In the future, air transport to the Sierra may play arole, particularly for tourism (there are plans to improve the airportnear Huaraz); however, total traffic volumes on all three existing routeshad already passed the point where air transport alone would have been themost economic transport mode. There is no doubt that the total of existing,diverted and induced traffic that will result from efforts to rehabilitateand revitalize the Callejon de Huaylas will call for better roads than exist-ed before the earthquake, and have now deteriorated further as a result ofthe earthquakes. Therefore there is every reason to believe that a satis-factory and economically viable project will result from the feasibilitystudy and will be constructed under the project.

5. RECOMMENDATIONS

5.01 During loan negotiations agreement was reached with the Governmenton the fo'lowing principle points:

(a) Should surplus construction funds remain, they may be utilized fora high-priority road project to be agreed between the Governmentand the Bank (para. 3.06);

(b) Bids for construction will not be invited until agreement on thecomposition of the reconstruction project has been reached betweenthe Government and the Bank and detailed engineering completed(para. 3.11);

(c) The Government will review its road program with the Bank beforethe formal adoption of its Five Year Plan (para 3.06);

- 12 -

(d) The Government intends to gradually increase its annual budgetallocations for highway maintenance to a level adequate for theneeds of the country's highway system (para 3.08); and

(e) The Government will set aside in its annual budget adequatefunds for the reconstruction project (para 3.09).

5.02 A loan of US$30 million is recommended, including an amount of upto US$5 million for capitalized interest and commitment charges over a periodof five years. Because of the special circumstances prevailing as a resultof the earthquake, a 30 year term, including a ten year period of grace,would be suitable.

Auguwt 24, 1970

TABLE 1

PERU

APPRAISAL OF A ROAD RBCONSTRUCTION PROJECT

(EARTHQUAKE AREA)

Prelimina Disbursement Schedule(in US$ millions)

Calendar Years Total

1971 1972 1973 1974 1975

I. Engineering and TechnicalAssistance

(i) Feasibility Stud / 0.6 0.6(ii) Detailed Engineering ' 1.2 1.2(iii) Technical Assistance 0.6 0.6 U.

2.4 0.6 3.0

II. Constructio_ _ 2.1 .9 50 5.0 4.0 22.0

Total disbursed 4.5 6.5 5.0 5.0 4.0 25.0

III. Interest and CommitmentCharges 0.15 0.70 1.10 1.40 1.65 5.0

30.0

/ rounded figures

/ including construction supervision and an unallocated item ofUS$ 1 million

August 21, 1970

TABIE 2

PERU

APPRAISAL OF A ROAD RECONSTRUCTION PROJECT

(EARTHQUAKE AREA)

Tentative Cost Estimates(in US$ equivalent)

Bank GovernmentTotal Financed Financed

I. Studies and TechnicalAssistance

(i) Feasibility Study(including locationstudies) 700,000 560,000 140,000

(ii) Detailed Engineering

Chimbote-Huaraz 1,000,000Casma-Huaraz 500,000Pativilca-Huaraz 800,000

I4aximum totalwould be: 2,300,000

Assumed to be actually spent: 1,550,000 l,240i,000 310,000

(iii) Technical Assistance 1,-3O,000 1,200,000 300,000

Subtotal: 3,750,000 3,000,000 750,000

II. Road Reconstruction,(including supervision byconsultants and unallocated) 3,00Q,000 22,000,000 11,000,000

-f-i. Capitalized Interest andCommitment Charges 5,000,000 5.000,000 _

Total: 41,750,000 30,000,000 11,750,000

August 21, 1970

X~~~~~~~~~~~~~~~~- ' 'N MA fJ .iS 4~~~~~~~~~~A C O L 0 m BI A

t E C U A D-0 R-

g /' ?''deASa'm%' i i~~~/

j/..t , iI

coon~o~c... ny R A Z I L

Pa i i rz <ft$>}0 Chuluconos :onoanc yOoPOPa

f-' m\/- S < Ctl_yobombo 4<, ,> >~~~~unc~elco uclobmb

| \ Choehopoyos Co.b- /. 4yo

~~~~~~ I Freoe <]Trpt

U.-C. ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ -

\ sd11 rmbrzyeque X /| / ,'~~~~~~~~uroo ~ eqip

AUGUST 1970 d680 3 8

>~~~ ~~ mcho5ombmry r~

= Hemly~~~~~~ affcte ... cbob a\

= Less~~~~~~~ he-ily fice a,ec,\Loelu 4TnoMrl S

Cr~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~,q p ' n \

A v i ~~ + - /5 < \ .A- HIL

AUGUS 1970il IttRDe ere308 Xhlhuco aR

MAP 2

N. \0\<HIMBOTE "IOs HU

N. \\ X\t sm

Pcicific3OKm -AZ 4Km Tfclt~

\ \ Pcnomericon Conocoto

\ aR\MS// 65K\~~~1. Km\, hs.ut mbif80im.u\

Ocean 83Kms', t +1 > D greatof

P6t-namer |ican l91KmsoIJJ'odamageLU A. ,-'sS H1 ~\t grats

I Peru~~~~~~Trri

Earthquake and

Total affected Area ~AvaLanches, May 31. 1970

TotaL affected Area~~~ ~ ~ Ara o

700Km.x11sArea of GreatestDamage

..............Caeon de Huaylas...JULY 17 :

JULY 1970 IBRD 3098