Document of THE WORLD BANK HUNGARY ROADS PROJECT (LOAN 3549-HU) December 29, 1999

Transcription

1 Public Disclosure Authorized Document of THE WORLD BANK FOR OFFICIAL USE ONLY Report No Public Disclosure Authorized Public Disclosure Authorized IMPLEMENTATION COMPLETION REPORT HUNGARY ROADS PROJECT (LOAN 3549-HU) December 29, 1999 Public Disclosure Authorized Infrastructure Sector Unit Europe and Central Asia Region 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 disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (as of December 15, 1999) Currency Unit Hungarian Forint (HUF) IHUF = US$0.004 US$1 = HUF 250 AVERAGE EXCHANGE RATES (per US$1) (Dec) WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS EU - European Union ERR - Economic Rate of Return IBRD - International Bank for Reconstruction and Development ICB - International Competitive Bidding IDA - International Development Association IS - International Shopping KHT - Regional Road Management Public Companies KTI - Hungarian Institute of Transport and Science LCB - Local Competitive Bidding MOF - Ministry of Finance MOI - Ministry of Interior MTCWM - Ministry of Transport, Communication and Water Management NBH National Bank of Hungary PIU - Project Implementation Unit PMS - Pavement Management System SOE - Statement of Expenditures UKIG - Road Management Coordination Directorate HUNGARY'S FISCAL YEAR January 1 - December 31 Vice President: Johannes Linn, ECAVP Country Director: Roger Grawe, ECCO7 Sector Director: Ricardo Halperin, ECSIN Sector Leader Eva Molnar, ECSIN Teamn Leader Peter Parker, ECSIN Responsible Staff: Jacques Bure, ECSIN Robert Nooter, ECSIN

3 IMPLEMENTATION COMPLETION REPORT HUNGARY ROADS PROJECT (LOAN 3549-HU) CONTENTS FOR OFFICIAL USE ONLY PREFACE. Page EVALUATION SUMMARY.1i PART I: PROJECT IMPLEMENTATION ASSESSMENT... 1 A. Statement/Evaluation of Objectives... 1 B. Achievement of Objectives... 3 C. Major Factors Affecting the Project... 7 D. Project Sustainability... 9 E. Bank Performance... 9 F. Borrower Performnance G. Assessment of Outcome H. Future Operations I. Key Lessons learned PART II: STATISTICAL TABLES APPENDIX Table 1: Summary of Assessments Table 2: Related Bank Loans/Credits Table 3: Project Timetable Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual Table 5: Key Indicators for Project Implementation Table 6: Key Indicators for Project Operation Table 7: Studies Included in Project Table 8A: Project Costs Table 8B: Project Financing Table 9: Economic Costs and Benefits Table 10: Status of Legal Covenants Table I 1: Compliance with Operational Manual Statements Table 12: Bank Resources: Staff Inputs Table 13: Bank Resources: Missions A. Borrower's Contribution to the ICR Map (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 disclosed without World Bank authorization.

4

5 i IMPLEMENTATION COMPLETION REPORT HUNGARY ROADS PROJECT (LOAN 3549-HU) PREFACE This is the Implementation Completion Report (ICR) for the Roads Project in Hungary, for which Loan No HU in the amount of US$90 million equivalent was approved on December 22, 1992 and made effective on May 12, The loan was closed on June 30, 1999, compared with the original closing date June 30, Funds were almost fully disbursed as of October 25, 1999, and a small balance is being cancelled. No co-financing was provided to the Project. The ICR was prepared by Jacques Bure and Robert Nooter of the Infrastructure Department, Europe and Central Asia Region (ECSIN), and reviewed by Peter Parker (Program Team Leader) and Eva Molar (Sector Leader). The Borrower provided comments that are included as Appendix A to the ICR. Preparation of this ICR was begun in June It is based on material in the project file. The borrower contributed to preparation of the ICR by providing documentary information and presenting views reflected in its own evaluation of the project's execution in Appendix A.

6 ii IMPLEMENTATION COMPLETION REPORT HUNGARY ROADS PROJECT (LOAN 3549-HU) EVALUATION SUMMARY Introduction 1. Hungary is a landlocked country in Central Europe, sharing borders with seven countries. Road density is equal to the Western European average, but the technical condition of its transport infrastructure remains below European standards in terms of quality and safety. The Government has identified four main priorities for transport policy and infrastructure development: (i) the promotion of European Union integration within the transport sector; (ii) a more balanced regional development and more efficient transport organizations; (iii) the protection of human life and the environment; and (iv) efficient and market-oriented transport regulations. Maintenance of the road network was seriously under-funded in 1990 and 1991, and pavement strengthening was financed at a much lower level than in the 1970s. In this context, the Government requested that the Bank support the maintenance of the national road network, to help reduce the heavy maintenance backlog. The Hungary Roads Project was approved in December 1992 in response to this request. Project Objectives 2. The Project had three specific objectives: (i) to enhance the efficiency of public expenditure on the road network through new management, planning and programming techniques; (ii) to address the backlog of rehabilitation works; and (iii) to improve road safety. The Borrower and the Bank agreed on minimum levels of maintenance expenditure for each year of implementation, and on a set of actions to improve road safety. There were no modifications of the original objectives during the implementation of the Project. 3. The Project, which was supported by a US$90 million IBRD Loan (No 3549-HU), was implemented from 1993 to 1999 by the Ministry of Transport and Communications and Water Management (MTCWM). The Ministry of Interior also participated in the implementation of the road safety component. Project Accomplishments 4. The efficiency of public expenditures on roads was fostered through the implementation of an Institutional Development Program (IDP), with support from Hungarian scientific institutes, universities and local consultants, and with the assistance of foreign road agencies and

7 iii consultants. The IDP resulted in the adoption by MTCWM of improved management, planning and programming techniques, and enhanced quality control; restructuring of the public sector road maintenance organizations and upgrading of their testing laboratories; and by increasing the proportion of works carried out by competitive contracting, which reduced road construction costs by an estimated 20 percent. A Pavement Monitoring System was introduced and is in use, and road surface treatment techniques were substantially improved. Routine maintenance was enhanced by the supply of road maintenance equipment. 5. The Project contributed significantly to improved road safety results, with the number of road fatalities having fallen by roughly one third during the six years of Project implementation. This was primarily the result of the introduction of 50 km per hour speed limits in urban areas, the compulsory use of safety belts and lights in daytime, increases in penalties in the event of breach of traffic rules, and increased police enforcement. 6. The road maintenance backlog was reduced during Project implementation through the use of financing from the Bank loan, although less than expected at the time of appraisal. Pavement conditions were improved for the primary and secondary networks, thus allowing the users to travel at lower cost and with less limitations. 7. Financing mechanisms and working principles of the Road Fund were reformed during the implementation of the project. A vehicle tax was introduced, the fuel tax was put on an ad valorem basis from January 1998, and some of the investments toward the improvement of the motorway network were financed through the budget. Starting in June 1989, expenditures, both capital and recurrent, on the national highway system were financed from the Road Fund, including the Bank loan itself. However, Road Fund expenditures, and the corresponding level of fuel taxes, were subject to annual approval by the Parliament, so that the Road Fund was little different in practice from a traditional budget procedure. The Road Fund was abolished in late 1998 when the Government decided that all funding and borrowing should be channeled through the Ministry of Finance. Budget levels for road maintenance have not risen as anticipated at appraisal, however, and the current budget level is not adequate to prevent the future deterioration of the road network, especially the secondary roads. Project Sustainability 8. The sustainability of the Project achievements related to the improvements in the efficiency of road maintenance operations seems likely as the Government observes the usefulness of the new procedures and practices. Also, the organizational changes are in place and are not likely to be reversed. Improvements in road safety are sustainable as the laws and operating procedures are in place, and there is a growing public awareness of the importance of road safety. The improvement in the road tax structure is likely to be retained for the same reason. The situation regarding the backlog of deferred maintenance is more uncertain, however, with the abolishment of the Road Fund and budget levels that are not adequate to prevent further deterioration of the road network, due in part to the current emphasis on motorway construction.

8 iv Summary of Findings, Future Operations and Key Lessons Learned 9. Overall, the project is rated as "satisfactory" in that it achieved its major objectives of improving the efficiency of public expenditures on the road network, reducing the backlog of rehabilitation works (although to a lesser extent than expected at appraisal), and improving road safety. The actual average ERRs for road and bridge rehabilitation were 36 and 29 percent respectively compared to ERRs of 18 and 28 percent estimated at time of appraisal. 10. The Bank's performance in all aspects of the Project cycle was satisfactory. There were no deviations in Bank policies or procedures in project implementation. Project supervision was adequate. The Bank team included participation by several specialists in road maintenance management, Road Fund management and training programs. 11. The overall performance of the Borrower and the concerned Government agencies was also satisfactory in all phases of the project cycle except for meeting the financing requirements, and the Borrower complied with all covenants under the Loan except for clause 4.02 (the availability of funds for core maintenance activities in 1995 and 1996). 12. There are no specific plans for a follow-on project at this time. However, there is a need for further institutional improvements in the road sector including establishing a technically and economically based system of expenditure decision-making, rehabilitation of existing motorways and non-high speed roads and bridges, privatization in inter-city bus transport, and possibilities for further road safety improvements. 13. Two lessons emerged from the Project experience. Because the status of the Hungarian road network is representative of the situation in most of the Eastern European countries, it is expected that these lessons are transferable to other situations: (a) (b) There is a tendency for the Government to use the road budgets to expand the road network, whereas there are few incentives for allocating adequate resources for maintenance although ERRs for maintenance operations are usually quite high. Maintenance activities need to be given higher priority by the Government if the road networks are to be sustained and overall transport costs reduced. This could be done by greater efforts to educate the road users, the public at large and the Government's financial and technical managers on the need for an appropriate level of road maintenance financing and the consequent savings that would accrue to their benefit. It is possible to achieve a significant reduction in road accidents through a coordinated road safety program.

9 IMPLEMENTATION COMPLETION REPORT HUNGARY ROADS PROJECT (LOAN 3549-HU) PART I. PROJECT IMPLEMENTATION ASSESSMENT A. Statement/Evaluation of Objectives 1. Hungary is a landlocked country in Central Europe, sharing borders with seven countries. The Hungarian road network is diversified to integrate its 93,000 square kilometers of territory, and to serve the needs of its population of about 10 million. Road density is equal to the Western European average, but the technical condition of the infrastructure remains below European standards in terms of quality and safety. Combined transport has not yet been developed to the same extent as in Western Europe. The Government has identified four main priorities for transport policy and infrastructure development: (i) the promotion of European Union integration within the transport sector; (ii) a more balanced regional development and more efficient transport organization; (iii) the protection of human life and the environment; and (iv) efficient and market-oriented transport regulation. 2. Significant transit traffic is crossing the country in East-West and North-South directions. The internal traffic is largely determined by the traffic generating and concentrating effects of the capital, Budapest. In Hungary 87 percent of the passenger transport and 45 percent of the goods transport are channeled through the public road network. The level of motorization is increasing very significantly (203 passenger cars per 1000 inhabitants in 1997) following the shift toward individual cars from public transport in the early 1990s. Box 1. General Data about Hungary (as of 1997) Area: National Roads: Public Average Traffic on Motorways: 93,030 km2 30,000kms Passenger 18,000 pcu/day Cars: 2,092,000 Population: Local Public Roads: Trucks: Average Traffic on Main Roads: 10.3 million 76,000kms 238,000 5,500 pcu/day GDP: Private Roads: Buses: Average Traffic on Secondary Roads: 3,060 53,000kms 22,000 1,300 pcu/day USD/person _II I 3. The rate of modernization and maintenance of the main road network did not keep pace with the rapid traffic growth in , and the condition of the network was rapidly deteriorating by the end of that period. During the identification of the Project in 1992, the Bank

10 2 estimated that pavement strengthening and rehabilitation investments had the highest economic priority, with economic rates of return in the percent range. At the same time, the Government wanted to extend its motorway system rapidly, but was constrained by existing debt and an economic slowdown during Maintenance of the road network was seriously under-funded and pavement strengthening was financed at a much lower level than in the 1970s. An average of 1800 km a year were rehabilitated in the 1970s with an average 4 million tons of asphalt used each year. Those quantities fell to 800 km and 2 million tons during the 1980s, and 500 km and 1 million tons in In this context, the Government requested that the Bank support the maintenance of the national road network and assist the Government to reduce the heavy road maintenance backlog. The Project had three specific objectives: (a) First, to enhance the efficiency of public expenditure on the road network through the provision of financing for new management, planning and programming techniques: by strengthening of the Ministry of Transport, Communications and Water Management (MTCWM) in road management, training of the maintenance personnel, updating of national standards, establishing of an environmental monitoring system in the sector, and promoting bitumen technology. (b) Second, to address the backlog of rehabilitation works: by financing maintenance and rehabilitation of roads and bridges through support to the annual rehabilitation program for roads and bridges (pavement strengthening, asphalt overlays, surface dressing, widening of narrow sections of roads, and bridge repair on selected roads). The project also financed the procurement of road maintenance equipment. (c) Third, to improve road safety: by designing a road safety program, including the treatment of selected dangerous intersections, the provision of road safety equipment (e.g., radar's, ethylotests) and public education aids. 5. The Borrower produced a Strategic Plan for Maintenance, as agreed at negotiations. This plan laid out a comprehensive approach for clearing the backlog of pavement and bridges rehabilitation, and determining the optimum maintenance program for the long tern. A Core Road Maintenance Program was agreed upon'. Minimal levels of expenditure were set as a condition to the Project for each year of implementation (see table in paragraph 12). Regarding road safety, the Borrower agreed to implement through the Project: (i) works to reduce the number of dangerous intersections; (ii) public education; and (iii) enforcement of road safety regulation. The Borrower also declared its intention to introduce a reduction of the speed limit in heavily populated areas to 50 km from 60 km per hour. 6. There was no modification of the initial objectives during the implementation of the Project. Both the Borrower and the Bank have been monitoring the Project objectives, and have agreed that these objectives were not over-optimistic. Implementation and development objective ratings were monitored during biannual implementation missions. 1 The Core Road Maintenance Program meant (i) the debt service under the Road Fund (the Road Fund was established in 1989), (ii) current maintenance, and (iii) roads and bridges repair and rehabilitation.

11 3 7. The Project, which was supported by a US$90 million IBRD Loan (No 3549-HU), was approved by the Board of Executive Directors on December 22, 1992, and implemented from 1993 to 1999 by MTCWM. The Ministry of Interior participated in the Project with the procurement and utilization of road safety equipment to enforce traffic regulation and the issuance of public education aids. B. Achievement of Objectives 8. At the time of appraisal, the Bank estimated that the risks for inadequate project implementation were low, which has been confirmed over the six years of implementation. In retrospect, the project objectives were realistic and the efforts that were expected from the Government took into account a realistic pace for the reforms that were needed to enhance public expenditures financing, and also planning and introducing new programming techniques. The Project achieved its main objectives, specifically (i) enhancing management and planning techniques; (ii) addressing the backlog of rehabilitation works; and (iii) improving road safety: (i) Enhancing the efficiency of public expenditures on the road network through the provision of financing for new management, planning and programming techniques: 9. The Institutional Development Program (IDP) started in late 1993 when the Program Manager appointed task managers to carry out a set of actions that were agreed upon at the appraisal phase. The IDP contained nine actions, each of which was elaborated and implemented through the preparation of studies and the use of foreign expertise and experience gained from study tours. Each action had its financial framework and work program outlined. Hungarian scientific institutes, universities and local consultants, assisted by foreign road agencies and consultants, supported the implementation of the IDP. The program was completed successfully in The results are summarized as follows: * Action 1 Development of Road and Bridge Management Systems: Operable road and bridge management systems were developed on the basis of a combination of the World Bank HDM-3 model and the Finnish HIPS for roads and the PONTIS system used in the United States for bridges. * Action 2 Training of operating center personnel: The program of training managed outside of the school system was carried out through: (i) vocational training in road maintenance, and (ii) regular post-gradual training for medium and high-level technical staff. The program included the procurement of teaching aids, which contributed significantly to the efficiency of training. * Action 3: Updating of key road standards: A new system of technical specifications was introduced together with the updating of the directives for road surface treatments (see action 4). * Action 4: Increasing the lifetime of surface treatment: New techniques were introduced that resulted in a significant improvement of the lifetime of the surface treatments. These favorable developments were backed up by new standards, directives and other supporting materials.

12 4 * Action 5: Establishing an environmental protection system for the national roads: A group of experts prepared a global environmental action plan under the auspices of MTCWM. The group issued estimates of financial implications of the plan in the short, medium and long term. * Action 6: Traffic control and traffic safety: Studies were made regarding: (i) identification and assessment of accident black spots; (ii) a system of accident data collection; (iii) evaluation of road safety; and (iv) methodology for safety audits. These studies proved to be very useful to the participants of training programs that followed the studies. A wide range of staff involved in road safety participated in the training, including staff responsible for the management of the road network, inspectors, and traffic police staff. * Action 7: Development of road fund type financing: This action was dropped as agreed with the Bank, and funds were reallocated to the other actions under IDP. Nevertheless, a seminar on Road Management and Financing was organized at the completion of the Project. The participants--ifi staff, governmental authorities, road management institutions, civil organizations and scientific organizations--expressed their views during round-table discussions. The participants made recommendations regarding the establishment of a Road Fund Board, and explored various ways to increase the revenues of the Road Fund. * Action 8: Public involvement in the decision making processes: A committee reviewed the existing regulatory framework regarding the rights of the public in participating in the decision making process regarding the construction of new infrastructure, and numerous public hearings were held. The committee concluded that the existing regulations 2 were suitable to allow the public to participate in the decision-making process. * Action 9: Technical Assistance for Maintenance of the Local Road Network: First, a geographic information system for local road registration was put in place. This action allowed road officials of the local governments to be trained to maintain the newly established database. The legal framework associated with the maintenance of the local road network was also reviewed, and it was concluded that the existing framework was satisfactory. 10. In addition to the actions described above, the Borrower calculated the economic rates of return (ERRs) for the rehabilitation and maintenance of roads and bridges to be included in the Project, which account for 80 percent of the Project cost. The weighted average ERR was 18 percent for the roads and 28 percent for the bridges. It was agreed that only components with an ERR higher than 12 percent would be financed under the Project. The Bank's Design and Maintenance Model (HDM-3) was calibrated to conform to the conditions of the Hungarian network. The Borrower also contributed to the development of the new HDM-4. Regular road and bridge condition surveys were conducted during the Project. High output measuring devices were introduced to measure more quickly the physical condition of the network, and the data was entered into a databank to guide the allocation of funds. 2 Concept and codification of the Act on Public Utility (APU), and the proposed revision of the APU, together with justification for such revision.

13 5 11. The number of road maintenance districts was reduced, and the district road organizations were reorganized as public not-for-profit corporations (Regional Road Management Public Companies, or KHTs) in The reorganization of the KHTs constituted an important step forward toward the commercialization and rationalization of road maintenance in Hungary. The KHTs contract with the Government and also with local authorities (mainly at the municipality level), and establish their own personnel policies. They received new equipment under the Project, and winter maintenance, grass mowing and maintenance of safety barriers were expanded. Their testing laboratories were reorganized and upgraded by the provision of new equipment and training for the laboratory personnel, and quality control procedures were improved and strengthened. 12. Competitive bidding procedures were introduced after a public procurement law was adopted in mid The new law provided the public domain with competitive procedures, thereby enhancing the prospects for economy and efficiency in the use of public funds. Periodic maintenance and rehabilitation works under the Project have been largely contracted out since that time. The KHTs still conduct routine and winter maintenance operations under force account, with the costs of these operations monitored by the Road Management and Coordination Directorate (UKIG). The overall effect of the improvements in operational procedures and the use of competitive bidding has been a reduction in road construction costs by some 20 percent. (ii) Addressing the backlog of rehabilitation works: 13. The level of road maintenance has been increased and the road maintenance backlog has been reduced through the expanded program made possible by the Bank financing, although to a lesser degree than expected at the time of Project appraisal. Maintenance works financed under the Project were delayed during the years 1995 and 1996 due to a lack of counterpart funding, which resulted in a six month freeze in implementation of the works in The Project was rated "unsatisfactory", both with regard to the Implementation Progress and Development Objectives, during this period because road maintenance and rehabilitation financing were inadequate and lower than the relatively modest levels agreed during negotiations, as shown in the table below and described also in paragraphs 17 to 21: (1992HUF Billion) Agreed n-a n-a n-a Actual (budget) 14. This inadequate financial support was due to: (i) reduced revenues flowing to the Road Fund because of lower than expected traffic volumes; (ii) too rapid implementation of the motorway expansion program (which diverted revenue from core maintenance activities under the Road Fund to finance investment); and (iii) excessive borrowing against the Road Fund, depriving the latter of needed maintenance funds. The Borrower budgeted additional financing for road maintenance in 1997 (by about one-third in real terms over the actual amounts spent in

14 6 1996), though they still fell somewhat short of the stipulated levels in real terms. The authorities declared, in September 1996, that additional Road Fund revenues that became available would be spent on road maintenance, and no new road investment would be financed under the Road Fund. An examination of actual physical road rehabilitation and maintenance conducted by the Bank in May 1997 revealed that efficient use of the limited maintenance funds was indeed being made. As a result disbursements were activated again in December At the time of project preparation, it was not anticipated that Hungary's economic and budgetary situations would deteriorate to the degree they actually did during the implementation phase. This situation resulted in the shortage of maintenance funds mentioned above. The budget pressures noted in decreased slightly during the last two years of implementation of the Project, but the need for funds to build kilometers of motorways still provided intense competition for the financing of maintenance expenditures. 16. The financing mechanism and working principles of the Road Fund were reformed during the implementation of the project. A vehicle tax was introduced, the fuel tax was put on an ad valorem basis from January 1998, and some of the investments toward the improvement of the motorway network were financed through the budget rather than through the Road Fund. Unfortunately the reform has not proven to be long lasting, as the Road Fund was abolished in late This action was the result of a decision by the Governnent to limit borrowing authority to the Ministry of Finance, thus putting an end to independent financing arrangements such as the Road Fund. The abolishment of the Road Fund was decided along with a broad set of cancellations of similar financing mechanisms in other ministries. (iii) Improving road safety: 17. The Project has contributed greatly to improving road safety conditions, with the number of road fatalities having fallen by roughly one third over the six years of implementation of the Project. Road accidents and fatalities were as follows: Number of Accidents Total 24,500 24,600 19,500 20,700 19,800 18,400 18,000 20,150 Fatal 1,875 1,850 1,460 1,390 1,400 1,250 1,250 1, Under the Project, the Government initiated an Action Plan to improve road safety 3. The main measures under the Plan were (i) the introduction of 50 km per hour speed limit, from a 3 Government Resolution No 2036/1993 (IX.9.) sets out (i) the acceptance of the National Program of Transport Safety, (ii) the establishment of a financing scheme of program implementation, (iii) Transport Minister's responsibilities toward transport safety, (iv) the establishment of an inter-ministerial committee, and (v) the elaboration of yearly action plans corresponding to the available financial resources.

15 7 previous limit of 60 km per hour, in urban areas; (ii) the compulsory use of subdued lights at daytime; (iii) the compulsory use of built-in safety belts including in the rear seats; (iv) a significant increase in penalties in case of breach of traffic rules; and (v) an increase in police control (for which the Project financed the supply of equipment). As a consequence, Hungary has succeeded in reducing traffic fatalities by about 45 percent since its 1990 peak, compared, for example, to a 20 percent increase in the Czech Republic during the same period. Hungary alone among the Central and Eastern European countries has succeeded in restoring fully the traffic safety level of the period before However, a slight increase in indicates that this trend may be slowing down. In spite of this improvement, Hungary's road fatality rate is still about 50 percent higher than the EU average. The total socio-economic cost (direct and indirect) of road accidents in Hungary is still approximately US$1.4 billion, or 3.0 percent of GDP, which is a significant drag on economic development. Much, therefore, remains to be done to further improve road safety. C. Major Factors Affecting the Project 19. There have been two factors that have affected the Project: (i) the low level of financing of core maintenance activities during the years 1995 and 1996, and (ii) slippage in the procurement of equipment for the safety component. (i) the low level offinancing of core maintenance activities during the years 1995 and 1996: 20. Core road maintenance expenditures fell 14 percent below the level agreed at negotiations in 1995 and 33 percent below the agreed level in In early 1997 the Bank informed the Borrower that disbursements would be suspended until appropriate measures were taken. UKIG explained that it spent 1.8 billion BHUF more than usual on winter maintenance in 1996 due to an unusually severe winter. These expenditures were not reflected in the core maintenance budget 4. In addition, UKIG contributed 2.8 BHUF to the reform of the road maintenance organizations (UKIG subsidized the KHT's working capital in accordance with Hungarian law in 1996). Here again, the expenditures were not reflected in the core maintenance budget. The Bank concurred that this represented an advance payment for maintenance work, and therefore could be considered as part of the core maintenance budget even though it was not in the original definition. After these two items were included, core maintenance expenditures in 1996 increased to a level that was in substantial compliance with the project's maintenance covenant. In addition, the Borrower undertook to: (i) spend any fiture additional Road Fund revenues for road maintenance purposes; and (ii) finance new road development directly from the budget. As a result of these decisions, and because other aspects of the project were proceeding well, the Bank agreed to resume disbursements and to extend the project closing date by one year, to June 30, The Bank and the Borrower agreed, however, that the core maintenance program, as defined for the project, was below the level needed to maintain the main and secondary road networks. UKIG prepared a Road Maintenance Strategy Study that estimated that much more 4As agreed at appraisal, core maintenance activities included routine maintenance and rehabilitation of roads and bridges only. The 1.8 B3UF that was spent for additional winter maintenance in 1996 was budgeted under operational cost expenditures, and was not considered as part of the core maintenance expenditures.

16 8 needed to be spent on road maintenance, but this level of expenditures was not agreed by MTCWM. The Bank also visited typical roads and estimated that the Government would need to spend about 20 billion BHUF to maintain existing roads plus an additional 12 billion BHUF per year at 1996 prices over a fifteen year period in order to catch up with the maintenance backlog, approximately twice the maintenance expenditures agreed under the project. 22. The level of indebtedness of the Road Fund was very high during the same period. At negotiations, it was anticipated that debt service would peak at a maximum of 1.7 BHUF in 1995 expressed in 1992 prices (3.4 BHUF in 1996 prices). Debt service, in fact, increased to 14.5 BHUF in This represented 28 percent of the expenditures under the Road Fund, which declined to 18 percent of the expenditures under the Road Fund by This borrowing was motivated by the Government's desire to expand its main road network, and reduced the funds available for maintenance. At the same time, overall Government expenditures declined from 58.3 percent of GDP in 1993 to 47.2 percent in This was part of an unprecedented 23 percent reduction in the Government's central budget in only four years, a reduction that was not anticipated at appraisal and that affected resource availability for all activities including road maintenance. 23. Since the Road Fund was abolished in early 1999, the decision process and financial mechanisms could be described as follows. New investments on motorways and expressways are made in accordance with a ten-year plan that is described in Government Resolution No. 2117/1999 (26 May 1999). According to this Resolution, a National Motorway Co. Ltd. (NMC) will have to take over the existing public motorway companies and thereafter will be responsible for the construction, operation (including a unified toll collection 5 ) and maintenance of all public expressways and motorways in the country. Rehabilitation and widening of existing expressways is part of the ten-year plan. 24. Maintenance of the existing network will be financed by a combination of state budget funds and development loans. MTCWM still gives high priority to the rehabilitation of the nonhigh speed road and bridge national network in order to get ready for the EU Accession and to be able to harmonize with the Community legislation by meeting the EU axle load standards. The program for rehabilitation of the non-high speed network will benefit from the implementation of the Road Project, as it will use the Pavement Monitoring System, which was substantially improved under the Project. The prioritization of maintenance is now systemized through the identification of a short-list of principal routes to be rehabilitated, given (i) the importance of their function, (ii) the traffic they supported, (iii) the need to improve the load bearing capacity, (iv) the condition of the pavement, and (v) the width of the road. The short list is ranked using the ERRs calculated using the HDM computer model. Annual maintenance and rehabilitation programs are reviewed at the beginning of each year, based on the above prioritization scheme. (ii) The slippage of the safety component 5 A unified toll collection system for State owned motorways will be introduced gradually by January According to the Govemment Resolution No 2252/1998 of November 25, it is the responsibility of the Ministry of Transport, Communications and Water Management to negotiate with EKMA (the public concessionaire for M3 motorway) and to propose by July 30, 1999, further changes in favor of a unified toll collection system

17 9 25 The Ministry of Interior appeared to be well organized to procure safety equipment under the Project, but was unable to procure more than half of the US$4.5 million of the Loan funds that were allocated for this purpose, including fire brigade equipment and motorbikes for the police. Consequently, the Borrower asked for a reallocation of the proceeds of the Loan in June 1998, and US$2.5 million was reallocated to Category 3 of the Project (works toward the reduction of accident black spots). The Ministry has, however, made very efficient use of the equipment that it did procure. An additional one year extension of the Closing Date was granted to UKIG to implement this late contribution to the road safety program. D. Project Sustainability 26. The sustainability of improved efficiency of expenditures on the road network seems likely as the Government observes the usefulness of the new procedures. The Institutional Development Program (IDP) has improved the management and planning techniques within the MTCWM. The staff is now familiar with operating a road and bridge database and a traffic safety database, and is likely to continue to use these systems. Also, the staff responsible for maintenance operations procured new equipment through the Project, which will continue to be used. New standards for road surface treatments have been incorporated into MTCWM's operations and will most certainly be sustained. The organizational restructuring is in place, and the capacity of the KHTs to carry out routine maintenance has been enhanced substantially by the supply of road maintenance equipment under the Project, which will be sustained so long as the equipment lasts. 27. The improvements in road safety practices are the result of new laws and regulations that are in place, and the police staff is now equipped and trained for better enforcement. The road users are now accustomed to such practices as a 50 km per hour speed limit in urban areas and the use of safety belts. 28. The situation regarding the financing of road maintenance is more uncertain in view of the termination of the Road Fund. The Project fostered discussions about trading maintenance expenditures off against investments in Hungary, which was useful but not decisive in establishing the importance of maintenance. The Bank and MTCWM monitored the national financing plan and national road expenditures from 1992 to 1999, which has proven to be very useful in assessing the extent of the backlog in maintenance and the minimum level of maintenance required. Whether the regular budgetary system now in use will result in a level of financing adequate to maintain the primary and secondary road network is uncertain. E. Bank Performance 29. The Bank's performance in all aspects of the Project cycle was satisfactory. There were no deviations in Bank policies or procedures in project implementation. Project supervision was adequate. The Bank team included participation by several specialists in road maintenance management, Road Fund management and training programs. The Bank was successful in facilitating institutional development regarding the management of road maintenance. However, the Project could have benefited from closer coordination with the EU-PHARE program and utilization of additional Trust Funds for technical assistance.

18 10 F. Borrower Performance 30. The overall performance of the Borrower and the concerned Government agencies was satisfactory in all phases of the project cycle except for the provision of financing for road maintenance and the shortfall in procurement by the Ministry of Interior. The Government complied with all covenants under the Loan except for para. 4.02a, which refers to the availability of funds for core maintenance activities. The lack of sufficient financing for these activities impeded the pace of the Project in 1996, but the Borrower was prompt to address this issue (see paragraphs 18 to 21). All components under UKIG's responsibility are expected to be fully disbursed, although one year later than estimated at appraisal. The Ministry of Interior was slow in completing the procurement of the road safety equipment as was planned, but the remaining funds were reallocated to the reduction of accident black spots under UKIG management and relevant works were completed by June Despite the fact that not all of the safety equipment was supplied by the Closing Date, the Ministry of Interior organized a very successful advertising campaign regarding road safety and drastically improved the enforcement of road safety regulations. This resulted in a significant improvement of road safety results during the Project implementation period. 31. The cooperation and exchange of information between the Bank and the Borrower was excellent at all times. Issues, when they rose, were discussed and addressed through frequent dialogue and supervision missions that the Bank organized on a biannual basis during the implementation phase. G. Assessment of Outcome 32. Both physical and capacity building outcomes are rated as satisfactory. The efficiency of public expenditure on roads has been increased through continuous improvements in management, planning and programming techniques and by increasing the proportion of works carried out by competitive contracting mechanisms. The road organization has been restructured, with the district organizations converted to separate entities that secure their work through competitive bidding. Pavement conditions have been improved for both the primary and secondary networks, thus allowing the users to travel at lower cost and with less limitations. Still, annual maintenance fumds are not sufficient to prevent a gradual deterioration of the road conditions in the future, particularly of the secondary network, unless annual budgets are increased substantially. 33. Economic rates of return (ERRs) were calculated at appraisal for the road and bridge rehabilitation components, which account for 80 percent of total project cost. Weighted ERRs were 18 percent for roads and 28 percent for bridges. Actual average ERRs were 36 percent for the road rehabilitation components and 29 percent for the bridge components. The difference between estimated and actual ERRs for the road component is due primarily to the underestimation of traffic volumes on the sections of roads to be repaired (only 20 percent of the site locations were identified at the time of appraisal). 34. Discussions regarding the importance of maintenance versus new construction made a useful contribution to Hungarian understanding of this issue, even though the Road Fund was abolished in The structure of road user charges was improved, including the decision that

19 11 the part of the fuel tax that contributes to road financing will be collected on an ad valorem basis. Also road users, Chamber of Commerce and user associations were given the opportunity to discuss maintenance plans with Government executives. H. Future Operations 35. At present, there are no specific plans for a follow-on project, although one has been under discussion for some time. Today's priorities lie in consolidating the results achieved so far, while allowing Hungary to reach EU accession requirements in the transport sector. In this context, a follow-up operation could address some or all of the following issues: * Institutional development of the road sector: The possibility of reorganizing the road sector and merging all public motorway companies into one joint stock company should be explored. Also, the separation of the roles of UKIG and the Technical and Information Services on National Roads (AKMI) should be promoted (AKMI is now exclusively responsible for maintenance, while UKIG is now only responsible for investments on the road network outside of the high speed roads). Many positive changes that have been undertaken in the Hungarian road sector in the last five years should be consolidated, and there is room for greater decentralization and competition. MTCWM should be encouraged to focus on cross-sector coordination, creation of financing mechanisms, and policy and regulatory developments. Ensuring minimalfinancing of maintenance expenditures: The separation of the financing of road maintenance and rehabilitation from new construction should be encouraged. The termination of the Road Fund and the financing of road maintenance activities through annual budget negotiations could increase volatility of planning maintenance activities and limit opportunities for social and users' influence over road maintenance.. Rehabilitation of existing motorways: This could include M7 between Budapest and Zamardi, at an estimated cost of US$148 million (the economic feasibility study indicates that the ERR of this project is 17 percent). The rehabilitation of existing expressways could be financed by a combination of state budget funds, development loans, and toll income. * Rehabilitation of the non-high speed road and bridge national network: MTCWM has carried out a technical-economic study regarding the rehabilitation needs to match the 11.5 axle load standard under various budget constraints. A desirable program would include major roads with substantial traffic that do not constitute alternative routes to the expressways. This program could also include some intersection improvements, widening and minor alignment improvements. * Inter-city public transport: Some measures should be taken to accompany the new passenger transport law that is currently being prepared. Those measures could address: (i) the Public Service Obligation (PSO) of providing passenger transport services to every citizen and village; (ii) the low demand for such service, making it very costly to the Government; (iii) the prevalence of old buses (of the 20,000 buses in Hungary probably no more than 1000 meet the EU standard); and (iv) the employment of the private sector in the provision of the PSOs and public transport service in general.

20 12 * Road Safety Improvements: Follow-up activities of the road safety component could be targeted at (i) the supply of safety equipment and training for the police; (ii) black spot improvements; and (iii) an improved accident data monitoring system. I. Key Lessons Learned 36. Two lessons emerged from the Project, which are related below. Because the status of the Hungary road network is representative of the situation of most of the eastern European countries, it is expected that these lessons are transferable to other situations. (a) (b) There is a tendency for the Government to use the road budgets to expand the road network, whereas there are few incentives for allocating adequate resources for maintenance although ERRs for maintenance operations are usually quite high. Maintenance activities need to be given higher priority by the Government if the road networks are to be sustained and overall transport costs reduced. This could be done by greater efforts to educate the road users, the public at large and the Government's financial managers on the need for an appropriate level of road maintenance financing and the consequent savings that would accrue to their benefit. It is possible to achieve a significant reduction in road accidents through a coordinated road safety program.

21 13 PART II: STATISTICAL TABLES Table 1: Table 2: Table 3: Table 4: Table 5: Table 6: Table 7: Table 8A: Table 8B: Table 9: Table 10: Table 11: Table 12: Table 13: Summary of Assessment Related Bank Loans/Credits Project Timetable Loan/Credit Disbursements: Cumulative Estimated and Actual Key Indicators for Project Implementation Key Indicators for Project Operation Studies Included in Project Project Costs Project Financing Economic Costs and Benefits Status of Legal Covenants Compliance with Operational Manual Statements Bank Resources: Staff Inputs Bank Resources: Missions

22 14 Table 1: Summary of Assessments A. Achievement of Objectives Substantial Partial Nelible Macro Policies a U a Sector Policies :i 7 [ Financial Objectives 00 Institutional Development Physical Objectives ] E El Poverty Reduction El l lx Gender Issues E] lxa Other Social Objectives l ] a x Environmental Objectives Public Sector Management 00 E Private Sector Development E [xj E [ Other (specify)road Safety Ix ] E (Continued)