THE WORLD BANK Discussion Paper TRANSPORTATION ISSUES SERIES Report No. TRPI An Appraisal of Highway M4aintenance by Contract in Developing Countries Clell G. Harral, Ernesto E. Henriod, and Peter Graziano April 1986 Transportation Department Operations Policy Staff This is a document published informally by the World Bank. The views and interpretations herein are those of the authors and should not be attributed to the World Bank, to its affiliated organizations, or to any individual acting on their behalf. Discussion Paper, Transportation Issues-Series,. Report No. TRP1. AN APPRAISAL OF HIGHWAY M4AINTENANCE BY CONiTRACt IN DEVELOPING COUNTRIES Clell G. -arral, Ernesto E. Henriod, and Peter Graziano April 1986 Transportation Department Operations Policy Staff The World Bank Copyright @ 1986 The W4orld Bank 1818 TH Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved This is a document published informally by the World Bank. The views and interpretations herein are those of the authors and should not be actributed to the World Bank, to its affiliated organizations, or to any individuals acting on their behalf. This document is the third, updated, edition of a report dated March 3, 1982. It was prepared by Clell G. Harral, Transport Policy Adviser and Ernesto E. Henriod, Senior Construction Industry Specialist, both of the World Bank, and Peter Graziano, Vice President of de Leuw Cather & Co. SYNOPS.IS The introduction of competitive practices in the performance of routine maintenance operations is gaining strength in many countries. In some.cases, the move to contracting has been motivated *by the rapid growth of maintenance needs, which exceeded available resources; in others, the con- tracting out of routine maintenance was motivated by the presence of intract- able obstacles to the development of effective force account organizations. This paper presents a review of the experience in nine countries with routine maintenance by contract. Those countries cover the whole spec- trum of development, and their case studies reveal the advantages and poten- tial pitfalls of contracting for this purpose. The auLhors conclude that, given a suitable planning and management organization within the contracti:ng authority, and the prevalence of a truly competitive environment, the advan- tages of contracting can outweigh the disadvantages in terms, inter alia, of actual maintenance work carried out, cost effectiveness, flexibility in the management of resources, and support to the development of the national con- struction industry i-- I .>. J -v -. TABLE OF CONTENTS Preface to the 1986 Edition vii Summary ix 1. Introauction 1 Contracting: Pro and Con 1 Study Obj ectlves 3 II. The Brazilian Experience 3 Transition 4 Size and Duration of Contracts 4 Types of Contract 4 Planning and Procurement 5 Contract Management 7 Evaluation 10 Conclusions 15 III. Experience in Other Countries 16 Yugoslavia *16 Colombia 21 Argentina 25 Nigeria 28 Kenya 32 Ghana 33 Central African Republic 36 The United Kingdom 38 IV. Conclusions and Recommendations 39 General Conclusions 39 Under What Circumstances Should Contract Maintenance Be Considered? 41 How Should Contract Maintenance Be Introduced? 42 0 z *11 Ir ,- l-~. I ~M -vii- PREtACE TO THE 1986 EDITION The introduction of competitive practices in the performance of routine 'maintenance operations is gaining strength in many countries. In the World Bank we have been following, and in some cases assisted in the introduction of, such competitive practices, In a broad sense, they can be categorised in two types of action: (i) execution of routine maintenance by K contract and (ii) the conversion of force account units to commercial or quasi-commercial operation, through making them accountable for the use of resources against preset performance standards, and ultimately having to compete for their work in tthe open market. In 1982, we produced the first edition of this paper, which deals with the first subject, i.e., the execution of routine maintenance by con- tract. The paper was presented to the Irtternational Conference on Criteria for Planning Highway Investment in Developing Countries (London, May 1982). Since then, we have been gratified by the degree of discussion and interest generated,,and by the surgence of a new body of literature on the subject. Some changes have occurred in the countries whose experience in contract maintenance was described in the first edition. Other countries have joined the throng of the practitioners, some with bold privatization measures, others starting at the basic stage of developing a domestic contracting industry that will increasingly take part in maintenance activities, while growing and strengthening with the stimulus of a steady workload. The experience in some of these countries -is succinctly described in this edition, which only slightly updates that of June, 1985, presented to' the.Pan American Highway Maintenance Conference (Los Angeles, September 1985). We present this as a discussion paper, hoping to contribute thoughts and experience towards the improvement of highway maintenance in the Bank's member countries. At a later stage, wtLen more information has been gathered from a wider range of countries, this pa'er should be complemented with further cost comparisons of routine maintenance carried out by contract and by force account. It should also be complemented with other papers on practical guidelines (e.g., forms of contract) and policy aspects. Meanwhile, we would welcome suggestions, and further information (Darticularly on organizational arrangements). - VX// - TJS PAGE IS BLANK - ix SU MR~Y (i) While many road authorities have contracted for the performance of periodic maintenance - because of special skills or equipment requirements, the short-term nature of the work activity, or the desire to avoid overburd- ening existing government capacities - the practice in most government high- way agencies has been to perform routine1! maintenance with government for- ces, using personnel engaged on a full-time basis, and equipment owned and operated by the agencies. This has been a function of government for 100 years or more in most countries. Rowever, in recent years, several govern- ments have greatly increased the use of contractors in road maintenance, in many instances extending contracts to routine as well as periodic mainten- ance. Most were faced with maintenance needs growing more rapidly than resources, and thus sought greater cost-effectiveness. Others were faced with seemingly intractable problems in development of effective force account organizations and turned in desperation to contractors to get essential main- tenance done at whatever cost. (ii) This study was undertaken to review this experience and evaluate the prospects for contracting maintenance, particularly routine maintenance, more generally; specifically to provide a basis for determining whether, and to what extent, such contracting is desirable and applicable in developinng countries. It has encompassed a detailed examination of the extensive ex- perience with contracting of maintenance for federal highways in Brazil over the period 1970-82 (briefly updated for this edition), and shorter reviews of contract maintenance in Yugoslavia, Colombia, Argentina, Nigeria, Kenya, Ghana, the Central African Republic and the TJnited Kingdom. / Yugoslavia has had even more extensive experience than Brazil with the contracting of routine as well as periodic maintenance, while major experiments are really just beginning in the other cases._l (iii) The movement toward greater use of contractors in maintenance func- tions stems from general dissatisfaction with the performance of government force account organizations, whose problems are increasingly seen to be deep- rooted and-difficult to solve. It is unfortunately true that government road 1/ Road maintenance activities are generally classified as either routine or periodic. Routine maintenance includes operations that normally are repeated one or more times a year (e.g., vegetation control, cleaning ditches and culverts, patching potholes and emergency repairs). Periodic maintenance includes operations which typically neel to be repeated over longer than yearly cycles, primarily regravelling for gravel roads, and bituminous surface dressings or seals for paved roads. 2/ The Argentina, Colombia, and Nigeria reviews are considerably updated in this edition, Ghana, the C.A.R. and the TU.K. are new entries. 3/ There is also a wider and growing body of experience in other countries, including the industrialized countries, e.g., several states and cities in the UJnited States, and the Netherlands. authorities in many countries face severe difficulties in attracting and retaininng well-qualified management and skilled personnel, that bureaucratic formalities often hamstring effective management, that it is normally not possible to structure strong incentives rewarding superior performance and discouraging poor performance, and that government payrolls are often bloated with very large numbers of unproductive staff. (iv) Thus, the arguments for contracting maintenance are related to both efficacy and efficiency. Contractors -- operating under strong incentives for efficiency, with freedom to pay coripetitive salaries and to hire and pro- mote personnel on the basis of actual skills and performance rather than paper qualifications, with a better prospect for retaining the most produc- tive and greater freedom to discharge the less productive staff -- may stand a better chance for developing a lasting institutional capacity, in the form of a dynamic industry, to provide effective and efficient road maintenance services. (v) An important advantage in many cases is contractors' greater flexi- bility in scaling resources to meet specific needs and to scale back after peak demands are met, or when general budget cutbacks are required; in most force account organizations, because labor forces and payrolls are fixed, budget cutbacks have a much magnified effect on total oUptut as the entire budget reduction is normally effected through reductions in purchases of fuel and other critical inputs. An additional advantage is that contractual com- mitment can provide better control over diversion of maintenance funds to non-maintenance functions, when those who benefit are forced to pay full costs for services rendered. Finally, in a context where road.maintenance budgets in many countries are far below needed amounts, where contractors become involved in maintenance activities, their lobbying for increased bud- gets for maintenance can operate in the public interest. (vi) The principal contrary arguments, which vary depending on local circumstances, include that contractors may not have the requisite capacity, or that those with the capacity are disinterested in small routine mainten- ance contracts (especially in remote areas), and/or that the Government may not have the capability to manage contracts effectively. Other commonly ex- pressed concerns are that contracting maintenance may actually increase costs, because of increased administration (e.g., measuring and certifying quantities for payment), or increased redundancies (when government estab- lishment cannot be reduced or relocated to the private sector), or because corruption in the procurement process prevents cost savings from being passed on to the public. Concern is also expressed that contractors' resources might not be available to government to help meet emergencies, such as earthquakes, famines, etc. (vii) The experience in the nine countries reviewed here sheds light, b.oth positive and negative, on these a priori arguments. Some mistakes have been made, but, in general, contracting of routine as well as periodic main- tenance has proven to be efficacious. In most cases reviewed, roads are now being generally well maintained by contractors; in Colombia, initial problems encountered in the first small experiment have been largely overcome; in some cases maintenance work is now getting done where little was done before, e.g*, in the CAR and Nigeria; and in Kenya 14 small contractors accomplished 80 percent of the total road regravelling done during 1980/81. Major reduc- tions in government establishment have already been achieved in two cases: in Brazil, where the DNER workforce is said to have been reduced by 60% over a decade (although exact figures are not available) and in Yugoslavia, where, with the most mature system in place, as few as six public emplovees (5 inspectors and 1 director) control 4,700 km of high standard, well maintained highways (in Slovenia). (viii) In general, with sufficient profit incentives, contractors have been attracted to maintenance opportunities even in remote areas, and they have been willing to contractually commit their resources to the government in event of emergencies. While larger firms tend to prefer larger contracts including periodic maintenance, in many instances small firms have been form- ed specifically to undertake routine maintenance. (ix) With respect to efficiency, the evidence is also promising, al- though very limited. While the cost of contracted work is available, compar- able costs of similar operations by government forces are not generally available. In force account operations systematic recording- of the amount of work achieved (as distinct from the resources consumed) is not-generally done; moreover, the economic cost of go-vernment investment in plant and equipment is often overlooked. However, certain inferences can reasonably be drawn on the besis of the partial information which is in hand. TJnit-price contracts -clearly provide contractors with strong incentives for efficiency, and initial co8t results from Brazil-, Aigentina, and-Kenya (and also the UJnited States) suggest thai contractors can perform maintenance at substan- tially reduced costs. In the one case (from Ponta Grossa, Brazil) where ful- ly comnarable costs under similar conditions were available for both force account and uinit price contracts, the force account operation, commonly view- ed as a very efficient one, was 59 percent more costly. Brazil is currently undergoing conversion to unit prices for all maintenance contracts. (x) It is concluded that the possibility of contracting some part or all of routine maintenance should be considered by every road authority. Those countries with a well developed domestic contracting industry should experience few probIlms in introducing maintenance contracting, provided careful planning and preparation is done. Retention of a nuclear force account unit capacity in competition with contractors, as was originally planned in Argentina, may be desirable to provide a source of comparative costs, help reduce the danger of monopolistic exploitation, and enhance government management flexibility. (xi) Those countries with limited or non-existent domestic contracting industries typically also have limited institutional capacities for the execution of works by force account. In these cases the tasks of developing the necessary institutional capacities will be long and difficult no matter which course is pursued. Witness the efforts being made in the Central African Republic to form small contracting enterprises to carry out - xii - maintenance. Where development of a domestic contracting industry is at all a feasible proposition, the strategy of limiting the burden on government as much as possible, concentrating development of its capacities on the manage- ment of contracts and fostering the development of the domestic contracting industry is an option which merits serious consideration. (xii) It must be recognized, however, that the introduction of any new system engenders an element of risk. The early Colombian experience illus- trates some of the problems which can be encountered in introducing contract maintenance with inadequate planning and preparation. While the overall bur- den of responsibilities on the road authority is normally reduced by the in- troduction of contractors, the nature of the Government's responsibilities. changes sharply, and there is increased need for contract management skills. Careful planning and introduction of contracts on a small trial basis ini- tially can reduce risks, permitting the capabilities of government and con- tractors alike to develop before thrusting too heavy a burden on a new sys- tem. All of the successful contracting schemas "lave involved close coordina- tion between the Government and contractors in defining the work to be done and planning the work program. Thorough orientation of contractors prior to tendering promotes understanding of the tasks to be done, reduces perceived risks and risk Dremia included in tender prices. (xiii) The majority of work should be done under competitively-tendered, unit-price contracts. A small element, typically not exceeding 10-15 percent of routine maintenance, could best be done under cost-plus arrangements to simplify ad-ainistration of items whic'c are difficult to measure, and also to add management flexibility (as, e.g. for emergency operations) . (xiv) Simplicity and maximum incentives are desirable features of the contract, an1 in general unit-price contracts have proved well suited to maintenance activities. However, standard forms based on construction acti- vities are ofte'l unsuitable, and contractual instruments should be drawn spe- cifically to fit the needs of routine maintenance. Many governments may wish to consider, at least initially, the use of a consultant or management ser- vices contractor in order to develop especially adapted management systems and contract instruments. I. INTRODUCTION 1.01 While many road authorities have contracted for the performance of periodic maintenance -- because of special skills or equipment requirements, the short-term nature of the work activity, the ease with which periodic maintenance items can be organized into a contract package, or the desire to avoid overburdening existing government capacities -- the practice in most government highway agencies, at least until recently, has been to perform most routine/1 maintenance with government forces, using personnel engaged on a full-time basis, and equipment owned and operated by the agencies. This has been a function of government for 100 years or more in most countries, and the opportunities for stable employment with government security have been a boon for vast numbers of semi-skilled and unskilled road workers all over the world; indeed, in some cases the roads department has come to be seen as an instrument to provide unemployment relief, often without adapta- tion to the appropriate technologies. 1.02 However, government highway organizations in many countries are faced with severe difficulties in attracting, developing, and retaining well- qualified maintenance management and skilled personnel. Moreover, bureaucra- tic formalities frequently hamper the procurement and effective management of equipment, spare parts, materials, and labor, and often the full economic costs of government operations, e.g., interest on capital costs of equipment, are not incorporated in management decision making. Most importantly, it is normally not possible to structure strong incentives rewarding superior per- formance s-^d discouraging poor performance. It should not be surprising that these problems result in ineffective, inefficient and costly maintenance operations in many countries, performed by a service monopoly which is usual- ly not challenged by compet-ition. 1.03 The recent, unusually severe worldwide- phenomenon of general bud- getary crisis for governments, which has hit road authorities with their dependency on petroleum products particularly hard, is now imposing a new urgency to the solution of these traditional problems. Indeed, in many coun- tries there is need at the same time both for finding of ways to perform maintenance at lower unit costs and for increased levels of funding. 2/ Con'tr'a'cting:' Pr'o an'd Con 1.04 One way to deal with the overabundance of problems in force accoent operations is through the use of contractors to perform highway maintenance services, including routine as well as periodic activities. Maintenance contracting has attracted increasing attention in recent years, because it can provide:. 1/ Road maintenance activities are generally classifed as either routine or periodic. Routine maintenance includes operations that normally are repeated one or more time a year (e.g., vegetation control, cleaning ditches and culverts, patching potholes and emergency repairs). Periodic maintenance includes operations which typically need to be repeated over longer than yearly cycles, primarily regravelling for gravel roads, and bitumiaous surface dressings or seals for paved roads. 2/ The overall problems of road maintenance in developing countries are discussed in more detail in the World Bank publication The Road Maintenance Problem and International Assistance (December 1981). -2- (i) strong incentives for improvements in performance and economy; (ii) a more flexible operating environment in terms of managing resources, including greater flexibility in scaling resources to suit changing demands, thus facilitating improvements in cost-effectiveness; (iii) relief to the government from the burden of direct management responsibilities for large equipment fleets and work forces; (iv) the need to commit funds for maintenance contracts, with less likely diversion of resources to other as-;ivities; (v) political support for adequate and more stable levels of fund- ing for road maintenance, provided the contractors can organ- ize themselves into a responsible lobby, and (vi) a better prospect for developing a lasting institutional capa- city, in the form of a pool of local contractors skilled in providing efficient and effective maintenance services. (Dev- elopment of the potential to expand and undertake more exten- sive construction activities may be an important by-product). 1.05 Contrary arguments, which are often advanced when proposals for the contracting out of maintenance activities are being considered., include the following: (i) contracting may not decrease costs where redundant government establishment and work forces cannot be reduced or relocated to the private sector; (ii) contracting could increase costs because the very process of contracting and contract administration may require additional government resources, e.g., in measuring and certifying work quantities for payment; (iii) contracting may increase costs to the government where there is lack of effective competition in the procurement process, including abuses,such as corruption in contractor selection or price fixing; (iv) government may not have the capabilities necessary to properly manage contracts; (v) domestic contractors may not have sufficient capabilities - management abilities, technical skills, equipment, working capital, and other resources - necessary to insure effective execution of maintenance activities; and (vi) contractors may not be well placed to respond quickly during times of emergency, nor to address small-scale maintenance needs in remote areas. -3- Study Objectives 1.06 In recent years highway authorities in several countries have, for various reasons, turned to contracting of routine as well as periodic main- tenance. The present study was undertaken to review this experience and eva- luate the prospects for contracting maintenance more generally. Since con- tracting of periodic maintenance is already a well-established, widely-accep- ted practice, the report concentrates on the issues of extending contracting to routine maintenance functions as well. Specifically, the objectives of this report are: - to evaluate the experience of .public highway agencies in con- tracting for road maintenance, particularly routine maintenance; - to provide a basis for determining whether, and to what extent, such contracting is desirable and applicable in developing coun- tries; and - to detail the requ'site conditions and provide guidelines for preparing the undertaking of maintenance by contract. 1.07 This report is based upon a detailed study of the extensive expe- rience with contracting of maintenance for federal highways in Brazil over the period 1970-82 (somewhat updated for this edition), and a briefer review of contract maintenance operations in Yugoslavia, Argentina, Colombia, Nigeria, Kenya, Ghana, the Central African Republic, and the IJnited Kingdom.31 Yugoslavia has had even more experience than Brazil with the con- tracting of routine as well as periodic maintenance, while the other coun- tries are working on major experiments. It is recognized that the countries covered by this study do not cover the whole range of conditions world-wide; nevertheless, there are some similarities in road maintenance management problems among all countries, and there may be a potential role for contrac- tors in at least some maintenance functions in almost all countries. II. THE BRAZILIAN EXPERIENCE 2.P1 The use of maintenance by contract within the Brazilian -National Highway Department (DNER) began in 1970; previously DNER had performed all maintenance on the federal highway network by force account. However, in the context of a rapidly growing network, limitations on hiring and pay scales were placed on the DNER by the Federal Governments This decision ultimately forced the majority of the maintenance establishment outside the national roads authority. 2.02 DNER has subsequently contracted maintenance of federal roads to state road authorities and the army (through negotiated contracts termed "delegation") and, for paved roads only, to private contractors (through com- ~petitive tendering). Initially, heavier reliance was placed on delegation where the existing 'establishment of the state road authorities could also 3/ The Argentina , Colombia, and Nigeria reviews are considerably updated in this edition; the reviews on Ghana, the C.A.R., and the I.Ko are new. -4- accommodate federal roads thus reducing unnecessary duplication, but subse- quent to 1974 the major growth has been met by expanding the role of contrac- tors. Meanwhile, the size of the network maintained by DNER direct force account decreased from 41,816 km in the peak year of 1973 to 9,970 km in 1984, when private contractors accounted for the maintenance of 30,100 km and the states fo 22,310 km of federal highways. Since the states operate pre- dominantly in a force account mode, we focus subsequently on the DNER experience with private contractors. .... . . . i. . Transition 2.03 The gradual phasing in of private contractors to maintenance acti- vities - over the first four years roads under contract rose gradually to only 5,764 km in 1973 -- helped ease the transition process in Brazil and provided a helpful base of experience for the rapid expansion (to 17,499 km) which took place in the two years 1974-1975. In subsequent years, growth in contract maintenance has been only slightly more rapid than the growth of the federal network, so that the absolute size of the network directly maintained by DNER has been relatively constant since 1976, with a modest decrease in 1980. Most reductions in DNER personnel and equipment fleet have been effec- ted through natural attrition. Although exact figutes are not available, the DNER work force is said to have been reduced by approximately 60 percent over the first decade of the application of the Government hiring restrictions, while the size of the network directly maintained by DNER had decreased by about 76 percent by 1984. Thus, the government has ultimaLely been largely successful in reducing the size of its establishment, although it has taken several years to do so, and it chose to carry, the costs of some transitional redundancy in order to ease the- difficulties of staff affected. Size and Duration of Contracts 2.04 By mid-1981, 264 contracts for routine maintenance were in force. The size of contract was typically small, averaging just under 100 km (with most falling in the range 90-130 km) and having a value in the range of US$400,000-1,400,000 per annum, including in some cases betterments and periodic as well as routine maintenance in the same contract. However, after studies showed that larger contracts tended to reduce costs hy substantially increasing equipment utilization throughout the year, the DNER gradually increased the size of its contracts, until they reached an average of 270 km in 1985. The contract is initially for two years' duration, but is normally renewed annually for an additional three years. After five years, the con- tract must be retendered. Types of Contract 2.05 In 1981, two types of contract were being employed. The first type of contract to be employed and by far the dominant type in 1981 -- all but three of 264 -- was cost-plus-percentage-fee. Under this type of contract, as practiced in Brazil, the contractor only supplied labor, equipment and materials, while the main burden and responsibilities for directing the use of these resources to actually perform the work remained with DNER; heavy de- mands continued to be placed on DNER field personnel to provide on-site man- 5 agement, little different from force account operations. In an attempt to transfer the major burden for direct management of the worksite to the con- tractor, thus relieving the increasingly severe workload on the dwindling DNER supervisory staff, and also to reduce costs, DNER initiated three unit- price contracts in 1979. The unit-price contract ties the payment to the work achieved, and it alters fundamentally the respective roles of DNER and the contractors. The management responsibilities, risks and profit opportu- nities for the contractor are all greatly increased, and DNER Drofessional personnel are freed to concentrate on the higher level management functions of planning, work identification, scheduling, quality control, measurement, and payment. The results obtained from the three initial unit price con- tracts , and the additional experience gathered since 1979, has, led the DNER to totally phase out cost-plus contracts. Planning and Procurement 2.06 The planning process for cost-plus contracts as practiced in Brazil was not very rigorous, limited essentially to aiming at rough estimates of resource requirements, while responsibility for defining the work program, supervising resources and coping with any cost increases remained with DNER. Planning for unit price contracts is necessarily a more systematic process, as a careful definition of the work program is essential when payment is bas- ed on-work accomplished, and responsibilities for resource management and cost control are transferred to the contractor. The annual planning process of unit-price contracts includes: - identification of maintenance activities and their units of measure; - an inventory of physical highway elements (and condition, for the more important elements such as pavement); - the selection of annual quantity standards for each maintenance activity; - the development of performance standards for each maintenance activity, - the develoDment of an annual work program; and - the development of a balanced work calendar for performing the work, month by month throughout the year. 2.07 By encompassing these elements of any well-planned maintenance pro- gram in the annual Dlanning process for unit-price contracts, DNER establish- es what- is expected of the contractor and reduces the risks which would otherwise possibly scare some contractors away from tendering and which would be translated into increased tender prices. Tahle 1, which is taken froTm a bid document prepared by DNER, shows the type of planning information which is made available to the contractors at the outset, and which later forms the basis for regularly uDdated work programs. Table I Brazil Estimated Monthly Percentage Distribution of Work per Item (From DNER bid documents) DNFER ROAD: BR-407/BA Total length: 229.7 km Location: R-5/11 (Senhor do Bonfim) Percentage monthly distribution of work Work Item Quantity Unit I Tl III IV v VT VII VII IX X Xi %II Pothole patching 30 m 20 20 20 20 28 Asphalt-cold mix 33 a3 20 20 20 20 20 Tranisport in tip 5,440 T-km 20 20 20 20 20 trucks Cleaning curbs 25,000 m 10 10 10 10 5 5 5 5 10 10 10 10 and gutters ManuaX ditch 1,500 10 to t10 10 5 5 5 5 10 10 1t 10 cleaning Culvert cleaning 227 unit 30 40 30 Mantial excavation 400 m3 1o IO 10 10 10 10 10 10 5 5 5 5 Compacted fill 400 m 3 10 10 10 10 10 10 1Q 10 5 5 5 5 Concrete, as 200 m3 10 t0 1 10 10 10 10 o1 5 5 5 5 specified Formwork etc. 1,710 m2 10 10 10 . 10 10 10 1o 10 5 5 5 5 Note: Activity codes have been omttted, as have several items, listed after 'formwork'. At the bottom of the form, there is space for the contractor to write-in the monthly and accumulated values of work, at his bid prices. -7- 2.08 One unit-price table is used f or planning and budgeting throughout the entire country; regional price differences will, of course, be taken into account within the bidding process. Table 2 contains the standard unit-price table for DNER activities estimated for May 1980 and May 1984. In addition, unit prices for a series of material production activities are also 'estimated and included in the set of unit-price tables. The unit-price tables were developed by the staff of the Central Maintenance Directorate (CMD), initially with the aid of coftsultants. CMD is also responsible for updating the tables, whose format has remained unchanged to date. With 'inflation reaching triple digits, price indexing is important to contracts in Brazil. In 1980, tables were being undated quarterly; then were later adjusted -monthly according to a price indexing procedure, with a more thorough annual updating, usually in May. 2.09 xContractor Qualification. Until the early 80's, the same qualifi- cation criteria were bei&ng used for unit-price as for cost-plus contracts, geared to a contract which included not only maintenance but also some provi- sion for betterment work, which would normally require a medium-or large-size contractor. Thus, standard requirements in terms of technical and financial capacity, ownership and availability of equipment were higher than they need be for routine maintenance, and in the period up to 1980 25-40 percent of contractors tendering were being disqualified. Qualification criteria were modified later to suit the majority of contracts which involve only routine maintenance, and competition and cost-effectiveness improved, Also, there has been a trend to increase the size of contract, seeking to obtain lower costs through economies of scale. -Interim figures obtained in 1985'suggest that this is being achieved. 2.10 Tendering Competition. Maintenance contracts are competitively tendered by DNER. An examination of a sample cof 180 cost-plus tenders carried out in 1981 showed that 45 percent attracted 6 or more bids each, whtle more than two-thirds attracted at least three bids. The majority of those attracting fewer bids were contracts which were being retendered because the legal maximum five-year contract period had been reached, and it was presumed that the current contractor's existing base and knowledge of specific circumstances had tended to discourage competitors. Also, the size of the contract appeared to influence the degree of competition: about 7,000 km containing some betterment work, with costs in excess of US$7,500 per kilometer, attracted the largest number of bidders. Contract Management 2.11 Contract management includes work scheduling, quality control, measurement of resources consumed (cost plus) or work accomplished (unit price), and certification for payment. Under the unit-price contract these functions differ considerably from control of activities under force account; we will now focus on the unit-price approach. 2.12 Work Scheduling. Work scheduling on the unit-price contracts, as practiced in Brazil, is a joint effort shared by the ONER and the contractor. DNER personnel are responsible for identifying field maintenance work needs (the type and amount of work to be performed and its specific location). The -8- Table 2 Brazil Maintenance Directorate - Maintenance Division Highway Maintenance Costs Activity Unity Costs Unit of Unit of Unit Cost Measure Cr.$ 1,000 Cr.S Description (May 1980) (May 1984) Asphalt Pothole Patching m3 4,231.79 93.64 Deep Asphalt Patching m3 3,534.79 113.05 Cleaning and Filling Slab Joints 100 m 1,109.00 33.75 Sealing Asphalt Cracks 100 L 2,674.00 81.83 Cleaning Curbs and Gutters 100 m 232.00 5.55 Manual Ditch Cleaning 100 m 348.00 8.32 Culvert Cleaning unit 273.36 6.54 Repair of Guardrail m2 469.22 14.96 Manual Grass Cutting 100 mi2 41.00 1.01 Mechanized Grass Cutting 100 m 2 21.00 0.97 Manual Cutting of Vegetation 100 m 2 309.00 7.40 Chemical Control of Vegetation 100 m2 15.00 0.47 Gravel Patching m3 523.68 15.31 Blading Gravel Roadways 100 m2 28.00 1.13 Sign Repair ma 254.37 7.34 Repair of Pavement Reflectors unit 31.32 0.75 Repair of Metal Guardrail ' 29.42 0.71 Painting with Lime .100 m2 1,675.00 11.23 Repair of Glare Deflectors m 477.12 11.42 Manual Striping m3 1,057.00 25.27 Repaving Asphalt Surfaces with Hot Mix m3 2,514.08 40.93 Repaving Asphalt Surfaces with Cold Mix i3 1,498.20 39e01 Repaving Asphalt Surfaces with Sand m3 2,031.11 24.22 Asphalt Hot Mix Sealing 100 m2 610.00 17.64 Slurry Sealing 100 m2 642.00 17.92 Repaving Asphalt Surfaces with Sand m3 1,162.51 16.36 Asphalt Cold Mix Control of Asphalt Bleeding M2 47.77 1.50 Repair of Concrete Slab M3 3,632.39 97.01 Reforming Gravel Surfaces M3 159.34 47.02 Cleaning Bridges m 46.25 1.26 Manual Repair of Embankments m3 604.05 10.74 Mechanized Repair of Embankments * m3 183.14 5.32 Manual Removal of Landslides m3 204.31 6.44 Mechanized Removal of Landslides m3 147.57 4.06 Construction of Drainage Structure mi 507.58 13.33 Construction of Slope Benches m3 161.02 3.85 Embankment Protection with Turf Blocks 100 i2 161.00 3.85 Tree Planting unit 164.10 Reshaping of Right-of-Way m2 5.91 Construction of Stone Masonry m3 1,059.78 Rate of Exchange May 1980 US81 = Cr.$ 49.750 May 1984 .US$1 = Cr,$1,582.001 9- needs in the form of a work order are transmitted to the contractor at weekly scheduling meetings at which work objectives and work progress are discussed. Subsequently, it is the contractor's responsibility to assign and allocate his manpower, equipmetat, materials and time to meet the needs, within the contractual unit rates. 2.13 Quaiity Control. Contractors are provided with performance stan- dards which also indicate the procedure to be followed 4/; the unit-price contractagreement also stipulates that if work quality is sub-standard, the resident engineer may require it to be replaced at the contractor's expense. In addition to random on-site inspection, the quality of work can also be examined during measurement. The experience to date suggests quality control is not a major problem; this is mainly because the quality of most important elements of maintenance (e.g., mowing and drainage clearance) is clearly vis- ible in the end result. However, for those few 'important activities where poor work can be hidden (such as asphalt patching or bridge rehabilitation), quality control by frequent observation of work procedures is warranted. 2.14 Inspection Procedures. In 1980 it was forecast that, as unit-price contracts came to replace cost-plus, DNER's inspection force could be reduced to three per "residencia" (a unit covering 350-500 km), including a special- ist in asphalt paving, one for concrete and improvement works, and one for general activities. Working under the assistant residencia engineer, these three inspectors would certify quantity as well as quality of work. As add- itional experience is gained, it should be possible eventually to reduce the inspection duties to one inspector per residencia, further reducing manpower requirements. Inf6rmation on this aspect has not yet been updated, and we therefore cannot confirm whether the DNER plans for reducing the supervision staff were achieved in practice. 2.15 Work Measurement and Payment. Table 2'lists the basic work acti- vities and the units by which they are measured. DNER has found that approx- imately 90 percent of the activities are easy to measure according to unit- price specifications. However, difficulties have been found with about 10 percent of activities. These problems involve difficulties in predicting and measuring the quantity of work according to the specified units of measure. Inequities can result from the unit selected as a basis of payment. For example, repairs of broken concrete structures such as ditches may require for the same length of repair varying amounts of manual excavation, materials and labor depending on the degree of repair needed. A simple unit of measure is oLten inadequate to express either predicted or accomplished work quanti- ties. Attempting to measure the work for these types of activities using a unit-price concept generally results in excessive and unwarranted administra- tion. As a result of these difficulties, unit-price contracts contain a cost-plus element of about 10 percent of the total value of the contract to cover such activities. 4/ The procedure-type specification (or the cook-book approach) was also applied in Argentina, and is particularly useful at the introductory stage-of a contract maintenance system, when contractors are learning the operational requirements of highway maintenance. - 10 - 2.16 Training. In 1979, prior to the introduction of unit-price con- tracts in the three pilot residencies, the district and residency engineers, inspectors and clerks were trained in various concepts and procedures associ- ated with contract management. The training began with a one-day seminar on the concepts on the DNER Maintenance Management Systems (SAC). The seminar included such topics as planning, programming and budgeting, organizing and staffing, scheduling, and work reporting. The seminar was followed by local training in each residency. This training began with one or two days spent with each resident engineer reviewing the maintenance management system con- cepts and procedures. Following these sessions, the resident engineer, in- spectors and clerks were presented with separate case problems. The case problem for resident engineers and inspectors dealt with Dlanning and sche- duling while that for clerks involved record keeping and the use of forms. The data for these case problems were taken from actual maintenance planning, performance and control records for that residency. Finally, follow-up visits to each residency were conducted on one to two-month intervals. Dur- ing tnese visits, additional traiMn-na -._.Q provided and specific, current pro- blems were discussed. 2.17 In addition to the training of DNER personnel, one day of orienta- tion was provided to each of the key members of the initial contractors' staffs. The training included classroom presentation with visual aids and case problems. The topics included planning, scheduling, work measurement, work reporting, preparing forms, and basic accounting procedures. Most im-+ portantly, DNER continued to provide on-the-job management assistance to the contractors on the pilot unit-price contracts. As the system of unit price contracts has expanded to embrace all contracted maintenance, the training of DNER and contractors' staff has continued, following the patterns devised in the experimental period. Evaluation 2.18 Two analyses of the cost-effectiveness of maintenance operations by contract were done in 1981, where comparable activities and data were avail- able. The first compared only manpower productivity (production unit per man-day) among labor-oriented routine maintenance activities for all three modes--force account, cost-plus contract, and unit-price contract; such comparisons must be interpreted carefully, since they do not take account of other inputs, most importantly, equipment (and its operating costs). The second was a comprehensive cost comparison between an entire force accotnt operation and a DNER unit-price contract in the State of Parana.5/ 2.19 Productivity. The DNER collected productivity data on its mainten- ance operations for force account projects, cost-plus and unit-price contrac- ting in the States of Parana, Pernambuco and Rio Grande do Norte. The pro- ductivity data are shown in Table 3. It will be seen that of the five acti- vities constituting 88.4 percent of total costs, the highest productivity for 5/ A wider-scope cost effectiveness study (comparing contract and force account work) is currently being undertaken by DNER. Results are not available at the time of writing this update. Table 3 Brazil Productivity* Comparisons of Labor-Oriented Activities for Force Account, and Cost Plus and Unit-Price Contracts Force Account Cost Plus Unit Price ARCO *ORRAIS PONTA PONTA CARUARO VERDE PONTA CARAURO NOVOS Percent Dl)ER GROSSA GROSSA PERNAM- PERNAM- GROSSA PERNAM- RIO GRANDE Total Performance PARAKA PARANA BUCO BUO PARANA BUCO DO NORTE Cost Standards 1979 1980 1979 1980 1979-80 1980 1980 Pothiole patching (in) 36.1 0.71 0.30 0.45 0.43 0.49 0.48 0.29 0.36 Cleaning curb and 2.7 227.00 170.6 164.6 176.3 202.0 245.3 108.4 403.0 gtutter (mn) Manual ditch 1.4 150.00 93.0 92.0 - 166.6 36.1 -- cleaning (mn) Culvert cleaning 0.6 1.00 0.96 1.0k -- -- 22.14 0.65 2.02 (units) Repair of bridge 0.3 3.00 1.76 2.18 -- - 2.67 -- 0.41 Mlanual vegetation 20.0 1,363.00 .1,355.0 1,361.9 795.3 1,083.9 1,968.9 1,336.5 1,099.8 conitrol (in2) cantual weeding (n2) 11.2 205.00 183.1 172.6 187.3 185,8 96.1 -- Fence repAir (m) 1.9 31.4 15.5 15.6 18.3 20.5 Sign repair (in2) 2.6 2.00 13.71 7.73 3.95 -- 8.31 2.52 -- Repalr roadside 1.3 20.00 36.13 36.23 12.57 10.61 13.85 wmarkers (utints) Repair m ietal .1 3.60 34.28 7.47 -- 6.57 4.29 3.80 -- guardfrall (in) Paintinag curb 12.7 182.00 126.8 88.9 144.8 148.2 212.9 118.1 30t.1 and gtittLer (in) tManuial slope 8.4 1.50 -- 1.24 -- 1.43 5.22 1.00 2.4 repalir (in3) eanual slide3) 1.0 7.00 2.68 1.2*1 -- - 7.04 3.30 removal (m3) * Protductivity meastured in productioni uinits per man day. - 12 - t.hree of those activities was obtained under unit-nrice contracting. For a fourth, pothole patching (the largest single activity), manpower productivi- ties were very little different among the three different modes of'execution. Only in one of the activities, manual weeding, which was a major component (11.2 percent) of the total costs of all operations compared, was manpower productivity higher in both force account and cost-plus contracts than in unit-price contracts; however, under the unit-price contract this activity constituted a negligible proportion of total costs, so that it was not impor- tant enough to warrant the contractor's attention or result in economies of scale. On the other hand, it should be noted that one of the unit-price con- tracts (Caruaru) records extremely low productivities in almost all opera- tions. An interview with the contractor's representative revealed that he had been ill-prepared for the financial and management responsibilities of unit-price contracting and his program was in disarray, partly because of government cutbacks in budget. C . . t. . k .. - . . . . . 2.20 Cost-Effectiveness. In only one case (for Ponta Grossa, Parana) were data available to permit a coiprehensive cost comparison between compa- rable force-account and unit-price operations. The comparison was made pos- sible because in Ponta CGrossa the cost accounting system for force account had developed to the extent that all indirect, as well as direct costs, were properly accounted and distributed, including interest on equipment. 2021 The Ponta Grossa force account operation is considered one of the most efficient within the DNER. Its indirect costs for the eleven months studied were 36.5 million November 1980 cruzeiros (64 percent of total costs). Thus,- the total costs for this operation were.approximately 2.8 times its direct costs. Of the direct costs, only 40 percent could be clas- sified as normal maintenance activities. The remaining 60 percent included rehabilitation, resurfacing, betterments and aid to other entities., The direct costs of routine maintenance, plus the distributed indirect costs, and, where applicable, the production and cost per unit of production are shown in Table 4 for this force account operation. 2.22 Similarly, the unit-price contract in Ponta Grossa is an efficient operation. This was indicated by the productivity figures. Its indirect costs for the eleven months studied were 2.8 million November 1980 cruzeiros (46 percent of total costs). Total costs were approximately 1.8 times the direct costs. The indirect costs also include the pilot experiment control and accounting functions, which would be eliminated in the future. Most of the activities in this operation can be considered normal routine mainten- ance, except fence construction which accounted for about 35 percent of the total costs. Table 4 contains the cost and production information for this contract. 2.23 An examination of Table 4 reveals that twenty activities were com- mon to the two operations and thus directly comparable. Using the sum of the costs as a weight, and the ratio of the unit costs (force account to unit- price contract) by activity, a rough cost-effectiveness analysis was pos- sible. This analysis is illustrated in Table 5. The weighted average for the ratio of unit costs was 1.59, indicating that for the same work, the force account operation was 59 p.ercent more costly, or that tile unit-price contract was about 37 percent more cost effective. Table 4 Brazil (Parana Stace) Coscs and Production for Force Account Projecc/ Unit Price Highway Maintenance Concract Force Account - Unit Price 2/ Costs per Costs per unit of unit of Cost Production Cost Production Activity (1000 Cr$) Production (Cr$) (1000 Crs) Production (1000 Cri) Pothole patching (C3) 1,726Z.21 17Z.52 LO.005 1,986.99 235.75 3.43 Clean curb and gutter (m) 92.84 19,420 4.78 128.11 42,546 3.01 Manual cleaning ditch (m) 906.33 80,123 11.31 216.88 58,490 3.71 Culvert cleaning (units) 416.73 488 853.95 177.47 565 3L4.11 Repair surface drains (-) 14915 - - 466.70 - -- Repair bridge rail (m) 198.62 214 4928.13 49.29 . jO 985.dO Manual vegetacion control 2 ) 3,487.91 4,307,162 0.8097 2,245.59 8,469.428 0.27 Mechanical grass Fui:t.g (m ) 2,612.14 7,629,990 0.3423 2,522.29 4,721.370 Q.52 manual weeding (m 611.85 96,435 6.34 76.89 9,900.35 7.77 Chemical weeding (m ) 276.08 123,000 2.24 784.05 338,908 2.31 Clearing fire lane (m) -- -- - 381.19 42.260 9.02 Gravel patching (Cm) 6.86 17 403.53 - - - Blading gravel surface (m2) 1,219.44 1,420,800 O.8583 -- - -- Fence repair (1) 387.12 6.105 63.41 -- - - Sign repair (a ) 1,560.70 1,421.98 1,097.55 38.13 182.91 208.46 Repair Roadside markers (units) 1,600.68 10.145 157.78 378.30 1920 197.03 Repair estal guardrail (m) 45.69 216.5 211.04 379.16 611.35 620.20 Painting curb and gutter (m) 36.92 2,400 15.38 158.74 36,862.5 4.31 Clean and paint bridges (m) 10.81 ISO . . 60.05 404i30 360.70 111.73 Other roucine ?aincenance 175.76 5 - - - Ra±rf acing (m ) 3,487.12 567.84 6,141.03 Regraveiing (m 3) 1-28.25 502 255.48 - -- -- Other preventive mainenanie C-) 2.75 -- -- Manual repair of slopes (m3) 27.73 26 1,066,54 129.28 l,025 L2t.13 Mechanical slope repair (m 1,045.19 19,710 53.03 333.22 2,217 150.30 Manual removal of slides (n ) 15.86 17 932.94 317.92 1,994 159.44 Mechanical removal of slides (m3) 1,102.90 18,108.3 60.91 1,538.81 11,882.5 133.71 Other emergency maintenance 90.79 - - - -- Restoracion saintenrnce C-) 7,835.53 - -- Culvert construction (units) 24.04 1 24.04 - - Plant trees C-) 5.99 -- Concrete ditch construction C-) - - 218.73 - -- Farth litch conscruction ) (a12.6t 108.36 197.67 Fence construction (m) 485.25 2.180 222.68 7,255.90 36.708 19ao67 Other betterments cimplfmancary C-) 3,220.04 -- -- -- -- Leveling roadway (m ) 2,395.34 1,481,890 1.616 Other becerments modification C-) 6,239.67 -- -- -- -- -- Preparacion of asphalt mix (m3) 3,049.24 830. 3,673.78 894.48 279.16 3,204.18 Place concrece-culvert (m) 38.60 82 470.73 - -- - Sign production C-) 869.71 - - - -- - Production of anchor post (units) -- - - 333.45 543 614.09 Production of support posts (uaits) - - - 5,012.91 12.261 408.85 Production of bridge rail (m) - 4.15 36 115,28 Production of wood icems C-) 469.29 - - - Aid to federal police 4,552.73 -- - Aid to others C-) 6,182.52 L/ Ponta Grossa, Parana: 185.5 km; January through November 1980; in cruzeiros of November 1980. Rate or exchange: US$1 a 61.3 Cr.$ Z/ Ponta Grossa, Parana: 75.5 km; October 1979 through September 1980 excluding December 1979; Costs in cruzeiros of Mlovember 1980. Rate of exchange: US$1 - 61.3 Cr.$ 3/ The costs In the column contain the following indirect costs distributed in proportion to the direct cosc component cosCs in thousands of Cr.$: administration - 22,925.65; personnel leave - 5,358.86; uaprocuctive personnel cime - 1,0444ol6; general transportation - 4,988.35; and unproductive equipuqen.c- 2,300.14. 4/ The costs tn this column concain the following indirect cost Jistribuced in proportion to che direct cost comonent costs in thousands of Cr.$: Administration - 8.676.59; personnel leave - 165.35; unproduccive personnel tine - 20Z.5Z; general transportation - 2,412,74; and unproduccive equipment - 25.46 NOTE: Unit coats in this table are not comparable to the unit price cable because chey concain material and DNER overhead and aacerial costs. - 14 - Table 5 Brazil (Parana State) Comparison of Force Account to U%iit Price Costs per Unit of Production Ratio** of Costs Sum of Force per Unit of Production Activity Account and (Force Account over Unit -Unit Price Costs Price) Fence Construction 7,741.15 1.13 Manual Vegetation Control 5,733.50 3.05 Mechanical Grass Cutting 5,134.43 0.64 Preparing Asphalt Mix 3,943.72 1.15 Pothole Patching 3,713.20 1.19 Mechanical Slide Removal 2,691.71 0.45 Repair Roadside Markers 1,978.98 0.80 Sign Repair 1,598.83 5.26 Mechanical Slope Repair 1,378e41 0.35 Manual Ditch Cleaning .1,123,21 3.05 Chemical Weeding (Shoulders) . 1,060.13 *0.9.7 Manual Weedi'ng (Shoulders) 688.74 0.82 Culvert Cleaning 594.20 2.72 Repair Metal Guardrail 424.85 0.34 Manual Slide Removal 333.78 5.85 Repair of Bridge Rail 247.91 0.94 Cleaning Curb and Gutter 220.95 1.59 Manual Slope Repair 208.12 8.46 Painting Curb and Gutter 195.66 3.57 Cleaning and Painting Bridges 51.11 0.54 Weighted Average 1.59 * Activities are ranked in descending order according to the sum of the total activity costs for unit price coi i.act and the force account project. **Ratio Cost per unit of production of force account Cost per unit of production of unit-price contract - 15 - 2.24 Additionally, an examination of the force account direct and in- direct costs (footnoted in Table 4) indicates the vulnerability of the cost- effectiveness of the government operation to budget reductions. As the larg- est activities (rehabilitation and re-surfacing, which currently absorb a large part of the indirect costs) are reduced, unit prices for normal main- tenance activities could rise considerably because indirect costs are fixed. Conclusions 2.25 Overall experience over well over a decade clearly shows that in the Brazilian context contracting of routine as well as periodic maintenance is workable and efficacious: an expanding network of roads has been main- tained to reasonable standards, while the Government has been able to reduce its establishment by virtually two-thirds. An important advantage of con- tracting has been greater flexibility of resource dimensioning and balancing; contractors more easily gear up for peak demands, reducJ. when demand slackens and more quickly change the mix of their resources to fit the changing nature of the work. Where the costs of labor and equipment are fixed, as is normal- ly the case in force account operations, even a small decrease in total bud- get has a magnified effect on output, since the entire decrease must be ab- sorbed by reductions in fuel and other material inputs necessary to work operations. 2.26 The difference in cost-effectiveness, however, as a rule is very hard to quantify, primarily because of the absence of comparable cost and performance data for-government force account operations; in government - accounts an important economic cost component, interest on the investment in plant and equipment, is generally omitted, and estimates of the establishment overheads attributable to maintenance operationg are generally not available. Certainly the cost-plus-percentage-fee type contract, which was the primary mode of contracting in Brazil in the 70's suffers from severe shortcomings, particularly the absence of incentives for efficiency. Also, the burden of administration of cost-plus contracts was very little different, perhaps mar- ginally a bit less, than the administration of force account works. Much of the burden of management, and all the risks of cost overruns, continued to be borne by the government under this type of contract. 2.27 The experience obtained in the trial period with unit-price con- tracting was promising, and led to continued reductions in direct costs and government establishment. It was feared in 1981 that the group of contrac- tors then established and adapted to cost-plus contracting, whose lobbying for work had provided a helpful source of support for increased maintenance budgets, would not wish to encourage further development of unit-price con- tracting, since unit-price contracts pose a very different type of business approach, with mucch greater management responsibilities, risks, and profit opportunities. It was also feared that many contractors then engaged in cost-plus contracts would be unqualified or uninterested in competing under unit-price contracts. Nevertheless, it wqas anticipated that other contrac- tors who were well placed, including those experienced in unit-price con- struction contracts, would be tempted by the new profit opportunities in -maintenance. Time has proven the fears were unfounded, as cost-plus con- tracts are being phased out, and costs have continued to drop. - 16 - 2.28 Average costs per km dropped between 1983 and 1984, in constant terms, from an average of CRS2.7 million in 1983 to CR$2.0 million in 1984.6/ While there has been a reduction in the volume of work being carried out, reports suggest a tendency for the average costs per km to continue dropping. One obvious reason for this would be the increased competition induced by the reduction in the number of contracts, coupled with the added attractiveness of the longer maintenance "lots" and the accession of a larger number of contrac- tors to the bids, as prequalification requirements were relaxed. The reduc- tion in the overall availability of construction work in the market at large no doubt also helped to increase the competitive edge. To assist in the expansion of resources necessary to undertake larger contracts, DNER has been making available its equipment, on hire, to the contractors. III. EXPERIENCE IN OTHER COUNTRIES 3.01 Many other countries, including the industrialized countries of Europe and North America 7/ as well as developing countries in Africa and Latin America, have had varying degrees of experience with contracting road maintenance. Resurfacing and regravelling operations and subactivities such as the supply of asphalt, aggregates and haulage, are very commonly contract- ed, with generally satisfactory results. Here we select eight additional cases which offer some instruction, both positive and negative, relevant to the interests of developing countries which may be considering initiating or expandIng the use of contractors as an alternative to the traditional govern- ment force account establishment. These eight cases are drawn from Yugoslavia, Colombia, Argentina, Nigeria, Kenya, Ghana, The Central African. Republic and the U.K. Since Yugoslavia has had by far the most extensive experience in contractlng routine maintenance, we deal with it first. Yugoslavia 3.02 Yugoslavia is a socialist federal republic consisting of six repub- lics and two autonomous provinces. Since the mid 1950s, government adminis- tration and authority throughout much of the economy has increasingly been characterized by the separation of those who invest tax monies from those who execute the work; there has also been a general decentralization of decision- making to and within the individual republics. This general pattern of devo- lution has also applied to the highways sector. The maintenance functions of the highway agencies were essentially split in two during this period. The roads community retained annual work planning and contract management as the investor or custodian of the public interest, while the service or work exe- 6/ Source: DNER. Deflators from "Cojuntura4," 7/ Contracting is increasingly used also in the United States and some European countries, e.g., the Netherlands. Recent experience, generally favorable, with contracting of routine maintenance at the city and state level in six American states--Arizona, California, Colorado, Florida, Pennsylvania and Texas--was reported at two US Transport Research Board Annual Meetings (Washington, D.C. January 1982 and 1984). The primary motivation in these cases has been to reduce costs, but the State of Texas has also sought the additional objectives of reducing government personnel and promoting the development of small contractors. - 17 - cution agency was transformed into a type of cooperative enterprise, or cont- ractor. By introducing contractors, a system of incentives promoting effi- ciency was created, with employees sharing in the profits of the enterprise. Almost all maintenance activities for a highway network slightly in excess of 100,000 kilometers, encompassing a broad range of climates and terrain, have been placed under contract to these enterprises, including winter snow removal and other emergency maintenance. 3.03 The system has worked well, and the roads of Yugoslavia, many parts of which are heavily trafficked, are generally well maintained. A high degree of professionalism has evolved, accumulating years of experience into a well codified and well understood system which is administered witlh a minimum government establishment. The responsibilities of contractors (which may vary among the republics), are well defined in a body of regulations, a general agreement, and separate standard forms of contract custom-tailored to ppecific functions, e.g., routine maintenance, winter and emergency mainten- ance, major pavement maintenance, betterment work, and protection services (such as vehicle weight and size control). Technical standards, levels of service to the road user, work safety standards, response to emergencies are all well delineated contracttually. The contractor is not only liable to the community for noncompliance, for which a series of monetary penalties may be invoked, but he may also be held liable to the road user for damages result- ing from delays in timely execution of maintenance work. Such penalities, though not commonly exercised, are said to be seen by the enterprises as serious threats in the event of nonperformance. 3.04 Contract Management. Contract management in Yugoslavia has evolved into a highly effective system, ensuring adequate quality control, accurate work measurement and payment, with maximum simplicity and minimum cost. Tw6 key factors in this success are the well-qualified inspectors, who spend the majority of their time in the field, and the use of sensible sampling proce- dures in field control. 3.05 Inspectors of the communities spend an average of three days per week on the roads under their responsibility, recording data and coordinating with the enterprise. Their objectives are: - to identify where maintenance activities are needed for scheduling purposes; - to obtain sample measurements of completed work; - to irtspect the quality of work performed; and - to obtain both measurement of physical resources utiliz- ed and of work completed to document payments for cost- plus elements. 3.06 In the Republic of Slovenia, for example, our observations made in 1981 showed that only five inspectors (one for each enterprise) controlled road maineenance works for 4,700 km, including 105 km of high standard toll road, 902 km of other paved primary two-lane highways, and 3,693 km of regional highways. One inspector controlling between 500 to 1,000 kilometers - 18 - of highway may seem implausible, but in fact, the inspector actually super- vised the work of between seven and fifteen crews. He participated in, and was familiar with, the work scheduling for the period; he knew the nature of the work to be accomplished at each location and what it would take to get the job done. Re also knew when the crews were scheduled to accomplish each work activity included in the program and whether the activity was paid as a cost-plus or unit-price item. If the activity was cost-plus, he would spot check the crew for resource utilization as it was working. The end result of many unit-price items could be checked days later, to suit his workload and the crew locations within his area. Looking at the numbers involved and the method, it is not inconceivable that he could check 100 percent of all work production and make daily observations of resource use in all cost-plus oper- ations, if he so desired. He could reduce or expand his "sample' based on the contractors' performance. 3.07 A key factor, of course, is that the inspector is not responsible for the direct supervision of the crews or for making detailed measurements of work. These are contractor responsibilities, and the inspector is free to carry out his primary functions of general quality assessment and spot checks on measurements. 3.08 The inspector and the chief of the enterprise must review and approve all daily work reports which form the basis for payment. Payments requests are submitted monthly by the contractor with full documentation. The inspector reviews the payment documents, referring to the spot checks of measurements, and notes on quality in his log. If serious discrepancies in measu'rement are detected, the entire payment request is discredited, and:. - payment is withheld; - a lengthy process of field checking is carried otut to recalculate payment; and - control is tightened. 3.09 As a rule, the three steps described above occur infrequently because: - inspectors are high-caliber highly paid people with con- siderable field experience (10 to 20 years; in 1981, in one republic the average experience was 22 years); - as explained before, inspectors spend 60 percent of their time in the field applying contract management control procedures which are clearly defined and carried out; and - contractors are careful not to overstate their invoices because the costs of being caught in a discrepancy are quite substantial. 3.10 llnits of measure and measurement, for payment are not regarded as a problem* Measurement units differ between republics. For examDle, in one - 19 - republic, pothole patching and surface patching are measured in tons of asphalt mix. In another, they are measured in both square meters and tons, depending on the type of patching. But in both cases, investor and enter- prise personnel are fully familiar with the applicable units and the proce- dures for measurement. The system is based on fairness and maturity on both sides of the contractual relationship. It appears to be working in Yugoslavia, but the practice may not be replicable elsewhere for some time to come. 3.11 Cost-Effectiveness and Mode of Procurement. Historical costs per kilometer for the maintenance of two-lane roads in the Republics of Bosnia- Herzegovina, Croatia and Slovenia for the period 1976-79 are presented in Table 6. The numbers presented include a mix of winter and summer routine maintenance activities, resurfacing, repair of structures and other minor categories. Slurry coats and chip sealings are not in general use. 3.12 Maintenance outlays, as Table 6 shows, vary widely among republics, with those in Slovenia being almost dotuble those in Croatia. However, many important factors vary among the republics and it was impossible to assess, in the brief scope of this study, what part of the large difference in costs among the republics is due to differences in critical parameters such as climate, traffic and scale of the infrastructure, what part is due to differences in standards of maintenance, and what part is due to standards of efficiency. The latter are influenced by procurement practices, which vary among the republics. 3.13 Generally, contracts for periodic maintenance such as resurfacing are competitively tendered, with larger construction enterprises entering the competition, but routine maintenance contracts are normally negotiated with enterprises which have an assigned area of the road network. The possibility of tendering always exists, if a community is dissatisfied with the perfor- mance of a contractor, but in practice, not renewing a contract is a rarely exercised last resort; rather, budget and operational control procedures are exercised directly by the community to improve performance. 3.14 During negotiations, in the absence of price competition the commu- nity's interests are protected in two ways: (1) a competent professional staff, many of whom have extensive experience in contracting operations them- selves, and (2) good cost information collected and maintained by the commu- nity, for both direct and indirect costs. Negotiations are said to be a serious give and take. The delegates of the community and their executive committee hold their professional staff accountable for road conditions, and there is little tolerance for increases once budgets (and contract amounts) are established. 3.15 The various republics employ eltments of both the unit-price con- tract and the cost-plus contract in varying degrees depending upon local pre- ferences. For example, in Croatia, a combination,unit-price/cost-plus con- tract typically contains a very high percentage of unit-price items. In Slovenia, however, only 50 percent of the items in a typical contract are based on unit prices. The potential negative effect of cost-plus arrange- ments on incentives may be tempered in Yugoslavia to some degree because the - 20 - Table 6 Yugoslavia Samples of Levels and Maintenance Funding for Regional and Primary Highways (US$ per kkm) 1/ Republic of Year Bosnia-Herzegovina 2/ Croatia 3/ Slovenia 4/ 1976 2,338 1,548 2,850 1977 2,479 2,113 3,343 1978& 4,556 2,846 4,744 1979 5,055 3,879 7,243 Comparative Percents to Slovenia 69.8% 53.5% 100% in 1979 1/ Dollars calculated using exchange rates of 18.2, 18.3, 19.2 dinars/US$ respectively. The September 1980 exchange rate was approximately 27 dinars /TS$. 2/ For 1978 about 30 percent gravel roads; 1977, 40 percent gravel roads; 1978 and 1979, 14 and 12 percent respectively, due to decentralization of regional roads from republic level this explains the shaper rise in cost per kilometer. 3/ Percent gravel roads not determined. 4/ All paved roads included in calculation. 105 km of toll road not included. - 21 - enterprise is also contracting for other, often more profitable work, and this can provide incentive to carry out the maintenance work as expeditiously as possible, while the standards regarding road conditions, timeliness, and quality of what is expected from contractors, as well as budget controls, are well defined and closely enforced. 3.16 Proper definition and planning of work is, of course, in itself an important control on costs, and as noted above, the communities have accumu- lated over the years detailed knowledge of cost structures and determinants. Although open-market competition is not present, the enterprises' work is paid for on the basis of work performed, and well-defined cost parameters. This is a considerable improvement over other systems (force account or cost- plus contracts, for example) which often measure only the inputs. Colombia 3.17 In contrast to the smoothly functioning system which has evolved over years of experience in Yugoslavia and Brazil, we now examine an initial attempt which was recently made to employ maintenance by contract in Colombia. This first experiment was not successful, and although its nega- tive features were corrected, and the system improved considerably in its later development, it is appropriate to review some of those negative features, as examples of where contracting can encounter difficulties. 3.18 Four highway maintenance contracts were let in late 1977 by {inisterio de Obras Publicas y Transportes (MOPIT), which is responsible for the construction and maintenance of highways in Colombia. The contracts were let for four years, over road lengths which averaged 100 km. 3.19 The following contract features eventually led to serious difficul- ties in this first experimental attempt at contract maintenance: (a) Comprehensive well-defined work programs were not devel- opect. The MOPT transferred the responsibility for speci- fic work identification and scheduling to the contrac- tors. Also lacking were adequate penalties for noncom- pliance as well as.close supervision of work progress and quality. (b) The contractors were required to collect tolls, which were their sole source of contract revenues. A formula was provided for escalation of the toll charges, based on daily traffic counts carried out by MOPT personnel. H-ow- ever, some of the original contract toll rates were based on unrealistic initial counts which led to toll collec- tions below the anticipated necessary income. Toll charges were increased, but generally well below true price escalation levels. (c) Although unit rates were listed in the contract, and a method given for adjusting for price escalation, its application was left to MOPT's discretion, In practice - 22 - adjustments were not applied on a regular basis; such adjustments as were affected did not compensate adequate- ly for inflationary rises in basic costs. (d) The contractors were required to provide and retain at the work site various items of equipment, including 30 ton-per-hour asphalt hot-mix plants, which significantly exceeded the requirements of the contract work quantities. (e) Since the contracts included both routine and periodic maintenance activities, and the contractors were free to identify and schedule work without supervision, the ten- dency was to schedule and perform the more profitable periodic maintenance activities such as seal coating or asphalt overlays, even without prior necessary strengthen- ing or repair of existing pavement structures. 3.20 Other contract features which led to the early cancellation of the four initial contracts included clauses worded in terms which permitted con- tractors to delay the execution of work and thereby increase their holding of toll funds for their own advantage. In one case, the contractor carried out considerably less work than the toll monaey collected would have covered and, in another, the contractor collected tolls for six months without carrying out any work. All four of these first contracts ended in court cases. 3;21 tater'tImprovemenets. The second generation of maintenance contracts let in 1980 removed the toll collection feature, and instituted normal pro- gress payments, drawing from tolls (collected by a third party) and MOPT bud- gets. Once again, periodic maintenance (mostly overlays) was included with routine maintenance in the same contract. An additional feature which was introduced was the planning and supervision of the work by an external con- sultant. This meant an increase in the overall cost of about 10, but also the presence of sufficient numbers of field supervisors, which MOPT had not been able to provide directly before. Nine contracts were let in this second series, averaging 130 km each. 3.22 These contracts gave satisfactory results. The introduction of strong supervision, and the elimination of the collection of revenues from the contractorst responsibilities influenced this outcome. The flexibility of the contracting system was tested repeatedly, in the face of budgetary re- strictions. Contractors were able to adjust reasonably well in times of fiscal stricture and continue doing the most urgent work. In contrast, force account units on other work were unable to cut down on salaries and wages of permanent personnel; consequently, cash was restricted for the purchase of supplies and materials, and this affected field performanca of urgent work. 3.23 There is one minor area of rigidity in the contract system; this involves the supervisors supplied by consulting firms, who are engaged on a cost plus fixed fee basis over the period of the contract. If field work must be curtailed, their establishment is not adjusted down, to suit the reduced supervision duties. This rigidity has affected about 10% of the value of the work. Another problem, this time for the contractors, is the redeployment of equipment in case of enforced reductions of the work load. In particular, 23 - this affects crushing and batching plants, which are not normally mobile. The contractors who have fared best in the face of the inevitable fluctua- tions of budget availability have been those who could sell or use asphaltic concrete elsewhere in the vicinity of their static plants. 3.24 An accurate cost comparison between contracts and force account has not yet been possible. The principal stumbling block is the lack of measure- ments of actual work put in place by force account units. Also, force account costs are not all gathered under the same budget heading; some, as for instance those relating to staff welfare payments, are absorbed by broad- er overhead accounts of the Ministry. 3.25 The nine contracts were let for periods of 36 months, and for aver- age amounts of US811,OOO (equivalent) per km and per year. 'Periodic mainten- ance and rehabilitation were major components of this work, and the main at- traction for contractors. Routine maintenance was looked at as an unattrac- tive contractual obligation. Nevertheless, the work was done, properly and profitably, by subcontracting the manual tasks to local groups along the con- tract length. The local groups were supervised by a "mobile" foreman, and worked in coordination with the contractor's own patching gang (8 men, one backhoe or loader, two tip trucks and auxilliary equipment). 3.26 The ease with which local aroups were formed as subcontractors for the manual tasks of routine maintenance; a perceived opportunity to realize savings through the direct employment of those local gangs; and the opportu- nity to create permanent sources of employment in a larger scale, motivated MOPT to re-think. the apportionment of maintenance tasks, on the basis of fos- tering "micro-enterprises" to carry out manual routine maintenance work. The new maintenance system, which was initiated in early 1985, is being structur- ed in the following four tiers: Task Responsibility (i) Periodic maintenance and By established highways rehabilitation contractors; unit-rate contracts let through competitive bidding. (ii) Mechanized routine MOPT, by force account maintenance tasks, and materials supply to micro-enterprises (iii) All manual tasks of Micro-enterprises; routine maintenance negotiated contracts (classified highway network) (iv) All manual tasks of routine Lengthmen maintenance for the rural road system under Rural Roads Authority (Fondo Nacional de- Caminos Vecinales-FNCV) - 24 - 3. 27 The system will rely upon the MOPT's own forces to carry out mechanized work, such as grading and ma.jor patching. Also, the micro-enter- prise group will need to rely on MOPT supplies of, inter alia, base materials and asphalt mix for minor patching work. This is one major foreseeable snag in the system. If bureaucratic and budgetary constraints affect the flow of supplies and payments to the gangs, only part of the routine maintenance work will be accomplished, and the most visible and damaging problem, that of pot- holes and cracks in paved surfaces, may not be attended to properly. Also, while the informal groups of laborers worked well as subcontractors, a forma- lized system of MEs may fall prey to problems and constraints so far unfore- seen. The system of employing major contractors who subcontract to local gangs could sthen become a useful, proven, fall-back position. 3.28 Nevertheless, the Colombian initiative to foster "micro-enterpri- ses" (MEs) for routine maintenance merits special attention and, if the above possible constraints are overcome, may offer a long-term solution to the maintenance problem. The MEs are being formed especially for routine main- tenance work, The formal organization is necessary to enable MOPT to enter into contracts, as required by Government regulations for public works. While contractors have been able to engage less-formally-organized gangs as subcontractors, regulations require Government to contract only with legal entities having duly appointed legal representatives. With the assistance of Mexican and Peruvian UNDP experts, a system to promote the formation of, and assistance to, the groups of i, sn which will form the cooperatives has been established. The cooperative form of organizAtion was chosen, as it offers cons'derable legal and taxation advantages in Colombia. 3.29 The new MEs (the first of which have started work in January, 1985) are being formed by groups of between 10 and 14 men. They are given a 50 km road length each, and put in charge of all manual maintenance operations (grass cutting, drainage cleaning, removal of small landslides, small patch- es, etc.). At this stage, when local competition has not developed, and the lEs and MOPT are going through the learning process, contracts are being let at the standard rate of 73,440 pesos of January 1985 per km/year (about TJS$640) for paved roads and 54,560 pesos (US$480) for gravelled roads. This should result in gross income for each ME member of between 1.5 and 2.5 times the legal minimum wage in Colombia (13,000 pesos per month, January 1985 figure). Contracts are for one year, renewable at MOPT's discretion. The MEs have to provide their own tools and transportation; if MOPL is called to assist with the purchase of tools, their value is deducted from the monthly payments to the ME. 3.30 MOPT is currently establishing 28 already-formed MEs in 8 Dilot zones, covering the maintenance of 1500 km. During 1985, an additional 265 MEs will be established, over 1300 km in 7 additional zones. The final'goal is to cover the whole 25,000 km under MOPT's direct maintenance responsibi- lity. 3.31 The arrangements for the FNCV lengthmen follow similar ratios. Each man is entrusted with the manual tasks of maintaining 3 to 5 kin, and paid 60,000 pesos/km/yr (about US$520). The contracts are for one year, and are not renewable (i.e., after one year a new contract must be entered into). 25- Thus, the lengthmen are made to feel that they must perform satisfactorily if they are to deserve a new contract. There is always a plentiful supply of willing candidates to take over the lengthman's contract. Argentina 3.32 Contractors in Argentina have for many years been engaged in nerio- dic maintenance work and also, in a few cases, in routine maintenance of pri- vate (industrial estate) roads. Taking advantage of a new law requiring government agencies to reduce their work force, in 1979 Argentina's National Directorate of Highways (DNV) introduced a bold and imaginative scheme, which should have distributed routine maintenance work on the 47,000 km national highways network, 70% to contracts and 30% on force account -- over a period of 18 months. Complementary actions were taken to drastically reduce DNV's own personnel and equipment, and encourage ex-DNV engineers and technicians to embark on contract maintenance. The commitment of the DNV senior management at that time to contract maintenance was firm and enthusiastic. 3.33 The 70/30 apportionment of work was intended to: (i) give the maintenance Districts a continuing 'hands ont experience in the direct execution of maintenance, enab- ling their staff to better plan and. cost maintenance operations under contract; (ii) introduce a competitive edge in maintenanice work, provid- ing a source of motivation for both contractors and DNV staff; (iii) retain in the DtV Districts the capacity to handle by force account minor maintenance activities which are dif- ficult to manage by contract; (iv) enable DNV to retain the capability to take over the maintenance of roads whose contracts had failed for what- ever reason; (v) retain in DNV a core of resources which could be applied to overcoming emergencies (in addition to the resources which contractors would have to make available for such emergencies); and (vi) provide a continuing training.facility for road mainten- ance personnel. 3.34 These were the aims of a well-balanced system, which sought to obtain the maximum advantages of the market, while retaining a significant and motivated internal capability to carry part of the load, gauge market performance, counteract any tendencies towards collusion among contractors, and react to emergencies. Unfortunately, changes of management which brought about the waning of the commitment to complete the introduction of contract maintenance, coupled with the onset of economic difficulties from late 1982 - 26 - onwards induced a departure from the system, and a retrenchment of mainten- ance operations as a whole. Expenditures in routine maintenance had fallen to 65% of their 1980 level (in constant terms) by 1983. Although DNV budget allocations improved somewhat in 1984, the contracting out of comprehensive routine maintenance almost disappeared. The last full routine maintenance contract expired in September 1984 and was not renewed. Table 7 illustrates the all-too-short experience in comprehensive routine maintenance by contract in Argentina. Having peaked at 35% of overall routine maintenance in 1981, it ebbed down to an estimated 17% in 1984. 3.35 The financial figures do not suggest that budget cuts per se would have been a compelling cause for reducing the contracting out of maintenance. In fact, they tend to confirm the view that the most significant cause of the reduction of contract maintenance from 1981 onwards was institutional. With the change of DNV management in 1981, and the resulting change of policy to- wards contracting of routine maintenance, the well-established DNV institu- tional machinery reacted in strength against the sapping of its direct par- ticipation in fieldwork. 3.36 Although DNV obtained satisfactory or better results with 90% of the contracts for routine maintenance in 1979-81, the system was not given a long enough trial to iron out initial problems. After a rapid conversion to contracts, a learning period of five to ten years should have been allowed, and this could have permitted the system to develop into a strong model of state and private organizations collaborating and sharing in the r.esponsibi- lity for the mqaintenance service. Assessment of this experience is nonethe- less instructive: (i) Most contracts resulted in good performance against goals and specifications, in particular the contracts under- taken by local, experienced road. building contractors who, however, were not experienced in maintenance. Most had estimated their bid prices on the basis of construc- tion production rates, without taking into account the increased idle times of.the maintenance operations. These contractors adjusted their prices upwards for the second round of bids, and were often the high bidder. (ii) Costs were particularly high for non-local firms, obliged to maintain a remote establishment, and their inability to share the equipment with other jobs caused losses through the poor utilization rates achieved in practice. Local firms specializing in roads construction, and cap- able of sharing equipment with other on-going jobs, fared best. Such was the case of a Catamarca contractor who was the last contractor on the job in September 1984. (iii) Many contractors were undercapitalized, their equipment was not in good shape, and they did not have spare capa- city to deal with the more severe type of emergency. - 27 - Table 7 Argentina DNV-Routine Maintenance Expenditures (in US$ million) Routine maintenance carried out by: 1979 1980 1981 1982 1983 1984 4/ Force Account 24040 204.0 193.0 164.0 115.0 -- % of total 100.0 87 65 69 74 83 Contractors 0 30.0 102.0 0 41.0 -- % of total 0 13 35 31 26 17 Totals . 240e.0 234.0 .295.0 238.0 156.0 -- (%of 1.980 level) -- (100) (126) (102) (67) Source: DNV. Deflators by World Bank. 1/ Only approximate relative figures available for 1984. - 28 - 3.37 Should all contracts have been allowed a suitable time to settle in, it is possible that contractors could have become competent in mainten- ance in a few years, as well as competitive in pricing their bids. The above contractor from the province of Catamarca started work in maintenance by con- tract in 1979, and continued until his last contract, for 335 km, expired in Septeaber, 1984. According to DNV officers, this company's work was of a high standard, in compliance with contract requirements. 3.38 The Catamarca contractor ig a local firm, specializing in highway construction (and now maintenance), and having industrial installations and other sources of work in the area. An approximate, and conservative compari- .son of the costs to the Government, by contract in Catamarca and by force account in the neighbouring Province of La Rioja is shown in Table 8. This simple comparison shows that force account was more expensive by about 10%. 3.39 The above single case, representing the longest standar& contract under an experierce local firm, may not be conclusive evidence; but it pro- vides a strong argument, by correlation with the experience in other coun- tries, to justify a further attempt to establish the system of contracting out comprehensive routine maintenance for given lengths of road, when econo- mic conditions improve. However, DNV has decided not to follow this path but rather, to contract out specific operations (grass cutting, drainage clear- ance, pothole patching) in an ad-hoc basis, possibly leading to the contrac- ting-out of about 50% of the annual value of routine maintenance. 3.40 To some extent, thIs decision is due to the aon-availability of a contract form custom-tailored to comprehensive routine maintenance opera- tions, as opposed to the modified (but still rigid and complex) construction contract which was adopted. Another reason is the argument that small, ad- hoc contracts do not represenft a long-term obligation, and can be set aside if budget conditions deteriorate. However, this reasoning does not take into account one of the prime advantages of comprehensive maintenance by contract: the shifting of the burden of management of day-to-day operations to the contractors, with a resulting reduction in the Permanent departmental staff requirements and enhancement of the roles played by staff in management, and a resulting economy in overall cost. Nigeria 3.41 Road maintenance has proven an intractable problem over much of the period spanning the development of the modern trunk road system in Nigeria. The Civil War ending in 1970 left an enormous backlog of maintenance and rehabilitation needs, and the rapid economic expansion stemming from the oil boom after'1973 brought an explosive rise in traffic. Not surprisinglv, attention anid resources were diverted to the construction and improvements program, and development of institutional capacities for maintenance lagged far behind ever increasing needs. Responsibility for maintenance of the fed- eral highway network see-sawed between the Federal Ministry of Works (FMW) and the states as agents for the Federal Government, but neither has had the requisite capacity. An initial attempt in 1979 to tender maintenance for some 12,334 km of paved federal highways was aborted when the large variation in bid prices, reflecting uncertainties relative to the amount of work invol- - 29 - Table 8 Argentina Comparison of Costs per km by Contract and Force Account (in $Arg. of December 1984) -kPer hlr (A) Catamarca Contract (335 km) $A 366,800 Contract price, after deducting periodic maiiatenance items such as wire fences, reconstruction of embankments, surface treatment (items A 9, 10, 12 and C 3, 4) Deduct: Value-added tax, 18% on (say) 40% of the (24,600) Contractor's billings Deduct: Corporate taxes, say 5% of billings, (17,100) net of VAT Net co.st to government 325,100 (B) By Force Account, La Rioja (1,292 km) Annual cost of maintenance for 1983 $A 386,000 Deduct: National average of 17% of `09" contracts (65,688) (minor periodic maintenance contracts let by Districts) Add: General works insurance payable by contractors 8,000 to cover the risks which the state underwrites directly for force account work (2% of expenditures, net of "09" contracts) Add: Interest on capital uwd, assuming 10% 32,500 opportunity cost, straight line depreciation for equipment, over 5 years. La Rioja equipment-use figures for 1983 Total cost to Government 36 0,800 Note: The percentage for value-added tax, corporate taxes, and interest on capital used are figures estimated in discussions with DNV staff. - 30 - ved, pointed to the need for more specific definition of work activities and quantities. Accordingly, in January 1980 a program intending ultimately to tender under unit-price contracts the entire federal network (except Lagos State) was initiated. Since the previous situation had been somewhat chaotic, it was still not possible for the Government to present contractors with a very clearly defined work progran or performance standards. 3.42 The first lot of contracts 8/ were thus let with insufficient pre- paration, and resulted in abuse by the contractors. For instance, there was excessive attention paid to grass cutting, to the detriment of other activi- ties, and contractors' invoices often exceeded the value of actual work car- ried out by very large amounts. Consultants were called in early in 1982, to assist in setting up an improved system for contracting and controlling main- tenance. After almost one year of observations and preparation by the con- sultant,' a new system was designed and put in place. It resulted in consi- derable improvements, but it was not tested and further developed over a long period, since the budgetary constraints of 1984/85 forced a retraction of ac- tivities, away from routine maintenance-, and concentrating on periodic main- tenance and emergency repair work, often let without tenders, to contractors who were based near the work areas and who had performed well in the past. 3,43 Contracts for maintenance peaked in 1982 and 1983, when 80 con- tracts were let, covering 13,000 km (or 45%) of the Federal highway network, at a cost of 84 million Naira (about US$122 million) each year. Budget app,;opriations dropped to 60 million Naira (about US$78 million) in 1984 and to an estimated 5Q million Naira (about US$55 million )in 1985. Th4se figures are in current Naira; in real terms, the contraction has been consi- derably more severe. 3.44 The problems encouintered in Nigeria have been similar to those des- cribed before, for the three South American countries, and can be summarized as: (i) difficulties in defining the extent of routine mainten- ance work, planning annual operations, costing them, and controlling the work; and (ii) the contractors' inclination to concentrate on the items with the most volume and highest price, particularly those of periodic maintenance. 3.45 The first type of problem arose from the lack of sufficient infor- mation on which to base performance parameters, and also the lack of suitable contractual documents with which to define the responsibilities of both par- ties to the contract, and monitor progress in the field. As mentioned pre- viously, FMW senior staff became increasingly concerned with the problems of field supervision and general management of the maintenance contracts, and commissioned a firm of consultants to study and report on the system. 8/ By the end of 1980, 30 contracts covering about 6,600 km had been awarded. - 31 - 3.46 The consultants reported in July 1982 that: (i) the deficiencies in contract documents were resulting in inaccurate billing of work done; (ii) there was a lack of capable, qualified supervision personnel in the field; contractors often had to decide on the program of work to be done; (iii) many contractors lacked experience in maintenance work, particularly of asphalt surfaces; (iv) the overlapping of contracts and State borders brought about a duplicitv of supervisory functions and, at times, double billing, following separate State channels; and (v) considerable delays were experienced in the award of con- tracts, which resulted in problems in the contractors' planning of resource deployment. 3.47 There were additional flaws in the procurement system which result- ed in awards to contractors who were not suitably qualified or had not pro- vided the most competitive bid. The consultants concluded that mFi was incurring expenses considerably in excess of net contract obligations, and recommended that: (i) before the initiation of work on site, drawings should be prepared with an inventory of the condition of the roads; this information twould also serve to plan the work and better define the contract documents; (ii) work on site should only proceed on written authority from the Engineer's representative; (iii) payment forms should be checked against the written work schedules; (iv) spot checks by senior staff should be introduced; (v) grass cutting (a lucrative activity to which much of the contractors' efforts had been directed) should be restricted to points where there was an acute visibility or drainage problem; (vi) the Engineer's representative should approve the materials to be used in carriageway repair; and (vii) the contract sectors should fall completely within the bounds of one state, the contracts should include a balance of routine and periodic maintenance operations, and larger contractors should be allowed to bid for more. than one sector within a state. -32- 3.48 These recommendations were applied from November 1982, and the con- sultants brought in a special team to help manage the system,, However, al- though the size of the network under contract continued to axpand, the super- vising team was not augmented to suit, and the detailed prvparatory work which was necessary for adequate management of the maintenance contracts lag- ged. This again resulted in the contractors tailoring their work to suit profit enhancement and, with the onset of budget cuts in 1984, a reduction in the execution of routine maintenance work. 3.49 Several important lessons are to be drawn from the initial experi- enice in Nigeria. First is the importance of having a well-qualified team in the preparation and supervision of maintenance contracts, capable of: (i) planning the overall maintenance program; (ii) setting up individual contracts with due regard to the actual needs of specific road sections; and (iii) developing realistic work schedules for the contractors, taking full account of seasonal factors. 3.50 Second, the need to relentlessly pursue the execution of priority maintenance items, overcoming the tendency to neglect routine maintenance work, particularly in the face of funding constraints. 3.51 Third, the need to incorporate features which will ensure"that&the greatest possible benefit is derived frot competitive market forces. In par- ticular, this means setting up terms and conditions of contract which are fair and equitable, and permit the bidders a clear assessment of the risks involved in the maintenance work. With additional experience, it should be possible for FHW staff to define clearly the schedule of activities from year to year, and in terms which are simple to understand by the less sophisticat- ed contractors. For example, the preparatory work originally devised was too elaborate, consisting of detailed drawings and the very extensive descrip- tions for individual items which are usual in quantity surveying practice. The task of carrying out these complex preparations for 18,000 'km obviously proved beyond the capacity of the field crews, and this work lagged. A sim- plified system should help, following for example, the procedures-type speci- fications in special work item sheets which are used in Brazil. Kenya 3.52 Kenya has also experienced severe difficulties in establishing an effective road maintenance capacity to meet growing traffic needs in recent years, despite large-scale foreign assistance,from several sources. Acute shortages of experienced management and supervisory staff, fluctuations in available budgets (especially foreign exchange, with particularly adverse impacts on the availability,of spare parts and fuel), cumbersome government procedures and a growing burden of redundant stEffing (in a social context of severe unemployment problems) have all conspired to undermine the effective- ness and efficiency of government force account maintenance operations. - 33 - 3.53 For several years after independence, the Roads Department employed small indigenous contractors to haul gravel for regravelling operations. In a later stage, several of those small firms evolved, with considerable assis- tance from the Roads Department, into contractors for the complete regravel- ling operation. By 1980/81 the small indigenous contractors satisfactorily produced approximately US$5.2 million of regravelling works, which it is estimated, would represent only about half their potential capacity. Under the circumstances this was a notable accomolishment, accotnting for approxi- mately 80 percent of the entire regravelling operations done in Kenya that year. The Roads Department, due to various limitations, was able to accom- plish during the same period only some IJS$0.8 million, or about 20 percent of their estimated potential capacity (these figures are necessarily approximate and stem from rough estimates discussed with senior officers of the Roads )epartiment). 3.54 It must be reiterated that this achievement by small contractors would not have been possible without the commitment to develop an indigenous construction industry, as well as considerable assistance from the Roads Department. Indigenous contractors in Kenya (as, indeed, in many other African countries) are generally not wqell developed and face a considerable array of problems, starting from nascent enterprise creation. The owners of these companies have very limited experience and no long-standing tradition of entrepreneurial vocation; management shortcomings are therefore consider- able. There are, of course, a few exceptions but, by and large, the groups whieh are marnaging to survive and continue in business are doing so because: (a) their business span is small (often on.an artisan scale) and therefore can be managed with their limited resources; (b) they are being paternally guided either by the Roads Department or by larger companies who subcontract their services; and/or (c) they are being subsidized by grants or loans from development authorities. 3.55 Thus, any undertaking of road maintenance through such contractors must be cautious, initially small in scale and encompassing only those acti- vities which can easily be supervised (such as mowing, hauling, and regravel- ling), evolving only gradually over time into mcre ambitious undertakings. Supervision must be much more than a quality control and contract policing function: it must be concerned supervision, actively engaged in the develop- ment of the nascent enterprises. Ghana and the Central African Republic offer similar examples, which we review in the following sections. Ghana 3.56 Over the past 10 years, a group of domestic road maintenance con- tractors has been assisted to develop, with support from the World Bank- financed Second and Third Highway Projects. Further assistance has been in- cluded in the Fourth Highways Project. This program was launched to create a 34 - domestic capability to engage competitively in work which was not attractive to international bidders, particularly periodic maintenance operations. The program started with 40 firms, and 25 are still in operation today, having survived periods of extreme economic difficulty in the country. 3.57 Contract work has proven to be a strong driving force for achieving results in maintenance work. Contractors have particularly concentrated on regravelling work, and their participation in overall work achieved under this heading has been co-nsistently increasing, as shown by following figures: Participation of Contractors in Regravelling Operat:ions (in km3) 092 109MV OA4 1985 T Total needs 1,600 1,600 1,600 1,600 * Total achieved, by contract and force account 652 778 672 650 Of which: by contractors 418 517 627 650 * Representing (% of total achieved) (64) (66) (93) (100) 3.58 These figures refer to regravelling only. The participation of ldbmestic contractors in resealing work has also been increasing, and in 1985 it is- estimated they carried out 80% of all work, or about 144 km; the GHA have carried out 36 km of resealing by force account.. Routine maintenance by contract is also beginning to spread: in 1985, contracts for 245 km were let in the Volta Region while, in the Western Region, two timber companies were given contracts to maintain public highways within their area of influence. Single-man contractors (lengthmen) are also being established, in the Volta and Central Regions. 3.59 One important lesson emerges from the program to strengthen the domestic contractors: the numbers may have been too ambitious at the start. 40 firms is a large number indeed, and would have caused a dilution of the technical and financial assistance resources. This compounded the effect of the difficult economic period which Ghana has been going through, with the attendant delays in payments for Government work, to result in a very high "casualty" rate (15 out of 40 firms, or almost 40%). The rate is high, given that the contractors had some experience ab in-ito, even though their equip- ment holdings were inadequate. When starting with people who have no experi- ence as contractors, and must learn the trade from the very basic principles, a higher failure rate of individual firms can be expected. In such a case in the Central African Republic, for example, the rate is expected to be of about 50%. 3.60 The above i the longest experiment carried out in Ghana to intro- duce competitive practices in maintenance, but by no means the only one. The Ghana Highway Authority (GHA) is currently working on other options for improving the cost efficiency of maintenance, and developing innovative vari- - 35 - ations to force account and contracted operations. Two of these are worthy of note: the mobile maintenance unit and the single man cont:actors. 3.61 The'MobileNMaintenance'Unit'(M4J). Given the shortcomings of the GRA force account regional crews, largely resulting from the snags and diffi- culties which usually afflict government's own forces, the GRA, with assis- tance from the Japanese Government, set up an experimental MMU. To protect it from interference at regional and local level, and from the other trapp- ings of bureaucracy, the unit was given a high degree of autonomy. This in- cluded autonomy for management, a direct allocation of funds, and the avail- ability of the MMUJ's own support services (such as equipment maintenance and accounting). In fact, it has been made to operate as an independent contrac- ting unit, performing against pre-established performance parameters. 3.62 Individual performance has also been rewarded, by the provision of incentives to the workers, such as camp facilities and meals or meal allowan- ces. As a result, worker discipline is high. These featurds, plus the availability of a modern, well maintained equipment fleet have made the MM2U a very successful operation. 3.63 Although the MMU experience may not be replicable in a large scale for force account operations working under "normal" bureaucratic constraints, it is nevertheless significant as an indication of how force account units could be made more competitive, for instance, to participate in bids with contractors, to provide a challenge and control in the pricing of work. The Ghana MMU (soon to be joined by a second one) has not been used in this capa-: city yet. 3.64 The Single Manr Contractors (SMCs). The SMCs are an interesting development of the lengthman concept, based on the introduction of piece work for manual rouitine maintenance operations. This experiment was started in the second half of 1984 on a pilot basis, in the district of Winneba. It is planned to give each of 120 SMCs a 5 km length on which they will carry out grass cutting and drainage Clearance by hand; the GHA would retain a force of 44 men to carry out patching, grading, etc. The labor force will thus be of 164, as opposed to the previous approved complement of 250. 3.65 The planning of the work to be done is carried out by overseers, who discuss it with each SMC and with their own management. The same over- seers are in charge of measuring the work for payment. Payment is effected on a piecework basis, at a predetermined value per unit of work performed (or, in fact, as a unit rate contract). 3.66 At first, the SMCs did not understand the system, and their earn- ings were below the official wages set by the Government for laborers. How- ever, when the SMCs realized the advantages they would derive from a higher productivity, their average earnings rose steadily and, by March 1985, one SMC was earning as much as 7.5 times the prevailing wage for laborers. Pro- duction rates more than doubled: the average monthly production of 5,300 m2 per man of grass cutting observed in October 1984 rose to 11,500 m2 by March 1985. - 36 - 3.67 GHA personnel have been encouraged to join the SMC forces, and the District is close to fulfilling its goal of 120 SMCs in operation. The qual- ity of the work being carried out by the SMCs is reported to be excellent. However, it should be noted that, as with any piecework o)eration, close supertvision and accurate measurement are essential. Also, a steady flow of cash for a timely reward of the SMCs efforts. There is no greater dampener of productivity than a late or incomplete reward for a man's cfforts. 3.68 The GaA management expects that, as a result of resorting to con- tract maintenance (by established private contractors, by SMCs, and by pri- vate companies whose main activity is not contracting, such as mining and timber companies) it will be able to reduce its total staffing by about 47% (from 5980 to 3200), with the greatest reduction in laborers and operators (48%, from 5440 to 2800). The latter should find opportunities for work with private contractors or as SMCs. Cenitral African Republic (CAR) * U -- C 3.69 The C.A.R. is another country which has been experiencing consider- able difficulty in establishing a long-term highway maintenance facility. Beset by resource shortages and institutional problems, maintenance has been undertaken only intermittently, and the road network had deteriorated accord- ingly. Actions are under way in the country at present, seeking to establish small contractors for routine maintenance. Under the World Bank-financed 3iourth Highways Project, a consultant carried out a study of the development of "petty" contractors (petits et moyens entrepreneurs); the study concluded that it was feasible to-establish small contractors in routine maintenance. It also proposed a series of steos to develop those contractors, starting from basic training. The consultants' report was presented in early 1984, and work started on the implementation of the proposed plan later the same year. 3.70 After the selection of the small entrepreneurs, they are given classroom training, followed by a 4-month practical training course (during which they run their own section of road, under the close supervision of, and with technical assistance from, the project consultants). The cycle will be repeated in a second phase, this time with 6 months practical training. Finally, the entrepreneurs will be tested, given "reinforcement" courses, and given a first 12-month experimental contract, on a schedule of fees, and with full responsibility for managing their resources. The courses for contrac- tors are being paralleled by a training course for the Ministry of Public Works (MTP) staff who will be in charge of planning, contracting out, and supervising the work of the small contractors. 3.71 The consultants have estimated that the whole process should take 27 months, from the selection of candidates to the letting of the first con- tracts. During Phase 1 (ongoing), the candidates are treated as temporary employees of MTP, and are paid bursary allowances, plus a bonus if the pro- ductivity of the team they direct is seen to improve. During the second stage, they will continue being remunerated on a bursary basis, but the al- lowances will be supplemented by a share of the nominal profits realized by the team under each trainee's direction. Finally, after being tested and qua- - 37 - lified, they will be given full responsibility for their first experimental contract, under control and with the technical assistance of the Consultants 3.72 The small enterprises will operate only on the trunk road network, carrying out manual routine maintenance work; materials will be distributed by MTP. The system is not unlike that of the "micro-enterprises" which have begun work in Colombia. 3.73 The French and German bilateral agencies are also assisting in experiments to establish lengthmen for road maintenance, within a 290 km stretch of road in northwestern CAR. One full-time technical adviser is dedicated to training the lengthmen and providing them with technical assist- ance. Each man is given responsibility over 3 km of rioad, and paid 15,000 Fr. CFA per month (about TJS$31 equivalent) during the 9 months of the dry period, when work can be done in the roads. This is equivalent to US$93 per km-yr. Over the two years that the system has been in operation, results are reported to have been excellent. 3.74 The latter experiment however, is being carried out in laboratory conditions, as most of the funding is being provided as a bilateral grants and the system is not being put to the -most stringent test, that of adequacy and continuity of cash flows. Cash flows, the regularity with which con- tracts are renewed, and the ability of the market to replace those petty con- tractors who abandon the tasks, will be the real tests of the system, once external props are removed. The first two conditioning circumstances high- light the need for parallel action, creating within Governiment the mechanisms that will ensure continuity of the contractual and financial arrangements that will permit small entrepreneurs with precarious means to survive and maybe even prosper, forming the basis of a wide-reaching domestic construc- tion industry. At the same time, the training of new entrepreneurs must con- tinue, at least until such time when the pool of contractors has grown suffi- ciently to start generating offshoots and successors of the older-established firms. 3.75 The system of small enterprises being developed under the Fourth Highway Project will have a first (pilot) stage; starting with 18 candidates in its Phase 1, it is expected that 8 to 10 will reach the certification phase, and 4 others will have received a sufficient technical training to be employed by Public Works as team leaders for manual routine maintenance by force account. In the second stage, 12 candidates will be selected, from which it is expected that 6 will'"graduate." Each will be given an average of 60 km to maintain. The consultants estimated that the establishment of the 8 to 10 entrepreneurs in the first pilot stage would require 34 man- m6nths of expatriate advisors. This would represent a cost of the equivalent of about US$350,000 per enterprise in expatriate costs alone, or about $6,000 per km of road that will benefit. In terms of the added life that regular maintenance will contribute, this should be a reasonable price to pay. Ideally, the training of MTP staff should include a feature for "training trainers", in a way that it will become self-sustaining in future, i.e., without a continuing foreign input. - 38 - The ITnited Kingdom 3.76 Although we hnave refrained so far from describing in detail many interesting experiences of contract maintenance in developed countries (e.g., in the Netherlands and the United States), the U.Ko experience must be noted here, as it offers an example of the type of national policy which can open up the highway maintenance activity to the forces of the market at large. In a recent paper, Cox 9/ describes the development of these new policies. 3.77 Whereas in the past local governments (counties and districts) carried out maintetance work by force account ("direct labour"), as a total monopoly of this activity, today the force account units in local governments are forced to compete in open bidding with private enterprises, and to sur- vive on the basis of their productivity and ingenuity. The change of policy has had many salutary effects in the local councils. In the first place, they are now obliged to predetermine needs: they have to plan ahead careful- ly, to establish the annual volume of work which is to be put out-to bids. -Since the tendering and contracting process commits public moneys almost irreversibly, planners are compelled to be far more rigorous in their work than when planning the operations of force account units (which, more often than not, are operated on an ad-hoc basis, with resource allocations which carry on, from year to year, without the benefit of a careful scrutiny), In fact, planning and management in general become the exacting activities that they should always be, regardless of whether the work is carried out by con- tract or force account. 3.78 In the second place, the planners and managers, free of many of the pressures and distractions of day-to-day running of.a force account opera- tion, can take a wider view of maintenance, and dedicate themselves to their essential functions. Thirdly, the force account units (which are now identi- fied as Direct Labor Organizations - DLOs) have been forced to adopt the operating systems of private enterprises, particularly with respect to moni- toring the use of resources: accurate cost accounting has been introduced, and the results are fed back into the estimating process, to enable to DLOS to tender profitably for the following jobs. 3.79 The DLOs are also required to produce a minimum return on the capital (5% pa). If this minimum return is not achieved, Government can opt to close down the DLO. Partly as a result of this challenge, work forces and capital assets have been trimmed down to efficient levels, and productivities have increased considerably. This negative incentive to productivity ("produce more or lose your source of employment") is coupled with positive incentives for the labor force, in the form of bonuses which distribute part of the profits achieved by the DLO (in excess of the minimum return on capital). The balance of the DLO profit is handled in different ways by the various Councils: some reinvest, buying new equipment, or increasing the scope of services offered; others absorb the surDlus in the common fund; yet others compromise between those two extremes. None has yet introduced finan.- cial incentives for management. 9/ Brian E. Cox, Evaluation of the U.K. System of Incentives for Efficiency in Road Maintenance Organizations, and Possible Lessons for Developing Countries. Report to the World Bank Transportation Department. - 39 - 3.80 The British competitive system is mainly used in clearly quantifi- able discrete operations, such as overlays, surface treatments, structural repair. Routine maintenance items are being contracted out, but only when they can be identikied and measured as discrete works: for example, grass cutting, or patching of.a pre-delineated and measured road length. The sys- tem has not yet been extended to encompass all the work involved in compre- hensive routine maintenance contracts. However, financial ceilings applic- able to the size of work which can be done by force account are being lower- ed, to enforce an increasing measure of competition, and this may lead even- tually to comprehensive contracts of routine maintenance. IV. CONCLTJSIONS AND RECOdiENDATIONS 4.01 This brief review has shown that the use of contractors for routine as well as periodic road maintenance is gaining increasing use in several countries. Motives have varied: some countries have turned to contactors as a last resort when continuing efforts to build up government institutions over many years have failed to produce efficacious results; in other cases, the government and road authorities have sought improvements in efficiency so that increasingly hard-pressed highway budgets would stretch futher; and in still other cases, road authorities have reluctantly turned to contractors when general restrictions on hiring of government personnel prevented further buildup of force account establishment to meet growing maintenance needs. Different countries, depending on their individual circumstances, have also approached the use of contractors in different ways: some have employed cost- plus contractors'as hardly more than suppliers of men and equipment in an indirect extension of force account operations; others have taken maximum ad- vantage of the management capabilities and incentives of unit-price contrac- tors. Some countries have moved with speed to thrust the burden of entire networks on contractors, while others have taken years to gradually expand the role of contractors from minor beginnings to a still moderate role today. What general conclusions can be drawn at this stage? General Conclusions 4.02 The Efica fContractManageme'nt. With rare exceptions, con- tract maintenance has proven to be a workable undeortaking in countries at di- verse levels of development and with diverse forms of social and economic or- ganization. With relative freedom from entangling "red tape" and the ability to pay higher salaries to attract, retain, and motivate staff, contractors have in some cases, e.g., Nigeria, succeeded in getting maintenance done where all other approaches had failed. Where sufficient profit incentives exist, contractors are normally attracted to maintenance opportunities, even in remote areas; while larger firms tend to prefer larger contracts including periodic maintenance, in many instances small firms have been formed specifi- cally to undertake routine maintenance. Contractors are also commonly obli- gated to make their men and equipment available to the road authority in the event of an emergency. 4.03 It must be recognized, however, that the introduction of any new system, especially quickly and on a large scale, is risky. The earlier - 40 - experience in Colombia and Nigeria illustrates some of the problems which can be encountered in introducing contract maintenance with inadequate planning and preparation. While the overall burden of responsibilities oit the road authority is normally reduced by the contractors, the nature of the govern- ment's responsibilities changes sharply, and there is increased need for contract management skills. Careful planning and the introduction of con- tracts on a small trial basis initially can therefore reduce risks, permit- ting the capabilities of government and contractors alike to develop before thrusting too heavy a burden on a new system. 4.04 The commitment of government to the introduction of the new system is essential: on the one hand, contractors have to adapt to a tyPe of work (particularly routine maintenance) which they have not traditionally carried out. On the other, a monopoly is being broken, and the resistance of those who run it (and will be faced by new challenges and by more exacting manage- ment demands, as well as by the loss of direct command over men and machines) must be overcome, at the same time as they and their staff accept and prepare for new roles, as planners and supervisors of contract work. 4.05 c ncy o Contract Iaiiie'nane While the cost (or more correctly, prices) of contract maintenance can be taken from records of con- tract administration, and the direct costs of contract supervision by the government could be assessed, quantitative comparisons with the comparable costs of similar operations by government forces are not generally available. Few road authorities in developing countrUs.s have management systems which can produce reliable performance and cost information with which to plan and control operations. Systematic recording of the amount of work achieved (as distinct from the amount of resouces consumed) is not generally done, and both the amount of diversion to other activities and the amount of idle time are likely to be underreported. Moreover, the economnic cost of interest on government investment in plant and equipment is often overlooked, since it is not perceived as a financial cost. Regardless of the prospect of contracting maintenance, there is a great need for improved work planning, performance monitoring and more effective cost accounting in force account maintenance operations, but the prospective increased use of contractors to achieve improvements in cost-effectiveness in the fuiture places Particular importance on development of comparable cost information. 4.06 However, certain inferences can reasonably be drawn on the basis of partial information which is already at hand. Unit-price contracts clearly provide contractors with strong incentives for efficiency, and initial cost results from Brazil, Argentina and Kenya (and also the United States) suggest that contractors can perform maintenance at substantially reduced costs. The adminis.trative costs to the government in contract management, quality con- trol, measurement, and certification is normally substantially less than in administration of force account works, although the nature of the administra- tive&burden is different and may require enhancement of contract management staff. In every case where contract maintenance has been used on a large scale continuing over time, government has been able to effect a substantial reduction of its own establishment. Yugoslavia, with more than 20 years ex- 41 - perience, provides an example of a mature contract maintenance system where as few as five ins,ectors and one director (in Slovenia) supervise mainten- ance for a high standard road network of 4,700 km, with only limited support from the general administration; the entire road authority (encompassing planning, construction, maintenance, operations and safety) consists of only 185 persons - a fraction of that typical of most road authorities world-wide. 4.07 Those who are familiar with the difficulties in attaining efficient levels of operation in too many road maintenance directorates, not only in developing countries, will require little evidence to convince them that the contractors can perform maintenance at lower costs. However, many may question whether much of the potential cost savings would revert to the pub- lic. The best safeguard of the public interest is lively, open and honest competition; where this is assured, large cost savings are likely to be real- ized. Since the end of the great road building boom of the post World War 11 period is at Aand in most countries, it is plausible to hope that some of the civil engineering capacities and skills thus developed, which must now seek new outlets, will find their way into maintenance activities, thus enhancing competition and working in the public interest. 4.08 However, it must be recognized that the twin dangers of monopoliza- tion and corruption are ever present. While government force account opera- tions are, of course, not immune to corruption, many may argue that govern- ment procedures, while encumbering efficiency, do reduce the amount of cor- ruption--while others might retort that a small element of corruption would be a smnall price to pay for vastly enhanced efficiency! Retaining at least a nuclear force account operation, as was planned originally in Argentina, should help greatly to reduce the danger of monopolistic exploitation and provide a useful source of comparative costs. 4.09 Con'tractrs' 'L'oying of PuAlic Supporit£or Mainteniance Inade- quate government budgets for road maintenance are a widespread phenomenon, even in high income countries. Certainly contractors' associations have been active participants in the broad grouping of interests which have formed the lobbies for road construction that have been so potent in recent decades. Where contractors become an establised force in maintenance activities, it may be conjectured that their interests will prompt them to lobby for in- creased budgets for road maintenance, enhancing the much weaker (or nonexis- tent) lobbies presently promoting such expenditure. Under What Circumstances Shouid Contract Nain'enance Be Considered? 4.10 The possibility of contracting some part or all of routine as well as periodic maintenance operations should be considered by every road authority. Any of the following circumstances should particularly prompt consideration of contracting: (a) where services of short-term, small-scale or specialised nature ate required, particularly where established capacities for these services already exist with cnntractors or other suppliers; 42 - (b) where expanding maintenance needs cannot be met by existing government establishment; (c) where there is known to be a serious problem of idle equip- ment, staff redundancy, or other major inefficiencies with existing force account operations; (d) where efforts to build up institutional capabilities of government have met with continuing difficulties due to the inability to attract and retain adequate numbers of competent managerial or technical staff. 4.11. Circumstances which will make the use of contractors more prob- lematic include: (a) lack of (or weakness in) established domestic contracting industry; and/or (b) lack of (or weakness in) government capabilities to manage contracts. 4.12 Those countries with limited or nonexistent domestic contracting industries also typically have very limited institutional capacities for the execution of works by force account. In these cases, the task of developing the necessary institutional capacities will be long -and difficult no matter which course is pursued. H6wever; where development of a domestic contract-. ing industry is at all a feasible proposition, it should be noted that most characteristics of routine road maintenance activities--small scale, techni- cal simplicity, low capital requirements and a relatively stable demand over time--make them particularly well suited as a beginning activity for the nascent contractor. The primary counter consideration is the dispersed nature of the work, rwhich, as compared with the types of work traditionally contracted, increases the difficulties and costs of contract supervisiono However, it is not clear that the need for, and difficulties of supervision will be less when the same maintenance works are performed by government forces, although the costs are usually less obvious. 4.13 In those countries where the development of governmental capacities for road maintenance has proven to be difficult because of problems in attracting, retaining and motivating staff, or because of other governmental constraints, the strategy of limiting the burden on government as much as possible, concentrating development of its capacities on the ma'nagement of contracts, and fostering the development of the domestic contracting industry is an option which merits serious consideration. How Should Contract MainTtenance Be Introduced? 4.14 The character and extent of contracting for maintenance, and. the pace at which it is introduced, will depend on local circumstances'. Where there is a well established domestic contracting industry, combined with an established capacity of government to supervise contractors, extension of contracting services to maintenance activities s.hould present few difficul- - 43 - ties and can be accomplished very quickly, although the need to ease disloca- tion of government workers may slow the process. Where the aim is to promote the development of small contractors, as in the Kenyan case, or the govern- mentts capacity to manage contracts is limited, a more cautious approach, perhaps modelled on the Brazilian pilot projects with unit-price or schedule of rates contracts, is advisable. 4.15 Two principles should guide selection of activities to be contract- ed: complementarity of existing capacities of government and contractors, and ease of administration. Periodic maintenance--regravelling and reseal- ing--has been contracted so extensively largely because of the ease with which it can be administered. Rouf .ne maintenance, whether by force account or contractor, is more difficult to administer primarily because it is com- prised of many small scale, widely dispersed activities. 4.16 An essential ingredient of any cost-effective routine maintenance program is careful planning, scheduling and control. It is an advantage of contracting that it promotes, indeed requires_, more careful planning and con- trol,of such acti.ities. All of.the successful contracting schemes have involved close coordination between the government and contractor in defining the work to be done and planning the work program. Thorough orientation of contractors prior to tendering promotes understanding of the tasks to be done, reduces perceived risks and risk premia included in tender prices. 4.17 The majority of work should be undertaken under unit-price type contracts. A small element, typically not exceeding 10-15 percent of roiutine maintenance, may be done under cost-plus arrangements to simplify administra- tion of items which are difficult to measure, and also to add management flexibility (as, for example, for emergency operations). Other types of con- tract which apportion a greater share of risks to the governyment, e.g., cost- plus-incentive-fee or cost-plus-incentive-or-penalty ("target price") may be considered in some cases, particularly where uncertainty perceived by con- tractors may be large at the initiation oL activities for which they have no prior experience on which to base their productivity and cost estimates. 4.18 Simplicity and niaximum incentives are desirable features of the contract, and in general unit-price contracts have proved well suited to maintenance activities. However, standard forms based on construction acti- vities are often unsuitable, and contractual instruments should be drawn specifically to fit the needs of routine maintenance. Tany governments may wish to consider, at least initially, the use of a management services con- tract in order to develop management systems and contract instruments.