 CREMA
System in Argentina
The CREMAs
Probably the most
important milestone in the history of Bank-financed road projects
in Argentina has been the financial support provided by the Institution
to introduce and implement the The
National Directorate of Roads of Argentina (DNV) new type performance-based
maintenance contracts, comprising both rehabilitation and routine
maintenance,
and labeled “CREMA” (Contrato de Recuperacion y Mantenimiento).
The contracts require the contractor to rehabilitate and then maintain
a network of roads over a period of five years for a lump sum amount.
They further specify required road service outputs, and use incentive-based
payments to ensure the quality of the works. Rehabilitation and maintenance
indicators are kept to the minimum and are easy to monitor and measure:
indeed, throughout the contract period, rehabilitation works must
meet or exceed the minimum thickness of overlay and must comply with
the maximum level of roughness, rut depth, cracking, or raveling;
regular monthly visual inspections of maintenance activities focus
on a few essential items (about 10) in ensuring compliance with the
specifications: no potholes or unsealed cracks, no excessive rutting,
good condition maintained on shoulders, culverts and drains, guardrails,
vertical and horizontal signs, as well as on the road side environment.
Origin of the CREMA
DNV
devised the CREMA in 1996-97, in reaction to several factors: (i)
delays accumulated
in the implementation of the Sixth Bank-financed Highway Project,
stemming from problems with counterpart funds that became critical
with the onset of the macroeconomic crisis in 1995, and which affected
all Bank projects in Argentina; but also from lack of stocks of government-prepared
detailed engineering projects, ready to bid; (ii) as a result of
DNV’s retrenchment process, the increasing lack of DNV personnel
in the provinces available for supervising and measuring the vast
quantities of activities generally involved in the more traditional
maintenance contracts and also for monitoring performance standards
using inputs indicators; (iii) the frequent cost overruns that resulted
from inadequate designs and led to the necessity to increase activities
included in the original Bill of Quantities, compounded by the time-consuming
efforts wasted in analyzing and justifying a large number of claims
and in seeking for additional budget allocations before finally drawing
up contracts amendments; (iv) the perceived need to focus more on
customers’ satisfaction, seeking to identify outcomes, products
and services that road users expect to be delivered, and to monitor
and pay for those services on the basis of customer-based performance
indicators; (v) the need to shift greater responsibility to Contractors
throughout the entire contract period in order to stimulate and profit
from their innovative capacity, all this in line with the government
drive for a stronger role of the private sector in the management
and finance of infrastructure; and finally (vi) to make better use
of and accelerate disbursements of available Bank’s funds.
The First Generation of CREMAs
The
CREMA program was to be implemented in two phases. The first phase
starting in 1996-97 involved a network totaling about 11,000 km,
covering about 55% of the non-concessioned national paved network.
In 1996, that network had only 17% of i t s length in good condition,
42% in fair condition, and 41% in critical to poor condition. Traffic
volumes generally ranged from 250 to 2,500 vehicles per day, with
an average value of about 800 vehicles. Following international competitive
bidding, 60 contracts were let in 1997, covering sub-networks with
individual lengths ranging from about 100 km to 300 km, and averaging
about 180 km. The contracts were awarded to mostly local contractors
for a total of US$ 642 million, each contract amounting to about
US$ lomillion, equivalent to US$ 11,000 per kilometer a year. Overall,
and during the first year of execution and as required under the
contract, a length of about 4,500 km were rehabilitated, Le. about
40% of the total, the rehabilitation solution being generally a thin
asphalt concrete overlay, 3.5 to 4 cm thick, corresponding to the
minimum solution that would yield a positive Net Present Value or
a minimum Internal Rate of Return of 12%. The rehabilitation costs
represented generally between 75 and 80% of the total contract amount,
the remaining 20% covering routine maintenance costs over the 5-year
period. For that first generation of CREMAs, the payment schedule
was designed so as to avoid the risk of the contractors leaving unattended
maintenance activities once the rehabilitation phase was completed.
As such, contractors received only about 50 to 60% of the total contract
amount when the rehabilitation works have been completed, normally
at the end of the first year, while remaining payments were scheduled
to be made in 48 equal monthly amounts.
Outcome for Phase 1 CREMA Contracts
The
first phase was mostly completed by the end of 2002, although maintenance
activities were extended for a year, pending the decision to initiate
a second round of bidding. That first phase was successful in many
respects:
 The requirement
made to contractors to carry out detailed engineering designs
before initiating the works, has minimized delays in project
implementation,
and Bank’s funds were disbursed rapidly;
By
requiring also contractors to perform their own quality control,
the system
has cut down substantially the government’s supervision
costs;
The lump-sum
contracts practically eliminated cost overruns; the only cost
increases have been due to force majeure events (mostly related
to El Nino)
and have not exceeded 3% of the total contract price;
By making
the long-term payment obligation legally biding on the government,
the CREMA has deterred the Treasury from failing to provide
funding for road maintenance; and experience during implementation
showed
that at time of fiscal constraints, (in 1998 and 1999 and
at the end of 2001) the budget process respected the CREMA
contracts
and
funds were allocated to them in priority, as if they were
considered as non-discretionary expenditures;
The
performance indicators have been simple enough to apply and
monitor by
a much-reduced inspection team consisting generally of one
Engineer and one laboratory
technician, and the desired results have been obtained;
The
system has fostered innovation in the programming and execution
of
works, since payments are tied to outcomes and not to rigid
specifications
on materials standards or workmanship;
The
contractor’s
obligation to maintain the roads over a five-year period
has reduced the risk of unsatisfactory quality in the rehabilitation
and subsequent
maintenance works. Indeed, the CREMA program has substantially
improved the condition of the network, increasing the share
of roads in good to fair condition from 59% to 94% and reducing
the
proportion of roads in critical to poor condition ' from
41%
to 6%. In addition, measurements made at the end of 2002
and beginning
of 2003, indicate that because of the high standard of maintenance,
the evolution of roughness or deterioration on the network
has been slower, by about 20%, compared to what was anticipated
from
recognized deterioration models such as the HDM.
The
road safety issue has been dealt with (23% of total cost
for road
safety features)
and safety conditions should have improved, compared to other
traditional methods of maintenance and contracting: the severe
penalty system
selected has primarily focused on this issue as most of the
performance indicators are directly linked to safety problems
and penalties
for noncompliance have been set at very high levels; for
example, a pothole left unrepaired beyond the authorized
time limit
would cost the contractor US$ 400 a day until it i s patched;
an edge
break of more than 3 cm between the pavement and the shoulders
would cost him US$ 500 per week, and a debris on the surface
of the pavement would result in a fine of US$ 200 a day until
it is
removed;
In terms
of cost efficiency, the system has proven superior to the
conventional admeasurement type of contracts. First of all,
ex post economic
evaluation of the first generation of CREMAs showed that
the rehabilitation
and maintenance funding yields an economic rate of return
of 60%, at a 12% cost of capital; secondly, the contracts
will
reduce the
need for capital investments by nearly 30% in the future;
thirdly, the competition during bidding and the fact that
only one of
the 60 contracts has had to be canceled because of the contractor's
financial difficulties, suggest that these contracts are
financially attractive to the private sector; finally, comparing
the unit
costs
of the rehabilitation works of the CREMAS to those achieved
in the more conventional ad-measurement contracts, such as
the ones
used in the Provincial Roads Project, shows that the long-term
performance-based system is, overall, more cost efficient:
taking an average thickness of asphalt overlay of 3.5 to
4 cm similar
to what was placed on the network of the CREMA Phase 1, experience
shows that for the CREMAs the rehabilitation cost was about
US$ 66,000 per km, versus US$ 59,000 per km obtained under
the Provincial
Road Project Le., a cost difference of only 12%. However,
the CREMA costs include: (i) detailed engineering and quality
control
costs
which under conventional contracting are in the order of
10 to 15 % of the total cost of the works and such costs
are borne
by
the highway agency; (ii) CREMA contracts, because of the
penalties applied for non-compliance have guaranteed that
by the end
of the contract all the roads are in excellent condition,
therefore reducing
the future needs of road rehabilitation compared to works
done under conventional contracting; (iii) CREMA contracts
include
also and in addition to the overlay works, a number of mandatory
improvements
such as bridge repairs, upgrade of intersections, safety
features, that are usually not contemplated in conventional
rehabilitation
contracting. The following graph shows for a wide range of
rehabilitation solutions the comparison of unit costs between
the CREMA system
and the more conventional ad-measurement type of contracts,
such as the Provincial Roads Project and the Buenos Aires
Infrastructure Program . Over the normal range of solutions
Le. between 3
cm and
6 cm of asphalt concrete overlay, the CREMA appears to be,
on average, 16 to 20 percent more costly than the conventional
method of contracting
but that difference i s greatly outweighed by the many additional
features incorporated in the CREMAs, the costs of which would
normally be borne by the highway agency.
 CREMA contacts include:
(i) Detailed Engineering Design;
(ii) Mandatory
Contractor's Own Quality Control/Supervision;
(iii) Risks of Penalties
for Noncompliance of Specifications;
(iv) A Number of Mandatory Safety
Improvements Features;
(v) Traffic and Axle Load Control;
(vi) Contractor's
Site Attendance during 5 years;
(vii) No compensation for eventual
adverse site conditions;
(viii) Strict compliance with Environmental
Management Plan; and
(ix) Wider road width on national (13 m) than
on provincial (10m).
The Second Generation of CREMAs
With
the continued assistance of the World Bank, the Directorate of National
Highways has started
to implement a second phase of CREMAs aiming at rehabilitating
and maintaining another 8,200 km of the paved non concessioned national
network that had not been included in the first phase, at a total
cost of about US$550 million. The most significant differences
between
the first and second generation of CREMAs can be summarized as
follows:
The network
under consideration for the second phase is in somewhat worst
condition than the network of CREMA 1 : the average roughness
of the first
network was about 3.6 IRI before implementing the CREMA and
had about 40% of its length in critical to poor condition, while
the
network under phase I1 has a mean roughness of nearly 4 IRI
before work execution, with a proportion of roads in critical
to bad condition
of about 50%. Because of that, the proportion of roads to be
rehabilitated in the near future has increased to about 65 to70%,
much higher
than the 40% indicated above for the CREMA phase 1;
The rehabilitation
solutions used for the second generation of CREMAs is much
closer to the optimum strategy recommended by the HDM model,
corresponding
to an average thickness of asphalt overlay of about 5 cm, with
a higher unit cost per km, nearly US$15,000 per year;
The period
during which rehabilitation works are to be executed has been
increased from 12 to18 months and sometimes to 24 months;
The payment
mechanism has been changed: The contractors now receives full
payment for the rehabilitation works as they proceed during
the first 18
to 24 months; and adjustments for inflation are made throughout
the contract period, on a monthly basis;
The scope
of mandatory works to be executed, in addition to the overlay
operations, has been increased, essentially to improve road
safety conditions,
such as the inclusion in the contract of mandatory horizontal
marking, improvements at critical intersections, and enhancement
of guardrails
features;
Finally,
damage to roads caused by vehicle overloading is being more
aggressively
addressed, by asking contractors to provide and operate devices
for measuring axle loads on site and to report any excess load
problems to the highway authority.
Sources
- World Bank. 2005. “Project Appraisal Document on a Proposed
Loan in the Amount of USD 150 million to the Argentine Republic
for a Provincial Road Infrastructure Project.” Washington,
D.C. May 12, 2005. Contact person: Maria Marcela Silva, msilva@worldbank.org.
Available at: http://www-wds.worldbank.org/servlet/WDS_IBank_Servlet?pcont=details&eid=000012009_20050606123632
- “Penalties for non-compliance with mandatory requirements”.
Provided by G. Liautaud, former WB Task Team Leader (TTL) for Argentina,
March 2005.
- Please see Argentina's Contract Documents
Back to Case
Studies
|
© 2006 The World Bank Group , All Rights Reserved. 