FOR OFFICIAL USE ONLY Report No. 35397-PAK INTERNATIONAL ...
Transcript of FOR OFFICIAL USE ONLY Report No. 35397-PAK INTERNATIONAL ...
Document o f The World Bank
FOR OFFICIAL USE ONLY
Report No. 35397-PAK
INTERNATIONAL BANK OF RECONSTRUCTION AND DEVELOPMENT
PROJECT PAPER
FOR
PROPOSED ADDITIONAL FINANCING (LOAN)
IN THE AMOUNT OF US$65 MILLION
TO
THE ISLAMIC REPUBLIC OF PAKISTAN
FOR THE
HIGHWAYS REHABILITATION PROJECT
February 28,2006
Energy and Infrastructure Sector Unit South Asia Region
This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
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CURRENCY EQUIVALENTS
C A S DO EIRR F S L GDP GOP HDM HRP IBRD IDA MTBF MTDF NHA PRSP RMA
(Exchange Rate Ef fect ive February, 2006)
Currency Unit = Pak Rupees (Rs) Rs 59.90 = US$ 1.00
US$0.0167 = Rs 1.00
FISCAL YEAR July 1 - June 30
ABBREVIATIONS AND ACRONYMS
Country Assistance Strategy Development Objective Economic Internal Rate o f Return Fixed Spread Loan Gross Domestic Product Government o f Pakistan Highway Development & Management Model Highways Rehabilitation Project International Bank for Reconstruction and Development International Development Association Medium Term Budgetary Framework Medium Term Development Framework National Highway Authority Poverty Reduction Strategy Paper Road Maintenance Account
Vice President : Praful Patel, SARVP Country Director : John W. Wall, SACPK
Sector Director : Yusupha B. Crookes, SASEI Sector Manager : Guang Z. Chen, SASEI
Task Leader : Zafar I. Raja, SASEI
TABLE OF CONTENTS
A . ' B .
C . D . E . F . G . H .
Page
INTRODUCTION ............................................................................................................. 1
BACKGROUND AND RATIONALE FOR ADDITIONAL FINANCING IN THE AMOUNT OF US$ 65 MILLION ................................................................................... 1
PROPOSED CHANGES .................................................................................................. 4
CONSISTENCY WITH CAS .......................................................................................... 4
ECONOMIC ANALYSIS OF COST OVERRUN ......................................................... 4
EXPECTED OUTCOMES .............................................................................................. 5
BENEFITS AND R I S K S .................................................................................................. 5
FINANCIAL TERMS AND CONDITIONS FOR THE ADDITIONAL FINANCING ..................................................................................................................... 5
Annex 1 : REVISED ESTIMATED PROJECT COSTS ........................................................... 6
Annex 2: Financing Plan .............................................................................................................. 7
Annex 3: Cost Benef i t Analysis Summary .................................................................................. 8
Map: IBRD No . 3346
PROJECT PAPER DATA SHEET
Date: February 28,2006 Team Leader: Zafar I. Raja country: Pakistan Sector Directormanager: Yusupha CrookedGuang Project Name: Highways Rehabilitation Project Z. Chen Project ID: P100155 Country Director: John W. W a l l
Borrower: Pakistan Responsible agency: National Highway Authority
Revised estimated disbursements (Bank FY/US$m)
Environmental Category: B
FY 2005 2006 2007 2008 2009 Annual 24.50 50.00 95.00 95 .OO 100.00 Cumulative 25.00 75.00 170.00 265 .O 365.00
o Y e s .No Have these been approved by Bank management? o Y e s .No I s approval for any pol icy exception sought f rom the Board? o Y e s 0 N o
Revised project development objectives/outcomes: [Not applicable]
Does the scaled-up or restructured project trigger any new safeguard policies? w o t applicable]
[X ] Loan [I Credit [I Grant For Loans/Credi ts/Grants:
For Additional Financing
Total Bank financing (US$m): 65 Loan Proposed terms: (for IBRD Loan) 15.5 years to maturity with a 5-year grace period
Financing Plan (US$m.) Source Local I Foreign Total
I - Borrower 20.00 00.00 20.00 IBRD 22.50 42.50 65 .OO Others Total 42.50 42.50 85.00
A. INTRODUCTION
Key Project Data Effectiveness date (Cr-3846; Ln-7212): Feb 27,2004 Effectiveness date (Ln-7341): Jan 23,2006 Closing. date: June 30.2009
1. This Project Paper seeks the approval o f the Executive Directors to provide an additional loan in an amount of US$ 65 mi l l ion to Pakistan Highways Rehabilitation Project (HRP; Project ID: P010556, Loan Number: 72 12 PAK). The proposed additional loan would help finance the costs associated with cost overrun as discussed in paragraph 6 below. There would be n o change to the ongoing project activities. The expected outcome i s the sustainable delivery o f a productive and efficient national highway network, contributing to lower transportation costs.
Project Performance Development Objectives: Satisfactory Implementation Progress: Satisfactory Risk Flags: None
B. BACKGROUND AND RATIONALE FOR ADDITIONAL FINANCING IN THE AMOUNT OF US$65 MILLION
Proiect Data and Performance
Project Age: 24 months (38%) Credit Disbursed: U S D 47.73 mil equiv. (32%) Original Loan Disbursed: Additional Loan Disbursed: U S D 0.25 mil (0.25%)
U S D 0.52 mil equiv. (1%)
3. The project’s development objective i s the sustainable delivery o f a productive and efficient national highway network, contributing to lower transportation costs. T h i s i s to be achieved through implementation o f the following three project components:
a. Network Conservation Component - consisting of: (i) Rehabilitation & Improvement o f about 520 km o f highway (including structures), (ii) Resurfacing & Strengthening o f about 306 km o f highway, (iii) Safety improvement works, (iv) Afforestation, (v) Relocation o f utilities, (vi) Resettlement & land acquisition, and (vii) Design, contract administration & construction supervision consultant services.
b. Reconstruction and Rehabilitation of Earthquake Damaged Roads Component - comprising of: (i) Reconstruction & Rehabilitation o f about 180 km o f highway, (ii) Design, contract administration & construction supervision consultant services, and (iii) incremental operating costs.
c. Policy Support and Institutional Development Component - including technical assistance, training, equipment support and incremental operating costs to: (i) help implement improved sub-sectoral policies (Medium Term Budgetary Framework (MTBF) - to improve targeting o f public sector resources; and Road Maintenance Account (RMA) - to provide stable and secure funding for maintenance), and (ii) strengthen NHA institutional capacity, improve performance and efficiency.
4. The development objective and implementation progress are rated as ‘Satisfactory’ since: (a) a substantial portion (about 50%) o f total NHA road sector expenditures are being directed towards network conservation; (b) there is encouraging progress towards the institutionalization o f a rational and secure road maintenance management and funding arrangement; and (c) procurement (87% o f the funds have been contractually committed) and implementation o f the c iv i l works contracts is proceeding wel l - o f the 15 c i v i l works contracts, 13 valued at US$ 216 mi l l ion have been awarded, and work valued at U S $ 2 8 million has been completed (slightly delayed as compared to the appraisal schedule). The Bank has cleared the remaining 2 contracts.
5. There i s full compliance with credidloan covenants except for one covenant concerning financing o f NHA’s capital program in which case there i s partial compliance. Since creation o f NHA in 1991, the Government o f Pakistan (GOP) has been financing i t s capital program as loans from government to NHA. This financing practice i s unsustainable since NHA does not have adequate to l l revenues to repay this debt. I t was agreed in the context of this project that the government will: (a) on-lent the proceeds o f the credidloan to NHA as a grant, (b) carry out a review to identify available options for financing NHA’s investment program on a sustainable basis, and (c) take a decision regarding the treatment o f the existing stock o f NHA debt, and the mode o f a l l future NHA funding. The government has complied with (a) and (b) above and i s considering various options regarding stock and future funding mode. This decision has major implications for GOP in terms o f budget as wel l as i t s treatment o f government debt t o similarly established ‘authorities’ in other sectors. The government decision i s l ikely before next fiscal year.
Causes of the Cost Overrun
6. T w o main causes are increase in market prices and design changes. Cost estimates o f c i v i l works were finalized during appraisal in M a y 2003. These estimates were based on market prices prevalent at the time. Bids for eight phase-1 contracts were received in late 2003 and early 2004. Total price o f the eight bids was within 3% o f the cost estimate.
US$ Mi l l ion
7. cost estimate by 42% causing a massive cost overrun o f U S $ 82.7 mi l l ion.
Bids for seven phase-2 contracts were received in 2005. Total price o f the seven bids exceeds the
US$ Mi l l ion
2
8. Cost estimates prepared in 2003 have become invalid in 2005 due to the unprecedented hike in international o i l prices and other commodity prices. Oil price hike has substantially increased the price o f bitumen - an o i l based road construction material used in asphalt concrete pavements. The prices o f other road construction materials have also skyrocketed due to higher transportation charges. Some o f the pr ice increases over the last two and a ha l f years are as follows:
(a). (b). (c).
95% increase in diesel f rom Rs 19 per l i ter to Rs 37 per liter; 61% increase in bitumen from Rs 13,700 per ton to Rs 22,150 per ton; 97% increase in steel f rom Rs 17,500 per ton to Rs 34,500 per ton.
9. Another reason for high bid prices i s supply side constraints in the construction industry in recent years when the country has substantially expanded i t s infrastructure development program from 1 percent of GDP in the last decade to 4 to 5 percent of GDP during 2005-10.
10. The cost overrun i s particularly substantial in the case o f Contracts 8, 9, 11B and 13. This i s on account of significant design changes incorporated in these four contracts subsequent to appraisal that made these contracts more costly. A br ie f justification o f the design changes i s presented below:
(a). Contract 8: I t i s a 50 km section linking Lahore and Gujranwala - a very densely populated industrial corridor with built-up areas and encroachments all along the stretch. T h e c iv i l works involve rehabilitation and 6-lanning o f the existing 4-lane divided facility (2-lanes carriageway in each direction with a wide median in between). The southbound carriageway was built about 400 years ago and i s almost on the natural ground level. The north-bound carriageway was built in the early 1990’s on a 2 to 3 meters raised embankment. The 6-lanning design originally proposed by the design consultants envisaged construction o f the additional lane in each direction o n the outer side o f the existing camageways. However, this design necessitated land-acquisition, which entailed a host o f environmental and resettlement issues. NHA found this design to be impractical given that i t would take years to acquire land under the Resettlement Policy Framework (RPF) agreed with the Bank (the RPF allows only voluntary resettlement and debars NHA to use compulsory land acquisition powers available under the Land Acquisition Act). NHA, therefore, decided to construct the additional 2-lanes on the inner side i.e., within the wide median. However, 6-lanning on the inner side necessitated raising o f the south-bound Carriageway to the north-bound carriageway level to al low construction o f the New Jersey median barrier. This caused the earthwork quantities to increase manifold. The revised design also includes steel fencing o n both sides to prevent people f rom crossing over a high-speed 6-lane facility with n o wide median for refuge. That, in turn, necessitated provision o f a number o f underpasses and overpasses.
(b). Contract 9: It i s a 57 km 4-lane divided facility. A 15 km stretch o f this contract passes through a densely populated industrial corridor which has significant local traffic. The original design envisaged rehabilitation o f the existing 4-lanes only. Subsequently, in addition to rehabilitation NHA decided to add 2 more lanes in the 15 km industrial corridor to improve traffic f low and safety in this stretch.
(c). Contracts 11B and 13: These two were designed as resurfacing contracts (direct asphalt concrete overlay) at appraisal. However, condition o f the existing pavement began to deteriorate very rapidly after 2003 monsoons necessitating full-depth rehabil itatiodcold recycling.
3
Rationale for Additional Loan
Contract No. Contract 8 Contract 9 Contract 11B Contract 13
11. T h e causes o f the cost overrun were outside the control o f the borrower as w e l l as NHA. I t would be important t o complete the ongoing activities as planned in order to achieve the original project development objective. Without additional finance: (a) the PDO wil l be compromised, (b) the three impact indicators - reduction in average vehicle operating costs; reduction in travel time; and improvement in road safety - wil l be curtailed, and (c) the two output indicators pertaining to ‘km of highways resurfaced’ and ‘safety improvement works at 15-20 locations’ wi l l be reduced.
EIRR at Appraisal EIRR at Present Change in EIRR 33% 24% - 27% 53% 48% - 9% 24% 20% - 12% 51% 37% - 27%
C. PROPOSED CHANGES
12. There are n o changes in the project’s DO, design, and/or scope. There are n o complementary changes applicable to the institutional arrangements, financial management, disbursement arrangements, procurement, closing date, and implementation schedule. (see Annex 1 and Annex 2 for revised project costs and financing plan)
D. CONSISTENCY WITH CAS
13. The last C A S covered the period July 2003-June 2005, and a CAS for the period July 2005-June 2008 i s under finalization. The draft CAS identifies three pillars o f Bank assistance corresponding to the strategic priorities of the government’s PRSP: (i) sustaining growth and improving competitiveness; (ii) improving government effectiveness and service delivery; and (iii) improving lives and protecting the vulnerable. Supporting these pillars, the Bank Group’s lending program i s proposed to primarily target: (i) infrastructure, (ii) human development; and, (iii) programs targeting the poor and vulnerable.
14. The proposed additional finance i s fully consistent with the f i rs t CAS pil lar and program priorities. I t provides finance for the rehabilitation o f a key national highway, which carries over 60% o f Pakistan’s trade traffic. The investment funded under the project i s also consistent with the overall strategic framework of the proposed National Trade Corridor improvement program, currently being developed by GOP with support f rom the Bank. The Project and the additional finance being sought are financing the national highway development component o f the national trade corridor.
E. ECONOMIC ANALYSIS OF COST OVERRUN
1. The cost-benefit analysis o f Contracts 8, 9, 11B and 13 which are pr imari ly responsible for the cost overrun was undertaken. The economic analysis for these four contracts followed exactly the same methodology adopted at appraisal. It was carried out using the Highway Development and Management Model (HDM-IV), takmg into account the estimated economic cost, current road condition, traffic volume and i t s projected growth. The results indicate that the proposed investment o n these four contracts i s economically justified, with the Economic Internal Rate o f Return (EIRR) ranging fi-om 24% for Contract 8, 48% for Contract 9, 20% for Contract 11B, and 37% for Contract 13. With these rates o f return, the project as a whole continues to remain economically viable. Comparison o f current EIRR with appraisal estimates shows a decrease in rates o f return ranging between 9 to 27 percent. The impact o f higher prices on the rates o f return has been moderated by the significant growth in traffic volumes. Details are at Annex-3.
4
F. EXPECTED OUTCOMES
15. network, contributing to lower transportation costs.
The expected outcome i s the sustainable delivery o f a productive and efficient national highway
G. BENEFITS AND R I S K S
16. HRP is aimed at lowering transportation costs and travel times by improving the condition o f National Highways N - 5 and M-9, which are the lifeline or backbone of Pakistan’s economy (N-5 also forms a significant part o f the National Trade Corridor that i s l ikely to be the core o f our support to the transport sector in coming years). This would increase export competitiveness, accelerate export led growth and contribute to sustained economic development. Road users and inhabitantsbusinesses along this densely populated corridor will be direct beneficiaries o f the proposed additional financing.
17. There are n o additional r isks associated with this additional financing. However, there i s a considerable supply side constraint in the construction industry observed in the last 2-3 years. The Bank i s workmg with GOP to carry out an assessment o f th i s constraint with a v iew to develop mitigation measures for implementation by GOP in the short term.
H. FINANCIAL TERMS AND CONDITIONS FOR THE ADDITIONAL FINANCING
18. US$65.0 million would be provided as a Fixed-Spread Loan (FSL) with 15.5 years to maturity, including 5 years grace, commitment fee equal to 0.85 percent for the f i rs t 4 years and 0.75 percent for the remaining period, and a front end fee equal to 0.25 percent. The loan would be denominated in U S Dollars. Rekoactive financing up to 20% of the proposed additional finance could be allowed in accordance with the Bank’s operational policy on retroactive finance.
19. There are n o effectiveness conditions.
5
ANNEX 1 : REVISED ESTIMATED PROJECT COSTS
Project Cost By Component
1. Network Conservation Rehabilitation and Improvement o f 520 km o f N-5 (b) Resurfacing and Strengthening o f 306 km o f N-5 (c) Safety Improvement Works (d) Afforestation (e) Relocation o f Utilities (0 Consultancy Services for Contract Administration & Construction Supervision (g) Resettlement & Land Acquisition 2. Reconstruction and Rehabilitation of Earthquake Damaged Roads (a) Reconstruction o f 65 km o f N-15 (b) Rehabilitation o f 45 km o f N-35 (c) Rehabilitation o f 15 km o f S-2 (d) Rehabilitation of 55 km o f Jhelum Valley Road (e) Relocation o f Util i t ies, and Resettlement and Land Acquisition (0 Consultancy Services for Design & Feasibility, Environmental & Social Safeguards, and Contract Administration & Construction Supervision 3. Policy Support & Institutional Development - TA, Training, Equipment Support, and Incremental Operating Costs Total Baseline Cost Physical Contingencies Price Contingencies
Tota l Project Costs Front-end Fee
Total Financing Required
Local US$
Mi l l ion
99.00 24.38 1 1.43 4.34 0.44 4.59 0.92
19.00 7.00 2.00 14.00 1 .oo
2.15
7.28
197.53 9.16 16.24
222.94
222.94
Foreign US$
Mi l l ion
99.00 29.80 11.43 0.00 0.00 4.59 0.00
19.00 7.00 2.00 14.00 0.00
2.15
8.29
197.26 9.16 16.24
222.67 0.91
223.58
Total US$
Mi l l ion
198.00 54.19 22.86 4.34 0.44 9.18 0.92
38.00 14.00 4.00 28.00 1 .oo
4.30
15.57
394.80 18.32 32.48 445.6 0.91
446.50
6
ANNEX 2: FINANCING PLAN
Years Ending June 30 US$ Million
IMPLEMENTATION PERIOD Year 1 1 Year2 1 Year3 1 Year4 I Year5 1 Year6 1 Year7
Total Financing Required Proiect Costs
I Investment Costs I 0.0 I Recurrent Costs 0.0
Pmnt-end Pee 0.5 Total Project Costs 0.0
30.0 I 60.8 I 116.2 I 116.2 0.0 I 0.0 I 0.0 I 0.0 30.0 1 60.8 I 116.2 1 1 1 6 . 1 0.0 I 0.25 I 0 0 I 0.0
I 122.3 I 0.0
122.3 0.0
I Total Financing 30.0 I 61.05 I 116.2 I 116.2 I 122.3 I 0.0 I
1 Total Project Financing 1 0.5 1 30.0 1 61.05 I 116.2 1 116.2 I 122.3 I 0.0 1
7
ANNEX 3: COST BENEFIT ANALYSIS SUMMARY
Contract No.
Contract 8 Contract 9 Contract 1 1B Contract 13
2. Cost-benefit analyses were undertaken for Contracts 8, 9, 11B and 13 which are primarily responsible for the cost overrun. The economic analysis for these four contracts followed exactly the same methodology adopted at appraisal. I t was carried out using the most recent version o f Highway Development and Management Model (HDM-IV), which simulates highway l i fe cycle and vehicle operating conditions and costs for multiple road design and maintenance alternatives.
3. The table below summarizes the results o f the economic analysis. The results indicate that the proposed investment on these four contracts i s economically justified, with the Economic Internal Rate o f Return ( E m ) ranging from 24% for Contract 8,48% for Contract 9, 20% for Contract 1 lB, and 37% for Contract I3 .Wi th these rates o f return, the project as a whole continues to remain economically viable.
YO Increase Traffic Estimate Traffic Estimate Actual Traffic 2003 2005 2005
13,128 14,474 26,784 85% 11,887 13,105 24,703 88% 3,845 4,239 4,483 6% 6,818 7,517 8,670 15%
~~~
4. The above results are consistent with switching value analysis conducted at appraisal. Phase-2 analysis showed that costs would have to increase by 191 percent or benefits reduced by 65 percent to y ie ld the cut-off 12 percent EIRR. Total increase in cost due to high bid prices and design changes i s 64% much below the calculated switching value. High rates o f return are maintained on account o f two factors: (a) increased cost o f vehicle input parameters (e.g. 95% increase in cost o f diesel) resulting in higher vehicle operating costs savings, and (b) current traffic being much higher than estimated at appraisal resulting in, at least, proportionately higher vehicle operating costs savings.
5. Traffic has grown at much higher rates than forecast at appraisal due to strong economic growth in recent years. In FY 04 the economy grew at 6.4%, in the last fiscal year the GDP growth reached 7.0%, and in the current fiscal year the GDP growth seems well. poised to exceed 7.0%. Another reason for higher traffic i s the introduction o f car leasing schemes in Pakistan resulting in a large increase in the number of small and mid-size cars. Comparison o f traffic estimates used in the appraisal and current economic analysis i s as follows:
Contract No. Contract 8 Contract 9 Contract 11B Contract 13
EIRR at Appraisal EIRR at Present Change in EIRR
53% 48% - 9% 24% 20% - 12% 51% 37% - 27%
33% 24% - 27%
6. between 9 to 27 percent.
Comparison o f current EIRR with appraisal estimates shows a decrease in rates o f return ranging
' A pavement reconstruction technique involving reuse o f existing pavement materials after rejuvenation.
8
AFGHANISTAN
CHINA
To Mandi
30°N
25°N
65°E 70°E 75°E
K2(Mt. Godwin-(Mt. Godwin-
Austen) (8,611 m)
FED. CAPITAL TERRITORY
ISLAMABAD
KarakoramRange
Tha
rD
e s e r t
Hindu
Kush
Central Makran Range
Indu
s
Ravi
Sutlej
Chenab
Jhelum
Zhob
Ind us
Mas
hkai
Indus
B A L O C H I S T A N
S I N D H
P U N J A B
NORTHERNAREAS
Quetta
Lahore
Peshawar
Muzaffarabad
ISLAMABAD
SrinagarKargil
Hyderabad
Faisalabad
Rawalpindi
Saidu
Chitral
D.I. Khan
GujratGujrat
Kahat
Bannu
GujranwalaGujranwala
D.G. Khan MultanMultan
Sahlwal
BahawalpurNok Kundi
ChamanChaman
Surab
Zhob
BadinThatta
Panjgur
Ranipur
Turbat
MoroMoro
Bela
Gwadar
ApproximateApproximateLine of ControlN . WN . W. F. F. P. P..
JammuJammuand Kashmirand Kashmir
B A L O C H I S T A N
S I N D H
P U N J A B
N . W. F. P.
FED. CAPITAL TERRITORY
ISLAMABAD
SrinagarKargil
Hyderabad
Faisalabad
Rawalpindi
Saidu
Chitral
D.I. Khan
Gujrat
Kahat
Bannu
Gujranwala
D.G. Khan Multan
Sahlwal
BahawalpurNok Kundi
Chaman
Surab
Zhob
BadinThatta
Panjgur
Ranipur
Turbat
Pasni
Moro
Bela
Gwadar
ApproximateLine of Control
Karachi
Quetta
Lahore
Peshawar
Muzaffarabad
ISLAMABAD
AFGHANISTAN
INDIAISLAMICREPUBLIC
OFIRAN
CHINATAJIKISTAN
Jammuand Kashmir
Indu
s
Ravi
Sutlej
Chenab
Jhelum
Zhob
Ind us
Mas
hkai
Indus
A r a b i a n S e aRann of Kutch
To Kandahar
To Kerman
To Kerman
To Khash
To Jodhpur
To Mandi
To Kabul
To LudhianaTo
Bhatinda
KarakoramRange
Tha
rD
e s e r t
Hindu
Kush
Central Makran Range
K2(Mt. Godwin-
Austen) (8,611 m)
35°N
30°N
25°N
30°N
25°N
65°E 70°E 75°E
65°E 70°E 75°E
PAKISTAN
0 50 100 150
0 50 100 150 Miles
200 Kilometers
IBRD 33460
JANUARY 2005
PAKISTANSELECTED CITIES AND TOWNS
PROVINCE CAPITALS
NATIONAL CAPITAL
RIVERS
This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, o r any endorsemen t or a c c e p t a n c e o f s u c h boundaries.
MAIN ROADS
RAILROADS
PROVINCE BOUNDARIES
INTERNATIONAL BOUNDARIES