Peru - Port of Callao Project

ITO VE -h DISO INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATIONS of the PRESIDENT to the EXECUTIVE DIRECTORS on the PROPOSED LOAN to the REPUBLIC OF PERU for the PORT OF CALLAO December 28, 1951 Loan Department  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVEILOPMENT REPORT AND RECOM-2ENDATIONS OF TH4E PRESIDENT TO THE EXECUTIVE DIRECTORS ON THE PROPOSED LOAN TO THE REPUBLIC OF PERU FOR THE PORT OF CALLAO 1. I submit herewith a report and recommendations on the proposed loan of ,2.5 million for improvement of the Port of Callao, Peru, through the provision of general cargo handling, bulk grain discharging, and bulk grain storage facilities. PART I HISTORICAL 2. In I,ay, 1951 representatives of the Peruvian Government informally presented to the Bank a request for a loan of ;;. million for equipment to improve the facilities for handling general cargo at the Port of Callao. In discussing this loan request Aith representatives of the Bank, the Peruvian representatives indicated that Peru expected soon to vork out a mutually satisfactory settlement of its external debt. 3. The loan request, and information submitted by the Peruvian Government, were studied and a number of qu,estions arose which were investigated by the Bank mission which visited Peru in May and early June of this year. The Bank's analysis of the project was facilitated by the fact that technical studies of the Port of Callao had recently been preparea by W. R. Grace & Co.; the Frederick Snare Corporation; Admiral Stanley, a',retired U. S. naval office- experienced in port adcinistration, w,ho studied the Port of Callao at the request of the Peruvian Government; and Colonel Quinn, an American expert on port administration retained by the Peruvian Government,to assist in improving the operation of the Port of Callao'.. 4. As originally s,ubmitted to the Bank, the project related only to the improvement of facilities for handling general. cargo. Subsequent investiga- tions, however,'indicated that specialized facilities for the efficient unloading and storing of bulk grains at the Port (which could be provided if the loan were increased to p2.5 million) would not 'only contribute sub- stantially to the Port's capacity for handling general cargo (by freeing berthing space used by grain ships) but also bring about substantial savings relating directly to the handling of bulk grain. Accordingly, the Peruvian Government requested that the project and loan request be modified to include these facilities. 5. Negotiations for an appropriate loan vwere opened Wn A.gust 1951. The authorized negotiator on behalf of the Peruv-.an Government was ljlr. Fernando Berckemeyer, Ambassador for Peru to the United States. 6. In a message to Congress dated July 23, 1951, President Odria had stated that he considered the re-establishbment of external credit to be a matter of vital importance for' Peru,, that he hoped the way was open for a mutually agreed settlement with all Peru's bondholders, and that, if such a settlement were reached, he would be happy to submit it to the Peruvian legislature for approvaL  2 7. At the same time that the loan negotiations were cpmmenced, Ambassador Berokemeyer started discussions with the Foreign Bondho2.ders Protective Council,-Inc., in New York for the purpose of reaching a settlement applicable to the dollar portion of the Per.uvian Governmentts external debt. On November 14, 1951 the Peruvian Government published an announcement indicating the terms of a new debt readjustment plan negotiated with the Bondholders Council, and stating: (a) that the plan would be submitted promptly to the Peruvian Congress in order to obtain enabling legislation for opera- tion of the plan as soon as possible; and (b) that the Peruvian Government was proceeding to negotiate with the Council of Foreign Bondholders (London) with a view to reaching a settlement on the two Peruvian sterling loans which were in default. Tn the '-nnomucmucnt the 3rrodholtdern Count,Il iso $ndie,ted. th^.t lt ^ prc.- p-,Nd to recouiend ac'Opsance *o tha e. oti^-bJ. plan D ien the plar 3had been approved by the Peruvian Congress and fonmally presented to the Bon2Jholders. 8. During the latter half of November, 1951, Ambassador Berckemeyer negoti- ated vith the Council of Foreign Bondholders in London with a view to reach- ing a settlement on the two sterling loans. On November 26, 1951, the Council published an announcement stating that progress had been made toaards agreement, but that the Peruvian delegation had found it necessary to refer to their government on certain points, and that "some delay may be inevitable before a further announcement can be made." 9. Thus, although Peru is still in default, substantial progr.ess has been made towards a settlement with the bondholders. In the circumstances I have not considered it irapp oSZti.te to, procete eith the negotiation of this small lozvl PART II - DESCRIPTION OF THE PROPOSED-LOAN Borrower 10. The Borrower would be the Republic of Peru, a member of the Bank. Amount 11. The amount would be 'j2.5 million, or its equivalent in other currencies. *Purpose 12. The proceeds of the loan would be used for the importation of equipment needed: (a) to modernize the facilities for handling general cargo; and  3 (b) to construct new facilities for unloading and storing bulk grain at the Port of Callao. The total cost of the project is estimated at the equivalent of about 94 million. 13. The equipment referred to in 12 (a) would be designed for efficiently moving goods shipped in bags, bales, boxes and barrels to and from shipside, stacking such cargo in warehouses or storage yards, and transferring it to and from trucks and railroa4 cars. It would consist primarily of fork-lift trucks, pallets, pallet racks, straddle trucks, trucl;-mounted cranest tractors and tractor-trailers, together with an adequate supply of spare parts, tools and maintenance equipment. The estimated cost of the equipment is about one million' dollars. 14, The equipment referred to in 12 (b) would be designed for unloading grain in bulk from ships at a rate of about 4O0 tons per hour, and for equipping elevators capable of storing up to 20,000 tons of bulk grain. It would con- sist of two movable unloading tovwers with the necessary conveyors, distribution piping, machinery and accessories for delivering bulk grain as unloaded from ships to storage facil4ties located adjacent to the discharging plant. The estimated cost of this equipment is about one and a half million dollars. Terms 15. The loan would bear interest at the rate of 4-1/2% per annum, including the statutory comnission of 1%. 16. The conmitment charge would be 3/4 of 1% per annum and would accrue.from the effective date of the loan or from April 1, 1952, whichever was the.earlier. 17. The loan wouid be amortized by semi-annual payments commencing January 1, l954 and calculated to retire the entire loan by maturity on January 1, 1967, as set out in Schedule 1 of the proposed Loan Agreement. 18. I consider the proposed schedule for the repayment of principal and interest and other charges on the proposed loan to be reasonable and appropriate. Legal Instrutnents and Legal Authority 19. A draft Loan Agreement between the Republic of Peru and the Bank is attached as Appendix I. Except for certain conditions of vithdrawal described in para. 32 below, the draft Loan Agreement follows,the general form of loan agreement. 20. The report of the committee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Bank is attached as Appendix II. 21. The Peruvian Parliament, is now considering an lai authoriilg ti e govern- ment to contract loans up to a total of '60 million fro= this Bank and the Export-import 1anks  4 PART III - APPRAISAL OF THE PROPOSED LOAN 22. . A technical appraisal of the project to be financed by the Bank is attached as Appendix III. 23. The economic background against which the proposed loan should be considered is set forth in a report entitled "The Economy of Peru" (R*528Y dated October 12, 1951, which was distributed to the Executive Directors on October 15, 1951. Justification of the Project 24. . The Port of Callao, located about 8 killometers wvest of Li;a, is the main port of Peru.. About 1/3 of the total combined imports and exports of Peru (inc.luding 70% of Peruls exports of metals) move through Callao. In 1950, the latest year for which authoritative statistics are available, the total .traffic of the Port stood at approximately 1.3 million tons. Of this, 75-80% was foreign trade and the remainder coastwrise traffic. 25. . Approximately 60-65%' of the cargo now moving through the Port of Callao consists of general cargo (materials shipped in bags, bales, barrels and box-es, etc.)., Bulk grain imports, -which in the last two years have exceeded 200,000 tons per annum, currently account for about 20%. Although Callao is a modern port insofar as docks and vwarehouses are concerned, the methods of handling both types of cargo are slovw and wasteful as compared vwith modern methods. Further- more, the organization and status of the Port is not conducive to efficient administration. 26.' Except-for the lifting.of cargo into or out of a ship (which is done by ship's tackle) general cargo is currently handled largely by hand, one piece at a time. During most of the time a ship is in the Port, it is waiting for cargo to be moved on to or off of a loading platform and on to or off of the dock. i;iuch of this time can be saved by recently developed methods in which items of cargo are loaded onto pallets (small wooden platforms designed to bt handled by fork-lift trucks). Thereafter all of the cargo on each pallet can be handled as an individual package which is readily loaded, unloaded and stacked by fork-lift trucks and transported on tractorvdrawn trailers. w'hen- ever used, these methods have sharply reduced the time required to load, unload and handle general cargo. 'hile the size of the savings wJhich would result from this part of the project cannot be measured with precision, it is clear that they would be substantial. 27. Because of undue delays experienced by its ships in the Port of Callao' theEutopean, South Pacific and Magellan Conference on April'l, 1951 ordered a 25% surcharge applied on all rates between European ports and the Port of Callao. It has been estimated that the surcharge increases freight costs by about :`680,000 annually. By removing the major causes of the delays, the new facilities and improved adm4nistration should bring about the removal of the surcharge. On the other hand, continued inefficiency and increasing delay could lead to the imposition by other shipping conferences,of a similar sur; charge on shipping rates to or from Callao...  5 28, Under present manual methods of unloading bulk grains, unlo.a:ding time for an 8.,000 ton cargo runs from s to 10 days, and it has been conservatively estimated that 3% of the grain is lost in the process".. The new facilities Would reduce the loss of grain to a maximum of 10, and the unloading time of an 8,000 ton vessel by 7 to .9 days. The resultant savings to Peru of foreign exchange would be the equivalent of about a half million' dollars per year. 29. The amount of buulk grains handled by the Port of Callao has been increas- ing and vill continue to increase. Although local production of wh4at-;the principal grain involved, has been expanding (at the rate bf-3,g500tons per year) consumption has been increasing at a faster rate (13,000 tons per year). In Peru iJheat can be raised only in the high sierra, where the amount of cultivable land is strictly limnted. Thile improved methods can br-ig about increased yields, local production is not expected to increase as rapidly-as consumption0 Iiheat brought to the Lima area (the principal area of consump- tion) from the northern and southern departments of Peru, would be transported by coastal vessel to Callao. 30. The project can make its maximium contribution to Peru only* if concurrent steps are takcen to improve the administration of the Port of Callao. Admifnis- trative practices now followed are wasteful and cumbersome, partly because of the lack of technically qualified personnel in top administrative' position's and partly because the organization gives insufficient authority to those directly concerned with the Port's operation. To rermedy the situation, the Peruvian Government intends to establish a semi-autonomous Port Authorety to administer the Port and to appoint a tec;hnically qualified person as its Miianaginig Pirector.. 31. The proposed List of Goods and the general plans have been studied by the engineering staff and found to be appropriate for the size and type of the Port of CQ4lao. The project es 4 whole is technically sound and finiancially justified. Coppletion of this project, accompanied by improved administration, would eliminate the Port o' Callao's most serious shortcomings in a relatively short time. Conditions of Wlithdrawal 32. Section 2.02 of the proposed Loan Agreement provides that: (a) no withdrawals from the loan account can be made until an autonomous Port Authority has been established and placed under the direction of a qualified and experienced Port Administrator; '(b) no withdrawals frora the loan account can be' made for the purchase of goods required for the bulk grain handling facilities unless and until the Dorrzaver has submitted to the Bank satisfactory plans for the engineeringo the local currency financing, and the operation of these facilities.  6 THE ECONOOHIC SITUA-TION' 33. A favorable factor in Peruts balance of payments prospects-is the flexibility in its foreign trade, Markets-for export goods, principally sugar, cQtton and minerals', are likely to expand... While the increase in population would make it difficult for Peru to contract imports of fo'od- stuffs, most other imports can be reduced in times of exchange shortages.. Peru has already shown an ability'to keep its imports within the limits of exchange availabilities and over the last decade, it di'd not experience any serious loss of reserves. The adjustments.were brought about through exchange controls and import prohibitions or through devaluation.. 34. A system of fluctuating exchange rates was established in 1S9. It' permits two free-rates.- one for negotiable exchange certificates and the other for drafts. This reform was accepted by the BMF as a temporary measure. Since 1949, both rates have fluctuated around 15 soles per US dollar as compared tNith the par value of 6.5.soles per dollar. The out,- break of war in KQrea, brought about an increase in world demand for Peruvian products. In 1950 the value of total exports reached 4194 million and exceeded that of total imports ($A187 million) for the first time since 1946. This export surplus generated inflationary pressures,. Since May 151, there has been a small decline in foreign exchange reserves due primarily to lower prices for cotton and sugar. The expansion of bank credit was restrained by the establishment of higher reperve require- ments. IHoney supply and internal prices have been relatively unchanged. 35.-. The foreign trade situation is likely to become more difficult in. the near future.. If so, imports could be reduced... Present reserves also give some. leeway, In the long run, demands for imports could be substantially eased by an increase in domestic food supply which the Peruvian Government is attempting to promote through irrigation and trans- portation projects. The outlook for the Peruvian economy is, on the whole, hopeful provided there is no drastic decline in metal prices, 36. Perd's foreign public and guaranteed debt, as of October 1951, consisted of `o81.3 million, 47.4 million Argentine pesos and 72.68 million.. There are also two non-guaranteed Export-Import Bank loans amounting to, S'21.4 million. Part of the o;ld public debt, consisting of dQllar and sterling bonds, is in default on both interest and amortization. Until the terms of settlement are known, it is impossible to give an accurate dollar value of the total debt, but it would be of the general order of 4$130 million.. The Argentine debt is payable either in pesos earned by Peruvian exports to the Argentine, or in-dollars or pounds sterling at unrealistic rates of exchange., The bulk of the sterling bonds contain a conversion clause under which the bondholders have the option to be paid in dollars at a fixed rate. 'On the arbitrary assumption that the pound sterling obligations will be serviced at the rate of $4..86 to the pound, annual service payments of the pubblic and' guaranteed debt, and the non.- guaranteed Export-Import Bank debt, wou4d amount to about `8 million in 1954, $5 million for the years. 1955-58p and about ;F3 million thereafter until 1973. In view of Peru's economic situation and prospects, the burden of service of the proposed new loan should'not. prove excessive...  7 The Political Situation 37, The present administration, headed by Gen. Odria, assumed provisional power following a revolution in October, 1948 against the constitutional government of President Bustamante. In June-1950 the Junta Government held presidential and congressional elections in which General Odria, the only presidential candidate, was elected with a majority of his followers in the nevw Congress. The Odria Government is apparently well established and does not face substantial opposition. On the whole, the political situation appears to be stable. Prospect of Fulfillment of Obligations 38. By providing the Port of Callao with the equipment needed for the efficient handling of the chief types of cargo, and ensuring improvement in the organization and administration of the Port, the proposed loan would bring about large direct savings of foreign exchange now being lost through high demurrage charges, spillage and wastage of bulk grains, and the in- efficient handlina of cargo. It should aleo lead to the remaoval of the surcharge on freight rates. These direct savings would exceed the annual service charges on the loano 39. The more efficient methods of handling cargo should enable the Port to give improved service at less cost and still cover operating costs and pay to the Peruvian Government funds equal to the costs of servicing the proposed loan. 40.- The Peruvian Government has stated that it can and will provide the funds needed to cover the local currency costs of the project. It is in a position to do so. 41. The Peruvian Government is currently preparing a bill establishing an autonomous authority to operate the Port of Callao and intends to appoint a person experienced in port administration as general manager, 42. While it is always possible that the introduction of mechanized labor saving methods may meet with resiptance of organized labor, steps are being taken to obtain labor's cooperation, and laborts initial reactions to the project have been-favorable.. 43. The Peruvian economic position is sound and gives promise of continuing to improve and to afford opportunity for growth and development. h44. The Peruvian Government has evidenced its serious intention to negotiate and put into effect a mutually satisfactory arrangement for .resuming payments on its external debt. 45. I am satisfied that due regard has been paid to the prospect that Peru will be in a position to meet her obligations under the proposed loan and that in making it, the Bank will be acting prudently in the interest of Peru and of the members of the Bank as a whole,  8 PART IV - COMPLIANCE WITH ARTICLES OF AGRE4EANT 46. I am satisfied that the proposed loan will.comply.with-the requirements of the Articles of.Agreement of the B,nk. PART V - RECONMILNDATIONS 47. I recommend that the Bank at this time grant to the Republic of Peru a loan of 1R2.5 million for a term,of 15 years at such rates and on-such other terms as are specified in the draft Loan Agreement attached as.Appendix.I. &Eugene R..Black Washington, D. C. December 28,. 1951  Rates of exchange used in this report: $1 . - .15 soles 1 sol - 6.7 cents 1 million soles - $66,667