Jamaica - Airport Development Project

Report No. 405a-JM FILE p y Jamaica: "WE Appraisal of an Airport Development Project August 20, 1974 Latin America and Caribbean Projects Department Not for Public Use Document of the International Bank for Reconstruction and Development International Development Association This report was prepared for official use only by the Bank Group. It may not be published, quoted ur cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  Currency Equivalents Currency Unit = Jamaican $ (J$) US$1.00 = J$0.91 J$1 = US$1 10 J$1 million = US$1.1 million Fiscal Year April 1 - March 31 System of Weights and Measures IMetric British/US Eouivalent 1 meter (m) - 3.28 feet (ft) 1 kilometer (km) = 0.62 mile (mi) 1 square kilometer (km2) = 0.386 square mile (sq mi) 1 metric ton (m ton) = 2,204 pounds (lb) Abbreviations and Acronyms AAJ - Airports Authority of Jamaica ATC - Air Traffic Control CAD - Civil Aviation Department CIDA - Canadian International Development Agency CNIR - Composite Noise Rating DIME - Distance Measuring Equipment GDP - Gross Domestic Product GNP - Gross National Product IATA - International Air Transport Association ICAO - International Civil Aviation Organization MOW - Ministry of Works NDB - Non-Directional Beacon REIL - Runway End Identification Lights VOR - Very High Frequency Omnidirectional Radio Range  JAMAICA APPRAISAL OF AN AIRPORT DEVELOPMENT PROJECT TABLE OF CONTENTS Page No. S tTMARY AND CONCLUSIONS ...................... ............. . i - ii 1. INTRODUCTION............. 1 2. BACKGROUND .... .... .................. 2 A. General .2. .2 B. Tourism ... 2 C. Surface Transportation Sector ....... .......... 2 D. Transport Policy and Coordination . 3 3. JAMAICAN AVIATION ....... . . .. .. . ..3 A. General ..... 3 B. Air Transport in Jamaica . .. 4 C. Traffic Forecasts .... . . 5 D. Airport Administration . . 6 E. The Airports Authority of Jamaica . . 7 4. THE PROJECT ................8 A. General .......... .... .............. 8 B. Project Description . . . 8 C. Design and Construction. . . 9 D. Cost Estimates . . .10 E. Procurement........ * .. ...,., 12 F. Disbursement ....... . .. 12 5. ECONOMIC EVALUATION ... ... 13 A. General ...13 B. Sangster Airport - Aircraft Benefits. 13 C. Sangster Airport - Passenger Benefits. 14 D. Manley Airport - Aircraft Benefits. 15 E. Manley Airport - Passenger Benefits . .15 F. Project Return ........ ....... 15 This Appraisal Report has been prepared by Messrs. Bostrom (Aviation Economist), Chapman (Financial Analyst), Parker (Financial Analyst), Ewing (Aviation En- gineer), and Flores (Young Professional), and has been edited by Miss V. Foster.  TABLE OF CONTENTS (Cont'd) 6. FINANCIAL EVALUATION . ............. .... .. ....... . . . . . 15 A. Existing Situation ............ ...... ....... . 15 B. Financial Objectives and Financial Structure of the AAJ **e**..t**********. ................*........** 16 C. Financing Plan for the Project Period ............ 17 D. Financial Projections ...... ...................... 18 7. AGREEMENTS REACHED AND RECOMMENDATION ................. 20 TABLES 1. Air Traffic Projections 2. Detailed Cost Estimate 3. Summary Investment Plan, 1974-1985 4. Estimated Schedule of Disbursements 5. Passenger Arrivals at Different Airports, 1971-1972 6. Operating Results, 1970/71 - 1973/74 (for all Airports) 7. Summary Cash Flow, 1974-1984 S. Forecast Revenue Accounts, 1974-1984 9. Forecast Balance Sheets as of December 31, 1974 to 1984 ANNEXES 1. Status of Bank Group Operations in Jamaica 2. Existing Airports, Environment and Project Improvements 3. Existing and Future Airport Organization 4. Details of the Economic Evaluation 5. Typical Landing Fees 6. Financial Forecasts - Assumptions MAP IBRD 10590 - Jamaica CHARTS IBRD 10591 - Manley Airport IBRD 10592 - Sangster Airport  JAXAICA APPRAISAL OF AN AIRPORT DEVELOPMENT PROJECT SUMMARY AND CONCLUSIONS i. This report appraises a project for the physical and operational improvements of the two international airports of Jamaica, for which a Bank loan of US$12.5 million equivalent is proposed. For international passenger travel, aviation is almost the exclusive transport mode, and it is vital for tourism, a main earner of foreign exchange. Jamaican budgetary limitations have curtailed major airport investment for several years, and a point has now been reached where present airport and technical services lack capacity, are inadequate for present demands and will constitute an obstacle to future growth, especially of tourism. ii. The project is the first part of a master plan for the development of the two main international airports: Norman Manley, serving the capital of Kingston; and Sangster, serving Montego Bay and the leading tourist resort area. This project is the fourth Bank project for transportation and the first one in aviation. It consists of improvements to ground services for aircraft, modernization of air traffic control and air navigation equipment and improvements to passenger handling areas and other ground side services. An essential consideration associated with the project consists of important institutional improvements through the establishment of a new authority for operating the two airports. Consultant services will be provided for design, supervision and administrative systems improvements. iii. The total cost of the project is estimated at US$19.6 million. The foreign exchange cost of US$10.9 million, plus interest during construction of US$1.6 million, will constitute a proposed loan of US$12.5 million to the Government. The remaining costs will be met by the Government and the newly established airports authority. iv. The cost estimates have been prepared by consultants financed by the Canadian International Development Agency (CIDA) and the Jamaica Ministry of Works (MOW), taking into account developments up to the end of 1973; they are considered reasonable. Detailed engineering will be undertaken by the MOW with consultant assistance. MOW will be responsible for the physical execution of the project. Procurement will be largely carried out by inter- national competitive bidding. v. The quantified economic benefits are primarily reduced operating costs of aircraft. For foreign aircraft, such cost savings will be recap- tured by the Jamaican economy through increased user charges. Non-deterral of overseas arrivals and time savings to Jamaican residents, although less important in terms of overall economic justification, have been taken into account. The economic rate of return to Jamaica is 19%.  - ii - vi. Presently, the revenues earned by the Civil Aviation Department (CAD) from the operations of the airports have been sufficient to cover only cash operating costs of the department, including those of the airports and air traffic control. Financing of capital expenditure for development and major renewal of airports comes from the Government, which receives the pro- ceeds of the J$ 2.0 a head passenger departure tax. For the airports to be financially viable, with revenues sufficient not only to cover the cash operating expenses but also to provide for future debt service and to con- tribute to investment, the level of user charges must be raised. Aircraft landing fees, the major single source of revenue, are relatively low, due to the limited service provided, and can be raised substantially when better services are available. vii. The Government has recently enacted legislation establishing the Airports Authority of Jamaica (AAJ) to -oprate the two international airports in a financially viable manner. It has proposed a capital structure, con- sisting of Government equity on which a 7% rate of return would be paid, plus any accumulated surpluses remaining from the AAJ's operations. The AAJ will service debt incurred for investment, including the proposed Bank loan. Fi- nancial projections, taking into account the forecast increased traffic and the landing fee tariff increases proposed by the Government, show that the AAJ should earn an adequate rate of return soon after completion of the project. viii. Since Jamaica depends entirely on foreign oil supplies, the avail- ability and cost of oil will directly affect the economy. This and other related economic factors which will affect tourist traffic have been con- sidered by forecasting a reduction in the rate of growth of air traffic. In spite of this reduction and the use of higher price contingencies, the project remains fully viable, as indicated above. ix. The proposed project is suitable for a loan to the Jamaican Govern- ment in the amount of US$12.5 million for a term of 25 years, including a four-year grace period. Part of the proceeds of the loan up to US$11.3 million will be onlent to the AAJ. The AAJ will reimburse the Government for the debt service of this part of the proposed loan in accordance with a subsidiary loan agreement between the Government and the AAJ. A project agreement will be entered into with the MAJ to ensure compliance with administrative and finan- cial covenants. The remaining proceeds of the loan will be used by the Gov- ernment to improve the air navigation services provided by its CAD.  JAMAICA APPRAISAL OF AN AIRPORT DEVELOPMENT PROJECT 1. INTRODUCTION 1.01 The Government of Jamaica has requested the Bank to help finance a project consisting of improvements to the two main airports on the island, as well as equipment for air traffic control and communications and technical assistance in setting up a new airport authority. 1.02 This will be the first Bank aviation project in Jamaica. Annex 1 gives details of previous Bank projects in various sectors. The total amount of these loans outstanding is US$97.5 million. The Bank has experienced prob- lems in the execution of previous Bank-financed projects, although the situation has improved in recent months. 1.03 The project has been developing since 1970. Consultants (Kates, Peat, Marwick & Co. and Montreal Engineering Co. Ltd.), financed under a Canadian International Development Agency (CIDA) technical assistance program, with terms of reference agreed to by the Bank, prepared the final master plan and cost estimates presented to the Government in 1972. This, as well as previous studies, recommended a fairly substantial upgrading of both main international airports. In view of the Government budget situation and national priorities, the Government decided in 1972 to concentrate on the development of Sangster Airport at Montego Bay, with more limited interim improvements to Manley Airport at Kingston. This was the project defined for Bank appraisal in May 1973. Following this appraisal, further Jamaican budgetary constraints and the onset of the energy crisis led to a redefinition of the project at the end of 1973. The major change is that the new passenger terminal at Sangster Airport has been deferred, pending an improvement of the Jamaican economy and until the long term impacts of the energy crisis are better understood. 1.04 The total cost of the project is estimated at US$19.6 million, of which about US$10.9 million (55% of total cost) is the foreign exchange com- ponent. The proposed loan will consist of this amount plus interest during construction, or a total of about US$12.5 million. 1.05 This report is based on the studies and cost estimates prepared by Kates, Peat, Marwick & Co. and Montreal Engineering Company Ltd. and on the findings of an appraisal mission comprising Messrs. Bostrom (Aviation Economist), Chapman (Financial Analyst), Parker (Financial Analyst), Ewing (Aviation Engin- eer) and Flores (Young Professional), which visited Jamaica in May 1973 with subsequent followup visits; it has been edited by Miss V. Foster.  - 2 - 2. BACKGROUND A. General 2.01 Jamaica, with an area of 4,410 square miles, is the third largest island of the Caribbean. The country is roughly bisected (east-west) by a mountain ridge about 2,500 feet high, separating it into northern and southern coastal areas. The population is estimated at two million and is growing at 1.5% per annum (net of migration). Kingston, the capital, is situated on the southern coast and is the business and trade hub of the island. Montego Bay, on the northern coast, is a popular tourist resort. Bauxite is the country's most important mineral although there are other mineral deposits scattered over the central area. Other natural resources include beaches, a warm tropical climate, rich agricultural land, fishing and forest reserves. 2.02 The mining industry, primarily bauxite, is the mainstay of the Jamaican economy. In 1972, this sector accounted for about 13% of the country's gross domestic product (GDP). The other big contributor to GDP is tourism, giving a 10% share. Per capita GNP is estimated currently at about US$720, and the growth rate of GDP reached about 5% per annum during the past five years. B. Tourism 2.03 Jamaica has shown impressive growth in tourism, one of its main earners of foreign exchange. In order to retain this growth in an increasingly competitive market, a fairly sizable investment program has been undertaken. Some J$ 95 million is being invested in hotels during the current five-year period up to 1975, and Air Jamaica (the Government airline) has purchased three new aircraft for about J$ 18 million. The Jamaica Tourist Board has had an annual budget of J$ 5-6 million for tourist promotion and related activities in recent years. The improvement of roads calls for a five-year investment of J$ 101.7 million, part of which is related to tourism development. 2.04 Gross revenues from tourism have amounted to between 35% and 40% of commodity exports in the past. Presently, the tourist sector generates employ- ment for some 8,000 hotel employees, mostly unskilled and semi-skilled person- nel. The expansion and development of the two international airports will be commensurate with, and will complement, the large investments in tourism and transportation infrastructure in Jamaica. C. Surface Transportation Sector 2.05 Jamaica's transportation system is generally adequate in its extent. It serves most of the population centers, productive areas and ports. How- ever, it can be improved in terms of capacity and condition. The road net- work consists of about 9,500 miles of arterial and secondary main roads and parish roads, of which 7,200 miles are suitable for vehicular traffic. Roads are generally narrow, winding and in relatively poor condition; travel by road is scenic but slow. Revenues from road taxes and user charges are not  specifically earmarked for road financing and have been consistently higher than the total road expenditures. The public railway, run by the Jamaica Railways Corporation (JRC), is 180 miles long. Because of the island's rough topography and relatively short hauls, railway operations are costly, and the corporation is operating at a slight deficit. The general cargo ports at Kingston and Montego Bay handle most of the imports, while the other ports are specialized and concentrate on exports. A J$ 41.0 million program for improvement of Kingston as a major transshipment port is presently under way. D. Transport Policy and Coordination 2.06 Several Government departments and agencies are responsible for transport policy, which is to be coordinated under a new transport policy committee. Overall policy formulation for aviation, ports, and railways is the responsibility of the Ministry of Public Utilities, Communications and Transport. Public roads policy is the responsiblity of the Ministry of Works (MOW): planning and construction of public works are also primarily the responsibility of this Ministry. The Ministry of Commerce and Tourism handles policy for shipping. Financing and budgeting for all sectors are performed by the Ministry of Finance, but overall economic planning is the responsibility of the National Economic Council. 2.07 Competition between modes does not pose any problem inasmuch as each mode is highly specialized. The only competition that has arisen is between railway and road, and even this is not intensive. 3. JAMAICAN AVIATION A. General 3.01 Jamaica has two international airports as well as several small domestic airports and air strips. The two international airports are Sangster at Montego Bay, which serves the north coast and is the center of the tourist industry, and Norman Manley in Kingston, which serves the south coast of Jamaica and caters mostly to business and private travel by resi- dents. In 1972, Manley handled 720,000 passengers and 50,700 aircraft move- ments, while Sangster handled 907,000 passengers and 42,300 aircraft move- ments. The main domestic airports are Ken Jones in Port Antonio, Boscobel in Ocho Rios and Tinson Pen in Kingston (see Map). An air traffic control system provides navigation aids, communications and control services; a detailed description of the installations at Sangster and Manley is given in Annex 2. 3.02 The rapid increase in air traffic over the past few years, with larger and more sophisticated aircraft being used, has exerted considerable pressure on the facilities provided and has outstripped Jamaica's ability to upgrade the system. In fact, the funds available have allowed for only ad hoc solutions to pressing problems rather than an overall phased master plan program. Lack of adequate maintenance and the inability to replace,  - 4 - rehabilitate or modernize installations has meant that, even with careful and prudent use of the scarce funds, the navigation aids, air traffic control equipment and airport installations have become inadequate to meet present needs at an acceptable level of service during peak periods. The resulting delays and inconvenience to passengers and airline operations are reaching serious levels, and an aggressive program is needed to meet requirements for the next few years as the first step in a long-term planning program. 3.03 Future growth is dependent on a number of factors which are now uncertain, e.g., cost of fuel, type of aircraft and competition for tourist traffic. It is therefore prudent to put the two main airports into good operating condition and to defer major investment until the growth pattern is clearer. The proposed project stresses flexibility in meeting future needs rapidly as they may arise. 3.04 The location of the two airports is such that noise pollution is minimized with approach and departure patterns over the sea. There is some potential noise problem on the west side of the bay at Kingston, but proper planning by the Government can ensure that no major difficulty occurs. As- surances were given by the Government during negotiations regarding the development of adequate regulations to protect the airport environment by December 31, 1976. 3.05 The question of rehabilitating both airports rather than developing only one as a major international airport has been considered. Essentially, each airport serves a different market, and there is no really satisfactory alternative of serving both these markets with one airport; thus, the project envisages improvements to both airports to meet current market demand. The future will probably see larger, more efficient aircraft with larger passenger loads and a slower growth in the number of flights. Both airports will then require additional installations to meet this changed demand more efficiently. B. Air Transport in Jamaica 3.06 In addition to Air Jamaica, some 11 foreign airlines provide scheduled international services between Jamaica and over 40 foreign centers. The routes traveled most frequently are those connecting Jamaica to Miami and New York. In addition, bilateral negotiations are in progress with several European countries for new routes. Medium size aircraft such as DC-9's and BAC-111's are common on Caribbean routes, with larger DC-8's and B-707's being utilized on the long-range routes. 3.07 On domestic routes, the usual aircraft is a DHC-6 Twin Otter. The route between Sangster and Manley airports is also served by several inter- national air carriers with their larger aircraft, under special agreement to carry this so-called cabotage traffic. International charter operators provide a small but increasing service. 3.08 The Government flag carrier, Air Jamaica, which was formed in 1968, serves a network of over 6,031 route miles, most of which are to North America, but direct flights to Europe have just started. The airline also provides  a shuttle service between Kingston and Montego Bay. In 1973, with a fleet of five jets (two DC-9's and three DC-8's), the airline carried about 0.5 million passengers. It bought three additional DC-8 aircraft at the end of 1973 and has one more DC-9 on order. C. Traffic Forecasts 3.09 As a result of the increased tourism to the island and the develop- ing economy, air traffic has grown rapidly in Jamaica (Table 1). The basic traffic forecasts of passenger and air cargo were prepared by the consultants as well as a special International Air Transport Association (IATA) committee and were based on such factors as past air traffic trends, current tourism development plans and forecasts prepared by individual international air carriers. These forecasts have been adjusted to reflect recent developments, particularly the increased price of fuel and the impact on traffic demand from tourist-generating countries; they cover the period 1975-1985 and are considered reasonable. The actual and forecast traffic for passengers, cargo and aircraft movements is seen in Table 1. Assurances were obtained during negotiations that an integrated plan for tourism development will be drawn up by the Government by June 30, 1975. 3.10 The air carrier aircraft mix is related to the route structure and the type of equipment operated by the carriers serving the route. Equipment estimates were based on carrier forecasts whenever possible. Since the plans of air carriers are not normally available beyond a five-year period, equipment forecasts for later years were based on estimates. 3.11 Since Jamaica imports all its oil requirements, the full effects of fuel limitations will be felt by the economy. For aviation, therefore, the price of oil products supplied in Jamaica will reflect world market prices. More than half the fuel for traffic to and from Jamaica will be supplied at the airports of origin or destination outside Jamaica, such as the United States, Canada, Venezuela or Trinidad, where the fuel situation is likely to be better. The price of the most common fuel, kerosene, nearly tripled during 1973 from one of the most typical sources, Curacao. Airlines can compensate for this in two ways: one is to raise load factors and the other is to raise ticket prices. Both have taken, or are expected to take, place. Ticket price increases of 19% in 1974 may be followed by more. An increase in load factors will compensate for a large part of the fuel price increases and will also alleviate any shortages of fuel in the immediate term. Since the proportion of charter traffic in Jamaica with existing high load factors has been very small (7% at Sangster) so far, it is likely that the modifications made to the original forecasts would be sufficient unless the fuel situation should worsen drastically. (i) Passenger Forecasts 3.12 For projection purposes, the passengers were divided into categories with different growth characteristics. The most important group comprises the foreign tourists, who account for a very high share of all passengers at  -6- Sangster airport and a considerable share of the traffic at Manley. The most important categories at Manley, however, are the Jamaican residents. Up to 1977, the annual increases for all passengers at Sangster have been assumed at 8.3%, increasing to 9.7% until 1980 and about 7.5% thereafter; for the total of passenger arrivals and departures at Manley, the corresponding growth rates are 8.4% until 1980 and 7.7% thereafter. (ii) Cargo Forecasts 3.13 Air cargo forecasts were developed both by the consultants and the IATA committee (para. 3.09). Both forecasts give about equal overall growth in total cargo flows, but the IATA forecast shows a continuation of the present relationship between inbound and outbound cargo, with outbound cargo at about 50% of inbound cargo. This forecast has been accepted for the purpose of determining aircraft movements. (iii) Aircraft Movement Forecasts 3.14 Aircraft movement forecasts were developed primarily by the con- sultants. Since the forecast of the rate of gronyth of passenger traffic has been modified downward, the effect will probably be higher load factors, the greater use of medium size aircraft and delay in the introduction of more large capacity aircraft. D. Airport Administration 3.15 The Civil Aviation Department (CAD) of the Ministry of Public Utilities, Communications and Transport is presently responsible for the control and regulation of all civil aviation activities iii a including the provision, operation and maintenance o.f aOrports and cther related facil- ities such as air traffic controY, adAs to air navigation and oi co.itunications (Annex 3). 3.16 There are a num_er of weaknesses in the presen_ structure and op,- erations of civil aviation, i.e., the lack of a formal managanKer.t structure, the absence of defined 6bjectives and of forward planning, and the need for more effective management controls and accounting, ss well as an improved salary structure to attract_ high caliber personnel. As a first step toward improving the system, the consultants suggest that the day-to-day operations and management of airports should be separated from regulatory futctions (including the responsibility for setting standards). The fonmer will be vested in the new Airports Authority of Ja4iaica (AAJ), while the regu atory and standard setting functionz will remain wIith the CA". 3.17 The essential thrust of the project is to restore the two inter- national airports to an adequate operational level and to improve th,e level of passenger service to minimum acceptable staniards. It is of equal impor- tance that adequate management and operational systeme -he iratituted to ensure that sound programs for operation, maintenance, teudgetinrg, planning and development of the airport system are formulated and e.ecutad.  - 7 - 3.18 Having accepted the recommendation to create the AAJ, Parliament approved legislation in July 1974 to create this statutory body to manage and operate the two international airports. In order to establish a financially viable organization, initially only Manley and Sangster airports will be operated by the AAJ. The small subsidized domestic airports will remain under the control of the CAD. E. The Airports Authority of Jamaica 3.19 The policies and general administration of the AAJ will be determined by its Board of Directors. The Board, appointed by the Government of Jamaica, will take major decisions affecting the present and future operations of the Authority and will report to Parliament through the minister responsible for civil aviation (para. 2.06). 3.20 A general manager, appointed by the Board, will be the chief execu- tive officer of the AAJ. It is anticipated that he will be a Jamaican with a proven record in a commercial management position. His appointment, and those of the operating, financial and personnel managers immediately below him, will be made following consultation with the Bank; this was agreed dur- ing negotiations. 3.21 The organization proposed will require effective management tech- niques and controls to guide its operations. These techniques, as well as the organization structure itself, will have to be developed. The training and development will be part of the implementation process and are included in the project. A personnel administration program geared to the control and motivation of a large and varied labor force is needed, as well as a level of salaries competitive with those of the private sector. During negotia- tions, it was agreed that a personnel administration program will be developed, satisfactory to the Bank, including AAJ's organization, salary structure and training arrangements. 3.22 In addition to a Loan Agreement between the Government and the Bank, there is a project agreement between the AAJ and the Bank to cover the various operational, management and financial undertakings. 3.23 Since the AAJ will take over the operation of the two international airports from the CAD, changes in the CAD organizational structure are required. At the same time, the responsibilities, authority and job descriptions of the various officials in the CAD should be redefined in order to ensure that long- term planning, safety regulations and other policy matters or standards in the civil aviation field affecting airport operations are properly coordin- ated and implemented. Funds are provided in the loan amount for consultants to assist the CAD in this endeavor and for improving its management techniques. It was agreed during negotiations that appropriate training and development of managerial and operational personnel for the AAJ and the CAD would be developed from the consultant studies.  -8- 4. THE PROJECT A. General 4.01 The objectives of the project are to improve the management, oper- ational capacity and levels of service of Jamaica's international airports. The major goals will be: (a) to improve ground handling facilities for aircraft; (b) to modify and improve passenger handling facilities to meet expected traffic needs to 1980; (c) to improve air traffic control and air navigation facilities to reduce delays and meet safety needs; (d) to rehabilitate and improve water, sewer and electrical systems to meet current standards and requirements: (e) to develop a master plan for future development; and (f) to improve the management system and planning of the CAD and the AAJ. B. Project Description 4.02 Modifications will be made to the existing terminal buildings at Manley and Sangster airports to alleviate the problems of passenger processing. Improved baggage handling and rearrangement and expansion of passeuger waiting areas are planned, together with safer handling of passengers to and from aircraft. A simple, separate structure will be established at Sangster to handle charter passengers. At both airports, improvements will be made to the water, sewerage and storm water drainage systems; also, the electrical dis- tribution systems, switchgear and airfield lighting will be modernized, con- solidated and arranged to simplify future improvements (Annex 2 and Table 2). 4.03 At Sangster, a new parallel taxiway, partly constructed, will be completed and paved to reduce aircraft delays. The aircraft parking apron will be extended to accommodate wide body aircraft. At Manley, small modifi- cations will be made to the parking apron to provide an additional aircraft position. Building modifications include relocating the existing passenger finger, allowing an increase in usable apron area and a significant improve- ment in apron utilization. The runway at Manley will be lengthened by 600 feet to provide better takeoff parameters for Air Jamaica's long range aircraft. Navigation aids, in the form of co-located Very High Frequency Omni Range and Distance Measuring Equipment (VOR-DME), will be installed at both airports. These will serve as en route aids and, specifically, will provide guidance to pilots on approach and departure. This guidance will result in greater safety and savings in aircraft time and will assist air traffic control. Charts IBRD 10591 and 10592 show graphically the improvements to be made at Sangster and Manley during the project period.  -9- 4.04 The project will also finance the purchase of telecommunications equipment to improve air control air-ground communications in the control towers at Manley and Sangster and the Kingston air traffic control center. This equipment, as well as the navigation aids above (para. 4.03), will be pro- vided to the CAD. Assurances were given by the Government during negotiations that, by December 31, 1976, a program will be drawn up by the Government, satisfactory to the Bank, and thereafter implemented, for air traffic control, aeronautical communications and meteorologyv, including associated training and systems modernization. New modern crash/rescue equipment and motorized runway sweepers will be purchased. 4.05 The forecasts indicate that the capacity of the terminal buildings will be severely strained by 1980. Since it will not be practical to enlarge the present buildings again, new structures will be required at Manley and Sangster to augment the existing terminals in accordance with the master plan. In addition, the runway at Manley will require lengthening to accom- modate long range heavy aircraft. By 1980, the traffic will have increased to the point where the load penalties imposed by the present runway length will not be acceptable. The loan will finance detailed engineering and architectural studies and design for the next phase in accordance with the master plan, so that implementation can be readily accomplished on a priority basis as required. It is anticipated that major new works will be required about 1980 with a further expansion in 1985. This should provide for re- quirements to 1995 (Table 3). C. Design and Construction 4.06 A project team will be formed in the MO to execute and supervise the project; this was confirmed during negotiations. The Ministry, however, is presently understaffed and overloaded with other projects and will not be able to carry out all the necessary work. The project will coincide with the initial formation of the AAJ, which will be heavily involved in organiza- tional and management problems, including staffing. The AAJ is not expected to be able to provide complete project control and supervision, but will be required to approve and accept final designs and cost estimates. Consequent- ly, there is a need for consultants to assist the project team, to provide design and construction supervision service, to advise the AAJ and to train MOW staff so that ongoing airport work can be undertaken with local personnel. Draft terms of reference for the project team and the consultants were agreed upon during negotiations. In order to reduce the risk of delay, it is proposed that the appointment of the consultants, and the personnel of the MOW project team, on terms and conditions acceptable to the Bank, shall be conditions of loan effectiveness. It is recommended that retroactive financing be provided for services performed by the consultants after April 1, 1974 and prior to loan signing, and estimated to cost not more than US$160,000. 4.07 The CAD is expected to be able to furnish design criteria and expertise with respect to aircraft operation requirements and to control the design and procurement of the navigation and communication aids.  - 10 - 4.08 In order to ensure that decision-making and necessary Governmental action will be expedited and coordinated, an interdepartmental committee will be set up under the Ministry of Public Utilities, Communications and Transport with the Permanent Secretary as chairman. The members of the com- mittee will consist of the Chief Technical Director of the MOW, the Director of Civil Aviation, the General Manager of the Airport Authority, the Project Manager of the MOW, the consultant's Project Director and representatives from the Ministry of Finance and the National Planning Agency. The formation and structure of this committee were agreed upon during negotiations. 4.09 Tendering, procurement and contractual arrangements will be through the MOW. 4.10 An extremely important part of the project will be assisting the AAJ in its initial organization. Funds have been provided for the retention of consultants to review and advise on management, accounting and information systems. Funds have also been provided for consulting assistance to the CAD for improvement of its management system. At the time of negotiations, engagement of consultants as outlined above, on terms and conditions satis- factory to the Bank, was confirmed. Contracts, to be signed with consultants acceptable to, and on terms and conditions agreed on, by the Bank for the development and implementation of the organization, management and administra- tion structures and systems of the AAJ and the CAD, respectively, will be a condition of effectiveness. D. Cost Estimates 4.11 The cost estimates and foreign exchange component of the various parts of the project are on the-following page:  - 11 - J$ '000 US$'000 Local Foreign Total Local Foreign Tota % Aircraft Maneuvering Areas 1,673 1,210 2,883 1,840 1,331 3,171 16 Terminal Modifica- tions 1,627 1,911 3,538 1,790 2,102 3,892 20 Navaids - 778 778 - 856 856 4 Other Buildings and Utilities 1,584 2,011 3,595 1,742 2,212 3,954 20 Subtotal 4,884 5,910 10,794 5,372 6,501 11,873 60 Contingencies Physical 16% 781 946 1,727 859 1,041 1,900 10 Price 15% per annum 1,524 1,658 3,182 1,676 1,824 3,500 18 Engineering, Supervision and Consultants 777 1,377 2,154 855 1,514 2,369 12 TOTAL PROJECT COST 7,966 9,891 17,857 8,762 10,880 19,642 100 Locally Financed Ongoing Works in Project Period 1,330 - 1,330 1,463 - 1,463k TOTAL PROGRAM COST 9,296 9,891 19,187 10,225 10,880 21,105 A more detailed breakdown of cost estimates for all project items appears in Table 2. The Government is presently carrying out a program of improve- ments to the civil aviation system. Ongoing parts of this program will en- tail an investment of approximately J$ 1.3 million in the 1974/75 Jamaican fiscal year. This investment has been shown in the cost estimates table but will not be financed under the loan. 4.12 The amounts of various petroleum products or derivatives used in the project will be relatively small but critical. Contractors may have difficulty in obtaining some supplies, thus slowing production. The costs of materials may be affected due to oil costs and anticipated high labor wage increases in secondary industries of exporting countries.  - 12 - 4.13 A physical contingency allowance, averaging 16%, has been included to provide for unforeseen or changed conditions that may be encountered. In view of current uncertainties and price trends in Jamaica and foreign markets, an average price contingency of 15% per annum for foreign and local costs has been included. E. Procurement 4.14 Major civil works and certain equiprent procurement contracts will be awarded through international competitive bidding in accordance with the Bank's "Guidelines for Procurement". It is unlikely that any one civil works package will attract wide-scale international interest due to size, value, labor intensity and diversity. Related project items will be grouped as much as possible to attract competitive bidding. Foreign and local firms now work- ing in Jamaica are expected to show the chief interest. Smaller structures and related works contracts, estimated at a total of US$1.0 million, will be awarded on the basis of local advertising and competitive bidding. For pur- poses of standardization and urgency, VOR and some electronics equipment, es- timated in the aggregate to cost about US$400,000, will be purchased directly from suppliers. F. Disbursement. 4.15 Loan funds will finance consultants' services and the foreign exchange components of construction and equipment in accordance with the estimated schedule of disbursements shown in Table 4. Disbursements will be made on the following basis: (a) 55% of expenditures for civil works, representing the estimated foreign exchange component; (b) 100% of the foreign expenditures for foreign consul- tants, or 70% of local expenditures for local consul- tants, for consulting services, engineering and super- vision; (c) 100% of the foreign expenditures, or 90% of local expen- ditures, for procurement of imported equipment. 4.16 It is recommended that the costs of consulting services incurred after April 1, 1974 and before loan signing be financed retroactively (para. 4.06). These costs are estimated to be not more than USS160,000. Since the CAD has already placed orders for certain navigation equipment for reasons of safety, which may be delivered before loan signing, it is recommended that retroactive financing up to US$390,000 be approved to provide for this even- tuality. Any savings in the loan may be applied to works of a similar nature and contained in the master plan subject to Bank approval.  - 13 - 5. ECONOMIC EVALUATION A. General 5.01 Jamaica depends on sea and air for all transport to and from the outside world. With the exception of cruise ships, practically no scheduled passenger services by sea exist; therefore, the island must rely on air ser- vice for its passenger transport to foreign countries. This, together with the importance of the tourism industry, makes the provision of adequate air- ports vital to the country's economy. Due to the other pressing needs of a developing country, the investment in aviation infrastructure has been com- paratively small over a number of years, resulting in increased congestion at the two international airports caused by very rapid growth of traffic with no provision for increase in airport capacity. This congestion has reached a point where continued growth without serious constraints cannot be accommo- dated. It occurs at a time when substantial investment is being made for tourism growth in new hotels and better roads, and also coincides with the competition from a number of other tourist destinations (Table 5). There is, therefore, a significant risk that the airports, particularly that at ?-'ntego Bay, will become obstacles to further tourism development. 5.02 The economic evaluation tries to relate the advantages of airport traffic growth to the investment necessary to sustain such growth for a period of time until further major investments become necessary to meet even higher levels of traffic, toward the latter part of the 1980's. Conceptually, the analysis has been divided into two parts, one related to aircraft opera- tions and the other to passenger handling for each airport. The two, however, are highly interrelated, since runway-taxiway capacity must be provided to handle the aircraft that larger passenger processing areas can accommodate and vice versa (Annex 4). B. Sangster Airport - Aircraft Benefits 5.03 The most urgent problem at Sangster is the lack of a parallel taxiway. This has been recognized for some time, but, unfortunately, the Jamaican Government budget has allowed only certain preparatory works of the least expensive part of the work to be undertaken. The situation has led to aircraft delays; these, in turn, have resulted in rebates for landing fees at both international airports which otherwise would not have been necessary, and, consequently, lower airport revenue for the Jamaican Govern- ment. For Air Jamaica, which carries about 40% of the traffic at this air- port, these delays have meant substantially higher operating costs. 5.04 The quantified benefits of the project to all airlines consist of the aircraft time savings resulting from the parallel taxiway and improved terminal and apron area; these time savings have been multiplied by the direct operating costs for the aircraft in use. Certain assumptions have been made concerning the spreading of present peaks over a longer period of time and thereby reducing delay times. Since peaks are largely determined by conditions at airports other than those in Jamaica, it is unlikely that l  - 14 - any further spreading of peaks could be achieved, but the use of peak hour pricing, e.g., by rebates for traffic at other than peak hours, should be further investigated at the time of implementing increased aircraft tariffs. 5.05 The full aircraft cost saving accruing to Air Jamaica and the additional landing fees to be recovered from foreign airlines as a result of the project have been considered as a Jamaican benefit. The additional revenue from charges would arise from the removal of the present 25% rebate followed by a further increase of about 50% in the existing base tariff for landing charges. The additional landing fees from foreign airlines are less than the direct operating cost savings accruing to these airlines as a result of the improvements to aircraft movement areas at Sangster. C. Sangster Airport - Passenger Benefits 5.06 At certain times of the year, very congested conditions at the air- port have so far been mostly a matter of inconvenience to travelers and have not led to a serious limitation of travel growth. However, since two to three years are required for design and construction of a major terminal, this situa- tion will rapidly worsen. The direct effect will be passenger time losses coinciding with difficult waiting conditions immediately after arrival and prior to departure. Since this situation primarily affects North American tourists, the direct impact on Jamaica is small. However, such delay times, under difficult circumstances, create an unfavorable first and last impression of a country, and are likely to lead to a small, but complete, loss of visitors who have a wide choice of alternate destinations. Such a loss is very diffi- cult to quantify because passenger reaction to delays and inconvenience is very variable. Furthermore, it will most often not have a direct effect on the trip being undertaken, but rather on future visits by the same individual or an associate. There are indications that the rate of repeat visitors to Jamaica is fairly low. This is partly due to airport conditions and is likely to drop further if these conditions continue to worsen. Airlines also face higher costs when an airport terminal is congested and tend to decrease their frequency of operations at such an airport; this, again, would limit traffic growth. There is evidence that changes in trip time do, in fact, have an influence on the number of trips taken by air, especially when related to a particular destination or an individual airline. 5.07 These various influences of delays, under trying conditions, on passengers can be summarized in a regression analysis relating changes in trip time to other factors determining air passenger growth, such as dispos- able income and fare level. For US travelers, constituting the majority of foreign visitors, and for Europeans, studies have been made in recent years to determine the elasticity of demand to changes in travel time. While these studies, done in the early part of the 1960's, show a factor of about -0.4, this has increased to about -0.65 in more recent studies. This means a 4% (or 6.5%) reduction in travel for a 10% higher traveling time, or vice versa. The lower of these two elasticity factors has been applied, with the estimated time delays at Sangster, to arrive at the difference in the number of passengers with and without the project. The entire net foreign exchange contribution for this relatively limited number of visitors has been considered a total potential loss to the Jamaican economy (Annex 4).  - 15 - D. Manley Airport - Aircraft Benefits 5.08 At Manley airport, a number of relatively small individual air- craft-related improvements will be made as part of the project. The length- ening of the runway will lead to a payload increase under certain conditions, and the improved apron area will lead to delays avoided for aircraft. The combination of improved electricity supply and navigation aids will lead to improved regularity and better utilization of aircraft. Better runway maintenance will decrease the risk of engine damage. To ascertain, with accuracy, the full impact of each is difficult. 5.09 There is a high degree of interdependence between Sangster and Manley airports as well as joint use of certain air traffic control improve- ments. Since the two airports will offer equivalent services after the improvements made at both of them under the project, the increase in landing fee tariffs will be the same. Therefore, the same landing fee increases used for Sangster have been applied to the Manley aircraft movements as a measure of the minimum value of the Manley improvements to the airlines. E. Manley Airport - Passenger Benefits 5.10 Passengers at Manley will save time, particularly at traffic peaks. The time saved has, however, been applied only to Jamaican residents, who are the predominant passengers. In view of the more limited improvement for pas- sengers as compared to Sangster and the different composition of visitors, no effect of deterred traffic has been included. F. Project Return 5.11 The economic return of the project for the Jamaican economy, based on the above benefits, is about 19% for each airport individually. Disre- garding any passenger benefits, this rate of return is 14% at Sangster and 15% at Manley. The sensitivity of these rates has been tested with acceptable results. Thus, a 15% increase in construction costs would lower the return from 19% to 16%. A 25% decrease in benefits, due either to lower traffic than projected or lower unit benefits, would lower the rate for the project as a whole to 14%. The first year return is above 14%. 6. FINANCIAL EVALUATION A. Existing Situation 6.01 Annual budgets are prepared by CAD providing for the costs of the operation and maintenance of all airports, air traffic services and general administration. These costs are covered by aircraft landing and hangar fees, rentals and concessions, and miscellaneous revenues, but not the revenues from the passenger departure tax, amounting to over J$ 1.0 million annually. When these revenues have been insufficient, either the Government has subsi- dized the sector or expenditures have been cut. Provision made for capital expenditure has been quite erratic and insufficient in the past.  - 16 - 6.02 The charges for landing fees, established in February 1972 (Annex 5), are relatively low by international comparison in relation to the service offered and should be raised when better facilities have been provided. The financial information prepared under the present Government accounting, cov- ering the activities of the civil aviation sector, is inadequate and incom- plete. In consequence, only pro forma operating accounts can be prepared and are given in Table 6 for the years 1970/71-1973/74. These accounts should be regarded with caution, but they emphasize the fact that user charges must be increased. The AM plans to have its accounting period on a calendar year basis. B. Financial Objectives and Financial Structure of the AAJ 6.03 The Government intends that the new AAJ should be a financially viable body, earning revenues sufficient to cover all cash operating expenses, to service debt, to pay a return to the Government for the capital it has invested and to provide a contribution to its future investment requirements. 6.04 Adoption of the following financial structure for AAJ was confirmed during negotiations. Equity - comprising (a) ordinary shares to be held by the Government in the AAJ; and (b) the retained earnings of AAJ built up from annual surpluses consistent with its obliga- tions under the legislation establishing AAJ. The Government undertakes to provide AAJ with initial equity equivalent to (a) the net depreciated value of the fixed assets of the two international airports transferred to AAJ on vesting day, as provided under the Act establishing AAJ, and (b) at least US-$4.3 million for the purpose of carrying out the project. Debt - such long-term debt as may be incurred by the AAJ, including US$11.3 million of the proceeds of the Bank loan relent to it by the Government under the subsidiary loan agreement. A subsidiary loan agreement will be required between the Government and the AAJ as a condition of loan effectiveness, prov4ding for the repayment of its share of the proposed Bank loan to the Government. The remaining portion of the Bank loan, assigned to the CAD, would be repaid by the Government. 6.05 In order to increase the AMT's revenues, the Government has proposed phased increases in the levels of landing fees, as detailed in Annex 6. Re- moval of a remaining 25% rebate during 1975 is necessary to cover cost in- creases over 1972/73, and increases in real terms of 50% in 1976 and of 25% in 1977 would enable the AAJ to recover some of the economic benefits of the project. The Government has also agreed that annual revenues from the pas- senger departure tax in excess of the present level of about J$ 1.2 million be collected by the AAJ and regarded as airport operatling revenue. Agreement on a program for increasing aircraft landing fees and arrangements for trans- ferring passenger tax revenues was reached during negotiations.  - 17 6.06 Within the overall picture of financial viability, revenues from airport user charges should cover the costs of services provided. Present accounting does not permit the comparison of such costs and revenues. It was, therefore, agreed during negotiations that, when the results of the new ac- counting system (para. 6.17) become available, all airport user charges will be reviewed, and revised as necessary, to cover the costs of the services provided. C. Financing Plan fr3 theLPrject Period 6.07 Table 7 gives a forecast of the funds required over the period 1974-1977 for the project, and other works, together with the sources of funds. A suimnary is given below: J$ millions US$ millions _ Foreign Local Total Foreign Local Total Funds Required The Project - AAJ 8.8 8.0 16.8 9.7 8.8 18.5 81.5 - CAD 1.1 - 1.1 1.2 - 1.2 5.2 Ongoing works - 1.3 1.3 _ - 1.4 1.4 6.2 9.9 9.3 19.2 10.9 10.2 21.1 92.9 Add interest during construction 1.5 - 1.5 1.6 - 1.6 7.1 Total Required 11.4 9.3 20.7 12.5 10.2 22.7 100.0 Funds Available From Government contributions - 5.2 5.2 - 5.7 5.7 25.1 From AAJ - 4.1 4.1 - 4.5 4.5 19.8 From proposed Bank loan 11.4 - 11.4 12.5 _- 12.5 55.1 Total Available 11.4 9.3 20.7 12.5 10.2 22.7 100.0 The total cost of the program is J$ 19.2 million, plus interest during con- struction of J$ 1.5 million, making J$ 20.7 million (tTS$22.7 million) in all. This would be financed by the proposed Bank loan of J$ 11.4 million (US$12.5 million) and Government equity contribution of JS 5.2 million (US$5.7 million) and AAJ's own funds J$4.1 million (US$4.5 million). As indicated, part of the loan, J$ 1.1 million, would be used by the Government for the part of the project relating to CAD.  - 18 - D. Financial Projections (i) Income and Expenditure 6.08 Revenue details and projections for AAJ for the years 1974-1984 are given in Table 8. Summarized forecast results for the years 1974, 1978, 1980 and 1984, based on assumptions in Annex 6, are given below: 1974 1978 1980 1984 -