Ecuador - Second Guayaquil Port Project

Document of FILE COPY, The World Bank FOR OFFICIAL USE ONLY Repor No.P-1827-EC REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE GUAYAQUIL PORT AUTHORITY WITH THE GUARANTEE OF THE REPUBLIC OF ECUADOR FOR A SECOND PORT OF GUAYAQUIL PROJECT April 28, 1976 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.  CJRRBNCY EQUAVLNTS Currency Unit - Scre (SI.) US$1 - SI. 25 S/.1 = US$0.04 S/.1,9000 = US$40.0 S/.l,000,000 = Us$40,000.00 Fisca;l Year: January 1 to December 31  FOR OFmFCIAL USE ONLY INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE M RECTORS ON A PROPOSED LOAN TO THE GUAYAQUIL PORT AUTHORITY WITH THE GUARANTEE (F THE REPUBLIC OF ECUADOR FOR A SECOND PORT OF WUAYAQUIL PROJECT 1. I submit the following report and recommendation on a proposed loan to the Guayaquil Port Authority with the guarantee of the Republic of Ecuador for the equivalent of US$33.5 million to help finance a second Port of Guayaquil project. The loan would have a term of 24 years, inclu- ding 4 years of grace, with interest at 8-1/2 percent per annum. PART I - THE ECONOMY 2. A report entitled "Ecuador: Economic Memorandum" (No.1033-EC) was distributed to the Executive Directors on February 26, 1976. Annex I summarizes the main economic and social indicators. 3. With the first shipments of crude oil from the Oriente Region in 1972, Ecuador became a net exporter of oil. This provided the country with additional resources which at least temporarily removed the savings and foreign exchange constraints that had severely impeded Ecuador's growth in the past. Oil income rose from $38 million in 1972 to over $420 million in 1974. However, during the last year it has become clear that the coun- try's oil wealth is smaller than previously estimated. One year ago, it was estimated that the country had total -- proven and probable -- oil reserves equivalent to 5.7 billion barrels. Current estimates are of only 2.5 billion barrels, owing to a substantial decline in the calculation of probable exploitable reserves. Moreover, it is now expected that the production levels projected last year for 1976 will not be achieved until the early 1980s. These revised estimates, together with a better knowledge of the difficulties to be encountered in the exploitation of Ecuador's untapped oil fields, and with the transitory problems faced by the country's oil exports in 1974-75, indicate that Ecuador is not likely to accumulate substantial amounts of foreign exchange reserves in the foreseeable future. 4. There has been a sharp decline in petroleum output since mid- 1974 because of marketing difficulties for Ecuadorian crude in export markets and a protracted disagreement between the Government and the foreign concessionaires over the taxation of oil exports. The total off- take of oil dropped from an average 232,000 b/d during January-June 1974 to 123,000 b/d during the second half of 1974, and became irregular in 1975, owing to two breaks in the trans-Andean pipeline. For 1975, the average production is estimated at about 165,000 b/d. There has also been a virtual standstill in exploration during the past two years and the level of proven recoverable reserves, estimated at 1.5 billion barrels, has remained unchanged. I This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may dot otherwise be disclosed without World Bank authorization.  - 2 - 5. The disappointing performance of the petroleum sector had not been expected by the Government. Counting on rising petroleum income, the Goverment had adopted policies designed to stimulate further growth. It increased public expenditures -- including subsidies of essential consumption goods --, offered more generous credit programs for agricul- tural and industrial investment, and lifted most quantitative import restrictions. In 1974., import duties were cut by an average of 34 percent. Moreover, imports of agricultural inputs and of essential foodstuffs were fully exempted from duties. 6. The response of the economy to these policies, and to the pre- vailing very optimistic economic climate was, in general, strong. Gross investment grew by 22 percent in real terms in 1973 and growth of GDP at market prices reached a rate of about 15 percent, far above historical levels. Continuing rapid growth in industry, construction, trade and Government services, made it possible to achieve an overall GDP growth rate of approximately 8 percent in 1974. This was obtained in spite of the significant decline in the oil sector product, and of the virtual stagnation of agricultural production -- which was hampered, until early that year, by the insufficiency of credit availabilities and by the inade- quate price policies followed up to then by the Government. 7. The rapid economic expansion was accompanied by inflationary pressures. The cost of living index for low and medium-income families in Quito, which had risen by about 8 percent per anumm during 1971 and 1972, increased by 13 percent during 1973 and by over 23 percent during 1974. While the inflationary pressure was largely generated by the rapid rise of public expenditure, the strong expansion of credit to the private sector also contributed to the increasing money supply. Domestic supply could not respond in full to the growth in demand, which led to higher imports of wheat, oils and fats, and other products. In construction materials, domestic production did not keep pace with increases in demand. In manufacturing, the process of import substitution of finished goods accelerated, leading to rapidly rising imports of equipment, raw materials and semi-finished products. As a result, total imports of goods and non- factor services rose from about $440 million in 1972 to $515 million in 1973 and over $1.0 billion in 1974. This import growth in part also reflects a rise in import prices of 17 percent in 1973 and 28 percent in 1974. Exports -- also including non-factor services -- e-xpanded from $365 million in 1972 to about $1.1 billion in 1974. Of the increase, about 75 percent was accounted for by petroleum. 8. Despite the growth of imports, Ecuador's balance of payments showed, until mid-1974, a marked improvement. In 1973, Ecuador achieved the first surplus in its resource balance since the early 1950s, and net foreign exchange reserves rose from $128 million at the end of 1972 to $371 million by the end of June 1974. However, these favorable trends could not be maintained after mid-1974. As oil exports declined and total imports continued to rise substantially, Ecuador's reserve position began to deteriorate rapidly. By August 15, 1975, the country's net foreign exchange reserves had fallen to $181 million, equivalent to less than two months' imports.  - 3 - 9. Until 1974L, increasing oil revenues brought about a substantial improvement of the Government's financial position. For the Central Government /1 -- which received about 54 percent and 57 percent of total oil revenues in 1973 and 1974 respectively -- these revenues led to a strong increase in current savings and to an expansion of capital expendi- ture substantially above the growth of current expenditure. With current savings rising to about $68 million in 1973 and $298 million in 1974, the overall cash position of the Central Government turned from a small deficit in 1973 to a $62 million surplus in 1974, despite a more than threefold increase in capital expenditure in 1974. FONADE, established in late 1973 in an effort to earmark part of the additional oil revenues for the finan- cing of public investment projects over and above budgetary allocations, disbursed about $93 million in 1974. Most of these disbursements helped finance the construction of the Esmeraldas refinery, and the credit pro- grams of the National Development Bank and other financial institutions. As a result of the decline of oil revenues, current savings decreased by an estimated 20 percent in 1975 despite an-improved performance of non- oil taxes. These developments led to a temporary financing gap in the Central Government operations and to the decision to contain the growth of Government expenditure in 1976. 10. A number of recent measures have contained the deterioration of the balance of payments, and foreign exchange reserves are estimated to have totalled about $245 million by the end of 1975. The measures included a reduction of the tax-paid cost of petroleum exports by the equivalent of about US$0.43 per barrel; the concession of higher allowances to oil com- panies for their production cost; and the introduction of import restric- tions in August and September 1975. Oil production has recovered, mainly as a result of the cut-back in the income tax rate on oil exports, and is estimated to have reached over 210,000 b/d towards the end of 1975. 11. On October 2, 1975, the Govenument announced new financial objec- tives for 1976: to achieve additional increases in foreign exchange reserves and a more balanced budgetary position, which would make it unnecessary for the Government to borrow further substantial amounts from the domestic banking system during 1976. The Government hopes to reduce the annual rate of inflation from some 15 percent in 1975 to about 10 percent in 1976. Further negotiations with the oil companies are expected to open the way to increased exploration and development efforts. 12. Ecuador's oil production is now expected to increase gradually and to reach about 270,000 b/d by 1979-80. An expansion beyond this level appears feasible, provided that a vigorous exploration and development program can be brought underway in the near future. Increasing export earnings from petroleum, coffee, sugar and manufactured goods, combined with a net inflow of foreign capital in the order of $265 million a year /1 Including the National Development Fund (FONADE) and the National Participation Fund.  - 4 - during 1976-80 -- needed largely to finance new gas and oil-related ventures -- should make a substantial improvement of the overall balance of payments situation possible after 1976, and permit a moderate increase in foreign exchange reserves. The extent to which Ecuador's balance of payments situation will actually improve depends largely on the success of immediate stabilization policies, the development of oil production, the behavior of oil prices, and the mobilization of foreign capital. 13. Although the oil sector will continue to be the major source of foreign exchange in the medium term, there are considerable uncertainties with respect to the possible production profile of this sector in the longer run. Most of the oil likely to be produced until the early 1980s has already been found. Unless exploration efforts are substantially stepped up and new oil fields are discovered, production could decline soon afterwards. To make the most efficient use of oil revenues the Government therefore intends to begin to diversify the production base of the economy by developing agricultural and industrial activities in which the country has a potential comparative advantage. Exports other than oil need to be developed -- for example, natural gas, and agricul- tural and forest resources. An appropriate use of the financial resources provided by oil will also make it possible to alleviate the country's most pressing social needs. However, Ecuador continues to be one of the poorest countries in Latin America, with an estimated per capita income of $450 in 1974, and a large proportion of the ponulation living at subsistence levels. Oil has only shifted Ecuador from the upper strata of the poorest countries to the lower brackets of the middle income developing countries. 14. Several years ago the Government designed an ambitious develop- ment strategy. It is reflected in the 1973-77 Plan Integral de Trans- formacion y Desarrollo and focuses on (a) promoting the diversification of the economy by fostering agricultural and industrial development; (b) alleviating poverty in the countryside through rural development pro- grams; (c) upgrading social services; (d) expanding infrastructure; and (e) improving the absorptive capacity by overcoming major bottlenecks to development, notably the shortage of qualified manpower and the adminis- trative weakness of the public sector. 15. To pursue these broad objectives, efforts have been made to improve the investment capacity of the public sector. In 1973, a preinvest- ment fund (FONAPRE) was set up to finance prefeasibility and feasibility studies. Inventories of projects and project ideas were compiled in the public sector. Also the Government has been able to increase public invest- ment rapidly. However, progress has been slow in sectoral planning -- particularly in setting investment priorities in some major sectors -- and in the coordination of investments by region. 16. Ecuador's development needs, as well as persistent structural and institutional weaknesses, call for continued external assistance. Although the country's creditworthiness has improved greatly, it would not be sound  - 5 - policy for Ecuador to rely on the capital market as the sole source of external finance. Neither the amounts nor the terms available to Ecuador in the market would make this advisable. Rather, a mixture of commercial and official financing will best suit Ecuador's needs during the next few years. 17. Ecuador is creditworthy for further lending on Bank terms. The external public debt outstanding on December 31, 1974 was estimated at US$530 million, of which US$297 million was disbursed. Service on out- standing public debt is relatively moderate -- about $85 million in 1975, equivalent to about 8 percent of the exports of goods and non-factor services. The debt service ratio is projected to fall to approximately 4 percent in 1979-80. The Bank/IDA share in outstanding and disbursed public debt as of December 31, 1974 was about 19.7 percent; it is expected to rise to about 25 percent by 1980. PART II - BANK GROUP OPERATIONS IN ECUADOR 18. Starting with the first loan in 1954, the Bank and IDA have made sixteen loans and six credits to Ecuador totalling US$171.5 million, net of cancellations. At March 31, 1976, the Bank and IDA held about US$11 3.2 million including about US$44.6 million not yet disbursed. The most recent loans, to finance projects for technical assistance, seed produc- tion and highways were approved by the Executive Directors on March 30, 1976 and have not yet been signed; therefore their aggregate amount -- US$17.5 million -- is not included in the total amount held by the Bank and IDA. IFC has made five loans and investment commitments in Ecuador, two in a large textile company and three in a development finance company, amounting to Us$4.3 million of which, as of March 31, 1976, US$2.7 million has been repaid, sold, terminated or cancelled. In addition, IFC is considering a loan to help finance the expansion of sugar production in the Guayas Province area and a loan and an equity investment for a plYwood mill near Esmeralda-s. Execution of Bank Grup financed projects has, on the whole, been satisfactory, even though it has not been free of difficulties often caused by the insufficiency of the country's managerial and technical resources -- a constraint that still is a major obstacle for Ecuador's economic and social development. Annex II contains a summary statement of Bank loans, IDA credits and ZFC investments as of March 31, 1976, and notes on the execution of ongoing projects. 19. Bank and IDA lending were originally concentrated in transpor- tation and power, where there were substantial deficiencies to be overcome. These two sectors still account, respectively, for about 36 percent and 10 percent of total past lending. Most of the lending for transportation was to improve the road network of the country, although one loan was made to help finance a new port in Guayaquil (FY59). Lending for power has been concentrated in improving generation and distribution facilities in Quito. The first livestock development loan (FY67) marked the beginning of a  - 6 - diversification of lending; since then, the Bank and IDA have made six more loans and credits for agriculture and fisheries, two loans to support industrial development through two development finance companies, two loans for education and one loan for water supply. Bank/IDA assis- tance for the production and social sectors account now for about 54 percent of total lending. 20. External development financing has also been provided by IDB and USAID and, to a lesser extent, by other bilateral sources. External financing by sector and by source through 1974 is summarized below: (US$ millions, Figures Net of Cancellations) IBRD IDA IDB AID Lending 1954-64 54.o 8.0 35.3 67.7 Lending 1965-74 59.5 28.9 232.6 42.0 Transport 79 - Power 6.8 67.7 3.6 Education 5.1 4.1 5.3 Health & Sanitation 23.2 49.3 2.8 Agriculture & Fisheries 8.3 17.0 53.7 10.8 Industry 28.0 21.2 8.0 Urban Development 14.4 Other 4.2 11.5 113.5 36.9 267.9 109.7 =_ == Z_ = IDB is the largest single lender, having extended most of its loans to Ecuador from the Fund for Special Operations, which has normally carried a 2 percent interest rate, a ten-year grace period, and repayment terms of up to forty years. It is likely that IDB will remain the major develop- ment lender in the immediate future, although the terms will be less con- cessionary than in the past. USAID loans generally have had amortization and grace periods similar to those of IDB, with interest at 2-3 percent. Education, health and other socially oriented activities, as well as agri- cultural development, have been receiving increasing attention from the external lending agencies in recent years. IDB, USAID and the Bank Group have coordinated their efforts in these fields to assure the most effective use of all available resources. 21. Bank lending is aimed at supporting the Government priorities outlined in Part I above. This objective will be met by emphasizing projects that will help strengthen the institutional framework for develop- ment policy -- particularly concerning project planning, preparation and implementation -- in agriculture and rural development, transportation and other high priority activities. The second Port of Guayaquil project will substantially complete an important stage of the Bank's involvement in Ecuador's transport sector. This project -- as well as the recently  - 7 - approved fourth highway project -- is designed to help the Government to establish the administrative mechanisms and technical procedures required for designing and implementing appropriate policies and investment projects in the sector during future years, while assisting also in the overcoming of some major transportation bottlenecks. 22. Beyond those two transportation projects, the current Bank pro- gram is primarily concentrated on agricultural and rural development. The Bank can undertake a major institution-building effort in these fields, which should yield tangible benefits for Ecuador. Agriculture is, at the same time, the most important and the most neglected sector of the Ecua- dorian economy. Its potential is far from being adequately realized and its low productivity is a main cause of the extreme poverty in which most of the Ecuadorian population still lives. The current Bank program includes a substantial support for integrated rural development projects and impor- tant assistance for the development of the country's agricultural potential. All projects programmed for this sector include sizable technical assistance components, as a major part of the overall institution-building effort referred to above. This is reflected particularly in the projects for certified seed production and for technical assistance in the field of rural development which the Executive Directors approved on March 30, 1976. Other projects in this sector planned for the next two years include one agricultural credit, one irrigation and two rural development projects. Moreover, most of the other projects currently under consideration - for instance, rural roads, rural electrification and agro-industries -- are also related to the major objectives referred to above for agriculture and rural development. PART III - THE PORTS SUB-SECTOR IN ECUADOR 23. Ecuador's four main seaports -- Guayaquil, Puerto Bolivar, Manta and Esmeraldas - handle 98 percent of the country' s external trade. Traffic at those ports (excluding petroleum products) has increased from 2.15 million tons in 1969 to 2.94 million tons in 1974. There are also two important oil terminals: one at Balao, near Esmeraldas, which is the export point for crude from the Oriente fields and where a refinery is being built; the other one is at La Libertad, which receives crude oil for two near-by refineries dating back to the oil import days. There are also minor ports at San Lorenzo and Bahia de Caraquez, and fishing port facili- ties at Manta and Posorja. 24. Since the days of the Spanish conquest, Guayaquil has been the most important port of Ecuador. The original port was located on the Guayas River estuary, some 80 km. from the sea. New facilities -- partly financed with a $13 million loan from the Bank (No.212-EC, FY59) were built during 1958-63 on a tidal inlet, some 4 km. south of the original location, to accommodate ships of a larger size and draft. The Guayaquil Port  - 8 - Authority (GPA) was created in 1958 to operate the new facilities. As an autonomous agency, it was given broad powers to conduct its operations, including the power to establish its own tariffs and salary levels which attracted qualified staff. Its overall management was entrusted to a board of directors composed of a chairman, appointed by the President of the Republic, three Government representatives and three representatives of business and local interests; day-to-day operations were the responsi- bility of the general manager. The Bank's association with that project and with the creation of GPA afforded it an opportunity to familiarize itself with the problems and institutional aspects of Ecuador's ports sub-sector and the plans for the expansion of ports infrastructure and to maintain over the years a continuing dialogue with the Ecuadorian authorities concerning these matters. 25. The organization described above operated the new port success- fally for a number of years. However, a 60 percent increase in expenses (mainly personnel costs) during 1968-69 brought about serious financial problems for GPA; it sought and obtained financial assistance from the Government which, in turn, decided to reorganize port administration on a nation-wide basis. This resulted in the creation of (a) the National Council of Merchant Marine and Ports, as a policy making body with broad representation of concerned government departments, (b) the Merchant Marine Directorate (DIMERC), as a regulatory and supervisory agency reporting to the Navy's General Commander, and (c) the National Ports Department, a division of IEMERC in charge of port matters. This whole institutional set-up was placed under the aegis of the Ministry of Defense and given responsibility for the formulation and implementation of port policy in the country. Under this arrangement, GPA's autonomy was markedly reduced. 26. Lately, however, the Government's policy has gradually shifted towards restoring a degree of autonomy to the Port Authorities which would be compatible with their operational efficiency and with the necessary safeguards and controls for the Government. Recently enacted legislation has resulted in a streamlined institutional organization for the ports sub-sector which leaves its regulation in the hands of the Council and DIMERC alone. The Port Authorities have been given power to organize their day-to-day operations according to their own specific local problems and to conduct studies for the improvement, of their opera- tions. In general terms, the new legislation provides a balance of powers between the Government agencies and the operating Port Authorities which would afford the latter a more flexible operational environment without detriment to reasonable Central Government controls. 27. Original forecasts of pcrt traffic growth indicated the need for an expansion of port facilities at Guayaquil in the early 1980s. This need, however, has been accelerated since 1973 by the increase of imports resulting from increased oil revenues. This sudden change in operating conditions caught GPA unprepared. The Port suffered heavy congestion which led three shipping conferences to impose surcharges of up to US$6 per ton of cargo handled at Guayaquil. In addition to earlier than antici- pated increases in traffic volumes, the main causes of this congestion  were low storage charges, long periods of free storage available to importers and cumbersome cargo clearance procedures. Recently, however, the free storage period was reduced, the storage charges were increased almost five-fold and GPA and the Government adopted several measures to expedite the clearance of goods. As a result, cargo clearance time was reduced from 45 days at the time of appraisal to an estimated 18 days in November 1975. Two of the shipping conferences have already removed their surcharges and the third is expected to do likewise in the near future. There is, however, room for additional improvement in the handling of cargo at Guayaquil and both GPA and the Government have agreed on a series of specific measures,to be adopted during the execution of the project, con- cerning the operation of the proposed bulk cargo terminal and further adjustments in storage tariffs designed to encourage prompt removal of goods from the port area. (See Sections 3.04 and 4.05 of the draft Loan Agreement and Section 3.03 of the draft Guarantee Agreement.) In addition, GPA has agreed to retain the services of port operation experts to be engaged by the end of 1976 to advise its management on day-to-day opera- tions (see Section 3.05 of the draft Loan Agreement). PART IV - THE PROJECT 28. The proposed project would be the Bank Group's second operation in Ecuador's ports sub-sector. This project has been prepared on the basis of a feasibility study made by Messrs. Palmer and Baker (U.S.A.), engineering consultants to GPA, as modified during the oourse of appraisal. The appraisal was conducted in May-June 1975. Negotiations were held in Washington from January 26 to 30, 1976, at which time GPA was represented by its Acting General Manager, Capt. Tomas Leroux and the Government was represented by Mr. Manuel Calisto. An appraisal report on the project (947a-EC) is being circulated separately to the Executive Directors. A summary statement on the proposed project and loan is contained in Annex III to this Report. General Description 29. The proposed project would include: (a) The construction of (i) three alongside deep-water berths for container and general cargo traffic, four transit sheds, open storage areas and associated facilities; and (ii) a bulk cargo terminal comprising one alongside deep-water berth and mechanized storage and loading facilities for sugar, wheat, molasses and edible oils; (b) The relocation of the existing small boat moorings; (c) The acquisition of cargo handling and workshop equipment; and  - 10 - (d) The provision of technical assistance to (i) improve port operations; (ii) carry out a training program for shore labor, stevedores and equipment operators; and (iii) manage the pro- posed bulk terminal for two years and train GPA staff to operate and maintain it thereafter. The proposed project constitutes the least-cost solution to the present need for additional berthing and cargo handling capacity at Guayaquil. With the proposed expansion, the port of Guayaquil could handle forecast traffic through the mid-1980s, depending on the trend of containerization. However, given the relative uncertainty of traffic forecasts and the economies of scale attainable in construction, the Bank has agreed with GPA on the inclusion in the bidding documents of an option to construct a fourth general cargo berth. GPA would not begin such construction before parts (a) and (b) of the above project are completed, unless its economic justification has been demonstrated to the Bank and arrangements satis- factory to the Bank have been made for its financing (see Section 3.08 of the draft Loan Agreement). 30. In line with the Bank strategy outlined in paragraph 21, the purpose of the proposed project is two-fold. First, to improve the insti- tutional and operating conditions at the Port of Guayaquil. The measures agreed with GPA and the Government (see paragraph 27), and the recently enacted legislation (see paragraph 26), are likely to contribute substan- tially toward improving port operations at Guayaquil. It is hoped that these measures eventually would be extended to other ports. Moreover, the project includes technical assistance designed to expedite cargo handling further, to train GPA staff to operate the new balk terminal, and to train port labor. Second, to provide additional berths and facilities to relieve the existing congestion caused by earlier than anticipated traffic growth, and to handle forecast increases in cargo traffic. Execution 31. Project execution is expected to start around August 1976 and it is expected to require about three years to be completed. Responsibility for the execution of the project would rest with GPA, with the assistance of consultants to be retained on conditions satisfactory to the Bank. Provision has been made for engineering consulting services which would include about 192 man-months of expatriate staff and 348 man-months of local staff at an average cost of US$5,700 and US$2,100 per man-month respectively. Technical assistance to operate the proposed bulk cargo terminal initially and to train GPA's staff to take over this task is estimated to require 120 man-months of specialists' services at an average cost of U $4,000 per man-month. Project Cost and Financing 32. The total cost of the project, including taxes and import duties, has been estimated at US$83.6 million equivalent. This estimate is based on bids received by mid-March 1976 and includes US$3.0 and US$13.4 million,  - 11 - respectively, for physical and price contingencies. The estimated foreign exchange component represents 68 percent of total costs and would amount to US$56.7 million equivalent. 33. GPA is expected to be able to finance all local costs (estimated at about US$26.9 million equivalent) and about US$3.2 million of the esti- mated foreign exchange costs, out of its internal cash generation. The balance of the foreign exchange component would be financed in part by the proposed US$33.5 million Bank loan (59 percent). In addition it has been agreed that GPA would be provided with US$20.0 million as follows: (a) a US$10.0 million Government loan -- which is expected to be disbursed during 1979 -- on terms not less favorable than those of the proposed Bank loan; and (b) as a condition of effectiveness, another US$10.0 million Government loan -- which is expected to be disbursed over the project construction period, starting in 1976 -- on terms and conditions satisfactory to the Bank (see Sections 7.01(a) and 7.02(a) of the draft Loan Agreement and Section 2.02(a) of the draft Guarantee Agreement). 34. The Government and GPA are currently negotiating with a private foreign bank a US$10.0 million medium-term loan, within a co-financing framework which would enable GPA to obtain better terms than those it could have obtained by itself in the international financial markets. The loan would be guaranteed by the Republic of Ecuador. If these nego- tiations were satisfactorily concluded within a reasonable time after approval of the proposed Bank loan by the Executive Directors, the second US$10.0 million Government loan (paragraph 33(b) above) would not be required. In that event, the Loan and Guarantee Agreements between the Bank and, respectively, GPA and the Republic of Ecuador, would require amendments to reflect the co-financing arrangements with the private bank. Such amendments would be brought to the attention of the Executive Directors. 35. In summary, the cost and overall financial plan for the project would be as follows: US$ Million Local Costs Foreign Costs Total Estimated Costs Civil Works 17.5 35.3 52.8 Equipment 1.6 8.2 9.8 Consultants and Technical Assistance 2.7 1.9 4.6 Sub-Total 21.8 4.4 77 Contingencies Physical 0.9 2.1 3.0 Price 4.2 9.2 13.4 TOTAL COSTS 26.9 56.7 83.6  12 2 US$ Million Local Costs Foreign Costs Total Financing From GPA's Estimated Cash Generation (1976-1979) 26.9 3.2 30.1 Proposed Bank Loan - 33.5 33.5 Government Loan (a) - 10.0 10.0 Government Loan (b) or Private Bank Loan - 10.0 10.0 TOTAL FINANCING 26.9 56.7 83.6 Procurement and Disbursements 36. Civil works and equipment installation will be contracted with the successful bidder in the recently opened bids, which have been obtained by GPA on the basis of international competitive bidding. Some Ecuadorian firms are expected to participate as sub-contractors. There are no local manufacturers of the types of equipment required for the project. Retro- active financing not exceeding US$180,000 is proposed for consultant services incurred after January 1, 1976. 37. The proposed Bank loan would be disbursed against 60 percent of the foreign exchange component of civil works, equipment, consultants' services for supervision of construction and procurement of equipment and technical assistance to manage, operate and maintain the bulk cargo terminal and train GPA staff therefor. The bulk of the disbursements would be com- pleted towards the end of 1979; however, the technical assistance to operate the bulk terminal would require final disbursements until the end of 1981. Annex III contains the estimated disbursements schedule for the proposed Bank loan. GPA Finances 38. GPA has a successful financial record: in the 16 years since it was created, it only had operational losses in 1968 and 1969. The rapid increase in traffic has meant higher expenses for GPA but also a consis- tently high level of revenues. These have covered operational expenses and debt service, and permitted the build-up of liquid assets -- which amounted to US$7.2 million equivalent at the end of 1974 -- which would be used to finance part of the cost of the forthcoming expansion. In addition, the Government of Ecuador and the Province of Guayas owe GPA about US$2.0 million equivalent, most of which is overdue. The Government has given assurances that these debts will be paid by the end of 1976 and 1978, respectively (see Section 3.02 of the draft Guarantee Agreement).  - 13 - 39. Based on its financial statements, GPA's financial rates of return on average net fixed assets for the years 1972, 1973 and 1974 were respectively 8.8 percent, 13.3 percent and 21.7 percent. However, these rates of return are overstated since GPA's fixed assets have not been revalued since 1963 and the depreciation provisions are low. As part of the overall improvement in its operations, GPA has agreed to establish a new system of cost accounting by the end of 1976; in conjunction with this, GPA's fixed assets will be revalued by the end of 1976 and realistic depreciation allowances will be established (see Sections 5.03 and 5.06 of the draft Loan Agreement). Once cost accounting is established and assets are revalued, it would be possible to review the structure of GPA's tariffs which, although desirable, would not be feasible at this point. 40. In November of 1975, the National Council of Merchant Marine and Ports approved a tariff increase of about 20 percent which became effective in January 1976. GPA this will be able to generate revenues which, in addition to its present resources, will enable GPA to finance the local cost of the project and about 5.4 percent of its foreign exchange component. No further tariff increases are contemplated until the project is completed and the new facilities become operational during the second half of 1979. GPA and the Government have undertaken to maintain a tariff policy, starting in 1980, which would enable GPA to cover operational expenses, provide adequate maintenance and depreciation and achieve a rate of return of at least 8 percent on revalued average net fixed assets (see Section 5.05 of the draft Loan Agreement and Section 3.04 of the draft Guarantee Agreement). 41. At the end of 1974, GPA's total debt amounted to only 19 percent of capitalization. Based on current traffic forecasts, GPA's financial position should be good during the period 1976-80 and should be safficient to service the loans required to finance the project. However, the repay- ment of that debt would absorb a large proportion of GPA's cash flow. Therefore, GPA has agreed not to incur any further debt unless its debt service requirements are covered by net revenues at least 1.5 times (see Section 5.07 of the draft Loan Agreement). Economic Benefits and Justification 42. In 1974 the Port of Guayaquil handled about 80 percent of general imports and exports, excluding bananas. Although Guayaquil's share of total traffic is expected to decline somewhat as other seaports are expanded, Guayaquil is expected to remain the leading port in Ecuador. Import traffic at Guayaquil is expected to grow at 7.5 percent per annum while exports would increase at 2.5 percent per annum during the period 1975-85. Consequently, overall traffic tonnage is expected to grow from 1.8 million tons in 1974 to 3.27 million tons in 1985. Therefore, if the Port of Guayaquil were not expanded now, it would become a serious bottleneck for the flow of imports and exports in Ecuador. This accounts for the high priority assigned by GPA and the Government to this project whose principal benefits consist of savings in ship turn-around time, cargo handling and traffic diversion.  - 14 - 43. The economic analysis has shown that the project would have an overall economic rate of return of 14 percent. A separate analysis has been conducted for the three general cargo berths, which showed an economic return of 16 percent and for the bulk terminal which showed an economic return of 12 percent. In addition, sensitivity analyses revealed that even under adverse assumptions of higher costs and lower benefits, the rate of return would still be acceptable. This economic rate of return is based exclusively on the estimated direct and quantifiable benefits accruing to the ports and shipping sub-sectors of the Ecuadorian economy. In the case of the general cargo berths, these benefits consisted of time savings in Ecuadorian ship turn-around time and in the avoidance of lighterage and of diversion of traffic to other ports. In the case of the buIlk terminal, the benefits consisted of savings in freight costs arising from the use of larger ships that could be berthed at the proposed bulk berth and from savings in cargo handling costs (especially elimination of lighterage for sugar and molasses). 44. The above calculation of benefits is a conservative one. In the first place, benefits accruing to other sectors of the Ecuadorian economy, which could not be easily quantified, have not been included. In the second place, these estimates include only the likely benefits to Ecuadorian users -- i.e., ships owned or chartered by Ecuadorian nationals -- who account for about 55 percent of total traffic at Guayaquil. The benefits accruing to foreign users -- 45 percent of the total -- could, and probably would, be partly recovered through higher tariffs that GPA will be able to charge to those foreign users once the improved facilities are operational. If those benefits were fully recovered in this fashion, the economic rate of return would increase to 21 percent. Therefore, the actual return to the Ecuadorian economy, measured in terms of direct, quantifiable, benefits to the ports and shipping sub-sectors, will depend on the degree to which benefits to foreign users are recovered through new tariffs charged by GPA but it is likely to lie somewhere between 14 percent and 21 percent. Risks 45. The expansion of the port facilities would be conducted in the same area where the original facilities were built. The consultants who designed the expanded facilities and are expected to supervise their con- struction also designed and supervised the construction of the original facilities. In the light of their experience, and bearing in mind that the present design and construction plans include precautions against the recurrence of the slides which affected the construction of the existing wharves in 1960-63, no major engineering problems are expected. The project design also takes account of the possibility of earthquakes in the area. The new facilities would handle general cargo similar to that handled at present and the bulk terminal would handle only non- polluting cargo. No adverse effects on the environment are therefore expected.  PART V - LEGAL INSTRUMENTS AND AUTHORITY 46. The draft Loan Agreement between the Bank and the Guayaquil Port Authority, the draft Guarantee Agreement between the Republic of Ecuador and the Bank, the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement, and the text of the draft resolution approving the proposed loan, are being distributed to the Executive Directors separately. Features of the draft Loan and Guarantee Agreements which are of special interest are referred to in paragraphs 27, 29, 33, 38, 39, 40 and 41 of this Report. 47. A special condition for the effectiveness of the Loan Agreement would be the signing of a US$10.0 million loan agreement between the Government and GPA and the falfillment of the conditions of disbursement (_If any) thereunder (see Section 7.01(a) of the draft Loan Agreement). 48. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 49. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments Washington D.C. April 28, 1976   ANNEX I TABLE 3A Page 1 of 5 Pages ECUADOR - SOCIAL INDICATORS DATA SHEET LAND AREA (THOU KN2I - ------- ECUADOR REFERENCE COW TRIES 11970) TOTAL 283.6 MOST RECENT AGEC. *- 1960 1970 ESTIMATE ALGERIA PERU VENEZUELA* GNP PER CAPITA (USS) 190.0 280.0 380.0 470.0 510.0 1500.0 POPULATION AND VITAL STATISTICS POPULATION (MID-YR, MILLlON) 4.4 6.1 6.8 13.4 13.3 10.3 POPULATION DENSITY PEP SQUARE KM. 16.0 21.0 24.0 6.0 11.0 11.0 PER SOUARE KM. AICC. LANn .. .. .. .. 400.0 VITAL STATISTICS CRUDE BIRTH RATE PER THOUSAND 48.0/a 38.0 /a 35.1 /a 49.0 42.0 40.0 CRUDE DEATH RATE PER THOUSAND 14.07ah 11.0 7- 9.8 17.0 11.0 8.0 INFANT MORTALITY RATE I/THOU) 100.0h 71.0 r 79. 0/a 86.0/a 65.0 49.0 LIFE EXPECTANCY AT BIRTH IYRS) 51.0/b 57.0 .60.0 51.0 58.0 64.0 GROSS REPRODUCTION RATE .. 3.3 3.2 3.5 2.9 2.9 POPULATION GROWTH RATE (II TOTAL 3.0* 3.4* 3.- 3.1 2.9 3.5 URBAN 5.0 S.0 5.0 7.0 5.0 4.5 URBAN POPULATION (I OF TOTAL) 36.0/c 38.0 39.0 45.0 53.0 76.0 AGE STRUCTURE (PERCENT) 0 TO 14 YEARS 45.0aLe 48.0Lm 47.0 La 47.0/b 45.0/a 47.1 15 TO 64 YFARS 52.00ae 49.0/R. 50.0/ 49.0Th 52.0T. 50.5 65 YEARS AND OVER 3.oMh 3.0k 3.0h 4.07b 3.OT 2.4 AGE DEPENDFNCY RATIO 0.9/a c 1.0/ I.0 /a 1.0/b 0.9/a 1.0 ECONOMIC DEPENDENCY RATIO 1.77a 1.67 1.5 7T 2.6Th 1.5 1.6 /a FAMILY PLANNING- ACCEPTORS (CUMULATIVE, THOU) .. ]I.2 .. .. .. 67.o USERS It OF MARRIED WOMEN) .. .. .. EMPLOYMENT TOTAL LABOR FORCE (THOUSANDS) 1400.0/a c 1900.0 2200.0 2600.0/b c 4300.0/a 3200.0 LABOR FORCF IN AGRICULTURE (S) 51707 54.0 .. 64.O0/ b 45.O./a 22.0 UNEMPLOYED IS OF LABOR FORCE) .. .. .. I .I:Oc 5.0Th 8.0 INCOME nISTRIBUTION X OF PRIVATE INCOME REC D RY- HIGHEST 5X OF HOUSND DIDS 52.64d 43.0 /c .. .. 31.4/c HIGHEST 20S OF HOUSEHOLDS 69.2/d 72.0Th .. .. 62.6/c LOWEST 20X OF HOLHDII 4 3Th I .8/ .. .. 1.8a7. LOWEST 401 OF DlDSUEHDDS 9.87T 5.2/ .. .. 1.37. DISTRIBUTION OF LAND OWNERSHIP 8 nWNED BY TOP 108 OF OWNERS .. .. .. .. 93.0 X OWNEn BY SMALLEST 10 OWNERS .. .. .. .. 0.1 HEALTH AND NUTRITIJN POPULATION PER PHYSICIAN 2800.0/c 2930.0 .. 7860.0 1920.0 11O0.O POPULATION PER NJRSING PERSON .. 8630.0 .. 2730.0 3200.0 530.0 POPULATION PER HOSPITAL RED 52O.0/cO. 430.0 470 .0 340.0 470.0 320.0 PER CAPITA SUPPLY OF - CALORIES (X OF REQUIREMENTSI 81.0 89.0 88.0 71.0 98.0 100.0 PROTEIN (GRAMS PER DAY) 46.0 49.0 47.0 45.0 62.0 62.0 -OF WHICH ANIMAL AND PULSE 24.0 22.0 .. 9.0/d 24.0 32.0 DEATH RATE (/THOU) AGES 1-4 .. 13.0 .. 12.0/b .. 5.0 EDUCATION ADJUSTED ENROLLMENT RATIO PRIMARY SCHOOL 83.0 95.0 .. 75.0 115.0 82.0 SECONDARY SCHOOL 12.0 24.0 .. 11.0 41.0 33.0 YEARS OF SCHOOLING PROVIDED (FIRST AND SECOND LEVEL$ 12.0 12.0 12.0 15.0 12.0 11.0 VOCATIONAL ENROLLMENT (S OF SECONDARYr 29.0 29.0 .. 20.0 17 .0/d 33.0 ADULT LITERACY RATE ISI .. 68.0 69.0 25.0 HOUSING PERSONS PER ROOM (AVERAGE) 2.1/c .. Z.8/be . OCCUPIEO DWELLINGS WITHOUT PIPED WATER 88.0/c f .. , 77.0/b ACCESS TO ELECTRICITY It OF ALL DWELLINGS) 32.0/c .. .. 3*.0/b RURAL DWELLINGS CONNECTED TO ELECTRICITY (IS 9.0/c .. .. 1Z.0/b CONSUMPTION RADIO RECEIVERS (PER THOU POPI 41.0 279.0 .. 52.0 134.3 164.0 PASSENGER CARS IPER THOU POP) 2.0 4.0 5.0 10.0 17.0 55.0 ELECTRICITY IKWHZYR PER CAP) 92.0 156.0 172.0 139.0 392.0 1215.0 NEWSPRINT IKG/YR PER CAP) 2.0 2.3 3.8 0.01 3.6 7.8