Honduras - Third Port Project

Document of The World Bank RFILE COPY FOR OFFICIAL USE ONLY Report No. 1347b-HO STAFF PROJECT REPORT THIRD PORT PROJECT HONDURAS March 14, 1977 Latin America and the Caribbean Projects Department Tlis docuent bas a resricted dIstribultion and may be used by recipients nly in the performace of | their official dutes. Its contents my not otherwise be diclosed without World Dank autboriztion.  Currency Equivalents Currency Unit = Lempira (L) US$1.00 = L 2.00 L 1.00 = US$0.50 L 1,000,000 = US$500,000 Fiscal Year (Government and Empresa Nacional Portuaria) January 1 - December 31 Weights and Measures Metric US$ Units 1 meter (m) = 3.28 feet (ft) 1 kilometer (km) = 0.62 mile (mi) 1 kilogram (kg) = 2.2 pounds (lb) 1 ton 11 = 2,205 lb 1 l,000 kg 1 long ton = 2,240 lb 1 short ton = 2,000 lb 1 US gallon = 3.8 liters 1 hectare = 2.47 acres Abbreviations ACENSA - Azucarera Central, S. A. CABEI - Central American Bank for Economic Integration COHDEFOR - Honduras Forestry Development Commission CONSUPLAN - Consejo Superior de Planificacion Economica ENP - Empresa Nacional Portuaria FNH - Ferrocarril Nacional de Honduras IDB - Inter-American Development Bank INA - Institute for National Agrarian Reform MCOPT - Ministry of Communications, Public Works and Transport UNCTAD - United Nations Commission for Trade and Development VIF - Venezuelan Investment Fund l/ Unless specifically mentioned otherwise, a ton means a metric ton (1,000 kg) throughout this report.  FOR OFFICIAL USE ONLY OONFIDENTIAL STAFF PROJECT REPORT THIRD PORT PROJECT HONDURAS TABLE OF CONTENTS Pa2e No. INTRODUCTION AND SUMMARY ............................... i x I. THE TRANSPORT SECTOR . a .....* .......... ............. 1 A. The Distribution of Economic Activity .... ........ 1 B. The Transport System ..* ...................*......*oo 2 C. Transport Planning and Coordination ...... ......... 5 II. THE PORT SUBSECTOR *.................e................ 14 A General .......... . 14 B. Bank Assistance in the Port Subsector ............ 14 C. Organization .......* ...... ........................ 15 D. Facilities .... ................................... 16 III. THE PROJECT .................... ....................... 21 A. Need for Additional Port Capacity .. .............. 21 B. Project Objectives, Scope and Timing ... ........... 22 C. Project Description . .. .. ..o ... ........ . . . ... .s.e.s.... 23 D. Engineering Evaluation .............o.... ........... 24 E. Cost Estimates . ................................. . 26 F. Borrower and Executing Agency ................s.... 26 G. Financing ........a................................... 28 H. Procurement ... ..................... ... .... 28 I. Disbursements ....... ... ................ ... ... .... 29 J. Technical Assistance ...... ................. ... . 29 K. Uncertainties in the Project ..................... 29 L. Retroactive Financing .............. .............. 30 M. Ecological Considerations ........................ 31 IV. ECONOMIC ANALYSIS .............. 36 A. Puerto Castilla ... 36 B. San Lorenzo .... .. .. ...... ..... 40 This report has been prepared by Messrs. R. Burns (Economist), J. McCunniff (Consultant), A. Stephenson (YP/Financial Analyst) and R. Vinekar (Engineer) and has been edited by Miss V. Foster. Tbis document ha a restricted ditbution and my be end by rechipe oin01 In ths Ib _ of their offcia dutie. Its contents may not otherwW be dscisd witout Word Diak audhomo.  TABLE OF CONTENTS (Continued) Page No. V. FINANCIAL EVALUATION ...*.............................. 55 A* General ... .......................................... 55 B. Past Financial Performance ........................ 56 C. Methodology of Financial Analysis ...... ............ 57 D. Forecast Financial Performance *...... 0 ............ 58 E. Balance Sheet ..................................... 59 F. Financing Plan ............................... 00...... O.00060..O... 61 G. Forecast of Project Ports o........................ 62 VI. AGREEMENTS REACHED AND RECOMMENDATION ..o ............... 66 ANNEX - Documents Available in Project File MAPS IBRD 12462 - Transportation and Relief IBRD 12463 - Puerto Castilla IBRD 12464 - San Lorenzo  STAFF PROJECT REPORT THIRD PORT PROJECT HONDURAS INTRODUCTION AND SUMMARY A. The Transport Sector Background 1. The principal agricultural and industrial areas of Honduras are the Sula Valley and the nearby Atlantic coastal strip. San Pedro Sula, which has emerged as the country's main industrial center, and the ports of Cortes and La Ceiba are the principal cities in the area. Further to the south lies Tegucigalpa, the capital city and the second industrial center. The corridor joining Tegucigalpa with San Pedro Sula and Puerto Cortes in the north and the Pacific port of San Lorenzo in the south has been the main conduit of the country's economic activity. 2. Development of the transport sector has taken place only during the last two decades, mainly in the highway and port subsectors. The con- struction of the Inter-American highway in the southern region was started in the mid fifties, and an all-weather road between Tegucigalpa and San Pedro Sula was completed in 1971. Modernization of Puerto Cortes was begun with Bank financing in the late sixties. A second expansion of Puerto Cortes was completed recently, and the construction of a deep water port at San Lorenzo is presently under way, both with Bank financial assistance. Puerto Castilla, to be financed under the proposed loans and credit, would serve the increasingly important agricultural and timber areas of eastern Honduras: the Aguan Valley and the Olancho forestry reserve. A number of highway projects are now under construction or about to begin, which would complete most of the country's primary highway network, and the Government is now paying greater attention to the improvement and expansion of the feeder and access road system. Honduras can thus look forward to having, in the medium-term future, a transport system to serve its most important productive areas and to meet the needs of its international trade. Highways 3. Because of the topography of Honduras, road construction, in general, has been difficult and expensive; nevertheless, the road network grew from about 3,200 km (110 km paved) in 1960 to about 6,100 km (1,240 km paved) in 1975. In addition to the principal roads mentioned in the pre- ceding paragraph, the primary system includes a road southwest from San  - ii - Pedro Sula to the El Salvador border and a road along the north coast to La Ceiba. The country's secondary and tertiary road system is not yet well developed. Major road projects now under construction or due to be started shortly include three highways from the Tegucigalpa-San Pedro Sula corridor to the central region: the Progreso-Yoro road in the north; the Tegucigalpa- Juticalpa-Catacamas highway in the central area (financed under the Bank's Sixth and Seventh Highway Loans); and the Tegucigalpa-Danli road in the south. The road system to connect the Olancho forest reserve areas with the sites for the planned sawmills, the proposed pulp and paper factory, and Puerto Castilla are now in the design/engineering phase. Construction of these roads should start in mid 1977 with financial assistance from the Inter-American Development Bank (IDB). Ports 4. Ports are a critical component of the transport sector since they handle nearly 95% of the country's international trade. Because of the larger trade with gulf and east coast ports of the United States, port capacity has developed mainly on the Atlantic coast, where three out of the four principal ports are located. Puerto Cortes is the principal general cargo port, while Tela and La Ceiba are mainly banana handling facilities. San Lorenzo on the Pacific side is presently a lighterage port, but will soon have alongside facilities to service ocean-going vessels and will be able to handle increased sugar and lumber exports. Puerto Cortes, which handles over 1.8 million tons, or 79%, of the overseas traffic, is the largest port of Honduras, with an excellent natural harbor, and provides efficient service. It is quickly adapting to new types of traffic such as roll-on/roll-off, containers, and lighter-aboardship. A gantry crane for handling containers is scheduled to be installed in 1977. 5. The ports of Honduras are administered by Empresa Nacional Portuaria (ENP), the national port authority, established with Bank assistance in December 1965. ENP is an autonomous Government entity with an Executive Board of seven members consisting of three Ministers, one representative of the National Planning Council and one delegate each from the Chamber of Commerce and Industry, the trade unions and the shipping companies. The day-to-day administration is the responsibility of the General Manager. The management and operations of ENP are considered highly efficient, and its financial position is sound. The port subsector, during the decade since the creation of ENP, has responded adequately to the needs of the growing volume and variety of overseas traffic. 6. Two previous Bank loans approved in 1966 and 1971 (Loans 463-HO and 767-HO) have provided almost all the external financing for port expan- sion in Honduras. ENP carried out the two previous port projects, for improvement of Puerto Cortes and the construction of San Lorenzo, in a very capable manner. There was a long delay in the start of construction of San Lorenzo, which resulted in a large cost overrun and required a US$3.0 million supplemental loan from the Bank (approved July 1975). This, however, was the result of a political objection to the location of the port, raised by the  - iii - Government which came into office after the loan had been signed, and was not the fault of ENP. The succeeding Government approved the original site, and, since approval of the supplemental loan, project execution has been progressing normally. The San Lorenzo port is now expected to be completed by September 1977. 7. ENP has the sole responsibility for port planning. Its planning process includes development of a rolling five-year plan that covers economic, engineering and financial analyses, most of which are done by ENP's own staff. The inclusion of a cash flow analysis in the five-year plan effectively integrates the ENP planning and capital budgeting process. Other Transport 8. The railway system consists of three narrow-gauge lines, all located in the north and serving mostly the banana plantations in the Sula Valley, the northern coastal strips, and the upper Aguan Valley. Honduras has two princi- pal airlines; between them they provide adequate douiestic and international service. With the improvement of the road system since 1970, domestic air traffic has declined steadily. Little intermodal transport planning is done since air and rail transport are relatively unimportant and highway/port coor- dination is not complex. B. The Project Project Objectives 9. The primary objectives of the project are (a) to provide suitable port facilities at Puerto Castilla and at San Lorenzo for the efficient handling of new export traffic expected to be generated in the near future; (b) to carry out a channel depth study for San Lorenzo; and (c) to train EIIP staff in container operations. Project Description 10. To support the above objectives, the proposed project contains the following components: (a) Civil Works At Puerto Castilla: Construiction of a 450 m wharf, one transit shed, one warehouse, two lur,I,er sheds, storage tanks for palm oil and petroleum, an office building, and miscellaneous services. At San Lorenzo: ExLension of the pier (presently under construc- tion) to provide an additional berth 145 m long, and construction of a sugar storage shed and two molasses tanks.  - iv - (b) Equipment At Puerto Castifla: Provision of general cargo and lumber handling equipment, chip-loading equipment, a used tugboat and a launch. At San Lorenzo: Provision of (1) equipment for handling sugar, lumber and general cargo and for pumping molasses and (2) navigational aids. (c) Consultant Services for Detailed engineering and supervision of construction, and (d) Technical Assistance for (i) Channel depth study at San Lorenzo; and (ii) Training of ENP staff in container operations at Puerto Cortes. Puerto Castilla 11. The facilities at Puerto Castilla are needed to serve the important export development projects now being undertaken by the Government in the -Aguan Valley and the Olancho Forest Reserve. The first phase of the Aguan Valley agricultural development project, which received financing from IDB, has been completed, and IDB has recently approved a US$40.0 million loan for a more ambitious second phase. Surpluses of corn and beans are already being produced, and production of grapefruit and palm oil from the first phase will become substantial within a few years. Although all of these products except grapefruit would be primarily for domestic consumption, they would be shipped by Puerto Castilla since land transport is very expensive. The Government is also going ahead with the first stage of the Olancho forest industries project with IDB and Venezuelan financial support to produce timber and chips for export. In February 1977, IDB and the Honduran Government signed a loan for US$59.5 million to finance the road infrastructure for this project. Three sawmills will be constructed during the 1979-1981 period. For the second stage, a pulp and paper factory is to be constructed in the early 1980's to produce liner board, which will then largely replace chips in the export program. San Lorenzo 12. The works proposed at San Lorenzo are related to the expansion of the sugar industry, which is presently under way in the southern region of Choluteca. Since the sugar companies (some of which are in part foreign- owned) developed their export plan after the present contract for the port works at San Lorenzo was awarded, the facilities currently under construction are inadequate for handling the expected traffic and, therefore, need to be expanded. The sugar companies have contracted with a large international firm to provide technical assistance and to serve as their marketing agent. The exports are expected to be profitable since the cost of production in Honduras compares favorably with the price level at which the world market for sugar  is forecast to stabilize within two years at about USi12 per pound FOB in constant 1974 prices. Because the sugar mills are close to San Lorenzo and expect to export some production to Japan, the owners have requested that facilities be provided at San Lorenzo. In order to justify the provision of the storage and handling facilities, the sugar companies have offered to guarantee ENP a minimum tonnage of exports. It has been agreed that ENP would not sign the contract for the construction of additional facilities at San Lorenzo until an agreement satisfactory to the Bank on minimum tonnages has been obtained from the sugar companies. 13. Lumber and general cargo-handling equipment for San Lorenzo was originally included in the Second Port Project (Loan 767-110); however, because of the cost overrun on the civil works, it was agreed, when making the supple- mental loan of US$3.0 million, that the unordered equipment would be deleted and might be considered for inclusion in a subsequent project. Accordingly, since the equipment is still needed, provision for it has been made in this project. Technical Assistance 14. The channel depth study will examine the feasibility of deepening the access channel to San Lorenzo to permit the use of larger vessels than can now enter the port for export of sugar and molasses, and the training will prepare ENP staff for the efficient handling of the growing container traffic. Project Costs 15. The total cost of the project is estimated at US$29.9 million, with a foreign exchange component of US$17.0 million, as summarized below: -------------- US$ million ------------- Percent of Local Foreign Total Foreign Cost Civil Works Puerto Castilla 7.5 6.4 13.9 46 San Lorenzo 1.2 1.9 3.1 60 Sub-total 8.7 8.3 17.0 49 Equipment Puerto Castilla 0.2 2.8 3.0 95 San Lorenzo 0.1 1.0 1.1 95 Sub-total 0.3 3.8 4.1 95 Consultant Services Puerto Castilla 0.5 0.8 1.3 60 San Lorenzo 0.1 0.2 0.3 60 Sub-total 0.6 1.0 1.6 60 Technical Assistance Channel Depth Study 0.1 0.2 0.3 60 Training 0.0 0.1 0.1 60 Sub-total 0.1 0.3 0.4 60 Contingencies Physical 1.2 1.2 2.4 48 Price 2.0 2.4 4.4 56 Sub-total 3.2 3.6 6.8 73 Total 12.9 17.0 29.9 57  - vi - 16. The base cost estimate for civil works and equipment has been obtained by updating to December 1976 the consultants' estimate, which was based on 1975 prices. Contingency provisions include: (a) physical varia- tion in civil works at 15% for Puerto Castilla and 10% for San Lorenzo; and (b) annual price escalation at 12% for civil works, 8% for equipment and 6% for consultant services for the 1977-1979 period. The costs of a total of 440 man-months for consultancy services and technical assistance are estimated at an average, for foreign and local consultants, of US$3,900 per man-month. The proposed Bank Group financing would cover the estimated foreign costs. 17. The local currency costs (US$12.9 million equivalent) would be met partly by ENP's own resources and partly by a domestic bond issue with a 10-year term. It has been agreed that the Government would underwrite the ENP bond issue or make other financial arrangements satisfactory to the Bank in order to ensure that the local resources necessary to complete the project are available. Project Implementation 18. ENP would be the Borrower and the Executing Agency. As demonstrated in the case of the two previous Bank-financed port projects, ENP has the capac- ity to execute the project satisfactorily. For carrying out engineering and supervision of construction, the channel depth study and the training of ENP staff in container operations, ENP has contracted for consultants whose quali- fications, experience and terms of reference are acceptable to the Bank. Construction on both ports is expected to commence in mid-1977. The work at San Lorenzo would be completed by March 1978 and that at Puerto Castilla by September 1979. An implementation schedule for the project has been agreed upon. Financial Analysis 19. ENP's financial performance for the five years from 1971 through 1975 has been good. During this period, ENP's operations were profitable, and the return on net assets was above 16%. Since 1971, revenues have grown by 70%, partly because ENP has assumed responsibility for the operation of additional ports and partly because of the growth in traffic handled. Net income during this time, however, has increased only by 41% because increases in expenses have not been matched by increases in tariffs. As a result, the operating ratio increased from 44% in 1971 to 63% in 1975. The debt equity ratio at the end of 1975, although higher than the 35/65 ratio in 1971, was satisfactory at 44/56. 20. Forecasts for the 1977-1983 period indicate that there are good prospects for satisfactory financial performance by ENP. A tariff increase was implemented in February 1977, which should enable ENP to achieve an 8% rate of return on revalued assets in 1977. While this tariff increase was accompanied by some restructuring of the tariffs, there is need for further restructuring in order to relate tariffs to the present value of assets and to the real cost of providing port services and facilities. ENP has agreed to make such further adjustments to its tariff structure not later than July 1,  - vii - 1978, based upon a full revaluation of its assets, to be completed by October 1, 1977. ENP has also agreed to carry out further asset revaluations at least once every three years. Information regarding the cost of port services and facilities will be provided by a cost accounting system which ENP is now pre- paring and has agreed to put into operation by October 1, 1977. Furthermore, ENP has agreed to increase tariff levels as necessary to maintain an annual rate of return of not less than 8% on revalued assets, and, in order to maintain a satisfactory cash flow, it has also agreed to limit capital expen- ditures during the construction period for items not included in the Second and Third Port Projects to a maximum of US$500,000 per annum. 21. The total planned investment of ENP during the period 1977 to 1983 is US$49.3 million. Of this total, US$29.5 million relates to project items, and the balance of US$19.8 million of non-project items refers to the ongoing construction of San Lorenzo under the Bank's Second Port Project and the new Free Trade Zone at Puerto Cortes. The Free Trade Zone is not related to port operations, and, in order to ensure that non-port operations do not become a financial burden on the port operations, ENP has agreed to the following: (a) ENP will retain each year an amount equivalent to 8% of net fixed assets for investment in port services and facilities; (b) ENP will use its best efforts to ensure that non-port operations will earn sufficient revenue to cover their expenses; and (c) ENP will advise the Bank prior to any changes in port tariff levels in order, among other things, to afford the Bank an opportunity to comment on increases which might not be related to port operations. 22. As a result of both planned investments and asset revaluation, ENP's fixed assets are forecast to increase by 140%, or US$41.7 million, by 1979, pushing up the debt equity ratio to a peak of 56/44. However, after 1979, because the rate of growth is expected to decline and ENP will generate substantial amounts of surplus funds, the debt equity ratio will decline to a satisfactory level of 35/65 by 1983. With these projected surpluses, ENP will be in a position, and has agreed to set aside funds each year sufficient to retire the local bond issue (para. 16) at maturity. With the intended revision of tariffs, debt service coverage will be at least 1.75 to 1 throughout the period, and ENP agreed that no debt will be incurred without Bank agreement unless net cash generation for the preceding 12 months is at least 1.75 times the maximum total debt service requirements for any succeeding fiscal year. 23. Although ENP's accounting procedures and control are generally satisfactory, individual accounts separate from ENP's overall account should be established and maintained for each of the major development projects. It has been agreed that such separate accounts will be set up and maintained. Procurement and Disbursement 24. All contracts for civil works and equipment for Puerto Castilla and San Lorenzo would be awarded on the basis of international competitive bidding, except that the used tugboat for Puerto Castilla would be procured by inter- national shopping. With regard to the civil works for San Lorenzo, ENP pro- poses to negotiate with Columbus Latinoamericana (the contractor which is presently carrying out the port works at San Lorenzo) an extension of the  - viii - ongoing contract. Since the new work would be similar to, and about one- third of the amount of, the work in the current contract, ENP's proposal is practicable and would result in the facilities being ready earlier than would be the case if new bids were invited. It is doubtful that international contractors would be interested in the new bid, not only because of the modest size of the contract (estimated cost US$3.1 million), but also because of the effective competition which Columbus Latinoamericana is in a position to offer because it is already on the site. Since the current contract with Columbus Latinoamericana was awarded in 1975 on the basis of international competitive bidding, and the prices applicable thereto would provide a basis for negotiat- ing the prices of the new contract, ENP's proposal is considered acceptable on condition that the terms of the revised contract will be subject to Bank approval. 25. The proposed Bank Group financing will be disbursed to cover the estimated foreign exchange costs of the various project items as shown in paragraph 15. In order to meet the tentative schedule for completing the port works at Castilla by the end of 1979, work on the detailed engineering of the project has already been started. Also, because of the possibility of utilizing, at a favorable price, the services of a dredging contractor (which would be financed by ENP) who is scheduled to complete a job in Corinto, Nicaragua in the latter half of 1977, ENP has also begun the channel depth study. Retroactive financing of up to US$500,000 is therefore recommended to meet foreign expenditure incurred on consultant services for engineering and technical assistance after November 1, 1976. Environmental Impact 26. Since no dirty or dusty cargoes would be handled at either of the project ports, and since normal precautions would be taken in handling the small quantities of petroleum at Puerto Castilla, there would be no adverse effect upon the ecology as a result of the port development proposed under this project. The ecological implications of the proposed sawmills and the paper and pulp factory have been considered by the Government and IDB, and suitable provision for controlling air and water pollution would be included in their design. Economic Analysis 27. Traffic projections for Puerto Castilla are based on the Government's program for export of forestry products (sawn timber, woodchips and eventually liner board) from the Olancho forestry reserve, and of agricultural products (corn, beans, citrus fruit and palm oil) from the Aguan Valley, and the esti- mate of imports is based on the projected inputs (machinery, chemicals, ferti- lizers, petroleum) to the forestry and agricultural development projects. M4ajor financial commitments have already been made in both these development schemes. The port, which will handle the traffic generated by the Aguan and Olancho projects, is justified as part of this larger package of investments. The fundamental economic issue is whether the agricultural and forestry  - ix - development programs are economically viable, and the question has been answered affirmatively by formal economic and financial analyses. Given these investment decisions, the task was to identify a least cost solution for the required port infrastructure, i.e., the optimal location, timing, and size of the port facility. This exercise, together with the determination of an appropriate port tariff structure that will generate revenues to cover the full cost of the port, has established that the investment is justified. 28. Starting at a level of 264,000 tons in 1980, the total traffic at Puerto Castilla is expected to increase to 1,049,000 tons in 1983, when the export of chips will reach the peak of 643,000 tons. With the expected startup of the pulp and paper factory in 1984, chip export will decline rapidly and will be replaced by a smaller tonnage of liner board (133,000 tons), bringing the total traffic to 794,000 tons in 1986. These traffic projections are conservative since they include only the reasonably firm traffic related to the forestry and agricultural projects and do not take into account export traffic such as hardwood products, sugar from the Aguan Valley and bananas from the Isleta area, which is likely but not yet certain. 29. At San Lorenzo, the traffic is expected to rise from the 1976 level of 172,000 tons to 240,000 tons in 1978, when the export of sugar and molasses is to commence. Thereafter, the traffic will gradually build up to 276,000 tons in 1986. Based on firm figures of export traffic, which the sugar industry will guarantee, and on a conservative estimate of growth of lumber and general cargo, these projections are considered to be realistic. 30. The overall rate of return for the project is 25% with first year benefits of 23%. The benefits attributable to the proposed facilities at Puerto Castilla are mainly the avoided cost of the closest alternative to the proposed investment, i.e., (a) land transport of the export cargo to Puerto Cortes and (b) a wharf and ancillary facilities at Puerto Cortes which would be needed for handling the additional traffic at that port. These benefits yield a rate of return of 27% with first year benefits of 25% for this invest- ment, which accounts for 80% of the project costs. 31. In the case of San Lorenzo, if the proposed extension of the pier is not carried out, the least cost alternative would be to divert the sugar and molasses traffic to Corinto in Nicaragua, which is the nearest suitable port on the Pacific side. The avoided cost of land transport and port charges at Corinto would be the benefits from the proposed investment at San Lorenzo. In addition, there would be savings in waiting time for lumber and general cargo vessels. Together, these benefits yield a return of 14% with first year benefits of 14% for this investment, which accounts for 20% of the project costs. 32. Sensitivity analyses in which the cost and benefit streams are varied by 25% indicate that the return would be no lower than 22% for Puerto Castilla and 10% for San Lorenzo.  x Project Risks 33. A delay in the startup of the first of the three proposed sawmills at Corocito is a possible uncertainty associated with the project. This delay might result from (a) slow progress in the arrangements for financing and management of the sawmill and (b) the necessary road infrastructure, which is being financed by IDB, not being ready in time. In order to expedite con- struction of the sawmill, the Government has assigned it high priority and has appointed a ministerial committee to monitor progress and resolve any problems that may arise. Also, IDB has provided a senior executive to assist COHDEFOR in preparing and executing the project. Design of the sawmills is proceeding on schedule. Financing for the sawmills will be provided by the Government, IDB and suppliers. Preliminary discussions have begun with a number of bilateral export finance agencies. Financial arrangements are expected to be concluded by September 1977. In order to ensure that there are no administrative delays in the forest roads project, the Ministry of Communications, Public Works and Transport has expanded an existing project execution unit for the forest roads. 34. In view of the steps taken, and progress made so far in meeting preparation schedules and arranging the necessary financing for the sawmill and forest road projects, it appears that there is little risk of delay. However, since the usefulness of having the proposed port facilities at Castilla in operation by the end of FY1979 is dependent to a large extent upon the completion of the supporting road system, it has been agreed with ENP that bid documents for the port works at Castilla would be issued only after satisfactory bids have been received for the forest road works. Conclusion 35. The proposed project fully merits Bank Group support. It will provide suitable outlets for export commodities which will help Honduras to earn valuable foreign exchange and will yield acceptable rates of return of 27% and 14% on its two main components. The facilities proposed at Puerto Castilla are essential for the success of two important projects of the Honduran Government, i.e., the Aguan Valley Agricultural Development Project and the Olancho Forest Industries Project, which have been undertaken with the object of developing the northeastern region. Without the proposed facilities at San Lorenzo, sugar enterprises, which have already committed considerable investment to expansion of capacity, will face higher costs in exporting their products.  I. THE TRANSPORT SECTOR A. The Distribution of Economic Activity 1.01 Although Honduras is the second largest country in Central America, it is estimated that only 17% of the land area is suited for intensive agri- cultural use. The rest of this mountainous country, with thin soils and steep slopes, is best suited for forestry and other extensLve uses. The good agri- cultural land is concentrated in four widely separated major river valleys, ten smaller valleys, and the northern coastal strip. The four major valleys are the Aguan, Sula, Guayape, and Choluteca (Table 1.1). Bananas comprise the most important commercial crop (34% of exports by value) and are produced in the Sula Valley, the northern coastal strip and the upper Aguan Valley. Coffee, produced in the hilly areas between 700 and 1,200 meters above sea level, is an important export crop (15% of exports by value), and a source of cash income for small farners. Production of sawn timber from the exten- sive pine reserves of the central and eastern parts of the country is a major industry, accounting for 14% of exports by value. It is likely to become more important in the future with the planned development of the Olancho forestry project in the northeast. Cattle breeding occupies many valley areas where big land holdings have dominated, and the export of beef has accounted for 7% of export earnings. Corn and beans are the staple crops grown by the peasants in all parts of the country and are used mainly for domestic consumption. Sugar cane is grown in the south near Choluteca for domestic production of sugar, Plans are advanced for increasing production for export. 1.02 The capital and largest city, Tegucigalpa, had a 1974 population of 280,000, while the second larg-.,ct city, San Pedro Sula, had a population of 200,000. Additionally, tLoere -re five departments in the country with urban populations of less 0-0-n 000 but more than 20,000 (Table 1.2). San Pedro Sula has emerge1 as industrial center of the country, with an estimated 55% of the 1970 m.anufacturing activity. Together, the two largest cities were estimated to account for 80% of the manufacturing output of the country in 1970. 1.03 The Siula Valley and the nearby northern coastal strip have dominated the agricultural and industrial development of the country. Located in the extreme northwest, the valley attained a distinct, almost self-sufficient, regional economy centered on the city of San Pedro Sula, itself about 60 km from the Atlantic coast and from the main port of Puerto Cortes. To the south, facing the Pacific coast, is the Choluteca Valley, of considerable historical importance but having less rainfall and, therefore, less potential than the Sula Valley. The largest of the valleys, the Aguan, like the Sula, faces the Atlantic coast in the northeast, but is isolated from the rest of the country; it has excellent soils and good rainfall and its development is to play an important role in the future shape of the transport system. 1.04 An understanding of the valley-centercd regionili economrns of Honduras is essential to an understanding r-f pc.St ;1nd fuitlure transport  - 2 - development strategies. A complicating factor is the transport network required for exploitation and management of the largest natural resource in the country, namely the softwood forests in the central mountainous areas, where road building is extremely costly and intensive agriculture is not possible or even desirable. According to forestry experts, most of these areas should be left as reserve, and managed to provide a sustained growth of timber for export and domestic purposes, rather than be cut to clear the land for tilling. In the western mountains of Honduras where the timber has been removed, the peasants farm the steep slopes and thin soils and manage to provide a subsistence type of agriculture with no real hope of increased living standards unless they shift the farming activity to the rich valley lands. B. The Transport System (i) Highways 1.05 Honduras is essentially a unimodal country dominated by roads and road transport; the distances are short and the terrain rugged, making rail- ways non-competitive, except in the northern coastal strip where specialized banana railways continue to operate. The Superior Planning Council (Consejo Superior de Planificacion Economica, CONSUPLAN, para. 1.19) estimated that road transport carries 86% of the freight tonnage and 96% of the passenger traffic in the country. 1.06 The total length of the road network in Honduras in 1974 was about 6,140 km, of which 1,240 km were paved (Table 1.3). A major effort to expand the road network was started in the mid-1950's; by 1960, there were about 3,230 km of roads, of which only 110 km were paved. The backbone of the net- work is the north-south road, which runs between the ports of San Lorenzo and Puerto Cortes, passing through Tegucigalpa and San Pedro Sula and joining the Sula and Choluteca valleys. The Tegucigalpa-Catacamas road is the major route to the east-central part of the country and the Guayape valley. The Sixth Highway Project (Loan 896-HO) was to aid in financing the reconstruction and paving of the Tegucigalpa-Talanga section of this road, while the proposed Seventh Highway Project would extend the paving and partial relocation to Catacamas. The El Progreso-Tela-La Ceiba road joins the Sula Valley in the north with the northern coastal strip. When the La Ceiba-Sava road, financed by the Central American Development Bank (CABEI), is completed, the Aguan Valley will have, for the first time, an efficient all weather access to the main road network. With the completion of these primary roads, the main production and population centers will be joined with an adequate road network. 1.07 New road programs are now being undertaken or planned to join the potentially productive areas of the eastern part of the country with the north- south road axis; this work should be complete within a few years. Such roads, in order to fulfill their development purposes, will have to be supplemented by a feeder road system; the Government is aware of this, and some emphasis is now being given to the expansion and improvement of the feeder road system.  The Bank, through the Sixth Highway Project, is assisting in such expansion by financing technical and economic studies for about 330 km of feeder roads and reconstruction of about 80 km of these roads. IDB and USAID are also assist- ing in the financing of studies of feeder roads in productive areas. 1.08 Road transport expanded rapidly in the decade from 1964 to 1974; during that period, the vehicle fleet grew from about 16,000 to 43,900 (Table 1.4), an increase of about 174%. The most notable growth occurred in the number of trucks, which increased by 230%. The Government has enacted a revised Land Transport Law (February 1976), which permits the regulation of freight and passenger transport, in order to organize the transport indus- trv within Honduras and to improve its competitiveness within the context of the overall Central American region. In general, availability of road trans- port has not been a serious bottleneck to growth, although shortages do occur during seasonal peaks in demand. (ii) Railways 1.09 There are three small, narrow gauge rail operations in the country, all located in the north and designed originally to serve the banana planta- tions in the Sula Valley and the northern coastal strips. They total 450 km of main and branch line and 750 km of sidings and spurs. The Government- owned railway, Ferrocarril Nacional de Honduras (FNH), runs from the Atlantic port of Puerto Cortes to San Pedro Sula and along the upper Sula Valley, with a total length of 114 km of main line. It hauls sawn timber as weil as agri- cultural imports and exports. Until recently, FNH showed a profit. However, investments to repair the damage of Hurricane Fifi in 1972 and the reduction of banana shipments from damaged plantations led to a deficit operation of about US$0.5 million per year for the last two years (Table 1.5). The Tela Railway operates over 179 km of main line and serves the plantation areas of the eastern side of the Sula Valley and part of the coastal strip. It has access to both Puerto Cortes and the specialized banana pier at the port of Tela. It was owned and operated by the United Brands Company in Tela, but has recently been acquired by the Government. Since both these lines are of the same gauge (1.07 m), their rolling stock is compatible. The Standard Fruit Railroad operates over 157 km of main line and serves the banana plantations on the coastal strip between Tela on the west and Balfate on the east. The specialized pier at the port of La Ceiba is the outlet for banana exports. Since the line is a 0.91 m gauge, there is no connection to the other railroads. A branch line from the coastal strip through rugged terrain and into the upper Aguan Valley is the only access, apart from the sea, that it has with the rest of Honduras. Negotiations have been initiated to make the Standard Fruit Railroad a Government operation also. FNH will then control all the rail operations in the country. With captive banana traffic and a simple operation, FNH should have no trouble in making a reasonable profit, provided that tariffs are adjusted periodically to reflect current costs for each major section of the railway system and that uneconomic extensions of the present system are avoided.  -4- (iii) Ports 1.10 On the Atlantic coast, from west to east, are the four ports of Puerto Cortes, Tela, La Ceiba and Puerto Castilla. On the Pacific coast, there is a deepwater anchorage at Amapala on the island of El Tigre with lighter service to the shallow draft mainland port of San Lorenzo. The ports are operated by the Empresa Nacional Portuaria (ENP), a semiautonomous Govern- ment organization that was highly successful in developing the port of Puerto Cortes and was subsequently directed to take over the operation of all the ports in the country. (See Chapter II for a full description of the port subsector.) (iv) Air Service 1.11 Honduras has two principal airlines offering both domestic and inter- national service. The larger is SAHSA, a private airline with headquarters in Tegucigalpa. It has a fleet of 14 planes (DC-3, DC-6 and Convairs) for domestic services, and a Boeing 737, its major revenue earner, for inter- national service to New Orleans, Managua, San Jose and Panama. The 737 calls at both Tegucigalpa and San Pedro Sula, offering service between these two points. The second airline, TAN, operates a 737 out of San Pedro Sula and offers service to Miami and Mexico City, calling at Tegucigalpa and La Ceiba en route. TAN also operates three smaller aircraft for domestic service. It is privately owned and recently acquired a majority share in SAHSA, effect- ing a merger of sorts; so far, the operations of the two have not been con- solidated. In addition to the two above-mentioned main airlines, there is a local airline (Aerovias Nacionales de Honduras) operating DC-3 aircraft, which provides regular domestic service to 20 cities, including the bay islands in the Caribbean Sea. There are also a number of "bush pilot" services that provide access to a large number of airstrips in isolated sections of the country. 1.12 The Villeda Morales airport at San Pedro Sula has a good runway of 2,800 meters. Construction of a new terminal building for improving the service to tourists is presently under consideration. The Toncontin airport at Tegucigalpa is less satisfactory, with only 1,980 meters of runway, barely adequate for modern jets, and is considered a hazardous facility. The proposal for a new airport at Tegucigalpa has been under consideration for many years, but has not been implemented due to the high costs and relatively low level of traffic. 1.13 With the completion of the Western Highway and the road between Tegucigalpa and San Pedro Sula, domestic air traffic has declined steadily since the peak year of 1969 (Table 1.6). Private automobiles and a good intercity bus and truck service have diverted a large portion of air traffic, especially on the Tegucigalpa-San Pedro Sula segment.  C. Transport Planning and Coordination 1.14 Responsibility for highway planning lies with the Ministry of Communications, Public Works and Transport (MCOPT). The main bases for highway investment planning are: (a) a long-term highway network master plan, which was prepared almost ten years ago; and (b) a long list of proposed projects which reflect a variety of local interests as well as national development priorities. Present road planning is unrealistic because it is not related to the constraints of financial resources and available execu- tive capacity. There is need for a change in the planning approach, which should focus on a core of a small number of projects of high priority which can reasonably be implemented with available resources. 1.15 Port planning is the responsibility of the National Port Authority (ENP), a semiautonomous organization that operates and plans all ports in the country. It generates many of its financial requirements through a system of port charges. Because of the limited number of ports in the country, it also avoids the problem of attempting to implement too many projects. Its management has been good and is not subject to frequent change, allowing the development of a rolling five-year plan that includes economic, engineering, and financial analysis, most of which is done by the port staffs themselves. The inclusion of a cash flow analysis in the five-year plan avoids the worst deficiency of the highway plan and effectively integrates the annual budget exercise for the ports into a longer term plan. 1.16 FNH is also a semiautonomous organization that will eventually be in charge of operating all three narrow gauge railways. It is a stable operation with little traffic growth, specializing in moving bananas to the Atlantic ports. As such, its planning operation is essentially financial and involves projection of revenues and operating expenses. The capital budget is small and has not required sophisticated engineering or economic analyses. The current planning staff is small but has been adequate to date. 1.17 Airport planning is the responsibility of MCOPT. With distances so short and incomes so low, road transport cut deeply into domestic air traffic as the road network expanded in the 1970's, obviating the need for planning new investments in domestic airports. 1.18 The two modes that receive most of the transport investment in Honduras are roads and ports, and they are the subjects of continuous planning activity. Highways, which control by far the largest budget, accounted for 72% of the 1975 budget expenditure for transport. In the same year, ports accounted for 20%, rail 6% and airports 2% (Table 1.7). To speak of a trans- port plan for Honduras is to speak, therefore, of an independently produced port plan and a highway investment plan. 1.19 The formal transport coordination mechanism involves both MCOPT and CONSUPLAN. CONSUPLAN, which is a quasi-ministry, deals with intersectoral considerations as well as intrasectoral ones, such as those within the trans-  -6- port sector. It has published both a national development plan and an annual operation plan for the transport sector. In the last year, the division within CONSUPLAN that dealt with transport matters has become weak due to the departure of key personnel and advisors, some of whom went to the MCOPT planning unit, and the basic coordination effort now takes place between MCOPT and the Ministry of Finance. 1.20 Since intermodal considerations are not generally of major concern and highways dominate the transport picture, the budget decision for highways is the major transport investment decision. The coordination required among roads, airports, and the semiautonomous railroads and ports is handled through ad hoc meetings and the personal relationships of the heads of agencies. 1.21 With an adequate, independently produced port plan and no serious problem of intermodal coordination, the major task remaining is to formulate a highway investment program that reflects both national priorities and constraints. Technical assistance under the ongoing Sixth Highway Project (Loan 896-HO) has been aimed at developing a suitable data base and technical skill that would allow such an exercise to be carried out. The proposed Seventh Highway Project includes a component for financing the preparation of a Highway Master Plan and is the logical extension of the current technical assistance effort.  AbLE 1 .1 -7- HONDURAS THIRD PORT PROJECT Areas of Major Vallevs Valley Area Km2 % Total Aguan 2,288 22.6 Sula 1,841 18.2 Guayape 1,155 11.4 Choluteca 973 9.6 Agalteca 605 6.o Pauiaya 582 5.7 Comayagua 53 5.3 La Masica, Este 388 3.8 Siria 364 3.6 Talanga 329 3.2 Nacaome 321' 3.2 Yoro 271 2.7 Jamast ran 261 2.6 Banli-El ParaLso 214 _2.1 Total 10,127 100.0 -Soul2e: Agricultural/Rural Sector Survey: Honduras IBY3D/IDB/AID December 1975, Table 1 of Annex 1 April 1976  TABLE 1.2 HONDURAS THIRD PORT PROJECT Urban Population Centers - 1974 1974 Urban 1/ Department Population (000's) Main city or town Francisco Morazan 286.4 Tegucigalpa Cortes 219.0 San Pedro Sula Atlantida 57.9 La Ceiba Yoro 45.3 El Progreso Comayagua 35.6 Comayagua Choluteca 34.4 Choluteca Olancho 23.7 Juticalpa Other 122.7 Total Urban 825.0 Total Rural 1,828.9 Total National 2,653.9 1/ Urban refers to localities with 2,000 or more inhabitants having essentially urban characteristics. Source: Current Economic Position and Prospects of Honduras, IBRD Draft Report May 3, 1976 August 1976  _9- TABLE 1. 3 HONDURAS THIRD PORT PROJECT Development of the Highway Network 1964-1974 (in kilometers) Year Paved Gravel Earth Total 1964 3b2 1,805 1,408 3,595 1965 407 1,852 1,380 3,639 1966 407 1,928 1,713 4,048 1967 416 1,978 1,955 4,349 1968 472 2,120 1,978 4,570 1969 622 2,102 2,004 4,728 1970 745 2,162 2,033 4,94o 1971 1,168 2,988 1,433 5,589 1972 1,228 3,028 1,490 5,746 1973 1,228 3,225 1,490 5,943 1974 1,240 3,406 1,490 6,136 Source: MCOPT March 1976  - 10 - TABLE 1.4 HONDUI?AS THIRD PORT PROJECT Vehicle Registration 1964-1974 Year Total Cars Buses Trucks Various 1964 16,002 8,759 1,217 5,909 117 1965 18,797 10,273 1,526 6,682 316 1966 21,609 11,786 1,784 7,871 168 1967 22,560 12,042 1,7C4 8,784 30 1968 24,746 11 ,045 1,982 11,617 104 1969 27,527 12,254 2,198 12,950 125 1970 28,706 12,630 2,296 13,492 288 1971 30,614 13,765 2,066 14,755 28 1972 34,421 15,293 2,420 15,116 1,592 1973 39,940 17,617 2,654 17,921 1,748 1974 43,934 19,379 2,920 19,727 1,908 /1 Including small pickups, widely used in Honduras,which,for statistical purposes,are classified as trucks. Source: MCOPT March 1976  - 11 - TABLE 1.5 HONDURAS THIRD PORT PROJECT Honduras National Railway: Traffic and Finance 1970-1975 Net Total l/ Operating Cargo Total Operating Surplus (Metric Revenues Expenses Deficit (-) Year Tons) Passengers (1000 Lempiras) (1000 Lempiras) (1000 Lempiras) 1970 510,359 106,769 4,130 2,753 1,377 1971 591,010 102,948 4,146 3,661 485 1972 546,724 76,051 3,410 3,624 - 214 1973 619,378 78,452 4,069 3,659 410 1974 446,348 92,991 3,264 4,277. - 1,013 1975 3/ 339,745 98,561 2,380 3,631 - 1,251 1/ Includes depreciation and debt service 2/ Estimate based on eleven months figures Source: Ferrocarril Nacional de Honduras August 1976  - -12 - TABLE 1.6 HONDURAS THIRD PORT PROJECT Passenger and Cargo Traffic at Major Airports 1965-1973 Tegucigulpa San Pedro Sula Total Year Passengers Cargo Passengers Cargo Passengers Cargo (l,QOO) (1,000 lbs) (1,000) (1,00C lbs.) (1,000) (1,000 lbs) 1965 113 11,451 78 8,795 191 2C,246 1966 125 12,955 109 11,339 23L 24,29L 1967 133 1)4,927 112 10,397 2L45 25,324 1968 168 15,151i 137 11,601 305 26,755 1969 18Lf 18,124 167 17,578 351 35,702 1970 213 18,381 200 16,654 h13 35,035 1971 174 15,855 150 15,306 324 31,161 1972 152 11,336 109 11,602 261 22,938 1973 143 10,199 103 9,811 2L6 2C,O01O Source: Estadisticas de Transporte Aereo 1973-74 Direccion General de Aeronautica Civil, MOOPT, May 1975 April 1976  - 13 - TABLE 1. 7 HONDURAS THIRD PORT PROJECT Public Investments in Transport 1973-1974-1975 Mode Amount (1,000 Lempiras) 1973 1974 1975 Roads 19,800 23,400 34,700 Ports 5,293 15,649 9,433 :2/ Railroads 304 297 3,057 Airports 1,769 1,168 872 Total 27,193 40,514 48,062 Sources: / MCOPT i/ Plan Operativo del Sector Transporte 1976 CONSUPLAN April 1976  - 14 - II. THE PORT SUBSECTOR A. General 2.01 Ports, which handle over 96% of exports and 93% of imports, play a dominant role in the foreign trade of Honduras. Only a small amount of over- land trade to adjoining Central American countries moves by road transport. The Government attaches high priority to the development of adequate port cilities. At the four ports handling overseas traffic, the tonnages (includ- -g petroleum products) in 1975 were as follows: Traffic ('000 Tons) Port Exports Imports Total % Puerto Cortes 851 977 1,828 79 Tela 73 58 131 5.5 La Ceiba 196 39 235 10 San Lorenzo-Amapala 113 15 128 5.5 1,233 1,089 2,322 100 Bananas, lumber, sugar and coffee constitute the main exports, while machinery, manufactured goods, foodstuffs, fertilizers and grain account for the imports. Because of the larger trade with the gulf and east coast ports of USA, the port capacity has developed mainly on the Atlantic coast, where three out of the four principal ports are located. Puerto Cortes is the principal general cargo port while Tela and La Ceiba are mainly banana-handling facilities. San Lorenzo-Amapala on the Pacific side is a lighterage port, catering mostly to lumber traffic. B. Bank Assistance in the Port Subsector 2.02 In 1966, the Bank made the first loan (463-HO) of US$4.8 million to Empresa Nacional Portuaria (ENP) for building two deepwater berths and support- ing facilities at Puerto Cortes. Soon after the completion of this project in 1970, need was felt not only for addition to that port's capacity but also for providing a deepwater port on the Pacific side. Accordingly, the second port loan (767-HO) of US$6.0 million was made in 1971 for a project which provided for the construction of a new wharf and railway yard at Puerto Cortes and a pier for seagoing vessels at San Lorenzo. The works at Puerto Cortes were completed satisfactorily in 1975 and those at San Lorenzo are in progress.  - 15 - Because the bids received in 1975 for the latter works were much higher than appraisal estimate of 1971, a supplemental loan of US$3.0 million was made in 1975, bringing the total of the Bank's lending in the port subsector to US$13.8 million. The present proposal will be the third port project to be executed with the Bank's assiistance. Apart from an Eximbank loan for the purchase of container-handling equipment for Puerto Cortes, all port development in Honduras so far has been financed by the Bank. C. Organization 2.03 The ports of Honduras are administered by ENP, the National Port Authority, which was established on December 1, 1965. Initially ENP was given charge only of Puerto Cortes, the principal port on the Atlantic Coast, and, while the other public ports were left under the jurisdiction of the Directorate General of Customs and Indirect Taxes, two private ports (Tela and La Ceiba) continued under the management of United Fruit and Standard Fruit Companies. On January 1, 1974, the administration of all ports (including the private ones) was transferred to ENP. 2.04 Being an entity created as a precondition for the appraisal of the first port project (Loan 463-HO of 1966), ENP has been constituted on lines acceptable to the Bank, which assisted the Government in its formulation. ENP is an autonomous undertaking with an Executive Board of seven members: three Ministers (Economy and Finance, Communications and Public Works, Natural Resources) or senior officials designated by them; a representative of the Economic Planning Council; and three delegates, one each from (a) Chambers of Commerce and Industry, (b) Trade Unions and (c) shipping companies. The latter three members are nominated by the President of Honduras from the lists submitted by the respective groups. The Minister of Economy and Finance is the Chairman of the Board. The day-to-day administration of ENP as a whole is the responsibility of the General Manager who is assisted by a submanager and by heads of the operations, engineering, accounts and other departments. A Port Superintendent with suitable supporting staff is responsible for the working of each port. A chart showing the organization of ENP is given on page 20 (Table 2.1). ENP has a total staff of about 566 distributed as follows: General Management 10, Planning and Development 14, Data Processing 12, Design and Construction 7, Promotion and Marketing 4, Accounts and Personnel 48, Cargo Operations 296 (including 60 temporary workers), Maintenance and Services 109, Hydrography and Navigational Aids 11, and Security 59. Relations between staff and management are good. Under the terms of Loan 463-HO, ENP has under- taken to consult the Bank when appointing the General Manager. The present incumbent is a capable, dynamic person with good leadership qualities, and the affairs of ENP are carried out in an efficient manner. 2.05 ENP has adopted operations procedures and accounting systems on Ehe advice of management consultants, Booz, Allen and Hamilton International Inc., who were employed by it, with the agreement of the Bank, in accordance with the provision in the agreement for Loan 463-HO. Since taking over all  - 16 - of the ports in 1975, ENP has been maintaining separate accounts for each of them, in addition to the accounts for Puerto Cortes. A separate account for ENP itself, however, has not yet been started, and items not clearly attri- butable to any individual port are being booked into the accounts for Puerto Cortes. The need for opening a new account for ENP has been accepted by the General Manager, and action is expected to be taken shortly (para. 5.03). ENP's accounts are audited at the end of each fiscal year by independent auditors acceptable to the Bank. Under Loan 767-HO, ENP has undertaken to establish charges for the provision of services and facilities which will be reasonably related to the costs thereof and which will produce revenues sufficient to earn an annual rate of return not less than 8% on the historic value of its net fixed assets. For this purpose, its accounts department is presently preparing to install a costing system acceptable to the Bank, which will provide the necessary information to design a cost-based tariff structure (para. 5.06). The financial position of ENP is satisfactory. D. Facilities 2.06 Puerto Cortes is the largest port of Honduras, handling over 1.8 mil- lion tons of cargo annually. It has an excellent natural harbor formed by a large, well protected bay with a depth of 12 to 16 m, an easy access and a tidal range of 0.3 m. The berthing facilities at the port comprise: (a) Texaco oil pier (1959) serving Texaco refinery (b) Finger pier for sugar and molasses (c) Banana wharf (1919) - 292 m long (d) General cargo wharf No. 1 (1955) - 187 m long (e) General cargo wharf No. 2 (1970) - 336 m long (f) General cargo wharf No. 3 (1975) - 353 m long Ancillary facilities available at Puerto Cortes include storage tanks for oil and molasses, one shed for sugar, four transit sheds, two warehouses for general cargo, one warehouse for wheat, open storage areas and a railway yard. Construction of wharf No. 2, one transit shed and one warehouse was financed by the Bank under Loan 463-HO, and construction of Wharf No. 3 and the rail- way yard was financed under Loan 767-HO. 2.07 The port of Tela, developed mainly as a banana export facility by the United Brands Company in 1914, has one pier constructed normal to the shore in an open roadstead about 60 km east of Puerto Cortes. The pier can receive two vessels of 9.0 m and 7.0 m drafts, one on each side. Its timber construction is in a good state of repair. Ancillary facilities include petroleum storage tanks, a customs warehouse, storage sheds and yards belonging to the United Fruit Company, and a railway yard.  - 17 - 2.08 The port of La Ceiba, situated about 63 km further east of Tela, was built primarily for the export of banana production of the Standard Fruit Company; this port also has one finger pier in an open roadstead. The timber construction of the pier, which can berth two vessels of 7.0 m draft, is in poor condition and will need substantial repairs and restoration if the facilitv is to be kept in operation beyond the next few years. Access to the pier is mainly by rail. Shore facilities include a customs warehouse and some private storage sheds, mostly belonging to the Standard Fruit Company. 2.09 On the south side of the Caribbean island of Roatan, a small pier has been constructed to serve the meager passenger and goods traffic handled by ferries operating from La Ceiba. 2.10 A small concrete pier located on the south side of the bay of Trujillo, near the old city of Trujillo, serves only the coastal vessels since the available water depth is less than three m. On the north side of the bay, which is very well sheltered and has deep waters, stands Puerto Castilla, where the only facility presently in operation is a small T-head pier, con- structed by the fish processing plant for the use of the fishing vessels. About 1,000 m to the east are the ruins of a timber pier which served as a banana export facility of Puerto Castilla until 1938. The pier was built in 1923 by the Trujillo Railroad Company, a subsidiary of the United Fruit Company, and was one of the most active banana export centers of Central America for 15 years. It fell into complete disuse, however, beginning in 1938, when the banana cultivation in the valley of the Aguan and Paulaya Rivers was abandoned as a result of the destruction of the plantations by the sigatoca disease. Since then, the Bay of Trujillo has seen little commercial activity. Its large expanse of sheltered waters, with depths of 22 m at less than 300 m from the shoreline, makes it an excellent natural harbor with great unexploited potential. A study carried out by Tippetts-Abbott-McCarthy- Stratton (TAMS), Consultants to ENP, has identified potential for the develop- ment in the bay of an oil transshipment terminal for the use of very large crude carriers (VLCC) and of a bulk terminal for importing bauxite for an aluminum smelting plant. Because of the high priority being given to the economic development of the northeastern region of Honduras, which is the service area of Puerto Castilla, a need is now perceived for new facilities at this port. 2.11 All overseas traffic on the Pacific coast of Honduras is handled by lighterage. Two anchorages, one opposite to Amapala on the Island of Tigre and the other at El Muerto, near the town of San Lorenzo, are accessible to seagoing ships, drawing up to 8.5 m and 7 m respectively. Masonry wharves for lighters have been provided at both Amapala and San Lorenzo, but, because they are constructed at low water line, barges can use them only during part of the tide. Since there is no land connection between Tigre Island and the mainland, cargo lightered to Amapala must be transported to San Lorenzo in barges. There are four storage sheds at Amapala and nine at San Lorenzo. With a view toward replacing a major part of the inefficient lighterage opera- tions, ENP is presently building, with the Bank's assistance (Loan 767-HO), alongside facilities for seagoing ships at Henecan, near San Lorenzo; these  - 18 - consist of an L-shaped pier 145 m long with a 15 m wide access bridge. The pier would be suitable for berthing, on its outer face, ships drawing up to 7 m, which is the maximum draft of ships that can reach the new facilities without deepening of the channel. The inside face of the pier would be useful for vessels drawing up to 6 m and for lighters. A transit shed for general cargo, and covered and open storage areas for lumber are being provided. E. Operations 2.12 Shipping and cargo-handling operations at Puerto Cortes are well organized and managed. Over 1,400 vessels per year belonging to some 54 ship- ping companies use the port. While banana ships, lumber ships and general cargo ships account for nearly 95% of the users, Roll-on/Roll-off (Ro-Ro) and container vessels are on the increase. Delta Lines started a lighter-aboard- ship (LASH) service in 1975, with two calls per month and an average of 900 tons of cargo per call. Caribbean Overseas Lines (CAROL), a consortium of four European Shipping Lines - Hapag-Lloyd (German), KNSM (Dutch), T & G Harrison (British) and CGT (French) - plans to start a container service to Puerto Cortes as a part of its program to replace the existing break-bulk service between the Caribbean, Central America and Europe. Pilotage is compulsory and is provided by ENP. A used tugboat was acquired in 1975 to assist vessels in berthing and unberthing, and the damage caused frequently to fender piles by bulbous bow vessels has been reduced. The port operates 24 hours a day, 362 days a year. 2.13 Cargo handling on shore is carried out by ENP staff, except in the case of export cargo transferred directly to ships from railroad cars or trucks, which is handled by labor supplied by ship's agents. All stevedoring is carried out by private contractors. Because of free competition, the stevedoring charges are reasonable without requiring any regulation by ENP. 2.14 Generai cargo is handled with ships' gear. Dock pallets and fork- lifts are used extensively, averaging a productivity of 33 metric tons per ship-hour - a significant increase over the 15.5 metric tons per ship-hour obtained in 1968. Loading at the banana wharf, used mainly by United Brands Company, is carried out with four gantry-type conveyor loaders with a loading rate ranging between 150 and 175 metric tons per ship-hour. The United Brands Company is increasingly exporting its bananas in containers, which are loaded and unloaded directly from railcars by ship-mounted cranes. About 15 to 20 movements of 20-foot equivalents (TFE's) are made per hour. The Standard Fruit Company uses four portable conveyors between the railcars and the ship to obtain a loading rate of 125 to 150 metric tons per ship-hour. Lumber is loaded directly from rail cars, with a loading rate of 25 to 30 metric tons per hour; this low rate is due largely to the lack of an adequate number of flat bed rail cars and partly to the low efficiency of the ships' gear. ENP is considering the provision of preshipment storage for lumber to improve the loading rate. Imported bulk grain is discharged by pneumatic unloaders directly into rail cars or trucks at a rate of 45 metric tons per ship hour.  - 19 - Mineral concentrates in dump buckets are transported by trucks and loaded by ships' gear. The loading rate ranges between 60 and 70 metric tons per ship-hour. With an average ship turnaround time of less than 28 hours and dry cargo throughput of over 900 tons per meter of quay, the port operations at Puerto Cortes are efficient. 2.15 Regarding the container service planned by CAROL and the increase in the containerization of bananas, ENP has decided, on the basis of a study made by its consultants, to invest in a 40-ton capacity container gantry crane to be installed on the new wharf No. 3. A Paceco crane, financed by Eximbank, has been ordered and is scheduled for delivery in 1977. A free zone, in which warehouses and a container consolidation shed would be provided, is also planned. 2.16 At Tela and La Ceiba, bananas, which constitute the bulk of the traffic, are loaded directly from railroad cars. With portable conveyors, the loading rate averages 125 metric tons per ship-hour. General cargo, also handled directly from rail cars with ship's gear, averages 30 metric tons per ship hour. 2.17 Lighterage operations at San Lorenzo and Amapala are carried out with a fleet of 25 barges and 7 tugs and with ship's gear at shipside, and largely by manual labor at the warehouses. Because customs clearance for all imports on the Pacific coast must be obtained at Amapala, all cargo other than readily discernible items must be barged to the customs warehouse at Amapala and, after being cleared by customs, must be reloaded into barges to be towed to San Lorenzo. Some cargo is handled as much as six or seven times before reaching San Lorenzo. This situation will change when the new port facilities at San Lorenzo come into operation since the Government has agreed to modify the present regulation and to permit importation or exporta- tion through the new port.  HONDURAS Third Port Project Organization of ENP Board of Directors General Manager Sub-Manager Statistics e__cords Maintenance Hydrography | Administrative lIl Operations Division Navigational Personnel Services Legal Division (Civil Works) Aids Division Division Division Auditor AAdvisor Design & Planning 6 Construction Development Section Section Jr. Superintendent Superintendent Superintendent Superintendent Superintendent Superintendent Trujillo & Castilla La C iba Tela Puerto Cortes Free ZDne San Lorenzo/ Ama ala erations erations Operations -Promotion Operations (Checker) Accounts Accounts Commercial Accounts Security Security Finance & Security Administration LLegal Maintenance of Equipment Security Operations Accounts I 1 I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ } Workshops Bert~hing & Carg Sheds. Bills Time Pilotage Handling Warehouses Keeping I l 3~~~~~~~~~~~~~~~~~~~~~~~~> Operators t Cash Container m Handling t Source: ENP August 1976  - 21 - III. THE PROJECT A. Need for Additional Port Capacity 3.01 The Government of Honduras is vigorously pursuing its program for the development of the northeastern region of the country. It has already embarked on an extensive scheme for agricultural development in the Aguan Valley with financial assistance from the Inter-American Development Bank (IDB). The first stage of this scheme has recently been completed, and the more ambitious second stage is now being launched. The initial problems of land tenure have been resolved, and over three thousand families have been settled in cooperatives organized in the region. Based on the satis- factory progress of the scheme and the acreage planted and planned, it is expected that an exportable surplus of corn, beans, grapefruit and palm oil would develop within a few years. 3.02 The Government's plans for developing the forest industry in the Olancho region have also moved forward. The feasibility study for a paper and pulp factory project (which has been under consideration for many years and with which the Bank has been actively associated through the International Finance Corporation) has been completed by consultants (Simons of Canada), and the Government has decided to proceed with the project, estimated to cost US$431 million and to implement it in two stages. Estimated to cost US$191 million, the first stage (1978-1979) aims at the production of timber and chips for export by installing sawmills at Corocito, Pueblo Viejo and La Union and includes 211 km of road infrastructture (Map IBRD-12462). This would be followed by the second stage, which involves the construction of a paper and pulp factory at Corocito in 1984. when liner board will largely replace chips in the export program (Tables 3.I and 3.2). 3.03 Since the eYistffi-;,3 i J capacity is not adequate or suitable for handling the overseas traffc which would be generated by these agriculture and forestry development schemes (paras. 4.02-4.05), ENP proposes to construct new port facilities at Puerto Castilla, which is well located with respect to Corocito and has an excellent natural harbor. 3.04 Another export-oriented development in the agriculture sector is the expansion of sugar manufacturing capacity in the Choluteca region in the south. Two new sugar factories are under construction, and one is being expanded to produce cane sugar and molasses for the overseas market. This traffic (para. 4.17) will need port facilities on the Pacific coast. Since the sugar companies developed their export plans after the contract was awarded for the port works at San Lorenzo, the facilities presently being constructed under Loan 767-HO are not sufficient to cope with the increased demand expected after 1978. ENP therefore proposes to make suitable additions to them. Pursuant to enquiries from the sugar industry, ENP also wishes to examine the feasibility of deepening the access channel to San Lorenzo to permit the use of larger vessels for the export of sugar and molasses.  - 22 - B. Project Objectives, Scope and Timing 3.05 The objectives of the project are: (a) To provide facilities at Puerto Castilla and at San Lorenzo for handling efficiently and economically the overseas traffic related to the agricultural and forestry development schemes in the Olancho region and the expansion of the sugar industry in the southern region; (b) To carry out a study to determine the optimal size of vessel for handling the projected traffic at San Lorenzo, considering the cost of initial and maintenance dredging versus the economies associated with the use of larger vessels; and (c) To improve the capability of ENP staff through training in container operations. 3.06 The scope of the project works is based on the feasibility studies carried out by ENP with the help of consultants. The study for Puerto Castilla was made by Tippetts-Abbott-McCarthy-Stratton (TAMS) and that for San Lorenzo by Netherlands Engineering Consultants (NEDECO) - firms which were already working for ENP, respectively, on the Puerto Cortes and San Lorenzo projects. The studies have been modified to incorporate the Bank staff's comments. 3.07 The facilities would be designed initially to handle traffic levels expected up to 1984-1985, but would be capable of being expanded thereafter, if required. Lumber and general cargo-handling equipment for San Lorenzo was originally included in the ongoing project (Loan 767-HO); however, because of the cost overrun on the civil works, it was agreed, when making the supple- mental loan of US$3.0 million, that the unordered equipment would be deleted and might be considered for inclusion in a subsequent loan. Accordingly, since the equipment is still needed, provision for it has been made in this project. 3.08 Ideally, the proposed facilities should be ready for operation just before the principal overseas traffic is offered for shipment. According to schedules indicated for the sawmill at Corocito and for the sugar factories in the southern region, the facilities at Castilla should be available for use by end 1979 and those at San Lorenzo by March 1978. The implementation schedule (Table 3.3), prepared in consultation with ENP and its consultants, indicates that these target dates can reasonably be met.  - 23 - C. Project Description 3.09 The project will consist of: I. Civil Works At Puerto Castilla (Map IBRD 12463): Construction of a wharf, 450 m long with alongside depth of 10.5 m below mean low water spring tide; one transit shed, 100 m x 30 m; one warehouse, 3,000 two open-sided lumber sheds, 6,000 m2; office building, 800 m maintenance building, 560 m2; one palm oil storage tank, 2,500-ton capacity; one petroleum storage tank, 2,000-ton capacity; and miscellaneous struc- tures such as guardhouses, shelters, pumphouses, gates and fences; also site development, including grading, drainage, roadway and utility services. At San Lorenzo (Map IBRD 12464): Extension of the pier (presently under construction) to provide an additional berth 145 m long with alongside depth of 7.5 m below mean low water spring tide, construction of one sugar storage shed 76 m x 31 m, and two molasses tanks 3,800-ton capacity each. II. Equipment At Puerto Castilla (a) 14 forklifts (nine of 2 ton and five of 5 ton) and 500 wooden pallets for handling general cargo; (b) four forklifts (two of 10 ton and two of 5 ton), three tractors and six flat bed trailers for handling lumber; (c) three front-end loaders 2.5 m3, five dump trucks 40 m3 and one portable loader of 250-ton-per-hour capacity for handling woodchips; and (d) One used tugboat 1,200 HP for berthing operations and one launch 12 m for general harbor duties. At San Lorenzo (a) One mobile crane - 15 ton, five forklifts - 5 ton, four tractors and 10 flat bed trailers, and 500 pallets for handling lumber and general cargo; 3 (b) Two mobile cranes - 15 ton, two front end loaders 2.5 m two tractors and five flat bed trailers, and 20 steel buckets for handling sugar;  - 24 - (c) Pumping equipment 150 T per hour capacity with piping, valves, etc., for handling molasses; and (d) Six light buoys for aiding navigation. III. Consultant Services for Detailed engineering and supervision of the construction for Puerto Castilla and San Lorenzo. IV. Technical Assistance for (a) A study to determine the optimal depth of the access channel for San Lorenzo; and (b) A manual detailing the procedures and documentation for container operations, and training ENP's staff in the management and operation of the container berth and consolidation depot at Puerto Cortes (the container facili- ties are not a part of this project). D. Engineering Evaluation 3.10 The main considerations taken into account in the engineering evalua- tion of the project were: At Puerto Castilla (a) Suitability of the site from the point of shelter, littoral drift, siltation, natural sea bed levels and access from the sea, all of which are excellent on the north side of the Bay of Trujillo; (b) Feasibility of providing transport infrastructure to the service areas; (c) Suitability of subsoil conditions (as indicated by five test borings carried out by ENP) for the pile construction proposed for the wharf and for future deepening, if required; (d) Conformity of the wharf location with the Master Plan for future developments; (e) Location of the wharf to balance the quantity of material required to be dredged with that required as fill for the land to be reclaimed; (f) Adequacy of the wharf length for serving the expected number and size of ships without undue queuing;  - 25 - (g) Provision for future rail service to the wharf; (h) Adequacy of open and covered storage areas; (i) Availability of land for future expansion; and (j) Suitability of the methods and equipment proposed for cargn handling, which are as follows: General Cargo: Ships' gear to be used for loading and unloading and forklifts and pallets for movements between wharf and storage. Lumber: To be transferred from open-sided shed to shipside using forklifts, flat bed trailers and tractors, and to be loaded with ships' gear. Chips: At the stockpile in an open storage space, front- end loaders will load chips into dump trucks for conveyance to the wharf, where the chips will be dumped into the bin attached to a custom-made portable loader. The bin will be raised and tilted into a chute discharging into the ship's hold. The portable loading system will not only allow any one of the three berths to be used for chip loading operations, but also will be readily adaptable for handling other bulk materials. Since the export of chips is expected to phase out when the paper and pulp factory goes into produc- tion in a few years, the latter feature of the system is useful. One loader with a capacity of 250 tons per hour has been proposed; however, when preparing the detailed design for the loader, the visability of providing two units of 125 tons per hour capacity each will be considered in order to avoid complete stoppage of loading operations due to a possible breakdown of the loader. Grain: An existing silo (which was built by a private company a few years ago, but which is presently out of use) will be taken over and relocated in the port for use as a preshipment storage facility for grain. Conveyance from silo and loading into the ship will be carried out with the help of the chip loading equipment. Citrus: Initially, the cartons will be handled with pallets and forklifts, but, when the traffic grows, portable conveyors similar to those in use for bananas will be employed. (k) Proposal for acquiring a used tugboat based on the satisfactory experience at Puerto Cortes.  - 26 - At San Lorenzo (a) Possibility that the alternative of constructing a dolphin berth to serve molasses vessels only would lead to unacceptable queuing of dry cargo vessels, and that the extension of the wharf (presently under construction) to provide an additional berth which could handle molasses as well as dry cargo would be preferable and economically justified. (b) Wharf extension to be similar in design to the ongoing construction. (c) Molasses storage tanks to be located as close as possible to the new berth to minimize pumping distance. (d) Height of molasses tanks to be kept low to enable founda- tion to be designed without recourse to costly piling. (e) Suitability of the semimechanized system proposed for handling sugar (using front end loaders, buckets and trailer trucks) in preference to a fully mechanized conveyor system which would not be justified for the level of expected traffic. E. Cost Estimates 3.11 The total cost of the project is estimated at L 59.8 million (US$29.9 million) with a foreign exchange component of L 34.0 million (US$17.0 million), as detailed on page 27 following. 3.12 The base estimate cost of civil works and equipment has been obtained by updating to December 1976 the consultants' estimates, which were based on December 1975 prices. The consultants' estimates have been prepared on the basis of recent bids and prices quoted for comparable work in the region and are considered realistic; contingency provision includes (a) physical varia- tion in civil works at 15% for Puerto Castilla and at 10% for San Lorenzo, and (b) price escalation at 12% for civil works, 8% for equipment and 6% for consultant services each year from 1977 to 1979. 3.13 The cost estimates provide for 170 man-months of expatriate engineers at US$6,000 per man-month and 270 man-months of local engineers at US$2,500 per month for consulting services and technical assistance for an average man-month cost of US$3,900. F. Borrower and Executing Agency 3.14 ENP would be the Borrower and the Executing Agency. For the detailed engineering, preparation of bid documents and supervision of works for Puerto  - 27 - Cost Estimates I. Civil Works Lempiras (000) US$ (000) % of Project (A) Puerto Castilla Local Foreign Total Local Foreign Total Cost 1. Mobilization and Demobilization 56 509 565 28 254 283 2. Dredging and Reclamation 441 1,763 2,204 221 882 1,102 3. Shoreline Protection 534 178 712 267 89 356 4. Site development 1,695 565 2,260 848 282 1,130 5. Wharf Structure 450 mx38 m 9,221 6,147 15,368 4,610 3,074 7,684 6. Transit Shed 415 771 1,186 208 385 593 7. Warehouse 415 771 1,186 208 385 593 8. Opensided Lumber Shed 581 1,080 1,661 290 540 831 9. Office Building 441 147 588 220 74 294 10. Maintenance Building 308 103 411 154 52 206 11. Roadway 344 114 458 172 57 229 12. Palm Oil Storage Tank-2500 Tons 136 316 452 68 158 226 13. Petroleum Storage Tank-2000 Tons 102 237 339 51 118 169 14. Miscellaneous Structures 254 85 339 127 43 169 Sub-total 14,943 12,786 27,729 7,472 6,393 13,865 46 (B) San Lorenzo 1. Dredging 68 270 338 34 135 169 2. Wharf Extension 145 mx25 m 1,300 1,300 2,600 650 650 1,300 3. Fendering 108 434 542 54 217 271 4. Sugar Shed 76 mx3l m 573 1,065 1,638 287 533 820 5. Molasses Tanks 7600 Tons 346 807 1,153 173 403 576 Sub-total 2,395 3,876 6,271 1,198 1,938 3,136 11 II Equipment (A) Puerto Castilla 1. General Cargo handling equipment 33 621 654 16 311 327 2. Lumber handling equipment 33 621 654 16 311 327 3. Chiploading equipment 162 3,108 3,270 81 1,554 1,635 4. Tug Boat 1200 HP (used) 55 1,035 1,090 28 517 545 5. Launch 16 311 327 8 155 163 Sub-total 299 5,696 5,995 149 2,848 2,997 10 (B) San Lorenzo 1. General Cargo handling equipment 41 786 827 20 393 413 2. Sugar handling equipment 38 725 763 19 363 382 3. Molasses handling equipment 16 300 316 8 150 158 4. Navigation Aids 16 311 327 8 155 163 Sub-total 111 2,122 2,233 55 1,061 1,116 4 III Consultant Services - Engineering & Supervision for (A) Puerto Castilla 1,052 1,578 2,630 526 789 1,315 (B) San Lorenzo 260 390 650 130 195 325 Sub-total 1,312 1,968 3,280 656 984 1,640 5 IV Technical Assistance 1. Dredging Study 200 300 500 100 150 250 2. Training 80 120 200 40 60 100 Sub-total 280 420 700 140 210 350 1 V Contingencies 1. Physical 15% on I(A) and 10% on I(B) 2,496 2,290 4,786 1,248 1,145 2,393 8 2. Price 4,01 4,842 8,854 2,006 2,421 4,427 15 Sub-total 6,508 7,132 13,640 3,254 3,566 6,820 23 Grand Total 25,848 34,000 59,848 12,924 17,000 29,924 100 1/ Excludes interest on Bank debt during construction of L 3,25 million  - 28 - Castilla, ENP would retain services of consultants whose qualifications and experience, terms of reference and terms of appointment would be satisfactory to the Bank. NEDECO would provide these services for the San Lorenzo component of the project. From its performance on previous Bank-financed projects, it can be expected that ENP, with the assistance of the consultants, would be able to execute the project satisfactorily. G. Financing 3.15 The proposed Bank financing for the project would cover the estimated foreign exchange cost (US$17.0 million). The estimated cost in local currency (US$12.9 million equivalent) would be met partly by ENP's own reserves and partly by a bond issue of approximately US$13.0 million with a 10-year term. H. Procurement 3.16 All contracts for civil works and equipment for Puerto Castilla and San Lorenzo would be awarded on the basis of international competitive bidding, except that the used tugboat for Puerto Castilla would be procured by inter- national shopping. Of the equipment to be procured under the project, only flat bed trailers are manufactured locally and may qualify for domestic pref- erence. With regard to the civil works for San Lorenzo, ENP proposes to instruct Columbus Latinoamericana (the contractor which is presently carrying out the port works at San Lorenzo) to execute them as an extension to the ongoing contract. Since the new work would be similar to, and about 33% of, the work in the current contract, ENP's proposal is practicable and would result in the facilities being ready earlier than would be the case if new bids were invited. It is doubtful if international contractors would be interested in the new bid, not only because of the modest size of the contract (estimated cost US$3.1 million), but also because of the effective competition which Columbus Latinoamericana is in a position to offer due to its being already on the site. Since the current contract with Columbus Latinoamericana was awarded in 1975 on the basis of international competitive bidding, and the prices applicable thereto would provide the basis for the prices for the new contract, the Bank has accepted ENP's proposal, on condition that the terms of the revised contract would be satisfactory to the Bank. Agreement in this regard was reached during negotiations. It was also agreed during negotia- tions that ENP would not sign the contract for the construction of additional facilities at San Lorenzo unless an agreement satisfactory to the Bank has been obtained from the sugar companies (para 4.20) guaranteeing a minimum tonnage of sugar and molasses traffic and payment therefor of tariffs as would be established by ENP from time to time to achieve the financial objective of earning a minimum return of 8% on revalued assets (para 5.13).  - 29 - I. Disbursements 3.17 A schedule of estimated disbursements is given in Table 3.4. This is based on a provisional project implementation program (see bar chart presented as Table 3.3) drawn up to coincide with the schedule startup of the Corocito sawmill by end 1979 and the export of sugar and molasses by March 1978. During negotiations, agreement was reached on the implementation schedule. Disbursements would extend over a period of four years and would be made against 49% of total expenditures for civil works at Puerto Castilla and at San Lorenzo, 60% of total expenditures for consultancy services and tech- nical assistance and 100% of foreign expenditures for all equipment and craft. Upon completion of the project, any savings in the loan might be used with the approval of the Bank for procurement of equipment items or services similar to those included in the project. Failing such approval, they would be cancelled. J. Technical Assistance 3.18 During negotiations, agreement was reached with ENP that, in the case of the consultants for the San Lorenzo channel depth study and for training in container operations, the qualifications and experience, the terms of reference and the terms of appointment would be satisfactory to the Bank. K. Uncertainties in the Project 3.19 Possible factors that could delay the startup of the proposed sawmill at Corocito constitute the main uncertainties associated with the project, e.g. (a) slow pr,:e-ss in the arrangements for management, finan- cing, engineering, supply and erection of the sawmill and (b) the necessary road infrastructure not being ready in time. With regard to (a), preparatory work has already been started. The Government of Honduras has clearly assigned a high priority to the forest industries project, and a high level committee has been appointed under the chairmanship of COHDEFOR to coordinate and take followup action with the various agencies involved in the project. An expat- riate senior executive from IDB has been seconded to help COHDEFOR in expedit- ing the project. Design of the sawmills is now proceeding on schedule. A critical path network covering all the important elements of the project has been prepared and is being followed closely. Financing for the sawmills will be provided principally with suppliers' credits and additional contributions by IDB, VIF, IFC, the Government, and private sources. Preliminary discussions have begun with a number of bilateral export finance agencies. Financial arrangements are expected to be concluded by September 1977.  - 30 - 3.20 With regard to the road infrastructure, item (b), the two aspects causing some concern are related to constraints of executive capacity and availability of suitable contractors. The road infrastructure required to connect the port at Castilla, the sawmills at Corocito, Pueblo Viejo and La Union and the pine woods around El Carbon (Map IBRD 12462) forms part of a highway project which was appraised by IDB in September 1976. Involving an investment of over US$60.0 million in the next five years, this project would nearly double the country's annual road construction program during the period. Such an increase would severely strain the executive capacity of MCOPT, espe- cially since it would have to implement the forestry road works (being fi- nanced by IDB) at about the same time as the Talanga-Catacamas highway, which has recently been appraised by the Bank (Seventh Highway Project). To meet the execution needs of both these projects, MCOPT has expanded an existing "executing unit" and established a new one, each comprising three engineers and two administrators. In order to attract available qualified personnel for the units, salaries higher than those paid to civil service personnel are being offered by MCOPT, which receives a special budgetary allocation for the purpose. With these arrangements, the execution of both the highway projects can be expected to proceed satisfactorily. As for the availability of suit- able contractors, it is understood that COHDEFOR has received letters from 15 foreign firms expressing interest in bidding for the forestry roadworks. This would indicate a reasonable prospect of timely completion of the necessary road infrastructure. 3.21 Since the usefulness of the proposed port facilities at Castilla is dependent to a very large extent upon the supporting road system, agreement was reached with ENP during negotiations that the bids for the port works at Castilla would be invited only after satisfactory bids have been received for the road works. L. Retroactive Financing 3.22 In order to meet the tentative schedule for completing the port works at Castilla by end 1979, work on the detailed engineering of the project has already been started. Because of the possibility of utilizing with advantage the services of a dredging contractor (which would be financed by ENP), who is scheduled to complete a job in Corinto in the latter half of 1977, ENP has also begun the channel depth study at San Lorenzo. ENP wishes the foreign costs incurred on engineering services to be financed retroactively, and such retroactive financing is recommended for an estimated foreign expenditure up to US$500,000 to be incurred on consultant services for engineering and technical assistance after November 1,1976.  - 31 - M. Ecological Considerations 3.23 Since no dirtv or dusty cargoes would be handled at either of the project ports and since the usual precautions would be taken in handling the small quantities of petroleum at Puerto Castilla, there would be no adverse effect upon the ecologv due to the port development proposed under this project. The ecoloe,cal implications of the sawmills and the paper and pulp factory have been considered by the Government and IDB, and suitable features and processes for controlling air and water pollution would be included in the design.  HONDURAS THIRD PORT PROJECT Schedule of Major Activities - Honduras Forestry Development Project 1976 1977 1978 1979 1980 1981 1982 1.983 1st 2nd 1st 2nd 1st 2nd 1st 2nd 1st 2nd 1st 2nd lst 2nd 1st 2nd Activities half half half half half half half half half half half half half half half half A. Lndustrial 1. Main Sawmill 1.1 Studies for mill and forest management plan ooooooc0ooo00 a 0 1.2 Formation of enterprise saxxxxz xx0Xxx 1.3 Loan for share capital // ////// 1.4 Construction ****** ****** ****** ****** 2. Pulp and Paper Plant xxx: xxxxxx jooooc0 oooooo /1,/ // //***i ******1 ****** ****** ****** k***S*,* ****** *****slt 3. Satellite Sawmill No. I oooooo ooooo 1******, ****** ************ N 4. Satellite Sawmill No. 2 oooooo oooooo ***** ****** ****** :***** B. Infrastructure 1. Roads 1.1 Km 35-Pto. Castilla 000o ooo/ l****** ******s ****** ***** ***** ***** ***** ***** 1.2 Km 35-Corocito // /I *** ***** ****** ***** ****** ****** ****** ***** 1.3 Corocito-El Carbon -000 ooo/// ***** ****** ***** ***** ****** ***** ***** ***** 1.4 La [Inion-Mame ooo0 ooo//// ****** ***** ****** ******, ****** ******s ****** ****** 1.5 Secondary and feeder roads 000 oo/// *****s***** ****** ***** ***** ****** ***** 1.6 Planning Study /// 0000001 1.7 Stuidies for other roads I/boo 0000006000 2. Port i 2.1 Pto. Castilla 000 oo////!//**** ****** .***** ***** r***** *** Key Source: Inter-American Development Bank, December 1976, and mission estimates. ooo 0 Studies xxx = Formation of enterprises -/1 Loans and/or technical cooperation - Project execution  _ 33 - TABLE 3.2 HONDURAS THIRD PORT PROJECT Olancho Forestry Development Program Costs (Millions of US$ in 1976 prices) Amount Financing Phase I Forestry Development and Preservation 27.0 Canadians and Honduras Sawmills Corocito 25.0 Shares 100% Honduran, Pueblo Viejo 14.0 cwnership with loans La Union 14.0 from IDB, IFC, Suppliers and other Private Sources Roads 81.0 IDB and Honduras Port at Castilla 30.0 IBRD and Honduras Total Phase I 191.0 Phase II Shares 51% Honduran, 15% Pulp and Paper Mill 240.0 Technical Partner, other Mexico, Venezuela, Ecuador and Central American groups Total Phases I and II 431.0 Source: Inter-American Development Bank December 1976  HONDURAS Third Port Project Provisional Project Implementation Schedule Calendar Year 1976 1 197 1978 1979 - Quarter I IIIII IV I ITI III IV I III II -II II IV Loan Effectiveness A Puerto Castilla (1) Civil Works Detailed Engineering Prequalification of bidders Invite & Receive Bids Award Contract I Wharf Construction , - __ Site Development - - - - Buildings ,_ (2) Equipment Specifications Invite Bids Delivery & Installation B San Lorenzo (1) Civil Works Detailed Engineering Negotiate Contract Wharf Construction Sugar Shed Molasses Tanks (2) Equipment Specifications Invite Bids Delivery & Installation C Technical Assistance (1) Channel Depth Study (2) Container Operations & Training = Source: ENP and Mission Estimates. August 1976  - 35 - TABLE 3.4 HONDURAS THIRD PORT PROJECT Schedule of Disbursements IBRD Fiscal Year Disbursement in US$ 000 and Quarter During Quarter Cumulative FY 1977 June 30, 1977 500 500 FY 1978 September 30, 1977 1,400 1,900 December 31, 1977 2,500 4,400 March 31, 1978 1,700 6,100 June 30, 1978 800 6,900 FY 1979 September 30, 1978 1,200 8,100 December 31, 1978 900 9,000 March 31, 1979 1,000 10,000 June 30, 1979 1,100 11,100 FY 1980 September 30, 1979 2,000 13,100 December 31, 1979 2,000 15,100 March 31, 1980 1,900 17,000 June 30, 1980 Source: Mission Estimates September 1976  - 36 - IV. ECONOMIC ANALYSIS A. Puerto Castilla (i) The Economy of the Hinterland 4.01. The basic hinterland of Puerto Castilla is the northeastern quadrant of the country, which is dominated by the Aguan River Valley and the northern portion of the Olancho forestry reserve. These areas will generate the bulk of the traffic for the proposed new port. The forestry development strategy of the country is keyed to the proposed pulp and paper mill at Corocito in the lower Aguan Valley, and the port is only one of numerous infrastructure elements for the forestry development scheme. The Aguan Valley is considered by agriculturalists to be the richest agricultural resource in the country (comparable to the Sula Valley), and the crop production in the valley is being organized along cooperative lines for export as well as domestic use. (ii) Traffic Projections 4.02 At present, there is no port facility and no traffic at Puerto Castilla. Future traffic for the proposed port is made up of forestry exports (sawn timber, wood chips, and eventually paper), Aguan Valley exports (palm oil, citrus fruits, maize, and beans), and imported inputs to the agricultural and forestry development projects (chemicals, fertilizer, machinery and petro- leum). Table 4.1 gives a detailed breakdown of the traffic projection. 4.03 The current COHDEFOR program indicates that forestry exports are to commence in 1980 with 124,000 tons of wood chips and 43,000 tons of sawn tim- ber produced by the mill at Corocito. With the mills at Pueblo Viejo and La Union expected to go into production in 1981 and 1982, the forestry exports expand to 643,000 tons of chips and 221,000 tons of sawn timber in 1983. In 1984, the pulp and paper mill is to begin operation, and, by 1985, chip exports will have ceased and been replaced by exports of liner board. Allowing for approximately one-third of the liner board production for domestic use as banana packing material, 1985 exports of forestry products are projected at 235,000 tons of sawn timber and 133,000 tons of liner board, a level that is expected to be sustained indefinitely. 4.04 The Institute for National Agrarian Reform (INA) bases its projec- tions for the Aguan Valley on plantation crops already planted and acreage planned under its second stage development program, for which financing has been obtained. In addition to the citrus fruits and African palm oil, INA has projected an exportable surplus of 51,500 tons of corn and beans annually, beginning in 1980. Palm oil exports are to begin in 1981 with 7,000 tons, in- creasing to 31,100 tons in 1986. The main agricultural export crop of citrus fruits is to commence in 1982 with 14,500 tons, expanding rapidly to 222,200 tons in 1986. Of a total export tonnage of 672,800 tons in 1986, almost 45% would be Aguan Valley agricultural exports with 55% forestry and paper exports.  - 37 - 4.05 Import flows were estimated by the consultants based on the input requirements for the agricultural and forestry projects. Chemicals and fer- tilizer imports increase from 10,000 tons in 1980 to 46,000 tons in 1986; machinery and equipment increase from 22,000 tons to 39,000 tons for the same period. Petroleum imports are projected to increase from 6,000 tons in 1980 to 24,000 tons in 1986. Total import flows are projected to reach a level of 122,000 tons by 1986. Thus, of a total tonnage flow of 79::,000 tons in 1986, 122,000 tons, or 15% of the total, will be import tonnage, leading to a large directional imbalance of flows. 4.06 Traffic projections are usually the highest risk element in a project analysis, and, when no traffic currently exists as is the case here, the un- certainty is even greater. For this reason, the traffic includes only those items that were based on firm development programs supported by adequate finance. Other types of traffic are almost certain to be generated by the existence of a port facility at Puerto Castilla. In particular, exports based on the substantial hardwood reserves in the area, such as rail sleepers, ply- wood, and furniture parts, are likely candidates, but firm plans are not yet available. Sugar exports from the Aguan Valley and banana exports from the Isleta area are other cases of likely but not yet certain traffic and were not considered. The port requirements consider only reasonably firm traffic through 1986. However, the economic analysis is extended beyond that period, holding 1986 traffic levels constant for purposes of computation. (iii) Capacity Requirements 4.07 The capacity requirements for Puerto Castilla were based on the traffic projections in TabLe 4.1 and on reasonable assumptions concerning the average cargo size, loading and discharge rates, and ship size. These assump- tions are given in Table 4.2. A queuing analysis was then conducted to esti- mate annual ship waiting times for various numbers of berths, and the value of this waiting time was compared with the annual cost of providing a new berth. A US$5.0 million berth with a 25-year useful life has an annualized cost of US$637,500, using a 12% discount rate. The cost of a waiting ship is currently estimated at US$6,000 per day. When waiting time costs exceed the cost of a new berth and other aspects of the port operation are adequate, an extra berth is justified. The results of this analysis are summarized in Table 4.3. In order to provide economic levels of service with tolerable congestion, a 450 m wharf is required in the third year of operation (1982) and would be adequate until the seventh year of operation (1986), at which time a second stage addition would be required. A 300 m wharf would suffice for the first two years, but the addition of a third berth, 150 m long, during the initial construction period, precludes having to let a contract for the third berth almost as soon as the first two are completed and avoids the interference in port operations due to construction. It also provides buffer capacity to allow for lower than forecast loading and discharge rates during the initial organization. Finally, it provides adequate wharf for six years of operation for a relatively small increment of investment. The 450 m facility and its cost is the basic development considered in the economic analysis.  - 38 - (iv) Rate of Return Analysis 4.08 Large investments have already been made in the Aguan Valley in agricultural development and more are planned. Over US$100 million are committed to the first stage of the forestry project. Implicit to these commitments is the assumption that the exports of agricultural and forest products are economically viable. In this sense, the port (and the road infrastructure) is justified as part of a larger package of investments. In this case, there are two large and independent investment schemes, together generating almost a million tons of traffic annually--traffic that will make use of the port facility. The fundamental economic issue is whether the agricultural and forestry development programs are economically viable, and the question has been settled already both by formal economic and financial analyses and by basic social and political decisions. IDB and IFC have each reviewed the basic scheme for the forestry development project and are supporting it. The task for the economic analysis herein is to provide a least cost solution for the required port infrastructure, i.e., the optimal location, timing, and size of the port facility. This exercise, together with the determination of an appropriate port tariff structure that will generate revenues to cover the full cost of the port, will indicate that the investment is justified. 4.09 The nearby banana piers at La Ceiba and Tela are not realistic al- ternatives for traffic of the magnitude and characteristics considered. The narrow wooden piers served by narrow gauge rail preclude truck turning opera- tions, and the exposed location leads to interrupted service during stormy weather. Depth and dredging are also serious constraints. The closest pier at La Ceiba is structurally inadequate and could not be depended on to serve without major investments in a new facility. The only realistic alternative to Puerto Castilla is an expansion of Puerto Cortes, approximately 450 km to the west. This would mean trucking the exports over relatively long distances. Offsetting this cost would be a less costly investment at Puerto Cortes, which is already a well developed port with room for expansion, and additional highway investments. The "do nothing" alternative, therefore, is to use Puerto Cortes as the outlet for export flows. In doing so, it is necessary to consider if this is a realistic alternative, i.e., would the exports be profitable with the extra domestic transport cost. For wood chips--a bulky, low value commodity which sells for approximately US$50 per ton FOB on the world market--the extra cost of trucking to Puerto Cortes is estimated at US$11.0 per ton, or 22% of the FOB price. Ocean freight charges to Europe and Japan raise the price to about US$100 CIF, and the extra over- land transport cost becomes 11% of the CIF price. This could be a significant factor in the export decision and would be equally important for commodities such as beans and maize, but does not exclude the possibility of such exports. For high value commodities such as sawn timber, paper, and citrus fruits, trucking to Puerto Cortes would be a viable alternative. 4.10 The center of the Aguan Valley production is Tocoa, 61 km by road from Puerto Castilla and 389 km from Puerto Cortes, a difference of 328 km. The mill at Corocito is 41 km from Puerto Castilla and 409 km from. Puerto Cortes, a difference of 368 km. The produietion of the La Union and Pueblo  - 39 - Viejo sawmills travels an extra 260 km to get to Puerto Cortes instead of Puerto Castilla. The average economic cost net of taxes for trucking over the roads in question is estimated at L 0.066/ton-km, assuming trucks of nine-ton capacity and 50% two-way load factors. The savings attributable to the con- struction of Puerto Castilla are estimated by the reduced cost of overland domestic transport, as indicated in Table 4.4. 4.11 Puerto Cortes currently has 876 meters of reinforced concrete wharf in good condition, providing space for seven to eight ships at one time. Con- sidering the proposed installation of a container crane in the near future, and the rising trend of Ro-Ro and LASH operations, the port has adequate capacity for its projected traffic until 1990 if high productivity rates are achieved. If the new traffic from the Aguan Valley and the sawmills were to be diverted to Puerto Cortes, the port could handle it with no more than a 150 m berth extension, equipment and warehousing by 1982 at a cost of L 14.0 million. Puerto Castilla, in order to provide equivalent service at acceptable levels of congestion, would require 450 m of wharf with equipment and buildings costing L 37.2 million. The cost of operating and maintaining the incremental investment at Puerto Cortes would be less than that for the Puerto Castilla facility since there would be some scale economies with having one large port rather than two smaller facilities, and these costs are considered in the analysis. The use of Puerto Cortes would also avoid some investments in urban infrastructure that will eventually have to be made at Puerto Castilla. This, however, will be gradual because adequate urban infrastructure now exists at the town of Trujillo, 20 km from Puerto Castilla, which is situated on the same bay and will initially serve as the headquarters for constructing and operating the new port. Investments in relocating the village and school at Puerto Castilla from the proposed port area have already been made, and the area is clear for future development. 4.12 The road infrastructure investment for the Puerto Castilla alter- native is more costly than the Puerto Cortes alternative since a 41-km paved road must be constructed from Corocito to Puerto Castilla at a cost of L 23.2 million (IBRD Map 12462). This cost can be avoided if the traffic moves out through Puerto Cortes. However, the Saba-La Ceiba road would require an investment of L 12.2 million to upgrade it from gravel to paved in order to handle the high traffic volumes (on the order of 400 trucks per day) that would be moving to Puerto Cortes. The net road infrastructure investment required with the use of Puerto Castilla is, therefore, L 11.0 million. 4.13 The cost streams considered in the rate of return analysis are the investment required to make Puerto Castilla operational, and the required maintenance and operating costs. This information is given in Table 4.5. The benefit streams are the avoided road transport costs as given in Table 4.4 and the avoided investment, maintenance, and operating costs associated with the use of Puerto Cortes. 4.14 The cost and benefit streams in Table 4.5 yield a rate of return of 27%, with first year benefits of 25%, indicating that the project is well justified and appropriately timed. A sensitivity analysis in which the cost and benefit streams are varied by 25% yields a rate of return no lower  - 40 - than 22%. In addition, consideration was given to the possibility that the pulp and paper mill of the second stage of the forestry project might not come into production in 1984 as planned. Under these circumstances, chip exports would continue at the high 1983 level instead of being replaced by a smaller tonnage of paper exports. The benefits of avoiding road transport for chips are higher than those associated with paper, and the effect of continuing chip exports would be to increase the rate of return for the port project. The proximity of Puerto Castilla to the source of the export traffic is so advantageous that no reasonable combination of circumstances raises any doubt regarding its justification. B. San Lorenzo (i) The Economy of the Hinterland 4.15 Historically, the hinterland of San Lorenzo port has been the area south of Tegucigalpa, where the major agricultural areas are the Choluteca and Danli valleys. The water resources in this area are so limited that nothing equivalent to the Sula Valley production and the port capacity of Puerto Cortes on the Caribbean coast is likely to develop. The construction of the Tegucigalpa- Talanga-Juticalpa road to the northeast timber areas allowed the development of export traffic of sawn timber through the port, and this has constituted the major traffic flow in recent years. With a good road now joining Puerto Cortes on the Caribbean with San Lorenzo on the Pacific, traffic feeding onto this north-south road can choose either port, depending on trucking costs, the ulti- mate destination of the goods, the depth of water desired, and specialized re- quirements such as warehousing, handling equipment, and commercial services. (ii) Traffic Projections 4.16 At present, the old port of San Lorenzo is essentially a lumber ex- port outlet. In 1976, over 130,000 tons of sawn timber are expected to be exported with a slow and costly shallow draft lighter operation. Eleven thou- sand tons of minor exports will raise the total export figure to 141,000 tons. In the same year, general cargo imports (fertilizer, chemicals, machinery) are expected to amount to 41,400 tons, bringing the total cargo flow to 172,400 tons (Table 4.6). Cargo flows at San Lorenzo have not grown as was expected at the time of the appraisal of the Second Port Project (Loan No. 767-HO) in 1971. Lumber traffic is about 55,000 tons per year less than original expec- tations (Table 4.7), and the disruption of the cotton growing industry after the war with El Salvador has adversely affected the export of cotton. 4.17 Expectation for future traffic levels at San Lorenzo am* based on past traffic levels, the future timber harvest patterns in Honduras, and ad- vanced plans for a sugar and molasses export industry in the region south of Tegucigalpa. Lumber exports are expected to decrease gradually from the current level of 130,000 tons to 100,000 tons in 1983 and to stabilize at that level (Table 4.6). This reflects the recent analysis of timber harvest  - 41 - patterns and traffic flows in Honduras carried out in connection with the Central American Transport Study (ECAT). General cargo traffic, which has been nearly constant at 40,000 tons in recent years (Table 4.7) is expected to grow at 4% annually, reflecting the sensitivity of this commodity flow to avoidance of the current lighter operation. The total general cargo flow in 1968 would then be about 62,000 tons (Table 4.6). Two items of additional traffic which are possible but yet uncertain have not been taken into account: these are lumber from the northwestern region of Nicaragua, for which San Lorenzo would be a nearer outlet than Corinto, and profitable cotton exports, the revival of which is being actively considered by Government. 4.18 The sugar traffic is based upon recently revised regional estimates of sugar production, domestic consumption, and resulting export surpluses, for 1980. The current industry estimates are shown below in short tons. Region Production Local Consumption Export Surplus North (3 mills) 138,000 37,500 100,500 Central (2 mills) 47,500 47,500 - South (2 mills) 82,500 - 82,500 Total 268,000 85,000 183,000 With 1975 production levels at 87,790 short tons and domestic consumption at 76,790 tons, the exportable surplus for the country was only 11,000 tons. The Hondurans plan to triple production in five years, yielding an export surplus in 1980 of 183,000 tons. This would involve constructing four new mills and expanding the capacity of the existing three mills. All of the mills are under construction and near completion. It is, however, the cane production to feed these mills that involves considerable planning and cooperation since approximately half the cane is to come from Government cooperatives and independent farmers. With all of the mills due for full production in 1979, plans for cane production are well advanced but are being implemented in stages in order not to overproduce before crushing capacity is available. Efforts so far have led to an estimated 30,000 tons of sugar exports for 1977 (three times the level of 1975 exports), with only the expansion of one of the northern mills in the Sula Valley. To avoid the use of expensive overland transport, export surpluses of the north will use Puerto Cortes, while those of the south will use San Lorenzo. The two centrally located mills will serve the domestic market exclusively, but will receive export earnings relative to their share of total national production. 4.19 The two mills in the south that will generate traffic for San Lorenzo are located in the highest yielding cane area of the country. The small (20,000 short tons per year) mill at Choluteca has been in production for 10 years and has organized its cane production. It is to be expanded to a 25,000-ton capacity. The biggest investment in the south involves the 70,000 tons of Azucarera Central S.A. (ACENSA). The mill is under construction and scheduled for completion by the end of 1977. To produce at capacity, this mill requires about 7,200 hectares of new cane production. The ACENSA mill has already planted 2,800 hectares of the required area under its own control.  - 42 - Independent large farmers are planting an additional 560 hectares. ACENSA is also negotiating an additional 1,050 hectares with the independent farmers. The Institute for National Agrarian Reform (INA) has agreed to provide 2,800 hectares for the 1980 crop. So far, 420 hectares have been prepared for the 1978 crop. This means that slightly more than half the required cane acreage for the ACENSA mill has been prepared and planted, a considerable achievement. For this analysis, it has been assumed that the cane production targets will not be fully achieved, and that the ACENSA mill will utilize only 60,000 short tons of its capacity by 1980. Similarly, the Choluteca mill is assumed to expand its production from the current 20,000 tons to 22,500 tons by 1980, hence, the forecast of 82,500 short tons of production and exports from the southern mills. It has been further assumed that 6,000 short tons of this production will be required for domestic consumption in the immediate Choluteca area, leaving an export surplus of 76,500 short tons, or 68,800 metric tons, to be moved through the port of San Lorenzo. In addition, 44,500 metric tons of molasses from the southern mills and one of the central mills is expected to use San Lorenzo, and these are the basic figures used in the forecast. 4.20 It is clear that the Hondurans are making a major effort to increase sugar exports, and the first results of that effort are already apparent in 1977. By 1980, a relatively large amount of raw sugar for export will be available and the profitability of the exports in view of the current world surplus and low prices is an important consideration for the future. The current view of commodity experts is that the next two years will be a period of excess supplies and low prices which will force the high cost producers (mainly the U.S. and European countries) to use their farm land for other more profitable crops. Low cost producers can then capture a permanently larger share of the world market if they have the capacity to do so. The Honduran expansion of exports is well timed in this sense, and commodity experts feel that any country that can produce raw sugar at costs of USJ 12 per pound in constant 1974 prices should be able to compete in the world market. Honduran producers estimate that their exports will be profitable at USJ 10.5 per pound FOB and thus are well within the cost range of countries with an absolute advantage in the medium and long term. The southern sugar producers have formed an association for purposes of exporting their surpluses and have contracted with a large international firm (Mitsubishi of New York) to provide technical advice and to serve as their marketing agent. Because the southern production is close to San Lorenzo and some is expected to go to Japan, the producers have requested that facilities be provided at San Lorenzo. The sugar producers have offered to guarantee ENP a minimum tonnage of exports, at yet to be negotiated tariffs, in order to justify the provision of storage and handling facilities. The first exports are scheduled to take place in 1978 with 26,700 tons of molasses and 41,000 tons of sugar, reaching levels of 44,500 tons and 68,850 tons respectively in 1980 and continuing at this level (Table 4.6). A complication of the sugar and molasses traffic lies in its seasonal nature, i.e., all of the exports are to take place during a six-month period between March and September. The projections in Table 4.6 are broken down into peak and off-peak traffic in order to consider this factor in the capacity analysis.  - 43 - (iii) Capacity Requirements 4.21 The facility currently under construction at San Lorenzo can handle three types of vessel; it can service ships drawing up to 7 m at the front face of the L shaped berth; it can also service ships drawing up to 6 m at the inside face of the L, and it can handle shallow draft lighters at the insidK- face. The most recent statistics available indicate that 65% of the ships calling at Amapala-San Lorenzo have actual drafts less than 7 m; 35% have drafts greater than 7 m and must offload onto lighters even after the current construction is completed. The net effect on actual cargoes would be that 20% of the general cargo and lumber traffic would have to be handled at Amapala and be lightered to and from the new facility at San Lorenzo and could use the inside berth of the pier. In addition, another 20% of lumber and general cargo carried in coasters could use the inner face of the pier together with the barges. Thus, 40% of the lumber and general cargo could load or offload at the inner berth, leaving the outer berth to handle 60% of the lumber and general cargo and all of the sugar and molasses. This is the basic pattern assumed in the capacity analys.s, although a check was made to explore the implication of having only 20% of lumber and general cargo at the inside face should vessel drafts be adj1:sted to take advantage of the alongside berthing which would be available at the outer face of the new facility. 4.22 A queuing analysis was performed on the outer berth of the new L shaped pier, assuming it would handle 60% of the lumber and dry cargo flows and all of the molasses and sugar traffic. The analysis was done for both the peak and off-peak periods, using the ship and cargo characteristics set forth in Table 4.8. The basic tradeoff in the queuing analysis involves a comparison of the annual cost of ship waiting time at US$5,000 per day and the annualized cost of a US$3.0 million berth, which is US$382,500 per year (at 12% for 25 years). The summary of the analysis is provided in Table 4.9. This analysis indicates that, during the first year (1978),sugar and molasses exports would require an ad itional berth since the berth occupancy in the peak period would be 51%, yielding an average waiting time per ship of 1.6 days, costing a total of US$405,000 per year, more than the annual cost if an additional berth. With one more berth in 1978, the occupancy rate drops to 25% in peak periods with average ship waiting times of 0.1 days costing only US$27,000 per year in waiting costs. In 1980, when the sugar and molasses traffic reaches its long-term level, the occupancy rate without an additional berth would be as high as 62%, producing average ship waiting times of 2.7 days and costing US$822,000 per year, when the annual cost of an additional berth would be less than half the congestion costs. The addition of a berth reduces the average ship waiting time in 1980 to 0.2 days, an adequate level of service. If 80% rather than 60% of lumber and general cargo should make use of the deeper side of the pier, the two outer berths would still be adequate for the traffic. Thus, the second outer berth is required in the first year of sugar and molasses exports in 1978 and would be adequate for the forseeable future.  - 44 - (iv) Rate of Return Analysis 4.23 If a second berth, together with storage and handling facilities, is not provided at San Locenzo, the sugar and molasses traffic would have to divert to the nearest port with adequate facilities. Export through Corinto in Nicaragua is the lowest cost technically acceptable alternative. The extra cost of using Coriqto wou