Somalia - Fourth Port Project

fILE t0PY Document of copy ~The World Bank FOR OFFICIAL USE ONLY Repi N.. P-229 1-SO REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE SOMALI DEMOCRATIC REPUBLIC FOR A FOURTH PORT PROJECT June 21, 1978 This doumet h a ruutce iebudb snd may be _W by reckents ody In the perfomne of their cIalb dud.. Its ewfts may mat otberwbe be dbeo withdut Wod Dank aftortl..  CURRENCY EQUIVALENTS (CY 1977, and May 1978) Currency Unit Somali Shillings (So.Sh.) US$1.00 So.Sh. 6.295 So.Sh. 1.00 = US$0.1589 WEIGHTS AND MEASURES 1 meter (m) 3.28 feet (ft.) 1 kilometer (km) 2 - 0.62 mile (mi.) 1 square kilometer (km ) 0.386 square mile (sq. mi.) I hectare (ha) 2.47 acres 1 kilogram (kg) - 2.2 pounds (lbs.) I meter ton (ton) = 2,205 pounds (lbs.) GLOSSARY OF ABBREVIATIONS SPA - Somali Ports Authority dwt - deadweight tons PW = Price Waterhouse Associates (Consultants) PPF = Project Preparation Facility NBB - National Banana Board FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY SOMALIA - FOURTH PORT PROJECT Credit and Project Summary Borrower: Somali Democratic Republic Beneficiary: Somali Ports Authority (SPA) Amount: US$5.5 million Terms: Standard IDA terms On-Lending The proceeds of the Credit will be onlent by the Somali Terms: Democratic Republic to SPA for a period of 20 years, at an interest rate of 7-1/2 percent per annum. Project The Project is intended to provide a conventional tanker Description: pier in Mogadishu deep-water harbor. It would be used for receiving inbound crude oil for the Mogadishu oil refinery and for outbound refined products. Its layout and design will make provision for its possible future use also for handling bulk grain, sugar and molasses. The Project consists of: (a) a tanker pier for crude oil tankers of maximum 50,000 dwt and for small-products' tankers; (b) pipelines within the port limits; (c) hydraulic model tests, site investigations, detailed engineering, preparation of tender documents, assis- tance during tendering and supervision of construction of the tanker terminal, and (d) site investigations, detailed engineering, preparation of tender documents and assistance during tendering by consulting engineers for a 210-meter extension of the existing banana quay in Mogadishu harbor. Benefits The quantifiable benefits of the Project consist of cost and Risks: savings due to reduced ship waiting time as a result of released general cargo berth capacity. The weakness in SPA's management, coupled with the recent transfer of operations from lighterage port to the new deep water facility entail some risk in respect to future effective working of the Port. This document has a restricted distribution and may be used by recipients only in the performcnce of their official dutiea. Its contents may not otherwise be disecod without World Bank authorization.  - ii - Estimated Prolect Cost: 1/ US$ Million % of Local Cost Foreign Cost Total Cost Total Civil Works and Engineering 0.9 4.6 5.5 83 Contingencies 0.2 0.9 1.1 17 Total Cost 1.1 5.5 6.6 100 Financing Plan: Government 1.1 1.1 17 IDA 5.5 5.5 83 Total 1.1 5.5 6.6 100 Estimated Disbursements: US$ Million 1979 1980 1981 1,500 3,600 400 Rate of Return: 15% (calculated on 91% of total project costs). Staff Appraisal Report: "Staff Appraisal Report, Mogadishu Fourth Port Project," (No. 1967-SO), dated June 20, 1978. 1/ The Project would be exempt from taxes and duties.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE SOMALI DEMOCRATIC REPUBLIC FOR A FOURTH PORT PROJECT 1. I submit the following report and recommendation on a proposed credit to the Somali Democratic Republic for the equivalent of US$5.5 million on standard IDA terms to help finance the Fourth Port Proiect. The proceeds of the Credit would be onlent to the Somali Ports Authority for a period of 20 years, at an interest rate of 7-1/2 percent per annum. PART I - THE ECONOMY 1/ 2. A Country Economic Memorandum (Report 1421a-SO) was distributed to the Executive Directors on April 18, 1977. An IDA economic mission is cur- rently visiting Somalia. Country data sheets are attached as Annex I. 3. The Somali Democratic Republic was formed in 1960 by a merger of the former Italian Trust Territory of Somalia and the British Protectorate of Somaliland. Following a decade of parliamentarv rule. the Government was taken over by the military in 1969. The Supreme Revolutionary Council, con- sisting of army and police officers became, in fact, the highest policy-making body until mid-1976 when it was abolished and a political party, the Somali Revolutionary Socialist Party, was formed and became the key political institution. 4. Since 1970 the Government has adhered to a program of "scientific socialism", emphasizing egalitarianism and social justice, development through the public sector, nationalization of certain foreign enterprises, and the formation of cooperatives. While the Government has always stated that there is room for private initiative in Somalia and several privately financed proj- ects have been implemented, the main emphasis has been given to development of the public sector. The Government's development efforts have been charac- terized by austerity and self-reliance. 5. Somalia is located on the Horn of Africa with three thousand kilo- meters of coastline on the Gulf of Aden on the north and the Indian Ocean on the east. The topography varies from a hot and arid coastal plain, which gives 1/ This section is the same as that of the Mogadishu Water Supply and Technical Assistance Projects.  - 2 - way to sparsely wooded savannah, to rugged mountains, agricultural plateaus and lowlands of varying fertility and rainfall. Much of the country is arid; water supplies are scattered and often unreliable, and periodic droughts bring hard- ship to both the people and their livestock. Only a small proportion of the land, approximately 13%, is arable. While the existence of several minerals has been confirmed, exploration is still in the early stages and commercial viability remains to be proved. Short of other known resources, Somalia's prospects center on agricultural and livestock development in which progress will depend upon careful management of scarce land and water resources. 6. With an estimated per capita income in the order of US$110 in 1976, Somalia is classified by the UN as one of the 25 least developed countries of the world. Of the total population of approximately 3 million, about two- thirds are nomads and semi-nomads, who depend on livestock for their livelihood and about 20-25% are farmers cultivating land along the Juba and Shebelli rivers and in the higher-rainfall North-West region. The small monetary sector of the economy provides only limited opportunities for employment. Apart from the traditional export of livestock, commercial agriculture is mainly centered on the production and export of bananas, in which Italian concession holders are still important, and the production of sugar for the domestic market. The expansion of manufacturing and other service sectors of the economy is limited by the small size of the domestic market, poor infrastructure, and the shortage of capital and entrepreneurial experience. No income distribution data exist, but the Bank estimates that about 70% of the population live at subsistence levels of about US$200-250 per family of five. Social services are still very inadequate; the school enrollment ratio was until recently among the lowest in the world but took a great leap forward in the past two years. There is little economic data on Somalia. Even basic figures such as GNP, population, number of livestock, or output of major agricultural crops are only rough estimates. Therefore, it is extremely difficult to measure economic perfor- mance except in a very rough manner. Political Changes and their Economic Consequences 7. The effect of recent political events on economic development policy in Somalia is bound to be rather limited because of the lack of alter- native strategies to the one currently followed. However, some change was perceived in recent months as evidenced by a revision (and liberalization) of the law on foreign investment of 1960 and the reappointment of a tech- nician as Chairman of the Planning Commission. 8. Since various state enterprises (such as the Kismayu Meat Factory and the Las Koreh Fish Factory) were organized with Soviet assistance, the departure of Soviet technicians will cause problems in these firms and in the Planning Commission, which also received Soviet personnel. However, the real need for replacements is estimated to be substantially less than the number of departures (estimated at 200-250 civilian technicians).  - 3- Development Planning Achievements 9. The long-range objectives of the Government are strongly influenced by the desire to be self-reliant. The Government is seeking to make the country self-sufficient in agriculture through both an expansion of the area under cultivation and the development of irrigation while trying to provide permanent settlement for many of the nomads and putting considerable emphasis on modernizing and mobilizing the population. Of central importance for achieving these objectives are education, rural literacy and self-help pro- grams such as those in agriculture and public works (referred to as "Crash Programs"). Finally, the Government places emphasis on developing infra- structure, especially transportation and communications. 10. Since the bulk of the population is engaged in herding or in sub- sistence farming, a development strategy for Somalia must start with agri- culture and livestock as a base. The major development goals of the Somali Government include self-sufficiency in foodgrains, the partial substitution of other food imports (oils, rice) and improvement of the lot of the traditional nomadic herdsmen through settlement programs and improvements in livestock production and marketing facilities. The current Plan's emphasis on irrigated agriculture is meant to make the country less dependent on the erratic pattern of rainfall, and assure more stable and predictable increases in output. Attention is also being given to projects in rainfed agriculture (mainly through the Government-financed self-help projects, the IDA-financed rainfed crop production project under the Juba-Shebelli Area Emergency Settlement Scheme and the North-West Region Agricultural Development Project) which focus on making the best use of the limited amount of rainfall. Improvements in livestock production and marketing are being promoted by the IDA-financed Trans-Juba Livestock Project designed to provide market access to the nomads in the southern part of the country and the Kuwait Fund-financed Northern Rangelands Project with emphasis on rehabilitation of the denuded rangelands in the North. The Plan continues to base its development of industry on the processing of domestic raw materials to substitute for imports. 11. The 1974-78 Five-Year Plan, as originally conceived, called for investments of So.Sh. 3.9 billion and was probably overly ambitious, both with respect to financial and implementation constraints. Because of inflation, the cost of carrying out the same (physical) investment program will now require an additional So.Sh. 1 billion. A review of Plan implementation after three years shows (financial) rates of implementation of 46.2%, 40.8% and 77% in 1974, 1975 and 1976, respectively. If adjustments for investments outside the Plan (mainly drought relief and rehabilitation) were made, they would show implementation rates (in financial terms) of about 60% in 1974 and 55% in 1975. In absolute terms, annual investment therefore increased from about So.Sh. 340 million in 1973 to an average of So.Sh. 500-600 million in 1974-75 and to about So.Sh. 700 million in 1976 which suggests that annual investment in real terms is increasing. However, it also seems that an essentially financial constraint in 1974 has turned into an implementation constraint in 1976. The implementation constraint is particularly acute as the result of a sharp exodus of skilled Somalis to the neighboring oil- exporting countries.  -4 - 12. The Government's achievements over the past several years have been impressive by any standard. Before the present Government came to power in 1969, the economy was stagnant and the Government often in severe financial difficulties. Today the pace of development (as measured by public investment) has quickened and a far higher level of public services is being supplied. 13. Two fields where the Government's achievements have been particularly outstanding have been in the settlement of nomads and in education. Within a period of less than one year beginning in the summer of 1975, more than 100,000 nomads were transported from the arid rangelands of the North and settled on unutilized agricultural areas in the South. Small harvests have already been reaped and this has encouraged both the Government and the settlers. In education, the Government has concentrated on two aspects: basic education (literacy and numeracy) for all people, young and old, to enable them to effectively participate in the social, economic and political process; and specialized manpower training as a requirement for national development. With respect to the former, the mass literacy campaign conducted in the years 1973, 1974 and 1975 at a cost of So.Sh. 100 million (US$16 million) has resulted in an increase in the adult literacy ratio from about 5% to about 50-60%, according to Government estimates. The formal primary school enrollment ratio has risen from less than 15% of the relevant age group a few years ago to approximately 34% at present, and universal primary education may be reached by the mid-1980's. A script, introduced by the Government in 1972, made the writing of the Somali language possible for the first time, and this removed one of the major constraints to progress in the field of education. With respect to manpower development, the Government is concentrating on the training of high- and middle-level personnel in its principal development sectors--agriculture and livestock. Recent Economic Performance 14. Poor rainfall in 1973 and a virtual absence of rain during 1974 and the first half of 1975 led to widespread crop f-ailures. The drought hurt exports of livestock and bananas, the two largest earners of foreign exchange, and resulted in large imports of maize, sorghum, rice and sugar. The entire central and northeastern parts of the country were affected, as well as a large part of the population, mostly nomads. Iln 1976, the Somali economy experienced a further slight recovery from the effects of the serious drought of 1973-75, mainly on account of continued expansion in Government expenditure, which contributed to substantial increases in overall investment and consumption. 15. Since 1973, production and exports of bananas have continued to decline and export volume in 1976 amounted to 72,500 metric tons, only 54 percent of the 1972 level. It is expected to have fallen further in 1977, partly because of a disruption in exports to the Middle East on account of a commercial dispute. Because of a flood which seriously affected growing areas in late 1977, recovery of production and exports of bananas may be delayed further. A partial recovery in output of local food grains was evidenced by increases in marketed quantities in 1976/77 when the Agricultural Development Corporation purchased 54,000 tons of grains, up from 45,000 tons the previous year, but only 55% of the predrought level.  16. Somalia's manufacturing sector consists of a few relatively large- scale, public-owned enterprises and a large number of small private enterprises. In 1973, the public sector accounted for about 80% of value added in industry then estimated at US$20 million. Most of the industries are agro-based, depending upon locally produced raw materials. After making strong progress in the period 1968-70, industrial production stagnated from 1971 to 1973 but appears to have picked up since. Several investments were made in the latter period such as a brick factory, a flour and pasta mill, grain mills, and a corrugated carton factory. Existing plants, especially the sugar complex and the textile factory, were expanded and modernized. Also, increased fishing capacity is contributing to the improved performance of the fish factory. Construction of a 500,000-ton petroleum refinery is nearly completed. Short- ages of technical and managerial staff and in some cases lack of domestic inputs have resulted in underutilized capacity, and the recent departure of Soviet technicians is aggravating this problem in specific industries. 17. Somalia's fiscal performance has continued to be encouraging, and budgetary savings will remain an important goal of the Government. Together with the many self-help projects, the country's efforts to help finance its investments provide evidence of commitment to self-reliance. Since 1971 when the Government succeeded in reversing a ten-year history of budget deficits, a surplus has emerged every year (approximately $5.2 million in 1976). However, the increasing supply of Government services nation-wide and the recurrent cost implication of recent large public investments will make it increasingly difficult for the budget to generate substantial savings. 18. To raise Government revenues will probably require a reform of the tax system and identification of new sources of revenue, including measures to mobilize remittances of Somalis working abroad. In addition, ways of improving efficiency in parastatal enterprises are necessary to turn them into larger and growing sources of public savings. A World Bank mission recently studied state firms and discussed its findings with the Government. Further assistance to Somalia in this matter is being contemplated. 19. Somalia's balance on goods and services has been in deficit since Independence. The gap has grown from US$18.6 million in 1970 to US$110 million in 1976 and US$154.2 million in 1977, largely as a result of rapid growth in merchandise imports. Imports (f.o.b.) have risen steadily from US$56.8 million in 1971 to US$153 million in 1976 and US$193.5 million in 1977. 1/ The Government's comprehensive import licensing system can only have a limited impact, since development-related imports (which are not actively limited) already accounted for 40% of the total in 1974 and undoubtedly account for a higher share at present while another non-compressible import, food, accounted for a further 35-40%. Exports jumped from US$31.9 million in 1970 to US$85.3 million in 1975 but have stagnated at about US$80 million in 1/ Foreign trade statistics for 1976 have been revised downward but still remain provisional; data for 1977 are preliminary estimates based on returns for the first 10 months.  - 6 - 1976 and 1977. Also, increasing banana prices more than offset a marked decline in volume exported in 1975 and 1976 but prices stopped rising in 1977 and export receipts actually dropped. The overall balance of payments in 1977 is likely to show a small surplus (in the range of US$7-8 million) as has been the case in the last two or three years because of large transfers and net capital inflow. 20. In view of Somalia's poverty, external assistance has played a major role in the financing of investment for the development of the country. Somalia joined the Arab League in 1974 and mounted a major effort to attract commitments of funds from the Arab petroleum exporting countries. The large inflows of external capital and transfers from 1975 onward indicate that the effort has been successful. Due to political events, the source of foreign assistance has recently changed from the socialist block (except for China which maintains a large program) towards Arab bilateral and multilateral institutions (continuing the trend started in 1975) and Western countries, several of which have had substantial assistance programs for a number of years. 21. The public external debt of Somalia as of December 1976 (outstanding and disbursed) was approximately US$277 million. Although a large share of this debt is on fairly soft terms, the debt service ratio has increased from 3.4% in 1972 to about 9% in 1977, and will probably continue to increase, because of increased amounts of aid. Somalia's export prospects are rather poor because of the concentration on two primary products--livestock and bananas--both of which face problems in expanding production in the long run. Livestock is subject to cyclical droughts which decrease export supplies and competition from the Sudan and Ethiopia, and even Australia and New Zealand, are to be reckoned with in assessing Somalia's future market position in Saudi Arabia. Banana exports have fallen because of both supply (drought, floods, poor marketing practices) and demand (increasing competition from multinationals in both Italy and the Middle East) problems. Diversification efforts have been attempted in hides and skins and fisheries with limited success but are bound to receive a setback with the withdrawal of Soviet technical assistance which was especially important in all aspects of fisheries and processing of fish. Therefore, in view of the country's poverty and uncertain export prospects, assistance should be provided on the softest terms possible and contain provisions for local currency financing. PART II - BANK GROUP CPERATIONS IN SOMALIA 1/ 22. Starting in 1965 IDA has made 16 Credits totalling about US$105 million of which about 35% have been made for transportation development, including construction of three trunk roads and a new deepwater port and associated extensions at Mogadishu. IDA Credits were also made for livestock development in FY74, for a development finance company project in FY77, and 1/ This section is the same as that of Mogadishu Water Supply and Technical Assistance Projects.  for education in FY71, FY75 and FY78. Lending for agriculture commenced in FY76 with two Credits for a Drought Rehabilitation Project and a North-West Region Agricultural Development Project. A Credit for development of water supply in Mogadishu and a technical assistance Credit for project prepara- tion were approved recently. No Bank loan or IFC investment has been made to Somalia. Annex II contains a summary statement of IDA Credits as of June 16, 1978 and notes on the execution of ongoing projects. Performance on ongoing projects generally has been satisfactory. However, as the pace of development continues to rise, absorptive capacity constraints are likely to become increasingly evident, especially in the field of agriculture where projects are rather complex and implementation experience is limited. There- fore, in preparing and appraising new projects, particularly close attention will have to be paid to implementation capacity and the adoption of measures to ease this constraint when necessary. 23. We plan to direct our future efforts on the country's directly productive sectors, agriculture and livestock, and also on education and transportation. While agriculture and livestock offer potential for devel- opment, most rural development activities are only at the beginning stage. Moreover, agricultural development in Somalia is particularly difficult because most of the people in rural areas are nomadic. For these reasons, we plan that much of our future lending will be in the agriculture and live- stock sectors, and this will be complemented with near equal attention on education. In the future we intend to seek Board approval for an Agricul- tural Extension and Training Project, a Central Rangeland Livestock Project and an agricultural project for the Bay Region. In addition to these sec- tors, we plan to support the Government's industrial development efforts (and assist in the formulation of an industrial development policy) through our country economic work and future DFC projects. We also plan to continue assistance to the water supply sector. 24. To facilitate the development and implementation of the Associa- tion's growing operational program in Somalia, we recently established, a one-man resident mission. The mission represents the Bank Group in its contacts with the Government thus facilitating an efficient and smooth day- to-day working relationship and assists in coordination of the cofinancing efforts. 25. Although the situation in the Horn of Africa is a cause for concern, the impact of the recent events on our operations has not been much. Only one project, i.e., North-West Agriculture Development Project, was affected in the sense that the management consultants invoked "force majeure" and left the project area. However, since the troop withdrawal in March, 1978, conditions in Northwest Somalia are returning to normal and the Government intends to proceed with implementation of the Project until new management consultants are appointed.  -8- 26. Implementation of other projects is proceeding generally satisfac- torily, although some are affected by shortages of qualified staff, adminis- trative and other factors which sometimes slow project implementation. PART III - THE TRANSPORT SECTOR 27. The exploitation of Somalia's limited resources has been inhibited by the lack of adequate transportation facilities. The density of freight and passenger traffic is light in all modes. Although some 10,400 motor vehicles operate in the country, camels and donkeys continue to play an important part as reliable means of transport. Road Transport 28. The road network is still limited and comprises about 17,700 km, of which some 1,400 km are bituminous surfaced roads and about 1,000 km are gravel roads. Long distances and light traffic densities make road projects difficult to justify economically although they are necessary to ensure national unity and administrative accessibility. IDA has financed the Afgoi-Baidoa highway, providing a road link from Mogadishu through the center of its hinterland and the Hargeisa-Berbera road, and is currently financing the construction of a paved road from Hargeisa to Borama (113 km) with a link to Tug Wajale (19 km) under the Third Road Project. A 1,045 km road, financed by the People's Republic of China, is under construction from Belet Uen in the central region, to Burao in the north, and the unpaved section (275 km) of the coastal road between Kismayu and Mogadishu are now being paved under a project financed by the European Development Fund. Ports 29. Four major ports accommodate practically all of Somalia's shipping. Of these, ports with deep-water facilities are: Berbera, which exports mostly livestock; Mogadishu, which imports most of the country's general cargo; and Kismayu, which exports bananas and meat. Merca, which exports bananas, is a lighterage port. The new deep-water port at Mogadishu financed jointly by IDA (Credits 359-SO and 586-SO) and the European Development Fund, was inaugurated on October 22, 1977. 30. Most of Somalia's international trade is handled by foreign vessels, supplemented by the National Shipping Line, which was established in 1974 as a joint venture of the Governments of Somalia (51% ownership) and Libya. This line operates two refrigerator ships, of 4,000 dwt and 4,700 dwt capacity, a livestock-carrying ship of 12,500 dwt capacity and two small general cargo vessels of 1,500 and 2,000 dwt capacity.  -9- 31. Despite the long coastline, transport by coastal shipping within Somalia is limited because there has been little inter-regional trade suitable for such shipping. However, a cement plant under construction in Berbera will send most of its annual output (100,000 tons) by sea to Mogadishu. Similarly, petroleum products from the new refinery outside Mogadishu will be transferred by small tankers to Berbera and Kismayu. Current development of commercial fishing is also expected to stimulate some growth of coastal shipping because the fish are to be transported from a number of small ports to a few processing and distribution centers, particularly Mogadishu and Berbera. Civil Aviation 32. The air transport system in Somalia serves ten scattered regional centers, with Mogadishu as the focal point. Only three airports have paved runways. Somali Airlines operates three DC-3's, two turbo-prop aircraft (F-27 and Viscount) on its domestic routes. Two Boeing 720 jet aircraft connect Mogadishu with Rome, Cairo, Nairobi, Djibouti and various points on the Arabian Peninsula. A few foreign airlines link Somalia with other African countries and Europe. Transport Policy. Planning and Coordination 33. The Government's transport objectives, as indicated in the 1974-78 Plan, are to (i) open new areas for development and thus increase the economy's productive capacity; (ii) foster regional economic integration of the country's many isolated areas; and (iii) lower the cost of, and facilitate domestic transport, thereby reducing the disparity between rural and urban areas in price and availability of goods. The Government intends to achieve these goals primarily through construction of main and feeder roads; two of these main roads are included in the Third Road Project. Other key plans are the completion of the Mogadishu harbor and relocation of its airport, improvement of the Hargeisa airport, and strengthening of the Somali Airlines and the National Shipping Line. 34. Transport and communications account for 25% of total planned public investment over the 1974-78 Plan period, compared with 29% of actual invest- ment in the previous Three-Year Plan. Within the transport and communications sector of the 1974-78 Plan period, 73% of the investments are allocated to highways, 19% to ports and shipping, 3% to civil aviation and 5% to communica- tions. While the current investment plan is not likely to be fully imple- mented, a substantial portion of the investments will probably be made and the country's transport infrastructure is expected to continue to improve over the 1974 78 Plan period.  - 10 - 35. Four ministries are concerned with the transport sector; the Minis- try of Public Works which, through its Civil Engineering Department, is responsible for highway maintenance and for planning and construction of highways, ports and airports; the Ministry of Transport which is responsible for vehicle registration and control, and for civil aviation through its Civil Aviation Department; the Ministry of Marine Transport and Ports which, through the Somali Ports Authority, is responsible for port operations and, through the National Shipping Line, is responsible for marine transport planning; and the Ministry of Interior which is responsible for highway traffic control. No Government agency exists to oversee the functioning of the whole sector, but some limited coordination is provided by the Planning Commission. 36. Intermodal coordination is not an issue; there is no railway nor are there any plans for one, and the limited coastal shipping is not likely to increase significantly in the foreseeable future with the exception of cement and petroleum products. PART IV - THE PROJECT Background 37. A report entitled "Staff Appraisal Report, Mogadishu Fourth Port Project--Somalia" (No. 1967-SO) dated June 20, 1978 is being distributed sepa- rately. A Credit and Project Summary appears at the beginning of this report and a Supplementary Project Data Sheet is given in Annex III. The Project was prepared by the Government with assistance of consultants, and appraised by an IDA Mission in December 1977. Negotiations were held in Washington, D.C. from April 17 to 19, 1978. The Somali Delegation was headed by Mr. Abdurahman Nur Herzi, Economic Advisor to the President of Somali Democratic Republic. 38. Somalia and Iraq have jointly constructed a petroleum refinery some 15 km south of Mogadishu which will be in operation by July 1978. The refinery will be operated by experienced Iraqi technicians while Somali per- sonnel is trained in Iraq. It is expected that the refinery will operate at full capacity, 500,000 tons per year, from the start and that the surplus which is not consumed within Somalia will be marketed abroad with the assis- tance of Iraq. Present consumption in Somalia amounts to about 200,000 tons of petroleum products per annum. Imports of crude oil and exports of refined petroleum products will temporarily be handled at the third general cargo berth in the new deep-water Port of Mogadishu. This is both a wasteful use of an expensive general cargo berth and a hazardous operation. Project Objective and Description 39. The purpose of the Project is to provide economical and safe facil- ities for accommodating petroleum tankers carrying crude oil for the new Mogadishu refinery, and for smaller tankers transporting petroleum products from the refinery. The proposed facility would be a tanker pier in the  - 11 - Mogadishu deep-water harbor. However, its layout and design will also pro- vide for its future use for handling bulk grain, sugar and molasses. At the Government's request, engineering preparations of the next extension of Mogadishu harbor have also been included in the Project, as there are considerable savings in combining this with engineering of the proposed tanker terminal. 40. Specifically, the Project would comprise: (a) a tanker pier for crude oil tankers of maximum 50,000 dwt and for small products tankers. It consists of a loading/unloading platform, berthing platforms and mooring platforms connected to shore by a causeway and/or trestles which would carry a crude oil pipeline and petroleum products pipelines and a roadway for light trucks. The platforms will either consist of concrete caissons or be supported on steel piles; (b) pipelines within the port limits; (c) hydraulic model tests, site investigations, detailed engineer- ing, preparation of tender documents, assistance during tender- ing and supervision of construction of the tanker terminal by consulting engineers; and (d) site investigations, detailed engineering, preparation of tender documents and assistance during tendering by consulting engineers for a 210 meter extension of the existing banana quay in Mogadishu harbor for general cargo traffic, the construction of which will be optional under the tanker terminal contract (but not financed under the proposed Credit). 41. Total Project cost, including contingencies, is estimated at US$6.6 million,of which US$5.5 million is in foreign currency. The Project is exempted from duties and taxes. Project costs are outlined below. US$ Million % of Local Cost Foreign Cost Total Cost Total Civil Works 0.9 3.5 4.4 66 Engineering - 1.1 1.1 17 0.9 4.6 5.5 83 Contingencies: Physical 0.1 0.5 0.6 9 Price 0.1 0.4 0.5 8 Total Cost 1.1 5.5 6.6 100  - 12 - Cost estimates for civil works are based upon the preliminary project design prepared by consultants after studying the technical feasibility of the Proj- ect. An additional allowance of 10% has been provided for physical contin- gencies. Annual price contingency factors ranging from 7% to 8% were applied for the civil works. Cost estimates for consultants' services are based on a lump-sum proposal, without price escalation, which has been submitted to the Ministry of Public Works; the average man-month cost for each consultant is US$6,000. Financing 42. The proposed Credit of US$5.5 million equivalent would be used to finance all foreign costs, representing 83% of total project costs. These would include costs of the project preparation paid by advances under the Project Preparation Facility (US$0.5 million). The advances would be reim- bursed from the proposed Credit when it becomes effective. The Goverrunent will provide for local currency expenditures. 43. When construction of the new tanker terminal is completed, it will be handed over to and owned by the Somali Ports Authority which will be responsible for its operation and maintenance (see para. 44). The resulting loan from the Government to SPA, covering the equivalent in Somali shillings of the proposed Credit, will be for a term of twenty years at an interest rate of 7-1/2% per annum. The above conditions would be reflected in a subsidiary loan agreement to be entered into between the Government and SPA, execution of which is an additional condition of effectiveness (draft Development Credit Agreement, Sections 3.01 and 6.02). Implementation 44. The Project will be carried out by the Civil Engineering Department of the Ministry of Public Works with the assistance of consultants. The Civil Engineering Department has in the past carried out several IDA-financed projects satisfactorily. Implementation of the Project will require about thirty months. When the Project is completed, it will be handed over to the Somali Ports Authority for operation and maintenance. 45. The management of the Somali Ports Authority would need strength- ening, particularly in planning, accounting, and management information sys- tems. Under a previous Project (Credit 359-SO), Price Waterhouse Associates (consultants) made a study of SPA's management, accounting and operations and have made several proposals for improvements. To implement consultants' recommendations and to train SPA's staff, a management expert experienced in these fields would be needed. Assurances have been obtained that a suit- ably qualified port management expert with terms of reference satisfactory to the Association would be employed no later than December 31, 1978 (draft Project Agreement, Section 2.02). The European Development Fund has agreed in principle with SPA to provide the necessary financing for the port management expert. Assurances have also been obtained that SPA will prepare a training program for its staff in consultation with the Association and commence the implementation of the program not later than June 1, 1979 (draft Project Agreement, Section 3.05).  - 13 - 46. In order to improve the performance of the Somali Ports Authority in regard to its operation of the new alongside general cargo facilities financed under the previous two IDA Credits, certain operational targets were prepared by the consultants and are suitable for implementation. Assurances have been obtained that these operating targets will be achieved (draft Project Agree- ment, Section 2.03). Procurement 47. The contract for the civil works will be awarded on the basis of international competitive bidding in accordance with Bank Group guidelines. No local contractor is expected to qualify as the principal contractor, although some are likely to be eligible as subcontractors or joint venture partners. Disbursements 48. Disbursements from the proceeds of the proposed Credit will be fully documented and will be on the basis of 80% of the cost of civil works and 100% of expenditures for engineering consultants' services. Environmental Impact 49. The existing primitive facility for unloading crude oil and loading petroleum products presents considerable pollution risks. The new facility will be designed to avoid spills. Financial Aspects 50. SPA's operating results have been satisfactory. Under Credit 359- S0, SPA was required to produce a 5% annual return on net fixed assets; how- ever, because of the subsequent extension under Credit 586-SO of the new Mogadishu deep-water harbor, and the resulting higher investment, the re- quirement was reduced to 4.5% for 1977, though retained at 5% for subsequent years. SPA has consistently met the above requirements which has enabled it to generate sufficient revenues to cover all financial requirements. 51. SPA introduced new tariffs effective on December 1, 1977, as a result of the tariff revision studies undertaken by Price Waterhouse & Asso- ciates, the consultants under the previous Credit 359-SO. SPA followed the recommendations of the consultants in general, although in some cases, where the rates proposed by the consultants were relatively high, SPA lowered the range somewhat. SPA's concern is that any immediate higher rates without better quality of service would be unreasonable. As the expected operational improvements take place, particularly in the new Mogadishu Port, SPA will re-study the tariff situation and introduce such changes as may be necessary to maintain as well as improve its financial performance.  - 14 - 52. Financial projections indicate that SPA would earn annual returns on net fixed assets ranging from 5% in 1979 to 7% in 1982. This would enable SPA to cover its operating expenses, meet its debt service requirements and make routine capital investment additions. However, no major ports develop- ment, in addition to the tanker terminal, has been taken into account. To ensure a sound financing plan for the proposed Project, assurances have been obtained that (i) SPA will maintain its tariffs at such levels to enable it to continue to earn an annual return of not less than 5% (draft Project Agreement, Section 4.05); and (ii) SPA shall not, without prior consultation with the Association, undertake any capital investment exceeding So.Sh. 6,000,000 p.a. before completion of the Project (draft Project Agreement, Section 4.03). 53. Since SPA's financial viability could also be endangered if it were to incur substantial additional debt, assurances have been obtained that SPA will not incur any additional long-term debt without the Association's prior agreement unless its net cash revenues for the fiscal year or the twelve consecutive months immediately before the date of incurrence, would be at least two times its maximum debt service requirements of any succeeding year on all SPA's debt (draft Project Agreement, Section 4.04). 54. The Magistrate of Accounts, who is independent and reports directly to the President, is responsible for the audit of all Government departments and agencies in Somalia and will audit SPA's accounts. While the Magistrate of Accounts audit of SPA's accounts has generally been satisfactory in the past, the audit practices employed by the Magistrate need to be reviewed, particularly in the verification phase of the work. The Association intends to assist the Magistrate of Accounts in this area during Project implementa- tion. Assurances have been obtained that SPA will have its accounts audited annually by auditors acceptable to the Association and would furnish such audited accounts to the Association not later than six months after the end of its fiscal year (draft Project Agreement, Section 4.02). Economic Evaluation 55. The quantifiable benefits of the Project consist of cost savings due to reduced ship waiting time as a result of released general cargo berth capacity. In calculating the economic return, only half of the benefits from reduced ship waiting time have been considered. This is due mainly to uncer- tainty about the extent to which these benefits will be passed on to the Somali Economy. The cost savings are estimated at US$5,000 per day, being the average cost per day for the typical 8,000-12,000 dwt general cargo ship calling at Mogadishu. The even higher cost per day for oil tankers is dis- regarded as a benefit since tankers are assumed to get preferential berthing. For the purposes of calculating the economic return, total project costs have been adjusted by excluding price contingencies. Furthermore, a shadow rate of about 40% above the official rate has been applied to the Project's foreign exchange costs to reflect its estimated economic value.  - 15 - 56. Based on the above benefits and costs, and assuming a 25-year life, the Project is estimated to yield a quantifiable economic return of 15% (calculated on 91% of total Project costs) in addition to the important benefits of providing a safe and efficient tanker terminal. Without shadow pricing foreign exchange the economic return is estimated 14%. The return from the Project is sensitive to traffic developments, and to the cost of the Project. If traffic falls short of forecast and the corresponding savings from ship waiting time are assumed to be 20% less, the return from the Project will drop to 13%. A 20% increase in cost will also lower the return to 13%. Risks 57. The weaknesses in SPA's management, coupled with the recent transfer of operations from a lighterage port to the new deep-water facility, entail some risk in respect to the future effective working of the Port. To reduce the risks, assurances have been obtained for SPA to employ a port management expert to assist in implementing sound management practices and training SPA's staff (para. 45). PART V - LEGAL INSTRUMENTS AND AUTHORITY 58. The draft Development Credit Agreement between the Somali Democratic Republic and the Association, the draft Project Agreement between the Somali Ports Authority and the Association, and the Recommendation of the Committee provided for under Article V, Section 1(d) of the Articles of Agreement of the Association are being distributed to the Executive Directors separately. 59. Features of the Development Credit Agreement of special interest are referred to in Annex III of this report. 60. An Additional condition of effectiveness would be conclusion of a satisfactory Subsidiary Loan Agreement between the Government and SPA (draft Development Credit Agreement, Section 6.01). 61. I am satisfied that the proposed Credit would comply with the Articles of Agreement of the Association.  - 16 - PART VI - RECOMMENDATION 62. I recommend that the Executive Directors approve the proposed Development Credit. Robert S. McNamara President Attachments Washington, D.C. June 21, 1978  TABLt 3A ANNEX I SOMALIA - SOCIAL INOICATORS DATA SHE