Ecuador - Fisheries Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 3731 PROJECT PERFORMANCE AUDIT REPORT ECUADOR FISHERIES PROJECT (LOAN 555-EC) December 23, 1981 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. ACRONYMS CFN - Corporacion Financiera Nacional (National Finance Corporation) EDP - Escuela de Pesca, Manta (Fisheries School, Manta) EPNA - Empresa Pesquera Nacional (National Fisheries Company) GOE - Government of Ecuador INP - Instituto Nacional de Pesca (National Fisheries Institute) SSRP - Sub-Secretaria de Recursos Pesqueros (Subsecretariat of Fisheries Resources) FISCAL YEAR GOE - January 1 - December 31 CFN - January 1 - December 31 CURRENCY EQUIVALENTS US$1.00 = Sucres 18 (at appraisal) US$1.00 = Sucres 25 (since 1970) FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT ECUADOR FISHERIES PROJECT (LOAN 555-EC) TABLE OF CONTENTS Page No. Preface ........................... .. ... .... i Basic Data Sheet ................................................... ii Highlights ............... .............. ..... .................... iv PROJECT PERFORMANCE AUDIT MEMORANDUM ....... 1 I. SUMMARY .................................................. 1 II. MAIN ISSUES .............................................. 3 A. Project Design ..................... 3 B. Vessel Procurement Procedure ..................... 6 C. Harbor Studies ..................... 7 Annex I . . . . . . . . . . . . . . . . . . . . . . . . . . ....... 8 Attachments I and II: Forrowers Comments .......................... 11 PROJECT COMPLETION REPORT I. Background ............................................... 15 II. Project Formulation ............................ 16 III. Implementation ........................................... 18 IV. Financial and Economic Impact ............................ 30 V. Institutional Performance and Development o................ 32 VI. Bank Performance ................ ......... .......... . 35 VII. Recommendations and Conclusions 38 Appendices: 1 - Tuna Purse Seiner: Key Parameters - Appraisals vs. Actual . ........... . o ..... ...... 40 2 - Tuna Purse Seiner: Operational Data ................... 41 3 - History of Four Purse Seiners Financed Under the Project ... ........................ o ..... 42 MAP This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - 1 - PROJECT PERFORMANCE AUDIT REPORT ECUADOR FISHERIES PROJECT (LOAN 555-EC) PREFACE This is a performance audit of the Fisheries Project in Ecuador for which a loan of US$5.3 million was approved on September 3, 1968. In 1974, the Loan Agreement was amended for the first time and an amount of US$700,000 was cancelled. Subsequently in 1977, the Loan Agreement was again amended and another US$300,000 cancelled. The final disbursement was made on May 19, 1981. After the cancellation of the remaining balance of US$420,000, the loan was closed on October 31, 1980. This audit consists of a memorandum prepared by the Operations Eval- uation Department (OED) and a Project Completion Report (PCR) dated May 11, 1981. The PCR was prepared by the Latin America and Caribbean Regional Office following a visit to Ecuador in January 1981. The audit memorandum is based on a review of the Appraisal Report (No. TO-640-A) dated July 18, 1968, the President's Report (No. P-624) of July 18, 1968, the Loan and Project Agree- ments dated September 5, 1968, the Amendments of August 21, 1974 and of August 5, 1977, and the PCR; correspondence with the Borrower and internal Bank memoranda on the project issues contained in the Bank files have also been consulted and Bank staff associated with the project have been inter- viewed. An OED mission visited Ecuador in July 1981. The mission held discussions with officials in the Ministry of Agriculture, the National Finance Corporation and other entities associated with the Project. The draft report was sent to the Borrower on October 10, 1981 for comments. Comments have been received and taken into account in the report. They also have been reproduced and included in the report as Attachments I and II. The audit finds the PCR comprehensive and accurate with respect to the project's principal achievements and shortcomings. The points discussed by the audit have been selected because of their relevance to this and other fisheries projects. The valuable assistance provided by the Government, its officials and other individuals met during the preparation of this report is gratefully acknowledged.  - ii - PROJECT PERFORMANCE AUDIT REPORT BASIC DATA SHEET ECUADOR FISHERIES PROJECT (LOAN 555-EC) KEY PROJECT DATA Appraisal Actual or Item Expectation Current Estimate Total Project Cost (US$ taillion) 6.6 6.7 Overrun (%) - 2 /a Loan Amount (US$ million) 5.3 3.8 Disbursed )- 3.8 Cancelled ) . - 1.5 Repaid toMay 31, 1981 Repaid to )-- Outstanding to ) 3.8 Date Physical Components Completed June 1974 October 1980 Proportion Completed by Above Date (%) 100 30 Proportion of Time Overrun (%)- 120 Economic Rate of Return (%) 21 Negative Cumulative Estimated and Actual Disbursements (US$ million) FY69 FY70 FY71 FY72 FY73 FY74 FY75 Estimated 0.3 1.5 1.7 3.5 5.0 5.3 - Actual - 0.05 0.11 0.16 2.16 2.16 2.86 Actual/Estimate % - 3 6 5 2 41 - FY76 FY77 FY78 FY79 FY80 FY81 3.46 3.66 3.76 3.76 3.76 3.8 OTHER PROJECT DATA Original Actual or Item Plan Revisions Est. Actual First Mention in Files or Timetable - - 1967 Government's Application - - - Negotiations - - 06/03/68 Board Approval - - 09/03/68 Loan Agreement Date 09/05/68 - 09/05/68 Effectiveness Date 09/05/68 - 09/04/69 Closing Date 10/31/74 06/30/76 10/31/80-/ Borrower Republic of Ecuador Executing Agency National Finance Corp., Nat'l Fisheries Instit. Sub. Fiscal Year of Borrower January 1 - December 31 Follow-on Project None  - iii - MISSION DATA No. of No. of Date of Item Sent by Month, Year Weeks Persons Man-weeks Report Identification FAO/CP 03-04 1967 6.0 3 18.0 07/05/67 Preparation FAQ/Bank 08 1967 2.0 2 4.0 11/10/67 Appraisal Bank 11-12 1967 4.0 4 16.0 07/18/68 Total 12.0 38.0 Supervision I Bank 01 1970 1.5 2 3.0 02/24/70 Supervision II Bank 08 1970 2.0 2 4.0 09/01/70 Supervision III Bank 04 1971 2.0 2 4.0 05/25/71 Supervision IV Bank 12 1971 3.0 2 6.0 01/06/72 Supervision V Bank 05 1972 1.5 2 3.0 06/30/72 Supervision VI Bank 10-11 1972 2.0 1 2.0 12/07/72 Supervision VII Bank 05 1973 2.0 1 2.0 06/12/73 Supervision VIII Bank 11 1973 2.0 1 2.0 12/21/73 Supervision IX Bank 02 1974 1.5 3 4.5 03/22/74 Supervision X Bank 07 1974 2.0 1 2.0 08/15/74 Supervision XI Bank 03 1975 1.5 1 1.5 04/22/75 Supervision XII Bank 06 1975 2.0 1 2.0 07/21/75 Supervision XIII Bank 03 1976 1.0 2 2.0 05/13/76 Supervision XIV Bank 05-06 1977 0.5 2 1.0 07/27/77 Supervision XV Bank 05 1978 1.0 1 1.0 07/10/78 Supervision XVI Bank 05 1979 0.5 1 0.5 05/25/79 Supervision XVII Bank 12 1979 0.5 1 0.5 12/10/79 Completion Bank 01 1981 2.0 1 2.0 03/20/81 Total 28.5 45.0 COUNTRY EXCHANGE RATES Name of Currency (Abbreviation) Sucres (S/.) Appraisal Year Average (1968) Exchange Rate: US$1 = S/18 Intervening Years Average (1970-80) US$1 = S/25 Completion Year (1980) US$1 = S/25 /a After adjusting appraisal cost estimates upward for the effects of devaluation in 1970 and downward for the elimination of 8 of the 12 purse seiners and the training vessel, which were not financed under the project, the revised appraisal cost would be US$2.1 million and cost overrun would be about 219%. /b Closing date also revised to May 1, 1978 and March 31, 1980.  - iv - PROJECT PERFORMANCE AUDIT REPORT ECUADOR FISHERIES PROJECT (LOAN 555-EC) HIGHLIGHTS The objective of the project was to more fully exploit Ecuador's abundant off-shore fishing resources through investments in modern tuna fishing vessels and training of key crew members. The Loan (US$5.6 million) was expected to help finance the design, construction and equipping of 12 tuna purse seiners with a carrying capacity of 150 short tons (st) or 1,800 st in total. This level would more than double the fishing industry's tuna catch and increase export earnings by an estimate US$3 million annually. The project also included the preparation of a feasibility study to improve harbor facilities outside those of the project. Total project cost was estimated at US$6.6 million. Only four of the twelve purse seiners were constructed. Due to lack of interest from additional buyers, the loan proceeds for purchase of boats was either cancelled (US$1.5 million) or reallocated to allow a change in the scope of the training component from a small program to train purse seiner crews to construction of an on-shore fisheries school. The cost of each boat escalated from an estimated US$350 thousand to a range of US$580 to US$800 thousand. Two of the boats were purchased by subsidiaries of international companies and the other two by local firms (one in the public sector). Just three of the boats are presently operational; all are now owned by multi- national companies. The project took about 12 years to implement, seven years longer than expected. The effective date of the loan was delayed by one year because Ecuador decided to extend its territorial waters to the 200 mile limit. The Bank initially objected but then accepted the action when such action gained acceptance in other countries. Other causes of delay were lack of interest by possible beneficiaries (noted above), revision and delay in completing the training component and, most importantly, stretching out the completion of the harbor studies. Disbursements between FY76 and FY81 amounted to just US$340,000. Present tuna catch for the three project vessels is about 2,100 st per annum or 700 st per vessel. At appraisal, it was estimated that each vessel would catch about 2,000 st per annum. Despite the scaling-down of the project, total cost at completion was 2 percent above the appraisal estimate, mainly due to an increase in boat cost (noted above). The re-estimated rate of return at completion is negative compared with 21 percent estimated at appraisal. - v - Other points which may be of particular interest are: - purse seiners designed under the project were relatively small with limited operating range and economically inefficient (PPAM, paras. 11-14); - lack of appreciation of the variable nature of tuna catch at appraisal led to some unrealistic subloan provisions (PPAM, para. 20); - vessel procurement procedure - separate vessel design and tendering - resulted in time and cost overruns. A better procedure would have been to invite offers from responsible shipyards for a range of standard designs (PPAM, para. 22); - extension of the loan closing after June 1976 was a decision of doubtful merit (PPAM, para. 27 and PCR, paras. 6.08-6.10); - all covenants were not adequately complied with (PCR, para. 3.29); and - subloans were made to multi-national companies that had other sources of financing (PCR, para. 6.04). PROJECT PERFORMANCE AUDIT MEMORANDUM ECUADOR FISHERIES PROJECT (LOAN 555-EC) I. SUMMARY1/ 1. At the time of appraisal, it was found that substantial scope existed for modernization and investments in the tuna industry in Ecuador. The industry was then characterized by inadequate technology and available resources were not fully exploited. The Fisheries Project was a first step to engender development to modernize the tuna industry in order to spur production. 2. Although the tuna industry in Ecuador has grown significantly since appraisal, the direct influence of the project on this process appears to have been slight. The promulgation of a Fisheries Law (Ley de Pesca) in 1974--which allowed, inter alia, certain tax incentives to exporters of processed tuna--provided impetus to the tuna industry and induced substantial growth in investments by multinational companies. 3. The project as appraised in November 1967 was one of the first Bank projects in fisheries and aimed to construct, equip, train crews, and operate 12 tuna purse seiners in order to expand Ecuador's production and export of tuna. A study of harbor facilities was also included and the total project cost was estimated at US$6.6 million (Bank Loan US$5.3 million). The Government of Ecuador on-lent loan proceeds relating to construction of the purse seiners at 6.5% interest to a public development finance corporation, the Corporacion Financiera Nacional (CFN), which in turn on-lent to fishing companies at 10% interest. The project took about 12 years to implement (appraisal estimate was 5 years), and Schedule I of the Loan Agreement was amended twice (August 21, 1974 and August 5, 1977). Of the original US$5.3 million Bank loan, only about US$3.8 million was actually disbursed as of the final closing date of October 31, 1980. 4. Only four of twelve purse seiners were actually constructed due to reported lack of interest from additional buyers in 1973, after which the out- standing balance of loan proceeds for purchase of boats was either reallocated or cancelled. The final cost to make the boats operational was significantly above appraisal estimates (US$0.58-0.80 million versus US$0.35 million). Two of the boats were purchased by subsidiaries of multinational companies and the remaining two by local firms (one in the public sector). At present only three of the boats are operational, all now owned by multinational companies. At appraisal, the annua. catch per boat at full development was estimated at 1/ Adapted from the PCR. -2- 2,000 tons. This was revised downward by a Bank supervision mission in 1974 to 1,200 tons per annum, and actual catches in 1980 reached only about 700 tons. It should be noted, however, that tuna catches by all Ecuadorian vessels in recent years, have significantly declined as a result of movements in the "El Nino" current in the Eastern Pacific Ocean. 5. The training component was changed during implementation. The original objective to train crews for the 12 purse seiners was abandoned when only four boats were constructed and the owners themselves conducted on-board training using expatriate captains. Consequently, the consultants, initially hired under the project to draw up training programs, were requested by Government to design, equip and prepare curricula for an on-shore Fisheries School at Manta which was to provide general training for purse seiner crews. The school opened in 1976, but due to Government's reluctance to allow private sector representation on the Board of Management, private boat owners remain skeptical of the school's usefulness. As a result, although well equipped, the school does not appear, at this time, to provide a major benefit to the industry. 6. The harbor studies component of the project was a major cause of delay between 1976 and 1980. Disputes over the conclusions of initial consultant feasibility studies, combined with indecision by the Bank and Government, prolonged the process of deciding whether a follow-up Fishing Port Project was justified. Consultants hired by the Bank in 1976 considered there was little scope for large scale investment in port facilities and a similar conclusion was again reached by a Bank mission which visited Ecuador in February 1981 to prepare a Fishing Port Project although small scale invest- ment in boat repair facilities are now considered appropriate. 7. The initial closing date of October 31, 1974 was first extended to June 30, 1976 in a Loan Agreement Amendment dated August 21, 1974. After this period, there were a series of short term extensions which resulted in the project continuing until its ultimate closing date of October 31, 1980. All key investments had been made by the end of 1976, namely: the four boats were operational, the school was constructed and staffed, and the preliminary port feasibility studies had been completed. The only activities which occurred in the 1977-80 period were procurement of additional items for the Manta School (in 1980) and extension of the studies component of the project. 8. Although the conditions prior to appraisal were favorable in justi- fying substantial investments in the tuna industry, project results fell short of appraisal targets. To some extent, the Bank loan contributed to the introduction of modern purse seiner technology in Ecuador, which was later accelerated by the Fisheries Law of 1974, providing fiscal incentives to entrepreneurs and multinational companies. 9. Overall, the project was marred by several shortfalls and deficien- cies which impaired project implementation. First, the appraisal failed to study the demand for purse seiners, legislation to regulate the growth of the industry and alternative sources for financing, both local and foreign. -3- Potential beneficiaries, who could own and operate purse seiners, were not adequately identified. During the course of Bank supervision, these con- straints could have been identified and highlighted, with necessary measures adopted to alleviate problems. During project implementation, the Bank was not effectively associated with the formulation of the Fisheries Law of 1974, which has led to the current, nationally registered fleet size of 56 purse seiners, 73% of which were built after 1974. While the Fishing Law provided incentives and boosted investments, it also contributed to an uncontrolled growth and over-investment in the tuna industry. There were no provisions in the law to regulate the growth of the industry; consequently, as the number of purse seiners rose dramatically, the Government was unable to balance tuna resources with fleet capacity in order to remain at maximum sustainable yield levels. 10. The important lesson learned from this project is that, with the right incentives and proper legislation, a healthy and strong private sector participation can emerge. In future fisheries projects, special attention should be focussed on (i) greater private sector participation in project design and implementation; (ii) incentives for investments; (iii) effective- ness of key legislation; and (iv) soundness of pertinent policies and insti- tutions concerning the fisheries subsector. II. MAIN ISSUES A. Project Design 11. Some of the reasons for the project's lack of success can be traced to some misjudgement during project preparation and appraisal. During project preparation a 27.3 m purse-seiner with a hold capacity of 200 mt was recom- mended as the most suitable vessel on the basis of stated availability of tuna within 200 miles of the coast, but no full techno-economic analysis of the suggested vessel size was ever made. 12. Had such a techno-economic vessel analysis been performed, it would have revealed the fact, well known at the time, that the more efficient vessels, giving a greater rate of return, were in the larger size classes - around 400 tons fishhold capacity and beyond.!L The size chosen for the project vessels was in a region of minimum economic efficiency. The effect of recommending larger purse seiner vessels to the potential Ecuadorian owners would have immediately focussed attention on the larger capital cost involved (ca. $1.5 million in 1970 per vessel) and possibly led to groups of owners 1/ The Central Projects staff does not fully agree with this statement, noting that the conclusion depends on the degree of vertical integration of the enterprise and the cost of supporting services. combining their financial and technical resources to operate such vessels, or immediately involved subsidiaries of multinational companies, as in fact eventually took place. 13. Cooperation between individual fishing vessel owners at the time of appraisal was already known to existl/ and should have been actively encouraged by the Bank. As will be commented upon later (para. 14), the effects of operating larger purse seiner vessels during the early stages of the project (1969-71) would also have accelerated the ultimate development of the Manta Fishing Port, as well as the scope of the training programs. Larger vessels, with greater range than those proposed by the Bank, would also have been less subject to the vagaries of tuna availability and changes in currents which affect fish behavior in the region. Due to the rather limited operating ranges of this type of purse seiner present levels of fishing effort within the 200 mile limit have to remain low, and it is unlikely that total landings of yellow fin and skipjack tuna will show any marked increase within the next few years. 14. Some improvements in quantity of catches could have been expected if more economic purse seiners of around 400-500 tons fishhold capacity with a range of operations extending to two months had been introduced. These vessels could fish outside territorial limits and could be expected to land about 1,350 tons of tuna per trip. Their economics would, however, depend on the extent to which fuel oil prices continue at the present domestic subsi- dized levels, the extent of foreign fishing effort outside the 200 mile fishing zone, and the method of application of the new laws requiring majority Ecuadorian ownership of fishing companies. A comparison of operating costs of U.S. tuna fishing vessels of different tonnage from the Eastern Tropical Tuna Purse Seiner Fleet is presented in Annex 1, Table 3. It shows that in 1974 variable costs ranged from US$574 per ton of fish landed for 300 t boats to US$277 for 2100 t boats. 15. One could argue that the initial capital requirements for larger boats could not be met by a single investor. However, during project imple- mentation it became apparent that even lower capital resources for smaller boats could not be found by individual entrepreneurs. The PCR (para. 6.04) correctly questions the wisdom of Bank finance extended to multinational corporations, who have access to other sources of finance. What was missing was a Bank effort to determine possibilities of joint ownership of larger boats, be it in the form of a corporation or a cooperative. 16. There is also some evidence, even discernible before the project was fully appraised, that the main project objective of increasing foreign exchange earnings was affected by a change of emphasis on such matters as: 1/ FAO/IBRD - Draft Report No. 10/67 ECU-2 July 5, 1967, p. 8. - 5 - (i) increased protein food for domestic consumption; (ii) freezing of the catch versus preservation in ice; (iii) more intensified fisheries operations and a rise in the income of the fishermen themselves; (iv) free boat owners from the need to borrow capital from controlling interests in the processing industry. By introducing these often conflicting aims, it is evident that the primary objective of increasing foreign exchange earnings for the economy was to be fraught with problems from the beginning. Since the processing and freezing facilities on shore were already firmly in the hands of the larger private sector when the project started, it was unrealistic to imagine that any major fishing project could be launched without their active support and coopera- tion. This cooperation should have been sought and incorporated in the design of the project. 17. Subsequent developments arising from the Ley de Pesca (1974) did indeed confirm that the larger private sector was able and willing to invest in both new and second-hand tuna vessels provided that the financial incen- tives were there to do so. Subsidiaries of multinational companies, and a few other fish processing and freezing companies in Manta, are prepared to expand further in the fisheries sector, given the right economic climate for such developments. 18. Another shortcoming of the project design was the assumption that the project purse seiners of about 27 meters length (150 tons capacity) would catch some 1,500 tons of tuna per year in their first year of operation. It was further assumed that, in the following years the vessels would undertake 15 fishing trips of 18 days (270 days) duration per annum and would land some 2,000 short tons of tuna for a total of 180 actual fishing days in each year. 19. By comparison, comparable tuna catch figures (Annex I, Tables 2 & 3) show that larger, more modern purse seiners operating out of San Diego prior to 1974 (300 tons capacity), could only fish 148 days per year and bring in catches of only about 974 short tons. In the opinion of the OED mission, tuna catch data on which the Appraisal is based were insufficient to warrant the catch assumptions made and were overly optimistic for the labor and technical support conditions applicable in Manta at that time. Present tuna catches for the project vessels are around 700 tons/annum/vessel. 20. The project also failed to appreciate the random nature of tuna fishing per se, and its effect on the working capital requirements of the vessel owners. While the appraisal suggests an allowance for working capital of $16,000, the earlier preparation report estimated it to be $50,000. Based on the operating costs given by the PCR (Appendix, Table 1), working capital - 6 - per fishing trip amounted to US$30,000 at a highly subsidized fuel cost, the major operational cost item. As is well known, due to the variability of tuna fishing operations, minimal catches on some trips and the likelihood of net repairs and similar large expenditures, owners of such vessels require exten- sive working capital and reserves. These requirements should have been better clarified with groups of potential vessel owners from the outset and more realistic loan provisions made for such reserves to be available. B. Vessel Procurement Procedure 21. The audit considers that the extra costs (between $80,000-$300,000), incurred by the sub-borrowers in purchasing the four project vessels, relative to the basic contract vessel price of $500,000, were a consequence of the procurement approach adopted for this project. The vessel procurement proce- dure was too time-consuming and lent itself to time and cost overruns. 22. The comments made by C.F.N. in 1971 are persuasive: "that the original project philosophy of having only one vessel size and hiring an independent naval architect to create the necessary design, were untenable for the remainder of Loan 555-EC". In their view, shared by the audit, the best procurement procedure for the project vessels from the outset would have been to invite offers from responsible shipyards. These shipyards, pre-qualified by C.F.N., would have been able to offer a range of standard purse seiner designs which could have been assessed on the basis of techno- economic performance criteria similar to those described in the existing literature..L 23. This vessel procurement procedure has the following advantages over the method which was adopted for the project: (i) vessel costs at delivery are not usually escalated by responsible shipyards, since for a standard design their costs are better defined; (ii) potential vessel owners can usually inspect sister ships or similar vessels to those required prior to contract placement; (iii) most shipyards building tuna purse seiners and similar fishing vessels provide on-board maintenance and training programs prior to ship delivery, which would have materially assisted in this project development; 1/ For instance: "Some Aspects of Research Related to Business Decisions in the U.S. Tuna Industry" - G. C. Broadhead, Paper 5.10, Meeting on Business Decisions in Fishing Industries, FAO Fisheries Report No. 22, September 1964. - 7 - (iv) penalty clauses, due to lack of indicated vessel performance, are more easily invoked (10% hold-back on contract price). Lenders and borrowers, therefore, have more control over the vessel procure- ment procedure; (v) completion dates for standard fishing vessels are usually more realistic than for custom designs, which results in the project coming on-stream much earlier than the method adopted, with con- siderably improved cash flows; (vi) more reliable planning of infrastructure (inter-phasing) can be made for such Ltems as shore-based processing and freezing facili- ties, training facilities, port and harbor works, etc., in relation to vessel completions. C. Harbor Studies 24. The various Ports & Harbor Studies conducted over the last 12 years since the Loan became effective in 1969 have been beset with problems mainly arising from differences of opinion between the various Government departments and imprecise terms of reference. 25. The original Identification Report clearly stated that any expansion of the port of Manta would necessitate detailed study of the physical condi- tions pertaining to the area. The report also made clear that the economic justification for a new fishing harbor at Manta would depend mainly on its specialization in tuna fishing and processing on shore, and the audit con- siders that the Bank's reservations and reluctance to agree with major fishing port development until both physical and economic factors were fully clarified have been correct. 26. Since the Loan became effective in 1969, the number of purse seiners operating from Manta has increased from 6 to some 40 vessels by 1980. Only six of these are, however, in excess of 400 GRT, and the 1974 consultant's prediction of 10 - 14 purse seiners of 600 tons capacity by 1976 was unreal- istic. In reviewing the documents relating to the Harbor Studies component of the project, the audit considers that such studies should have been given top priority from the outset since the major capital investment depended on their findings. The Bank has to take some of the blame for the delays. More than one year elapsed between the first Feasibility Report being made avail- able to the Bank and its being handed to Government in April 1975 during which period no action or even correspondence transpired from either side. 27. Bearing in mind the high cost of project supervision, it is doubtful that extension of the loan after June 1976 was a sound decision. By then the Fifth Highways project (Ln. 1429-EC) was under active consideration (approved by the Board on May 19, 1977) and also the Second Technical Assistance project (Ln. S006-EC approved on August 2, 1977). Funding of the studies could have been included in one of these projects and the transfer of supervision respon- sibilities of aspects related to port development would have been more in line with the expertise found in the Bank's Ports and Railways Division than in the Agriculture Department. ANNEX I PROJECT PERFORMANCE AUDIT REPORT ECUADOR FISHERIES PROJECT (LOAN 555-ECQ TABLE 1 Eastern Tropical Pacific Tuna Purse Seiner Fleet Economic Data for 40 United States Vessels, 1974 (US Dollars) Size Class: Carrying Capacity (Tons) Overall Overall Standard 201-400 401-600 601-800 .801-1000 1001-1200 1201 + Mean Deviation Landings (Tons) 974 1,188 1,778 2,490 2,292 2,615 1,980 987 TOTAL REVENUE 566,536- 654.588 1,011,400 1,403,880 1,217,910 1,770,482 1,090,416 541,990 Variable Costs: Trip Expenses: Fuel and Oil 60,577 73,758 114,020 187,981 162,996 239,665 138,888 77,450 Other 37,722 29,980 29,295 57,106 27,190 88,167 41,408 46,588 Total Trip Expenses 98,299 103,738 143,315 245,087 190,186 327,832 180,296 111,825 Provisions 24,323 24,585 30,578 31,622 25,562 26,039 27,098 8,820 Crew Share & Commissions 213,338 263,902 359,143 436,085 422,914 449,430 366,729 178,928 Repairs & Maintenance 115,072 187S401 115,422 139,318 75,864 76,016 120,868 67,822 Gear & Supplies 13,082 14,652 2,903 10,502 22,355 20,293 14,687 11,998 Payroll Taxes 12,163 14,335 18,951 10,985 8,345 6,685 12,328 6,389 Miscellaneous 34,280 12,224 59,655 27,247 37,604 86,989 37,825 61,924 TOTAL VARIABLE COSTS 510,557 620,837 765,967 900,846 782,830 993,284 759,831 269,848 Fixed Costs: Insurance 32,092 32,918 48,408 63,170 71,968 73,251 55,174 19,737 Interest 5,345 25,528 33,476 108,000 78,506 147,326 67,471 109,076 Depreciation 16,082 40,803 58,146 122,511 197,778 176,617 111,431 98,426 Other 9,265 17,997 33,151 53,195 21,825 31,795 28.662 24,571 TOTAL FIXED COSTS 62,784 117,246 173,181 346,876 370,077 428,989 262,738 210,104 TOTAL COSTS 573,341 738,083 939,148 1,247,722 1,152,907 1,422,273 1,022,569 421,757 NET RETURN BEFORE TAXES (Taxable Income) (6,805) (83,495) 72,252 156,158 65,063 348,209 .67,907 242,499 -9- ANNEX I PROJECT PERFORMANCE AUDIT REPORT ECUADOR FISHERIES PROJECT (LOAN 555-EC) TABLE 2 Estimated Days Fishing, Days Absent, and Fuel Cost Per Day Absent For Tuna Purse Seiners - 1974 Total Fuel Cost Per Vessel Carrying Fuel Cost Days Days Day Absent Capacity (Tons) (Dollars) Fishing Absent (Dollars) 300 52,654 148 190 277 500 83,931 164 205 409' 700 112,595 171 213 529 900 138,960 175 217 640 1,100 163,293 177 220 742 1,300 185,819 179 222 837 1,500 206,732 180 223 927 1,700 226,200 181 224 1,010 1,900 244,368 182 225 1,086 2,100 261,361 182 226 1,156 ANNEX 1 PROJECT PERFORMANCE AUDIT REPORT ECUADOR FISHERIES PROJECT (LOAN 555-EC) TABLE 3 COSTS OF OPERATION FOR THE EASTERN TROPICAL PACIFIC TUNA PURSE SEINER FLEET, 1974 (DOLLARS) Vessel Carrying Total Landings Crew Repairs and Other Variable Total Variable Average Variable Capacity (Tons) (Tons) Salt Fuel Labor Provisions Maintenance Costs Costa Cost/Ton of Fish 300 913 1,295 52,654 251,780 30,141 144,846 43,560 524,276 574 500 1,302 2,344 83,931 298,653 30,141 144,846 54,501 614,416 471 700 1,690 3,466 112,595 345,527 30,141 144,846 63,170 699,745 414 900 2,079 4,643 138,960 392,401 30,141 144,846 70,532 781,523 375 1,100 2,467 5,862 163,293 439,274 30,141 144,846 77,022 860,438 348 1,300 2,856 7,119 185,819 486,148 30,141 144,846 82,878 936,951 328 1,500 3,245 8,407 206,732 533,021 30,141 144,846 88,247 1,011,394 311 1,700 3,633 9,724 226,200 579,895 30,141 144,846 93,228 1,084,034 298 1,900 4,022 11,066 244,368 626,769 30,141 144,846 97,889 1,155,079 287 2,100 4,410 12,431 261,361 673,642 30,141 144,846 102,282 1,224,703 277 Vessel Carrying Replacement Opportunity Cost Other Fixed Total Fixed Average Fixed Average Total % c- Capacity (Tons) Cost Depreciation of Investment Insurance Costs Costs Costs Total Cost Cost/Ton of Fish RC 300 1,637,366 109,158 81,868 27,443 12,231 230,700 253 754,976 826 46.1 500 2,242,234 149,482 112,112 37,922 26,120 325,636 250 940,052 722 41.9 700 2,758,127 183,875 137,906 46,925 32,073 400,779 237 1,100,524 651 39.9 900 3,219,484 214,632 160,974 55,017 35,380 466,003 224 1,247,526 600 38.7 1,100 3,642,690 242,846 182,134 62,470 37,484 524,934 213 1,385,372 561 38.0 1,300 4,037,131 269,142 201,857 69,439 38,941 579,379 203 1,516,330 530 37.6 l,5Q0 4,408,809 293,921 220,440 76,024 40,009 630,394 194 1,641,788 505 35.7 1,700 4,761,846 317,456 238,092 82,293 40,826 678,667 187 1,762,701 485 37.0 1,900 5,099,223 339,948 254,961 88,297 41,471 724,677 180 1,879,756 467 36.9 2,100 5,423,188 361,546 271,159 94,072 41,993 768,770 174 1,993,473 452 36.8 FORM Nu. 788 (1-74) - 11 - Attachment I Page 1 Borrower's Comments Ministry of Natural and Energy Resources Subsecretariat of Fishery Resources Guayaquil, Ecuador 516-ATG 811013 Guayaquil, November 27, 1981 Mr. Shiv S. Kapur IBRD, Washington Sir: I acknowledge receipt of your letter of October 1 with the enclosed report on the execution and results of the Fishery Development Project (Loan 555-EC), concerning which -- rather than embarking on a detailed analysis -- I would like to make the following comments: - In the Project Completion Report, p. 1, under 1.03, there is a statement to the effect that the Law contains a requirement that all commercial fishery operations be under Ecuadorian majority ownership by 1984. Our fishery legislation contains no such requirement. - Also on p. 1 of the Project Completion Report, under 1.04, there is a reference to tuna being Ecuador's chief commercial fishery product, after shrimp, with exports of US$80 million in 1979. Our statistics for 1979, copy of which is attached, show that total fishery exports for that year were US$131,643,000, with tuna in frozen or canned form making up US$23,893,000 of this figure. - On p. 22 of the Project Completion Report, under 4.02 it is stated that the basic reason for the reduction in the catch has been the shifting of the "El Nifto (Humboldt)" current. However, it should be noted that off our coasts the El Nifo and the Humboldt currents are two separate natural phenomena notwithstanding the fact that it is their interaction that determines the principal characteristics of our waters. These comments are made so that you may amend the passages in question accordingly. Yours, etc. /s/ Tuly Loor Argote Undersecretary for Fishery Resources FOREIGN EXCHANGE EARNINGS FROM FISHERY PRODUCT EXPORTS (in US$'ooos) Period 1974 - 80 1 9 7 4 1 9 7 5 19 7 6 19 77 1 9 7 8 1 9 7 9 1 9 8 0 Products usdct us s us.s US.s$ us. us.s us. s 3 33 ?iA2/ 2S TL28.728,oo 38.379,oo 55.501o 75.150,oo 91.397,o 131.643,00 165.6660,o tI i Frozen 16.719,oo 25.355,oo 33.671,oo 35.927,oo 42.472,00 72.348,oo 82.698,c- Whole tuna 6.671o 8 6 1 9.8,oo 8.860,00 16.321,co 11. 13,00 Tuna pieces for human cons . -- Co Tuna pieces for animal cons 9. - -- -- -- -0 ,oo · .;oo Shrimp 8•755,oo 15.110,oo 25.619,oo 23.795,oo 31.286,oo 52.091,oo 66.237,:o other fish 290,oo 1.008,oo 1.122,oo 1.552,oo 1.634,oo 2.716,oo 4.154,o ! Turtle meat 75,oo 76,oo 205,oo 215,oo 198,oo 18,oo 3,oo Lobster tails 928,oo 174,oo 344,oo 485,oo 444,oo 348,oo 359,oo Squid -- --- --o 23,oo 7.823,oo 7.163,00 1 2.029,oo 17.864,oo 23.852,oo 27.319,oo 48.e57,oo Canned tU Tuna 2.451,oo 3.005,oo 3.746,oo 3.014,oo 5.053,oo 6.723,oo 9.937,k1 Alewife and mackerel 5.324,oo 3.990,oo 8.195,00 14.839,oo 18.791,oo 20.579,oo 38.456,00 Shellfish li 48,oo 168,oo 88,oo 11:o > 8,00 17,oo 34,00 l Real and Oi}l_ 3.97 5, oo i 5.527,oo 9.239,oo1 2.06 22.295,oo0 1 28 746o 33M 7o Meal 3.975,oo 5.408,oo 7.900,o 18.291,o i 3 Oil --1119,3o 1 339,0w 1.775,00 3.364,oo 1365,oo -- _iye 197,oo 152,oo 3,oo 8,0 2,oo 2,0o 29,oo Labsters 197,oo 3,oo-----60 Ornamentals -03,00 8, 0 2,0 2,0o ',0o Shells --149,-ooi Dried adatd 18,oo 1.3396 1.77 5oo 2.76,oo '3.2285,oo co Died17,o l 182,oo 35,00 1.285,oo2o 00o I 2>0 --- -1.1 el - 13 - Attachment II Borrower's Comments CORPORACION FINANCIERA NACIONAL Quito - Ecuador December 1, 1981 Mr. Shiv S. Kapur Director, Operations Evaluation Department 1818 H Street, N. W. Washington D. C. 204:33 U. S. A. REF. Loan BIRF No. 555/EC Dear Mr. Kapur: We acknowledge receipt of the preliminary version of the Project Performance Audit Report on the Ecuador Fisheries Project (Loan 555-EC). We would like to inform you that we have found this pre- liminary version of the Report to be satisfactory, and consequently we have no comments to make on it. Very truly yours, /sf Sylvia Vaca de Mantilla Deputy Manager, Resources  - 14 - ECUADOR FIS:HERIES PROJECT (LOAN 555-EC) PROJECT COMPLETION REPORT May 11, 1981 Latin America and the Caribbean Regional Office - 15 - I. RACKOROUND Fisheries Sector 1.01 The Pacific Ocean waters off the Ecuadorean coast are rich in fishery resources. In the period between 1970 and 1979, total fish landings rose from about 91,000 tons to about 537,000 tons with the largest growth occurring in small pelagic species (including anchovies, Pacific thread herring and Pacific mackerel), 35,000 tons to 450,000 tons. Over the same period, shrimp catches remained relatively stable, around 6,000-9,000 tons per annum, and tuna landings fluctuated widely, from los of 9,000-12,000 tons p.a. (in 1972-73) to peaks of over 36,000 tons (1975 and 1979). Between 1970 and 1979, the fishery sector's contribution to MDP grew from 0.6% (US$8.5 million) to about 1.8% (US$150 million). Most importantly, the sector became an important foreign exchange earner with exports of shrimp, tuna, fish meal, and other products rising from US$4.0 million in 1970 to about USS131 million in 1979. 1/ 1.02 Supporting infrastructure, including fish handling, cold storage, processing and marketing facilities are well developed; in fact, there is a considerable underutilization of processing capacity especially for tuna. One key constraint, however, is the severe shortage of vessel repair facilities. The only repair facility with a capacity to service vessels over 150 NRT is the Astinave shipyard (state-owned) in Guayaquil. As a result, the larger boats frequently travel to Panama, Peru or even San Diego for repairs. 1.03 The most important policy initiative, which occurred in the 1970s, was the promulgation on February 19, 1974 of the Fisheries Law (Ley de Pesca y Desarrollo Pesquero) and its associated rules (Reglamentos) on August 9, 1974. The law provides inter alia considerable incentives to exporters of processed fish products by removing import duties on fishing vessels/equipment and providing tax exemption on exports. Furthermore, during completion, the mission was advised by representatives of multinational companies, operating in Manta, that they interpreted the Law and its associated regulations as eventually requiring majority control of commercial fishery operations by Ecuadorians. 1.04 Next to shrimp, tuna has been Ecuador's most important commercial fishery with export earnings reaching US$80 million in 1979 (70% frozen, 30% canned) ../The two species found off the Ecuadorean coast are "skipjack" (Euthynnus pelamis) and the higher quality "yellowfin" (Thunnus albacares). During the 1960s yellowfin and skipjack were found in large numbers off the Ecuadorean coast and an industry developed based on relatively small, "pole and line" boats, which made daily trips of about 40 miles to the fishing grounds, using live anchovy bait (Anchoa naso) collected in coastal waters. During the 1970s, the pattern of fish movements changed and the main concen- trations of skipjack moved to the north, out of Ecuadorean waters. Consequent- ly, operation of the small pole and line boats became uneconomic and by 1980, most of the fleet (about 70 boats) had stopped fishing for tuna. Over the last decade, the pole and line vessels have largely been replaced by tuna purse seiners, which have longer operating ranges, use nets instead of bait, and can refrigerate tuna on board rather than needing to return to port each 1/ Manta Port Project Brief 3/13/81. 2/ For alternative figure, see Borrowers comments, PPAM Attachment I page 2. day. By 1980 Ecuador had a registered fleet of about 56 purse seiners ranging in size from 75 to 985 tons (NRT). The average size of these vessels is 258 NRT and only six of the 56 are over 400 NRT. About 70% of these tuna purse seiners are based in the port of Manta. II. PROJECT FORMULATION Identification and Preparation 2.01 The project originated from an FAO/IBRD CP identification mission which visited Ecuador for six weeks in March/April 1967. The main objective was to modernize the tuna industry and increase tuna production especially for export. This was to be achieved by introducing purse seiner technology to replace the traditional pole and line boats. Twelve vessels were to be constructed, credit was3 made available to replace the traditional practice of borrowing from processing companies, training was included for crews, and harbor studies were to be carried out to determine the need for a second phase project to develop key port facilities. Servicing facilities were also included in this first phase proposal. The catch per project vessel was estimated at 7.5 short tons/day over a 200 day fishing period, equivalent to 1,500 tons per boat per year (10% yellowfin, 90% skipjack). 2.02 A follow-up mission consisting of three Bank staff subsequently discussed the report's findings with the Government of Ecuador (GOE) in August 1967. The issues raised were the low price of tuna paid to local boat owners and the 55% duty applied to imported fishing vessels and equipment. At that time, GOE indicated that the training activities would be carried out under an OAS technical assistance program. 2.03 A combined Identification/Preparation Report was subsequently produced in November 1967 and confirmed that the 12 purse seiners were required to help fill the gap between processing and production capacity prevailing in Ecuador at that time. The rapid expansion in processing, cold storage and canning facilities had resulted from the relatively high U.S. market prices for tuna which caused an influx of foreign as well as local private investment to the tuna industry in Ecuador. This report again raised the estimated catch per vessel to 1,800 tons per annum (160-190 days), and estimated the total value of production from the 12 vessels at US$1.9 million per annum at full development in year 3 of the project. Government also agreed to reduce import duties on imported boats from 55% to 5%. The proposed 91 foot (27.3 m) steel-hulled vessels had an estimated fish holding capacity of 150 short tons, a main diesel engine of 500 hp (max) and crew accommodation for sixteen. The report also indicated that GOE had agreed to sponsor negotiations between boat owners and processors to ensure that landing prices were raised to international levels. Appraisal 2.04 A four-man Bank appraisal mission which visited Ecuador in November/ December 1967 basically concurred with the CP report but decided to include a training component since OAS assistance did not materialize. Boat specifica- tions were relatively unchanged. Government agreed to exempt the new project - 17 - boats from all taxes (except for a 10% ad valorem monetary stabilizing charge) and also agreed that frozen tuna could be transshipped abroad after landing in Ecuador. The latter was done in an attempt to ensure that international prices were paid to local boat owners. Catch projections were again raised above those of the two previous CP reports to 2,000 short tons/vessel/year, but the relative proportions of yellowfin to skipjack (10:90) were maintained in accordance with prevailing estimates from the Inter-American Tropical Tuna Commission (IATTC). Little attention was given to project coordination and monitoring of resources to effectively regulate growth in the industry. Project Objectives and Description 2.05 The main project objective was to expand tuna catches by stimula- ting development of modern purse seiner technology, and thereby increase the capacity utilization of existing and planned private sector freezing and processing facilities, which, in turn, would substantially increase exports from the sector. The project aimed to remove production constraints by constructing purse seiners with refrigerated storage which would be able to exploit more distant tuna resources than was possible with the traditional pole and line boats. The main components were: (i) design, construction, supervision of construction and equipment of 12 (150 ton) tuna purse seiners; (ii) training for the 12 purse seiner crews; and (iii) preparation of a feasibility study to improve harbor facilities beyond those required under the project at the ports of Manta, Santa Posa,and Ballenita. 2.06 The total project cost was estimated at USS6.6 million and the Bank loan of US$5.3 million financed only foreign exchange costs, including 85% of the construction costs of the purse seiners, 100% of foreign exchange costs for training, consultants and the purchase of a training vessel. Proceeds from the sale of fish caught by the training vessel were to be used to offset local costs and reduce Government's contribution. The Bank loan also financed 100% of foreign exchange expenditures on the harbor studies. Loan proceeds for the purse seiners were to be on-lent to selected subborrowers by the Corporacion Financiera Nacional (CFN) at 10% interest. The training program and harbor studies' components were administered by the Instituto Nacional de Pesca (INP - National Fisheries Institute) and the National Planning Board respectively. In addition to the Loan Agreement, side letters were exchanged on: (i) the training program; (ii) harbor studies; (iii) pro- curement; (iv) external debt; (v) importation of vessels and equipment; and (vi) technical evaluation. 2.07 Identification through Board presentation took 15 months. - 18 - III. IPLEMENTATION 3.01 Project implementation was poor despite the fact that tuna purse seiner technology developed considerably in the decade of the 1970s. The key condi- tions obtained from Government at negotiations, namely, removal of import duties on new boats and agreement to raise local tuna prices to international levels, combined with incentives provided in the 1974 Ley de Pesca, appear to have provided the major impetus to expansion of the tuna industry in Ecuador. The main problems encountered with the various project components in this same time period are described below. Loan Effectiveness 3.02 The project did not become effective until September 4, 1969, approximately one year after loan signing. The main reason for this delay was Ecuador's decision to extend its territorial waters to 200 miles at a time when this was not a widely accepted limit. Bank objections were ultimately removed as it became apparent that such action was gaining acceptance in other countries also. Purse Seiners 3.03 At appraisal., purse seiner technology was not common in Ecuador, and hence, in order to sti,mulate their usage, the 12 project vessels were to be constructed over a four-year period. The first phase of four boats was to become operational by the end of year 1. 1/ After delays in selecting consul- tants, primarily because of GOE's requirement for local counterparts, the design contract was warded in mid-1970, at which time CFN indicated that interest from the private sector in procuring vessels was very high. However, many potential subborrowers failed to meet the financial (15% deposit) and technical experience requirements established by CFN and approved by the Bank. Consequently, Government and the Bank agreed to allow subsidiaries of foreign companies (multinational corporations), who also owned local processing plants, to become subborrovers. This was the kind of involvement which the appraisal sought to avoid since it was believed that the processors would squeeze out private boats by not paying international prices for tuna landed in Ecuador. Although the appraisal highlighted the real possibility that locals would be unable to meet loan requirements, it apparently chose to disregard this risk (taff Appraisal Report - paragraphs 2.23 and 4.03). This proved to be a major oversight in formulation of the project. Foreign investment interest heightened further after devaluation in 1970 (18 to 25 sucres to the US dollars), since this increased the profitability of exported processed tuna from Ecuador where labor was relatively cheap. In the meantime, tuna prices had risen from 1968 appraisal estimates of US$93-114/ton (skipjack- yellowfin) to between US$180-230/ton by 1970. 3.04 In September 1970, the consultant held meetings with potential sub- borrowers to determine their needs. This resulted in the fish holding capa- city being changed from 150 tons to 180 tons, the length of the boat being 1/ At appraisal, only three vessels were included in the first phase. This number was raised when four firms qualified as subborrowers. - 19 - increased from 91 to 99 feet, and the engine capacity being raised from 500 to 565 hp. At this time the Bank also agreed that the consultant could assist CFN in bid evaluation. Tenders were floated in January 1971 and eleven bids were opened from nine countries in April 1971. Bids ranged between US$0.50 and 1.70 million per vessel (appraisal estimate, $0.35 million, including contingencies). At CFN's request, the consultant architect visited the shipyards of the two lowest bidders and as a result a selection was made in July 1971 at a unit price of about US$0.5 million delivered to Guayaquil. After clearance of the award by the Bank and a final decision by CFN to construct only four vessels, the contract was signed in April 1972 and con- struction began in May 1972 with all four boats scheduled for delivery by May of 1973. 1/ The consultant visited the shipyards several times to supervise constructTon. After some delays in mid-1973, when steel plate was diverted to Nicaragua for earthquake relief, the first two boats were delivered and, after usual startup problems, they began operations in late November 1973. The final boat was delivered in February 1974. It is important to note that the mission was advised by CFN and two of the subborrowers that the cost to make the boats acceptable to the owners was actually about US$0.58 to 0.8 million. The mission could substantiate only the US$580,000 figure but believes that there were indeed changes required to the boats after delivery to make them acceptable to subborrowers (para. 5.06(i)). Whether these were additional to the original specifications is unclear. 2/ 3.05 In the meantime, a new Government came to power in 1972 and created the Subsecretaria de Recursos Pesqueros (SSRP) in the Secretaria de Recursos Naturales y Energeticos, which was to coordinate all operations related to fishing activities in Ecuador. SSRP proceeded to organize a Government- controlled company named the Empresa Pesquera Nacional (EPNA), which aimed to involve Government directly in fishing operations. It also proceeded, with FAO support, to prepare the revised Ley de Pesca, which was ultimately promul- gated in February 1974. 3.06 Although paragraph 2.07 of the Loan Agreement indicates that purchase of the second group of vessels would await the successful performance of the first group, meetings were held in 1973 to discuss the next phase of boat construction. Initially, there was considerable interest from the foreign- owned companies since boat prices and credit arrangements were attractive. However, the mission was advised by several processors that since Regulation 24 of the Andean Pact Regulations indicates that Government funds cannot be loaned to multinational companies for periods over more than three years, CFN pressured Government during discussions on the second phase of vessel construction to support only Ecuadorean firms, including public sector companies such as Ecuatun, which CFN owned 3/. Consequently, the foreign-owned companies did not want to become embroiled in these disputes and proceeded to purchase 1/ CFN had considered increasing the number of subborrowers to six but ultimately rejected the additional two on technical/financial grounds. 2/ Since there was no vessel design engineer on the mission it is difficult to explain why these overruns occurred. According to the construction contract, there was a manufacturer's guarantee of one year, and trial runs were apparently held before delivery was made. 3/ GOE had granted a waiver of this requirement for the first phase of vessels. - 20 - boats, using other sources of funds. At this time, CFY attempted to buy two more identical vessels for Ecuatun, but it was unable to reach a satis- factory agreement with Astilleros de Veracruz. 3.07 As a result, in November 1973, CFN requested that the second and third phases of boat: procurement be halted for the following reasons: (i) CFN was unwilling to continue to finance boats for the benefit of foreign-owned companies; (ii) FPNA existed only on paper as of January 10, 1973 and therefore could not meet technical or financial requirements as a subborrower; (iii) there was considerable uncertainty over the effects of the proposed revision t.o the Fisheries Law; (iv) Fcuatun (which was interested in a further two boats) was being reorganized; and (v) unit boat prices had escalated considerably (US$0.8 million). Consequently, about US$1.1 million was reallocated to the crew's training school and fishing ports study components and about US$0.7 million was cancelled. 3.08 The Bank investigated the possibility of utilizing the undisbursed funds available under Categories I and II to buy second-hand purse seiners; however, this was rejected when it was determined that there was not a sufficient supply of' "good" second-hand vessels available in 1973/74. At that same time, a second-hand vessel in the Ecuatun fleet had just sunk with loss of life and this added to CFN's reluctance to proceed with second-hand vessels. It is interesting to note that in the period 1975-80 the main demand for purse seiners was second-hand vessels. 3.09 The final Bank disbursement under this category was made in mid-1974; however, two of the four subloans had to be refinanced (both locally owned vessels) in 1977. Cne of the subborrowers (Rafranco: locally-owned private firm) had amortized S/. 5.4 million of its S/. 10.7 million subloan, but was SI. 2.2 million in arrears before refinancing. The case of the state-owned Ecuatun boat was more serious since it had never made an amortization or interest payment on its S/. 10.7 million subloan, and the entire loan had to be refinanced. These problems came to light in a 1978 Bank supervision report. It appears that the locally owned private vessel suffered from poor management in the parent company and as a result the company eventu Ily declared bank- ruptcy in 1980 and its boat went to one of the foreign-owned companies in lieu of debts. The state-owned enterprise, whose debts to CFN totalled over S/. 65 million, suffered the fate of many public sector attempts to compete in commercial business with only public sector incentives. The latter's assets are being taken over by CFF and the enterprise has already gone out of business. 3.10 Of the four boats constructed under the project, only one remains with its original owner: INEFPACA, parent company Ralston Purina. Of the remaining three, the second foreign-owned boat has been sold by Del Monte to another multinational concern, Castle and Cooke (Bumble Bee Tuna). The - 21 - public sector, Ecuatun boat has been out of operation since 1978. It suffered extensive damage in 1979 and has been taken over by the insurance company and indemnization has been paid to CFN. The locally owned private boat was transferred to INEPACA. Only the two foreign-owned boats have been in continuous operation since 1974. A more detailed history of all four boats is given in the Appendix Table 3. Crew Training Program 3.11 At appraisal, Ecuador had no experience of crewing purse seiners and the INP training component envisaged hiring consultants to train the twelve crews on a training vessel to be supplied under the project. However, by the time the project became effective in 1969, tuna purse seiners had begun oper- ating in Ecuador and expatriate skippers had been hired by the owners to train crews. Consequently, the original focus of training program was changed in 1970 to on-the-job training on existing vessels. By June 1971, however, Bank supervision missions were reporting that training was no longer critical to the success of the project. In spite of this fact, the Bank agreed with a Government proposal for continuing the component to provide general training needs for the tuna industry. The terms of reference of the consultants were changed and the three previously short-listed firms were asked to resubmit proposals. In 1972, INP began negotiations with an expatriate consultant firm. At that time INP had no local funds to meet boat training expenses and the Bank indicated that it did not want to participate in local cost financing. 3.12 With the formation of SSRP in 1972, GOE proposed further changes in the draft terms of reference which involved establishment of an on-shore school to benefit the entire fishing industry, not only tuna. At this time, Government also agreed to make local funds available for the program and the Bank accepted the revised proposal. All civil works activities were to be financed by Government and loan proceeds were made available only for imported equipment and the consultant contract. The Bank did not review civil works bidding procedures. 3.13 The contract with the consultant, which was finally signed in August 1973, required him to provide the technical assistance for constructing, equipping and initially operating a Fisheries Training School (Escuela de Pesca (EDP). The consultant contract allowed a 3.5% commission on all equip- ment procured for EDP. As a result of the delay in awarding the consultancy and changes to the terms of reference, the contract cost rose from the 1972 original bid of about US$0.4 million to about US$0.52 million in 1973. 3.14 Final specifications on the school buildings, which were prepared by the consultant for a site at Manta, were made available to prequalified bid- ders in February 1974. A contract was signed with a local construction firm in May 1974 at a cost of S/. 5.66 million (US$226,000). In August 1974, the Bank optimistically reported that construction would be completed by December 1974, and, depending on the availability of qualified personnel, training could begin in early 1975. Although the consultant obtained the necessary - 22 - equipment roughly on schedule, it remained in boxes at the site because of construction delays caused by shortages of cement and of local funds from Government. In mid-1975, GOE requested that the training vessel be revived under the project but the Bank indicated that a decision would not be made until the school was complete and all consultant expenses paid. 1/ 3.15 Construction was finally completed in mid-1976, by which time civil works costs had risen to S/. 12.29 million (US$492,000), or 117% above original contract estimates. The main reason for the cost overuns were delays caused by Government failure to supply local funds and also the failure of the original tender to adequately cover drainage and electrical needs. Further- more, the site chosen by GOE and the consultants almost washed away during construction because of poor site selection and inadequate drainage allowances. A total of 10 additional subcontracts were awarded at a cost of about S/. 6.63 million (US$0.27 million). 3.16 When instruction was ready to begin in 1976, there were no qualified instructors and therefore the consultant contract was again extended to pro- vide support in translating technical manuals from English to Spanish (as course material) and to assist in the training of the first batch of students from whom potential staff were to be chosen. Unfortunately, shortly there- after a dispute erupted. between the Government and the consultant. This centered on differences of opinion on the delegated responsibilities of the consultants and complaints of overcharging and supplying defective equipment. However, at the consultant's suggestion, Government obtained three experts in 1977 under Spanish bilateral assistance for 12 months to assist in training local instructors. When the final payment was made against the consultant contract, the estimated cost had risen about 94% above the 1973 contract to about US$1.0 million. 3.17 The training program at EDP offered 10 fisheries courses in 1980 from which 281 students: were graduated. Plans for 1981 include the following courses: Marinero Pescador (3) 60 places Jefe de Cubierta (1) 20 places Machinery Operations (2) 40 places Engine Mechanics (1) 20 places Refrigeration/Electricity (1) - 20 places Artisanal Fishing (14) - 560 places 2/ In addition, the training vessel will offer about 23 weeks of on-the-job training, provided sufficient local funds are available. The courses will be given by a teaching staff of 10 instructors, four of whom have received overseas training. There is also a support staff of five administrators. However, it is widely stated that the caliber of existing staff at EDP is poor 1/ The vessel was deLeted from the loan when Japanese Bilateral Aid expressed interest and ultimately supplied the vessel, "SIRIUS", in 1979. 2/ The emphasis on artisanal fishing reflects an attempt by Government, with IDB support, to diversify fishing in Ecuador. - 23 - and that considerable strengthening through additional consultant support and/or overseas training is necessary. 3.18 Employment opportunities for EDP graduates are not good. Only about one-quarter of the estimated 330 fishery course graduates in 1979 and 1980 (who could be traced) are estimated to still be in the industry. One major problem is the lack of confidence in the school by the private sector. The Bank has previously proposed adding a representative of private fishing vessel owners and a representative of fishing vessel crews to the Board of Directors in order to improve the EDP's courses but no action has been taken yet by the Government. 1/ 3.19 Two other constraints which confront EDP at present are lack of dormitory facilities for students from outside Manta which was also brought to GOE's attention by Bank supervision teams, and failure of Government to provide sufficient local funds. On the latter point, the annual budget for the school is approximately S/. 11-12 million. This amount, while normally adequate 2/ does not cover the training vessel's operating costs (approximately S/. 3 million per year), which it is hoped will be partly covered by sales of the resulting catch. Harbor Studies Component 3.20 In the early stages of project implementation, there was little action on the part of Government or the Bank to carry out these studies. Priority treatment was given to the purse seiner components and training. The Junta Nacional de Planificacion, which was the responsible executing agency, received proposals on the studies from eight firms in March 1970 and, with FAO consultant support, drew up a short list. Serious delays resulted from bureau- cratic indecision such as failure to have a quorum at key decision meetings, disputes between the Junta and the Direccion General de Marina Mercante y del Litoral., 3/ and failure to agree on the draft terms of reference especially on the specific ports to be studied. Eventually, a joint venture contract was signed between a foreign and an Ecuadorean consulting firm in September 1973 to carry out a prefeasibility study on harbor facilities at Manta, Aconcito, Chanduy and Posorja. 3.21 The feasibility report, which was completed in November 1974, recom- mended that, of the four sites examined, only Manta and Posorja should be 1/ The Board comprises the Minister of Natural Resources and Energy (or the Subsecretary of Fishery Resources), the Director of the National Fisheries Institute (INP), and the Director of the Merchant Marine. 2/ Except in 1980 when sanctioned releases totalled only SI. 9.5 million. 3/ The Departamento de Puertos took over responsibility for the component after its formation in 1971, and SSRP took over responsibility in 1973. - 24 - considered for further study and possible investment. 1/ The Bank's fisheries specialist, however, expressed reservations on the technical and commercial assumptions used in forecasting fisheries development and it was suggested that an updated market study be carried out before proceeding with the detailed engineering of the fishing ports. After extensive discussions, in 1976 the borrower hired, at the suggestion of the Bank, two consultants, to carry out an independent review of the marketing aspects of the feasibility study. These consultants concluded inter alia that: (i) there was little or no scope for marketing silver hake, pinchagua and mackerel; (ii) there were some possibilities of increasing the annual landings and sales of tuna by 15,000 to 20,000 tons; (iii) there was no case for construction of a new fishing port at Manta; and (iv) preparation of detailed engineering studies for large scale investment in fishing ports was not justified but consideration should be given to augment the capacity of the existing fishing landing facilities at Manta to support the possible expansion of tuna fishing. 3.22 These recommendations were not accepted by Government which wished to go ahead with the construction of the facilities at Posorja and Manta and pressed for the use of loan proceeds for a detailed design study for the purpose provided in the amended Loan Agreement. It would appear that this would have been an app:ropriate time for the Bank to have closed further action on the studies. It did not; instead, the Bank agreed to finance final engineer- ing for Manta where the need for additional capacity had been identified by the consultants. It was also agreed that a further marketing study was required to determine the scale of facilities needed at Manta. At this time, Government also requested the Bank to consider financing a first-stage of Fishing Port Development Project (provision of 15,000-20,000 tons of additional tuna landing facilities), provided such a project met the Bank's economic and financial criteria. The aim was to include the project in the FY82 lending program. 3.23 After Bank concurrence, a consultant contract for detailed engineer- ing work at Manta was awarded in October 1977. Again after considerable delay, final designs were completed in early 1980 and a final report was submitted in June 1980. Unfortunately, the design was not completely consis- tent with the requirements outlined by the Bank. The same consultants also prepared a final design for Posorja fishing port, which was financed directly by the Government, without Bank participation. The Bank-financed engineering study was carried out according to the terms of reference and was considered satisfactory from an engineering point of view; it formed the basis of Bank preparation missions w1aich visited Ecuador in October 1980 and February 1981. The latter mission confirmed that large-scale investment in fishing ports was not justifiable but that some additional services, notably boat repair facil- ities, were badly needed. This position has been accepted by the Government and an appraisal mission for the Fisheries Port Project is planned for May 1981. 1/ Recent (1981) review of the report by a consultant on the Manta Ports Preparation mission drew attention to an error in determining benefits for the economic analysis which ultimately led to the assumption that the proposed large-scale investments were justified. - 25 - 3.24 After very lengthy procedures, the marketing study referred to in paragraph 3.22 was finally awarded in July 1979 to an expatriate consulting firm in a joint venture with an Ecuadorean company. This report was completed in February 1980, and a review by LCPPR considered the forecasts of export sales to be highly optimistic and the value of the study, in general, to be limited. Project Costs 3.25 A revised estimate of total project costs over the 11-year investment period is given in Table 3.1. It should be noted that in mid-1970, there was also a currency devaluation which raised the exchange rate used from 18 to 25 sucres to the US dollar and that no specific contingencies were added to costs at appraisal since it was felt that cost estimates of the major items (boats), which were based on US market prices, were about 20% above other estimates received from Latin American builders, whom it was assumed would prove to be successful bidders on the construction contracts. However, although the boats were indeed constructed in Latin America, the final cost to make them oper- ational in 1974 was about 66%-130% above the appraisal estimates of US$0.35 million. Project Financing 3.26 Despite the considerable delays in project implementation, the only serious financing problems encountered were for local costs at the training school and those related to disputes over payment of final (performance) fees on consultant contracts for the training program and marketing and port design studies. All except the latter (consultant and port design) were ultimately resolved. The Loan Agreement was substantially amended twice, on August 21, 1974 and again on August 5, 1977. The former resulted in the cancellation of about US$0.7 million and the latter of a further US$0.3 million. Withdrawals under the loan between the end of 1976 and the actual closing date of October 31, 1980 were only US$0.24 million (6% of the total) and covered consultant expenses on the harbor and marketing studies and procurement of additional equipment (in mid-1980) for the Fisheries School. Reporting and Auditing 3.27 Progress reporting requirements were not established at appraisal; however, all project agencies subsequently expressed a willingness to supply regular reports based on a format provided by the Bank in April 1971. The first report was received in January 1972 from CFN on the purse seiner activi- ties. Progress reports on the other project components were not submitted. The CFN reports, although deficient in some details, were submitted regularly between 1972 and 1974. After the boats became operational in 1974 the CFN reports became irregular and those which were received failed to draw attention to such critical problems as the need to refinance two of the loans. The Bank did not appear to press for regular reports but rather relied on supervision missions and, in the case of the Fisheries School, on regular letters with complaints from the consultants. 3.28 Audit reports were supplied regularly by CFN in the early years of the project and not at all by other implementing agencies. Unlike the Bank's Project Agreement with CFN (Section 2.08(c)) regarding Part A of the Project - 26 - Table 3.1 - Summary of Project Costs Component Appraisal Actual 1/ (S/'000) Purse Seiners Construction 75,600 80,477 2/ Design/Supervision 2,160 1,414 Working Capital 3,456 3,717 3/ Subtotal 81,216 85,608 Training Program 15,786 38,725 Harbor Studies 5,094 25,031 Interest During Construction 17172 19111 Total 119,268 168,475 (US$'000) (6,626) 4/ (6,739) 5/ 1/ SSRP Estimate, January 1981. 2/ Includes Sucres 1.2 million after delivery costs per boat (Total US.0.8 million per boat). 3/ Based on revised estimated increase in operating costs per boat of 232% (see SPN Report dated March 22, 1974) and reduction in number of boats from 12 to four. 4/ Assuming only 4 boats constructed and excluding training vessel (which was deleted) project costs of appraisal items would have been estimated at about US$2.05 million. 5/ About 94% of actual project costs had been incurred by December 1976 (i.e., the revised closing date for the project as.amended in the Loan Agreement dated September 1974). April 10, 1981 - 27 - Table 3.2 - Bank Disbursements Category in Schedule I of Loan Agreement Appraisal Reformulation Actual (1968) (1974 ) (1980) -- ------------(US$'000)----- ---- I. Purse Seiner Construction 3,570 1,950 1,625 II. Purse Seiner Design and Supervision 140 60 57 III. Training Program 400 620 983 IV. Harbor Studies 190 760 454 V. Interest During Construction 1,000 900 719 VI. Unallocated - 300 - Total 5,300 4,590 3,838 1/ 1/ January 1977, US$3.6 million; January 1978, US$3.7 million; January 1979, US$3.75 million; January 1980, US$3.76 million; and October 1980, US$3.84 million. April 10, 1981 - 28 - (purse seiners), there was no specific audit provision in the Loan Agreement with the Government. However Section 5.04 did include standard language on maintain- ing adequate records in, accordance with consistent sound accounting practices. The Bank started to seriously follow up on project accounts after the mid-1977 supervision mission. In November 1977 the Bank reviewed the situation and reiterated its understanding that the Direccion de Credito Publico y Finanzas would coordinate the updating of general project accounts for audit and submission to the Bank. In March 1978 the Minister of Finance advised the Bank that an audit was underway. To date no audits of the training and studies components have been received and it is apparent that there is consid- erable confusion over the flow of funds during construction of the Fisheries School at Manta. Adherance to Covenants 3.29 The covenants which were not adequately adhered to were the following: Table 3.3: Covenants Not Adequately Adhered To Section No. Scope of Covenant Comment 5.03 INP to assist project as follows: 5.03(a) Employ consultant to establish GOE dispute resulted in training program, who would consultant being unable to inter alia supervise acquisi- complete training duties. tion and operation of a train- Provision of a vessel was ing vessel. not included in consultant contract. 5.03(b) Employ three experienced ex- Consulting firm provided perts (captain, engineer, head experts but GOE did not bosun) to operate and train consider them effective. crews on a training vessel. 5.03(c)(d) Advise CFN and subborrowers There appears to have been on technical aspects relating no monitoring of this sub- to Part A of the Project lending program by INP. In (purse seiners, crews, opera- any event, it is apparent tion, etc:.). that INP lacked the neces- sary technical experience. 5.04 Maintenance of Adequate There was no unified set of Records and Accounts, etc. accounts to record the costs incurred by the various agencies participating in the Project. Only in the case of Part A was an audit re- quirement included in the Project; annual audits on this component were regular- ly submitted by CFN to the Bank, although often a few months late. - 29 - Changes in the Project During Implementation 3.30 The September 5, 1968 Loan Agreement was first amended on August 24, 1974. This was done to allow disbursement to be completed for additional spare parts on the purse seiners and also to ensure that the Manta Fisheries School and harbor studies components were completed. 1/ By June 1976 all major project investments had been completed: the four boats were operational, the Fisheries School was constructed, and preliminary harbor studies had been completed, which, according to Bank consultants, suggested that further large- scale investment in port facilities was inappropriate. Unfortunately, because of the Bank's decision in the amended Loan Agreement of 1974 to include funds for detailed design of harbor facilities (taken before justification for such studies was proven) the project closing date was extended several times up to the final date of October 1980 in order to complete activities under the Ports Studies component and to complete payment to the training consultants. The key changes to project scope during the 11 year implementation period were the reduction of the number of vessels from 12 to four and the major shift in the training component from a relatively small program for 12 purse seiner crews to construction of an on-shore Fisheries School. 1/ Justification for extension of the closing date from October 31, 1974 to June 30, 1976 was well documented in the March 1974 supervision report. - 30 - IV, FINANCIAL AND ECONOMIC IMPACT Purse Seiner Operations 4.01 Appraisal targets for average catch per vessel and gross production over the project period proved to be optimistic, as shown in the following table: Table 4.1: Tuna Catch from Project Purse Seiners Between 1974-80 (tons) Appraisal Reformula- -----------Actual /1----------- 1968 tion 1974 Multinationals Locals Total Number of Vessels: 12 4 2 2 4 Average Annual Production Year 1 1,500 900 1,399 913 1,156 Year 3 (full dev.) 2,000 1,200 1,166 600 883 7-year period 1,900 1,140 1,302 624 963 Total Production (7-year) Per Vessel 13,300 7,980 9,115 4,373 6,744 All Vessels 159,600 31,920 (18,230) (8,746) (26,976) Individual Vessel Catch as % of: Appraisal Estimate 100 60 69 36 51 Reformulation Estimate 167 100 114 55 85 /1 Vessels owned by foreign investors (multinationals) were the San Antonio V and the Lucy. Locally-owned vessels were the Maria (private) and the Princesa Pacha (public sector company). Details are in Appendix Table 3. It is important to note that average annual production levels are considerably biased by excellent catches in 1975 (year 2) when the average per boat was about 2,320 tons (2,760 tons for the multinationally-owned boats and 1,880 tons for the locally owned boats). One of the vessels (San Antonio V owned by Del Monte) caught 3,300 tons and effectively paid off its loan to CFN. After seven years of operation, gross production from the purse seiners is about 20% of appraisal estimates, due to lower catches per vessel and a two-thirds reduction in the number constructed under the project. During the seven years of operation of the tuna vessels, the total combined catch has varied between about 5% (1978) and 25% (1975) of Ecuador's total landings of tuna. - 31 - Income from Purse Seiners 4.02 At appraisal it was estimated that the primary beneficiaries would be local private individuals who would procure the boats and sell their catch to local processors at world market prices. This did not occur, since each of the four vessels was actually owned by processing firms. Furthermore, the net income from purse seining has varied widely in the seven years since the vessels began operations. Although wide fluctuations and a "boom-or-bust" philosophy are common in the tuna industry, the recent decline in catches has created difficulties for several purse seiner owners (especially the locally owned firms). The key reason for the decline, as stated previously, has been the movement in the "El Nino" current although some sources indicate that there has been a complementary problem of overfishing. In this environ- ment, only the multinational companies with diversified worldwide operations and high technology have been able to take the financial risks necessary to make tuna fishing profitable. The results are reflected in the significantly higher catches of the projects' two foreign-owned boats compared to their locally owned counterparts (Table 4.1 and Appendix Table 3). 4.03 An analysis of the vessels which operated continuously throughout the entire period between 1974-80 (both multinational), indicates that the net income before debt service (in 1980 prices) ranged between a net loss of about UTS985,000 in 1980 to a net benefit of about US$1,040,000 in 1975. These values are purely indicative since it proved extremely difficult to obtain accurate detailed information from private boat owners. The equally subjective estimate of the financial rate of return over the seven-year operation of these two foreign owned boats is about 46%. However, even this return is considerably biased by the bumper catches in 1975 and an extremely subsidized price of fuel which in 1980 was SI. 3.75 per gallon (US$0.15). 1/ Economic Impact 4.04 A revised economic analysis of the project has not been carried out since the considerable reduction in the scope of the project and the poor performance of the subsector as a whole in recent years leads to the conclusion that the ERR would be substantially below appraisal estimates of 21%. Only two of the originally planned 12 purse seiners operated continuously for the seven years between 1974-80 and each had a crew of only about 13 to 15 people. 1/ The price of fuel was raised to S/. 11.0 per gallon (US$0.44 in February 1981). - 32 - V. INSTITUTIONAL PFPFOP'ANCF AND DEVELOPMFNT 5.01 During project implementation there were four changes in Government 1/ and several transfers of responsibility for key project components, as shown below: (i) Training: 1968-78 - Instituto Nacional de Pesca (INP), Junta Directiva; (1972 - Subsecretaria de Recursos Pesqueros (SSRP) formed in Ministerio de Pecursos Naturales); (1976 - Manta Fisheries School (EDP) constructed); 1978 to present - SSPP (ii) Harbor Studies: 1968-72 - Junta Nacional de Planificacion (JUNAPLA) 1972-77 - Direccion de la Marina Mercante y de Litoral (Consejo Nacional de Puertos). 2/ 1977 to present - SSPP. Project implementation suffered from a lack of coordination. This continued even after 1972 when SSRP was established specifically to provide leadership and coordination in the fisheries sector as a whole. CFN 5.02 The benefits of continuity in an implementing agency are most obvious in CFN. The lapse in providing progress reports to the Bank after the boats became operational is largely a criticism of the Bank and INP (see later). Vey personnel responsible for the project in CFN have remained unchanged since 1971/72. CFN also has a local office in Manta which greatly improves coordination with the subborrowers. According to a January 1972 Bank supervision report, it was CFN which initiated the GOE request for an FAO/IBRD CP review of the fisheries sector which inter alia identified key policy needs and led to the revised 1974 Ley de Pesca. 5.03 After the Loan Amendment of 1974 which halted construction of purse seiners after only the first four vessels, the Bank expressed concern that CFN would no longer be actively involved in the project since up to that time it had been a key source of project coordination. As feared, CFN did 1/ 1968-72, Velasco Ibarra (civilian); 1972-76, Rodriguez Lara (military); 1976-79, Triumverate (military); 1979-present, Poldos (civilian). 2/ Fondo Nacional de Preinversion (FONAPRF) involved in contractual requirements governing detailed designs. - 33 - become less involved and the frequency and thoroughness of its progress reports declined. It should be stressed, however, that responsibility for monitoring of the boats operations belonged officially to INP and as such CFN carried out its obligations under the Loan Agreement satisfactorily. The task of monitor- ing the performance of the purse seiners was not easy since owners (especially foreign investors) were unwilling to discuss their operations and felt that CFN should only be concerned with repayment of the loans. However, CFN was less than aggressive in advising the Bank of the imminent need to refinance the two locally owned boats in 1977. The Bank could also have been more diligent in monitoring this activity. Overall, however, CFN performed well and demonstrated a sound business approach to the subloans provided under the project. It should be stated, however, that CFN's experience in dealing with Bank-financed DFC lending operations had a positive effect on its approach to the Fisheries Project. INP 5.04 INP is a weak institution which has not been effective under the project and it readily acknowledges that it lacks the technical experience and necessary manpower to provide technical backstopping to either CFN or its subborrowers. In reality, there was little incentive for INP to provide this support after the large influx of foreign investment and expertise in the early 1970s. Although INP was also in charge of the training program and was instrumental in the construction of the Fisheries School (EDP), its only remaining interest is through its representation on the Board of Management of EDP. This decline in INP interest in training started in 1974 when the highly regarded then-President of INP left his post. This was a crucial time in the training component since construction, equipping and staffing of EDP was about to commence. SSRP 5.05 SSRP is a weak, somewhat politicized organization which, in spite of earnest efforts by low-level staff to provide a degree of project leadership, has not been effective. SSRP made a real attempt to coordinate the project when it was first formed in 1972 but this effort largely failed after the first Subsecretary left his post in 1973. This change in leadership was closely followed by the departure of the President of INP (paragraph 5.04) and occurred immediately prior to delivery of the last of the purse seiners and the decision to halt subsequent phases of vessel construction. These changes in leadership and transfer of responsibility between agencies had a serious effect on project coordination as experienced in the harbor studies. Consultants 5.06 Project experience with consultants has been mixed: (i) Boat Design. The consultant contract to design project vessels was awarded to a reputable foreign firm, which held detailed discussions with master fishermen in Manta before finalizing the designs which were approved by the Bank. However, some of the vessel owners (and CFN) expressed concern to the mission that the main engine was - 34 - underpowered.. One owner claims that his vessel was unable to reach 10 knots. .This is barely enough for present-day tuna fishing off Ecuador where tuna schools are scarce and scatter quickly thereby requiring speeds of 10-12 knots to effectively release the nets to catch the turLa. It also appears that several of the subborrowers had to spend more money to make their vessels meet requirements (paragraph 3.04). Since no boat design expert participated in the completion mission, it is difficult to accurately assess the tech- nical validity of these points; however, it does appear that the boats, as designed, have presented some problems to subborrowers. (ii) Training. After considerable delays and several changes to the terms of reference, the successful consultants carried out their terms of reference in accordance with their contract which was cleared by the Bank. Although the consultants put considerable effort into completing EDP, they did make an error in siting which almost led to the school being eroded into the sea. This potential catastrophe was averted by urgent installation of extensive drainage and surface water runoff systems. The dispute which arose between Government and the consultants was caused by: (a) failure of GOE in the early years of EDP's operation to provide adequate counterpart funds; (b) personality conflicts between the consultants and a team provided by Spanish bilateral assistance to assist in training the teaching staff; and (c) failure by the Bank and Government to realize the possible implications of certain provisions in the consultants' contract which allowed the consultant to obtain a commission on all equipment purchased for the school. (iii) Harbor Studies. The quality of the efforts of the various consultant groups involved in this activity is explained in paragraphs 3.20-3.24. The main observation which needs to be made is that neither the Bank nor GOE appeared to closely review and analyze the initial feasi- bility report (1976), which led to preparation of detailed engineering studies in 1980. Consequently the general observation made in 1976 that large scale investment in fishing ports was not justified, was reconfirmed by a February 1981 Bank mission preparing a Fishing Port Project. It should be noted however that the latter mission did identify the need for additional, though much reduced, services at Manta Port (boat repair) and is proceeding to appraise a project to support these activities. Therefore it can be argued that the delays in completing the harbor studies ultimately led to a more rational decision and more limited investment. - 35 - VI. BANK PERFORMANCE Appraisal 6.01 The key project objective was met since tuna purse seiner technology did develop rapidly in Ecuador during the early 1970s. In spite of this fact, which occurred mainly because of increased foreign investment, technical targets proved to be optimistic: estimated catches were too high; costs per boat were too low; boat design and construction periods, and the time allocated for award and execution of consultant contracts, were too short. The difficul- ties encountered by local firms in meeting subloan financial and technical requirements were not anticipated and project coordination was not well described. A number of factors may explain the weaknesses in appraisal: (i) this was one of the first Bank projects in the fisheries sector; (ii) there were no fisheries experts in the Bank to review identification/ preparation and appraisal reports; and (iii) the rapid development of foreign investment in the tuna industry started after appraisal about the time project implementation actually started (1969/70). Supervision 6.02 The intensity of project supervision can be divided into three phases: the original project implementation period with closing date October 1974 (10 missions in four years); the period of reformulation up to first extension of the closing date in June 1976 (three missions); and the period between mid-1976 and the final closing date of October 1980 (four missions). Continuity of Bank personnel was excellent between 1970 and 1976 (13 missions). During this period, one of a core group of three staff members participated in 10 missions (nine of which were consecutive), one in five missions (four of which were consecutive), and one in three missions (all of which were con- secutive). In the four missions between mid-1976 and the end of 1980, only one staff member participated more than once (twice), and three of the missions were carried out by LCPA4 and one by LCPPR. During project implementation there were two reorganizations within the Bank: (i) in 1972 - Bank-wide; and (ii) in 1974 - LAC reorganization in Agriculture. Responsibility for the harbor studies component was officially transferred out of Agricultural Projects to the Ports and Railways Division in 1974. 6.03 Before discussing the Bank's performance on each of the categories, the following statements can be made: (i) Continuity of staff did not imply effective supervision; (ii) Bank review of the consultant contract for the training program failed to highlight possible areas of conflict of interest when commissions were allowed on all equipment procured for the Fisheries School by the consultant; - 36 - (iii) Bank follow-up on vessel operations was extremely poor after 1975. Although CFN's 1976 audited report (received in the Bank in late 1977) indicated that two of the subloans needed to be refinanced, the first mention of this problem in Bank supervision reports was in July 1978; (iv) Bank performance in reviewing consultants' reports on the harbor studies and in follow-up action between 1976-80 on the detailed design activities was indecisive. Since the amended Loan Agreement in 1974 incLuded funds for detailed engineering studies, the Bank (at a later date) did not appear to emphasize strongly enough to Government that the need for large scale detailed design studies was not highly Justified; (v) Delays in officially cancelling the loan balance in 1980 were partly the result of a request by the ED's office in the Bank on behalf of consultants responsible for the marketing and engineering studies. Although such coordination within the various levels of the Bank is commendable, such exercises should not be allowed to unnecessarily prolong the cancellation of outstanding balances under a loan; and (vi) Although the harbor studies after much discussion and delay have led to a much reduced investment proposal for a follow-up Ports Project, thEre appears to have been little justification for conti- nuing with final designs for which it was necessary to extend the project closing date after the end of 1976. Purse seiners 6.04 In 1972 the Bank agreed to allow local subsidiaries of multinational companies to become subborrowers in the first phase of vessel procurement, since they were the only group capable of meeting the financial and technical requirements set by CFN. When discussions were being held on the second phase of boat procurement in 1973 and CFN expressed reservations about providing loan proceeds to multinationals, the Bank finally decided to cancel the balance of loan proceeds under Category A when local qualified participation was not forthcoming to procure additional vessels. The question arises whether Bank funds should have been made available in the first place to subsidiaries of multinational companies who were obviously able to finance the boats from other sources. By the time the contract to construct the vessels was finally signed in July 1971, foreign investment in the sector had grown considerably and purse seiner technology had become well established. However, even if Bank financing had been used to support only fledgling local enterprises, it is arguable whether these would have been any more successful than the two local firms who received subloans under the project and who ultimately went out of business. 6.05 Bank interest in the purse seiners, and LCPA4 involvement in the project as a whole, appeared to decline after 1976 when all major investments had been completed. No Bank mission appears to have met with the boat owners - 37 - between 1977 and 1980 and the sole source of information on their operations was CFN reports. Although this would not have affected disbursements under the loan on project implementation, such visits would have highlighted the problems of the two locally owned vessels which had to be refinanced and could have suggested possible remedies to the problem. Training Program 6.06 Although no Bank missions actually visited the EDP at Manta between May 1977 and November of 1979, LCPA4 maintained close interest in the training program. After FDP began instruction in 1976, Bank missions regularly pressed C0E: (i) to provide adequate local funds for the school's operations; and (ii) to include private sector representatives on the School's Board of Manage- ment. nfortunately, these efforts were only partly successful and at present EDP has little impact on the tuna industry. In an attempt to improve its effec- tiveness, EDP has recently reoriented its priorities towards artisanal fishing. studies 6.07 Rank handling of the port's studies component was not good. Consul- tants retained to review the port's feasibility report concluded that only moderate investments in additional facilities for the fishing fleet were justified at Manta. The Bank discussed the possibility of constructing a fishing pier at the existing port, but GOE strongly opposed any expansion of fishing facilities adjacent to the commercial quays. As an alternative, the Bank and GOE agreed to retain yet another group of consultants to prepare engineering studies and final designs for a fishing port which could be built in stages according to the growth of fish catches and other industry require- ments. These preliminary consultant studies concluded that the best location for a new fishing port was the existing old fishing port. However, they proceeded to suggest that rehabilitation should not be executed in stages and recommended design of a large port. This recommendation was supported by the Bank but we simultaneously proposed that GOE undertake a marketing study to establish the potential development of the new fishing port. These studies were finally completed in mid-1980, and in October 19P80 and February 1981, two Bank missions visited Ecuador to prepare a Fishing Port Project. This entire process of study and restudy was the main reason for extending the closing date on the project between 1977-80. Extension of Closing Dates 6.08 The original closing date of October 31, 1974 was first extended to June 30, 1976 in an amendment to the Loan Agreement dated August 1974. The justification for this extension was well presented in a supervision report dated March 1974 in which the main reasons given for extension were: (i) to allow disbursement on vessel spare parts; (ii) to complete construction of EDP; and (iii) to carry out detailed engineering studies for a proposed Fishing Port Project. 6.09 In May 1976 a supervison report proposed extending the closing date again and suggested two alternatives: (i) in order to ensure effective start-up of the training program at EDP, the project could be extended to the end of calendar year 1976 by which time the first course would be completed; - 38 - or (ii) if detailed engineering studies were appropriate under the harbor studies component, the closing date could be extended to the end of 1977. Although the supervision report also noted the Bank's earlier reservations regarding the harbor studies, the closing date was extended to May 1, 1978. By this time, the Ports and Railways Division, who had taken over responsibility for the ports component, recommended detailed engineering and marketing studies to clarify sales alternatives for fish products. 6.10 The next extension was to March 1980, again primarily to continue with the ports studies components. At this time, the Office of an Executive Director requested that the project not be officially closed for a few more months to permit the consultants responsible for the marketing and the harbor studies to receive payment. For the design consultants, this meant resolving a dispute with GOE over a performance guarantee. When the project was closed on October 31, 1980, this dispute was still unresolved although the marketing consultants had been paid. Based on the experiences between 1977-80, it appears prudent to suggest that the project closing date should not have been extended past the end of 1976, and that the financing of harbor studies should have been carried out by some means other than leaving the loan open for withdrawals. VIII. RECOMMENDATIONS AND CONCLUSIONS Recommendations to GOE 7.01 SSRP needs to take a more dynamic role in coordinating fisheries activities and should involve the private sector more in decisions affecting the sector as a whole. The objectives of a national policy to increase foreign exchange earnings and of foreign investors to make a profit are not necessarily mutually exclusive since the initial positive effects of the 1974 Fisheries Law have been to stimulate foreign investment. However, Government should thoroughly evaluate the effects of enforcing the majority Ecuadorean ownership clause in the Fisheries Law since this could initiate an exodus of foreign capital from the tuna industry in Ecuador which would have a negative impact on the local economy in Manta. 7.02 Government should also seriously consider appointing representatives of the private sector to the management of the Fisheries School in Manta. If this is not done, it is difficult to see how the school will be able to gain the necessary private sector interest and guidance required to ensure that it is meeting the needs of the industry. Furthermore GOE should ensure prompt and sufficient budgetary allocations to the school. Lessons for the Bank Group 7.03 The project has highlighted the following important lessons for the Bank group: - 39 - A. Project Design and Changes During Implementation (i) Realistic targets for project implementation should be set at appraisal. In this project the time to hire consultants, review tender documents, award contracts and implement actions were highly optimistic; (ii) If a key sector objective can be achieved more simply by Government policy changes than specific project investment, this should be done (namely reducing import/export duties on certain items); (iii) Before undertaking projects in such subsectors, the Bank should ensure that the private sector is indeed unable to do the job itself. Once it is decided to include private participation, they should be involved at all stages of project formulation and implementation; (iv) Implementation timetables should be drawn up carefully, making allowances for likely delays; and (v) More careful attention needs to be made to project manage- ment (and coordination) at appraisal and supervision. b. Supervision (i) Careful review of consultant contracts is necessary to avoid disputes during implementation; (ii) Once the key project objective has been achieved and all major investments have been completed, and if the project is already well behind schedule, the remaining loan balance should be cancelled, in order to avoid substantial delays in project implementation; (iii) Continuity of field supervision does not necessarily imply effective supervision; and (iv) Close control and supervision over consultants is essential to ensure that coordination with Government is effective and that they are adhering to their terms of reference and the needs of the project. Appendi x - 40 - Table I ECUADOR FISHERIES PROJECT (LOAN 555-EC) Completion leport Tuna Purse Seiner! Key Parameters - Appraisal vs. Actual Appraisal Reformulation Actual 1967 19742 1/~ ___g_ Vessel Specifications Length (fiet) 90 - 95 99.5 2/ 99.5 Main Engine (hp.) 500 565 .7 (750 sugg.) I/ Fish Holding Capacity (tons) 150 180 2/ 180 Catch Composltion Yellowfin (%) 10 50 50 (40 - 70)J Skipjack (%) 90 50 50 (60 - io) Ex Vessel Price (USS/ton) Yellowfin - over 74 lbs. 114 375 1,100 / - under 7J lbs. 1.200 Skipjack - over 4 lbs. 93 345 1.000 - under 4 lbs. 200 I 100 Vessel Cost (USS000) 350 500 580 - 800 6f Equity (%) 15 15 15 - 30 1/ Loan (%) 85 85 70 - 85 Grace Period (yrs.) 2 3 3 Interest Rate (%) 10 12 12 Repayment Period (yrs.) 12 9 12 py Period of Op-aration (yrs.) 15 10 10 Operating Costs Per Year (USS'OOO) 101 237 494 f Sales income (USS'000) 190 415 409 2/ Financial Rai:e of Return (%) 21 21 46 Li/ _/ March 22. 1974 Supervision Report. Annex 1. page 3. Basis for Amendnent-to Loan Agreoment dated August 21, 1974. 7/ Based on design specifications proposed by consultants hired inder project. / Purse-seinter owner recommendation based on poor performance of 565 hp. engine. 4/ Relative proportion of yellowfin: skipjack catch varies significantly between boats. / Prices quoted for 1980 are international market prices which the project intended to be paid to boat owners. However since processors now own the boats. the value charged against the catch at the port varies between $660-1.100 per ton. deDendina on the processor. Private processors generally do not charge, in their accounts, the full world market price to the purte-seiner operations. 6/ Range of costs Incurred to make boats operational as result of design changes. / One of the private (multinational) companies voluntarily made a 30% deposit. i/ Since 1975 catches were very high. one of the private (multinational) boats actually paid off its loan ahead of schedule. The two locally-owned boats had to be refinancet. 2/ Ref. Appendix, Table 2, N.1 Catches, in general, were lower in 1980 than at any time in the seven years of operation of the project boats. Assume price paid was US$660 per ton, i.e. the actual value used in the accounts of the .L/ Sased on operating years 1974-R0 for San Antonio Vand Lucy. IRR falls to about 12.7% If ill four vessels are included. Values are skewed by excellent catch year in 15175 and by highly subsidized price of fuel. Also assumes initial cost to make boat operational of US$800,000. April 14, 1961 - 41 - Appendix Table 2 ECUADOR FISHERIES PROJECT (Loan 555-EC) Completion Report Tuna Purse-Seiner Operational Data 1/ 1. Year Catch in Tons 1974 1,400 1975 2,760 1976 1,170 1977 1,250 1978 960 1979 960 1980 620 2. Anua Oprting Costs Per Boat 2/ US$ Fuel (340,000 gals) 3/ 149,600 Food 20,000 Salt 6 or ton Licenses (Peru) 40,000 Insurance 30,000 Maintenance and Repair 140,000 Miscellaneous 30,000 Crew 130 per ton 1/ Ref: Appendix, Table 3. Based on data from the purse-seiners San Antonio V and Lucy, which were the only project boats in continuous operation since 1974. 2/ Values are representative of unit costs given to the mission by a total of three private processors who owned purse-9einers in January 1981. 3/ Reflects February 1981 fuel price increases from Sucres 3.75 to Sucres 11.0 per gallon, and assumes 20 trips per year. April 14, 1981 ECR FiSNERIES PROJECT (Loan 5S-EC) Completion Report Istory of Four Purse-Seiners Financed Under Prolact Comment PRINCESA 1. Name of Boat MARIA/TARouE SAN ANTONIO V LcPC 2. Subborroiger/hmper - Kae: RAFRANCO SEAFMAN INEPACA ECUATUN INEPACA CONTIMINfTAL INSURANCE - Business Tve: Local Private Multinational Multinational Local ulc i,/ (Del Monte) (Van Camp-Purina) Ir Multi natonal Insurance Company (Van Camp-Purins) Multinational (Castle and Cooke) 3. Start of Operation July 1973 October 1973 December 1973 February 19714 Appraisal Estimate: 1970 Ia Loan Repayment tatu Refinanced July 1977. Paid off On schedule Refinanced Nov. 1977. as of January 1W Refranco bankrupt 1980. March 1979 extensive Marle taken over by damagesg beached. Insurance Inepaca to cover debts. coany paid idemnization Renamed Tarque (1/81). to CFN September 1980. 5. No. of Fishing Day Multinational c I ppraisal 1974 1/ 125 229 170 2I5 200 170 IB2 (5 1975 II 222 220 231 170 226 196 182 (Iso) 1976 165 202 157 175 180 170 182 (150) 1977 188 217 197 132 207 160 182 (150) 1978 219 204 156 Inoperative. 180 219(1) 182 (150) 1979 123 175 271 Beached. 221 123(1) 182 (150) 1980 in part due to 239 227 J/ Repairs. 213 - 182 (150) Refranco bankruptcy. 6. Total Tuna Catch (shcrttons) 1974 1/ fazo 1.502 '1.296 1.406 1.399 913 1,500 ( 900) II 1975 1/ 1,889 3100 4A/ 2.213 1.873 2.757 1.881 1.800 (1.090) 1976 846 1,424 907 3SI 1.166 600 2.000 11.2031 1977 556 1.644 856 395 1.250 476 2.033 (1.203) 1978 821 947 969 - 958 821 2.033 11.203) 1979 187 957 957 962 187 2.000 11.203) 1980 - 598 650 1/ 62 - 2.000 (1.203) I/ Mission estimate based on data supplied for periods of overlapping calendar years or of less than twelve months6 periods. 2/ Multinational refers to San Antonio V and Lucy. and local refers to Maria and Princess Pacha. ,' Targets set in SPN report dated 3/22/74: Basis of Amendment to Loan Agreement dated August 21. 1974. 4/ F.sed on this bumper catch. owner effectively paid off loan to CF".  BRD 2243(FPA) DECEMBER 1981 WESTERN ECUADOR f FISHING PORTS AND - COLOBIASN GROUNDS 20 0 20 40 60 75 PATHOM SPOT 100 FATHOM SPOT QUITO - 0 l' Manta ISLA LA PLATX 4 FATHOM SPOT THE RIDGE"(1of) SE,- GUAYAQUIL ATHOM SPOT 3.1 PERU BANK THE RIDGE- (100 fm) MchRaay ---- terntionai houd-aie- L1mit or Pishing Grounds T 0 K.y Pishing Area TANNEP 1;BSED ON HRD 2243 A BH N1DATE AN BEATORY yIBRD MAP DISCLAIMER STATEMENT _oja P E R U