China - Tianjin Port Project

Do fut of The World Bank FOR OFmFCIAL USE ONLY A //. ;2C ef% ,-X C Report No. 5856-CHA STAFF APPRAISAL REPORT CHINA TIANJIN PORT PROJECT March 17, 1986 Transportation Division Projects Department East Asia & Pacific Regional Office. IThis 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.  CURRENCY EQUIVALENTS Currency name = Renminbi Currency unit Yuan (Y) US$1.00 = Y 3.20 (as of March 1986) US$0.313 = Y 1.00 US$312,!.00 = Y 1,000,000 FISCAL YEAR January 1 to December 31 MEASUREMENT EQUIVALENTS Metric System British/US system 1 meter (m) = 3.281 feet 1 square meter (sq m) = 10.764 square feet I cubic meter (cu m) = 35.315 cubic feet 1 kilometer (km) = 0.621 mile 1 ton-km = 0.621 ton-mile 1 ton = 2,208 pounds PRINCIPAL ABBREVIATIONS AND ACRONYMS USED CHC = Cargo Handling Corporation cif = Cost, insurance and freight COSCO = China Ocean Shipping Corporation dwt = Dead weight tons fob = Free on board MLW = Mean Low Water MOC = Ministry of Ccmmunications MOF = Ministry of Finance nrt = Net registered ton THCDC = Tianjin Harbor Construction and Development Company TPA = Tianjin Port Authority POC = Port Operating Company SPC = State Planning Commission  FOR OFFICIAL USE ONLY CHUIiA TIANJIN PORT PROJECT Table of Contents Page No. I. THE TRANSPORT SECTOR A Traffic ............... .... , 1 B Investme nt .......- ........ ........ ,.., ....... 2 C System.......... ....... 2 D Transport Issuc!s and Objectives in the 1980s .......... 3 II. THE PORT SUBSECTOR A Port Facilities. i..... .t e....... 6.*.0..*... ........... 3 B Traffic.. .....,............ ..................... 4 C Operations and Maintenanc e........................ 4 D Costs and Tariffs ... 5 E Planning and Control n........................... 6 F The Role of the Bank ...........oo.... ..... ......,. , 6 III. THE BENEFICIARY A Legal Status, Organization & Management..........O.. 7 B Facilities ................. , ....... 8 C Port Planning ... ................... ,.,..... . 9 D Accounting and Auditing.............i t-n........... - 9 IV. THE PROJECT A Project Ob jectives 10 B Project Description... ..... ....... ................ , ,, 10 C Cost Estimate .................... . ..0 . ........... 11 D Financing ............. ...... ,........ . ........ ... 13 E Implementation ........... 0..... , ,,,.....0........ 13 F Disbursements .......... a..0 .............. 15 G Ecology and Environment ................... a....... .. 15 This report is based on information obtained by an appraisal mission comprising Messrs. I. Mobarek (Port Engineer), J. Yenny (Economist), E. James (Financial Analyst), M. Tomlinson tYP), and H. Yen (Research Assistant). The report was written by Messrs. Hobarek, Yenny and B. K. Thomas. This document has a nstriced distribution sd mny be ud by nipients only in te peformance of their offcia dutieL Its contents may not otherwie be disckaed without World Bank authorintion.  - ii - V. ECONOHIC EVALUATION A. Port Hinterland and Traffic ........................... 16 Bo Port Operations....................................... 16 C. Costs and Benefits .................................... 17 D. Overall Evaluation and Risks ..o...................... 18 VI. FINANCIAL ANALYSIS A. Past Performance: 1981-84 ............................ 18 B. Present Financial Position.......................... 19 C. Financial Policy ...... ......................................... 20 D. Future Financial Performance .......................... 21 VII. AGREEMENTS REACHED AND RECOMKENDATIONS .................... 22  - iii - List of Annexes Annez 1: Related Documents and Data Available in the Project File Annex 2: Organization Structure of Tianjin Port Authority Annez 3: Principal Port Charges in China Annex 4: Training Needs for the East Pier Project Annex 5: Schedule and Estimated Technical Assistance Annex 6: Tianjin Port Development Institute Annex 7: Economic Evaluation Annex 8: Operations Control and Management Information Systems Annex 9: Terms of Reference for Siltation Minimization Study List of Tables Table 1.1 Freight Traffic 1.2 Passenger Traffic 1.3 Investments in the Transport Sector Table 2.1 Major Coastal Ports Freight Traffic Table 4.1 Project Cost Summary 4.2 Project Cost Estimate US$ 000' 4.3 Project Cost Estimate Y 000' 4.4 Equipment Cost Estimates 4.5 Disbursement Schedule Table 6.1 TPA: Income Statement, 1981-92 6.2 TPA: Sources and Applications of Funds, 1981-92 6.3 TPA: Balance Sheet (at Dec. 31), 1981-92 6.4 TPA: Traffic and Cargo Handling Revenue, 1985-92 6.5 TPA: HSO Income and Expenditure Account, 1981-84 6.6 TPA: Investment Plan, 1986-90 6.7 TPA: Financial Forecast Methodology and Principal Assumptions List of Charts Chart A: List of Packages and Summary Chart B: Implementation Schedule Chart C: Implementation Schedule for the South Side Chart D: Implementation Schedule for Tug Boat and Machinery Equipment List of Maps Map No. IBRD 18961  - iv - CHINA TIANJIN PORT PROJECT Loan and Project Summary Borrower: People's Republic of China Beneficiary: Tianjin Port Authority Amount: US$130 million Terms: Twenty years, including five years of grace, at the standard variable interest rate. Relending Terms: GOC procedures for ports subsector; currently 20 years, including five years of grace, at 4Z p.a. interest, and TPA will bear the foreign exchange risk betweem the dollar and the borrower's currency and commitment charge on the subsidiary loan. Project Description: rte project will directly contribute to China's overall plan _..- remove port bottlenecks by constructing deepwater berths at key ports by 1990. The project will meet government objectives by supporting infrastructura development at the Tianjin port; providing training in planning. design, control and operation of ports; including preparation of a master plan for the Tianjin port; providing equipment for the devel- opment of computerized operations and information systems, and a study on reducing siltation in the port; and establish- ing the Tianjin Port Development Center for training, research, and development studies. It will also contribute to the development of an important new organizational model for port operation and management in China. Specifically, the project would: (a) increase capacity by construction of 2,150 m of quaywalls for timber, construction material and general cargo berths with the necessary works like dredging, reclamation, railways, pavement, roadways, utilities, and supply of equipment; (b) provide technical assistance and training for port personnel to minimize silta- tion, to extend computer control of operations, to prepare a master plan for the port and to further develop management information systems; and (c) establish Tianjin Port Development Center and provide the necessary equipment and technical assistance. Risks: There are no unusual risks associated with the project since all components involve proven technology that has been in  - 'I- eztended use in China or in other parts of the world. The training that will be provided to Tianjin Port Authority (TPA) personnel to construct and operate the new project will assure its proper function and use. The risk involves possible delays in project start-up due to the introduction of ICB for civil works in this subsector. To minimize this risk, appropriate Bank assistance and supervision will be provided in the early project stages. Estimated Project Costs: Local Foreign Total (US$ million) - Civil works 92.0 49.8 141.8 Equipment 11.2 51.1 62.3 Training 2.0 0.4 2.4 Technical assistance 0.2 3.1 3.3 Subtotal 105.4 104.4 209.8 Contingencies Physical 10.6 10.4 21.0 Price 23.2 28.0 51.2 Total Project Cost /a 139.2 142.8 282.0 Total Financing Required 139.2 142.8 282.0 Financing Plan: Bank Loan - 130.0 130.0 TPA/Government 139.2 12.8 152.0 Total 139.2 142.8 282.0 Estimated Disbursements: Bank FY 87 88 89 90 91 92 Annual 7 19 23 41 20 20 Cumulative 7 26 49 90 110 130 Rate of Return 212 Map IBRD No. 18961 /a Includes customs duties of about $5.0 million.  CHINA TIANJIN PORT PROJECT r . THE TRANSPORT SECTOR 1.01 The structure of China's economy, which for three decades emphasized heavy industry at the expense of light industry and the service sector, is still inherently "transport intensive," despite recent reforms of the sectoral priorities. Chinese policy statements repeatedly identify transportation and energy shortages as the two most critical bottlenecks in the economy. Coal is at the heart of both problems, because coal is simultaneously the most import- ant source of energy and the largest user of transport capacity. This dual problem with coal is exacerbated by China's high level of energy consumption per unit of GDP (about two and a half times that of other ldcs). However, the need to ship large volumes of coal is not the sole cause of the transportation bottleneck. The rapid growth of China's economy in recent years has naturally entailed ; growing demand for the shipment of commodities of all sorts, and for passenger travel as well. Efforts to reduce waste within the transport system (for example, by eliminating cross hauling of the same commodity, increasing the processing of raw materials before shipment, and increasing the intensity of road and waterway utilization) are certainly desirable. More fundamentally, however, the Government's strategy for solving transportation shortages will have to rely on an expansion of the system's capacity, primar- ily by increasing the productivity of existing facilities wherever possible, and secondarily by building new facilities where needed. A. Traffic 1.02 Freight Traffic. Domestic freight transported in 1984 reached 1,131 billion ton-km, a 15-fold increase since 1952, or an average annual growth rate of almost 92, systematically higher than the growth of domestic product. By the year 2000, domestic freight traffic could be in the range of 3,000 billion ton-km, or nearly three times the 1984 level. The modal split has moved toward a more balanced use of modes, but the railways still handle 64Z of the traffic versus 82% in 1952; this predominance is expected to continue for quite some time. 1.03 Passenger traffic reached 362 billion passenger-km (p-km) in 1984, a 14.6-fold increase since 1952 and an average annual growth rate of almost 9%. Since 1978, growth averaged 13Z p.a. This illustrates the potential demand for travel as income grows. It is likely that this growth would have been even more rapid if it had not been constrained by the limited capacity, particularly of the railways, to offer more passenger services. The modal split has shifted more rapidly than for freight, and the railways now handle less than 56% of the !traffic versus over 80% in 1952. Despite the rapid growth of passenger traffic in recent years, the mobility of people in China is still much lower than in countries of comparable income levels. By the turn of the century, passenger traffic may well reach about 1,500 billion p-km per year or about four times current levels.  -2- B. Investment 1.04 Over the period 1953-84, some Y 136 billion, or 14Z of all new investments under central government control went to transport. In comparison with other countries, annual levels of transport as a investment appear some- what on the low side, a factor contributing to transport's being a bottleneck to economic development. For example, by 1983, 30 million tons of coal had accumulated in Shan i for lack of transport, and some of this stockpiled coal was destroyed by spontaneous combustion. Despite a recent policy of curtailing production to match available transport, the volume of coal stockpiled in ShAnxi increased during 1984. Rural areas are short of transport, both for agriculture and for commune and brigade enterprises. In the ports, lack of proper handling facilities is hampering trade of bulk commodities such as fertilizers, cement and grain. In the forthcoming decades, a much larger investment effort will be needed in transport if these bottlenecks are to be overcome. C. System 1.05 The railway system consists of some 52,000 route-km, of which about 9,700 km are double or multiple-track and 3,100 km are electrified. The net- work is served by 11,100 locomotives, 291,000 freight cars and 19,600 passen- ger coaches. At present, 682 of tractive power is still steam, 28Z diesel and 42 electric. Freight traffic density averages 15 million net ton-km per route-km which is the second highest freight density in the world after the Soviet Union, and 502 higher than freight density in the United States. Freight traffic reached 1.2 billion tons in 1984. Growth which averaged 4.5Z p.a. since 1978, reached 92 in 1984. Three quarters of all freight traffic involves ten commodities including coal, iron and steel, grain and construction materials. The passenger traffic density of 4.2 million passen- ger-km per route-km is also second in the world this time after India. In 1984 1.1 billion passengers were carried. The average annual increase since 1978 has been 11 p.a. 1.06 Despite some possible rationalization in the transport of natural resources and heavy industrial outputs, there is no question that the trans- port demand for the major commodities will continue to grow rapidly. Thus, although the rail share is expected to decrease, rail traffic will continue to grow requiring massive investments in line capacity increases as well as in motive power and rollini stock well into the future. The Bank has financed two railway projects.(Loan 2394-jCA, 1984 and 2540-CHA, 1985) and a third is scheduled for Board approval soon. Besides line capacity increases, these projects include assistance to the manufacture of electric locomotive, passenger coaches and signalling equipment, as well as to railway management. 1.07 The highway system comprised about 915,000 km in 1983, of which about 180,000 km were asphalt paved, about 510,000 km were gravel and sand paved, and the remainder were earth roads. Despite impressive expansion of the road network since 1949, when only some 80,000 km of motorable roads exis- ted, the roads in China today are inadequate because: (a) pavement strength and quality are poor; (b) there are many thousand kilometeres of extremely rough macadam surfaced roads with traffic in excess of 300 average daily  -3- traffic (ADT); (c) congestion is severe near cities, due to mixed slow and fast moving traffic; and (d) there are gaps of about 4,000 km on major national roads linking large cities and provincial capitals. The road network and road transport in China today can therefore be characterized as under- developed. Road maintenance, however, is well organized and currently absorbs much of the attention and resources of the provincial and other local road authorities. Except for western China, the highway network is still very much a system of feeder roads to the railways. Nevertheless, motor traffic has reportedly grown at a very high overall annual average of 15% on the national highways since 1978. The Bank's First Highway Project in China (Loan 2539-CHA; Credit 1594-CHA) involves the construction or improvement of about 290 km of national roads and about 1,400 km of rural roads. Transport Issues and Objectives in the 1980s 1.08 The transport system has been severely taxed by the recent economic development and capacity constraints are evident in all modes. At present, railway transport is a greater constraint on energy supplies than coal mine development. Recently initiated projects of line electrification and new line construction are addressing the problem although it will take several years to alleviate bottlenecks between major mining areas and coastal cities. Modern freight car technology and operational improvements could also contribute to capacity increases. China will also need to expand substantially its ports and waterways facilities for domestic and foreign trade (details on the port subsector are given below). But the most serious transport need is for dramatically expanded road transport, especially in rural areas where increased specialization has created an urgent demand for better farm to market transport services. It is widely recognized in China that road transport should and will play a larger role in the future. Yet there seems to be no strate'gic plan to bring this about. There is a need for more efficient trucks of both larger and smaller size as well as for more and better roads to handle the traffic. Potential sources of financing for road development such as road user charges need to be investigated as they could generate sufficient funds for an accelerated construction and improvement program as well as contributing po an economically appropriate division of traffic between modes. Considerable efficiency gains could be made in the entire transport system through better:intermodal coordination which has thus far been impeded by the vertical and self-contained organization of transport and other sectoral agencies. Through container transport from origin to destination is still the exception. Changes in policy, pricing and management of the system are needed to maximize the benefits of intermodal transport. To support all th_ developments referred above, staff development and training will also be an important ob;ctive in the sector. II. THE PORT SUBSECTOR A. Port Facilities 2.01 China has 15 major coastal ports but most foreign trade passes through just seven of these: Dalian, Huangpu, Qingdao, Qinghuangdao,  -4- Shanghai, Tianjin and Zhanjiang. There are also many minor ports along China's 2,000 km coastline and 110,000 km of navigable rivers. China's largest port, and one of the ten largest ports in the world, is Shanghai. It has 96 berths with a total waterfront of 12,700 m but only 50 berths acces- sible to ships larger than 10,000 dwt. In 1984, Shanghai port handled just over 100 million tons of cargo and more than 10 million passengers. Dalian and Tianjin are China's next largest ports. Dalian has 36 deep water berths and a further 3 under construction. Tianjin has 26 berths and 3 under con- struction. Approximately 30X of all traffic passes through Shanghai, 35% through the three bulk cargo ports of Dalian, Qingdao and Qinhuangdao, 9% through Tianjin and 26Z through the remaining 10 major ports. 2.02 Most of China's ports are now badly congested. There are shortages of bulk cargo berths, container berths, port equipment and storage areas and transport infrastructure for distribution. For example, in 1981 container cargo at the most important 7 ports was only 700,000 tons, even though 60% of general cargo of 42 million tons was suitable for concainers. As a result, ship waiting time is very high; outside Shanghai part alone there are usually 120 vescels at anchor waiting for berths. The extent of the congestion is so serious that it threatens to hold back further expansion of China's foreign trade. B. Traffic 2.03 Despite the serious congestion, for the size of its economy China's port traffic is low compared with other developing countries. This is mostly because of China's historical emphasis on self-sufficiency. In 1983, China's foreign trade accounted for abolit 13% of GNP whereas Brazil's accounted for about 20% of GNP, Korea's for nekrly 30%. However, China's port traffic is now growing quick4y following the opening of the economy to foreign trade: between 1977 and 1983 traffic at the 15 major ports increased over 50% to 249 million tons (Table 2.1). l 2.04 Tonnages of domestic and foreign cargoes are growing about equally but proportionately foreign traffic is growing faster. Between 1977 and 1983 foreign traffic more than doubled to 89 million tons and domestic traffic increased about 502 to 160 million tons. Foreign trade is expected to con- tinue growing in stride with the economy as a whole, and domestic water trans- port should play an increasing role to relieve the congested rail system. These two elements combined will continue to generate a large demand for port capacity and port traffic could more than quadruple its 1980 level by the end of the century. Accommodating such an increase would require major expansion of all China's port facilities. C. Operations and Maintenance 2.05 All the major ports operate continuously using a 3-shift system but port operations are hampered by congestion. On average more than 60% of ships' port time is spent waiting first for berths and then for port equip- ment. Berth time is also long because a lot of China's port equipment is out- moded and slow. In 1983 the average demurrage time in Dalian port was 5.7 days, up from 3.6 days in 1981. Total port tir- in 1983 averaged 9.2 days. In Tianjin the average in 1983 was 5.5 days; in 1984 it increased to 7 days.  5- 2.06 Apart from inadequate port capacity, three aspects of port opera- tions contribute significantly to the delays. First, documentation procedures are complicated and ponderous. Frequently this results in port equipment not being in the right place at the right time and sometimes in cargoes arriving before bills of lading have been received by the port. Second, in some of the southern ports, a large proportion of traffic is ship-to-ship or ship-to-barge transfers some of which could be avoided by direct trading between minor ports or by modern sea going barges capable of operating both on coastal routes and inland waterways. Third, not all shipping and domestic distribution is arranged as efficiently as it might be and some trans-shipment cargoes could be distributed more easily by rail from another port. Recently, the Ministry of Communications (MOC) has begun rationalizing some traffic flows. Shanghai, for example, has already had some coal traffic directed to their final desti- nations in surrounding provinces and by year 2000, approximately 34 million tons of other trans-shipment traffic is expected to be diverted from the port. 2.07 Each major port has its own maintenance works and port equipment is kept serviceable although because of its age much of the equipment suffers frequent breakdowns. The most serious maintenance problem is siltation at the estuarine ports and this requires considerable routine dredging. Neverthe- less, some present dredging may be excessive and might be reduced somewhat through survey work to understand estuarine flows better. D. Costs and Tariffs 2.08 The structure of port ta'riffs and tariff rates are determined jointly by MOC and the State Price Bureau. The present tariff structure was set up in 1978 on the basis of an accounting allocation of costs to the dif- ferent types of port services which was to some extent arbitrary. The tariff structure also reflects all the distortions inherent in the prices of the dif- ferent factor inputs. As a first step in rationalizing tariffs, the Bank's first port project in China (Ln 2207-CHA, October 1982) included a study of the economic costs of providing port services for bulk cargoes and contain- ers. This study is to be carried out during 1987, the first year of operating the new terminals under the project, and includes Tianjin. 2.09 About 8OZ of all Chinese cargo is carried in vessels owned or operated by the Chinese Ocean Shipping Company (COSCO), which is controlled directly by the MOC. In national terms, port tariffs paid by COSCO are little more than a transfer payment between two parts of MOC. Tariff rates could still be set for efficiency objectives, but instead rates seem to reflect the relative financial -trengths of COSCO and the ports and their different investment requirements. In contrast, rates for foreign vessels seem to be set on the basis of what the market will bear. Until a 40% increase in May 1985, tariff rates for foreign vessels had been kept somewhat lower than rates at Hong Kong. There was no increase in the lower rates charged for domestic vessels, and HOC says it has no plans to increase these rates. Overall, present tariffs provide TPA with a sound financial position (details are in Chapter 6). 2.10 There are no shipping conference rates for Chinese ports and the ports only rarely pay demurrage charges for ship waiting. Charter contracts  - 6 - usually incLude an allowance for ship waiting time, but these charges are paid by the cargo owner, not by the port. Recently, however, ports have been signing contracts with ship operators guaranteeing a certain turnover time with demurrage charges if time is exceeded or premiums paid to the port if a ship is handled faster. Usually the premiums far exceed the demurrage charges. E. Planning and Control 2.11 Investment planning has so far been largely carried out by the MOC i1 consultation with the ports management. The process starts with the annual drafting and revision of plans by the ports themselves. These plans are usually based on actions needed to alleviate congestion. MOC subsequently holds extensive meetings with port personnel and reviews the draft plans. If necessary, the plans would be amended during these meetings so as to achieve consistency with the national transport plan objectives. Once approved by the MOC, the plans are submitted to the MOF for final approval. In the case of new projects designed to handle more than one million tons of cargo annually, approval of the State Planning Commission is also required. 2.12 Financial planning consists mainly of short-term budgeting, because the traditional grant system of financing combined with rigid central govern- ment control of project approvals, rendered unnecessary anything more sophis- ticated. As ports acquire a greater degree of autonomy and greater discretion over available funds, more comprehensive planning techniques will be needed. Recently, the Government has initiated quite radical institutional reforms of the ports sub-sector as part of its policy of devolving responsibility from the central government. The beneficiary of the proposed loan, Tianjin Port Authority, is a pilot for these reforms, whose object is to create the incen- tives necessary to accelerate resource mobilization at the enterprise level, enhance operating efficiency and provide the extra port capacity needed to facilitate the further expansion of China's foreign trade. The significance for TPA's operations is discussed at para. 3.03. F. The Role of the Bank 2.13 Besides assisting the urgent expansion of port capacity and improve- ment of productivity, the Bank is through its involvement in the subsector at this time afforded a unique opportunity to assist Government in introducing organizational changes aimed at improving the effectiveness of port management and autonomy of operation. While the general direction of the reforms is sound, a number of the steps so far taken are short-term expedients pending the more careful evolution of longer term policies and the benefit of 'experience. Through a dialogue with government and through education at the enterprise level, the Bank can contribute to the formulation of these policies in the light of its international experience. 2.14 At the Ministerial level, the Bank will concentrate on demonstrating to Covernment the need to give increasingly autonomous enterprises an appro- priate policy framework within which to work; in particular a financial envir- onment which will encourage planning for expansion, and provide the means to implement it, thus securing the benefits expected from the system reforms. At  - 7 - the enterprise level, Bank will continue to help develop project identifica- tion and evaluation techniques and stress the importance of integrating investment planning and financial planning. Both these dialogues can best be pursued through a continuous lending program to the ports. III. THE BENEFICIARY A. Legal Status, Organization and Management 3.01 Tianjin Port Authority (TPA) will be the beneficiary of the proposed project. On June 1, 1984, TPA was placed under the primary leadership of Tianjin Municipality rather than MOC, and functions as the harbor administra- tion agency of Tianjin Municipality. Its powers and duties are described in regulations which have recently been approved by the Tianjin Municipal Government and found acceptable by the Bank. It has authority over the land and water areas of Tianjin port, and is responsible inter alia for planning port development, ra.sing finance therefor, administering fees and charges, training personnel and enforcing security, safety and environmental protec- r-ion. It can enter into joint ventures and technical cooperation projects with foreign partners. 3.02 TPA is managed by a director and a deputy appointed by Tianjin MuniLipality. Other officials are appointed by the director. TPA controls the five enterprises that carry out port operations, as well as a number of other enterprises engage- in warehousing, tug and lighter operation, engineer- ing and maintenance. Each of these enterprises is self accounting and has legal personality, but their individual production and project plans and budgets are subject to approval by TPA, which as their supervisory authority is ultimately responsible for their coordination. The consolidated plans and results of TPA and its subordinate enterpriaes are subject to review and approval by Tianjin Municipality. 3.03 The administrative arrangements for Tianjin port represent a signi- ficant departure from normal practice in the subsector in a number of ways. First, Tianjin port is the fitst to be placed under the primary leadership of the local mAunicipality instead of MOC. Second, the degree of supervision to which it will be subject is considerably less than that exercised by MOC over the ports under its leadership. Third, TPA has been endowed with a number of powers which considerably exceed those typically vested in the administrations of China's other major ports. In particu'lar: (a) TPA bas been authorized to retain the income tax and profit remit- tance due from its subordinate enterprises (and also from the local branches of PENAVICO, the foreign shipping agency, and SINOTRANS, the foreign trade transport corporation), and to utilize the funds for capital expenditures instead of paying them over to the State; (b) TPA's own approval ceiling on individual capital projects has been raised to Y 10 million;  (c) foreign exchange earnings of the subordinate enterprises may be retained by TPA for application to the purchase of imported plant and equipment. 3.04 Taken together, these arrangements represent a substantial decentra- lization of authority and increased autonomy for TPA. The objective is to develop the capability of local management in the interests of improved effi- ciency of operations and more effective planning and development of the port. TPA is clearly an experiment: it is referred to in the Chinese documents as a "pilot system reform." If it is successful, there could be significant conse- quences not merely for other ports but for state enterprises generally. 3.05 Due to the large construction program of the Tianjin Municipality, including port development projects, TPA's construction and development department (Tianjin Harbor Construction and Development Company -- THCDC) has recently been separated and given the status of an enterprise under the Municipality. THCDC is entrusted with feasibility studies, design, bidding construction supervision and the import of equipment for all the new major projecLs in the Municipality. A charter for THCDC has been approved by Tianjin Municipal Government and found acceptable by the Bank. THCDC will be responsible for the construction of the project and disbursement of funds allocated to the project. B. Facilities 3.06 Tianjin is located about 42 km from the mouth of the Hai river and 120 km Southeast of Beijing (Map IBRD 18961). The city's main port is sited at Xingang, at the river mouth. Construction of these facilities began in 1939, replacing much older and since abandoned shallow facilities near the city. There are also shallow draft berths for fishing vessels and ships up to 3,000 dwt at Tanggu, a few km upstream of Xingang. A barrage has been built on the Hai river between Xingang and Tanggu for irrigation purposes, and access to Tanggu is through a navigation lock. 3.07 Tianjin port has 26 deep-water operating berths totalling 3,405 m in length, with water depths alongside between 8.0 m and 12.0 m below MLW. Three new container berths financed under the Three Ports Project (Loan 2207-CHA) are nearing completion. The proposed project will add 11 berths with a total length of 2,150 m and water depths alongside between 11 and 13 m below MLY. The port is protected by north and south breakwaters of 5 km and 8 km in length respectively. The access channel extends from the east side of Xingang lock to the entrance channel Tanggu light tower and is about 24 km in length and 8 m depth at MLW. 3.08 Tides are semi-diurnal with a range of about 2.5 m between mean high and low water levels. Ice conditions prevail for about three months of the year during the months of December through February with most severe condi- tions in January, but they do not hinder shipping or port operations. The port and access channel experience heavy siltation naL.;sitating about 8 mil- lion cu m of snnual maintenance dredging. Dredging spoil is dumped in the sea. The dumping sites are not selected to prevent the spoil from returning to the channel and port basins by waves and currents. Assurances were  - 9 - obtained that TPA will carry out a siltation minimization study aimed at reducing maintenance dredging in accordance with terms of reference and timing agreed with the Bank. Terms of reference were discussed and agreed with the Bank (Annex 9); implementation will start around October 1986. 3.09 Tianjin Port is connected to the city by two railway lines. The port is served also by two highways, with a third highway under construction that will bypass the city of Tanggu, and relieve traffic congestion in the city. Adequate transit sheds, warehouses, and open storage areas are avail- able. Rail and road service in the port area, power and water supplies, waste disposal and telecommunication systems are also adequate. C. Port Planning 3.10 The need to update the port master plan for Tianjin is urgent. The future needs resulting from rapid economic growth and in particular from the creation of a special economic zone area and the rearrangement of existing port facilities which will be made following completion of the proposed project are all important activities that need to be coordinated in a master plan. The transfer of the port to the authority of the Municipality of Tianjin gives it an added incentive, since its plans must be harmonized with those of the municipality. Accordingly, TPA hired consultants (Port of Kobe, Japan) to roll forward the master plan for the port. Upon completion of the Master Plan TPA will send it to the Bank for review and comments. The present project is contained in the existing Master Plan and thus will also be part of the new one. A Master planning course financed by the Bank was conducted in China in August 1985 to train Tianjin and other major port's staff in modern master planning techniques. 3.11 TPA's master plan is not complemented by a financial plan. The financial policies which applied until recently rendered such a plan unnecessary at the enterprise level, since investment project approval by SPC automatically conveyed the corresponding release of funds from the State budget. Now, however, changing circumstances render the adoption of formal financial planning procedures highly desirable; this is further discussed in paras. 6.05-6.07. D. Accounting and Auditing 3.12 TPA prepares the following financial statements: Funds BaLance Sheets (yearly); Statement of Fixed Assets (yearly), an elaboration of a Balance Sheet item; Special Funds and Appropriations (yearly), an elaboration of a Balance Sheet item; Statement of Seaport Handling Cost (monthly), containing information on the plan for the year and the performance for the reporting month as well as cumulatively to date; and Statement of Profit (monthly). Double entry accrual basis accounting is used. It is entirely manual. Management accounting consists of monthly key indices and capital construction progress statements. Revenue, handling costs and administrative expenses are examined quarterly and compared with budgets. Final accounts for the year including a balance sheet are prepared within 50 days of the fiscal year ending December 31. Annual financial statements on capital construction are ready within 60 days of the fiscal year end.  - 10 - 3.13 The ports financial statements are now audited by the State Audit Administration (SAM), whose procedures are acceptable to the Bank. The SAA reports to the municipal government in the event of dissatisfaction with a port's accounts. Assurances were obtained from TPA that financial statements, including balance sheets, statement of income and of sources and application of funds for the entire port will be audited .y independent auditors acceptable to the Bank and submitted to the Bank for review not later than six months after the end of each fiscal year. At the same time, assurances were also obtained from THCDC that project accounts kept by THCDC will be similarly audited and submitted. IV. THE PROJECT A. Project Objectives 4.01 This project will directly contribute to China's overall plan to remove port bottlenecks by constructing additional deepwater berths at key ports. It will increase Tianjin port's efficiency in handling timber, con- struction materials and general cargo by constructing specialized berths with modern equipment. The project will also contribute to longer-term efficiency improvements by: providing training in the planning, design, control and operation of ports; including preparation of a master plan for the port; providing technical assistance for the development of computerized operations and information systems, and a study on reducing siltation in the port; and establishing the Tianjin Port Development Center. Importantly, the project will allow the Bank to participate in developing a new orpanizational model for public enterprises in China, which could have a significance much wider than the ports sector alone (para. 3.03 and 3.04). B. Project Description 4.02 To reduc' congestion and handle future cargo volumes, the construc- tion of a new pic (East Pier) has been decided (see Map No. IBRD 18961). It will comprise 11 dLep-water berths for ships of 30,000-50,000 dwt with work to be carried out from 1986 to 1992 in two phases: Phase I (1986-1990) to con- struct 5 berths and Phase II (1987-1991) to construct an additional 6 berths. The 11 berths have been designed to be converted into container berths in the future when needed. The proposed project would comprise both phases. It would include the following components: (a) construction of five new berths on the East Pier's south side for timber, general cargo and construction materials, requiring: (i) construction of a 780 m quaywall for four berths with alongside depth of 10.5 m; (ii) construction of a 170 m quaywall with alongside depth of 10 m for the remaining berth; (b) construction of six new berths 1,200 m in length on the East Pier's north side for general cargo with alongside depth of 10 m; and the construction of some service boat quays;  - 11 - (c) dredging about 11.82 million cu m of spoil and reclamation of 840,000 sq m of land and stabiLization of the fill material; (d) construction of the required railway lines (about 15.6 kms), roadway and yard pavement (about 48,000 sq m); (e) provision of water supply, sewerage and power supply systems; (f) provision of the required loading/unloading equipment, navigational aids, harbor operations equipment and boats; (g) construction of the required maintenance buildings, auxiliary build- ings, and various minor structures; and (h) provision of consultants to assist port staff in supervising construction. 4.03 The project also contains components to address the port's needs in institutionaL and technological development. These components comprise: (a) technical assistance for a study of methods to minimize siltation in channels and basins (para. 3.08) and training of port specialists; (b) equipment for the development of TPA's management information and operations control system (see Annex 8); {c) establishing Tianjin Port Development Center for training, research and development studies (see Annex 6 for details). Assurance was obtained that TPA will carry out the training under the project in accordance with the program agreed with the Bank (Annex 4). C. Cost Estimate 4.04 The total project cost is estimated at Y 902 million or US$282 mil- lion equivalent, including Y 457 million or US$143 million in direct and indirect foreign exchange costs. Detailed cost estimates are presented in Tables 4.1, 4.2 and 4.3 and are summarized below. 4.05 Cost estimates for civil works including design and supervision are based on unit and design prices for ongoing similar works in China. Equipment costs are based on costs of similar equipment recently purchased in China and in other Bank-financed projects. Estimates are in January 1986 prices, and include physical and price contingencies. They are based on design d.tne by the First Design Institute and reviewed by consultants financed under the Technical Cooperation Credit (TCC) (IDA Credit No. 1412-CIA). Physical con- tingencies of 10% have been added for all civil works and equipment. Price contingencies for both foreign and local costs assume an annual increase of 7% for 1986, 7% for 1987, 7.5% for 1988, 7.7% for 1989, 7.6% for 1990 and 4.5Z for 1991. Customs duties amounting to about 10% of purchase price will be levied on imported equipment. The foreign exchange component of Bank financed civil works is based on construction by foreign contractors.  - 12 - Summary of Cost Estimates Y thousand US$ thousand Loan Item Local Foreign Total Local Foreign Total Loan Z of total Civil work 294,678 159,358 454,036 92,087 49,799 141,889 49,799 35 Equipment 19,892 163,677 183,569 6,216 51,149 57,366 51,196 89 Subtotal 314,570 323,035 637,605 98,303 100,948 199,255 100,948 51 Training 6,250 1,267 7,517 1,953 396 2,349 396 17 Technical Assistance 582 9,773 10,355 182 3,054 3,236 3,054 94 Subtotal 6,832 11,040 17,872 2,135 3,450 5,585 3,450 62 Customs duties 15,926 - 15,926 4,977 - 4,977 - - Subtotal 15y926 - 15,926 4,977 - 49977 Base Costs 337,328 334,075 671,403 105,415 104,398 209,812 104,398 50 Physical contingencies 33,733 33,408 67,140 1C,542 10,440 20,982 10,440 50 Price contingencies 74,35S 89,370 163,728 23,237 27,928 51,165 15,162 29 Subtotal 108,091 122,778 230,868 33,779 38,368 72,147 25,602 35 Grand Total 445,419 456,853 902,271 139,194 142,766 281,960 130,000 46 4.06 The total cost of consulting services for assistance in reviewing designs, construction supervision, and carrying out the study, the improvement o, management information and operations controL systems is estimated at about US$6.0 million, of which US$3.0 million is foreign exchange (see Annex 5 for detail). The rest of the foreign exchange is earmarked for training pur- poses. Consultants will be chosen following the Bank Guidelines.  - 13 - D. Financing 4.07 Financing of the project will be as follows: FIGURES IN USs MILLION Source of finance Foreign Local Total IBRD loan 130.00 - 130.00 TPA/Government 12.77 139.19 151.96 Total 142.77 139.19 281.96 The Bank loan will be made to the People's Republic of China and will be used to finance the foreign exchange cost of civil works and procurement of equipment awarded through international competitive bidding (ICB), and the costs of technical assistance and training. TPA will finance the local costs and the remainder of the foreign exchange costs. The Government will onlend the loan proceeds to TPA on terms and conditions approved by the Bank. In accordance with the Government's established procedures, the terms will be those prescribed for enterprises in the ports subsector, currently 4Z over 20 years including a grace period equal to the period of construction (but for this subsidiary loan, five years). TPA will bear the foreign exchange risk and the commitment charges. Signature of a subsidiary loan agreement between the Government and TPA satisfactory to the Bank is a condition of effectiveness of the loan. The subsidiary loan agreement will provide for THCDC, as the implementing agency, to withdraw the required funds. E. Implementation 4.08 The implementation of the proposed Project falls within the juris- diction of: THCDC for the construction of the East Pier (para. 4.02); and TPA for the institutional and technological developments of the port (para. 4.03). THCDC would be assisted by the Design Institute consultants and the China National Technical Import Corporation (CNTIC) as appropriate. Assur- ances were obtained that at the completion of project construction, the facil- ities will be transferred from THCDC to TPA for operation. Other aspects of project implementation (training, master pla7., operations control/MIS, silta- tion study and the establishment of Tianjin Port Development Center) would b2 carried out by or under TPA. 4.09 Procurement will be carried out according to the following table:  - 14 - (USS million) Procurement method Project Element ICB LCB Other N.A. Total cost Civil works 120.0 75.9 - - 195.9 (60.0) (60.0) Equipment 79.0 - 1.0 - 80.0 (65.5) (1.0) (66.5) Services - - 6.0 - 6.0 _ (3.5) (3.5) Total 199.0 75.9 7.0 - 281.9 (125.5) (4.5) (130.0) Note: Figures in parentheses are the respective amounts financed by the Bank loan. Six works contracts will be awarded after ICB for wharf construction south side (US$25.0 millions), soil consolidation (US$30.0 million), storage yards and roads (US$12.0 million), utilities (US$15.0 million), wharf construction north side (US$34.0 million), and other utilities (US$4.0 million). The remaining civil works, not financed by the Bank, will be carried out by contractors chosen through Local Competitive Bidding (LCB). These are mainly for dredging of the north basin which can be more economically and efficiently handled through LCB due to technical reasons including labor intensive tech- niques for site preparation and flexible use of dredging equipment. Other elements of LCB will be the railway connection outside the port which does not belong to the port, and auxilliary buildings that are mostly for overall port use. Prequalification of contractors will be carried out for works contracts to be awarded under ICB. Qualifying domestic contractors for civil works will receive a preference in bid evaluation of 1iZ of the total contract cost. Most of the equipment will also be procured through ICB. Qualifying domestic suppliers of goods will receive a preference in bid evaluation of 15% of the cif price or the import duty, whichever is lower. Some small items to be agreed with the Bank and amounting to less than US$200,000 per contract, and aggregating less than US$1,000,000, will be procured under contracts awarded after evaluation and comparison of quotations solicited from at least three qualified suppliers under procedures acceptable to the Bank. ICB awarded contracts will be subject to the Bank's prior review of procurement documentation and proposed contract awards. 4.10 Civil works and equipment installation are expected to be completed by the end of 1991. Construction, procurement and installation schedules are shown in Charts A and D.  - 15 - 4.11 In order to operate the new terminal at Tianjin until 1995, TPA intends to train some 6,000 management and administrative staff, stevedores, machine operators and maintenance personnel (Annex 5). TPA prepared a recruitment and training plan which incLudes training to be provided by equipment manufacturers. The training plan covers the operational needs until 1995. 4.12 Land needed for the project will be reclaimed from the sea and consolidated within the project. Designs are completed and consultants are now assisting in the preparation of the bidding documents, which would be com- pleted by April 1986. Prequalification of contractors was carried out for the two major contracts; for the other contracts, prequalification will follow according to schedule (Chart A). The call for te- v for items (a) and (c) in para 4.02 is planned for April 1986 and evaluation of bids from July to September 1986. THCDC will construct the project assisted by foreign consul- tants to supervise execution. The consultants will be appointed following the Bank's Guidelines and with terms of reference reviewed and agreed with the Bank. Construction will start by November 1986. F. Disbursements 4.14 Disbursements from the proceeds of the loan will cover: (a) 100% of the foreign costs of equipment or 1002 of the local costs ex-factory, 75% of other items locally procured; (b) 1002 of foreign cost and 20% of local costs of civil works procured under ICB; and (c) 100% of the costs of technical assistance and training. Disbursement will be made againist full documentation except for reimbursement for training and contracts for civil works, goods and services each valued less than US$200,000 equivalent which will be disbursed against statements of expenditures. Statements of expenditure for civil works should be supported by an engineer's certificate. Supporting documents for the statements of expenditure will be kept in the offices of TPA and THDCD and will be made available for inspection by Bank supervision missions. On the basis of the implementation schedules shown in Charts A and D, a schedule of estimated quarterly disbursements has been prepared (Table 4.5). This sche- dule is based on the assumption that the proposed loan will become effective by July 1986 and the loan closing date will be December 31, 1992. It follows implementation schedule and disbursement profiles of similar .orts projects in China and in other countries. To facilitate disbursement a special account will be set up in a bank on terms and conditions satisfactory to the Bank; the authorized allocation should be $8.0 million, approximating four months' estimated expenditures. Applications for replenishments would be submitted quarterly or when the special account is drawn down by 50% of the initial deposit. G. Ecology and Environment 4.12 The project will not affect the existing ecology of the port of Tianjin. The dredging spoil will be used for reclamation; an arrangement  - 16 - which has proved satisfactory in the past. The terminal design will incorpo- rate the equipment and safeguards appropriate in minimizing pollution. V. ECONOMIC EVALUATION A. Port Hinterland and Traffic 5.01 Tianjin port serves a vast hinterland extending all the way to Xinjiang province, some 3,000 km inland. However, 97% of the outgoing traffic and 841 of the incoming traffic have their origins and destinations within the special cities of Tianjin and Beijing and the surrounding province of Hebei. The nearest ports north and south of Tianjin are Dalian and Qingdao. Both are equally congested and need further investments to serve their own hinter- lands. In addition, the overland distances from those ports to the Beijing- Tianjin area are respectively 1,000 and 600 km and the rail lines which could be used to and from these ports are heavily congested. Therefore, there is no economic alternative to further development of Tianjin port. 5.02 In 1984, Tianjin port handled 16.1 million tons (mt) of which 12.4 mt foreign trade and 3.7 mt domestic cargo. The traffic reflects the economic base of the hinterland and the high level of industrialization of the two special cities and Hebei province. These three areas account for 12% of the country's gross industrial output value with Beijing and Tianjin alone doing 8%. In 1984, Foreign trade general cargo including iron and steel pro- ducts exceeded 7 mt, representing 44Z of total traffic. The main bulk commo- dities are grain imports and salt exports each with a volume of 2 mt nandled in 1984. Details are in Annex 7. 5.03 Total port traffic is forecast to double over the next decade to 38 mt and triple to 50 mt by the end of the century. Given the emphasis placed by Government on foreign trade and the potential for greater use of coastal shipping, these forecasts could well be exceeded. General cargo, timber and construction materials are expected to grow fastest in the coming years. TPA also plans to handle significant amounts of coal, petroleum pro- ducts and mineral ores in the future. These developments are contingent upon developments in the port hinterland, and specialized facilities will be necessary for this traffic when demand firms up. The project does not include any facilities for such traffic. B. Port Operations 5.04 TPA now operates 31 berths, 26 of which are on the ocean and 5 in the Huai river accessible through a small lock and used primarily for domestic cargos. Four of the berths are fully dedicated; two for grain, one for salt, one for containers. TPA plans to install equipment to receive bulk cement on another berth, thus leaving 21 berths for general cargo including iron and steel products. Three new container berths financed under the Three Ports Project (loan 2207-CHA) are nearing completion.  - 17 - 5.05 The port works around the clock, 7 days a week and has achieved a high throughput of about 400,000 tons of general cargo per berth in recent years. Despite such remarkable achievements existing facilities cannot keep up with the traffic growth. Congestion is heavy and total ship waiting time exceeded 10,000 days in 1984. At an average value per ship day in port of about US$6,000, this represents an economic cost of US$60 million or about one fourth of total project cost. 5.06 Thte proposed project will provide 11 new berths to be used for general cargo, timbe. and construction materials. Project berths will be used flexibly, first for general cargo, gradually shifting to timber as this traffic grows and eventuelly to containers. With the project, traffic will still exceed capacity in 1990 and 1991 when the first five berths are open to traific. It is only in 1992 that occupancy will be a more efficient 76%. New container berths will be needed around 1995. The logical expansion of container facilities will be along the south face of the east pier in direct continuation of the three berths now being completed. Remaining general cargo will have to shift to new facilities at this time. C. Costs and Benefits 5.07 For this analysis, all inputs and outputs were evaluated in constant January 1986 prices. Financial cost estimates were converted to economic costs by shadow pricing and by excluding price contingencies, taxes and duties (details are in Annex 7). 5.08 Quantifiable benefits attributed to the proposed project are: cargo handling cost savings, ship time savings and cargo time savings. Benefits build up rapidly upon project completion since the port is very congested now. They have been assumed constant after the year 2000 when project facili- ties will be used to their full capacity. 5.09 The largest part of the benefits results from ship time savings accounting fcr wo thirds of the first year benefits and increasing to 70 Z by 1995. These in ude the reduction in ship time waile awaiting berth and at berth due to im1roved cargo handling productivity. Cargo handling cost savings account for most of the remaining benefits with cargo time savings representing only a small fraction of the total (Annex 7, Table 12). As about 75% of the ships calling at Tianjin are either Chinese owned or operated, most of the project benefits will accrue to China directly.  - 18 - D. Overall Evaluation and Risks 5.10 Based on total project costs and the benefits described above the overall ERR of the project is 212. The sensitivity of the ERR to variations in costs and benefits is summarized below: ERR (Z) Best estimate 21 15Z increase in costs 19 15Z reduction in benefits 18 15% increase in costs combined with 15Z reduction in benefits 16 Using annualized resale value of ships for ship time savings benefits 18 5.11 The economic benefits are calculated on the assumption that the port could handle all the traffic demand without the project, by using measures such as lightering from anchorage. This is a conservative assumption. Some traffic might conceivably be diverted to other ports at a much higher total transport cost (para. 5.01), but since these other ports are themselves congested, it would be more likely that some traffic demand would simply not be satisfied thus affecting adversely the economic development of the port hinterland. The cost of such curtailment of demand is difficult to estimate but could be substantial. 5.12 The risk involves possible delays in project start-up due to the introduction of ICB for civil works. To minimize this risk appropriate Bank assistance and supervision will be provided in the early project stages. It is unlikely that traffic will fall short of estimates and it may indeed be higher. The flexibility of the design enabling to use project berths first for general cargo and convert later to container traffic ensures that their use will be maximized at anytime. VI. FINANCIAL ANALYSIS A. Past Performance: 1981-84 6.01 Financial results of TPA 1/ for the years 1981-84 are at Tables 6.1-3: the highlights are summarized below. 1/ All subordinate corporations (Annex 2) consolidated.  - 19 - SELLCZED FINANCIAL DATA 1981-84 1981 1982 1983 1984 Revenues (Y million) 93.9 106.9 123.6 150.6 Operating income (Y million) 49.0 61.7 69.7 88.7 Net fixed assets (Y million)/a 462.3 499.1 562.3 l102 Working ratio 39 35 36 33 Operating ratio 48 42 44 41 Rate of return (Z) 11 12 12 15 /a At historic cost less depreciation. The working and operating ratios, as well as most other indicators of port performance, were satisfactory and show an improving trend due in part to the tariff increase of 1984 and, more importantly, to excellent cost control. Unit operating costs fluctuated during 1981-84, ending the period with only an average 1.0% p.a. increase; the port-wide average handling cost for all commo- dities was a low Y 3.9 per ton in 1984. B. Present Financial Position 6.02 At the end of 1984, TPA's financial condition was sound. Current assets substantially exceeded current liabilities, with two-thirds of the net current assets in the form of cash or equivalent. The salient points of the balance sheet are as follows: Y million Current assets 135.2 Fixed assets (net) 630.4 Special Fund assets 32.4 Total 798.0 Current liabilities 8.5 Long-term debt 5.0 Equity 727.7 Special Funds 56.8 Total 798.0 6.03 The virtual lOOZ equity capitalization is a function of the finan- cial policies for state owned enterprises which applied until very recently and under which enterprises obtained all their funding for approved capital projects by way of budgetary grants from the State. In return, enterprises turned over the greater part of their profits to the State, retairzin only  - 20 - small amounts for the purposes served by the "special funds" - principally R&D, welfare and bonuses. Generally, the policy is now changing to one of financing through loans instead of grants, coupled with a system of taxation of profits which, although at present closely approximating the effect of the earlier profit remittance system, does allow considerable flexibility for the future to introduce increased - and perhaps discretionary - retention of earnings through adjustment of rates. 6.04 In the case of TPA, the application of these new policies has been suspended for an unspecified period (understood to be not less than three years), as part of the "pilot system reform" described in paragraphs 3.03 and 3.04. TPA's financial policies are thus fluid. A number of possibilities are discussed below, and proposals are introduced as to: (a) how TPA could derive maximum advantage from its experimental status by developing financial poli- cies best tailored to the requirement of the port and the municipality; and (b) financial objectives which would be appropriate for TPA to adopt pending definition of those policies. C. Financial Policy 6.05 In the absence of specific measures to extend the tax holiday or to introduce alternative policies, it must be presumed that TPA would eventually become subject to the normal policies for public (state, provincial or munici- pal) enterprises in China. As in force at present, these would include in particular: (a) capital project funding by 20-year loans at 3.6% through People's Construction Bank of China (PCBC); (b) income tax at 55%; (c) adjustment tax at 24%; and (d) retention by TPA of remaining profits, but earmarked to the purposes of the special funds. On present understanding, the earliest date by which TPA could revert to these arrangements would be 1987. By virtue of its heavy development program, a policy of 100% debt financing would raise TPA's leverage to around 50:50 by the early 1990's; debt service coverage would be below 2 and falling, and a persistently negative cash flow would be emerging (tariff increases excepted). 6.06 On the other hand, if the tax holiday were to be continued indefi- nitely, TPA would have very little need of recourse to debt (apart from the existing and proposed Bank loans). Debt service (virtually all Bank) would be covered around three times, and leverage would be a low 30:70 in the early 90's. This scenario must, however, also be considered unsatisfactory from a national point of view since, although it leaves TPA in no jeopardy, it is an inefficient method of funding for revenue-earning projects. The ready avail- ability of cost-free money does not encourage rigor in project selection or cost-consciousness in construction; and, in any event, operational cash flows  - 21 - will only by coincidence match optimal capital expenditures, especially on a year-by-year basis. 6.07 Clearly some compromise between these two extremes is required which would maximize leverage to the extent sustainable by TPA's operational cash flow while at the same time leaving some cushion of retained earnings against an unforseen traffic recession or other adverse circumstance. One such com- promise which at first sight appears viable is one in which adjustment tax might be reduced or phased out and the resultant increased profit retention applied to capital expenditure, while TPA remained liable for income tax and special fund contributions at normal rates. There are undoubtedly many other arrangements that would work. What is important at the present time is not that long-term policies should be immediately defined, but rather that TPA should develop an expertise in devising and evaluating alternative financial strategies, and through this process initiate and maintain a dialogue with its lead agencies to define longer term policies best suited to the objectives of the "pilot system reform" now underway. To this end, assurances were obtained from TPA that, beginning in 1986, it will prepare annually a rolling 5-year financial plan bringing together its projected traffic, revenues, costs, capital expenditures and financing plan (or plans), and will discuss its conclusions with the Bank. D. Future Financial Performance 6.08 TPA's projected income statements through 1992 are at Table 6.1. The revenue estimates are based on the traffic forecasts in Annex 7, Table 1, which have been reduced slightly to reflect revenue cargo volumes. Forecasts of revenue from loading and unloading cargo, which represents more than 70X of alongside port operations, are given in Table 6.4. Forecast working expenses allow for annual inflation on most costs. No increase in individual tariffs has been assumed, but the growth in container traffic will be highly benefi- ciaL to average revenues because container unit revenues are much higher than those for other cargo. The estimated gross revenue growth over 1984-92 at 82 p.a. will therefore slightly exceed the overall growtL t t:affic. On these fairly conservative assumptions, the port's operating performance conti- nues satisfactory through 1992. with en operating ratio of around 40 as at present and a rate of return on assets employed of around 9%. 6.09 Because of the uncertainty surrounding TPA's future financial poli- cies, it is not possible to forecast funds flows and balance sheet items with the same degree of confidence. The projections at Tables 6.2 and 6.3 portray the base case described in para. 6.05 in which TPA reverts in 1987 to the (presently) orthodox policies for Chinese public corporations. Many other scenarios are possible, however, as discussed above. In these circumstances it would be premature to propose that TPA should adopt specific financial objectives other than in the most general terms. Therefore, assurances were obtained from TPA that it will take such measures as may be necessary to maintain its gross revenue at a level sufficient to cover its full costs of operation (including depreciation), and to meet from internally generated funds all its financial obligations including debt service, taxes, allocations to special funds, and other cash outflows.  - 22 - VII. AGREEMENTS REACHED AND RECOMMENDATIONS 7.01 Assurances were obtained from: (a) TPA, that it vill: (i) carry out a siltation minimization study aiming at reducing maintenance dredging (para. 3.08); (ii) provide the Bank with its audited financial statements within six months from the end of each fiscal year (para. 3.13); (iii) carry out the technical assistance and training components as agreed with the Bank (para. 4.03); (iv) beginning in 1986, prepare annually a rolling 5-year financial plan and discuss it with the Bank (para. 6.07); and (v) take measures to maintain its gross revenue at a level suffi- cient to cover its full costs of operation (including deprecia- tion), and to meet from internally generated funds all its financial obligations including debt service, taxes, alloca- tions to special funds and other cash outflows (para. 6.09); (b) THCDC that it will: (i) provide the Bank with audited accounts of the project, within six months from the end of each fiscal year and (para. 3.13); and (ii) upon completion, transfer project facilities to TPA for operation (para. 4.08). 7.02 Approval of the Loan .Agreement by China's State Council, and execution of a subsidiary loan agreement satisfactory to the Bank (paras. 4.07-4.08) are conditions of effectiveness of the proposed loan. 7.03 Agreement having being reached on the above matters, the project constitutes a suitable basis for a Bank loan of US$130 million to the People's Republic of China for a term of 20 years, including a five year grace period, at the standard variable interest rate.  -23 - AMIEX 1 CHINA TIANJIN PORT PROJECT RELATED DOCUMENTS AND DATA AVAILABLE IN THE PROJECT FILE 1. Feasibility study of East Pier Project, 1984 First Design Institute, Tianjin, China. 2. Terms of reference for consultants to assist in revieving designs and tender documents for the project. 3. Detailed list of equipment for East pier project, May 1985 by TPA. 4. Tianjin Port Project, Update of the Project Brief, May 17, 1985. 5. Training needs for East Pier project, August 16, 1984. 6. Tianjin port project, Legal aspects of appraisal, June 9, 1985. I. Issues Paps.rq T;anjin Port Project Appraisal June 30, 1985. 8. Time schedule for project execution, June 1985, TPA. 9. Document of the Tianjin Municipal People's Government, Tianjin Government Document No. [1985J 11, January 28, 1985. 10. Proposed plan for Training Center for Tianjin Port, TPA, June 1985.  CHINA TIANJIN PORT PROJECT Organization Chait of Tlianiln Podt Authority Diocloo | ~~ OOeMa Pa wto Dewn Faug Man tls Amlonl ftwiani ftwl~~~~~~aamIf -r Nwit I I [-t>ct l Dcta Engvuw _ Wt0s Dtn Lsot rl A loctncd t*ba 5uporn$ Lwg.tlwm - Ec a wwor L mt Sg O wrtm ntW FXIr D~ opototwg Dmww A~~~~~~~~~~~~~~d1wWNdOte Somm Fj Km tD lQN t" tww PM -NVn e > t>^on Er_waFoe o E wn t - Pawnct On w Elstt PtcSt3et on _ tLt~~~~~~~Ncio DMo 2 Conm I Cawpo'oun _ & TldCt -~~~~~u & 14 gLhtw Fs t*ata _omtio Omora~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~a CCn=ward ion WbcMGai*-2?6?0  ANNEX 3 -25 - Page 1 CHINA TIANJIN PORT PROJECT Principal Port Charges in China A. Charges Against Vessels (Y) and Ceneral cargo Mooring at Harbor Berthing at closing harbor dues Pilotage Buoy Wharf dues Buoy /_ Wharf hatches Inward Outward Foreign 0.20 1.20 0.80 0.25 0.02 0.02 2.00 3.00 1.00 per per per per per per per per per (exceeding) nr /a ship ship nrt nrt nrt ship ton ton 2000 NRT) Local 0.10 nil nil 0.10 0.02 0.05 10.0 1.50 0.10 per per per per per per per nrt nrt nrt nrt hatch ton ton /a nrt charges are on a daily basis. 7b The charge increases to Y 0.10/nrt per day when a vessel remains at berth four or more hours after completing loading/unloading. B. Loading/Unloading Charges Against Cargo - Foreign (Y/ton) Between ship and storage Between ship and ship side Cargo type Ship gear Port gear Ship gear Port gear Dangerous 16.00 18.40 11.20 14.60 Coal (bulk) 6.40 7.40 4.50 5.90 Cement (bags) 12.00 13.80 8.40 10.90 Steel 10.40 12.00 8.10 10.60 Timber 9.20 10.60 12.00 24.10 General 13.20 15.20 9.20 12.00 Sulphur, iron ores 6.40 7.40 7.00 9.20 Metallic and non- metallic ores 6.40 7.40 4.50 5.90 Fertilizer (bulk) 11.20 12.80 7.80 10.10  ANNEX 3 Page 2 - 26 - C. Loading/Unloading Charges Against Cargo - Local (Y/ton) Ship to Ship to To storage To storage Cargo type shore lighter and train and truck Dangerous 2.40 2.20 1.20 0.90 Coal (bulk) 1.20 1.10 0.70 0.50 Cement (bags) 1.20 1.10 0.70 0.50 Steel 1.60 1.40 0.90 0.80 General 1.60 1.40 0.90 0.80 D. Storage Charges Against Cargo - Foreign and Local (Y/ton-day) /a Free Foreign Local storage General Light General Light Direction period cargo cargo cargo cargo Dangerous Inward 4 days 0.25 0.30 0.10 0.15 0.30 Outward I day 0.05 0.10 0.02 0.05 0.10 /a From expiration of free storage period. Source: Ministry of Communications, Tianjin Port Autherity. June 1985  ANNEX 4 _27 _ Page 1 CHINA TIANJIN PORT PROJECT Training Needs for the East Pier Project East pier Distributed by district Items project South district North district Direct Working Staff Stevedore 2,935 817 248 Driver 674 230 444 Subtotal 3.609 1,047 2,562 Auxiliary Productive Staff Managing staff on storage yard 350 100 250 Line fastening worker 55 25 30 People for covering cargo by oil cloth 120 120 Packaging staff 30 30 Tool godown 63 24 39 Repair shop 54 22 32 Tool warehouse 36 36 oil cloth repair & washing room 37 37 Trailer packing & repair shop 29 10 19 oil station 16 16 Material warehouse 35 15 20 Repair and test station 128 18 110 Drainage & water supply 44 14 30 Boiler room 56 36 20 Power supply & maintenance station 140 70 70 Vessle operating staff 45 45 People for communications & repair 40 20 20 Railway repair and railway maintenance protecting Hydraulic & civil maintenance people 138 138 Sutotal 5,052 1.566 3,486 Non-productive People Cardres of management 150 336 Port service people 126 279 Total 5,943 1.842 4.101 Total Port Personnel 21,000 existing  ANNEX 4 Page 2 - 28 - CRINA TIANJIF PORT PROJECT Phasing of Training Needs Persons Years required 2,480 1990 2,274 1991 1,169 1992-1995 Total 5,943  - 29 - ANNEX 5 CHINA TIANJIN PORT PROJECT Schedule and Estimated Technical Assistance (US$) 1. Assistance in special designs for the east pier project - 200,000 Special deep mixing tests - 150,000 Sundries - 50,000 Subtotal 400,000 2. Assistance in siltation reduction - 300,000 Special tests 150,000 Sundries ' 50,000 Subtotal 500,000 3. Assistance in Supervision of construction =650,000 4. Assistance to the Port Development Institute =600,000 5. Provision of computer harware and software for development of operations control and manage- ment information systems - 550,000 6. Visits by Chinese personnel to other ports 100,000 Total 3,450,000  - 30 - ANNEX 6 Page 1 CHINA TIANJIN PORT PROJECT Tianjin Port Development Center Manpower Requirements 1. In 1982, the number of employees within the port was 20,365. This number is expected to increase to 29,362 in 1990 and 38,000 in 2000. Currently, there are 1,078 operation management staff which is expected to increase to 4,050 by 1990. The following is a breakdown of staff requirement by level of education. College Middle Other operating graduates education management Total Existing 510 388 180 1,078 Forecast till 1990 1,946 2,104 0 4,050 Training Needs 2. The TPA has establisehd a goal of upgrading and retraining approxi- mately 702 of its existing workforce over the next decade. This is primarily due to the lack of education received during the decade of the cultural revolution. In addiiton, TPA has set a goal of increasing the percentage of college trained employees to at least 50% during the next decade. The current port workers training center trains about 700 per year in a variety of areas. Most of the training is in basic vocational skills and general educa- tion. It does not provide any significant technical training. Training in the New Center 3. Training requirements at the institute covers the following: (a) Short-term training for 3-6 months period and include training in languages, computer, automation, communications, electronics, system management information systems, capital construction, procurement, port planning, and management; (b) Seminars and workshops for exchange of information and technology between domestic ports and possibly some foreign ports; and (c) College graduate courses at the TV college in the port. This would increase the number of college graduates particularly in Transport  -31- ANNEX 6 Page 2 Machinery, Business Administration, electricity and equipment, and port construction. Cost Estimates 4. Total cost estimate of this component without contingencies is about US$3.05 m with a foreign component estimated at US$1.788 m. Implementation 5. Technical assistance would be needed to define the courses, prepare the texts and advice on the needed educational equipment and facilities.  ANNEX 7 - 32 - Page 1 CHINA TIANJIN PORT PROJECT Economic Evaluation A. Hinterland and Traffic 1. The port of Tianjin serves a vast hinterland extending all the way to Xinjiang province, some 3,000 km inland. However, almost 90% of the traffic has its origins or destinations within the special cities of Tianjin and Beijing and the surrounding Hebei province. The nearest ports are Dalian in the north and Qingdao in the south. The overland distance from these ports to the Beijing-Tianjin area is 1,000 km and 600 km, respectively, and the rail links which could be used from these ports to the Beijing-Tianjin area are heavily congested. Therefore, there is no economic alternative to the port of Tianjin. 2. Present Traffic. In 1984, the port handled 16.1 million tons (mt) of cargo, 12.4 mt of foreign trade and 3.7 mt of domestic cargn. The traffic composition reflects the economic base of the hinterland, and in particular the high level of industralization of the two special cities and surrounding Hebei province. Foreign trade general cargo (including iron and steel pro- ducts) is the most important type of traffic with over 7 million tons in 1984 or 44Z of total traffic. The main bulk commodities are grain imports and salt exports. In 1984, trade in each was 2 mt. Container traffic started only in 1980 but is increasing rapidly and reached 80,000 TEUs in 1984. Details by commodity are give in Table 1. The distribution of traffic to and from the port by mode is in Table 2. Rail handles about 70% of incoming cargoes but only 20% of the outgoing cargoes since most of these are generated in the proximity of the port. Future Traffic 3. Total port traffic is forecast to more than double over the next decade to 38 mt. in 1995 (8Z p.a. annual growth) and is expected to reach 50 mt by the year 2000 (less than 6% p.a. annual growth). These figures are well in line with macro-economic projections of quadrupling the output of industry and agriculture by the year 2000. Given the emphasis placed by Government on foreign trade and the potential for greater use of coastal shipping, they could even be on the low side. 4. Detailed forecast by commodities are also on Table 1. General cargo is expected to grow at 8% p.a. while iron and steel products are expected to stay around 4 mt p.a.; with imports being gradually replaced by domestic trade as domestic steel production increases. Timber traffic is expected to grow rapidly from 400,000 tons in 1984 to 1.2 mt in 1990 and 2.5 mt in the year 2000. China is a net importer of timber and expects rapidly increasing needs in the next few years. Construction materials traffic, mainly sand, is also expected to grow fast, doubling from 1.5 mt to 3 mt by the end of the  ANNEX 7 Page 2 century. The demand is for the port construction itself, the city of Tianjin and the oil industry. 5. From 1990 onwards, the Tianjin Port Authority (TPA) plans to handle significant amounts of coal, petroleum products and mineraL ores. Only very small amounts of these commodities are handled at present. These developments are contingent upon industrial and mining developments in the port hinterland as well as the finding and development of oil in the Bohai Gulf. Specialized port developments will be necessary to handle this traffic if this demand materializes. The project does not include any facilities for such traffic. B. Operations Without the Project 6. The port now operates 31 berths, five of which are in the Hai river. These five berths were only recently reopened to sea-going traffic after the decision to reopen the lock to the river. However, the lock is only opened a few hours per day to prevent salt water intrusion and is limited to ships of 5,000 tons or less. The berths are used primarily for domestic cargoes. Of the 26 ocean berths, four are fully dedicated; two for grain, one for salt and one for containers. One berth is used preferentially for cement which is now imported in bags. TPA plans to install equipment to receive bulk cement and the berth will then be fully dedicated. Therefore, there are 21 berths capable to receive general cargo including iron and steel products, timber, construction materials, miscellaneous general cargo and lesser amounts of chemical fertilizer and ores. In addition, three new container berths included in the Three Ports Project (Loan 2207-CHA) are nearing completion. 7. Table 3 summarizes the operational characteristics of existing general cargo berths. The port works three 8 hour shifts; with " net working time per shift of 5.3 hours, equivalent to 16 hours per day. The table beljw gives some of the hourly productivities per crane or gang achieved by TPA. tons/hour/crane In Out General cargo 16 17 Iron and steel 27 48 Timber 24 - Fertilizer in bags 28 - Cement in bags 29 - Ore (alumina) 84 _ The annual throughput per berth for general cargo is well above 300,000 tons. In recent years, because of the very large traffic increases, throughputs around 400,000 tons per berth have even been achieved, but it would be difficult to maintain that level indefinitely. 8. Table 3 also gives average shipment sizes. Presently these are quite small: around 5,000 tons for general cargo, 6,600 t for steel and  34 - ANNEX 7 Page 3 8,000 t for timber. Because of this and the traffic congestion, ships now spend more time waiting for berths than being loaded/unloaded. Average ship waiting time in 1984 was 3.3 days while averagc loading/unloading time was only two days. Details by type of ship are in Table 4. Total ship waiting days in 1984 exceeded 10,000. With an average ship value per day in port of about US$6,000, this represent an annual economic cost of US$60 million or about one fourth of total project costs of about US$250 million. Operations with the Project 9. The project will provide 11 new berths to be used for general cargo, timber and construction materials. They will all be suitable for conversion to container berths when the need arises. Five berths on the southern face of the east pier will be available to traffic from 1990 and the other six from 1992. One of the new berths will be used mostly for construction materials and up to four berths can be used for timber. The remaining berths will be used for general cargo. The economic analysis is based on operating the new berths flexibly between general cargo, timber and construction materials to ensure even berth occupancy as well as adapt to traffic demand over time. With present traffic forecast, the 11 berths would be used as follows by the year 2000: general cargo 6, timber 4 and construction materials 1. More berths will be used for general cargo in the 1990s while timber demand is gradually expanding. Operational characteristics of the proposed berths are also on Table 3. 10. General cargo traffic which will use the 21 existing berths and the proposed project berths is summarized on Table 5. This traffic includes only foreign trade general cargo as domestic cargo is handled mainly in the Hai river. This traffic is likely to peak between now and the project opening date and then stabilize around 8.5 mt per year as a result of the increase in containerization. It is expected that by 1995, 80% of the containerizable cargo will be containerized. The existing container berth plus the three nearing completion are expected to be able to handle the forecast container traffic until about 1995; possibly with the need for one additional crane. It is expected that at least six container berths will be needed by the year 2000. 11. Table 6 shows cargo handling with and without the proposed bertbs. It is based on the operational parameters of Table 3 and the traffics of Table 1 and 5. Without the pro,ect, traffic far exceeds the practical capacity of existing berths. For the purpose of the economic evaluation it has been assumed that ways would be found, e.g. through lightering, to hardle traffic in the port area with waiting times not exceeding those corresponding to 95% berth occupancy. As waiting time increases rapidly with congestion this is a fairly conservative assumption. Indeed for 1984, the model gives less than 5,000 waiting days versus the actual figure of 10,000 days. 12. With the project, traffic would still exceed capacity in 1990 and 1991 when the first five berths ar- opened to traffic. It is only in 1992 that occupancy would be a more efficient 76%. Occupancy would climb to 80% by  ANNEX 7 - 35 - 8g 1995 and stay at this level as the demand shifts increasingly to container traffic. Since container berths will be needed after 1995 and the expansion of the container facilities will logically be along the south face of the east pier in continuation of the three berths now being completed, some of the general cargo will have to shift to new facilities at that time. C. Economic Evaluation Project Costs 13. Financial cost estimates have been converted to economic costs by shadow pricing and by excluding price contingencies, taxes and duties. Conversion factors for various cost categories have been estimated in two ways. (a) for major items such as wharf construction, dredging and reclamation and consolidation, by separately shadow pricing each cost components (Tables 7 and 8); and (b) for minor items such as utilities, auxiliary buildings and ancillary facilities, by applying aggregate conversion factors estimated in previous Bank studies (Table 9). Conversion factors for major items are near onie; the overall factor for the project is 1.06. The factors derived for the -arious cost items have been applied to the table of annual project expenditures to obtain the stream of project economic costs (Table 10.). Project Benefits 14. Quantifiable benefits attributed to the proposed project are: cargo-handling cost savings, ship time %avings and cargo time savings. Benefits build up quickly as the port is very congested now. They have been assumed constant after the year 2000 when the project facilities will be used to their full capacity. 15. Cargo-handling Cost Savings. Handling costs calculated by TPA for the existing berths are given on Table 3 together with estimates of handling costs at the proposed new berths. No savings are expected for handling general cargo over the new berths. However, without the project, the only way to handle traffic in excess of berth capacity would be through more costly lightering. TPA estimates lightering costs to be 3 to 4 times normal handling costs. Detailed estimates of handling cost savings are in Table 11. Lightering has been assumed for cargo tonnage in excess of berth capacity at 95% occupancy at a cost three times that of normal handling. 16. Savings in handling costs have been converted to economic benefits by shadow pricing the main cost components of normal handling and of lighter- ing. Shadow pricing each component on the basis of TPA's estimated handling cost breakdown yields an aggregate conversion factor of 1.05:  ANNME 7 - 36 - Page 5 CONVERSION FACTOR FOR NORMAL HANDLING Z of handling Conversion Proportion of Cost heading cost /a factor lb economic cost Labor 28 0.75/c 21 Fuel 31 1.00 31 Depreciation 26 1.34 35 Transport 5 0.90/d 5 Maintenance 10 1.34 13 Total 100 105 /a Estimated by TPA except for transport and maintenance which were classed by TPA as 'other costs.' lb Changcun (Luan) Coal Mining Project: SAR No. 5127-CHA, February 1985. /c It is assumed that 50% of labor is unskilled and 50% is skilled. /d See Table 8 for explanation. A similarly estimated conversion factor for lightering is 1.1. It combines the factor estimated for handling normal traffic with factors estimated for the economic costs of transshipment and of barging the cargoes into river berths for final unloading. 17. Ship Time Savings. These include both the reduction in ship time while awaiting berth and at berth due to improved cargo handling. Estimates of ship time in port with and without the project are calculated on Table 6. Ship costs in port are based on the ship cost model developed by the Bank, updated to reflect recent world market prices. The annualized repLacement value plus operating costs is used to calculdte project benefits. This gives a cost per day of 1 16,200 (US$5,700) for general cargo ships. For sensitivity analysis, the annual resale value of ships have been assumed to reflect the presently depressed state of the shipping industry (see para. 19). 18. Cargo Time Savings. Savings in ship time apply also to cargo: the benefit is in interest savings on cargo value. For domestic cargoes, the marginal source of working capital would be loans from PBC at 6.5-7.5Z interest. For foreign cargoes, higher foreign exchange working capital would mean more foreign borrowing and it is assumed that this would be at China's marginal cost of capital of around 12Z. Roughly two-thirds of all cargo passing through Tianjin is foreign trade cargo, and imports account for about half of total cargo. Interest savings have therefore been calculated assuming an average rate of interest of 9.5% p.a. 19. Total project benefits by year for the three items discussed above are calculated in Table 12. The majority of project benefits would be in ship  -37- ANNEX 7 Page 6 time savings. These would accrue first to ship owners and could be passed on to cargo owners. As about 75% of the ships calling at Tianjin are either Chinese owned (COSCO) or operated, most of the project benefits will accrue to China. Rate of Return Calculation and Sensitivity Analysis 20. Table 13 sets out the rate of return calculation. Cost data are taken from Table 10 and total benefits from Table 12. The best estimate rate of return is 21X. The sensitivity of the economic returns to variacions in costs and benefits are summarized as follows: ERR Best estimate 21 15% increase in cost 19 15% reduction in benefits 18 15% increase in cost combined with 15% reduction in benefits 16 Using annualized resale value of ships for ship time savings benefits 18 The results show that the project remains well justified even with sizable variations in project costs and benefits. The assumption that the port could handle all the traffic demand by measures such as lightering is a conservative one. Some traffic could be diverted to other ports at a much higher cost, but since these other ports are themselves congested, it would be more likely that some traffic would be curtailed thus affecting economic development of the port hinterland. 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