Mexico - Ports Project

RETURN TO REPORTS DESK - EA RESTRICTED WITHIN DILi t r Report No. PTR-104a ONE WEEK Tlis report is for official use only by the Bank Group and specificaiy authorized orpnizations or persons It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. INTERNATIONAL BANK FOR RECONSTRUCIION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF A PORTS PROJECT MEXICO February 16, 1972 Transportation Projects Department  UNIrS OF WEIGHTS AND MIEASURES: METRIC British/US Equivalent 1 kilometer (kan) - 0.62 miles (mi) 1 meter (mi) - 3.28 feet (ft) 1 square kilometer (la2) - 0.386 square mile (sq mi) 1 hectare (ha) - 2.47 acres (ac) 1 metric ton (ton) - 0.98 lg. ton (1.1 US short ton) 1 barrel - 0.137 ton dwt - Deadweight Tcns (a measure of weight-carrying capacity) ABBREVIATIDNS CNCP - Comision Nacional Coordinadora de Piertos ESP - Empresa de Servicios Portuarios GRT - Gross Registered Tons (a measure of cubic space) Marina - linistry of the Navy PEMEX - Petroleos Iexicanos SCT - Secretariat of Communications and Transport  NZXICO APPiAISAL OF A P.ORTS PROJECT Table of Contents Page No. SUMMARY AND COYCLUSIONS 1. INTRODUCTION 1 2. BACKGROUND 2 A. Economic Setting 2 B; Transport Sector 2 C; Port Sector 3 D. Transpert Coordination and Planning 4 3. PORT ADkiVTIfSr--`,.TI0N 5 A. Organization 5 B; InstalLf.; ons 8 C. 1aintea:-;.ce 8 D. Operatiuns 9 4. THE PROJECT 11 A. Investment Program 11 B. Project Description 11 C, Cost Estimates 12 D. Project Execution 13 E. Project Financing 13 F; Procurement 14 G. Disbursements 14 5. ECONOMIC EVALUATICU 15 A. Past Traffic 15 B. Traffic Forecast 16 C. Economic Justification 16 6. FINTANCLU EVALUATICN 18 A; Rates and Charges 18 B. Past Barnings 18 C. Pricing Policy 19 D. Financial Objectives 22 E. Accounting and Audit 23 7. RECOGRIMTDATICINIS 24 This report has been prepared by Messrs J. Bigosinski (Economist- Consultant), J. De Gryse (Financial Analyst), -TJ. Elsby (Engineer- Consultant) and J. Newman (Engineer) and edited by Miss L. Soifer.  - ii - Annexes 1. Existing Installations and Equipment at Project Ports 2. Project Descr'.ption and Program 3. Objec.-ILves and Scope of Operations and Accounting Consultants Se..vi.e~s 4. Olbjecti.ves and Scope of a National Port Development Study 5. Objecti.ves and Scope of Dredging Orga-iization and Equipment Study 6. Staff Training 7. Demand Analysis and Economic Justification 8. Port User Charges 9. Fully Distributed Costs for Marina and Charges to be Levied by Marina in the Project Ports 10. Recovery of Part of the Cost of the Proposed Project from Port Users Tables 1. Existing '?harves and Installations at Project Ports 2. Characteristics of Dredgers 3. Dredging rLequirements/Existing Capacity for Self-propelled Dredgers 4- Dredging Equipment 5. Fire-fighting, Communications and Mobile Cargo-handling Equipment 6. Project Cost 3stimates 7. Schedule of Estimated -Disbursements 8; Seaborne Traffic 1962-70 9.- Traffic Growth in Project Ports-1961-70 10; Cargo Mtix in Project Ports 1961-70 11. Grain-handling Costs at Veracruz 12; Estimates of Demand, Capacity and Savings for Self-propelled Dredgers 13; Guaymas - Notional Income Accounts 1966/70 14; Manzanillo - Notional Income Accounts 1966/70 15$ Mazatlan- Notional Income Accounts 1966/70 16. Tampico - Notional Incoae Accounts 1966/70 17. Veracruz - Notional Income Accounts 1966/70 18. The Five Project Ports - Notional Income Accounts 1966/70 Charts 1. Organization of CNCP 2; Organization of Marrina 3. Organization of Marina's Department of Port Operations 1; Mexico (3668R) 2; Port of Veracruz (3669R1) 3. Port of Tampico (3670R) 4. Port of Manzanillo (3706R1)  MEXMO APPRAISAL OF A PORTS PROJECT SUMMALiY AND CONCLUSIONS i. Transport in Mexico has traditionally been land-oriented. The rail and road networks have developed in response to the facts that 1Mexico's popu- lation is largely concentrated in the central plateau, and that the United States is its principal trading partner with the bulk of foreign trade moving across the land border. Port services have grown less dynamic ally than the land transport system. Increased commerce with several overseas trading partners and the Government's policy of developing the coastal areas have recently placed greater emphasis on port development. The Bank's 1970 general transport sector review recommended improvements in the port sector and higher priority of port operations. ii. Mexico has 36 ports. In 1970 they handled about 27 million tons of which 15 million tons were domestic trade largely dominated by oil move- ments. Five major ports: Guaymas, Manzanillo, Mazatlan, Tampico and Vera- cruz (referred to in this report as the project ports) handled 80% of total traffic, excluding oil. In the last decade the annual rate of port traffic growth was 7.5%. iii. In general port installations are satisfactory. Berthing availa- bility is adequate and waiting time is low. Maintenance is good except for dredging. Clearance of goods is slow in some ports because of lack of ware- houses. Productivity is improving and is expected to continue to do so when more cargo-handling equipment is available. iv. There are four problem areas which the proposed Bank projec.t aims at improving: (a) Port policy, management and operation responsibilities are divided among 12 ministerial departments and various other agencies and groups, both public and private. Within the Ministry of the Navy (Marina), which has the largest single share of the responsibility, management is hampered by lack of clear objectives and by inadequate organization, coordina- tion and staffing which has led to investments of doubtful justification. (b) Financial planning and management of the ports are inadequate. Charges have little rational or economic basis and bear no relation to costs or to the attainment of economic or finan- cial objectives. (c) Dredging operations are inadequately planned and managed and the dredging fleet is becoming obsolete. (d) Cargo-handling is inefficiently managed and under equipped.  - ii - V. The Government is aware of these problems and is taking action to solve them. Although it has not gone as far as the recommendations in the Bank's sector review, steps have been taken to bring order in the field of port policy and management. Financial objectives have been set to attain viability for the project ports. A National Ports Coordinating Commission (CNCP) has been established; Marina is being reorganized and a new type of cargo-handling organization has been introduced on a pilot basis at Manzanillo. A trust fund has been established within the Government Development Bank (Nacional Financiera) to supply mechanical cargo-handling equipment. vi. The objectives of the project are to: (a) provide high-priority installations and equipment; (b) assist the Government in developing port administration and operation; and (c) provide a plan for national port development and feasibility studies of high priority projects. It consists of: 1. a grain-handling installation and tanker berths in Veracruz; 2. two dredgers and dredging equipment; 3. warehouses at three ports and a transit shed at Veracruz; 4. fire-fighting and port communication equipment at the project ports; 5. mobile cargo-handling equipment; 6. consulting services; and 7. staff training. The project cost is estimated at Ps 347 million (US$27.8 million equivalent) with a foreign exchange element of US$20.0 million, or 72%, for which Bank financing is requested. The project would be carried out by Marina, except for the cargo-handling equipment which would be administered by the port equipment trust fund and for two studies to be carried out by consultants, which would be the responsibility of CNCP. All project items would be pro- cured under international competitive bidding. Retroactive financing for consultants' services amounti-ng to US$120,000 is recommended. vii. Prior to and during loan negotiations, agreement was reached with the Government on several steps related to the effectiveness of the new policies and organizations in the field of planning, management and financial control.  - iii - viii. The project, the evaluation of which is relatively insensitive to traffic forecasts, is economically justified with rates of return for the individual items ranging from 14L% to 287. ix. The project is a suitable basis for a Bank loan of US,20.0 million for a term of 25 years, including four years of grace.  MEJCO APPRAISAL OF A PORrS PROJECT 1. INTRODUCTION 1.01 Following a request made by the Government of Mexico, the Bank undertook in 1970 a general transportation sector review (PTR-88, dated May 13, 1971). The section dealing with ports made numerous recommenda- tions related to institution building, administration, operations, pre- investment and finances and devised a comprehensive strategy to achieve much- needed improvement in a sector which until recently was considered of low political and economic priority. The recommendations were well received; their expected impact as an element of national econamic policy was fully understood and important measures have since been taken by the Government, in line with the strategy proposed in the report. 1.02 The proposed project makes provision for further implementation of the reportts recommendations; it concentrates on institutional reforms, financial objectives and pre-investment studies. The project was tentatively identified in March 1971; a financial preparatory mission was made in May 1971 and the project was appraised in September/October 1971 by lMessrs. J. Bigosinski (Economist-Consultant), J. De Gxyse (Financial Analyst), W. Elsby (Ehgineer- Consultant) and J. Newman (Engineer). 1.03 To date the Bank has made six loans for IMexican highways and toll facilities (US$177 million) and one loan for railways (US$61 million); a second railway loan is under consideration. The proposed project would be the first Bank operation in the port sector.  2. BACKGROUaD A. Economic Setting 2.01 Mexico has an area of aboat two million hm2 and is the third largest country in Latin America. The population of 53 million is growing at the high rate of 3.5% p.a.; density is uneven with the highest concentration in the Mexico City metropolitan area where about one-fifth of the total population lives. Fast-growing urban centers such as Mexico City, Guadalajara to the west and M4onterrey to the north, create a high demand for transport. 2.02 In the past five years GDP grew at an average of 7.0% p.a. to reach US$670 per capita in 1970; the same rate of growth is planned for the fore- seeable future. Tourism and manufacturing are the most dynamic sectors. Further development of tourism (a major foreign exchange earner),decentraliza- tion of industry and increased agricultural output are among Mexico's long term economic goals and their achieverment requires substantial investment in the transport sector which, in the seventies, is expected to receive about one-fifth of total public investments. B. Transport Sector 2.03 The United States is Mexico's principal trading partner and road and rail connections have develcped from producing areas in Mexico towards a dozeii points along the 2,500 kma frontier. Because of the predominance of this trade and the lesser importance of cnmerce with overseas destina- tions, transport in Mexico has been traditionally land-oriented. 2.04 The highway network has expanded rapidly in recent years and now totals some 70,000 km, much of it paved and well-maintained. The road trans- port industry is extremely active and road traffic growth averages nearly 10% p.a. In 1970, more than half a million trucks were in operation with an estimated annual carrying capacity of about 100 billion ton/km. Although road operating costs and rates are hidher on the average than railway costs and rates, trucks have been competing successfully and have increased their share of traffic through efficient service. 2.05 The railwzay system comprises five Government-owned companies, which operate some 20,000 km of routes. In 1969 they moved some 46 million tons of freiglt, or 30% of the nation's total. Uneconomic lines and services and inadequate tariffs have resulted in heavy financial losses for the railways; corrective measures are included in a railway project presently being con- sidered for Bank financing. 2.06 Air traffic is developing rapidly, particularly in connection with tourism. Some four million passengers were carried in 1970 and passenger traffic increased in recent years at an average annual rate of 10%.  -3- C. Port Sector 2.07 Because of Mexico's traditicna1 pattern of trade, port installations and services have grown less rapidly than the land transport system. This contrasts sharply with the modern and dynamic nature of the Mexican shipping industry and Petroleos Dbxicanos (PBEIX) oil tanker operations. A fundamental change in the Governmentts port policy has recently occurred as set forth in Chapter 3; it has been influenced by: (a) the Government's policy to develop the low-lying coastal areas, including ports and port-related industries, to reduce population pressures, decentralize industry, and provide a more balanced regioonal economic growth; (b) the increased commerce wfith several trading partners and the resulting diversification of Ilexico's foreign trade with overseas destinations; and (c) the growth of the tourist industry. 2.08 Mexico has 36 deep-water ports, including 31 fiscal ports (with customs services) and five free ports. The free ports, under the jurisdic- tion of the Ministry of Finance, were set up to facilitate the movement of bulk commodities and of shipments between Atlantic (Coatzacoalcos) and Pacific (Salin.e Cruz) markets across the Tehuantepec Isthmus; they account for less than 5% of all seaborne cargo. Of the 31 fiscal ports, five ports: Veracruz, Tampico, Guaymas, M4azatlan and Mianzanillo, handle 80% of the general and dry bulk cargo (Mlap 1). Their total traffic in 1970 was as follows: of which General and Foreign Domestic Total dry cargo Oil (tons million) Veracruz 2.2 1.4 3.6 2.3 1.3 Tampico 3.7 5.3 9.0 1.3 7.7 Guaymas 0.4 1.0 1.4 o.6 0.8 Mazatlan 0.2 0.8 1.0 0.4 o.6 larizanillo 0.4 0.2 o.6 o.4 0.2 Totals 6.9 8.7 15.6 5.0 10.6 44% 56% 100% 32% 68% Most of the items in the proposed project are destined for these five ports, which are referred to hereafter as the project ports.  -4 - D. Transport Coordination and Planning 2.09 To date, there has been little effort to integrate Mexico's transport system and to develop long-range,comprehensive transport sector plans and programs. The Bank's transport sector review made specific reconmendaLions in this respect, and steps have since been taken by the Government. A national transport policy is being progressively implemented with the aim of achieving lowest economic cost of transport while ensuring financial viability for the operating agencies, particularly ports and rail- ways; for the latter, major deficits in recent years have posed general problems of public finance. The Government is establishing a Sectoral Plan- ning Office within the Secretariat of Communicationr and Transport (SCT) to formulate long-range policies and introduce project evaluation procedures; agreement with the Bank on the terms of reference of this office is a condi- tion of the railway project presently under consideration. For ports, the recent establishment of a coordinating body has substantially improved the situation. Coordination is expected to be further strengthened by the availability of a national port development study, included in the proposed project.  - 5 - 3. PORT A1NINISTRATION A. Organization 3.01 Responsibility for the development and operations of the fiscal ports rests primarily with the Ministry of the ilavy (Marina). In general its management has been hampered by lack of clear objectives and by inade- quate organization, coordination and staffing. The main problems are as follows: (a) Some twelve ministerial departments, four Government agencies and numerous state, munic-pal and private groups are directly or indirectly involved in port activities. Communications between these interests have been unsatis- factory resulting in inadequate coordination of operations and in investments of doubtful justification; (b) Responsibility for port operations is distributed among Marina's numerous departments in MeAico City without appropriate inxternal coordination; (c) Marina's representation in the ports is limited to the port captain and the resident engineer; both report to their respective departments in Marina; (d) Maintenance dredging and most of the capital dredging is carried out by a separate departmient of Marina whose activities are neither well-planned and managed nor properly coordinated with other port functions; (e) Marina's staff is primarily military-oriented with limited experience in the commercial aspects of port activities; (f) Marina's function in the ports is limited to (i) providing and maintaining port installations and fixed equipment and (ii) regulating their use, incluiding the movement of ships. All cargo-handling is carried out by concessionnaires, mainly labor unions, with little control over costs and productivity; and (g) Cargo-handling carried out by concessionnaires (cooperatives and labor unions) is often inefficient due to inadequate management, wasteful labor practices and insufficient mechanized equipment. Fally aware of the urgent need to achieve major improvements in port organi- zation, plarming and operation, the Government has now started four important institutionlal reformus which are reviewed below.  - 6 - 3.02 The National Ports Coordinating Commission (Comision Nacional Coordinadora de Puertos - CNCP) was established on December 23, 1970. It is essentially an interministerial committee responsible for: (i) policy formulation; (ii) overall planning; anc (iii) coordination of all public and private interests related to ports. It is not concerned with day-to-day port operations which remain the responsibility of Marina. CNCP consists of: (a) the Cormission: a high-level body of 31 members representing ministerial departments (at sub-secretary level), government agencies and private sector groups, chaired by the Minister of the Presidency; (b) in Mexico City, a commission staff of about 30; and (c) in each major port, a coordinating delegate, responsible for coordination of public and private sectors at the local level. He chairs a Coordinating Committee (Junta Coordinadora) comprising the local representatives of the departments, agencies and groups represented in the Commission and a Consultative Committee (Comision Consultiva) whose members represent local sectors directly interested in port activities. Chart I shows the CMNCP structure. Organization and staffing are satisfactory and the results achieved since CNCP's inception are most promising. 3.03 The second step taken by the Government was the creation, within Marina, of a Department of Port Operations responsible for operational matters which were previously distributed among Marina's departments. The new depart- ment is represented in each major port by a superintendent who is the port manager - assisted by a port captain, a resident engineer and an administrator/ accountant. Except for a few technical matters, the superintendent reports to the Director General of the Department ofZ Port Operations in Mexico City. The new organization of Marina and of its Department of Port Operations, as shown in Charts II and III, is satisfactory. 3.04 To ensure adequate staffing of the Department of Port Operations in Mexico City and in the ports, candidates are bei selected -ith the assistance of operations and accounting consultants/ appointed in August 1971. Training of existing staff is necessary and is being organized. Some delay is expected before staff selection can be completed and agreement was reached during negotiations that, by no later than July 1, 1972, Marina will employ qualified managerial staff (a) for each of the following functions in the Department: office of the chief executive, port faciiities and equipment, port operations, economic studies, tariffs and administration; and (b) in the five project ports: Superintendent, Port Captain, Resident 5agineer, and Administrator/Accountant. A joint venture of Ingenieria y Procesamiento Electronico S.A.-IPESA (Mexico) and Fox-Muller-Pennington Associates (USA).  -7- 3.05 The Government has devised a new type of organization to tighten control of port operation and increase efficiency of cargo-handling: the Empresa de Servicios Portuarios (ESP). The first ESP was established in Manzanillo on June 16, 1971, with an initial capital of Ps 7 million (US$56o,o0o) of wihich 51% is Government-omned. It took over responsibility for port functions (stevedoring, longshore handling, supply of equipment, sale of water) previously carried out by labor unions. The organization, methods, accounts and staffing of ESP-Jianzanillo are being progressively set up with the assistance of the operations and accounting consultants. Produc- tivity has increased, costs are being checked and the first financial results are promising. ESP are likely to be established, in the near future, in Mazatlan and Ensenada; however, resistance by unions may inhibit extension of the system to the ports on the Gulf Coast. 3.06 On September 29,1i971, a port equipment trust fund was established - within Nacional Financiera_ to supply - by rental or sale - mechanical equip- ment to cargo-handling concessionnaires. An initial capital contribution of Ps 1 million (US$"80,000) was made by the Government; more contributions are expected from the Governaent and public agencies, and there is scope for private investment as well. The trust fund is managed by a committee chaired by the Minister of the Presidency and comprising Government, unions and port users representatives. The administrative, operational and staffing policies of the trust fund have been defined ancl are satisfactory. In addition, agreement was reached during negotiations that the trust fund dill be finan- cially viable, with (a) operating revenue sufficient to cover operating ex- penses, including depreciation on equipment for rentals and (b) internally- generated revenues sufficient to service debt. 3.07 The combined administration of the port system by GNCP and by Marina is unusual. Although the responsibilities of each entity are being carefully defined to avoid conflicts between policy making, planning and coordination on the one hand, and day-to-day operations on the other, a risk of overlap remains. In this respect the scheme may not be the best solution and the establishment of a National Ports Council, with executive responsibilities (as recommended in the Bank's sector review) would have had some advantages. However, the present scheme is a substantial improvement over the previous syrstem and it is considered that - with appropriate adjust- ments as experience warrants - the arrangements are workable. CNCP - through its Chairman, the Minister of the Presidency - has the strong political stature required to initiate the actions needed. This, together with the reorganization of Marina, the establishment of a port equipment trust fund and the progressive installation of ESP, indicate a drastic change in Mexico's traditional attitude towards ports, and the Government ts wTil1 to achieve major improvements in this sector. I/ The Government Development Bank  -8- B. Installations 3.08 The project ports have entrances wshich provide access to bulk carriers of up to about 22,000 dwt. At Veracruz (Map 2) there are general cargo berths for vessels up to 12,000 dwt, at Tampico 8,000 dirt (Nap 3), at Manzanillo 1i,000 diat (Map 4), and at Mazatlan and Guaymas 15,000 dwt. The larger carriers are mainly PEI4EX fleet tankers. Details of the existing installations and equipment are given in A'nex 1 and Table 1. In 1970 berth occupancy at Veracruz was 45% of the maximum; ship waiting time records are not available but waiting time is knoim to be low. Berths are operating at between 6N, and 70% of optimum capacity and additional berths are not presently needed. However, at Veracruz the narrowmess of the finger piers causes congestion and long hauls of cargo to-clear goods from the piers; remodelling the piers might be justified by cargo-handling savings. At Tampico the port land area is restricted, heavy dredging of the Panuco River is needed from the harbor entrance to the general cargo installations 12 km upstream, and the passage of larger tankers is subject to frequent draft restrictions. QNCP and Miarina will be studying these problems with the assistance of the operations and accounting consultants. 7xcept for Tampico, the harbor entrances and water areas are adequate for present traffic; land areas are generally satisfactory or can be made so at reasonable cost in reclamation or purchase. 3.09 Dry bulk-handling installations for minerals and agricultural products are available at most ports. Tanker berths have been developed by PEI,=. Container traffic is very small and no special provision has been made for it; however, existing berths and storage areas could accommodate the early stages of containerization. C. Maintenance 3.10 Maintenance of port installations and equipment is fairly good. Some improvements (e.g. in pavement maintenance) are needed, and these and reductions in unit costs of maintenance could be achieved by detailed programming which the operations and accounting consultants will be investigating. 3.11 IMintenance dredging - the responsibility of the Marina Dredging Department - is not fully effective. Depths are not always maintained and hydrographic records are sometimes out of date. Arrears of dredging amount to about 5 million m3, three quarters of the needed annual maintenance dredging of all ports. The department's difficulties are due to the: (a) magnitude of the dredging task; (b) inadequacy of hydrography and dredging management; and (c) inefficiency of some of the old dredgers. Details of the dredgers are given in Table 2, which shows that the efficiency of the fleet has deteriorated substantially from its rated output. A comparison of annual maintenance dredging needs and existing dredger capacity is given in Table 3; the annual and cumulative deficits in capacity are as follows:  1972 1973 1974 1975 1976 1977 Annual deficit (million m3) 4.3 0.9 1.3 2.2 2.9 3.6 Cumulative deficit (million m3) 4.3 5.2 6.5 8.7 11.6 15.2 The insufficiency of the maintenance dredging fleet should not be made 5ood by contract dredging since (a) the cost would be increased (Ps 12 per m as compared with Ps 7), and (b) maintenance dredging, characterized by small, imprecisely defined quantities at scattered locations, is much more difficult to undertake economically by contract than capital dredging. There is there- fore a need to increase the fleet's capacity and to retire and replace un- economical dredgers. Provision has been made in the project for two new self-propelled dredgers, auxiliary equipment for the existing fleet, and a study of dredging organization and future requirements. D. Operations 3.12 Marinals function in the ports is limited. Workers' syndicates (unions), workers! cooperative societies, and in one case (Manzanillo), ESP, handle cargo both on board ships and ashore but provide some of the mobile equipment including tugs; private pilot associations provide pilotage. The Secretaria de Agricultura y Ganaderia operates some bulk-handling installa- tions and PEaEX operates loading and discharge installations for oil and oil products. 3.13 In a port operation test case at Manzanillo a large part of the port area has been designated a zona franca (customs-free zone) to avoid customs delays. The practice of splitting the berthing and transit areas into a customs-free zone and a customs zone could cause considerable opera- tional difficulties; during negotiations the Government indicated its inten- tion to consult the Bank before the system is extended to other ports. The operations and accounting consultants are advising on these developments at Manzanillo and their suitability for extension to other ports. 3.14 General cargo (not bagged or baled) is loaded and discharged at about 8 tons per hook-hour and bagged cargo at about 13 tons per hook-hour. IWorking hours are only 12 per day. CNCP and Marina are improving operations and an increase of about 20-30&fio in handling rates may be achieved in the next few years; they would then be satisfactory. A similar improvement in working hours, including two shifts when justified, will probably be achieved as traffic through the ports increases. 3.15 At Veracruz, Tampico and Manzanillo respectively, 25%, 28% and 8% of general cargo remains in the port for 31 to 90 days; this causes transit shed congestion as there are no warehouses. Reduction of free time is pro- posed (para. 6.02) and provision for warehouses at these ports is made in the proposed project.  - 10 - 3.16 There is insufficient mobile cargo-handling eq7aipment and, though well-maintained, much of it is old and forklift trucks and tractor-trailers are particularly needed. Complete assessment of the needs is being under- taken with the assistance of the operations and accounting consultants. Minimal needs were therefore assessed and are included in the project. There is no fire-fighting equipment and no radio communication between shore sta- tions and between shore and ships. Provision for minimal needs is also made in the project.  - 11 - 4. THE PROJECT A. Investment Program 4.01 There is no long-range port development program. Investments are reviewed yearly and funds are provided by annual allocations in Malina's capital budget. Capital expenditure authorized for 1972 concerns 19 ports and amounts to about Ps 260 million; the project ports' share is some Ps 125 million. Although the overall level of budgeted funds seems adequate, adjustments will be needed to meet the financial requirements of the pro- posed project. B. Project Description 4.02 The objectives of the project are to: (a) provide high-priority installations and equipment; (b) assist the Government in developing port administration and operation; and (c) provide a plan for national port development and feasibility studies of high-priority projects. It consists of: (i) A grain-handling installation at Veracruz and consequent siting of tanker berths; (ii) TwJo self-propelled dredgers and other dredging equipment; (iii) CTarehouses at Veracruz, Tampico and Manzanillo and a transit shed at Veracruz; (iv) iWire-fighting and port communications equipment; (v) Mobile cargo-handling equipment; (vi) Consultants' services for: (a) operations and accounting; (b) a national port development study including feasibility studies; and (c) dredging organization and equipment; (vii) Staff training. The project items have been selected to meet known requirements at the five project ports except for (ii) dredging equipment, and (vi) consulting services which will cover all ports. A detailed description of the physical items in the project is given in Annex 2 and Table 5, and layouts of the proposed installations at Veracruz, Tampico and Manzanillo in Maps 2, 3 and 4 respec- tively. The objectives and scope of consultants' services are described in Annexes 3, 4 and 5; the staff training program is detailed in Annex 6. The possibility of UND? financing for consulting services and staff training was discussed with the Government who indicated its preference for inclusion of these items in the proposed project.  - 12 - C. Cost EstTMVItes 4.03 The total estimated cost of the project is Ps 344.7 million (US$27.6 million equivalent) with a foreign exchange component of US$20.0 million equivalent, or 72%. Details are given in Table 6 and are summarized below: % of total expend- Local Foreign Total Local Foreign Total iture (Ps '000) (US$ '000 equivalent) (i) Grain-handling installation and tanker berths 29,200 28,250 57,700 2,330 2,290 4,620 16.7 (ii) Dredging equipment 10,500 150,700 161,200 840 12,030 12,870 46.7 (iii) Wlarehouses and transit shed 25,300 7,200 32,500 2,020 580 2,600 9.4 (iv) Fire-fighting and communications equipment 380 5,000 5,380 30 400 430 1.5 (v) Mobile cargo-handling equipment 1,600 20,200 21,800 130 1,620 1,750 6.3 (vi) Consultants' services for: (a) operations and accounting 7,100 2,800 9,900 570 230 800) (b) national port ) study 7,300 6,180 13,480 590 490 1,080) 8.0 (c) dredging study 1,300 2,500 3,800 100 210 310) Sub-total (vi) 15,700 11,480 27,180 1,260 930 2,190 (vii) Staff trainLig 380 3,380 3,760 30 270 300 1.2 83,060 226,460 309,520 6,640 18,120 214760 89.8 Contingencies Physical (10% on civil works) 5,400 2,000 7,400 430 160 590 2.1 Price (7% on civil works, 10% on equip- ment and 7% on consultants' services and staff training) 6,340 21,420 27,760 -500 1,720 2,220 8.1 914,800 249,880 31'i.9680 7,570 20,000 27,570 100.0 _~~ = =  - 13 4.04 The costs are based on realistic estimates made by Marina with con- sultantst assistance in the case of the grain-handling equipment. They have been revised by the Bank staff to take into account recent changes in exchange rates& Custom duties on materials for civil works and on capital equipment, from which exemption will be granted, have not been included. The estimates- for civil works include l1CP for physical contingencies and 7% for price esca- lation on both foreign and local components;escalation estimates are based on civil works being undertaken by Mexican contractors, price increases of labor and materials in the last five years, and a construction period of 2-1/2 years to mid-1975. Price escalation estimates for equipment are based on supply over a period of 16 months to the first quarter of 1974. D. Project Execution 4.05 Marina would be responsible for carrying out the grain-handling installation and the tanker berths (i), dredging equipment (ii), warehouses and transit sheds (iii), fire-fighting and communications equipment (iv) and dredging studies (vi)(c). The other studies (vi)(a) and (b) and the staff training (vii) would be the responsibility of CNCP in coordination with Marina, and the mobile cargo-hanclling equipment (v) would be that of the port equipment trust fund. The project would take three years to complete as from mid-1972. Consultants acceptable to the Bank have been appointed for the operations and accounting services. The contract provides for services until December 31, 1972, and allows for a possible extension thereafter. It was agreed during negotiations that, on or before November 1, 1972,-the Government will consult iath the Bank on the neee to continue the services. It iwas also agreed during negotiations that consultants satisfactory to the Bank i11 be appointed: (a) for the national port study, by no later than June 30, 1972; and (b) for the dredging study, by no later than June 30, 1973. 4.06 The pert study included in the project is expected to result in an integrated long-range progrma for port development and feasibility studies of high priority projects selected by the Government in consultation with the Bank. This study would possibly identify projects suitable for Bank financing. Because of the present lack of coordination and planning it wazs agreed during negotiations t1hat until the findings of the master plan for port development- are available - some 14i months after the beginning of the study - the Govern- ment will make only those investments in ports required to meet immediate needs3 and to that end the Government will exchange view-s with the Bank on port investments exceeding 10 million pesos in any one port with the under- standing that the investment limitation does not apply to port construction and improvement w^;hich are directly related to industrial or mining development. E. Project Financing 4.07 The proposed loan would finance the foreign ex,change element of the project (US',,20.0 million); a term of 25 years, including a four-year period of grace, would be appropriate on the basis of the weighted average economic  - 140 - life of the project items, estimated at 23 years. The local currency element of the project would be financed. by the Government, and agreement on this uas reached during negotiations. The trust fund, which iwol'ld administer project item (v), woulJ1 service the corresponding portion of the proposed loan to the Government, on terms and conditions substantially similar to tnose appolicable to the proposed. loan. In case Bank-financed: equipment were to be sold, fiunds wouldC be left with the trust fund for purchase of similar ecquipment on a revolving basis. F. Procurement 4.08 A-ll contracts for construction and for equipment supply would be atrarded on the basis of international competitive bidding in accordance with Bank guidelines. It is expected that domestic manufacturers will participate in the bidding for equipment and they will be granted a margin of 15% or the level of custom duties whichever is lower, for bid comparison. For the grain- handling installation separate contracts would be let for (a) the supply of equipment and (b) the civil works and erection of the equipment; the selected equipment suppliers would be nominated in the civil works contracts as equip- ment erection sub-contractors. G. Disbursements 4.09 A schedule of estimated disbursements by quarter is given in Table 7; it is based on the project program detailed in Annex 2. Disbursements would cover: (a) 27% of the cost of civil works, including grain-handling equip- ment erection, corresponding to the estimated foreign exchange component; (b) the actual CIF cost of imported equipment or the ex-factory cost of equipment manufactured by successful local bidders (in the latter case financing of a small amount of local cost may be involved); (c) the foreign exchange component of consultantst services; and (d) the actual foreign exchange costs of the staff training item. Because of the urgent need for assistance the contract with the operations and accounting consultants was signed in August 1971 in agreement with the Bank; it is recommended that the consultants' foreign exchange costs be reimbursed out of the Bank loan funds; reimbursement would cover payments made after October 15, 1971, and the total amount involved in retroactive financing would not exceed US$120,000. Since the cargo-handling equipment portion of the project covers only minimal needs which can be defined at this time and requirements for additional equipment will be identified during the execution of the project, it is proposed that any savings in the Bank-financed project items be used to finance the foreign exchange cost of such additional equipment and/or of the operations and accounting consultants' services beyond December 31, 1972.  - 15 - 5. ECONCIIC EVALUATION A. Past Traffic 5.01 Seaborne commerce is presently handled by 36 ports located along the Pacific and Gulf coasts. In 1970, these ports moved 27.3 million tons of cargo, broken down into 14.6 million tons of domestic and 12.7 million tons of foreign trade commodities. In the last decade, total port traffic has gron at an average annual rate of 7.5%. During that period the rate of traffic growth ranged from 6.1%O annually for coastal shipments to 8.5% for exports and 11.5% for imports (Table 8). 5.02 Oil movements dominate coastal shipments and include substantial intercoastal shipments via the Panama Canal. The canal is also occasionally used for the movement of wheat from northwestern Mexico to major population centers along the Gulf Coast. 5.03 There is little containerized traffic through Mexican ports at present but the largest Mexican shipowner (Transportacion Maritima lMexicana, with a fleet of 320,000 dwt) has acquired two container ships each capable of carrying 415 standard 20 ft containers; these ships are at present in use as break-bulk carriers. 5.04 In 1970 the five project ports jointly handled 15.6 million tons, or 57Z of Mexico's total seaborne commerce. WTith oil excluded, the share of the project ports increases to 80%, as showm below: General and drv bulk carzo Oil Total (tons millions) Veracruz 2.3 1.3 3.6 Tampico 1.3 7.7 9.0 Guaymas 0.6 0.8 1.4 IMazatlan o.4 0.6 1.0 Mlanzanillo 0.4 0.2 0.6 Totals 5.0 10.6 15.6 Other ports 103 10.4 11.7 Grand Totals 6.3 21.0 27.3 During the sixties the annual rate of traffic growth has been uneven; average annual groRth rates have varied from -2.5% in Manzanillo to 20.0% in Mazatlan. Except at Veracruz traffic growth through the project ports has been sub- stantially slower during the most recent (1965-70) period. Details of volume, cargo mix and growth rates are given in Tables 9 and 10.  - 16 - B. Traffic Forecast 5.o5 Traffic forecasts based on an analysis of demand are currently not available; port planning has developed using forecasts based on extrapolations of past trends. In view of the changes occurring in the Mexican econoliy and the growing importance of the maritime sector, there is an urgent need for a comprehensive, demand-oriented framework for forecasting the volume, compositioi and direction of port traffic. Provision for this has been made in the nationa. port development study included in the project. 5.06 Fortunately, the evaluation of the project is not sensitive to the lack of reliable traffic forecasts. For one thing, there is adequate capacity in each project port. More important, all principal project components were found economically justified on either the current level of use (maintenance dredgers) or on a specific commodity forecast for the facility in question (grain terminal at Veracruz). A demand analysis for each project item, stating assumptions and methodology, is presented in Annex 7, supported by Tables 11 and 12. C. Economic Justification 5.07 Veracruz Grain-Handling Installation - a grain-handling terminal at Veracruz is needed to handle corn exports as well as grain imports required by occasional shortfalls in the domestic grain output. It is estimated that the proposed installation will handle an average annual volume of 200,000 tons. Due to inefficient, labor-intensive grain-handling procedures, use of rail cars for grain storage and excessive shiploading time, current terminal costs of grain movements through Veracru.z average Ps 83.20 (US$6.66) per ton. As a result of the proposed improvement, these costs will decrease to Ps 32.35 (US$2.59) per ton for shipments using the Veracru.z railroad station and to Ps 16.87 (US$1.35) per ton for grain moved directly to the port's marshalling yard, generating annual operating cost savings of Ps 11.5 million. The cost of the proposed facility is estimated at Ps 35.4 million (US$2.83 million) of which Ps 16.9 million will be for the equipment with an estimated useful life of 15 years and Ps 18.5 million for the structure with a life of 30 years. Benefits stem essentially from savings in labor, for which alternative oppor- tunities exist locally, and the economic rate of return on this project itew is estimated at 28%. 5.08 Tanker Berth at Veracruz - the port of Veracruz handles substantial coastal shipments of crude and refined products - 9.3 million barrels in 1970. This traffic is expected to grow at about 4.5% per amnum allowing for a partial diversion, after 1974, to the Veracruz-Tierra Blanca pipeline. The present draft limitations at Veracruz permit the use of only partially loaded 22,000 dwt class tankers recently acquired by PErE4X. The relocation of the tanker berth would not only permit the optimal operaticn of PMAEI tankers but would also obviate the need for oil tankers to share the same berth with the proposed grain-handling installation. Average operating costs to tankers using the new berth would decline from 0.42 zentavo or more per barrel/km to  - 17 - 0.25 centavo per barrel/km. Project costs, including additional dredging, are estimated at Ps 26.2 million (US$2.1 million) and the annual maintenance costs at 1-2% of the project cost. The comparison of this item's costs and benefits yields an economic rate of return of 17%. 5.09 Dredging Equipment - the two self-propelled dredgers included in the project are needed to: (a) eliminate accumulated maintenance dredging arrears; (b) provide adequate capacity for annual maintenance dredging; and (c) carry out small volumes of capital dredging. The dredging capacity of the existing self-propelled dredger fleet is inadequate for current work requirements, and will continue to decline due to decreasing working efficienc7 and increasing time out for repairs. If no new dredgers are acquired, Marina may have to resort to more expensive contract dredging. There are no privatelj owned Mexican dredgers able to handle any significant amount of the required maintenance dredging so that contract dredging would be performed by foreign firmu. Since contracts awarded to foreign firms would be an economic cost' to Mexico, the financial savings to the ports represent the economic savings to the country. The expected savings from the acquisition of the two self- propelled dredgers instead of resorting to contract dredging are estimated at Ps 450 million (US$36.0 million) for the useful life of the equipment compared with an estimated cost of Ps 132.5 million (US$10.6 million) and the economic rate of return on the investment is estimated at about 24%. 5.10 Warehouses - the project provides for about 29,000 m2 of warehousing at Vcoracruz, Tampico and Manzanillo, to relieve the present congestion in the tran.:-t sheds and to reduce the operating costs resulting from inefficient stackLag, wasteful shifting of cargo and hindrance to movement of port equip- ment. Because of lack of reliable data on the above operating costs and possible savings thereon, no attempt has been made to evaluate the warehouses on an econonic basis. Instead, an operational analysis has been made, the details of which are in Annex 7, based on a comparison of storage demand and capacity. It shows that the warehousing space provided in the project is adequate. 5.11 Mobile Cargo-Handling Equipment - mobile equipment is needed to replace existing old equipment, to meet current and future needs and permit more efficient operations. Cperating cost savings resulting from the use of new forklifts, tractors and some ancillary equipment are estimated at Ps 5 million annually. The economic rate of return, excluding possible additional savings from the salvage of scrap value of replaced equipment is around 14%.  - 18 - 6. FINANCIAL EVAIUATION A. Rates and Charges 6.01 Charges levied by.Marina are mainly. p6rt dues, berthage, Wharfage and storage; cargo-handling charges are applied by concessiontiaires at rates approved by the Ministry of Transport and Communications. The present system of charges was evolved in response to political and budgetary pressures and has little economic basis. Little consideration was given in the past to the important objectives: (a) that ports be financially viable; and (b) that charges be reasonably cost-based, at least to the extent that they pay mar- ginal costs and, except Where sound economic reasons exist, they cover fully- distributed costs. Details of present port user charges levied by Marina are listed in Annex 8; port dues, berthage and wharfage were raised in 1966 and storage charges in January 1969. Nevertheless, the overall level of Marina's charges remains..low and, in addition, the tariffs provide for numerous exemptions and for preferential rates. Port dues on vessels carry- ing exports and imports are higher than those on vessels carrying domestic cargo; coasters and fishing craft are exempted from berthage; wharfage is higher on exports and imports than on domestic cargo. It is estimated that less than one-third of the tonnage handled in the five project ports pays some 90% of the port dues, berthage and wharfage collected in these ports. Charges are identical for all fiscal ports and although no costing informa- tion is presently available, some charges are obviously below marginal cost. 6.02 Storage charges, although substantially increased in 1969, do not provide for an adequate scale of demurrage rates for goods in transit sheds and there is insufficient incentive for fast clearance of goods. The situation improved somewhat when the 30-day free time was recently reduced to 15 days. As recommended in the Bankts transport sector review, the free time period for imports should be further reduced to 10 days and agreement was reached.during negotiations that such reduction will be applicable in Manzanillo, Tampico and Veracruz when the warehouses provided for in the project are in operation. B. Past Earnings 6.03 Revenues from ports are collected by Customs; the proceeds go to the Treasury and are shown as receipts in the budget of the Ministry of Finance. Working expenses for the ports are provided for in the budget of Marina; no allowance is made for depreciation. An attempt has been made by the Bank staff to identify the operating costs, and their broad components, in the five project ports and to check the adequacy of revenue derived from port charges levied by Marina against such costs. Information gathered from treasury and budgetary sources has been summarized in notional income accounts for the period 1966-70. They should be considered as approximations only. Details for each project port are given in Tables 13 to 17; they are consolidated in Table 18 for all five ports.  - 19 - 6.04 Past earnings for the project ports taken together were as follows: Total 1966 1967 1968 1969 1970 1966-70 Operating Revenue 14.8 19.0 23.3 42.9 40.7 14o.7 Working Expenses 18.5 27.4 16.4 16.1 14.9 93.3 Depreciation 21.2 22.9 22.2 23.4 23.9 113.6 Cperating Expenses 39.7 50.3 38.6 39.5 38.8 206.9 Net Operating Revenue (24.9) (31.3) (15.3) 3.4 1.9 (66.2) Until 1968 the project ports showed net operating deficits in most cases with operating ratios varying from 81% (Nanzanillo in 1968) to about 600% (Tampico in 1967). The situation improved substantially with the increase of storage charges and the project ports, taken as a whole, made a profit in 1969 and 1970. The largest profits were in Veracruz which recouped losses incurred elsewhere. Except for maintenance dredging costs which vary substantially from one year to another, working expenses appear to have been kept at a reasonable level. In 1970, the rate of return on net fixed assets, as tentatively estimated, varied from -2.2% for Guaymas to 3.2% for Veracruz. Together the five project ports yielded a modest return of 0.2%. 6.o5 The present position is unsatisfactory with respect to: (a) the favorable treatment granted without economic justifica- tion to a substantial portion of traffic through exemption from charges and/or preferential rates; (b) charges are the same for all fiscal ports although costs vary widely; and (c) the imbalance of the present tariff structure with too heavy a reliance on storage charges (in 1970, they accounted for 70% of the total operating revenue of the project ports). However, this is expected to be ixmroved through faster clearance of goods as explained in para. 6.02. Corrective measures are recommended below. C. Pricing Policy 6.o6 Mexican ports and in particular the project ports each have a rather well-defined service area iith little overlap; consequently there is little inter-port conpetition (Map 1). The relatively small impact of port charges on the value of goods makes it also unlikely that traffic will divert to road or rail as a result of increased port charges. The demand for port services is thus relatively inelastic. For this reason, it cannot be expected  - 20 - that lowered charges would result in increased use of existing excess port capacity. It appears, therefore, that measures required to achieve financial viability for ports would neither dampen demand nor distort the economically desirable distribution of traffic. Consequently it is recommended that port charges should be reasonably related to fully-distributed costs except in those specific cases where economic loss might result from applying such a policy. Details of fully-distributed costs for Marina and on their respective coverage by charges in the project ports are given in Annex 9. Reassessment of Marina's present tariffs on these bases could be completed towards the end of 1972, with the assistance of the operations and accounting consultants. A major point to be studied by the consultants Will be the valuation of fixed assets and the assessment of their depreciation, taking into account the low utilization of some assets due to overinvestment. During negotiations, it was agreed that: (a) with the exceptions listed in (b) and (c) below, charges levied by Marina in each port will be reasonably cost-based and sufficient to cover the fully-distributed costs of each project port (as defined in Annex 9, para. 1), including a return on the value of fixed assets to be determined in consultation with the Bank; the rate of return should be sufficient to achieve the financial objectives defined in para. 6.11; (b) exemption from port charges should be granted only for com- pliance with international courtesy rules; and (c) only when economic factors so require, will charges be assessed below fully-distributed costs with a floor not lower than the relevant marginal cost. Full implementation of the above policy requires legislative approval which is not expected before late 1973. It was therefore agreed during negotia- tions that the policy will be fully implemented by not later than January 1, 1974, with the understanding that legal action not requiring legislative approval will be taken as may be practicable so as to achieve in 1973 a financial performance as consistent as possible with that laid down in the policy. 6.07 The notional income accounts for the five project ports indicate that, on the basis of the average financial results for 1969/70 shown below, full coverage of costs with no return on fixed assets would have required overall tariff increases in Tampico (54%), Guaymas (175%) and Mazatlan (200%)p while the overall level of revenue in Manzanillo and Veracruz would have been adequate.  -21- Five Pro- Guaymas Manzanillo Mazatlan Tampico Veracruz ject Ports (Ps '000) Operating Revenue 1,323 4,020 1,641 8,672 26,183 41,839 Required Increase 2,309(175%) - 3 260(200%)_4673(54%) - 10 242 Total 3,632 L,Q20 13,345 26,183 12 3 Working Eqpenses 872 1,082 1,735 6$416 5,398 15,503 Department of Port Operations/ 500 500 5