Afghanistan - Aviation Project

DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Putblic Use FILE CopY Report No. 93a-AF APPRAISAL OF AN AVIATION PROJECT AFGHANISTAN April 5, 1973 Transportation Division Projects Department Europe, Middle East, and North Africa Regional Office This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization.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.  CURRENCY EQUrVALENTS Currency Unit - Afghani (Af) US$0.0125 Af 1 US$1.OO- Af 80 US$12,500 Af 1 million SYSTEM OF WEIGHTS AND MEASURES : METRIC Metric System British/US System 1 kilometer (km) a 0.62 mile (mi) 1 meter (m) 2 3.28 feet (ft) 1 metric ton (m ton) = 2,204.60 pounds (lb) ACRONYMS AND ABBREVIATIONS AAA - Afghan Air Authority ANS - Air Navigation Services ATO - Afghan Tourist Organization FTC - Flight Information Center ICAO - International Civil Aviation Organization STOL - Short Take-off and landing uS - United States USSR - Union Soviet Socialist Republics HF - High Frequency VHF - Very High Frequency ROYAL GOVERNMENT OF AFGHANISTAN FISCAL YFAR March 22 - March 21  APPRAISAL OF AN AVIATION PROJECT AFGHANISTAN CONTENTS Page No. SUM1ARY ......................................... i I. INTRODUCTION ........................................ 1 II. THE TRMNSPORT SECTOR ................................ 1 III. CIVIL AVIATION ...................................... 2 A. Background ..................................... 2 B. Flight Information and Air Traffic Control Services 3 C. Administration ................................. 4 D. International Airports ......................... 5 E. Domestic Airports .............................. 6 IV. THE PROJECT ......................................... 7 A. Description .................................... 7 B. Cost Estimates ................................. 9 C. Execution ...................................... 11 D. Financing ...................................... 11 E. Disbursements .................................. 13 V. ECONOMIC EVALUATION ................................. 13 A. Introduction ................................... 13 B. Traffic Forecasts .............................. 14 C. Costs ................ 15 D. Benefits .15 E. Economic Return ...................... .. 16 VI. FINANCIAL EVALUATION ................................ 16 A. Existing Situation ............................. 16 B. User Charges and Financial Objectives .... ....... 16 C. Future Earnings and Financial Position ..... ..... 17 VII. RECOMMENDATIONS .................. ................... 19 This report was prepared by Messrs. W.B.R. Zetterstrom (Aviation Engineer), B.B.M. Bostrom (Economist), D.C. Elliott (Section Chief), and D.D. Singh (Economist) all of the Association.  -2- CONTENTS (Continued) ANNEXES 1. Equipment to be Purchased for Kabul Flight Information Center 2. Estimated Schedule of Disbursements 3. Economic Evaluation 4. Financial Assumptions TABLES 1. Estimated and Projected Operating Results of Air Navigation Services, FY70-80 2. Air Navigation Services - Comparative Balance Sheets 3. Estimated and Projected Cash Flow of Air Navigation Services, FY70-80 MAPS Transport Facilities in Aghanistan - IBRD 3367 Afghanistan Airways System - IBRD 3368R  APPRAISAL OF AN AVIATION PROJECT AFGHANISTAN SUMMARY i. This report appraises an aviation project in Afghanistan, for which an IDA Credit of US$2.5 million equivalent is proposed. Afghanistan is a land-locked and extremely mountainous country, which has no railtways and only a very small amount of river traffic. Although the road transport system is far from adequate, it provides the principal mode of internal and international transport. However, the difficult mountainous terrain, the low proportior. of the total road network which is paved, the effects of the inclement weather on unpaved roads, and the scattered pattern of the country's predominantly rural population combine to produce conditions in which air transport plays an increasingly important complementary role in the country's domestic transport system. International air services provide an essential link between this remote country and the developed world, and are the only realistic means by which its considerable attractions could be made available to the growing international tourist market. ii. This would be the second transportation project in Afghanistan to be financed by the Bank Group. The project consists of three parts: A. investments in flight information facilities for civil aviation (US$1.5 million), B. organizational changes and technical assistance to improve the civil air navigation services in Afghanistan (IJS$700,000), and C. studies and engineering work for additional airport capacity to serve the Kabul area (US$900,000). The foreign exchange component of this US$3.1 million project is estimated to be 80% or US$2.5 million equivalent, and would be financed by this IDA Credit. iii. The project would establish, no later than the end of 1973, Air Navigation Services (ANS), a separate entity with its own charter, to have general responsibility for the provision of civil air navigation, air traffic control and air communication services in Afghanistan. ANS would be run on a commercial basis and would be responsible to the Afghan Air Authority (AAA). iv. The Credit would be made to the Afghan Government, which would make it available, with the US$600,000 equivalent local costs, to the AAA for the purposes of the project. AAA would be responsible for the project, but would transfer responsibility for parts A. and B. of the project to ANS when it is established. The funds attributable to parts A. and B. of the project would be treated as a loan, repayable by AN'S to the Government over 12 years (including a two-year grace period) at an interest rate of 7 1/4% per annum. Repayments would begin in 1976. Funds for part C would be provided as a grant by the Government to AAA. v. The construction, and procurement and installation of equipment involved in part A. of the project are likely to be carried out under a single contract, which will be awarded under international competitive  - ii - bidding. The design, engineering and supervision of this work will be under- taken by consultants. Since improvements in flight information services are a matter of considerable urgency, the Government is currently in the process of appointing consultants for this work. Retroactive financing for these consultants services, which is expected to involve less than US$50,000, has been requested by the Government and is included in the Credit. vi. Part C of the project would also be undertaken by consultants. It consists of (a) preliminary engineering and economic studies of new airport facilities for Kabul, and (b) final engineering for these facilities. The final engineering would only be financed by this Credit if, after (a) above is completed, the Government and the Association agree that the final engineer- ing is justified at that stage. vii. The improvements in the flight information and air traffic control services resulting from the project will justify increases in the charges paid for them by foreign and domestic airlines. As the present rates will not be sufficient to cover the cost of operations, it is recommended that they be raised to levels which would make the provision of these services financially self-sufficient. The revenues from increased charge to foreign airlines are direct incremental benefits to the Afghan economy arising from the project, and these benefits alone give the project an economic return of 12%. viii. It is recommended that a Credit for US$2.5 million be made to the Royal Kingdom of Afghanistan on the usual terms.  APPRAISAL OF AN AVIATION PROJECT AFGHANISTAN I. INTRODUCTION 1.01 In 1969, the Royal Government of Afghanistan asked the Association to review its proposed expansion program for Kabul airport. An identifica- tion mission, wqhich visited the country in November 1969, recognized the economic priority of further developing civil aviation in Afghanistan as well as the neeed for improvements in civil aviation facilities. In particular, improvements in air navigation services were seen to be urgently required. Consequently, a US$3.1 million project has been prepared with the two objec- tives of improving the Flight Information and Air Traffic Control services in Afghanistan, and of assessing the airport capacity needs for the Kabul area. The proposed IDA Credit would finance the 30% foreign exchange component of this project, which amounts to US$2.5 million. 1.02 This report is based on the findings of an October/November 1970 appraisal mission composed of Messrs. W.B.R. Zetterstrom (Aviation Engineer) and B.B.M. Bostrom (Economist) of the Association and Mr. B. Rollins (Financial Analyst), a consultant, as well as on the findings of updating missions by Mr. Zetterstrom in July 1972 and bv Mr. D.C. Elliott (Section Chief) in November 1972. II. THE TRANSPORT SECTOR 2.01 Afghanistan is a land-locked and mountainous country. Nearly a half of its area of 635,000 km2 is more than 1,800 m above sea level, with several peaks exceeding 7,000 m. The 725 km Hindu Kush mountain range cuts a broad swathe across the country, separating the fertile northern agricul- tural plain and the arid deserts which make up most of the south. The country's population, estimated to be about 14.6 million and growing at about 2% per annum, is predominantly rural and widely dispersed. It has been estimated that only 1.1 million of the total population live in urban areas with over 20,000 inhabitants, and that some 435,000 of these urban dwellers live in the capital city of Kabul. 2.02 Map IBRD 3367 shows transport facilities in Afghanistan. Road transport is the principal means of international and domestic movement, with air transport playing an increasingly important complementary role. No railways exist because the mountainous terrain makes construction extremely difficult and expensive and because the volume of bulk products for long distance hauls is very small. 2.03 The need to link the principal river basin agricultural areas, in which all the major population centers are located, has led to development of a roughly circular road system. Primary roads run around the Hindu Kush  - 2 - range, parallel to the borders of the country, and spurs extend to neighbor- a ing countries. About 3,200 km of primary roads exist, of which about 2,500 km have paved all-weather surfaces. In addition, there are some 14,000 km of other roads and motorable tracks, of which about 10,000 km have gravel and improved earth surfaces. Heavy rain often washes away road sections and erodes surfaces, making movement difficult. There is about one motor vehicle to every 500 persons in the country and two-thirds of the vehicle fleet consists of trucks or buses. Animals, mainly camels, carry much traffic, particularly on routes not yet served by roads. The size of the road system is inadequate for the country's needs, but the most immediate requirement is for improved maintenance of existing roads rather than expan- sion of the system. 2.04 The only significant water transport is on the Amu Darya River, which runs along the border with the Union of Soviet Socialist Republics (USSR). The river carries about 150,000 m tons annually including some international traffic with the USSR. A pipeline carries gas to the USSR. 2.05 The civil aviation system is described in Chapter III. III. CIVIL AVIATION A. Background 3.01 Afghanistan's civil air transport system has largely been developed over the last 15 years with American and Russian aid. It now contains 20 airports and airstrips of which Kabul, with more than 2/3 of all inter- national and domestic passenger movements, is by far the most important. Six other airports each handle more than 2,000 passengers a year, of which one, Kandahar, is also an international airport. Ariana Afghan Airlines, which is jointly owned by the Government and Pan American Airlines, and six foreign airlines connect Afghanistan with 11 cities in 8 foreign countries. A second Afghan airline, Bakhtar, was set up in 1968 to provide feeder services to remote areas. In 1971, it took over all of Ariana's domestic routes. 3.02 Air transport has an obvious role to play in a land-locked mountai- nous country such as Afghanistan in which the population is widely scattered over a large area. Moreover, because of Afghanistan's remoteness from the major tourist generating countries of the developed world, aviation is the only realistic means by which the country's considerable attractions could be made accessible to the growing and lucrative international mass tourist market. 3.03 The vital importance of air transport to the economic and social development of the country was not explicitly recognized until the early 1950's. In 1952, the International Civil Aviation Organization (ICAO)  -3 - established a Technical Assistance Mission in Kabul, and it formulated the country's initial requirements in an Air Transport Project, which was launched in 1955 and took over 10 years to complete. This project called for the construction of two international airports (Kabul and Kandahar) and four domestic all-weather airports (Herat, Kunduz, Mazar-i-Sharif and Jalalabad) to serve the main cities in the country. In addition, it includ- ed the establishment of a system of air routes, the acquisition of communica- tion and navigational equipment required to operate such a system, as well as the reorganization of the national airline and of the administration of civil aviation. Most of the initial requirements identified by this project were met by 1968, with the help of bilateral aid, principally from the United States (US). Between 1956 and 1968, the US contributed over US$22 million to Afghanistan for aviation projects, including the construction of Kandahar International Airport and four domestic airports, and for technical assistance. The USSR built Kabul airport at a cost of about US$6.5 million and provided technical assistance and training in the USSR. 3.04 Afghanistan is located on an important junction in the airways system for intercontinental travel. The existing and proposed air routes over Afghan territory are illustrated in Map IBRD 3368R. The most important of these is the east-west route, along the Tehran-New Delhi axis, which is i-ollowed by a stream of flights from Europe and the Middle East to South and Southeast Asia. In 1970, some 4,800 foreign civil aircraft flew over Afghanistan without landing in the country and paid charges for the use of Afghan airspace. B. Flight Information and Air Traffic Control Services 3.05 Officially, all the airspace over Afghanistan is under the control of the Royal Afghan Air Force (RAAF), but a network of air corridors has been established into an airways system for civilian use, which is admin- istered by civilian authorities. The safe and efficient operation of an airways system requires sophisticated radio equipment and skilled manpower to provide information and to control continuously the movement of aircraft along the established routes to their destination airports in the country, or, in the case of overflying aircraft, to the airspace of neighboring countries. For this purpose, a Flight Information center (FIC) was establish- ed at Kandahar as part of the 1955 Air Transport Project. 3.06 liowever, the communications equipment in the existing FIC is now largely obsolete and unserviceable. Consequently, the center is unable to secure positive and continuous control of aircraft in Afghan airspace in accordance with Instrument Flight Rule (IFR) separation standards. The pilots of overflying aircraft are hence obliged to ensure their own separa- tion from other operating aircraft; to do this, they have to rely on visual sightings and on the limited and often unreliable information service provided by the existing FIC. The provision of a continuous positive IFR separation service is an urgent necessity and is strongly urged by ICAO.  - 4 - Moreover, the existing FIC is unable, because of its inadequate equipment, X to communicate satisfactorily with FIC's adjacent countries and to provide and receive appropriate advance notices for the transference of control of aircraft. These are serious deficiencies in Afghanistan's aviation infra- structure, which need to be rectified expeditiously, if safe movement of civilian aircraft in Afghanistan's air corridors is to continue. 3.07 Since almost all of the equipment at the FIC needs to be replaced, and since it is necessary to continue using it to provide limited services until the new equipment is operational, re-equiping it will provide an apt opportunity to relocate the center, with little additional cost, at Kabul where the Afghan Air Authority has its headquarters. This would improve supervision and enable better manpower utilization by providing a larger concentration of the relevant technicians at one location. C. Administration 3.08 The administration of the civil airways system and the provision of the air navigation services it requires are the responsibility of a non- ministerial autonomous government organization, the Afghan Air Authority (AAA) which was set up under the 1955 Air Transport Project (para. 3.03). The AAA is responsible for Afghanistan's civil airports, for the regulation of its airline industry and for the provision of meteorological services. It has also been responsible for the direct management and operation of the Government--owned domestic airline, Bakhtar, since its establishment in 1968. Although Ariana Airlines is organized as a distinct entity with its own accounts, sub-management, pay scales, etc., it is very closely connected with the AAM, with which it shares a common President and headquarter offices. The President of the AAA, as head of the Afghan Tourist Organization (ATO) also deals with all matters relating to tourism in Afghanistan. The ATO receives no funds from the state budget but is entirely supported by the earnings of its commercial arm, Afghantours, which operates tours, rents vehicles and manages hotels. Afghantours and Bakhtar airlines each have their own operational personnel, but share some administrative services with civil aviation administration functions within the AMA. 3.09 The growth in the functions centered on the AAA, the wide interests of its President, and the need for clearer definition and increased delega- tion of responsibilities in the existing organization structure are giving rise to serious and pressing problems for the air navigation and traffic control aspects of administering civil aviation in Afghanistan. These pro- blems are aggravated by inadequate procedures of operating and maintaining air traffic control communications facilities; methods of procurement and warehousing in particular need substantial improvement. Moreover, as the AAA does not operate a modern cost accounting system, management lacks the control data to efficiently operate and maintain its air navigation facil- ities. Further, the existing system of remuneration, with low civil service pay scales and progression based exclusively on longevity, makes it difficult  -5- to attract and retain the highly skilled technicians required in air naviga- tion services. An important part of this proposed project is designed to overcome the above problems by organizational and administrative changes, and by technical assistance (paras. 4.06 and 4.09). 3.10 A potentially dangerous situation arises when it is necessary for non-civilian aircraft to use civilian airspace. Assurances have been obtained from the Government that it will take all the necessary steps to enable civil aviation to enjoy the safe use of its designated airspace, and that adequate notice will be provided to the civilian air authorities each time civilian airspace is to be used by non-civilian aircraft. D. International Airports 3.11 International aviation in Afghanistan is very much centered on Kabul airport, which was opened in 1962. By 1964 it was handling 30,000 international passengers; this rose to 55,500 by 1969. A sample survey conducted in 1969 showed that 22% of international passengers at Kabul were Afghans, 44% were foreigners resident in Afghanistan and that 34% were foreign visitors. By 1972, the number of international passengers handled at Kabul rose to 87,000. The volume of international traffic at Kandahar is much lower: the passengers it handled, consisting mainly of Haj pilgrims and of passengers joining outbound Ariana flights to Europe, rose from 3,900 in 1964 to 8,300 in 1969. 3.12 The existing airport at Kabul is located about 6 km to the north of the city center. The surface of its 2,800 m x 45 m runway is uneven due to irregular settlement of the square concrete slabs used in its construc- tion. A combination of the airport's elevation (1,800 m above sea level), high temperatures in the summer months, and the inadequate length of the runway results in restrictions on the loads of the heavier aircraft now using Kabul, such as the Boeing 727. The runway, moreover, is not strong enough to accommodate the larger aircraft (e.g. the Boeing 707 and DC8 types) which have been in use by international airlines during the past decade on their long haul routes. It has been estimated that over 90X of the civil aircraft currently flying across Afghanistan are unable to use Kabul airport with normal commercial loads. 3.13 Thereas it is feasible tolengthen, strengthen and improve the existing runway to accommodate the largest civil aircraft now flying, a serious problem, difficult to overcome, is created by a mountain range some 8.5 km away on the western approach to the airport. These mountains pre- clude both instrument approaches from the west and take-offs toward the west by larger aircraft. However, with the existing alignment of the runway, easterly operations have to be across the prevailing winds for a large pro- portion of the time. Given the present low frequency of operations with heavy aircraft like the Boeing 727, this is not yet a serious problem, but as traffic and aircraft movements grow, an increasing number of take-offs by heavy aircraft to the east would experience tailwinds which would constitute  - 6 - a serious safety hazard. It is however, not possible to re-align the runway with the prevailing winds on the present site because of surrounding mountains. Moreover, the existing airport is not capable of accepting aircraft at night or at times when low cloud and reduced visibility conditions occur; opera- tions under these conditions would require sophisticated electronic landing aids which the AAA and several international airlines do not consider safe in the mountainous conditions around Kabul airport. 3.14 At present all international scheduled flights in Afghanistan originate or terminate at Kabul. This airport, despite its favorable geographic location, is totally unused as a route stop on the major inter- national networks. The inadequate facilities at Kabul airport have undoubtedly contributed to this situation. Improvements in the airport facilities to serve the Kabul area are clearly necessary to meet the needs of the long-term development of international air travel to Afghanistan. These needs are unlikely to be met satisfactorily at the existing site because of its operational disadvantages. 3.15 An alternative would be to construct a new airport with a well aligned runway and clear approaches to it. It has been established that the closest available site which meets these requirements is some 47 km south of Kabul in the Logar valley, and the Government intends to build a new international airport at this site. There is little doubt that the Logar site is considerably better than the existing airport from a technical viewpoint of aircraft operations; however, what remains to be established is whether, from an economic and financial viewpoint, the disadvantages of the present airport would warrant the immediate construction of a new airpor,. for the levels of traffic expected by the late seventies. Under the proJect, a study will be made to ascertain if and when a move to Logar would be justified and, if such a move is justifiable in the near future, to develop well-conceived and soundly planned investment proposals for it (paras. 4.10 and 4.11). E. Domestic Airports 3.16 Besides Kabul and Kandahar, there are about 18 airports and air- strins in the domestic air system, which between them serve all of the more important and a few of the smaller centers of population in Afghanistan. In 1972, Kabul, which is the focus of the domestic air network, handled some 26,500 passengers on 2,200 domestic flights. Bakhtar Airlines now provides jet services connecting the more important towns in Afghanistan with its fleet of Russian YAK 40 aircraft. 3.17 The majority of the country's population, however, still lives in inacessible areas which, though they are often relatively short distances apart, are in many cases isolated bv the difficult surface terrain. The Government hopes to reduce the isolation of these communities by providing, through Bakhtar Airlines, short haul feeder services using short take-off and  - 7 - landing aircraft (STOL). In 1969, ICAO established a new Technical Assistance Mission, financed by a UNDP grant, to assist Bakhtar in its feeder service program. The Government envisages STOL services eventually serving a very substantial number of air strips in remote parts of the country. Bakhtar is already serving several such strips using its existing fleet of STOL aircraft (De Havilland twin engine Otters). IV. THE PROJECT A. Description 4.01 The project consists of: (i) the design, construction and equipment of a Flight Information Center at Kabul, to serve international and domestic civil aviation in Afghanistan; (ii) organizational changes and technical assistance to ensure the provision of adequate air navigation services; and (iii) preliminary engineering, economic studies and final engineering of new airport facilities to serve the Kabul area. (i) The Flight Information Center 4.02 The principal categories of equipment to be purchased are high frequency and very high frequency transmitter and receiver systems for air/ground communications, direct speech/radio teletypewriter circuits for communication with neighboring FIC's, equipment for an aeronautical fixed telecommunications local network, and voice recording equipment. Spare parts of short life components, sufficient for two years, will also be provided. An Air Traffic Control (ATC) Simulator (for basic and refresher training of about 100 controllers over the next few years) will also be purchased. This equipment (see Annex 1 for full details) which is the minimum required for providing adequate air navigation services in Afghanistan, will be capable of serving forseeable traffic requirements. 4.03 The new equipment will be installed in a two-storey addition above a wing of the existing terminal building at Kabul airport which would provide direct physical access both to the Kabul control tower and to the AAA unit providing meteorological services. The existing structure is sufficiently strong to carry the additional loads involved. Two hundred square meters of space will be made available on the second floor of the existing terminal building for use as an ATC Training Center, which will contain the ATC simulator (para. 4.02). The FIC would not need to be moved if and when a new airport is built at Logar, as it could continue to function satisfactorily from its site at Kabul.  - 8 - 4.04 The existing transmitter building will be enlarged to accommodate the new transmitting equipment. Ample space exists for the additional external transmitting antennae. The existing receiver site at Kabul airport is located on the main airport access road close to the antennae of Radio Afghanistan, leading to interference in radio signals. To overcome this problem, a new receiver site will be constructed for the FIC antennae. Several suitable sites exist on Government-owned land, and the final location of the FIC receiving antennae will be determined after testing the equipment under operating conditions to ensure that the interference is stopped. 4.05 The services of consultants, acceptable to the Government and the Association, will be provided under the project to develop detailed designs and final engineering of the FIC, and to supervise the construction of the buildings and the procurement and installation of equipment. (ii) Re-organization and Technical Assistance 4.06 The most effective way of dealing with the administrative difficul- ties confronting civil air navigation in Afghanistan would be to establish a separate entity with general responsibility for the provision of civil air navigation, air traffic control and air communications services in Afghanistan. Under this project, the Government has agreed to establish such a separate entity, with its own charter, to be called Air Navigation Services (ANS) and responsible to the AAA, as early as possible but not later than December 31, 1973. ANS, which would operate and maintain the FIC, would be run on a commercial basis and would be organized to provide clear lines of command and communication between its headquarters staff and its field staff at various operational locations. The Government has agreed that ANS, which will levy and collect user charges for air navigation services, shall retain its operating revenues to meet its expenditures and that it shall pay its employees such salaries as shall be necessary to attract and retain adequately qualified and experienced personnel. 4.07 Since with the present procurement and warehousing procedures, it is not possible to provide expeditiously supplies to operational points in the field, a small procurement section in the ANS will be established to purchase and distribute maintenance supplies for air traffic control and communication equipment. This section will become operational at the same time as the ANS. 4.08 Technical assistance is required to enable ANS to be organized into an efficient unit and improve the quality of air navigation services in Afghanistan as soon as possible. The project will provide: a) the services of consultants to establish modern commercial and management accounting system,s for ANS. These consultants will also provide one man for one year to advise ANS in implementing and maintaining these accoutting systems;  -9- b) the services of three advisers, to the Chiefs of ANS, Air Traffic Control, and Maintenance, respectively, for an initial period of three years, to be extended to a maximum of five years by mutual agreement between the Government and the Association; and c) the services of a training adviser for one year to establish a training program for controllers and to train instructors in using the ATC simulator. 4.09 Assurances have been obtained from the Government that: (i) a modern commercial and management accounting system will be installed in ANS no later than March 22, 1974; (ii) certified accounts and financial statements of ANS for each fiscal year, audited by independent auditors acceptable to the Association, will be provided to the Association within 4 months after the end of each fiscal year, with an auditors report; and (iii) the advisers referred to in (b) and (c) of para. 4.08 above will be appointed as soon as possible, but no later than December 31, 1973. (iii) Preliminary Engineering, Economic Studies and Final Engineering 4.10 The project includes provisions for preliminary engineering and economic studies by consultants to accertain if and when moving the airport from Kabul to Logar would be justifiable. Preliminary engineering will plan and provide reliable cost estimates for the new airport whereas the economic studies will: (a) provide phased plans for developing the new airport; (b) estimate the net economic advantages to Afghanistan of moving from Kabul to Logar; and (c) assess the optimum timing for such a move. 4.11 The project also makes provisions for the final engineering and architectural design work by consultants of the first phase of developing Logar airport. However, such work will only be financed by this Credit if it is mutually agreed by the Government and the Association that it is necessary to commence the final engineering immediately after the completion of the studies referred to in para. 4.10 above, in order to cemplete the construction of the new airport at the optimum time recommended by those studies. B. Cost Estimates 4.12 The total project cost, including contingency allowances, is US$3.1 million. The foreign exchange component is US$2.5 million or 80%. A breakdown of the project costs is given on page 10.  10 - Foreign Costs _ Exchange Local Foreign Total Local Foreign Total Component -----Af thousand---- ----US$ thousand---- Proiect Element A. Flight Information Center: (i) Equipment Purchases 640 65,680 66,320 8 821 829 Installation 880 5,040 5,920 11 63 74 Building Works 7,440 7,520 14,960 93 94 187 Subtotal 8,960 78,240 87,200 112 978 1,090 90 (ii) Design and Final Engineering of the Flight Infor- mation Center System 2,880 6,720 9,600 36 84 120 Total - FIC 11,840 84,960 96,800 148 1,062 1,210 88 B. Technical Assistance27,600 29,200 56,800 345 365 710 51 C. Studies: Economic and Preliminary Engineering 6,400 25,600 32,000 80 320 400 Final Engine- ering 2,000 38,000 40,000 25 475 500 Subtotal 8,400 63,600 72,000 105 795 900 88 D. Contingency Allowance/1 1,200 22,000 23,200 15 275 290 Total Project Cost (Rounded) 49,000 200,000 249,000 600 2,500 3,100 80 /1 20% physical contingency on FIC equipment purchases and installation and 10% price contingency on subtotal A(i).  - 11 - 4.13 These costs were estimated by the appraisal mission in 1970 and were updated by the Association in 1972. The costs of the building works are based on costs of similar work recently done in Afghanistan. These estimates are considered to be reasonable by the Government and the Associa- tion, who have discussed and agreed on them. 4.14 Because the estimates of the costs of purchasing and installing the FIC equipment are based on preliminary engineering, a contingency allow- ance of 20% of the cost of these items has been included to provide for physical variations that may be produced as a result of the final engineering of the FIC system. An additional 10% contingency has been included on the FIC equipment, installation and building costs, to allow for possible price increases between the time the estimates were made and the time contracts are expected to be signed, a period of approximately one year. C. Execution 4.15 The AAA will be responsible for carrying out the project. However, when ANS is established (by December 31, 1973, at the latest), it will assume responsibility for the first two parts of the project, (sections (i) and (ii) of para. 4.01), while the AAA will continue to be responsible for the third part (Section (iii) of para 4.01). The design and final engineering of the FIC system is expected to be substantially completed by the end of 1973; the building work, and the procurement and installation of equipment are expected to commence in the second quarter of 1974 and to be completed by the third quarter of 1975. The preliminary engineering and economic studies for new airport facilities are expected to start in the last quarter of 1973 and to take 15 months to complete; the final engineering for these facilities, if undertaken, will require an additional year for completion. Consultants will assist in all three parts of the project. Assurances have been obtained from the Government that it will employ qualified and experienced consultants on terms and conditions suitable to the Association. 4.16 A contract for the supply and installation of the specialized FIC equipment and for the building work will be awarded after international competitive bidding in accordance with the Bank Group Guidelines for Pro- curement. Because the elements are relatively small, they will be awarded in a single contract, which a foreign firm is expected to win as there are no local contractors capable of undertaking even a part of the highly special- ized work involved. The special Air Traffic Control Simulator estimated to cost about US$20,000 will be obtained from a Canadian manufacturer which is the only firm that produces this unit according to ICAO specifications. Acquisition of materials and land for the project are not problems. All materials, except some for building, wwill be imported. The Government already owns the minimal amount of land required. D. Financing 4.17 The table on page 12 shows the funds required under the project and their sources.  - 12 - Distribution of Funds Elements Requiring Funds AAA ANS Total ---Af million--- Af million US$ million % Equipiaent 0 126 126 1.5 47 Organization of the ANS 0 57 57 .7 21 Economic and Preliminary Engineering Studies 72 0 72 .9 27 Working Capital 0 13 13 .2 5 Total 72 196 268 3.3 100 Sources of Funds Internal Generation 0 120 120 1.5 45 Less Debt Service 0 97 97 1.2 36 Payment to Government 0 5 5 0 2 Subtotal 0 18 18 0.2 7 Plus IDA Credit 64 136 200 2.5 75 Government Loan 0 42 42 .6 15 Government Grant 8 0 8 .0 3 Total 72 196 268 3.3 100 4.18 The Credit, to be made to the Government, will finance the foreign exchange cost of the project (US$2.5 million); the Government will finance the local cost (US$600,000). The Government will pass on the total (US$3.1 million) to the AAA. Since US$900,000 relates to the airports studies, this will be provided as a grant to the AAA, and since US$2.2 million relates to the cost of setting up and equipping the ANS, this will be a loan bearing 7 114% interest annually. In view of the comparatively short life of the air navigation equipment and the projected, ANS revenue, repayment by the ANS to the Government is proposed in 20 equal, semi-annual installments starting on the date of commissioning the new FIC (January 1976). The Government and the Association have agreed on the above arrangements. 4.19 Since FIC equipment purchases will start before the ANS is establish- ed, the related expenses will initially be carried on the AAA account books. The assets will be transferred to the ANS, together with the corresponding debt as soon as the ANS is established. The ANS will become responsible to the AAA for servicing the debt and will assume the AAA's obligations under the Project Agreement in this respect. The Government and the Association have also agreed on the above arrangements.  - 13 - 4.20 Because the existing FIC is in poor condition and its improvement is urgent, the Government wishes to employ consultants as early as possible for design and final engineering. The Government has asked for retroactive financing for these services. It is estimated that the amount involved would be in the order of US$50,000 and would cover payments between January 1, 1973 and signature of the Credit. The Association has agreed to this request. E. Disbursements 4.21 Disbursements from the Credit Account will be made to meet the actual foreign exchange costs of all project elements. Disbursements for final engineering of new airport capacity would be made only if the economic studies referred to in para. 4.10 justify proceeding to this stage. Based on the foregoing, and on the schedule for project execution (para. 4.15), an Estimated Schedule of Disbursements has been prepared (Annex 2). The Government and the Bank should discuss and agree on this schedule during negotiations. Surplus funds remaining in the Credit Account after the project has been completed will be cancelled. V. ECONOMIC EVALUATION A. Introduction 5.01 This economic evaluation seeks to establish whether it is justifi- able for Afghanistan to provide itself with a new, re-equipped FIC and to improve its flight information and air traffic control services. At present, these services are unreliable and deficient because the existing FIC has obsolete, unserviceable equipment and is inefficiently operated. If these conditions persist, many foreign airlines flying over Afghanistan would find the risks of collisions in Afghan airspace great enough to induce them to seek alternative routes. Moreover, if the project is not implemented in the near future, flight information services would deteriorate further and some of the foreign airlines now serving Kabul may consider withdrawing their flights. Improved flight information services are therefore essential to maintain and expand international flights to and over Afghanistan. B. Traffic Forecasts 5.02 The largest number of aircraft requiring flight information services are the foreign aircraft which fly over but do not land in Afghanistan. During the 1960's there was a steady growth in the number of such flights and in the late sixties the rate of growth was rapid; between 1967 and 1970, flights over Afghanistan rose by 50'% to reach a total of 4,800. With the closure of the air border between India and Pakistan since December 1971, following the Indo-Pakistan war, overflights fell to about 4,300 in 1971 and substantially to 900 flights in 1972. The number of overflights is expected to rise to levels on the long-term trend as soon as the border is re-opened and international airlines can resume flights along their shortest route patterns. The number of overflights is predicted to exceed 6,000 by 1975 and rise to about 7,500 by 1980.  - 14 - 5.03 The FIC, in addition to serving overflights, will also serve flights to and from points in Afghanistan. Since additional airport capacity for the Kabul area, capable of serving larger aircraft, is unlikely to be in operation for some years to come, it has conservatively been assumed in forecasting international flights to and from Afghanistan that these flights would arise only from countries currently serving Afghanistan and would be made only by aircraft types that Kabul is now able to accept. On this basis, it is predicted that international movements at Kabul, which were just over 2,000 a year in 1970, would rise to about 3,300 by 1980 and to 4,700 by 1987. If any increases in the capability or capacity of Kabul airport take place, this forecast is likely to be an underestimate. 5.04 Given the evolving nature of the domestic air network in Afghanistan and the limited information on the determinants of demand for local services, reliable aggregate forecasts of domestic air movements are difficult to produce. It is expected that, with the development of tourist facilities currently planned, an increasing number of domestic air trips will be made by foreign visitors. Given the recent introduction of jet services on the major domestic routes, the present policy of introducing air services to isolated areas and the low level of present domestic traffic, substantial growth in this traffic could be expected over the next decade. However, it has conservatively been assumed in this analysis that domestic aircraft movements will only increase at roughly the same rate as international traffic. 5.05 Forecasts of overflights over the country, and the international and domestic aircraft movements at Kabul (landings and take-offs) all of which will be served by the FIC are given below: FORECAST OF FLIGHTS TO BE SERVED BY AFGHAN FIC Overflights Kabul Flight Movements (landings and take-offs) Domestic International 1973 5,200 2,340 2,020 1974 5,720 2,510 2,170 1975 6,290 2,690 2,320 1976 6,420 2,850 2,490 1977 6,550 2,990 2,690 1978 6,780 3,110 2,890 1979 6,810 3,250 3,110 1980 7,490 3,410 3,370 1981 7,870 3,580 3,540 A 1982 8,260 3,760 3,710 1983 8,670 3,950 3,900 1984 9,100 4,140 4,090 1985 9,560 4,350 4,210 1986 10,040 4,568 4,510 1987 10,540 4,800 4,700  - 15 - C. Costs 5e06 The costs that have been taken into account in this analysis are the total costs of physical improvements to the flight information system (design, equipment purchases and installation, and buildings), the increased operating costs such as the higher expected maintenance costs and increased manpower costs arising from higher salaries (para. 4.06 and para. 6.05), and a proportion of the technical assistance attributable to services for overflying aircraft and for international aircraft serving Afghanistan. D. Benefits 5.07 The improvements in the quality of flight information services that the project will provide will give rise to increased revenues from the charges paid by airlines for these services. The additional revenues from the flight information charges paid by foreign airlines, which would be lost if the project was not implemented, constitute direct incremental benefits to the Afghan economy arising from the project. These direct benefits are the only ones that have been credited to the project in this analysis of the project's economic viability. 5.08 The direct benefits will arise through increased revenues from additional overflights and increased charges for flight information services. If the project were not undertaken, airlines wishing to fly over Afghanistan would be likely to choose alternative routes. Although it is probable that the number of civil aircraft flying over Afghanistan would decline if the project were not undertaken, this analysis conservatively assumes that over- flights would continue to increase as forecast until 1975 and maintain a constant annual level thereafter. If the project is undertaken, however, the number of overflights would continue to increase after 1975 as forecast (para. 5.05). Revenue from the additional overflights (about 1,300 flights by 1980) gives rise to the first stream of project benefits. 5.09 The improved flight information services will justify increased charges to international airlines for these services. Increases have been proposed and agreed with the Government (para. 6.03). The level of charges was established after considering the cost of improved services and its value to users, levels of charges for similar services in neighboring countries, and recommendations on such charges made by ICAO. Those increased charges which will be levied when the new FIC is completed, give rise to the second and third streams of project benefits. The second is the additional revenue from the US$35 increase (US$25 to US$60) in the charge for overflights; the third is the additional revenue from the US$15 increase (US$25 to US$40) in FIC charges to international airlines serving Afghanistan. These increases are not expected to deter traffic levels in view of the better service offered. For overflying aircraft, alternative routes to flying over Afghanistan are likely to cost airlines substantially more than the increased overflight charges and, if there are no offsetting revenues to be gained from changing route patterns, the best alternative route for a typical aircraft may cost airlines as much as ten times the increased overflight charge in terms of additional flying costs. The value of the improvements in safety and in reliability of operations for international airlines serving Afghanistan is likely to be greater to them than the $15 increase in the FIG charge to them.  - 16 - 5.10 Despite the conservative assumptions used in this analysis, the three benefit streams described above would collectively provide Afghanistan with incremrental annual foreign exchange earnings of about US$250,000 in 1976 rising to US$450,000 by 1985. The estimated cost and benefit streams are presented in Anrex 3. 5.11 The value to the Afghan economy of the benefits that Afghanistan's own international and domestic airlines will receive from improved flight information services is difficult to estimate. It has not been possible to estimate directly either the operating cost savings or the greater safety that the Afghan airlines will enjoy as a result of this project, and the increased charges that Ariana and Bakhtar pay for the improved flight informa- tion services may not be a reliable measure of the economic worth of these improvements to the country. Because of these measurement difficulties, the economic analysis does not include any estimates of the benefits of the project to Afghanistan's own airlines and consequently, the economic worth of the project has been underestimated. E. Economic Return 5.12 The economic rate of return of the project is 12%, based on the costs and benefits described above. The sensitivity of this rate to possible variations in costs and benefits was tested with the following results. A 15% increase in the costs of the physical improvements to the flight information system and a delay in all benefits by one year would reduce the economic return to 9%. Increases or decreases of 25% in the value of the benefit streams would increase the economic return to 17% or decrease it to 7% respectively. VI. FINANCIAL EVALUATION A. Existing Situation 6.01 Little financial information is available about existing FIC operations and tower operations at various airports for Afghan FY70-72. Because the existing equipment has been used for over 10 years and is now ineffective, the written-down opening value of fixed assets has been conser- vatively estimated. Information about present salary scales has been made available and estimated profit and loss accounts and balance sheets for Afghan FY70-72 have been reconstructed. They should be regarded, however, as indicative of orders of magnitude. B. User Charges and Financial Objectives 6.02 The new ANS (para. 4.06) will be responsible for establishing and collecting user charges, such as FIC charges from overflying aircraft and international airlines serving Afghanistan as well as air traffic control tariffs. Also the ANS will be responsible for the moneys collected and for  - 17 - paying its financial commitments. The commercial and management accounting system to be establ'shed will reflect, on an accrual basis, all transactions affecting its revenues and operating and capital expenses. These transac- tions will be subject to budgetary controls, involving monthly closure of accounts and preparation of reports showing operating results compared with the budget, and periodic, at least quarterly, presentation of financial statements. Financial statements prepared for each fiscal year and relevant accounting records will be audited bv auditors acceptable to the Bank (para. 4.09). 6.03 Existing user charges are not adecuate to allow the ANS to cover its cash operating requirement, repay the investment cost for new facilities and organizationaL development under the project, and finance routine new equipment and future expansion. Therefore, these charges will have to be increased as follows: User gha /Flig ht_ Tyne of Plight Existing Prosed Overflight US$25 USS60 as from March 22, 1976 (Afghan FY77) International 0 US$25 as from September 22, 1973 and US$40 as from March 22, 1976 (Afghan FY77) Domestic 0 US$10 as from MIarch 22. t 97D (AWch,. F"Y77) The new user charges are comparable to those of neighboring e The amount and timing of the increases were agreed during appra'.,al, and during negotiations, assurances were also obtained that they will be i;mplemented. C. Future Earnings and Financial Position 6.04 Table 1 shows estimated and projected operating results of the ANS for Afghan FY70-80. Because of the uncertainties associated with aviation development, a forecast now of operating revenues and traffic ,volumes beyond Afghan FY80 would be impractical. Also international traffic revenues have declined as traffic has declined due to the closure in Deceember 1971 of the border between India and Pakistan (para. 5.02). The projections assume, however, that normal traffic will be resumed by 1974. The forecast of operat- ing revenues was calculated, therefore, based on normal traffic growth and the proposed new user charges.  - 18 - 6.05 Operating expenses are estimated and projected on a broad basis, taking into account applicable general expenditure headings and making adequate allowances for cost increases. Salary costs include incremental charges, in the form of 20% annual increases for Afghan FY74-78 to cover the increased cost of attracting and retaining qualified personnel (para. 4.06). Annual costs of recurrent and preventive maintenance programs for equipment and buildings are estimated at 3% and 2%, respectively, of the investment under these items. Assurances have been obtained that the ANS will continuously maintain its equipment and related assets in good working order and that an annual certificate will be submitted to the Association from an independent engineer certifying the state of the equipment. Deferred charges covering organizational development costs are written off over the period in which they are incurred. Other financial assumptions are given in Annex 4. 6.06 Because of the heavy initial organizational costs incurred during the early years, the &NS will ircur annual deficits up to 1979, but will become increasingly profitable thereafter, This is normal in a new organiza- tion of this type and does not affect ANS9 abilit\' to futly meet its obliga- tions. Should the services of the advisers be required for only 3 years instead of 5 (para. 4.08(b)), then ANS will become Profitable earlier. 6.07 Table 2 shows comparative balance sheets and Table 3 the estimated and projected cash flow of ANS up to Afghan FY80. The ANS should be able to meet its obligations to repay the Government loan and at the same time maintain a reasonable level of cash. u.08 This situation depends, however, cn the continuation of overflights which provide most of the operating revenue. Should overflights be inter- rupted beyond 1974, due to closure of the Indian-Pakistan border or for other reasons, then the financial position of ANS would quickly deteriorate. Assur- ances bave therefore been obtained during negotiations, that the Government will at all times ensure the financial viability of ANS by providing it with funds, as may be necessary, for it to operate efficiently and maintain its equipment in sound condition. 5e09 It is also possible if traffic increases faster than foreseen, that ANS will accumulate cash balances greater than those projected and which would not be needed to meet its obligations or replace equipment. It has therefore been agreed during negotiations that any surplus shown in the accounts should, after deduction has been made for amortization of debt and a reasonable reserve, be transferred to the Afghan treasury. 6.YO Due to the comparatively short life of the equipment, a Financial Return calculation on net fixed assets would be meaningless, and the imposi- tion of a financial operating ratio would only cut back efficiency of the FIC if overflights were curtailed. imposition of any particular, measurable financial covenants, other than those mentioned in paras. 6.08 and 6.09, is not proposed.  - 19 - VII. RECOMMENDATIONS 7.01 During negotiations, agreement was reached and assurances obtained from the Government on the following principal points: (I) the Government will take all necessary steps to enable civil aviation to enjoy the safe use of civilian ait- space and will provide adequate notice to the civilian air authorities each time civilian airspace is to be used by non-civilian aircraft (para 3.10); (ii) the establishment of the ANS and a procurement section within it, appropriate salaries for its employees, and the installation of modern accounting systems (para 4.06, 4.07 and 4.09); (iii) the levels of user charge increases and the dates by which they would be levied (para 6.03); (iv) that ANS will maintain its equipment in good working order and will submit a certificate annually to the Association (para 6.05); (v) that ANS will transfer to the Afghan treasury any surplus funds arising from operations (para 6.09). 7.02 In view of the foregoing, the project is suitable for an IDA credit of US$2.5 million to the Royal Government of Afghanistan on the usual terms and conditions. 4   APFHANI;TAN APPRAISAL OF AN AVIATION PROJET BGuie nt to bs Pcrhased for Kabu.l Flight Inforation Center of