Somalia - Mogadiscio Port Project

RETURN TO g s REPCRTS DESKhILO WITHIN ONE WEEK - - t 'ERNATIONAL BANK FOR RECONSTRUCT14ON ANND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCLhA=N Not For PI& Un Rwart NtA PTR-124a APPRAISAL OF MOGADISCIO PORT PROJWEC SOMALIA February 14, 1973 Regional Projects Department Fastern Africa Regional Office This tqprt was ptepaxed for officiA use ony by the Bank Goup. It WAY nt be plh. I or cied without Bank Group authorization. The Bank Gro4p dom t PApt w _ fb t1z4 accuracy or ompletense of the report.  CURRENCGr EQUIVALES Currency unit Somali shilling (So.Sh) US$1 - So.Sh 6.925 So.Sh 1 US$O.01444 So.Sh 1 million us$1444,oo WEIGHTS AND MEASUL 1 meter (mI) 3.28 feet (ft) 1 cubic metr (i3) 35.29 cubic foot (cu ft) 1 kiloneter (km) - 0.62 mile (xi) 1 square kilometer (Oa2) 0.386 aquare mile (sq xi) 1 hectare (ha) - 2.47 acres (ac) 1 kilogram (kg) - 2.2 powads (lb) 1 metrio ton (a ton) - 2,204 pouds (b) 1 liter (1) = 0.22 Imperial gallon (Ig) = 0.26 US gallon (gal) GLOSSARY OF AMVIATIONS AIC - Associated Industrial Consultants Ltd. dwt - Deadweight tons FED - Fonds Europeen de Developpezent LLW - Low low water NRT - Net registered tons SOGREAX - Societe Grenobloise d'Etudes et d'Applications Hydrauliques SPA - Somali Port Authority UNDP - United Nations Development Programme USAID - United States Agency for International Development Note: For consistency, where there are alternative Italian and English spellings of names of places and geographic areas, the Italian spelling has been used. GOERNMENT OF SOMALIA FISCAL YEAR January 1 - December 31  SOMALIA APPRAISAL OF MOGADISCIO PORT PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS ....................... i - ii I. INTRODUCTION ................ .. 1 II. BACKGR<OUND ...................................... 2 A. Economic Setting 2................... . 2 B. The Transport Sector .....o... 3 C. Transport Planning and Coordination ...... 4 D. Government Policy for Autonomous Agencies 5 III. PORT ORGANIZATION AND ADMIINISTRATION .......... 6 A. Organization and Management .............. 6 B. SPA's Functions .......................... 7 C. Port Regulations ...... ...... ..........*. 7 D. Accounting Systems, Audit and Insurance .. 7 IV. THE PROJECT PORT ...... ....................... 8 A. Existing Facilities ...................... 8 B. Operations ............................... 9 C. Facilities Required ..... ................. 10 V. THE PROJECT ................................... 10 A. Project Description ..... ................. 10 B. Project Execution ..... ................... 12 C. Cost Estimates, Financing and Disbursements 13 VI. ECONOMIC EVALUATION ........................... 14 A. Traffic Forecasts * ....................... 14 B. Evaluation of Benefits ................... 14 C. Economic Costs of Project ................ 16 D. Economic Return ...... .................... 16 E. Employment Effects ....... ................ 16 This report was prepared by Messrs. J. Bigosinski (consultant-economist), A.11. Clark (financial analyst), C. Okurume (economist) and H. van Helden (consultant-engineer).  TABLE OF CONTENTS (Cont'd) Page No. VII. FINANCIAL EVALUATION .......................... 17 A. Tariffs, Other Port Investments, Relending of External Finance and Fixed Assets Valuation -. * ** * *** **...... *.* .............* * es 17 B. SPA's Financial Situation ................ 18 C. Financial and Economic Objectives and Covenants ... *** **...... ..*.*.*.*** *....** 21 VIII. ACTION TAKEN AND RECOMMENDATION ............... 22 ANNEXES 1. New Facilities at Other Main Ports 2. Main Project Characteristics Attachment - General Plan of Harbor Works 3. Traffic Forecasts 4. Economic Justification 5(a) Terms and Conditions of USSR Loan for Berbera - Summary 5(b) Terms of Conditions of USA Loan for Chisimaio Project - Summary 6. Assumptions Used in Financial Forecasts TABLES 1. Total Port Traffic in 1971 2. Project Cost Estimates 3. Estimated Schedule of IDA Disbursements 4. Mogadiscio Port Dry Cargo Forecasts 5. Livestock Diversion: Estimates of Benefits 6. Estimated Benefits and Costs 7. Principal Tariff Items 8. Forecast Revenue Accounts 9. Forecast Source and Application of Funds Statement 10. Forecast Balance Sheets 11. Forecast Debt Service Statement MAPS IBRD 10007 - Somalia and Mogadiscio Service Area IBR) 3015 - Location of New Port Site  SOMALIA APPRAISAL OF MOGADISCIO PORT PROJECT SUMMARY AND CONCLUSIONS i. Somalia is an extremely poor country with an economy based on agri- culture. 75% of the population are nomads. Exports are dominated by live- stock (60%) and bananas (30%). The most productive area is served by the inadequate lighterage port at Mlogadiscio, the country's capital and its major import port. Obsolete facilities and inefficient and uneconomic operations at this port have inhibited economic growth. Modern port facilities have re- cently been provided at Berbera in the north by the USSR and at Chisimaio in the south by USAID. ii. The proposed project, the first stage in a master plan to replace the lighterage harbor with a sheltered deep-water port, will provide a break- water with two general cargo berths, a banana berth and a livestock-handling facility. It also includes an access road, paved areas, two transit sheds, a warehouse, ancillary buildings, harbor and navigational aids, cargo-handling equipment and technical assistance, including training for management, account- ing and operations. The total cost of about US$25 million will be shared equally by IDA and the Fonds Europeen de Developpement (FED), who will also jointly undertake administration and supervision of the project. Foreign exchange costs amount to about US$20.3 million. iii. Construction of a new port and consequent increase in efficiency and capacity will enable Mogadiscio to recapture some of its service area traffic now handled uneconomically through other ports. Livestock now moved from the Mogadiscio hinterland to the port of Berbera in the north for export will be handled by Mogadiscio, as will cargo that must now be handled by Chisimaio, 500 km to the south, when the monsoon season makes lighterage operations at radiscio impossible. Bananas now exported through the inefficient lighterage port of Merca, 90 km to the south, will also go through Mogadiscio. Furthermore, the efficiency and lower cost of operations at the new port will generate new traffic. These developments will help to increase the annual volume of dry cargo traffic through Mogadiscio from the current 160,000 tons to 382,000 tons in 1977 and 525,000 tons in 1981. iv. Technical preparation of the project has been thorough. Preliminary engineering, financed by a Bank Technical Assistance Grant of US$311,000 and completed in 1967, and detailed technical studies, for a two-berth project, financed by an IDA Engineering credit (S5-SO) of US$550,000 and completed in 1970, were conducted by the consultants Societe Grenobloise d'Etudes et d'Applications Hydrauliques (SOGREAH). SOGREAH will supervise construction of the civil works. Procurement will be on the basis of international com- petitive bidding under Bank/IDA guidelines.  - ii - v. The port will be operated by the Somali Port Authority (SPA), an autonomous Government agency created in 1962. SPA has the necessary powers to operate the port effectively but is inefficiently organized, with all authority until recently vested in a commissioner of ports and no coordination between its departments. However, the Government has recently amended the Port Authority Law to provide for administration by a board of directors with a general manager. A financial manager will also be appointed. The project provides for management consultants to review the organization and administration and recommend improvements, to reorganize port operations and to continue the recent services provided under Credit S5-SQ to install accounting systems and to train accounting and operating staff. A project agreement has been negotiated between SPA and the Association. vi. In general the tariff structure covers principal facilities and services, but the charges are not based on costs. There is an anachronistic ad valorem harbor tax which should be replaced by cost-based harbor dues on ships. The general level of rates is high and the lower costs of an effi- cient modern port should permit reductions while still meeting acceptable financial objectives. The management consultants provided for in the project will also be required to review the tariff structure and recommend cost-based levels of charges. vii. In response to FED's request, to enable its half share of financing to be provided by way of a grant, the credit proceeds will be relent to SPA on IDA terms. At the same time Government borrowings for other port invest- ments, not previously relent to SPA, will be relent on the same financial terms as received by the Government. External finance by way of grants, in- cluding the FED grant, will be treated as Government equity capital in SPA. Under the Government's recent legislation on the finances of autonomous agencies, SPA will be required to pay over to the Government surplus funds generated by revenue surpluses and depreciation after full provision is made for working capital, specified reserves, debt service, asset replacement and development investment, based upon agreed financial plans. According to the financial forecasts, total payments to the Government under this legislation will substantially exceed what the debt service would be if the credit pro- ceeds were relent to SPA on Bank terms. The Government's financial policy with respect to these agencies is acceptable. viii. The economic return will be about 15%, which is satisfactory. SPA will be financially viable and a minimum financial return of 5% on net fixed assets will be required. ix. The project is suitable for an IDA credit of 50% of the project costs, i.e. US$12.5 million equivalent, to the Somali Democratic Republic on the usual terms. The amount of the credit will be increased by the outstand- ing balance on Credit S5-SO to enable that credit to be refunded. The amount expected to be outstanding at the time of credit effectiveness is US$450,000.  SOMALIA APPRAISAL OF MOGADISCIO PORT PROJECT I. INTRODUCTION 1.01 The Government of the Somali Democratic Republic has requested the Association and the Fonds Europeen de Developpement (FED) to finance the construction of a new deep-water protected port at Mogadiscio to replace the existing uneconomic lighterage port. The Government gives the highest prior- ity to this project in its current economic development program. 1.02 Because of chronic Government budgetary deficits and shortage of local currency, the Government has requested 100% financing. FED have agreed to this, and FED and the Association will contribute equally to the total project cost. FED's financial contribution will be in the form of a grant to the Government. Administration and supervision of the project will be undertaken jointly by the Association and FED; an Administration Agreement has been negotiated between the Government, FED and the Association. 1.03 This will be the first Bank Group port project in Somalia. In March 1965 the Association made a credit of US$6.2 million (74-SO), followed in June 1968 by a supplementary credit of US$2.3 million (123-SO), to help finance the First Highway Project, construction of the Afgoi-Baidoa road which has now been completed. The credits were supplemented by grants from FED and the United Nations Development Programme (UNDP). The project also included technical assistance to set up a Civil Engineering Department in the Ministry of Public Works and feasibility studies of two roads, including the Hiargeisa-Berbera road. This road is the subject of the Second Highway Project, the total cost of which is being financed by an IDA credit of US$9.6 million (295-SO), signed March 30, 1972, and an African Development Bank loan of US$1 million. (Map, IBRD 10007). 1.04 In February 1964 a Bank Group mission visited Somalia to review a Government proposal to construct a deep-water port at Mogadiscio. In November 1964 the Bank made a technical assistance grant of US$311,000 (Report No. R64-134) for a preliminary engineering study (which was carried out by Societe Grenobloise d'Etudes et d'Applications lHydrauliques (SOGREAH, France), to determine the suitability of the existing shallow draft harbor for development or, alternatively, a suitable location for a new port. In February 1967, SOGREAH produced a flexible master plan for an extendable seven-berth port, behind a breakwater, to be located about 1-1/2 km southwest of the existing port (Map IBRD 3015). An IDA appraisal mission in May/June 1967 resulted in an engineering credit of US$550,000 (S5-SO) (March 3, 1969) for detailed engineering and preparation of tender documents for a two- berth first phase of the master plan, based on then-current traffic forecasts. The tender documents were completed in 1970. The credit also included consultants' services awarded to Associated Industrial Consultants Ltd. (AIC, UK), to install accounting systems and train accounting staff. The outstanding balance on Credit S5-SO, expected to amount to US$450,000 will be refunded by increasing the IDA credit by this amount.  - 2 - 1.05 Reappraisal of the port construction project was delayed until November/December 1971, largely because of uncertainties after the change in government in 1969 and the effect of the closure of the Suez Canal. The time lapse between the 1967 and 1971 appraisals necessitated a complete review of the project. Traffic forecasts now justify two general cargo berths, a banana berth and a livestock loading dolphin berth, all of which can be contained within the breakwater needed for two berths; also an ad- jacent area formerly used by the military has now become available allowing a better layout for the land area and access to the new port. Modifica- tions and additions to the original design, including the banana berth and the dolphin berth, were discussed and agreed between the Government, FED, the Association and the consultants. These revisions form the basis of the proposed project which also includes a tug, cargo-handling equipment and technical assistance for management, accounting and operations. The total project cost is estimated at US$25.0 million equivalent, based on SOGREAH's detailed engineering estimates for the civil works. 1.06 The Ministry of Public Works will be responsible for executing the project, with the assistance of consulting engineers, on behalf of the Somali Port Authority (SPA), an autonomous Government agency responsible for all seaports in Somalia; there is a project agreement with SPA. 1.07 In November/December 1971, a mission composed of Messrs. A. H. Clark (financial analyst), H. van Helden (engineer - consultant), J. Bigosinski (economist - consultant) and G. Okurume (economist) visited Somalia to appraise the project. Mr. Clark paid a further visit to Somalia in March 1972. This report is based on their findings. II. BACKGROUND A. Economic Setting 2.01 Somalia's 640,000 km2 (about the size of Spain and Portugal combined) consist largely of sparse grazing land and desert. Only about 13% of the land is suitable for cultivation, and this lies, for the most part, between the Giuba and Scebeli rivers in the southern part of the country where irrigation is possible. Natural resources are scarce and the economy is dependent on the export of livestock (and livestock products) and bananas which account for 60% and 30%, respectively, of export earnings. Budget deficits have been a con- tinuing feature, financed by Italian budgetary support and foreign develop- ment aid. Per capita income is one of the lowest in the world. 2.02 The population, estimated at between 2.5 million and 3 million, is largely nomadic. The highest concentrations are around Mogadiscio (225,000), the capital, commercial center and chief import port, and in the northern Hargeisa/Berbera area. The arid nature of the country, the low level of eco- nomic activity, and the sparseness of the population between distant popula- tion centers combine to make the provision of a transport system adequate to development needs a formidable problem.  -3- B. The Transport Sector General 2.03 The exploitation of Somalia's limited resources has been inhibited by lack of adequate transportation facilities, particularly ports and good roads between inland livestock-raising areas and the ports. The transport system is in the early stages of development. Many areas are not accessible by motor vehicles for much of the year. There is no railway, and air services are minimal. There are two (recently completed) deep-water ports, at Berbera in the north and Chisimaio in the south; Mogadiscio is served by an inefficient, uneconomic, lighterage port. For all modes freight and passenger densities are light. Road Transport 2.04 The road network comprises about 16,000 km of which less than 1,000 km are bituminous surfaced roads. Long distances and light traffic densities make road projects difficult to justify economically although they are necessary to ensure national unity and administrative accessibility. In addi- tion to the Afgoi-Baidoa highway, providing a road link from lIogadiscio through the center of its service area, the Hargeisa-Berbera road and a feasibility study of the Borama-Hargeisa road, all IDA financed, a 1,045 km road is programmed from Belet Uen in the central region, from which there is a road to Mogadiscio, to Burao in the north; this road is to be financed by the People's Republic of China. About 15,300 motor vehicles were registered in 1970, of which about two-thirds were cars. Motor vehicle registrations have grown at 6% per annum in recent years. Air Transport 2.05 Somalia is beginning to develop its domestic air transport system Somali Airlines) to connect scattered urban areas with Mogadiscio and now has direct flights between Mogadiscio and twelve other centers. Domestic freight transport reached only 321 tons and domestic passenger movements 18,000 in 1969, growing at an annual average rate of 34% and 19% respectively in recent years. International airlines have scheduled flights connecting Mogadiscio with Europe, the Middle East and North and East Africa. Between 1965 and 1969, international freight traffic (166 tons in 1969) grew at an annual rate of about 34% and passenger traffic (10,000 in 1969) at about 26%. Ports 2.06 Somalia has 27 ports along the more than 3,000 km of coastline, including four major ones at Berbera, Chisimaio, Merca and Mogadiscio. New ports have recently been built at Berbera in the north and Chisimaio in the south, with the help of international aid (para 7.03), and now have sheltered deep-water facilities. Mogadiscio and Merca are lighterage ports open to the Indian Ocean with its rough sea and seasonal high swells. The four major  - 4 - ports account for more than 95% of Somalia's oceanborne foreign commerce. There is little coastal traffic and virtually no passenger traffic. Mogadiscio, the principal import port, handles about two-thirds of the country's imports but normally only about 5% of its exports. Berbera is the only major port on Somalia's northern coast and the principal outlet for livestock exports. Merca and Chisimaio, located respectively 90 km and 500 km south of Mogadiscio, are primarily banana export ports but also handle small quantities of imports; Chisimaio also exports livestock and meat products and handles, during the southwest monsoon season, some import cargo destined for Mogadiscio. The relative importance of individual ports is shown in Table 1. Information on the new ports at Berbera and Chisimaio is given in Annex 1. Mogadiscio Port Service Area 2.07 The service area of tIogadiscio comprises the most productive part of the country and has the greatest potential for economic development. It covers the greater part of the southern region, including the administrative regions of Benadir (including Mogadiscio), Urpper Giuba, Hiran, and part of Mudugh; it does not extend to Lower Giuba, for which Chisimaio is the port, but it includes the area between the Giuba and Scebeli rivers, which has the highest average rainfall in the country. An important livestock-raising area lies in the more northern part of the southern region. The highway system has been improved to serve the area but this has not been matched by improve- ments in the port. This is a serious constraint on economic development. Mogadiscio port is also a potential outlet for landlocked regions of south- eastern Ethiopia. C. Transport Planning and Coordination 2.08 Four Ministries are concerned with the transport sector: the Hinistry of Planning and Coordination; the Ministry of Public Works, through its Department of Civil Engineering, responsible for planning and constructing transport infrastructure and for highway maintenance; the Ministry of Transport for vehicle registration and control; and the Ministry of the Interior for traffic control. No Government agency exists to oversee the functioning of the whole sector. While there is no pressing need at present for an agency for intermodal coordination, sectoral planning will eventually become more important as transport demand increases. 2.09 In the current tlhree-year Development Program (1971-73) the Govern- ment has allocated So.Sh 353 million, or 35% of the total development budget, to the transport and communications sector. The most important items are the proposed 1,045 km road (So.Sh 95 million) between Belet Uen and Burao to be financed by the People's Republic of China, the Association's Highway II Project (So.Sh 52 million), the I4ogadiscio port construction project (So.Sh 76 million), and a telecommunicationis project (So.Sh 40 million). These items account for 85% of the sector's total budget.  - 5- D. Government Policy for Autonomous Agencies 2.10 The Government has reviewed the financial situation of public agencies in the context of development fund requirements and availability. In the past the public sector has suffered from a lack of savings in the form of cash generated surplus to the requirements of individual agencies, while, at the same time, there has been some wastage of resources because of a lack of skill in management and especially financial management. The Government is unable to provide necessary capital out of its budgetary resources; it is also aware that some agencies are better able to generate cash resources than others. Unless these resources are controlled, they will not be put to the best use for the country's economy and may encourage wasteful expenditure and neglect of cost control. Pricing policies are also distorted in some cases by excessive depreciation charges which have been used to reduce liability to income tax. 2.11 The Government has now passed a law (Law No. 58), which came into effect on January 1, 1973, on the Finances of Public Enterprises and Agencies. Its main provisions are the following: (a) Responsibility for strict financial management and economic operations is imposed on each enterprise through the General Manager, Chief Accountant and Financial Officer. (b) The Mlagistrate of Accounts is responsible for auditing the accounts. (c) Income tax for the enterprises is replaced by a turnover tax, assessed on sales and services; the percentage for each year is fixed by the Ministry of Finance. (d) Annual investment estimates and finance plans must be prepared. (e) Caslh generated annually, surplus to the enterprise's require- ments, is paid to the Government; this comprises the balance of profits after specified appropriations and a share of depreciation for development as fixed by the Ministry of Finance on the basis of the finance plan. 2.12 In general, the law lays down acceptable principles. The Secretary of State for Finance is responsible for issuing regulations and implementing the law. The policy underlying the law is reasonable and acceptable. It will help to ensure the optimum use of scarce capital resources and encourage good financial management; in particular, capital recovered through depreciation will be available for reinvestment according to the priority needs of the country's development program. It will also ensure that enterprises will not accumulate large cash reserves beyond their individual requirements.  - 6 - III. PORT ORGANIZATION AND ADMIINISTRATION A. Organization and Management 3.01 The Somali Port Authority (SPA), an autonomous agency, was created in 1962 and reconstituted under Law No. 70 of November 22, 1970, under the supervision of the Secretary of State for Transport, who can give directives in matters affecting the interests of the State. SPA's object is to promote the development of all of the country's ports; its functions are comprehensive and it has all necessary powers to carry out those functions. It has power to issue regulations, including the fixing of tariffs. 3.02 Until recently, responsibility within SPA for all policy making decisions and executive action resided solely in an Extraordinary Commissioner of Ports, although the law governing autonomous agencies (Law No. 16 of April 1, 1970) provides for either a sole executive head or a board of directors. There was no management team, and the twelve department heads, with no interrelationship among them, reported directly to the Commissioner. The Extraordinary Commissioner and the four Ministries concerned agreed that SPA's organization must be improved, and the Government has recently amended Law No. 70 so as to restructure SPA's organization along lines agreed with the Association, i.e., to provide for a Board of Directors and a General Manager. 3.03 With respect to accounting, SPA has failed to benefit fully from the accounting systems introduced and the staff training undertaken by the accounting consultants (AIC) provided under S5-SO. The principal reasons for this identified by the consultants are: (a) a lack of understanding and interest in the use and value of management information systems and statistical data on the part of top management; (b) the transfer of trained accounting and statistical staff to other posts; and (c) failure to appoint a qualified and experienced financial director. During negotiations, the Government agreed that management consultants satisfactory to the Association will be appointed to review the present organization and administration and to recommend improvements; these consul- tants will be employed under the project. The Government also agreed to con- sult with the Association regarding appointments to the positions of General 1-Ianager and Financial Manager of SPA and to ensure that, at all times, the SPA's operations are carried out under a qualified and experienced managerial staff.  7- B. SPA's Functions 3.04 Originally, SPA's function was to provide port facilities only and its principal source of revenue was an ad valorem harbor tax (para. 7.01). Later, SPA took over stevedoring at all ports and lighterage and shore handling at Mogadiscio and Merca, shore handling at Berbera and Chisimaio continuing in private hands on payment to SPA of a tonnage royal- ty. On January 1, 1971, SPA also took over shore handling at Berbera and Chisimaio and now provides all port services. From the same day, ware- housing and storage charges, collected by customs and previously paid over to the Government, were paid to SPA, which now receives all port revenues. C. Port Regulations 3.05 Comprehensive port regulations have not yet been promulgated. The need for these is recognized and a United Nations Adviser on Maritime Law is currently engaged in preparing them. During negotiations, the Government agreed to issue comprehensive port regulations applicable to all ports under SPA's jurisdiction not later than December 31, 1973. D. Accounting Systems, Audit and Insurance 3.06 Considering the short period of training available to AIC and the subsequent transfer of some of the trained staff, the financial accounting section is carrying out its functions well. Accounts are audited by the Magistrate of Accounts. 3.07 The consultants (AIC) were required to make recommendations for changes in the schedule of port charges after determining the costs of pro- viding the various port services. They concluded that only two operating cost centers are necessary (cargo handling and all other) and recommended a tariff related to an ad valorem tax, rather than one related to various ser- 'ces and their costs as favored by the Government. As a result, the costing systems introduced are little more than budgetary-control systems. This is unsatisfactory and it is essential for the ports to have a tariff structure covering the principal facilities and services used by ships and cargo respec- tively and with charges based on costs. During negotiations it was agreed that SPA's tariff policy will be based on costs (para 7.15). 3.08 SPA's internal audit section is moderately competent, but with the expansion of SPA's functions and particularly in anticipation of the project port, the section requires expansion and additional training and upgrading. 3.09 Additional management consulting services are required, and are included in the project, to: (a) make a new appraisal of the tariff structure witlh recommenda- tions for amendments;  - 8 - (b) review and improve as necessary the financial and cost account- ing, statistical and management information systems introduced by AIC, and their implementation by SPA; (c) review the ability of staff in the accounting, statistical and internal audit departments, and to plan and undertake additional training programs; and (d) conduct seminars for top management in the use of management information systems. 3.10 During negotiations, the SPA agreed that its accounts and financial statements for each fiscal year will be audited by independent auditors accept- able to the Association and that copies of the audited financial statements and the auditor's report will be submitted to the Association within four months after the end of each fiscal year. The UK Government has provided the services of an expert for two years to set up within the Magistrate of Accounts' Department a special unit to audit the accounts of autonomous agencies, including SPA's. If the expert is successful in setting up and training an adequate audit unit, audit by the Department would be acceptable as an independent audit. 3.11 SPA has no insurance, in spite of its substantial assets; the extent of its public liability risks is uncertain. During negotiations SPA agreed to engage competent insurance experts to advise on insurable risks borne by SPA and, by .iarch 31, 1974, to insure, to the Association's satis- faction, against such risks and in such amounts as shall be consistent with sound business practices. IV. THE PROJECT PORT A. Existing Facilities 4.01 The existing port is a lighterage harbor, protected from the south- east by a 500 m breakwater but open to the southwest (Map IBRD-3015). Lighters are discharged or loaded at four finger jetties running at right angles to the shore, and by a berth approximately 100 m long on the landward end of the breakwater. Storage shed area is adequate but, as floors are about 1 m above ground, cargo-handling equipment such as forklift trucks and tractor-trailers cannot enter and must reload at the platforms. 4.02 Because of erosion of the adjacent shallow sandy coast and the absence of breakwater protection against southwest waves and currents, the harbor is silting up. Tidal range is about 3 m, and with depths varying from 0.5 to 2 m below low water within the port area, several finger piers, and sometimes the main berth, are unusable by lighters at low tides. The small dredge available cannot keep pace with siltation.  -9- B. Operations 4.03 SPA undertakes all cargo-handling operations, stevedoring, light- erage and shore handling. Mlost labor is casual, engaged by the SPA on piece- work. SPA's handling equipment consists of 14 lighters of 60 to 120 tons with another six 120-ton lighters on order, five launch-tugs, 10 mobile cranes, six tractors and 20 trailers, and three forklift trucks. Deep-water vessels anchor in the open sea about 1 km from the entrance of the lighterage harbor. Lighterage operations in an open roadstead, always cumbersome, are particularly so in Mlogadiscio where the sea is nearly always choppy. Heavy storms are rare, but frequent swells result from storms elsewhere in the Indian Ocean. During the southwest monsoon, from mid-May to October, es- pecially from June through September, there are many days when work is im- possible, and some cargo is diverted to Chisimaio (see Chapter 6, Economic Evaluation). On many days adjacent hatches cannot be worked simultaneously at the lee side of the vessel. Night stevedoring is impracticable. Opera- tions at ship side result in accidents to personnel and losses and damage to cargo which suffers further damage during unloading onto the quay. 4.04 Ship discharge rates have improved over the past year, reducing ship time in port; rates average between 200 and 400 tons per day per ship, depending on weather conditions and type of cargo. However, unloading from ship's hook requires little time since cargo is more or less dumped into lighters and has to be re-sorted in the lighterage harbor. The new manage- ment has improved the dock labor system. All casual labor is now organized in gangs which are called forward in rotation as required. Supervision has been tightened up. 4.05 iNevertheless, in general, cargo handling is primitive in spite of considerable mechanization (para. 4.03); there is no palletization or preslinging, and every parcel is handled manually several times, aboard nip, aboard lighter, at the pier and in the sheds. Considerable improve- ments in efficiency and reduction of damage are possible with relatively small investments for pallets, nets and slings and with improvements of pavements on the piers and in the sheds. Technical assistance by experi- enced port operations consultants is included in the project, initially using the existing port as a training ground for efficient cargo-handling operations in the proposed new port. Skilled and semi-skilled labor, such as supervisors and crane and forklift operators, should be carefully selected and trained. The proposed technical assistance will include such training and will also help users of the future port decide how to handle and ship special cargoes, such as bananas, most efficiently. The consultants will also be responsible for recommending the quantities and types of equip- ment required and for assistance in procurement. C. Facilities Required 4.06 In planning for a new port, adequate facilities should be provided to handle volumes and types of cargo expected for five or six years after port completion (in the case of Mogadiscio, to be completed in 1976, through  - 10 - at least 1981). Traffic growth over the following five years should also be considered. Assuming reasonably efficient operations, a mixed general cargo throughput of 1,000 tons per meter of berth per annum, or 160,000 tons per 160 m berth, should be achieved after a few years' experience. At Mogadiscio, the volume of total dry cargo for 1977 is forecast to be 382,000 tons, in- cluding 103,000 tons of bananas, which would be more than the capacity of two berths, making a third, specifically for bananas, necessary. By 1981 general cargo, excluding bananas and livestock, would reach about 330,(00 tons, about the capacity of two berths, bananas will be about 180,000 tons and livestock 18,000 tons. By 1986 general cargo (excluding bananas and livestock) is expected to be about 400,000 tons. It is probable that, with the new port coming into use, the present world trend to cargo unitization (e.g. on pallets, in containers, etc.) will apply at 1!ogadiscio; this, to- gether with increasing productivity through experience, may increase the capacity of the two berths. 4.07 The capacity of the banana bertlh can be increased with the intro- duction of loading equipment as traffic growth justifies it. With adequate equipment, the one berth could handle the maximum projected volume of banana exports of 240,000 tons expected in 1986 and may also take some general cargo during peak periods. Livestock exports must be separated from bananas and general cargo because of ecological and sanitary problems and a simple ramp- loading arrangement to a dolphin mooring berth is adequate. 4.08 In addition to possible use for lighterage in times of congestion of the new port, the existing port will continue to be of operational use for storage, berthing harbor craft, and fishing boats and perhaps for a small-boat shipyard and maintenance area. In any event, it must be im- proved and siltation controlled if it is to be able to continue to handle lighterage traffic until the new port is constructed. Some capital invest- ment is urgently required, and SOGREAH have recommended construction of a lee mole to protect the harbor entrance and dredging of the harbor, at an estimated cost of US$400,000 equivalent. During negotiations, the SPA agreed to take all measures which are necessary or advisable to ensure, to the satisfaction of the Association, the improvement and the continued and efficient use of the present harbor at least during the construction period of the project. SPA will finance this work, V. THE PROJECT A. Project Description 5.01 The project comprises the first stage of the master plan (para. 1.04) for the development of a new port at Mogadiscio. It includes the following: (a) the construction of a 770 m breakwater, two berths of 160 m and one of 140 m, a dolphin berth for mooring livestock vessels, a marshalling area for livestock, an access road, paved areas, two transit sheds, one warehouse and ancillary buildings;  - 11 - (b) the provision of harbor and navigational aids and cargo-handling equipment; and (c) technical assistance and engineering services by consultants. Details of the new port are described in Annex 2 and shown graphically in the attached drawing. Technical Features 5.02 After a brief survey had confirmed that no better location exists reasonably near Ilogadiscio, a hydrographic survey was made at the proposed site over a full year, covering depth soundings, wind speeds and directions, and tide, wave and current measurements. A hydraulic model based on these data was built, on a 1:100 scale, first to compare alternative solutions, such as an inner harbor versus an outer harbor basin, and thereafter to determine the optimum location of the breakwater. The solution arrived at proved to be the least expensive solution meeting acceptable standards. The civil works are a first three-berth stage of the master plan; the break- water can be extended in two further stages of about 200 m each, and two berths can be added with each extension, one alongside the breakwater and one on the landward side. Berths of varying lengths and depths may be added later. 5.03 Since no rivers enter the sea in this area of the Somali coast, siltation is due to the littoral drift of sand only and not mud. The seabed is stable because of low tidal current velocities and large areas of coral or limestone. Very little maintenance dredging will therefore be required. Soil conditions in general are favorable, and no particular foundation pro- blems are envisaged. Ample drillings and soil tests have been made at the site, for the location of material for fill, and at a quarrysite for rock to be used for the breakwater core. Technical Assistance 5.04 Technical assistance (paras. 3.09 and 4.05) will start while the present lighterage port is still in use and continue after the new port has become operational, since accounting and operations under present conditions are only partly relevant to the new port. The number of foreign experts required is relatively small but their assignments are likely to be spread over a three to four-year period. Altogether, some 100 man-months of tech- nical assistance are foreseen. To ensure coordination and consistency, the work will be undertaken by a management consultancy firm experienced in port operations and satisfactory to the Association. Engineering Services 5.05 The Government, with the agreement of FED and the Association, instructed SOGREAII to (a) review the original two-berth layout and design, (b) revise and update the cost estimates, (c) undertake the detailed design  - 12 - for the third berth and dolphin bertlh, and (d) assist with the prequalifica- tion and tendering. This work is almost complete. SOGREAH will also be responsible for construction supervision. B. Project Execution 5.06 The Department of Civil Engineering of the Ministry of Public Works will be responsible for execution of the project on behalf of SPA. Contracts for construction and procurement will be awarded on the basis of international competitive bidding in conformity with Bank/IDA guidelines; FED has waived its usual requirement that such contracts be restricted to its members. There is some small but inexperienced contracting capability in Somalia, and it is expected that such contractors might be retained by a foreign main contractor in a subcontracting capacity. While, as a signatory to the Yaounde Convention, Somalia allows proferential duties to member and associate member countries of the European Economic Community, it has been agreed between the Government, FED and the Association that for the purpose of comparing bids, any import duties or other local taxes will be excluded. The civil works construction period is expected to last about three years from arrival on site. 5.07 All land needed for the project is owned by the Government and is available. A report dated 1971 by Studio Architetti Ingegneri Specializzati on the development of the Mogadiscio urban area, financed by FED, accepts the siting of the project port in its recommendations. 5.08 The project is not expected to affect adversely fish and other marine plant and animal life in the area. It could, however, create some environmental problems relating to (a) the city's existing sewerage marine outflow, (b) disposal of the animal wastes from the livestock marshalling yards, (c) control of vermin, (d) treatment of ships' oily ballast waste and (e) avoidance of coastal erosion. To the extent possible, these problems have been minimized in the detailed port design. During negotiations, the Government agreed to take all reasonable measures to ensure that execution and operation of the project are carried out with due regard to ecological and environmental factors.  - 13 - C. Cost Estimates, Financing and Disbursements 5.09 The total cost of the project is estimated at US$25.0 million with a foreign exchange component of about 82%. Details are given in Table 2 and summarized below: So.Sh Ilillion US$ flillion % Local Foreign Total Local Foreign Total Foreign Civil Works 31.1 128.4 159.5 4.5 18.5 23.0 80.5% Engineering Supervision 0.7 6.2 6.9 0.1 0.9 1,0 89.5% 31.8 134.6 166.4 4.6 19.4 24.0 80.9% Operating Equipment - 4.2 4.2 - 0.6 0.6 100.0% Technical Assistance 0.1 1.9 2.0 0.0 0.3 0.3 95.0% 31.9 140.7 172.6 4.6 20.3 24.9 81.5% Project costs are net of taxes and duties. The cost estimate for civil works is based on costs derived by SOGREAH from their detailed engineering and in- cludes allowances for engineering quantities (6%) and price contingencies (12%). Foreign exchange costs are high because Somalia lacks most construc- tion materials; suitable rock is not available for breakwater armoring to protect the surface and concrete tetrapods will have to be used. 5.10 The above cost estimates were carefully reviewed during project appraisal and found to be reasonable. Given, however, the uncertainties involved in construction in Somalia, the inability of the Government to -ontribute to project costs should there be a shortfall in available funds, and the desirability of maintaining the respective shares of IDA and FED in the financing and supervision of the project, the Government proceeded with the prequalification and tendering of civil works prior to Board pre- sentation. Bids have now been received and suggest that the contract price will be well within the cost estimates. 5.11 Project costs will be met by equal contributions from FED and the Association. Disbursements under the FED grant and IDA credit will be made pari passu and will cover 100% of the cost of civil works, equipment, tech- nical assistance and engineering services up to a total of US$25.0 million equivalent. Some minor retroactive financing for detailed engineering, in excess of the funds available in Credit S5-SO, will be required, estimated at US$30,000. The IDA credit of US$12.95 includes its share of project costs (US$12.5 million) plus US$450,000 for refunding the outstanding balance of Credit S5-SO. An estimated schedule of disbursements under the IDA credit is shown in Table 3. Surplus funds remaining in the credit account upon completion of the project will be cancelled.  - 14 - VI. ECONOlIC EVALUATION A. Traffic Forecasts 6.01 The construction of a protected deep-water port with alongside berths at togadiscio will provide more efficient and less costly service than the present port and even than some other Somali ports for some of their cargo, resulting in substantial amounts of both diverted and generated traffic in the new port. Specifically, all cargo now handled by the banana lighterage port of Merca will transfer to Mogadiscio, which will also recapture live animal exports originating in its hinterland now going through the northern port of Berbera. Also, with a deep-water port at Mogadiscio, general cargo imports destined for the capital area will no longer have to be unloaded at the southern port of Chisimaio during the southwest monsoon season. As a result, dry cargo traffic using Mogadiscio port is expected to increase from an annual average of 160,000 tons in 1970-1971 to about 525,000 tons in 1981 and 660,000 tons in 1986. The basis of the forecast is given in Annex 3, and the detailed projections are shown in Table 4. B. Evaluation of Benefits 6.02 Detailed information on methodology and data used in the economic justification are given in Annex 4. Table 5 gives estimates of benefits of livestock diversion and Table 6 the annual flow of estimated benefits and costs. 6.03 Project benefits will commence in 1976 and continue for the use- ful life of the new port facilities, estimated at 40 years. However, no in- creases in annual benefits are expected for banana exports after 1985 (since maximum exports are expected to be reached then) or for other dry cargo after 1986, when further growth of traffic would require additional facilities to avoid ship and cargo congestion and economic losses. Total quantifiable pro- ject benefits are estimated at US$3.3 million in 1977, are expected to in- crease to US$5.2 million by 1986, and have been assumed to remain constant at that level for the remainder of the project port's life. The following is a summary of the estimated quantifiable project benefits in 1977 and 1986, shown in more detail in Table 6.  - 15 - (US$, 000) Source 1977 1986 Shipping surcharge savings 1,723 2,465 Reduction in cargo losses 1,082 1,491 Import diversion (Chisimaio) 207 398 Banana export cost savings 180 422 Livestock diversion (Berbera) 60 375 Total 3,252 5,151 6.04 The first and largest source of savings (all in foreign exchange) will be the elimination of a port surcharge of US$5.80 - 8.40 per ton of dry cargo. Vessels calling at 'logadiscio impose this surcharge because of the cost of extended time in port due to the unprotected anchorage and in- efficient lighterage operations. Cargo losses in Miogadiscio port attributa- ble to present operations are conservatively estimated to average 1.5% of the value of dry cargo imports and 0.5% of exports; the new port will virtually eliminate these losses, most of which also involve foreign exchange. All of the benefits will accrue to Somalia. 6.05 Benefits from traffic diversion are expected from dry cargo imports and livestock exports. Dry cargo imports destined for Ilogadiscio are fre- quently unloaded at Chisimaio and trucked 500 km overland to the M4ogadiscio area., at a cost of about US$14.75 per ton, during the southwest monsoon season wThen cargo handling at Mogadiscio becomes particularly hazardous. The new ,t will eliminate this practice. Because of inadequate facilities, the present port of Mogadiscio now handles only a fraction of the livestock exports originating in its hinterland. MIost animals from the area are transported on the hoof, at substantial cost, to the recently constructed port of Berbera some 1,250 km north of Mogadiscio. Diversion of this traffic will improve the quality of livestock exports and offer the potential for higher prices for the animals. Traffic diversion to the new port will in both cases result in substantial savings to the Somali economy. 6.06 The present use of the lighterage port of Merca for banana exports from the Afgoi-Genale area results in substantial costs in ship waiting time and in damage to and loss of banana cargo. Construction of a banana berth in Mogadiscio and termination of banana exports through Merca will reduce ship waiting time and cargo losses, though these savings will be partly offset by additional land transport costs. The indicated benefits are the net annual savings attributable to the transfer of banana export operations from t4erca to Mogadiscio, and will accrue to Somalia through adjustments in port charges.  - 16 - 6.07 Other benefits will include those arising from generated traffic, and from the undoubted advantages to tile economy of a more reliable and ef- ficient port facility. However, no meaningful estimate of these benefits was possible, and they have not been included in the cost-benefit evaluation of the project. C. Economic Cost of the Project 6.08 For the purpose of economic evaluation, the economic cost of the project is estimated at US$22.66 million, that is, the estimated total cost (US$25.0 million) less price contingencies. The annual maintenance cost is estimated at 1% of the capital cost. It must be emphasized that, while all project-connected costs have been allocated to this project, several impor- tant cost elements such as the breakwater, access road and administrative facilities will directly benefit future stages of the port development program. D. Economic Return 6.09 On the basis of the quantifiable benefits and economic costs dis- cussed above, the economic return on the investment in the project is esti- mated, on conservative assumptions, at about 15%, demonstrating that it is economically justified. The first year return is 11%, fully justifying the timing of the project. Some 75% of the savings are in foreign exchange and the present value of such savings over the 40-year assumed life of the proj- ect exceeds the foreign exchange costs; thus the project will more than self- finance the foreign exchange cost. 6,10 In order to test the sensitivity of the economic return to changes in the important parameters, a further analysis was undertaken by varying costs upward and benefits downward. The results (given in Annex 4, para. 18) show that, even with a 10% increase in project costs combined with a 25% drop in benefits, the economic return will exceed 11%. However, bids received in- dicate that project costs are likely to be at least 20% below estimates which suggests a return of close to 18%. E. Employment Effects 6.11 The expected expansion in overall port traffic, following provision of the new port at Mogadiscio, will be accompanied by substantial increases in the total port labor force, but an initial problem will be created by the transfer of banana traffic from Merca, where some 600 port workers will lose their jobs. The Government is anticipating this problem, however, and is taking active steps to increase employment in the area. The nation-wide "crash program," which combines training with paid labor on self-help schemes, will be expanded locally, and increases in banana and grapefruit cultivation are planned. In addition, Merca will soon become the administrative capital of a newly-created Lower Benadir region, which will also increase job opportunities.  - 17 - VII. FINANCIAL EVALUATION A,, Tariffs, Other Port Investments, Relending of External Finance and Fixed Assets Valuation Tariffs 7.01 The present tariffs are not based on costs, although in general the tariff structure provides for charges for individual services and facil- ities. Also, there is an ad valorem harbor tax of 1.5% on the value of all cargo loaded or unloaded, except bananas; this tax is applied at all ports whether lighterage or deep-sea. On the other hand no harbor dues are charged on ships for the use of the harbor, as distinct from the berth, although such charges would be justified at Chisimaio and to a lesser extent at Berbera to recover the costs of dredging and breakwater construction. Upon completion of construction of the new l4ogadiscio port similar charges would be justified to cover the costs of constructing the harbor. 7.02 The principal charges at SPA ports are given in Table 7. In gen- eral, they are high, although it is difficult to compare charges at different ports. A change from the present inefficient lighterage operation to an ef- ficient modern deep-sea port will effect reductions in overall por,<t costs and tariff reductions should be possible (para 7.13 and 7.14). Other Port Investments and Relending of External Finance 7.03 Any evaluation of SPA's financial situation is affected by re- cent and possibly premature investments at the ports of Berbera and Chisimaio. At Berbera, construction was completed in 1968 of a new two-berth (320 m quay) port, financed by the USSR at a cost of So.Sh 54 million (US$ 8 mil- lion equivalent), out of development and commodity loans, as part of a gen- eral program amounting to about So.Sh 375 million (US$54 million). At iPisimaio, a new four-berth (619 m quay) port was completed between 1967-69, financed by a USAID grant and a loan of US$ 1 million. The total cost of the project was US$9.8 million (So.Sh 69.9 million at 1970 exchange rates). Traffic forecasts indicate that these investments may have been premature by some five to ten years. Details of the loans are given in Annex 5(a) and (b). 7.04 During meetings between representatives of the Association and FED in July 1972, the question of relending the proposed IDA credit to SPA and the treatment of other external financing in the capitalization of SPA was discussed. FED would be unable to provide financing by way of a grant if the Association's 50% contribution of the project cost were to be relent to SPA on normal Bank terms. FED further considers that other external Government borrowings for SPA should be relent to SPA on the same financial terms as obtained by the Government and that grants should be passed on as equity capital. This is an acceptable solution since it provides SPA with a rational capital structure based on facts. Also, the financial forecasts show that, in accordance with the new finance law (para. 2.11), SPA payments  - 18 - to the Government by way of contributions from revenues and from depreciation, representing repayments of equity capital, together with debt service calcu- lated on the above basis will exceed what the debt service would be if the credit were relent to SPA on Bank terms. 7.05 It was therefore agreed during negotiations that an exception would be made to the general policy regarding relending the proceeds of IDA credits and that a Subsidiary Loan Agreement would be entered into between the Bor- rower and SPA whereby the credit proceeds will be relent on the same terms as to payment of service charges and repayment of capital as contained in the Development Credit Agreement. During negotiations the Government also agreed that it will: (a) lend to SPA the amount of the loans received from the USSR applicable to the port of Berbera and the amount of the loan received from the USA applicable to the port of Chisimaio upon the same terms and conditions relating to interest and repayment as are contained in the respective loan agreements and (b) treat as equity capital of SPA the amount of the grant received from the USA applicable to the port of Chisimaio and the proceeds of the proposed grant from FED. Fixed Assets Valuation 7.06 AIC carried out an inventory of fixed assets and valuation as at December 31, 1969. The basis of valuation was actual cost of the new invest- ments at Berbera and Chisimaio and replacement cost for other fixed assets, except land, less accumulated depreciation to that date. Nominal valuations were ascribed to land, since all the land belongs to the Government and there is no free market in land. The valuation is satisfactory. B. SPA's Financial Situation 7.07 Revenue accounts for 1969-1981 are given in Table 8, a statement of the source and application of funds in Table 9, and balance sheets in Table 10. Table 11 gives forecast debt service. Capitalization has been assumed as agreed during negotiations (para. 7.05). Present tariffs and levels of operating costs have been used in forecasting future revenue and expenses. Other assumptions made are given in Annex 6. 7.08 In 1969 the cash operating surplus was insufficient to cover de- preciation, and the operating ratio, including depreciation, was 110%. In 1970, reorganization of dock labor and improved supervision (para 4.04) and improved cost control effected substantial savings in operating costs and reduced the operating ratio to 79%. The takeover by SPA of shore handling at Berbera and Chisimaio and of storage revenue in 1971 increased revenues and expenses and resulted in all profits from shore handling operations accruing to SPA, instead of a much smaller concession revenue; this, combined with traffic growth, further reduced the operating ratio to 67%. However,  - 19 - since traffic in 1971 was unusually heavy the operating ratios thereafter are expected to stabilize at about 70% or less; such ratios are relatively low, considering that SPA provides all cargo-handling services, and are an indication of a general high level of tariff rates. Significant revenue data are given below for representative years. So.Sh Million 1969/1 1970L2: 1971 1973 1977-- 1979 1981 Operating revenues/3 17.6 19.5 34.8 35.6 48.7 54.1 60.9 Operating expenses 19.3 15.5 23.3 24.7 34.1 36.9 40.6 Operating surplus (1.7) 4.0 11.5 10.9 14.6 17.2 20.3 Interest 0.1 0.1 1.4 1.6 1.3 1.1 Income tax 1.4 4.0 Turnover tax 3.6 4.9 5.4 6.1 Government Development fund 2.0 5.9 5.8 7.8 10.3 12.9 Net Surplus 0.5 1.5 0.1 0.3 0.2 0.2 Operating ratio 110% 79% 67% 69% 70% 68% 67% Interest coverage 53x 137x 7.8x 9.4x 13.2x 18.8x Debt service coverage 6.3x 11.2x 2.7x 3.6x 4.2x 4.9x ,-nancial return on average net fixed assets 2.8% 8.2% 8.2% 5.2% 6.4% 7.9% /1 Actual. /2 First full year of use of new project facilities. /3 Based on current tariffs. 7.09 All earnings criteria are satisfactory; the financial rate of re- turn on average net fixed assets after completion of the project would reach 6% in 1979 and nearly 8% in 1981, in spite of the overinvestment at other ports. Interest coverage is high because of soft interest terms on borrowing; debt service coverage is ample because much of debt amortization is also on soft terms. Operatino working capital is maintained by appropriations from surplus. The fall in operating expenses in 1970 and increases in revenues and expenses in 1971 are explained in para. 7.08.  - 20 - 7.10 Because of 100% FED/IDA financing of the project on country grounds, SPA will not contribute directly to the financing of the project costs. It will, however, generate funds during the construction period in excess of the local currency costs of the project, estimated at about So.Sh 32 million, and will pay to the Government some So.Sh 44 million (after meeting debt service) by way of taxation, profit contributions and capital repayment. It will also finance So.Sh 3.3 million for improvements to the existing port and for other minor capital expenditure. An analysis of the source and application of funds for the period 1970-1981 is given in Table 9, from which SPA's financing plan for the project construction period 1973-1976 is summarized below. So.Sh US$ lillion Million Funds Required Proposed project 173.12 25.0 Other capital expenditure 3.28 0.5 176.40 25.5 % Sources of Funds Gross internal cash generated 71.52 10.3 40.4 Less: Debt service (24.02) (3.5) (13.6) Turnover tax (15.82) (2.3) (9.0) Contribution to Development (27.74) (4.0) (15.7) Capital Repayment (0.79) (0.1) (0.4) Net cash generated by SPA 3.15 0.4 1.7 Less: Increase in cash reserves (2.99) (0.4) (1.6) Net cash generated applied to investments 0.16 0.0 0.1 FED grant 86.56 12.5 49.1 IDA credit 89.68 13.0 50.8 176.40 25.5 100.0% 7.11 Over the whole period, 1970-1981, SPA is expected to pay to the Government So.Sh 51 million in income and turnover taxes, So.Sh 99 million in development capital contributions and equity capital repayments, while meeting all its commitments and increasing its cash reserves by So.Sh 16 million.  - 21 - 7.12 The balance sheets (Table 10) show a strong and continually improv- ing financial position. Debt/equity ratios are acceptable, the highest point after completion of the project being 42/58. C. Financial and Economic Objectives and Covenants 7,13 As stated in para 2.12 the Government's financial policy towards SPA is acceptable. However, in considering the financial objectives that ought to be required of SPA, as related to a rate of return on investment, various matters should be considered: (a) The present general level of port charges is high and should be capable of being reduced after completion of the project and introduction of efficient operating methods. Tariff reductions would especially benefit exports which are highly sensitive to port handling costs. (b) The already acceptable financial rates of return derived from the forecasts (5.2% in 1977, rising to 7.9% in 1981) are based on inclusion of the full costs of the Chisimaio and Berbera ports and full depreciation on them. If allowance is made for overinvestment the comparable rates of return would be of the order of 7% in 1977 rising to over 10% in 1981. (c) After providing for the admittedly low interest charges on relending borrowings on soft terms, the actual return to the Government on its equity capital in the form of turnover tax and profit appropriations is substantial, being 7.5% in 1977 and rising to 12.5% in 1981, on the present level of tariffs. (d) Alternatively, if the profit appropriations are considered as an additional return on borrowed money (as distinct from grants or equity capital), for the year 1977 (the first full year after completion of the project) in which the financial rate of return is 5.2%, the profit appropriation added to actual interest and service charges on debt would equal approximately 7% on that debt. 7.14 It is concluded that a minimum financial rate of return of 5% on total average net fixed assets would enable SPA to maintain adequate working capital and reserves, meet debt service and pay to the Government in one form or another out of profits a reasonable return on investment. Also, after completion of the project there would be the opportunity to reduce tariffs in areas where this would be of benefit to the economy. At the same time it is important to ensure that (a) the Government reaps the full benefit from capital investment borrowings, including the proceeds of the IDA credit, and that unnecessary cash operating surpluses are not retained by SPA or dis- sipated in investments or expenses that would not benefit the economy, and (b) that SPA will be able to retain sufficient funds for future investment as they are required. During negotiations it was therefore agreed that:  - 22 - (i) all necessary steps shall be taken, including, where necessary, revision of port tariffs, to ensure that SPA will earn a financial rate of return of at least 5% on total average net fixed assets in use; (ii) the Association will be consulted prior to any capital investment by SPA; (iii) SPA will not incur any debt unless its net revenue for the fiscal year or the 12 consecutive months immediately before the date of occurrence, whichever is greater, would be at least 1.5 times the maximum debt service requirements of any succeeding year on all SPA debt; (iv) Finance Law No. 58 will not be amended in any material respect without prior consultation with the Association; and (v) the Association will be provided promptly with copies of all regulations applicable to SPA issued under the Finance Law. 7.15 During negotiations, it was also agreed that SPA's tariff policy will be: (a) to levy dues and charges for the principal categories of facilities and services provided, based on the costs of those facilities and services; (b) particularly as regards charges on cargo, to cover at least the economic costs; (c) to ensure that, so far as is reasonable and practical, the economic savings and benefits from investments in the ports that would otherwise accrue outside the economy of the country are recovered; this applies principally to savings and benefits enjoyed by foreign-owned ships; and (d) in the event that the overall level of tariffs can be reduced, the first beneficiaries should be export cargo. VIII. ACTION TAKEN AND RECOMMENDATION 8.01 During negotiations agreement was reached on the following matters: (a) employment of consultants, improvement in organization and management, and appointments of general managers and financial managers (paras. 3.03 and 4.05);  - 23 - (b) promulgation of port regulations (paras 3.05); (c) audit and insurance (paras 3.10 and 3.11); (d) improvement of the existing harbor (para 4.08); (e) exclusion of customs duties and other taxes for bid evaluation (para 5.06); (f) protection of the environment (para 5.08); (g) relending of credit proceeds to SPA on IDA terms; relending of other port investment loans and treatment of grants as equity capital (para 7.05); (h) financial rate of return and other financial covenants (para 7.14); and (i) tariff policy (para 7.15). 8.02 The project is suitable for an IDA credit of US$12.5 million to the Somali Democratic Republic, plus US$450,000, being the amount outstanding on Credit S5-SO, making a total of US$12.95 million. February 14, 1973   ANNEX 1 SOMALIA MOGADISCIO PORT PROJECT New Facilities at Other Main Ports 1. BERBERA Main berth 300 m long Maintenance berth 40 m2long Quay area 40,300 m2 Transit shed 5,472 m Breakwaters Workshops, stores, etc. Housing estate Total cost So.Sh 53,972,000 Completed 1968 2. CHISIMAIO Dredging to 31 ft* Berth and jetty* 619 m long Breakwaters and causeway* 2 Banana conveyor shed** 521 m Cargo shed, including 2 refrigerated store** 1,985 m Administration buildings, workshops, etc. ** Total cost So.Sh 69,917,047 * Completed 1967 ** Completed 1969 February 14, 1973   ANNEX 2 Page 1 SOMALIA MOGADISCIO PORT PROJECT Main Project Characteristics 1. As the natural depth of the open sea near the harbor entrance is over 13 m at low low water (LLW), there is no need for a dredged entrance channel. Along the quays, a depth of 10 m below LLIW has been chosen for the two berths alongside the breakwater, and 8.5 m for the landward berth. These depths will accommodate vessels with drafts of 9.5 m and 8 m respectively, which is ample for the vessels expected to call at the port. The 10 m depth will acconmodate most vessels of 15,000 dwt; because of depth limitations in many ports all over the world, the trend towards larger vessels is reflected in increasing length and width of vessels, rather than depth. The chosen berth lengths (two of 160 m and one of 140 m) correspond with the above depth; it is unlikely that more than one maximum-size vessel would have to be accommodated at any one time. Spring highwater tide is 3.05 m above LLW and may reach 3.75 m in exceptional cases. The crest of the quay wall is there- fore 4.50 m above LL1-7. 2. 2 Two transit sheds along the deep quays and one warehouse, each of 5,000 m , will be sufficient to handle the cargo volumes expected in the 1980's. Another transit shed and/or air-conditioned banana storage shed at the third berth can be added later should the need arise. A 15,000 m2 livestock marshalling yard can accommodate one shipload of livestock (cattle, camels, sheep and goats), and its location is planned so that animals can -each the walk-on loading ramp without crossing any traffic or other quays. 3. Although the construction of the quay walls and aprons allows for the installation of cranes, no such equipment is included in the project since it is envisaged that ship's gear will be used. Buildings for the port administration, customs and police, and utilities are included in the project. Consideration was given to accommodating tankers for the supply of petroleum products to the tank farm adjacent to the port area, but this idea was abandoned because of the danger involved. 4. The construction of the breakwater is conventional, consisting of a rock-rubble core, covered at the seaside by heavy limestone blocks and concrete tetrapods. To minimize wave action, damping embankments will be constructed within the harbor basin where there are no quay walls. For the quay walls the conventional construction with heavy concrete blocks has been chosen; a sheet-piling construction was considered but was found to be more expensive, and it could not be used for the landward berths where there are rock layers through which sheet piling cannot penetrate. Even so, bidders  ANNEX 2 Page 2 will be allowed to submit bids for alternative types of construction for the quay wall if they believe that such construction would be cheaper, and for the sheds and warehouses which are designed with glued laminated timber spans. 5. Pavings of roads and aprons and within sheds is to be of asphalt concrete. Since the fill between breakwater and quay wall will be inserted hydraulically using vibrators, little settlement is expected. Equipment 6. Procurement of 12 forklift trucks and a tug is included in the project. SPA has sufficient mobile cranes and launches. February 14, 1973  ANNEX 2 Att-Rohment 6X, t:x5 "~~~~ ---0.00)----- > %. In~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~10 0 (2(17 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~