Mexico - Airports Development Project

Report No. 366a-ME Mexico: Appraisal of an Airports Development Project May 28, 1974 Latin America and Caribbean Projects Department Not for Public Use Document of the International Bank for Reconstruction and Development International Development Association 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 It may not be published, quoted or cited without Bank Group authorization.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 Equivalents Currency Unit a Peso (Ps) US$1.00 - Ps 12.5 Ps 1 - US$0.08 Ps 1 million - US$80,0 Fiscal Year January 1 - December 31 System of Weights and Measures Metric British/US Equivalent 1 meter (m) - 3.28 feet (ft) 1 kilometer (km) = 0.62 mile (mi) 1 square kilometer (km2) - 0.386 square mile (sq mi) 1 metric ton (m ton) - 2,204 pounds (lb) Abbreviations and Acronyms ASA - Aeropuertos y Servicios Auxiliares DGA - Direccion General de Aeropuertos DGAC - Direccion General de Aeronautica Civil DIGAS - Distribuidora de Gasolina, S.A. DME - Distance Measuring Equipment GNP - Gross National Product ICAO - International Civil Aviation Organization IDB - Inter-American Development Bank NACOA - Nacional de Combustibles de Aviacion NAP - National Airport Plan PEMEx - Petroleos Mexicanos RANSA - Radio Aeronautica Mexicana, S.A. SCT - Sbecretaria de Comunicaciones y Transportes SOP - Secretaria de Obras Publicas VOR - Very high frequency Omnidirectional Radio range  MEXICO APPRAISAL OF AN AIRPORTS DEVELOPMENT PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSi.ONS ........................ i - Ui 1. INTRODUCTION .................,... 1......... ..*..... 2 2. BACKGROUND 2 A. General .... ...2........ 2 B. The Transportation Sector ......... 2 C. Transportation Policy and Coordination 3 3. MEXICAN AVIATION .................................. . 4 A. National Airport Plan....... . ..... 4 B. Airlines . .4 C. Traffic Forecasts 5 D. Aviation Administration 7 4. THE PROJECT . ....... ...... 9 A. Description of the Project ......... ........ 9 B. Special Provisions of the Project ................ 9 C. Technical Assistance ... 10 D. Ecology .......*.... 10 E. Design and Supervision 10 F. Cost Estimate ...........10 C. Construction Employment .....11 H. Procurement ..................... 12 I. Disbursement . .12 J. Execution of the Project ............ 13 5. ECONOMIC EVALUATION ....... .......... 13 A. General . 1 3 B. Economic Analysis.................. 14 C. Project Airports . ... . ........15 D. Total Project Return ..............16 E. Air Route Analysis . ............16 F. Additional Advantages .....17 This Appraisal Report has been prepared by Messrs. Zetterstrom (aviation engineer), Bostrom (aviation economist), Chapman (financial analyst), Parker (financial analyst), Skocz (financial consultant) and Ms Foster (editor).  TABLE OF CONTENTS (Continued) Page No. 6. FINANCIAL EVALUATION ........................ 17 A. Existing Situation of ASA ........................ 17 B. User Charges and Financial Objectives ......O...... 19 C. Income and Expenditure Projections ...0.....0.... 20 D. Financing Plan ......... . . ........... . . ... . 22 7. AGREEMENTS REACHED AND RECOMMENDATION -................. 23 TABLES 1. Anmual Departing and Arriving Passengers 2. Aircraft Traffic Development 3. Detailed Cost Estimates (excluding Land) and Project Investment 4. Estimated Schedule of Disbursements 5. Economic Return (Sensitivity Analysis) 6. Summary Revenue and Expenditure Accounts, 1965-1973 7. Summary Balance Sheets as of December 31, 1965-1973 (Audited) 8. Cash Flow, 1968-1973 (for ASA as a whole) 9. Summary Operating Accounts, 1971-1985 (Campeche) 10. Summary Operating Accounts, 1971-1985 (Guaymas) 11. Summary Operating Accounts, 1971-1985 (Los Mochis) 12. Summary Operating Accounts, 1971-1985 (Minatitlan) 13. Summary Operating Accounts, 1971-1985 (Poza Rica) 14. Summary Operating Accounts, 1971-1985 (Tapachula) 15. Summary Operating Accounts, 1971-1985 (Tuxtla Gutierrez) 16. Summary Operating Accounts, 1971-1985 (Villahermosa) 17. Summary Operating Accounts, 1971-1985 (Total Project Airports) 18. Summary Revenue and Expenditure Accounts 1972-1985, ASA 19. Projected Balance Sheets as of December 31, 1972-1985, ASA 20. Projected Cash Flow, 1972-1985, ASA ANNEXES 1. Bank Participation in the Transportation Sector 2. Aircraft Equipment for Mexican Airlines 3. Transportation Coordination Committee - Participants 4. Organization Chart of ASA and List of Airports Presently Operated by ASA 5. Description of the Project 6. Economic Background of Individual Airports 7. Landing Fees at Class 4(a), 5(a) and 6(a) Airports 8. Financial Position, ASA 9. Notes Regarding Current Landing Fees. 10. Calculation Assumptions for Forecast Revenues and Expenses MAPS 1. 10803 - Project Airport Locations 2. 10804 - Typical Airport Layout Plan  MEXICO APPRAISAL OF AN AIRPORTS ])EVELOPMENT PROJECT SUMMARY AND CONCLUSIONS i. Ilexico is a country of widely dispersed low growth communities plus some rapidly growing urban centers, primarily Mexico City. To help draw the country together and promote a more even urban development, the Government is attempting to create a dependable air transportation system at a reasonable cost to the users. The two major Mexican airlines have been encouraged in their attempts to acquire more efficient aircraft, and a national system of airports and airways has been planned to accommodate them. Several of the larger airports have already been reconstructed, and the proposed project would continue this process of upgrading airport facilities. During the last decade, aviation has been one of the fastest growing modes for passenger travel. The appraisal is based primarily on the work of the Secretaria de Obras Publicas (SOP), which will perform the engineering and construction supervision for all but the navigational aids (to be conducted by the Secre- taria de Communicaciones y Transportes, SCT). ii. This will be the eleventh Bank transportation project in Mexico, and, not counting an airport being provided as infrastructure for the Zihuatanejo Tourism Project (793-ME), it will be the first aviation project. It will consist of the construction of seven new regional airports and the expansion of one existing regional airport, and will include runways; air- craft aprons; terminal, fire and control buildings; fueling systems and visual and navigational aids. Additionally, accounting consultants will be engaged to assist the airport operators, Aeropuertos y Servicios Auxiliares (ASA), in establishing a modern cost accounting system. iii. The project will allow the airlines to utilize their more efficient aircraft along the affected routes and will enable traffic at the project airports to grow in an unrestrained manner. It will also assist in strength- ening the operating organization so that it will be capable of efficient and cost-conscious operation of the entire Mexican airport system. iv. The energy crisis took place in the middle of the preparation of this report, and its potential impact on the project has been reviewed. The effects of the recent world-wide fuel shortages and price increases are not expected to change the various project rates of return significantly because of the conservative methodology used. v. Of the total project cost, estimated at US$59.3 million equivalent, US$21.0 million of the proposed Bank loan would finance the foreign exchange component of approximately 35% of total project costs. A further US$4.0 million is provided to finance interest during construction, totaling US$25.0 million in all. The loan would be to Nacional Financiera, S.A. The Government would provide the local cost component.  'Ji. At the present time, ASA is financially viable, primarily because it provides only a reduced share of its capital investments. With the completion of the project and the introduction of full cost accounting, ASA is a whole will still be viable, but, in the early years of operation, the project airports will be able to pay only for their operating expenses. This situation will be improved with the introduction of higher user charges, %lhich will also assist ASA in contributing substantially to future investment. vii. The main benefits of the project derive from Cost savings to the >exican airlines through the use of better aircraft and a safer, faster and ?,ore reliable service to the traveling public. Valuable land occupied by the existing airports will be released for better usage. In addition, there are unquantifiable benefits such as increased reliability of flights, improved air safety, expanded tourism and better regional integration of the country. The economic rates of return for the individual project airports, exclusive of passenger time savings, range from 11% to' 30% while, for the project as a whole, the rate of return is 22%. If passsnger time savings are added, the rate of return for the project rises to 29%. If land values are excluded, the overall project return is 16% based on aircraft cost savings alone. viii. The proposed project is suitable for a loan to Nacional Financiera, S.A. in the amount of US$25.0 million for a term of 24 years, including a four-year grace period.  MEXICO APPRAISAL OF AN AIRPORTS DEVELOPMENT PROJECT 1. INTRODUCTION 1.01 The Government of Mexico has requested the Bank to help finance a project consisting of the construction of seven new regional airports and the expansion of one existing regional airport. 1.02 This will be the first Bank aviation project in Mexico, although one airport was financed as part of the Zihuatanejo Tourism Project (793-ME, US$22.0 million). Annex 1 gives details of previous Bank projects in the transportation sector (highways, railways and ports); the total amount of the loans is US$422.8 million. Implementation of the Bank-financed projects has been generally satisfactory. The Inter-American Development Bank (IDB) has also assisted in the development of the Mexican transportation system through eight loans totaling US$181.0 million: five for feeder roads (US$101.0 million), one for federal highways (US$33.5 million), one for the purchase of maintenance equipnient (US$25.0 million) and one for construction of an airport as part of a totrism project (US$21.5 million). 1.03 This project is part of the Government's continuing attempt to upgrade the airports serving the various regions of the country. The existing airports in the project have short runways with aeronautical obstructions which limit aircraft size and require higher than normal meteorological operational minimums, causing flight delays or cancellations. The project will enable the domestic airlines to improve schedule reliability and to utilize larger, more efficient aircraft, resulting in better and, in the long run, cheaper service to the traveling public. 1.04 The total cost of the project is estimated at US$59.3 million, of which US$21.0 million (42% of the construction costs and about 35% of the total costs) is the foreign exchange component, and, together with interest during construction of US$4.0 million, makes US$25.0 million the amount of the proposed loan. 1.05 This report is based on the technical and economic studies prepared by the Secretaria de Obras Publicas (SOP) and on the findings of the appraisal mission, comprising Messrs. Zetterstrom (aviation engineer), Bostrom (aviation economist), Chapman (financial analyst), Parker (financial analyst) and Skocz (financial consultant), which visited Mexico in October 1973. The report has been edited by Ms Foster.  -2- 2. BACKGROUND A. General 2 2.01 Mexico covers an area of nearly 2 million km . Much of the country cs sparsely populated because of its difficult topography and inadequate rainfall, and, although extensive schemes for agricultural development have increased the areas under irrigation, the population is urbanizing rapidly - a matter of concern to the Government. Close to 60% of the population of 34 million is now urban; this proportion was 52% in 1960 and 43% in 1950. In 1972, about 18% of Mexico's population lived in the district centered by Mexico City. 2.02 Although overall population growth has been 3.5Z per annum since 1960 - one of the highest rates in the world - urban population growth was higher than 5% per annum, while rural growth was only about 1.5% per annum. 2.03 Since 1960, the growth rate of the Mexican gross national product (GNP) has been about 6.7% per annum, one of the highest in Latin America. GNP per capita was estimated to be US$744 for 1972. B. The Transportation Sector 2.04 The Mexican transportation sector in its inception was designed primarily to link, by road and rail, the major seaports with the industrial and urban centers of the interior; secondly, an intricate network of roads and railways was constructed within the central plateau to link Mexico City with the main surrounding centers; and, finally, road, rail and air connections were provided for foreign trade with the USA through a dozen border points along the frontier and international airports within the country. Most of the major towns and cities also have domestic airports. As a result, Mexico has a comprehensive transportation infrastructure, with seaport facilities to complement the other modes. The highway network has about 46,000 km of paved roads, the rail network has about 25,000 km and the domestic air system covers about 48,000 km. (i) Freight Traffic 2.05 The main traffic flows for agricultural products are located between the northeastern and northwestern principal centers of production, the main cities and the US border. The raw materials move from all over the country to the industrial centers of Monterrey, San Luis Potosi, Guadalajara and Mexico City, where finished industrial products originate, in turn, and are destined for local consumption or for export, mainly to the USA. Although the railways have a clear-cut advantage over road transportation for the carriage of bulk over medium and long distances, road transportation is carrying about half o- international transportation and a much more substantial part of national transportation. Seaports account for less than half of the total import/export trade of Mexico, although they are very important for coastal trad2. Recently, the construction of several new seaports has been started, including Madero on the Pacific coast at the sputherDDpst point of  -3. Mexico near Tapachula. The potential for air transportation of high value/ perishable goods is just beginning to emerge. (ii) Passenger Traffic 2.06 Although short and medium distance passenger travel is almost completely monopolized by road transportation, rail and air transport are important for distances over 200 km. While the overall growth of the transport fleet has been about 9% per annum, a comparison of fleet vehicle type growth with fuel type usage would indicate that private automobile utilization has not been keeping pace with the automobile fleet's growth, but that the utilization of larger vehicles has increased. Over the last twelve years, there has been a rapid growth in air traffic, but little or no growth in rail passenger traffic, with the result that these two systems are now about equal in terms of pass-km (4.5 billion/yr). C. Transportation Policy and Coordination 2.07 Three Secretariats are directly involved in transportation policy and planning: SOP, SCT and the Secretaria de la Presidencia. SOP is responsible for subsector planning and project preparation and construction of the transportation infrastructure, except for ports and pipelines. It is also responsible for maintaining the road network and paving of airports. It deals directly with the Presidencia and has very few official contacts with SCT. SCT regulates the operation of the systems by fixing tariffs, granting licenses, etc. SCT also deals directly with the Presidencia, which approves all transportation investment and is also involved in other important transportation matters. 2.08 These three Secretariats have recognized the lack of transportation coordination and have elaborated proposals to coordinate and program the transportation sector. During negotiations for the Second Railway Project (Loan 825-ME), the Government agreed to strengthen the Planning Department of SCT, and a new structure for this Department has recently been introduced. The new organization will have a much larger staff than the present one, and, with the help of external consultants, SCT will prepare a long-term transpor- tation program. The proposed new structure has been reviewed by the Bank and judged acceptable. In 1973, a Transportation Coordination Committee respon- sible for planning and coordinating investments, including all the entities dealing with transportation, was created uhder the Presidencia. 2.09 Since 1965, about 23% of total public investment has been devoted to the transportation sector, about 31% of which has been financed by internal credits and 20% by international credits. Of the total investment, 56% has been devoted to roads, 26% to railways and 18% to other transportation modes. 2.10 All infrastructure investments for roads, railways and airports are directly programmed and carried out by SOP, which has juzL updated a six-year investment program for 1971-1976. The revised program for the last  -4- four years (1973-1976) totals 36.8 billion pesos (about US$2.9 billion), of which 7.1% is for railways, 86.0% for highways and related rural development tnvestment and 6.9% for airports. 3. MEXICAN AVIATION 3.01 The Government's aviation policy is based on the premise that air transportation plays an important role in national development. Domestic aviation has been one of the fastest growing transportation modes. The Government is attempting to use aviation to encourage a more even urban devel- opment. It is felt that, by creating a dependable air transportation system at a reasonable cost to the users, the widely dispersed communities of the nation will be drawn closer together and assisted in their development. An easy mode of travel to the larger population and trade centers is part of the development process, which has previously been limited mainly to Mexico City and a few other large cities (paras 2.01 and 2.02). Aviation will also sustain a growth of freight traffic of perishable goods and help divert Mexican tourists from other countries. A. National Airport Plan 3.02 A National Airport Plan (NAP) was developed in 1964 by a Government- wide committee which provided for a total of 75 airports in Mexico, 37 of which are managed by ASA (para 3.20). Nine of these airports, catering to long range aircraft, have already been completed, while two more are under construction; 22 others are for medium range aircraft and the rest are for short range. Except for those already improved (about 20), the existing facilities are substandard for the types of aircraft now being added to the air carrier fleets. The NAP envisages improving all of these facilities to meet present and future demands and includes lengthening and strengthening of runways, taxiways and aprons; constructing or enlarging terminal, fire and air traffic control buildings; providing navigational aids (navaids) and communication equipment and providing improved utilities and fueling systems (see Map 10803 for project and other airport locations). 3.03 The eight airports under consideration for this project presently exist but are unsuitable for modern air carrier aircraft. Either the runways are too short, the pavements are too weak, the flight paths lie directly over heavily populated areas, terrain or man-made obstructions to flight exist, or combinations of all of these factors are present at each airport. With one exception, the existing sites cannot be improved to alleviate these deficiencies, and the airports must be relocated (see Map 10804 for typical airport layout plan). B. Airlines 3.04 In recent years, air transportation has become increasingly important for passenger traffic. The two principal Mexican airlines -  -5- Aeromexico, nominally the international carrier (100% Government ownership), and Mexicana de Aviacion, the domestic carrier (10% Government ownership) - jointly increased the number of domestic pass-km from 1.0 billion to 4.5 billion between 1962 and 1972. Freight transportation is not yet a major factor (about 40,000 tons/year), but several areas of the country have a good potential, especially the northwest perishable vegetable producing areas and the southeast shrimp and fish producing areas. The heavy industrial areas are also potential air freight producers. 3.05 As traffic developed, the two airlines were able to think in terms of larger, more efficient and more productive aircraft. Aeromexico began to substitute Douglas DC-9 aircraft for older or smaller aircraft such as the DC-6 or the Hawker Siddley 748. It presently has six DC-9's on order for delivery in 1974, making a total of 16 DC-9's for its domestic fleet. It has also ordered two DC-10's with a 1975 delivery for its international routes. 3.06 Mexicana is also upgrading its fleet by substituting Boeing 727 aircraft for its Douglas DC-6's. Given the same frequencies, this substitution more than doubles the airline's capacity and would completely remove any restraints to traffic growth if Mexicana could use the new aircraft through- out its route system. Mexicana is expecting delivery of three more B-727's in 1974, making a total of 19 for use in its domestic and close-by inter- national route system (see Annex 2 for the total fleet makeup of both airlines and comparative operating costs). 3.07 In addition to the principal carriers, there are eight small feeder airlines (alimentadores) operating in specific regions of the country; some of these are affiliated with Aeromexico. They generally operate with smaller aircraft such as Douglas DC-3's and de Havilland DHC-6 Twin Otters. Non- scheduled airlines of the air taxi category abound, as do privately owned, small, general aviation aircraft. Government (non-military), semi-Government and corporate aircraft add many pass-km to the totals reported by the scheduled airlines and reflect the importance of aviation to the activities of such organizations. C. Traffic Forecasts 3.08 Domestic air traffic has grown very rapidly in Mexico over the past few years, partly as a result of improved air services. The passenger traffic forecasts, prepared primarily by SOP, Direccion de Programacico, therefore took two factors into account: (a) the general traffic trend based on such factors as future population and income growth and (b) the additional growth as a result of service improvements at the individual project airports. For the latter purpose, an analysis was made of previous traffic development at other airports after the introduction of jet service. The forecasts were developed up to 1985 and correlated against air traffic forecasts made by other entities such as SCT and the two airlines. (i) Passenger Forecast 3.09 The SOP passenger forecast growth rates were used as given or modified to reflect lower airline projections. Until airport completion,  -6- the growth was generally based on the current traffic trend after using the ,3o0t recent traffic data (1972-1973). This methodology was also used for Lransit traffic at project airports not generated by other project airports. The actual average growth rate has been about 17% per year. The forecast .owers this to about 11% by 1985 (Table 1). (ii) Cargo Forecast t.10 Since cargo at the project airports is comparatively minor, no epecial air cargo forecasts were made. There are, however, two exceptions vwhere more positive development is likely to become an important factor, i.e., Los Mochis and Campeche. Since these shipments would need a fairly long time to develop, any impact on aircraft movements has not been included. (iii) Aircraft Movements 3.11 Aircraft movement forecasts were primarily developed by SOP, Direccion de Aeropuertos. The commercially important part of the movements was revised to be in line with the passenger forecasts. For other parts of the traffic , the forecasts were correlated against projections made :,y SCT for air traffic control purposes and are considered reasonable. The iActual and forecast traffic is shown in Table 2. (iv) Possible Effects of Fuel Shortages and Higher Fuel Prices 3.12 The basic aircraft movement forecasts were made prior to the current world-wide energy restrictions which occurred after the appraisal mission. The forecasts were modified as indicated above. One element of a fairly conservative approach for aircraft forecasts was the continued use of current relatively high load factors, due to the fact that both Aeronexico and Mexicana have had a recent shortage of aircraft which will be remedied when new aircraft are delivered in 1974. The other element concerns the avail- ability of fuel in Mexico. It is obviously very early to assess all aspects of possible fuel limitations. Regarding the fuel supply, Mexico obtains 92% of its requirements from the Government oil company, PEMEX. Proven oil reserves are also high, but development of these has been lacking; this means that, in the short term, a rather high proportion of the increased demand will be met by imports at higher prices. It is therefore likely that aviation fuel cost, which in 1972 was about 13% of the total costs of the two Mexican airlines, will rise substantially. 3.13 The effects of fuel prices on the traffic forecasts are complicated. At the existing cost of fuel, a rise in load factor of 10 points, as from 50% to 60%, could accommodate a 100% rise in fuel costs without affecting the profitability of the airline because, in the past, the fuel component of airline costs has been a relatively small factor. Apart from fewer flights, the fuel problem is not likely to affect traffic seriously. If fuel does become short, it will affect the surface transportation of individual units long before it will affect mass transportation in the air. The use of private automobiles, for instance, would decrease, and trips that normally were taken by automobile would be diverted to the mass forms of transportation. This has already occurred within the United States system. If air passenger traffic  -7- increases for this reason, there would be less of a tendency for the airlines to decrease their number of flights. This, in turn, would mean that the financial projections would not be affected adversely. 3.14 An increase in fuel price does not distort the relative costs for different aircraft for domestic services and therefore leaves the economic justification unaffected, apart from traffic growth. Increased airline tariffs, such as the 7-12% increases in January 1974, due to inflation, are also less likely to change the relative competitiveness of aviation compared to the other modes of transport. Any further modification of the traffic forecasts has therefore not been considered necessary at this time, since the positive aspects mentioned above are likely to compensate for the negative influences of the fuel restrictions. D. Aviation Administration 3.15 Theoretically, the administration and operation of aviation in Mexico is the responsibility of the Secretaria de Comunicaciones y T ens- portes (SCT), but, in practice, it falls under four organizations which, in the past, had little or no inter-agency coordination. The Direccion General de Aeronautica Civil (DGAC), within SCT, is in charge of establishing air routes And procedures, licensing, negotiating bilateral air agreements and other policy-type matters; it also provides air traffic control services at some of the smaller airports. The design and supervision of construction of airports and their buildings are the responsibility of the Direccion General de Aeropuortos (DGA) of SOP. After construction, the maintenance of the airfield operational surfaces (runways, taxiways, aprons, drainage, etc.) is the responsibility of SOP. The responsibility for the operation and main- tenance of the terminal buildings, maintenance of the field llghting and collection of landing and rental charges at 37 airports is that of Aeropuertos y Sorvtcios Auxiltares (ASA), an autonomous Government agency which reports directly to the Secrotaria de la Presidencia. 3.16 Radio Aeronautics Mexicana, S.A. (RAMSA) is responsible for the operation and MAintenance of the navaids, communication gear and RANSA's operational areas (control towers, etc.) and is in complete control of enroute air traffic and most terminal traffic. RAMSA reports to scr but is a private corporation which is partly owned by the Government and the airlineo serving Mexico. An assurance was given during negotiations that the Government will continue to make provisions for air traffic control and aeronautical communications throughout the country. 3.17 Two additional organizations operate the fuel systems on a concession fee basis after they have been built by SOP, Nacional de Combustibles de Aviacion (NACOA) and Distribuidora de Gasolina, S.A. (DIGAS). They are both mixed economy companies which operate under very exacting standards to meet airline specifications. Since the fuel being processed for the airlines actually belongs to them, the only income realized by NACOA and DIGAS is derived from service charges to the involved airlines and sales of company-owned fuel to non-acheduled users. These charges are established by SCT, not by NACOA or DIGAS.  - 8 - 3.18 The various other aeronautical charges are also established by SCT, aithough some are upon the recommendation of the operating services. For example, enroute communication charges and navaid user charges are established by SCT upon the recommendations of DGAC and RAMSA; landing charges, aircraft arking charges and terminal building rental charges are established by SCT upon the recommendations of ASA. The responsibility for collecting these charges rests with RAMSA and ASA, respectively. As an example, a private or corporate pilot, as opposed to a scheduled airline pilot, is required to obtain departure clearances from both organizations prior to takeoff. (i) Aviation Coordination 3.19 Fragmentation of authority for aeronautical affairs, such as exists in M4exico, creates many difficult problems. Among the most important of these are overinvestment and/or overdesign of facilities, lack of planning coordina- tion and split responsibility for items regarding aeronautical safety. Earlier suggestions by the Bank for the establishment of one Governmental agency to handle all of aviation were strongly rejected by the Government since, in its view, SCT already has this responsibility. However, it has been recognized that more comprehensive coordination would be desirable. To this end, a Transportation Coordination Committee (Annex 3) was establi8hed recently by the Presidencia (para. 2.08). One of the subcommittees of this Committee is specifically charged with coordinating all facets of aviation. In organiza- tional structure, this group is located at the Director General level and has been meeting regularly since its establishment. Assurances were obtained from the Government during negotiations that all agencies involved in the aviation sector will continue to be handled through the Transportation Coordination Committee. (ii) Airport Operations, Maintenance and Planning 3.20 ASA, the authority responsible for operating and maintaining most of the airports in Mexico, was formed by a decree of June 10, 1965; its organization chart is given in Annex 4, on page 2 of which are listed the 37 airports presently operated by the authority. It is empowered to raise and collect charges for the services provided at the airports. It is governed by an Administrative Board, whose president is appointed by the Federal Government, and the other members represent various Government departments or entities having an interest in aviation. The Board has the usual powers of formulating administrative, operating and investment policy and of approval of budgets, financial statements presented by the General Manager, and of tariff proposals to be subsequently approved by SCT; it also appoints the Director General, who has the overall responsibility of running the authority under the policy guidance of the Board. 3.21 ASA appears to be well staffed and able to carry out its responsi- bilities. Improvements are needed, however, in the provision of statistical and financial information. In particular, modern cost and revenue center accounting systems must be designed and installed in order to identify the  -9- costs of providing specific services and to permit the periodic assessment of the structure and level of user charges. Accounting consultants will be needed to assist ASA in establishing such systems and to train counterpart staff. Agreement was reached during negotiations that properly qualified consultants will be engaged by ASA for this purpose and that ASA will establish such an accounting system by December 31, 1976. 3.22 Although ASA has a planning department, its activities are limited to the short term. No recent long range investment planning has been done by ASA because SOP is entrusted with the design and construction of new airports and the major reconstruction of existing airports. This consequently leads to an uncoordinated picture of future aviation investment requirements. Since the Transportation Coordination Committee is responsible for long term investment planning, the existing NAP should be reviewed and/or replaced by a new airport plan, after close collaboration of ASA, SOP and SCT. Agreement was reached during negotiations that the Transportation Coordination Comittee will coordinate the preparation and updating of an airport development plan for the country. 4. THE PROJECT A. Description of the Project 4.01 The project consists of the construction of seven new airports to replace the existing ones at Villahermosa, Tuxtla Gutierrez, Minatitlan, Poza Rica, Los Mochis, Tapachula and Guaymas and the expansion of one at Campeche. The new airports will have asphaltic concrete runways 45 meters wide and between 1,800 and 2,500 meters long, depending upon elevation and use, lead-in taxiways, aircraft aprons, terminal buildings, control towers, fire stations, fuel storage and hydrant systems, electronic and visual aids, communication systems, automobile parking areas, fencing, and internal and external access roads. The expansion at Campeche will consist of a 300 m runway lengthening, runway strengthening, enlargement of the existing terminal building, runway lighting, obstruction removal and navigational aids. B. Special Provisions of the Project (Annex 5) 4.02 While the airport access roads will usually be less than 5 km, that for the new airport at Minatitlan will be about 33 km long, connecting Minatitlan and Coatzacoalcos, on the alignment of the original road between these two points. An elementary school presently existing within the area for the terminal building at the proposed airport for Minatitlan will be replaced. The proposed airport at Villahermosa is located across an existing double 60 cm gas pipeline which belongs to the national fuel company, PEMEX, and which will be relocated. A high-tension powerline skirts the southern end of the existing runway at Campeche and will be relocated; the length of powerline involved is about 15 km.  - 10 - C. Technical Assistance 4.03 The new commercial and cost accounting systems proposed at each of the project airports and in the headquarters of ASA (para. 3.21) will require the technical expertise of professional accounting consultants for proper implementation. The Government will engage suitable consultants for this purpose. D. Ecology 4.04 The airports to be replaced by the project airports are all in poor locations in relation to the towns they serve. In all cases except one, the existing approaches or departures of aircraft must pass over populated areas with attendant noise, fumes and safety problems. Two of the airports are in the midst of petroleum industry installations, and an accident could have catastrophic results. The project airports' approach and departure paths, on the other hand, are located away from population or industrial centers. Two of the airports are located on completely nonproductive land, while the others are located on low production agricultural land. At each of the new airports, drainage of the area will be improved and stagnant pools will be eliminated. E. Design and Supervision 4.05 SOP has been designing and supervising the construction of airports in Mexico for the past several years. It basically uses the International Civil Aviation Organization (ICAO) standards for its international airports, and ICAO recommended domestic standards for each class of its domestic airport system. The present project engineering is well advanced and will be sub- stantially completed by the time the loan, is signed. The standards used are acceptable, and the designs presented are the least cost solutions. The SOP engineers involved are competent, and the quality of their work is good. SOP will carry out the contract management and construction supervision through the middle of 1978. The costs for this,engineering work have been included in the total project cost estimates. F. Cost Estimate 4.06 It is estimated that the total cost of the project would be 740.6 million pesos (US$59.3 million equivalent), of which 261.8 million pesos (US$21.0 million) would be the foreign exchange component forming the basis for the proposed loan which, including interest of US$4.0 million during construction, would amount to US$25.0 million in all. 4.07 The cost estimates shown below are broken down by type of contract. A detailed itemization of these pontracts per airport is given on page 1 of Table 3, and the total annual investment per airport is given on page 2.  - 11 - Contract No. Mex$ (millions) US$ (millions) and Item Local Foreign Total Local Foreign Total Z 1. Airport Runway, Paving, Drain- age, Etc. 170.4 127.9 298.4 13.7 10.2 23.9 40.3 2. Buildings 64.0 34.5 98.5 5.1 2.8 7.9 13.3 3. Fueling System 6.5 4.3 10.8 .5 .4 .9 1.5 4. Visual Aids 12.3 6.9 19.2 1.0 .6 1.5 2.6 5. Electronic Aids 9.7 18.0 27.7 .8 1.4 2.2 3.7 Subtotal 262.9 191.6 454.6 21.1 15.4 36.4 61.4 Physical Contingency 10% 26.3 19.2 45.5 2.1 1.5 3.6 6.1 Price Contingency 25% 69.9 51.0 120.8 5.6 4.1 9.7 16.3 Engineering Design 5% 30.9 - 30.9- 2.5 - 2.5 4.2 Engineering Super- vision 7.5% 46.3 - 46.3 3.7 - 3.7 6.3 Land 42.4 - 42.4 3.4 - 3.4 5.7 TOTAL 478.6 261.8 740.4 38.3 21.0 59.3 100.0 4.08 The cost estimates were developed by SOP and are based on recent civil and architectural airport work awarded in Mexico, updated to mid-1974 prices; they are considered reasonable. Land required for this project is in various stages of acquisition. During negotiations, it was agreed that land for any one airport would be owned by the Government before any contract for development of that airport would be awarded. 4.09 An item for physical contingencies amounting to 10% has been included in the cost estimates to allow for minor changes in design and scope of work. An additional item for price contingencies, based on recent data, amounting to 25% over the construction period (20% per year), has been included to allow for anticipated increases in labor and material costs. G. Construction Employment 4.10 It is estimated that, during the construction phase of the project, approximately 500 men, ranging from common laborers to highly skilled artisans, will be employed at each airport with the exception of Campeche where approxi- mately half that number will be required. The greater proportion of these would be engaged in the construction of the runway, taxiways and apron.  - 12 - H. Procurement 4 11 Contracts for civil works (paving, drainage, buildings, fuel system, etc.), visual aids and most of the electronic equipment will be awarded through international competitive bidding in accordance with the Bank's "Guidelines for Procurement" after a prequalification screening of interested contractors, except as noted below. Construction firms capable of doing the type of work envisaged for the project are fairly numerous in Mexico and will probably win She awards. 4.12 A portion of the fifth contract (navaids and communication equip- ment) at each airport will be procured from Wilcox Electric Company, Division of American Standard, Kansas City, Missouri. The cost of this procurement will be about US$100,000 per airport, or a total of US$800,000 for the project, and will consist of the manufacture and delivery of Wilcox VOR/DME equipment. The VOR (very high frequency omnidirectional radio range) and DME (distance measuring equipment) are the standard short range navigational aids for the world. There is ample justification for purchasing this equipment from this sole manufacturer. All VOR's in Mexico (38) are Wilcox, supply support is based on this one type of equipment, the electronic maintenance technicians are trained for this equipment, test equipment for this specific VOR is available in quantity in the country, training at the manufacturer's plant is relatively easy because of the closeness of Kansas City to Mexico, the only DME's in Mexico (10) are Wilcox and the Wilcox DME is specifically designed to mate with the Wilcox VOR. 4.13 The relocation of the pipeline at Villahermosa, the construction of the school at Minatitlan and the relocation of the powerline at Campeche will be accomplished through separate contracts administered by SOP under the normal Government procurement procedures. All other work at each airport will be covered by five contracts: Civil Work, Building Construction, Fuel System, Visual Aids (all administered by SOP) and Electronic Aids (adminis- tered by SCT). While these will probably be awarded to individual contractors, a packaging of contracts would be acceptable. I. Disbursement 4.14 Disbursement of the proposed loan would be made on the basis of: (a) 42% of the costs of the first four contracts at each airport, which represents the estimated foreign costs; and (b) 65% of the cost of the fifth contract at each airport, which represents the estimated foreign costs. 4.15 Disbursements are expected to take place from the first quarter of 1975 through the second quarter of 1978. A schedule of quarterly disburse- ments is shown in Table 4. Any amounts remaining undisbursed should be canceled at the completion of the project.  - 13 - J. Execution of the Project 4.16 Except for the navaid and communication part, the project will be executed by SOP (para 4.05). The navaid and communication portion will be the responsibility of SCT. Funds must be provided to SCT so that this equipment may be purchased and installed in a timely manner which will not delay commissioning of the various project airports. Assurances regarding this point were obtained from the Government during negotiations. 4.17 Awards of the civil works contracts will come first and are expect- ed to be spaced at two- to three-week intervals. The other four contracts will take less time to complete and their awards will be timed to allow completion of all contracts at any one airport at the same time. It is expected that Villahermosa will be completed by the end of March 1976, Campeche and Los Mochis by the end of July 1976, Poza Rica by the end of September 1976, Minatitlan by the end of March 1977, and Tuxtla Gutierrez, Tapachula and Guaymas by the end of June 1977. 5. ECONOMIC EVALUATION A. General 5.01 Execution of the project would integrate the eight new airports with the airport system already part of jet trunk routes and with the two airports being developed for tourism - Zihuatanejo, financed by the Bank, and Cancun, financed by the IDB. Apart from cost savings primarily obtained by the Mexican airlines, the service improvement made possible by the project airports is consistent with the policy of regional integration of the country through a more rapid and reliable transportation system. The need for regional integration and development in Mexico, where there are long distances between urban areas having the best economic growth prospects, has led to an emphasis upon aviation as a rapid and reliable system of long-distance passenger transport. Airport development is a vital component in the most cost effec- tive solution to meet these transport needs. The expanded air route system will assist the economic development of secondary growth centers and thereby lessen the pressure on the main urban centers. 5.02 A major immediate source of quantifiable benefits of the project airports is the much lower operating cost of more efficient jet aircraft. In addition, passengers will gain significant improvements in handling times and reliability of operations which, at the moment, constitute substantial problems at some of the existing regional airports. 5.03 Another major factor involves the restrictions some of these project airports place on the growth and development of their local communities. If relocated to better sites, these airports will release urban land urgently required for commercial, industrial and residential development.  - 14 - 5.04 Experience in Mexico has indicated a very impressive traffic growth after the substitution of jet aircraft on domestic routes to newly improved a rports. Most of this traffic is diverted from other modes of transportation Out, in the case of tourism-generated airports, it represents generated traffic. It is indicative of passenger preference that this growth in Mexican domestic airline traffic has occurred in recent years despite higher airline tariffs for services by jet aircraft. B, Economic Analysis 505 The quantified economic benefits are: (a) cost savings to the two main Mexican airlines, the Government-owned Aeromexico and privately owned Mexicana with Government minority participation; (b) value of existing airport land released to owners, the Government-owned oil company, PEMEX, in two instances, and the local municipality in others; and (c) reduced handling times for passengers. 5.06 The cost savings for aircraft have been estimated as the aircraft time saved by more productive jet aircraft compared to slower and smaller propeller aircraft after taking their relative low cost into account. This has been based only on the direct operating costs of the aircraft and disre- gards additional effects on airline economy from better utilization of the aircraft. 5.07 Most of the present airports are poorly located in congested urban areas, and at least two on the east coast are situated on land owned by the Government oil company (PEMEX), which is needed for expansion of plants. Depending on the zoning regulations in the various towns involved, the released land--other than the two PENEX locations--is likely to be put to high value industrial or residential use. The valuation adopted in the appraisal report takes this factor into account and is based on the market value assessed by the Ministry of Public Works. 5.08 The passenger time savings have been estimated by SOP as working times saved at 71 pesos per hour for business travelers and 25% of this rate for leisure travelers. This is based on the average hourly earnings of the 1.8 million of the economically active Mexican population in 1970 earning more than about 18,000 pesos (US$1,440) per year. The time aaved has been based on a comparison of the total travel time, including surface access, for jet aircraft travel from the new airports with prior travel by air. For travelers previously going by road or rail, this understates their actual time savings and partly explains the rapid growth of air travel. The fairly important effect of improved reliability at some of the airports, which has not been quantified, will act in the same direction. 5.09 The existing airline traffic structure provides a 0.1 peso surcharge per pass-km for jet flights as compared with propeller services. This sur- charge would largely cover the direct time savings accruing to passengers from jet travel as compared with previous air travel. As a typical example, for the flight from Mexico City to Villahermosa (670 km), the additional fare of 67 pesos would be slightly less than the 71 pesos for the one hour of working time saved.  - 15 - C. Project Airports 5.10 In the more detailed description of the economic impact of each project airport, the airports have been divided according to their geographic location as follows: the southeast airports at Tapachula, Tuxtla Gutierrez and Villahermosa; the east coast airports at Campeche, Minatitlan and Poza Rica; and the west coast airports at Guaymas and Los Mochis. (i) Southeast 5.11 Tapachula, Tuxtla Gutierrez and Villahermosa form a small sub- system of airports which, with Mexico City as a base, is served by both major Mexican airlines in addition to thriving air taxi and corporate aircraft operations and, particularly in the case of Tapachula, agricultural aviation for crop spraying and similar operations. The areas served by the three airports have a good traffic potential: Villahermosa (an economically active population of 245,000 forecast for 1976 in the hinterland), Tuxtla (220,000 in 1976) and Tapachula (113,000 in 1976). The areas served are also fairly distant from Mexico City (700-900 km by air). Tuxtla lacks rail connection completely, whereas the fastest train from Mexico City to the point closest to Villahermosa takes 21 hours and to Tapachula 34 hours. Air transport therefore is a vital part of the communications linking this part of the country with the capital and these three regional centers with each other. Unfortunately, the location of the existing airports in combination with prevailing weather conditions has produced a considerable number of cancelled flights. The new airports will improve this situation significantly. This factor has not been included in the operational cost/benefit analysis although the lost revenue from Villahermosa cancellations alone in 1972/73 represented over 1.0 million pesos (above 100 flights). 5.12 The economic rates of return on the investment at these three airports from only aircraft cost savings and released land values range from 30% for Villahermosa and 25% for Tuxtla to 11% for Tapachula. If passenger time savings are also included, the corresponding rates are 38%, 33% and 17%. (ii) East Coast 5.13 The three east coast airports, Campeche, Minatitlan and Poza Rica, are not part of a separate route system. The new airports will be integrated with other domestic airports which already use Jet aircraft on scheduled services. Campeche is located on the routes to Merida while Poza Rica is on new routes to Tampico and possibly Vera Cruz. Most services to Minatitlan are terminating flights from Mexico City. A main part of the justification for two of the airports, Poza Rica and Minatitlan, is the release of existing airport land for industrial purposes. The two present airports are both on land owned by the Government oil company (PEMEX) and needed for oil refinery expansion. PEMEX is planning expansion of plants at both sites, 4 billion pesos at Minatitlan and 750 million pesos at Poza Rica over the next four years. The new airports will also better serve the town of Tuxpan (Poza Rica Airport) and Coatzacoalcos (Minatitlan Airport). The development of  - 16 - Campeche is more limited in view of the existing traffic. The project, however, includes the procurement of land for long term development of a new runway when traffic growth will justify such an investment. 5.14 The economic rates of return on the investment at these three air- ports from aircraft cost savings and value of released land range from 25% for Minatitlan and 17% for Poza Rica to 13% for Campeche. If passenger time savings are also included, the corresponding rates are 30%, 21% and 14%. (iii) West Coast 5.15 The two airports, Los Mochis and Guaymas, on the west coast are completely different from the six other project airports. The current traffic at the small existing airports is mainly for flights to the Baja California peninsula. The new airports would integrate these communities with the main domestic airline routes and, in the case of Guaymas, would also increase the tourist traffic from the western United States. The economically active population expected in 1976 is 190,000 for Los Mochis and 38,000 for Guaymas. Despite this relatively small population, traffic potential is good because the distances to the rest of the country are very long, and the needs for communication for the vegetable exporters in the Los Mochis area and for tourism in Guaymas become much greater. In Los Mochis, the release of valuable urban land within the city is also an important factor. 5.16 The economic rate of return on the investment from aircraft cost savings and released land values is 29% for Los Mochis and 18% for Guaymas. If passenger time savings are also included, the rates are 35% and 23%. None of these rates take into account the effect of tourism generated for Guaymas as a partial result of the project, but consider only the transportation cost savings or airline cost/revenue improvements. D. Total Project Return 5.17 In addition to the project return for individual airports, the combined effect of the individual projects has been estimated. The overall economic return from aircraft cost savings and value of released land of the existing airports is 22%. If passenger time savings are also included, the return is 29%. Disregarding these as well as land values would still bring an economic return of 15.5% based on aircraft cost savings alone. 5.18 A sensitivity analysis has been carried out for all project airports individually and as a group. The average economic return of 22% would be 28% at 25% higher benefits and 16% at 25% lower benefits. A construction cost overrun of 15% would decrease the 22% rate to 21%. The sensitivity analysis for each individual airport is given in Table 5. E. Air Route Analysis 5.19 The project will involve added investment in the airports as well as aircraft, with the ultimate beneficiaries being the traveling public. The preceding analysis sets forth only the overall benefits without particular  - 17 - attention to their distribution. The higher jet tariffs transfer most of the direct passenger time-saving benefits to the airlines. To ascertain the benefit-cost distribution of the airline/airport system as a whole, a special analysis was carried out for each airport, giving total estimated costs and revenues for each route for airlines as well as airports. The return on the total project airport investment plus airline and airport costs versus airline revenues over the project routes has been calculated by discounting the full investment and the operating costs and revenues at the 1973 price level. The rates of return vary between 16% and 20%, depending on the assumptions used concerning airline cost allocation between domestic and international services of common costs, such as passenger services, ticketing and general adminis- tration. While lower, this analysis yielded broadly the same results for all airports as those referred to under (a) through (c) in paragraph 5.05 preced- ing. This indicates that the airline passenger tariffs at current levels would allow increases in project airport charges to offset increased airport costs. Since the Government-owned airline, Aeromexico, is operating into seven of the eight project airports, the analysis also indicates that Mexican Government enterprises will be the major beneficiaries even if no modifications are made to airport charges. F. Additional Advantages 5.20 The quantified analyses preceding take into account the major factors prevailing at most airports influencing the justification of the project. There are, however, a number of other considerations which have not been quantified, either because they relate to only one or two of the project airports or because they are more difficult to ascertain with accuracy. The potential for generated exports of high value perishable products exists at Los Mochis and Campeche. Increased reliability of flights, together with improved air safety, is important for some airports (para 4.04 and Annex 6) and indirect effects of expanded tourism for still others (para 5.15). No value has been assigned to the importance of regional integration and devel- opment achieved as the result of an increase of almost 50% in the number of cities in Mexico efficiently served by air services. If all of these factors were to be fully quantified, the returns of the project would undoubtedly increase very significantly. Even under very pessimistic assumptions concerning higher airline costs and airline fares as a result of changed fuel prospects, the project economic returns are therefore likely to remain at high levels. 6. FINANCIAL EVALUATION A. Existing Situation of ASA (i) General 6.01 ASA has operated profitably since its formation in 1965, and, from 196^ onward, its earning power has increased rapidly, assisted by phased tariff increases commencing in 1969 (Annex 7).  - 18 - 6.02 Table 6 gives revenue and expenditure accounts, and Table 7 gives summary balance sheets for the years 1965-1973. Cash flows for the years 1968-1973 are given in Table 8. Annex 8, which describes ASA's past and existing finances in detail, is briefly summarized below. (ii) Earnings 6.03 Total annual revenues rose from 94 million pesos in 1968 to 367 million pesos in 1973, while total operating costs rose from 67 million pesos to 275 million pesos. Except for some fluctuations in 1969 and 1970, the operating ratio has been about 71-75%. Operating expenses are understated because certain maintenance carried out by SOP was not charged to ASA. The cost of this maintenance should, in the future, be identified by ASA, so that ASA's accounts will more correctly reflect the cost of operating and main- taining the airports. Depreciation rates are adequate but total depreciation charges are understated (paras. 3.21 and 6.06) (iii) Financial Position 6.04 Cash and bank balances and deposits rose to 317 million pesos by the end of 1973. Included is a balance of 216 million pesos held, without interest, by the Tesoreria General (Treasury). Receivables and inventories, 101 million pesos, include a debt of over 55 million pesos owed by Aeromexico, largely for landing fees. Agreement was reached during negotiations that, as of January 1, 1975, no future outstanding debtor balances should be more than three months' operations. 6.05 Since the incorporation of ASA, the Government has provided capital of about 1,800 million pesos in the form of transfers of airport assets and on which ASA pays no return. In addition, ASA has contributed about 500 million pesos toward investment. ASA has incurred no debt other than minor amounts for current liabilities. 6.06 ASA's fixed assets value is somewhat understated in its balance sheet, due to deficiencies in accounting. It was agreed during negotiations that ASA, assisted by SOP, will carry out a physical identification of all fixed assets, to be checked against existing records, and that the deficiencies will be correctly accounted for by December 31, 1975. (iv) Accounting and Audit 6.07 All accounting is done at ASA headquarters, on the basis of informa- -ion remitted by individual airports. A computer is used for processing salaries, accounts payable, and overall cash position, but the accounting for revenues, expenses and receivables is all manual. Although detailed revenue and expense figures are listed each month for each airport, periodic summary figures, either per airport, or for ASA as a whole, are not readily available. In addition, the revenue and expenditure classifications do ,iot readily lend themselves to cost and revenue center accounting, necessary in order to formulate and review user charges. As discussed in paragraph 3.21, this will be rectified.  - 19 - 6.08 ASA's accounts are audited by (a) staff of the Secretaria Patrimonio on a continuous basis and (b) a professional accounting firm on an annual basis. The periodic reports produced by the latter, since the formation of ASA, have been reviewed; the audit procedures and quality of audit are con- sidered satisfactory. Agreement was reached during negotiations that ASA would continue to employ independent auditors satisfactory to the Bank. B. User Charges and Financial Objectives 6.09 Large investments in infrastructure have been made in Mexico and will continue to be necessary to serve the expanding aviation industry. The direct beneficiaries of these investments are airlines and their passengers (para 5.05). User charges have paid part of this investment in the past and should aim at paying as much as possible of it in the future. The BEnk has therefore proposed to the Government that ASA's charges be reviewed so that, not only should ASA as a whole be financially viable, but also that the Bank- financed project airports should, within a reasonable time after construction, generate revenues sufficient to cover all cash operating expenses, and, there- after, contribute increasingly to general overheads and further investment. 6.10 ASA presently earns a return on net fixed assets of about 4 to 5%, which, while relatively low (para 6.19), is in line with the Bank's proposal. However, present tariffs for aircraft landing fees, which provide the bulk of ASA's revenues (80% in 1973), were established as a result of studies made in 1969 and require updating (para 3.22), due to increases in costs (Annex 9). 6.11 Taking into account the assumed tariff increases discussed below (paras 6.13 and 6.14), each individual project airport will generate revenues sufficient to cover cash operating costs by 1979. This satisfies the Bank proposal discussed in paragraph 6.09. As discussed in paragraph 6.18, only two will be able to cover all operating costs, including depreciation and share of ASA head-office expenses, in the immediate future. However, all of these airports are necessary links in various air routes, including Mexico City, the hub of the Mexican air network. Sttictly, each route should be costed and compared with the generated revenues, but, in a national system, this is not possible; it would not be practicable to charge varying scales of landing fees at each airport offering the same level of service. 6.12 Charges raised by ASA with regard to other sources of revenue (space rentals, concessions, car parking, fuel throughput, etc.) are covered by negotiated contracts. These should be increased to the extent possible in the light of recent cost increases; a further review should be made when detailed costs become available. 6.13 In 1977, when all of the new project airports are in operation, it should be possible for ASA to raise landing fees for the particular jet aircraft weight category primarily using the project airports at that time.  - 20 - ,kn increase of about 20% is suggested, which could be achieved by restructur- ing the present landing fee scale without raising the level of fees chargeable to the larger aircraft (Annex 7) more likely to use Mexico City and t:he other larger Mexican airports. 6,14 The following assumptions have been made regarding increases in charges for the purpose of financial projections (more detail is given in Annex 10); (a) an increase of about 20% in the landing fees of medium size transport aircraft in 1977; and (b) also effective in 1977, an increase of about 15% in other charges (rentals, concessions, car parking, etc.) on the assumption that the better facilities provided in the new airports would warrant higher charges. C. Income and Expenditure Projections 6.15 Projected income statements up to 1985 are given as follows: indivi- dual income statements for each project airport in Tables 9 to 16; a summary income statement for the eight project airports as a whole in Table 17; and an income statement for ASA as a whole in Table 18. 6.16 The projections are based on forecast traffic growth, constant costs with a 1973 basis and no change in user charges except for the increases referred to in paragraph 6.14, on the assumption that rises in cost levels will be met by increases in user charge levels. 6.17 Operating and maintenance cost projections for the new airports have been prepared by Bank staff on the basis of past costs for similar airports, suitably increased to reflect recent wage awards, with annual increases of about 2% to cover increased costs arising from the expected rise in traffic. 6.18 The projections show, on the basis of the above assumptions, that at Tuxtla and Villahermosa, revenues always cover cash operating expenses, and operating ratios of 89 and 71, respectively, will be earned by 1980, improving thereafter. Cash operating expenses will be covered by Los Mochis in 1976; by Tapachula, Guaymas and Minatitlan in 1977; by Poza Rica in 1978 and by Campeche in 1979. These latter airports will still incur operating deficits after 1985, but on a declining scale. For the project airports as a whole, the results for 1977 (the first year of full operation by all the new project airports), 1980 and 1985 are summarized on the following page.  - 21 - 1977 1980 1985 (Mex$ '000) ---- -- Operating Revenues 24,552 35,448 55,892 Working costs 12,321 13,077 16,575 Share of ASA overheads 2,427 2,572 2,814 Depreciation 36,518 36,518 36,518 Total Operating Costs 51,266 52,167 55,907 Net Working Revenue 12,231 22,371 39,317 Net Operating Revenue (loss) (26,714) (16,719) (15) Working Ratio 50 37 30 Operating Ratio 209 147 100 Their total revenues will always cover cash operating expenses (i.e., working costs), leaving a considerable amount (net working revenue) available to ASA for debt service, etc. The working ratio should steadily decline from 50 to 30, but, due to new airports being extremely capital intensive, the effect of depreciation is very pronounced; thus, in the early years, the operating ratio is high. However, it should improve to under 150 by 1980, and, by 1985, the group revenues should cover working expenses, depreciation and share of ASA headquarters expenses. The cash generation would then be nmre than adequate to service the proposed Bank loan. 6.19 As far as ASA is concerned, it should continue to operate profitably, earning a rate of return on average net fixed assets of about 4 to 6%. While this is relatively low, it would ensure an adequate generation of funds for investment and for servicing the Bank loan in the future if the financial policy study to be undertaken by the Government (para 6.23) so determines. The major reason for the rather low returns is that many of the older airports transferred to ASA are financially weak, due largely to low traffic levels. In the case of the project airports, the disparity between economic benefits and financial returns is due to the fact that substantial economic benefits, i.e., released high value land, accrue to non-users of the airports and are not directly recovered through airport charges. 6.20 To improve the overall return on net fixed assets without increasing the level of landing fees higher than is considered feasible, the Government has instituted a departure fee for all passengers, domestic and international. When the revenues from the departure fee are combined with ASA's operating revenues, the Government will earn a rate of return in excess of 6% on ASA's net fixed assets.  - 22 - 6.21 It was agreed during negotiations that ASA's charges be further reviewed, in the light of information from a cost and revenue center accounting system to be installed by the end of 1976, to ensure that: (a) the revenues of the project airports, as a group, will always be sufficient to cover cash working expenses and to reach an operating ratio of no greater than 150 by 1980; (b) ASA, as a whole, will earn a rate of return on average net fixed assets of no less than 4%; and (c) when the revenues from the new departure fee are combined with ASA's operating revenues, the Government will earn no less than 6% on ASA's net fixed assets. 6.22 Projected balance sheets for ASA oier the years 1974-1985 are given in Table 19. These show net fixed assets rising from 2,100 million pesos to 4,500 million pesos, and cash and bank balances, including deposits with the Tesoreria General, rising from 470 million pesos to 655 million pesos. Current and liquid ratios of 24 to 15, and 20 to 12, respectively, and pro forma debt/equity ratios of 2/98 to 13/87 are all satisfactory. 6.23 In theory ASA is an autonomous agency but in practice it is still in the process of evolving its financial relationships with the Federal Government. Its annual budget has always been approved by the Tesoreria Geineral, and, since 1970, ASA has been directed to leave the bulk of its earnings on deposit (interest free) with the Tesoreria General. During negotiations, the Government agreed to complete, by June 1976, a study of ASA's financial policy, including borrowing and servicing of debt; the con- clusions and implementation of the study will be discussed with the Bank. D. Financing Plan (i) The Project 6.24 Table 20 gives a forecast of the funds required over 1974-1978 for the project, together with the sources of such funds. A summary is given on the following page.  - 23 - Mex$ millions US$ millions Foreign Local Total Foreign Local Total Funds Required For Investment - Project Airports 260.5 476.7 737.3 20.9 38.1 59.0 For Debt Service - Interest 51.0 - 51.0 4.1 - 4.1 Total Funds Required 311.5 476.7 788.3 25.0 38.1 63.1 Funds Available From Proposed Bank Loan 311.5 - 311.5 25.0 - 25.0 From Government Contribution - 476.7 476.7 - 38.1 38.1 Total Funds Available 311.5 476.7 788.2 25.0 38.1 63.1 6.25 The proposed project is estimated to cost about 737 million pesos (US$59.0 million equivalent); interest during construction (1974-1978) would bring the total project financial requirements to 788 million pesos (US$63.0 million). This would be partially covered by the proposed Bank loan, 312 million pesos (US$25.0 million), which would be made to Nacional Financiera, with the Government providing almost 478 million pesos for the project. (ii) ASA as a Whole 6.26 The tentative estimate of investment required in airports over the period 1974-1985, as given in Table 20, is about 4,930 million pesos. This, together with service of the proposed Bank loan, being repaid over 24 years, including four years' grace, amounts to a total requirement of about 5,160 million pesos. Against this, the Bank loan provides 312 million pesos, and the Government contribution will be 900 million pesos, with 3,950 million pesos being provided from funds generated by ASA. The remaining 350 million pesos generated by ASA would increase its cash and bank balances, and, in particular, its deposits with the Tesoreria General, which could be used by the Government to assist in financing the proposed new Mlexico City airport. 7. AGREEMENTS REACHED AND RECOMMENDATION 7.01 During negotiations, agreement was reached on the following principal points: (1) The Government will continue to make provisions for air traffic control and aeronautical communications throughout the country (para 3.16); (2) All agencies involved in the aviation sector will continue to be handled through the Transportation Coordination Committee (para 3.19);  - 24 - (3) ASA will establish a cost accounting system by December 31, 1976, and, to assist in this matter, will engage properly qualified consultants (para 3.21); (4) The Transportation Coordination Committee will coordinate the preparation and updating of an airport development plan for the country (para 3.22); (5) The land for any one airport in the project will be owned by the Government before any contract for development of that airport may be awarded (para 4.08>; (6) The funds for the procurement and installation of required equipment for the airports will be provided to SOP and SCT by the Government to allow this work to proceed in a timely manner and not delay their commissioning (para 4.16); (7) The cost of maintenance now being carried out by SOP will be identified by ASA in the future (para 6.03); (8) As of January 1, 1975, no future outstanding debtor balances owed ASA should be more than three months' operations (para 6.04); (9) ASA, assisted by SOP, will carry out a physical identification and restatement of values of all fixed assets by December 31, 1975 (para 6.06); (10) ASA will continue to employ independent auditors satisfactory to the Bank (para 6.08); (11) ASA's charges will be reviewed in the light of cost information to ensure that, for the project airports as a group, the operating ratio will be no greater than 150 by 1980 (para 6.21); (12) ASA, as a whole, will earn a rate of return on average fixed assets of no less than 4% (para 6.21); (13) When the revenues derived from a departure fee are combined with ASA's operating revenues, the Government will earn no less than 6% on ASA's net fixed assets (para 6.21); and (14) The Government will complete, by June 1976, a study of ASA's financial policy including borrowing and servicing of debt (para 6.23). 7.02 The proposed project constitutes a suitable basis for a Bank loan of US$25.0 million for a term of 24 years, including a four-year grace period. May 28, 1974  TABLE 1 MEXICO AMPORTS DEVELDMENT FROJEMT_ Annual Departing and Arriving Passengers (000) A C T U A L F O R E C A S T 1970 1972 1975 19B0 1965 Villahermosa 32.7 74.2 1-42.4 274.2 441.7 Tuxtla Ou.tierrez 44.9 71.0 114.3 238.0 403.2 Minatitlan 30.1/A 47.6 63.4 102.1 164.5 Poza Rica 5.5 5.5 6.7 40.0 79.7 Los M%chis 21.04 29.6 39.5 126.2 216.5 Tapachula 8.0 18.3 26.6 66.8 1114.6 Guaymas 0 11.8 23.4 69.4 118.9 Campeche 3.6 3.6 4.8 12.5 20.7 261.6 421.1 929.2 1559.8 Yearly Average Growth 17.2% 17.1% 10.9% /1 1967 Source: SOP and IBRD Mission December 1973  TABLE 2 MEXICO AIRPORTS IEVE0FfMT PROJECT Aircraft Traffic Development A C T U A L F O R E C A S T Annual Landings 1970 1972 1975 1980 1985 Villahermosa Scheduled 4988 4288 2242 3316 5006 Other 25U1 2580 3210 4700 5995 Tuxtla Gutierrez Scheduled 4157 4879 1922 2409 3927 Other 3487 4659 5360 8635 11020 Minatitlan Scheduled 936 624 547 880 1418 Other NA 4150 6170 9945 13950 Poza Rica Scheduled 327 309 370 730 1184 Other NA 4165 6170 9945 13945 Los Mochis Scheduled 677 989 823 1591 2719 Other NA 4150 6170 9945 13950 Tapachula Scheduled 218 397 554 786 1348 Other 1963 2690 4670 5950 7560 Guaymas Scheduled 730 417 654 934 1517 Other NA NA 3180 4862 7432 Camp eche Scheduled 415 392 730 730 730 Other 1082 1132 1400 2325 4675 Source: SOP and IBRD Mission December 1973  MEXICO AIRPORTS-DEVELOPMENT PROJECT Detailed Cost Estimates (excluding Land) (In millions of Mexican pesos) /1 /1 /1. /1 /1 /1 /1 /1 T O T A L S VSA TGZ MTT PZA LMM TAP GYM CPE Foreign Local Total EARTH MOVING & PAVING Foreign 19.43 22./5 Z5.8Z 11.38 12.87 13.85 15.28 6.56 127.94 Local 26.15 30.16 34.53 15.09 17.06 18.36 20.26 8.83 170.44 Total 45.58 52.91 60.35 26.47 29.93 32.21 35.54 15.39 298.38 BUILDINGS Foreign 4.73 4.73 4.52 4.00 6.34 4.84 5.25 .05 34.46 Local 8.78 8.78 8.40 7.43 11.78 9.00 9.75 .09 64.01 Total 13.51 13.51 12.92 11.43 18.12 13.84 15.00 .14 98.47 FUEL SYSTEM Foreign .92 .77 .51 .51 .51 .51 .42 .16 4.31 Local 1.38 1-18 .76 .76 .76 .76 .63 .24 6.47 Total 2.30 1.95 1.27 1.27 1.27 1.27 1.05 .40 10.78 VISUAL AIDS Foreign 1.08 1.00 1.04 .79 .91 .96 1.00 .12 6.90 Local 1.92 1.77 1.85 1.40 1.62 1.70 1.78 .22 12.26 Total 3.00 2.77 2.89 2.19 2.53 2.66 2.78 .34 19.16 NAVAIDS Foreign 2.25 2.25 2.25 2.25 2.25 2.25 2.25 2.25 18.00 Local 1.21 1.21 1.21 1.21 1.21 1.21 1.21 1.21 9.68 Total 3.46 3.46 3.46 3.46 3.46 3.46 3.46 3.46 27.68 107 PHYSICAL CONTINGENCIES Foreign 2.84 3.15 3.41 1.90 2.29 2.24 2.41 .92 19.16 Local 3.94 4.31 4.68 2.59 3.25 3.11 3.35 1.06 26.29 Total 6.78 7.46 8.09 4.49 5.54 5.35 5.76 1.98 45.45 20%/YR. PRICE CONTINGENCIES Foreign 4.68 8.08 9.35 4.19 5.25 7.77 8.56 1.85 49.73 Local 6.46 10.99 12.71 5.68 7.38 10.77 11.91 2.06 67.96 Total 11.14 19.07 22.06 9.87 12.63 18.54 20.47 3.91 117.69 ENGINEERING DESIGN 5% Foreign - - - - - - - - Local 4,29 5.06 5.55 2.96 3.67 3.87 4.20 1.28 30.88 Total 4.29 5.06 5.55 2.96 3.67 3.87 4.20 1.28 30.88 ENGINEERING SUPERVISION 7.5% Foreign - - - - - - - - Local 6.43 7.59 8.33 4.44 5.51 5.80 6.30 1.92 46.32 Total 6.43 7.59 8.33 4.44 5.51 5.80 6.30 1.92 46.32 TOTALS Foreign 35.93 42.73 46.90 25.02 30.42 32.42 35.17 11.91 260.50 Local 60.56 71.05 78.02 41.56 52.24 54.58 59.39 16.91 434.31 Total 96.49 113.78 124.92 66.58 82.66 87.00 94.56 28.82 694.81 /1 VSA - Villahermosa; TGZ - Tuxla Guitierrez; MTT - Minatitlan; PZA - Poza Rica; LMM - Los Mochis; TAP- Tapachula; GYM - Guaymas; CPE - Campeche Source: SOP and IBRD Mission December 1973  ATRPORTS DEVELOPMENT PROJECT Project Investment (Mex$ millions) Total 1974 1975 19'76 l 19-3 Foreign Local Total Foreign Local Total Foreign Local Total ForeIgn Local Total -oreign Loca o'el _1 ei-gr =^1-l 1. Construction of Rew Airports Villahermosa 35.93 60.56 96.49 3.21 5.25 8.46 22.00 37.30 59.30 9.90 16.63 26.53 .82 1.38 2.20 - - - Tuxtla CTuitierrez 42.75 71.05 113.80 2.11 3.41 5.52 15.43 26.42 41.85 22.89 37.44 60.33 2.32 3,3 6.10 Minatitlan 46.91 78M03 124.94 1.60 2.60 4.20 16.59 28.21 44.80 26.06 42.87 68.93 2.66 4.35 7.01 Poza Rica 25.02 41.56 66.57 .47 .76 1.23 12.21 20.78 32.99 11.25 18.26 29.51 1.09 1.76 2.84 Los Mochis 30.43 52.25 82.68 - - - 14.62 25.81 40.43 14.40 24.10 38.50 1.41 2. 34 3.75 - - - Tapachula 32.42 54.58 87.00 - - - 7.78 12.90 20.68 18.66 31.63 50.29 5.58 9.39 14.9- .40 .66 1.06 C,uaymas 35.17 59.40 94.57 _ _ - 8.08 13.41 21.49 20.00 34.05 54.o0 6.60 1l.l2 17.72 .4 .**_ 1, 1 Subtotal 248.63 417.43 666.05 7.3