Ecuador - Second Guayaquil Port Project

Report No. 947a-EC Ecuador: Appraisal of a FILE COPY Second Guayaquil Port Project April 20, 1976 Latin America and Caribbean Projects Department FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Currency Equivalents Currency Unit - Ecuadorean Sucre (S) US$1 - 25 Ecuadorean Sucres Us$.o4 - 1 Ecuadorean Sucre Fiscal Year January 1 to December 31 Weights and Measures Metric British/US 1 kilometer (km) - 0.62 mile (mi) 1 meter (m) - 3.28 feet (ft) 1 hectare (ha) - 2.47 acres (ac) 1 metric ton - 29205 lb Abbreviations and Acronyms DIMERC - Directorate of Merchant Marine DIRDEM - General Directorate of Maritime Development DWT - Deadweight tons ENFE - Empresa Nacional de Ferrocarriles del Estado FONADE - Fondo Nacional de Desarrollo GPA - Guayaquil Port Authority JUNTAPIAN - Junta Nacional de Planificaci6n LIBOR - London Inter-Bank Offer Rate SICAP - Servicio Ecuatoriano de Capacitacion Profesional  FOR OFFICIAL USE ONLY ECUADOR APPRAISAL OF A SECOND GUAYAQUIL PORT PROJECT TABLE OF CONTENTS Page No. SuMMKARY AND CONCLUSIONS ............................ i-ii 1. INTRODUCTION .............................1.......... 2. THE TRANSPORT SECTOR ............................... 2 A. General ................ ....................... 2 B. The Transport Modes ...... ................ 2 C. Transport Policy, Planning and Coordination ... 4 3. PORT ORGANIZATION, FACILITIES AND OPERATIONS ....... 4 A. Organization..... 4 B. The Guayaquil Port Authority . .6 C. Port Facilities . .7 D. Engineering and Maintenance . . 7 E. Operations. . 8 4. THE PROJECT ............... 11 A. Objectives ....11 B. Description .... 11 C. Cost Estimates ....13 D. Project Execution ... .13 E. Project Financing . . .14 F. Procurement ... 15 G. Disbursements .... . . ....................... 15 H. Ecology ....15 5. ECONOMIC EVALUATION ..15 A. General ..................... 15 B. Traffic Forecasts . .16 C. Economic Analysis .17 This Appraisal Report has been prepared by Messrs. Jones and Aguirre (financial analysts/economists), Veniard (economist), Vinekar (engineer), Mosse (financial analyst), and Scheiner (engineer/consultant) and has been edited by Miss Foster. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  TABLE OF CONTENTS (Cont'd) Page No. 6. FINANCES ............. , .................... 19 A. Accounting, Audit, Budgets and Insurance 19 B. Past Finances .20 C. Tariffs .20 D. Future Finances ... 21 7. AGREEMENTS REACHED AND RECOMMENDATION . .23 TABLES 1. Cost Estimates 2. Estimated Schedule of Disbursement 3. Results of Economic Evaluation 4. Balance Sheets as of 12/31 - 1972/1930 5. Guayaquil Port Authority Income Statements - 1972-1980 6. Cash Flow Forecast 1975-1980 AINNEXES 1. Organization Chart - Guayaquil Port Authority 2. Existing Facilities 3. Potential for Cargo Unitization in Ecuador 4. Technical Assistance Prcgram 5. Project Description 6. Transit Shed and Open Storage Area Requirements 7. Project Execution Schedule 8. Traffic Forecast 9. Economic Analysis 10. Tariffs 11. GPA Financial Forecasts vAP S IBRD 11413R Transport Netwiork IBRD 11709 General Port Layout IBRD 11710 1972 Highway Traffic Flow  ECUADOR APPRAISAL OF A SECOND GUAYAQUIL PORT PROJECT SUMMARY AND CONCLUSIONS i. Guayaquil is Ecuador's leading general cargo port; in 1974, it handled some 80% of Ecuador's general cargo imports and exports, excluding bananas. Traffic at Guayaquil has grown rapidly since 1972 in response to the country's recently accelerated rate of economic growth. In view of the continuing trend of traffic growth, the failure to provide additional port facilities at Guayaquil, the country's major port and principal com- mercial and industrial center, could act as a bottleneck to the country's development. The proposed project for Guayaquil port is therefore of high priority. ii. The project consists of the required dredging and construction of three deepwater berths for general cargo and containers, three transit sheds, a container shed and workshop and maintenance facilities; the construc- tion of a bulk terminal comprising a bulk pier, mechanized loading and unload- ing facilities and storage for sugar, wheat, molasses and edible oil; the procurement of cargo-handling equipment; consultant services for construction supervision and technical assistance to improve port operations, to set up a program for training port workers and to manage the bulk terminal for the first two years of operation. The estimated cost of the project is US$83.6 million, of which US$56.7 million is the estimated foreign exchange component. The proposed Bank loan would finance US$33.5 million of the foreign cost, and the financing of the balance will be provided by the Government of Ecuador and the Guayaquil Port Authority (GPA). Retroactive financing of foreign expenditure up to US$180,000, incurred on engineering services after January 1, 1976, would be provided in the Bank loan. iii. In 1958, the Government established GPA in connection with the proj- ect for construction of the existing facilities at Guayaquil, which were fi- nanced in part by Bank Loan 212-EC. GPA was autonomous and functioned well until 1968-1969, when it encountered financial problems as a result of a large increase in expenses (principally personnel costs). Subsequently, the Govern- ment decided to reorganize port administration in Ecuador, and, in 1970, it established a rather hierarchical port organizational structure. GPA's auto- nomy was reduced, and it has been unable to recruit qualified staff, which has had a serious adverse effect on its management and operational efficiency. Moreover, decision-making has been slowed by the multi-tiered administrative system. iv. A program of proposed changes to improve the institutional organiza- tion of the ports subsector was discussed with the Government. Legislation has been enacted which will restore an appropriate degree of autonomy to GPA. v. GPA lacks experienced management Personnel. Ship discharge and loading operations are not properly planned, labor gangs and equipment are  - ii - not assigned, and shed and open storage areas are not utilized systematically. Low cargo storage charges and complicated, time-consuming cargo clearance procedures caused serious congestion of the transit sheds, warehouses and open storage areas; this, in turn, hindered cargo-handling operations and increased ship delays. Earlier in 1975, three of the principal shipping con- ferences imposed surcharges on import cargo. Additionally, the cost to the economy of the cargo remaining in the port was high, and the long delays in clearing cargo from the port greatly increased losses from damage and pilferage. A program of urgent measures to reduce cargo congestion and increase port operating efficiency was sent to the Government and to GPA in July. A Bank mission to review progress in reducing congestion visited Guayaquil in November and found that sufficient progress (including the elimination of two shipping conference surcharges and :he expected elimination of the other one) had been achieved. Further measures to assure additional operating improve- ments and to permit the retention of qualified staff to manage the port and carry out the project were agreed during negotiations. vi. Port traffic in Guayaquil port is expected to increase from 1.8 million tons to about 3.3 million tons between 1974 and 1985, including a significant increase in container traffic. The proposed project would provide capacity for general cargo traffic until about 1985. It would also provide for bulk cargo (principally grain imports and sugar and molasses exports), which is presently handled at private river installations where draft limitations restrict the size of ships in which these commodities are trans- ported. The new bulk pier included in the project will accommodate ships of up to 30,000 dwt with consequent savings in transport costs. vii. Taking into account only quantifiable direct benefits that are going to be obtained by the Ecuadorean economy, the economic return for the bulk pier is 12%, for the three general cargo berths, 16%, and for the project as a whole, 14%. Benefits that are going to be retained in the first instance by foreign interests have been excluded from the above estimates. To the extent that these benefits could be recovered by Ecuador through higher charges to ship- ping, the project could increase its economic return to a maximum of 21%. viii. The financial position of GPA is strong, and its earning perform- ance in recent years has been good. A recently approved increase in port charges of about 20% at Guayaquil, which became effective January 1, 1976, will enable GPA to finance the local project costs, estimated to be about US$26.9 million equivalent. The foreign exchange component of the project (estimated to be US$56.7 million) would be financed partly by the proposed Bank loan of US$33.5 million, partly by the Government (US$20.0 million) and the balance by GPA's internal cash generation. The Government and GPA are negotiating with a private bank for aL US$10 million loan, and, if these nego- tiations are satisfactorily completed, the Government's contribution would be reduced to US$10 million. ix. The project would provide a suitable basis for a Bank loan of US$33.5 million for 24 years, including a grace period of four years.  ECUADOR APPRAISAL OF A SECOND GUAYAQUIL PORT PROJECT 1. INTRODUCTION 1.01 The Republic of Ecuador has requested the Bank to assist the Guayaquil Port Authority (GPA) in financing the expansion of its port facilities. The existing port facilities were completed in 1963 and were partially financed by Bank Loan 212-EC; the port has operated successfully since its inauguration. The existing facilities have reached saturation, and additional berths must be constructed to handle forecast traffic. A feasibility study for the expansion project was completed in August 1974 for GPA by its consultants, Messrs. Palmer and Baker (USA). A supplementary report, containing certain revisions, was prepared in January 1975. 1.02 The scope of the project, as presented in the supplementary report, was substantially increased beyond that discussed with a Bank preappraisal mission in October 1974; it included three multipurpose berths (with an option for a fourth), three general cargo berths, a bulk terminal comprising storage facilities and two bulk piers, equipment and consultant services. The supplementary report provided no justification for the enlarged project, and, during the appraisal mission, agreement was reached among GPA, its consultants and the mission to reduce the project scope to include three berths (with an option for a fourth) for general cargo, containers and bananas; a bulk cargo terminal with one bulk pier; equipment and consultant services. This decision is supported by the economic analysis of project size (paras. 5.15 and 5.16). The estimated project cost is US$83.6 million equivalent with a foreign ex- change component of US$56.7 million. 1.03 The proposed loan of US$33.5 million would finance 59% of the foreign exchange cost estimated at US$56.7 million. The balance would be financed partly by loans from the Government (US$20 million) and partly by GPA's own resources. The Government and GPA are negotiating with a private bank for a US$10 million loan, and,if these negotiations are satisfactorily completed, the Government's contribution would be reduced to US$10 million. 1.04 To date, the Bank has made five loans and one credit to Ecuador in the transportation sector: one for ports in 1958; three loans and one credit for highways in 1954, 1957 and 1964 (in a consortium lending with USAID and IDB); and one for railways in 1957. The Bank's experience on these loans has been mixed; while the port project and the first two highway projects were efficiently implemented, the loan for the railways was cancelled, and, in the case of the consortium project, although the complexity of a four- agency participation led to some initial delays, progress improved, and the project was generally satisfactory. 1.05 This report is based on the consultants' reports (para 1.01) and the findings of a preappraisal mission by Mr. J. Veniard (economist) in March 1975, an appraisal mission composed of Messrs. H. A. Jones (financial analyst/econo- mist), U. Aguirre (financial analyst/economist) and R. Y. Scheiner (engineer/  - 2 - consultant) in May 1975, and an appraisal updating mission composed of Messrs. Jones, Veniard, Vinekar (engineer), Mosse (financial analyst), and Scheiner in November 1975. The report has been edited by Miss V. Foster. 2. THE TRANSPORT SECTOR A. General 2 2.01 Ecuador has an area of 271,000 km . Its geographical configuration has been a determining factor in the location of its population and economic activities, as well as in the development of its transport network (Map IBRD 11413R). Two principal mountain chains, the western and eastern ranges of the Andes, run from north to south and divide the country into three natural and distinct regions: the coastal region (Costa), the mountain region (Sierra) and the Amazon region (Oriente). Transport among these three regions is difficult, particularly access to the Oriente. 2.02 The principal land transport flows (Map IBRD 11710) are to be found (a) in the two corridors which extend from the Colombian border in the north to the Peruvian border in the south - one following the Central Valley of the Andean chains and servicing the capital, Quito, and the other following the Costa, from Esmeraldas, the chief port in the north, through Guayaquil, the country's major port, to Puerto Bolivar in the south; (b) in the most important corridor of the country, between Quito and Guayaquil; (c) between the Oriente region and Esmeraldas - mainly crude oil transported by pipeline; and (d) in the environs of the major urban areas. B. The Transport Modes (i) Highways 2.03 The highway network increased by 50% between 1963 and 1973, reaching 22,000 km, and the percentage of paved roads increased significantly, especially in the last three years. In spite of the expansion and improve- ments, the condition of the main netwqork is not adequate for the existing traffic. 2.04 Approximately 80% of the freight, and most of the passengers, in Ecuador are transported by road. The vehicle fleet more than doubled between 1966 and 1973, reaching above 90,000 vehicles, more than 62% of which are registered in the provinces of Guayas and Pichincha (Guayaquil and Quito). (ii) Pipelines 2.05 A pipeline for refined petroleum products extends from Duran, close to Guayaquil, to Quito (358 km), and a crude oil pipeline extends from Lago Agrio, in the Oriente, to the Port of Balao, in Esmeraldas (503 km). Smaller  - 3 - feeder lines connect these pipelines to the oilfields, such as the Lago Agrio to Shushufindi (16 km) and to Sacha (52 km). (iii) Aviation 2.06 Thirteen airports are served by scheduled services; two of these airports - Quito and Guayaquil - are also served by international carriers. (iv) Railroads 2.07 The Empresa Nacional de Ferrocarriles del Estado (ENFE), the national railway, operates 971 km of track consisting of three lines: the Guayaquil (Duran)-Quito line (452 km); the Sibambe-Cuenca branch (146 km); and the Quito-San Lorenzo line (373 km). Railway traffic has been steadily declining due to highway competition and deterioration of service; freight traffic declined from 82 million to 62 million ton-km between 1966 and 1973 and from 77 million to 69 million pass-km. (v) Ports 2.08 Ecuador's ports handle 98% of its external trade. Port traffic (excluding petroleum products) increased from 2.15 million tons in 1969 to 2.94 million tons in 1974, as shown for the four major ports below: (Thousand tons) Guayaquil Manta Puerto Bolivar Esmeraldas Total Exports 802 61 683 172 1,718 Imports 994 171 59 2 1,226 1,796 232 742 174 2,944 2.09 Guayaquil has five deepwater alongside berths and private wharves and river moorings on the Guayas river; Manta has four berths for ocean- going ships; and Puerto Bolivar has a two-berth finger pier (an additional two berths are currently under construction). Esmeraldas, where new facili- ties for ocean-going vessels are being built, is at present operated mainly as a lighterage port. There are also two minor ports, San Lorenzo and Bahia de Caraquez, with limited facilities and negligible traffic. 2.10 The other important port facilities are two oil terminals: one at Balao, near Esmeraldas, which is the export terminal for crude oil from the Oriente oil fields; and one at La Libertad, which receives crude oil for the two refineries on the Santa Elena peninsula (near Salinas) and some export products. There are also fishing ports at Manta and Posorja capable of handling ocean-going trawlers.  C. Transport Policy, Planning and Coordination 2.11 Five ministries and the National Planning Board (JUNTAPLAN) currently share authority in matters of transiport policy in the country, with the addi- tional intervention of provincial governments at the local level. Although JUNTAPLAN attempted the formulation of national policies (for its National Development Plan of 1973-1977), the effective policy-making has remained for the most part a prerogative of the -- often competing -- agencies indicated, which carried out their policies separately with little or no control and coordination by JUNTAPLAN. 2.12 With regard to planning, :Ln 1974, the Bank carried out a survey of the transportation sector. A number of deficiencies were identified during the study. For example, no one Government agency is responsible for overall planning in the transport sector; sectoral statistics are not collected, pro- cessed or retrieved centrally; there is no coherent pricing policy for the sector as a whole, which leads to an extremely variable performance in the individual modes; the preparation of transportation projects at the planning stage and at the level of pre-investment studies is slow, and the quality of the results is generally not good enough to meet the standards necessary to attract external financing; and the essential issues of intermodal planning for meeting the long-term demand for transport are not being adequately addressed. 2.13 Since the deficiencies more directly and immediately affect land transport, this matter was discussed during the negotiations for the fourth highway project in December 1975. It was agreed, as a condition of the loan for that project, that an appropriate and adequately staffed agency would be set up for land transport planning and coordination within one year after the date of the loan agreement and that an appropriate unit for transport sector planning and coordinating all modes of transport with such organiza- tion would be established not later than two years after the date of the loan agreement. 3. PORT ORGANIZATION, FACILITIES AND OPERATIONS A. Organization (i) Background 3.01 In 1958, the Government established the Guayaquil Port Authority (GPA) in connection with the project for the construction of the existing port facilities at Guayaquil, which were financed in part by Bank Loan 212-EC. The Port Authority was autonomous, with powers to fix and collect port charges; to control ship movements, navigational aids and port maintenance; and to appoint and dismiss members of its staff and fix salaries. Its board of directors consisted of a chairman appointed by the President of the Republic, three representatives of the Government and three representatives of business and local interests. Day-to-day operations were in the hands of a General Manager.  - 5 - 3.02 This administrative organization worked well for a number of years. However, GPA encountered financial problems in 1968-1969 as a result of a 60% increase in expenses (principally personnel costs). Subsequently, the Government decided to reorganize port administration in Ecuador. In 1970, a new law was passed, establishing a complex and rather hierarchical organizational structure with four levels: Ministry of Defense National Ports Council Directorate of Merchant Marine (DIMERC) National Ports Department Another organization, the General Directorate of Maritime Development (DIRDEK), was established in 1973 and put in charge of maritime development activities. 3.03 The National Ports Council consists of the Minister of Defense as Chairman; four representatives of the Navy (one non-voting); a representative of JUNTAPLAN; and one representative of each of the following four Ministries: Foreign Relations; Finance; Public Works; and Industries, Commerce and Integration. The Council establishes national port policy, approves port tariffs, decides on the establishment of new ports, approves the contracting of port studies and approves the budgets of the various port authorities. 3.04 In the existing port organization, DIMERC carries out the port policy established by the National Ports Council. Its principal powers are to: (a) make recommendations to the Ministry of Defense concerning private ports; (b) approve regulations covering the provision of port services, organizational manuals, personnel lists and internal by-laws of the port authorities; (c) study improvements in organizational, administrative and operational systems in the ports and require the Port Authorities to carry out the recommendations; and (d) approve all port construction projects and any expenditure over 5% of a port's annual budget (despite their previous review of the Port Authority budgets). The National Ports Department is the technical arm of DIMERC. 3.05 The autonomy of GPA was correspondingly weakened. I/ The number of representatives of port users on GPA's Board was reduced from three to one, and GPA's authority over the financial matters affecting it (tariffs, pay 1/ There are separate Port Authorities operating the ports of Bolivar, Esmeraldas and Manta.  - f6 - levels, budget expenditures) was considerably reduced. As a result, GPA has been unable to recruit qualified staff, which has had serious adverse effects on its management and operational efficiency. GPA has reacted slowly to its recent problems created by rapid traffic growth (congestion, increased cargo damage and pilferage). Decision-making has generally been slowed by the red tape resulting from the multi-tiered administrative system. 3.06 DIMERC has been trying to improve port operations and to reduce port congestion, but its staff does not have long-term experience in the management of port operations. On the other hand, GPA's management has not been given an active part in these efforts. (ii) Recent Improvement 3.07 During appraisal, the above deficiencies in port administration were discussed with the Government and the Government enacted new port legis- lation which will (a) eliminate two Levels (the Ministry of Defense and the National Ports Department) from the organizational structure; (b) limit DIMERC's powers regarding improvements in organizational, administrative and operational systems to their study only (formerly, the Port Authorities were required to carry out the recommendations of such studies); (c) eliminate the requirement that DIMERC approve all expenditures over 5% of a port's annual budget; (d) increase the number of user representatives on GPA's Board from one to two; (e) spell out the qualifications of CPA's General Manager and (f) restore to the Port Authorities the power to enatct certain operating regulations and to conduct studies for the improvement cif their operations. 3.08 This legislation provides an acceptable institutional framework upon which an efficient port administration could be built in Guayaquil. B. The Guayaquil Port Authority (GP A) 3.09 As a result of the changes made since July, GPA now has a Board of seven Directors: a member appointed by the President of the Republic from a list proposed by the National Ports Council; the Port Captain; a member desig- nated by the Minister of Finance; a member designated by the Minister of Industry and Commerce; a member designated by the Minister of Public Works and two members representing port users. A General Manager, selected by the National Ports Council, is responsible for day-to-day operations. GPA's or- ganizational structure (Annex 1), which consists of four departments (Opera- tions, Engineering and Maintenance, Finance and Administration) is basically sound; however, the limitations on its ability to pay salaries which would enable it to recruit and retain qualified staff have lowered the quality of its management and its capacity to deal with the recent problems created by rapid traffic growth. During negotiations, assurances were obtained from the Government that it will take all action as required to enable GPA to estab- lish salaries and fringe benefits consistent with GPA's need to employ quali- fied staff for top and middle management posts.  -7- C. Port Facilities (i) GPA 3.10 From the time of the Spanish conquest, Ecuador's only commercial port of any importance was the port of Guayaquil, situated some 80 km from the sea on the Guayas River. Because of increasing ship sizes and drafts, new facilities (the Puerto Maritimo) were constructed in 1963 on the Estero Salado estuary, some 4 km south of the City of Guayaquil. The port's present location, although still 77 km from the sea, eliminates maneuvering difficul- ties and enables ships with lengths of 175 m and drafts of 9.25 m to use the port at MLW. The tidal range varies from 2.8 m to 4 m. There are no sig- nificant wind or current problems. 3.11 The Puerto Maritimo facilities (Annex 2) were completed in early 1963 at a total cost of US$20.0 million, financed partially by Bank Loan 212-EC. The port consists of five marginal berths, each 185 m long with an alongside depth of 9.25 m at MLW. The wharves are of concrete construction supported by pre-stressed concrete piles. All berths have transit sheds, but their 12 m wide aprons are now found to be too narrow for efficient port operations, principally because of changing ship and cargo-handling technology. One berth serves as a banana-loading and heavy lift berth-a fixed 75-ton der- rick crane is mounted tbere. The port's present u2able storage area, in5luding transit sheds (32,000 m ) and warehouses (15,000 m ), is about 120,000 m . The existing facilities are generally in good condition. (ii) Private Wharves and River Moorings 3.12 Some 70 private wharves and river moorings are in use on the Guayas River and in the estuaries surrounding Guayaquil; the more important are two terminals for the import of grains and separate piers for fertilizer, paper, sugar and petroleum, including the terminal at Duran, which is the beginning of the product pipeline to Quito. Vessel sizes serving these termi- nals are restricted by the draft limitations of the Guayas River (7 m at MLW). D. Engineering and Maintenance (GPA) 3.13 Responsibility for general maintenance, including dredging, is vested in GPA's Engineering and Maintenance Department, which has divisions for planning, hydrography, maintenance and dredging (Annex 1). The level of maintenance of the civil structures is generally satisfactory, with the excep- tion of the fender piles, which need substantial repairs. The Engineering and Maintenance Department has performed no major marine construction for the past 12 years and, therefore, could fulfill only secondary functions during the execution of the project. Most of the construction supervision will be done by consulting engineers, whose contract includes training of GPA staff on the construction site. 3.14 Maintenance of cargo-handling equipment (Annex 2) is very poor. The advanced age of most of the equipment, in addition to the lack of spare parts, reduces the average equipment availability to some 60-65X. Port  - 8 - operating systems must be reviewed in order to improve port operating effi- ciency. During negotiations, GPA agreed to employ port operations experts by the end of 1976 for advising port management on day-to-day operations and for on-the-job training of staff in the Operating Department. Although the services of these experts will be financed by the United Nations technical assistance program, GPA agreed that the qualifications and experience of these experts and their terms of reference shall be satisfactory to the Bank. The above measures, together with the proposed establishment of a training program for port laborers, stevedores and equipment operators (para. 4.09), should also improve equipment availability. 3.15 The port owns a second-hand, 600 m3 hopper suction dredger acquired from Italy in 1973. It is capable of dredging to a depth of 13.8 m and has been successfully maintaining the access channel to the Puerto Maritimo at 9.25 m at MLW. The port's floating craft work efficiently in spite of their age. E. Operations (i) General 3.16 The lack of adequate management staff is especially pronounced in the Operations Department of GPA. Proper planning of ship loading and dis- charge operations and of gang and equipment assignments is not carried out, and, until recently, the utilization of shed and open storage areas was not organized in any systematic way. Moreover, until mid-1975, when emergency measures were instituted, efficient cargo handling was made very difficult by the serious congestion of the transit sheds, warehouses and open storage areas. This congestion was caused by low cargo storage charges and compli- cated and time-consuming cargo clearance procedures, imposed principally by the customs authority and by the banks which finance imports; these banks are regulated by the Central Bank of Ecuador. Cargo remaining in the port reached an estimated 80,000 tons, anci the long delays in clearing cargo from the port greatly increased losses from damage and pilferage, estimated at 5-10% of the value of imports. Moreover, the cargo congestion, together with rapid traffic growth, increased ship waiting time to the point where three of the principal shipping conferences had already, in early 1975, imposed sur- charges of up to US$6 a ton on import: cargo, and optional surcharges of US$3 a ton on export cargo. Although two of the conferences have since withdrawn them, the threat of imposition of surcharges is always present. 3.17 Between June and the beginning of November 1975, GPA and the Govern- ment took a number of measures to recluce the congestion in Guayaquil port, in- cluding, inter alia, increasing storage rates, extending the customs guarantee system, streamlining some customs procedures and providing additional storage areas. 3.18 The above measures resulted in a reduction in cargo clearance time from 45 days to an estimated 18 days, the removal of two shipping conferences' surcharges and the expected removal cf the third, and a significant reduction in carRo congestion in the port. During negotiations, it was agreed that the  following measures will be taken in order to further improve port operating efficiency and to prevent and reduce congestion at the Port of Guayaquil in the future: (a) The Government will maintain the system of customs guarantee, whereby, whenever the port becomes congested, goods may be removed from the port area by obtaining a bank guarantee of payment of the estimated customs duties to be levied thereon; (b) The Government will take steps to simplify customs procedures and instruct the customs authorities in Guayaquil port to make use of their power to auction goods remaining in the port for more than 90 days; (c) The Government will permit GPA to further revise storage dues as follows: (i) reduce the free storage period from ten to seven days; (ii) charge storage tariffs on a daily basis; and (iii) maintain rates sufficiently above commercial warehousing rates to encourage users to remove goods promptly. (d) GPA will, by the end of 1976, engage port operations experts, as outlined in paragraph 3.14. (ii) Cargo Handling 3.19 The port works three shifts around the clock seven days a week and 360 days a year. During 1974, the port handled some 1.25 million tons over its five berths. Allowing for the fact that one berth was permanently occupied by banana ships which loaded some 450,000 tons during 1974, the average amount of general cargo handled per berth was 200,000 tons/year. This throughput reflects the high occupancy rate of the berths during the year (85%), which, in turn, indicates the present delays to shipping. 3.20 Handling rates for general cargo in 1974 averaged 36 weight tons per ship working hour, or about 11 tons per gang hour based on the average 3-1/4 hatches worked. In view of the principal types of cargo handled (machinery, steel, bagged cargo), these handling rates could be improved. If the measures described in paragraphs 3.24 and 3.25 are taken (greater unitization of cargo and similar basis for compensation), cargo handling should improve by 15-20% by 1980. 3.21 Bananas are loaded manually from trucks at an average of about 60 tons per ship working hour so that the average banana ship is loaded in 24 hours. Banana loading across the wharf is supplemented at times by loading from barges. However, since some 400 of the best organized and highest paid workers are engaged in banana loading, GPA and the Government foresee serious  - 10 - labor opposition to any effort to change the existing system. For these reasons, the establishment of mechanized banana loading is not expected in the foreseeable future. Containerization of banana traffic is also not likely, mainly because strong labor opposition would discourage the shipping lines from making the large investments required for refrigerated containers. (iii) Operations of the Proposed Bulk Terminal 3.22 Most of Ecuador's bulk imports and exports are handled efficiently by the private sector at private piers, but in relatively small ships due to draft limitations at their installations. The Government has, for the last few years, rejected all proposals from the private sector to expand its facilities. The present port project includes the construction of a bulk terminal to handle wheat, sugar, mola,sses and edible oils. The private interests doubt that GPA would be able to operate a bulk terminal efficiently and fear that the Government would eventually force them to use the new bulk terminal, whatever its operating capability. 3.23 Additional facilities for bulk cargo are needed, and a multi- purpose bulk terminal is the most economical solution, provided it is operated with the high degree of skill and experience required for such a specialized installation. To assure the efficient operation of the proposed bulk terminal, the Bank and GPA discussed three possible alternatives: (a) GPA would build and own the terminal, which would be operated initially by a team of inter- nationally recruited experts who would train CPA staff to take over operation of the terminal upon completion of their mission (para. 4.10); (b) GPA would build and own the terminal and lease it to a private company composed of the terminal's major users; or (c) a mixed economy company would be organized to build, own and operate the terminal. GPA and the Government have decided to adopt alternative (a). Accordingly, funds have been provided in the proposed loan for the construction of the terminal and for the required technical assistance for its efficient operation. (iv) Unitization of Cargo (Annex 3) 3.24 The volume of prepalletized cargo arriving is still low, most being palletized in the ships' holds. Some 4,500 twenty-foot containers were handled during 1974 (up from 3,500 in 1973). Most unstuffing and container stuffing are done in the port. Conta.Lners arrive in conventional ships as deck load, are handled by ship's gear and are transported within the port area by tractor trailer. A substantial amount of cargo is containerizable, and container traffic would no doubt increase if containers could be cleared by customs at inland depots, the first: of which was recently opened in Quito. The new port facilities would be constructed to support heavy deck loads and to accommodate container cranes. (v) Labor 3.25 Stevedores are employed by the shipping companies and are paid on a cargo-output basis. Shore labor is employed by GPA and paid on a monthly basis. This difference in the basis for compensation creates different  - 11 - incentives between stevedores and shore labor, causes friction between the two groups and adversely affects operating efficiency. It was therefore agreed during negotiations that, no later than June 30, 1977, GPA would carry out, with the assistance of the experts referred to in paragraphs 3.14 and 3.18, a study regarding the impact of the conditions of employment applicable to the different categories of workers rendering services at the Guayaquil Port upon the efficiency of the operations at such Port and, after consultation with the Bank, would take all necessary steps to implement the recommendations of such study. In 1974, GPA's Operations Department staff numbered some 500, which is not excessive. There are separate unions for stevedores and shore labor. There have been no strikes in recent years. 4. THE PROJECT A. Objectives 4.01 The objectives of the project are to increase the capacity and operational efficiency of the port of Guayaquil by: (a) providing additional berths and facilities to relieve existing congestion and handle forecast increases in general and containerized cargo and in dry and liquid bulk cargo; (b) strengthening the autonomy and efficiency of GPA through institutional changes; (c) providing technical assistance to improve port operations and to set up a training program for shore labor, stevedores and equipment operators (Annex 4); and (d) providing technical assistance to operate and manage the proposed bulk terminal for two years and to train GPA staff to operate and maintain it thereafter. B. Description 4.02 The project, described in more detail in Annex 5, consists of: (a) dredging and placing of selected fill material; (b) the construction of three deepwater berths; (c) the construction of three transit sheds, one container stuffing and unstuffing shed, workshops and maintenance facilities, roads and paved areas, utilities, and minor buildings;  - 12 - (d) the construction of one bulk terminal comprising: a bulk pier, mechanized sugar loading and pneumatic wheat unloading facilitie, and storage facilities for sugar, wheat, molasses and edible oil; (e) the relocation of the small-boat mooring facilities; (f) the procurement of cargo-handling and workshops and maintenance equipment; 1/ (g) consultant services for construction supervision of (a) to (e) preceding; (h) technical assistance for improving port operations and for setting up a training program for shore labor, stevedores and equipment operators; and (i) technical assistance to manage the proposed bulk terminal for two years and to train GPA staff to operate it thereafter. 4.03 Map IBRD 11709 shows the Layout of the new facilities. The three deep-water berths are designed as multipurpose berths and will be able to handle break-bulk general cargo and heavy lifts, bananas and containers. They will be able to support heavy deck loads and to accommodate container gantry cranes. The transit sheds will be well removed from the wharf face- line to provide adequate working space. The bulk terminal is multipurpose and will be handling imports and exports of both liquid and dry bulk cargoes. The project includes the construction of sufficient open storage and parking areas (Annex 6) and an approach roac[ to the new port area, which will facil- itate traffic flows and operations in the existing port as well. 4.04 The project constitutes thIe logical extension of facilities in the port and is the least cost construction solution. The new facilities at the Puerto Maritimo could, with reasonably attainable improvements in operating efficiency, handle forecast traffic to the mid-1980's, depending on the trend of containerization. However, because of the normal degree of uncertainty in traffic forecasts and because of the economies-of-scale in construction, the Bank has agreed with GPA to include, in the contract documents, an option to construct a fourth berth as an extension of the three berths now planned. However, since the fourth berth is not economically justified at present (para. 5.16), agreement was reached during negotiations that construction of the fourth berth would not be undertaken until the completion of the works in this project, unless its economic justification was demonstrated to the Bank and satisfactory arrangements for its financing were made. 1/ The list of specific items to be procured will be determined with the advice of the port operations excpert and agreed between GPA and the Bank during project execution.  - 13 - C. Cost Estimates 4.05 The total estimated cost of the project is US$83.6 million equivalent, with a foreign exchange component of US$56.7 million (68%). Imported construc- tion material used on the site is not subject to import duties--nor is construc- tion equipment--provided it is exported after completion of the works. Local costs include a 4% sales tax on locally purchased construction materials. Detailed cost estimates are given in Table I and summarized below: Million S/ Million US$ % of Total Local Foreign Total Local Foreign Total Cost Dredging 65.4 286.8 352.2 2.6 11.5 14.1 16.8 Wharf Construction 116.7 388.2 504.9 4.7 15.5 20.2 24.1 Landworks 255.0 206.5 461.5 10.2 8.3 18.5 22.1 Bulk Terminal and Other Equipment 40.9 204.2 245.1 1.6 8.2 9.8 11.8 Consultant Services 61.5 41.0 102.5 2.5 1.6 4.1 5.0 Technical Assistance 5.0 7.5 12.5 0.2 0.3 0.5 0.6 Sub-total 544.5 1,134.2 1,678.7 21.8 45.4 67.2 80.4 Contingencies Physical 23.7 52.6 76.3 0.9 2.1 3.0 3.6 Price 105.5 230.5 336.0 4.2 9.2 13.4 16.0 Sub-total 129.2 283.1 412.3 5.1 11.3 16.4 19.6 Total 673.7 1,417.3 2,091.0 26.9 56.7 83.6 100.0 4.06 The bids for the main contract covering dredging, wharves, land- works, small-boat mooring and bulk terminal were opened on March 15 and are being reviewed by the consultants, Messrs. PalDaer and Baker (US). Until the analysis and evaluation of the bids is completed, GPA will not be able to determine the winning bid; however, the cost estimates have been prepared by adopting a base consistent with the low bid and adding thereto the estimated costs for cargo-handling equipment, consultant services and technical assis- tance. Provision has also been made for physical contingencies at 5% and for price contingencies amounting to about 20%. D. Project Execution (i) Engineering services 4.07 GPA would be responsible for the execution of the project, assisted by the consultants, Messrs. Palmer and Baker (US), who prepared the Master Plan for the port, the detailed engineering and the tender documents, and who have been retained by GPA for the supervision of construction works. This arrangement is satisfactory to the Bank. The consultants' services will  - 14 - include about 192 man-months of expatriate specialist staff at an average cost of US$5,700 per man-month and about 348 man-months of local technical staff at an average cost of US$2,100 per man-month. The consultants will train a group of GPA engineers on site during the construction period to enable them to carry out maintenance operations. Retroactive financing is recommended for foreign expenditure up to US$180,000 incurred for engineering services after January 1, 1976. (ii) Subsoil conditions 4.08 Subsoil conditions at the Puerto Maritimo are not favorable. How- ever, the present design and construction sequence are based on the experience gained in constructing the existing wharves when slides and damage to the super- structure occurred (Annex 5). (iii) Technical assistance 4.09 In addition to the expert advice for reviewing port operations, whlich will be provided under a United Nations program (para. 3.14), GPA needs technical assistance for organizing a suitable program for training port labor, stevedores and equipment operators. For this purpose, it was agreed during negotiations that GPA shall (a) enter into a technical assistance agreement, satisfactory to the Bank, with the Servicio Ecuatoriano de Capacitacion Profesional (SECAP) or other suitable institution acceptable to the Bank; (b) employ training experts whose qualifications, experience and terms and conditions of employment shall be satisfactory to the Bank; and (c) afford the Bank a reasonable opportunity to review the format and con- tents of the training program. This technical assistance program will not be financed by the Bank loan since GPA has already received offers from the American Association of Port Authorities (AAPA) and the Organization of American States (OAS) to assist in the training of its shore labor at no cost to GPA. 4.10 In order to assist GPA in managing the proposed bulk terminal, 120 man-months of services of technical specialists have been included in the project at an average cost of US$4,000 per man-month. In addition to managing the terminal for the first two years, they would train local staff to manage, operate and maintain it thereafter. The technical assistance would be phased out during the third year, according to a program which would be agreed with the Bank. During negotiations, it was agreed that the technical assistance would be continued until the Bank is satisfied that the local staff is adequately trained. Bank financing for this item would prolong the disburse- ment period of the loan until 1981, but this is considered worthwhile since it would facilitate the hiring of qualified personnel. E. Project Financing 4.11 The foreign exchange component, amounting to US$56.7 million, would be financed partly by the proposed Bank loan of US$33.5 million, partly by the Government (US$20 million) and the balance by GPA's internal cash genera- tion. The Government and GPA are negotiating with a private bank for a US$10  - 15 - million loan, and, if these negotiations are satisfactorily completed, the Government's contribution would be reduced to US$10 million. The local cost component would be provided by GPA from its own resources (for details, see paragraph 6.13 and Annex 11). F. Procurement 4.12 The main contract, comprising marine works, land works and bulk cargo-handling installations, will be awarded on the basis of international competitive bidding conducted under procedures consistent with, but involving a slight modification of, the Bank guidelines. This permits GPA to require the successful bidder to furnish a bank guarantee instead of a performance bond as security for the execution of the contract. This change was agreed to because the Law of Ecuador specified bank guarantees and precluded the right to offer performance bonds in lieu thereof. Six bids received in response to the invita- tion sent to 17 prequalified firms were opened on March 15 and are being evalu- ated. Procurement of the cargo-handling equipment will also be made through international competitive bidding. C. Disbursements 4.13 The proposed Bank loan would be disbursed against 60% of foreign exchange expenditures. Any funds remaining upon completion of the project would be cancelled. H. Ecology 4.14 The project would alter the existing embankments of the channel by reclamation of the area of the new facilities. The source of fill is material dredged from the channel, ihich would be widened and deepened to accommodate larger ships. The existing facilities are located on a tidal inlet some 77 km from the open sea, and experience has shown that the amount of silting is small. No large scale variations in the dredged areas and maintenance dredging quantities are foreseen. The dredged material which cannot be used as selected fill material would be deposited on the swampy low level mangrove areas near the port. The port's own dredger would carry out all maintenance dredging as required. The new port facilities would handle general cargo similar to that handled at present, and the bulk terminal would handle only non-polluting cargo, e.g., wheat, sugar, molasses and vegetable oils. No adverse effects are therefore expected. 5. ECONOMIC EVALUATION A. General 5.01 Guayaquil is Ecuador's leading general cargo port; in 1974, it handled some 80% of general cargo imports and exports, excluding bananas. Traffic at the port has grown rapidly since 1972 in response to the country's recently accelerated rate of economic growth. In view of the continuing  - 16 - trend of traffic growth, the failure to provide additional port facilities at Guayaquil, the country's major port and principal commercial and industrial center, could act as a bottleneck to the country's development. The proposed project is therefore of high priority in Ecuador's development plans. B. Traffic Forecasts 5.02 Traffic forecasts were based on the following studies, as revised by the Bank: (a) Ecuador Port Development Study, Sir William Halcrow and Partners (UK), August 1974; (b) Feasibility Study for Additional Facilities; Maritime Port of Guayaquil, Palmer and Baker (US) and Consultores Nacionales (Ecuador), August 1974, and Supplement (January 1975). The forecasts are consistent with growth rates for imports and exports estimated in Bank Report No. 507-EC (Current Economic Position and Prospects of Ecuador of August 1974) as updatted by a Bank economic mission to Ecuador in July 1975. 5.03 Guayaquil's predominance as Ecuador's main port has declined some- what in recent years since traffic, notably of bananas, shifted to other ports, especially Puerto Bolivar and Esmeraldas, as the areas of cultivation of the banana crop shifted to the areas of influence of these ports. During the traffic forecast period (1975-1985), Guayaquil's share of port traffic will continue to decline,although at a slower pace, since the growth rate of banana exports, the principal factor in the shift, will be relatively low. Guayaquil's share of export traffic is expected to be 41% in 1985 as compared to 47% in 1974; its share of imports is forecast to decline from 81% in 1974 to 78% in 1985. Some additional import traffic will pass through Manta (which now has excess capacity) and through Esmeraldas, where two new berths are being constructed. 5.04 Guayaquil import traffic i3s expected to grow at 7.5% per annum in the period 1975-1985, exports at 2.5%. Traffic is forecast to grow from 1,796,000 tons in 1974 to 3,266,000 tons in 1985. Details are given in Annex 8. 5.05 Traffic in containers has not been significant in Guayaquil and has not increased in the last few years. In 1974, some 30,000 tons in some 4,500 containers were handled there. With expected simplification of customs procedures, planned road improvements and the proposed open berths designed for containers, which should increase container-handling efficiency, traffic in containers is expected to grow steadily after 1979. Based on estimates of containerizable traffic, tonnages in containers are expected to increase from an estimated 60,000 tons in 1979 to 215,000 tons in 1982 and 425,000 tons in 1985 (Annex 8).  - 17 - 5.06 Lower transportation and handling costs at the proposed bulk terminal will produce a redistribution of traffic from private bulk terminals and river loading points to the new bulk pier. This will principally involve sugar and molasses (presently loaded from barges, which will all be handled at the new bulk terminal), vegetable oils and most grain imports. Details of how this allocation was made are spelled out in Annex 9. C. Economic Analysis (i) Calculation of Project Benefits 5.07 For the purpose of the economic analysis, the project was split into two elements, the general cargo berths and the bulk terminal pier, and each was justified separately since each caters to a certain distinguishable share of port traffic which is transported in different kinds of ships. In addition, benefits are different for each kind of traffic. 5.08 Project benefits have been calculated as the difference in directly quantifiable port user costs with and without the project; indirect benefits which may be induced beyond the port sector of the economy were not quan- tifiable and have been excluded. The benefits have been calculated separately for the following cost components: (a) cargo-handling costs in port; (b) costs of vessels in port; (c) costs of vessels at sea; (d) costs of lighterage; and (e) costs of traffic diversion to other ports. Cost reductions which may accrue to foreign ports through the use of larger bulk carrier vessels and containers, made possible by the project, have not been taken into account. 5.09 The berth occupancy at the port reached a high level in 1974 (para. 3.19) but was combined with relatively low operational efficiency (para. 3.16). A rapid increase in average ship waiting times is therefore to be expected if operating efficiency is not improved. The present operating conditions, how- ever, have not been used as a basis of comparison in calculating the economic rate of return because an improvement in cargo-handling rates is expected to take place due to proposed measures (para. 3.18). The benefits have been calculated from this improved operational base. 5.10 Benefits from constructing the general cargo berths consist of savings in ship turnaround time and savings from avoiding lighterage of bananas and from diverting traffic to other ports. There would also be some savings in the costs of handling containers (and, to a lesser extent, general cargo) at the new berths. Based on 1974 operations at GPA wharves, ship service and waiting time were simulated, using a computer model developed in the Bank. Operations were then simulated for a number of years, with and without the project, to estimate savings in ship waiting time due to the project. In making these calculations, it was assumed that improvements would be made (both with and without the project) in the rates of handling general cargo and bananas. See Annex 9 for details. 5.11 Benefits from constructing the bulk terminal pier consist of savings in transport unit costs from using larger ships and savings in cargo-handling costs in port. Especially in the traffic of sugar and molasses, which at  - 13 - present are handled from lighters to ships in the river, savings in cargo- handling costs and in reduced ship service time will be significant. (ii) Allocation of Project Benefits 5.12 In the calculation of the economic return (ER), only those direct benefits which are quantifiable and accruing to the Ecuadorean economy have been included, while benefits to other (foreign) beneficiaries have been excluded. This allocation has been made taking into account present trends in the participation of Ecuador in ocean shipping (Annex 9). To the extent that port improvement will produce additional benefits to Ecuador (para. 6.09 on proposed port charge increases; para. 3.16 on surcharges), net benefits have been understated. Therefore, in adclition to the economic return accruing to Ecuador, an analysis, including also direct benefits to foreign vessels, is contained in the evaluation (Table 3). The actual return would lie between these values (14% and 21%) and woulc depend on the degree to which new port charges could recover benefits from foreign ships. 5.13 Cost reductions in ocean freight under Ecuadorean flag ships, or vessels chartered by Ecuadorean interests, have been fully allocated to Ecuador. These represent about 55% of the total bulk freight shipping affected by the project and nearly 50% of general cargo shipping (Annex 9). This relatively high proportion of vessels owned or chartered by Ecuador is due to the present, almost exclusive, control by Ecuadorean vessels of bulk imports (grain, vegetable oil), the fast growing Ecuadorean Merchant Marine, and the recent Government decree (ley de Reserva de Carga) requiring that up to 50% of all import and export cargo should be carried under the Ecuadorean flag. 5.14 Cost reductions in cargo handling in the project port have been fully allocated to Ecuador, as well as cost reductions due to avoidance of lighterage and the elimination of traffic diversion to other ports. (iii) Analysis of Project Size 5.15 In the analysis, it was found that the single bulk berth would soon develop a high occupancy rate and that an additional berth would be needed in about 1985-1986, without any significant investment being needed in silos, etc. The additional berth, which is not part of the project, would provide capacity until about 1999. An analysis of the project over the period 1976- 1999, including the costs of a second berth, yielded an ER of 16%. 5.16 A marginal analysis for the third and fourth general cargo berths was made, as a result of which the proposed three-berth expansion was found fully justified. A fourth berth however, yielded an ER of about 8% over a 20-year life, but a first year return (FYR) of only 3%. An analysis of this FYR shows that, if only three berths are built first, an additional fourth would be justified in 1985, i.e., six years after the expected completion date of the proposed project. A sensitivity analysis of these conclusions has been carried out (Table 3).  - 19 - (iv) Economic Evaluation 5.17 The proposed port expansion project is well justified, with an ER of at least 14%. The bulk terminal pier shows an ER of 12% and the three general cargo berths, 16%, including benefits wiich are estimated to be obtained during the period 1979-1999. Benefits have, however, been considered as constant after the increased capacity provided by the project is fully utilized (1992 for the bulk pier, 1985 for the general cargo berths). Further, the ER gives the return to the Ecuadorean economy because it excludes that part of the benefits (about 35% of the total in 1980) which is assumed to be retained by foreign interests. To the extent that these benefits could be recovered by Ecuador (para. 5.12), the project would increase its ER to a maximum of 21% (16% for the bulk pier, 24% for the general cargo berths, Table 3). 5.18 Sensitivity analyses have been carried out on the main parameters affecting the economic evaluation (costs and benefits), showing that the ER would, even under adverse assumptions, still remain at 11 to 13%, which is acceptable (Table 3). 6. FINANCES A. Accounting, Audit, Budgets and Insurance 6.01 GPA's accounting system was set up by an international accounting firm (Price Waterhouse), and its financial statements are prepared in a commercial manner. However, GPA needs a system of cost accounting to be established for management information and tariff-making purposes. GPA's operating statistics should also be substantially improved. Therefore, during negotiations, GPA agreed, not later than December 31, 1976, with the assistance of consultants or specialists whose qualifications and terms and conditions of employment shall be satisfactory to the Bank, to implement statistical and cost accounting systems adequate to furnish the information needed for tariff setting purposes. These consultants will be financed by GPA. 6.02 In 1975, GPA introduced a budget-by-programs system; budget data are submitted in considerable detail to DIHERC and the National Ports Council. GPA's General M1anager may reallocate certain amounts among the budget cate- gories. 6.03 An international accounting firm, Deloitte Haskins and Sells, is GPA's external auditor. Existing external audit arrangements are satisfactory; however, internal audit procedures require improvements, including an adequate system of inventory control, as outlined by the external auditors to GPA in April 1975. Agreement was reached during negotiations that GPA will, with the assistance of its external auditors, establish, not later than December 31, 1976, improved internal auditing procedures and a system of inventory controls.  - 20 - 6.04 GPA carries adequate insurance against fire, theft and other risks, and assurances were obtained during negotiations that adequate insurance would be maintained in the future. B. Past Finances 6.05 In its 16 years of operation, GPA has had losses on its operations in only two years, 1968 and 1969, when expenses (principally salaries and wages) were increased 60%. Since then, GPA has had a reasonable level of earnings. Results for the years 1972, 1973 and 1974 are given in Table 5. Revenues and expenses rose rapidly in the period as traffic increased. The financial rate of return on average net fixed assets was 8.8%, 13.3% and 21.7%, respectively, in these years, and operating ratios 72%, 64% and 57%. Cash generated from operations has provided ample funds for debt service, and the surpluses have either been lent, to the Government or invested in short term securities. 6.06 GPA's fixed assets have not been revalued since the port was com- pleted in 1963, and depreciation provisions are low. The result is that earnings and financial rates of return are overstated. During negotiations, GPA agreed that it will contract a recognized professional firm to conduct a revaluation by the end of 1976 and prepare a realistic depreciation schedule for financial and cost accounting purposes. 6.07 Balance sheets for the years ended December 31, 1972, 1973 and 1974 are shown in Table 4. They indicate a strong financial position at the end of 1974 when liquid investments totaled S/ 180 million and debt was only 19% of total capitalization. Moreover, the Government of Ecuador and the Province of Guayas owed GPA some SI 35.5 and SI 12.3 million, respectively, most of which is overdue. During negotiations, it was agreed that the Government will repay these debts by the end of 1976 and cause the Province of Guayas to repay its debts to GPA not later than December 31, 1978. C. Tariffs 6.08 GPA provides all port services except stevedoring, which is supplied by private firms. Port charges are not cost based, and GPA provides a number of preferential rates, especially for exports. Storage charges have been very low historically, which has been one of the factors in the congestion of storage areas in the port. In mid-1975, storage charges were revised, and rates more than quadrupled. 6.09 In July 1974, GPA made a proposal for port tariff increases to DIMERC, based on a comparison between port tariffs in Guayaquil and other west coast ports of South America. The proposed tariff would increase revenues by about 20%. The proposal, as revised by DIMERC, was approved in November 1975 by the National Ports Council, to be effective January 1, 1976. The new tariff improves, to some extent, the existing tariff structure; how- ever, further changes are envisaged prior to the inauguration of the proposed facilities (para. 6.11). Details of the old and new tariffs are given in Annex 10.  - 21 - D. Future Finances 6.10 Based on the traffic forecasts (Annex 8) and the allocation of traffic among GPA and private installations outlined in Annex 9, financial forecasts were made by GPA staff and reviewed and revised by Bank staff. The forecasts reflect the new tariff levels from January 1, 1976 as recently ap- proved (para. 6.09). A detailed list of assumptions used is given in Annex 11, and the forecasts are given in Table 5. The results are summarized as follows: (Million of Sucres) Return Oper- on Net Debt Operating Operating Net Interest Net ating Fixed Service Year Revenues Expenses Revenues Cost (Net) Income Ratio Assets Coverage 1975 402 204 198 (8) 206 51 34 7.9 1976 419 257 162 (6) 168 61 25 5.1 1977 458 297 161 16 145 65 23 3.1 1978 494 340 154 54 100 69 22 2.1 1979 533 414 119 106 13 78 7 1.3 1980 736 486 250 75 175 66 9 2.0 6.11 The operating ratios are low and the returns on fixed assets very high between 1975 and 1978 for the reason given in paragraph 6.06 (under- valuation of fixed assets). When the project facilities come into use, these ratios will be more realistic (the return on fixed assets will actually be even lower than shown after existing port assets are revalued). More impor- tantly, debt service coverage declines to an unacceptably low level in 1979. It has, therefore, been assumed that, when the project is completed and improved services are provided, a further increase of 25% in the level of port charges will be made in 1980, and, thereafter, an attempt will be made to relate the tariff structure to the cost of the services, using the data that would be provided by the proposed costing system (para. 6.01). In addi- tion to improving GPA's debt service coverage, the tariff increase in 1980 would generate funds required by GPA to finance part of its next port expan- sion expected in the mid-1980's. Therefore, it was agreed during negotiations that, starting in fiscal year 1980 and thereafter, GPA will achieve a rate of return of at least 8% on revalued average net fixed assets. 6.12 A forecast cash flow for GPA was prepared and is given in Table 6. Results for the construction period of the project, 1976-1979, are summarized as follows:  - 22 - Million Source of Funds Million S/ _US$ % Funds generated from current operations 771.4 30.9 32 Sale or maturity of investments (net) 280.0 11.2 12 Repayment of debts by the Government 23.8 1.0 1 Bank loan 830.0 33.2 35 Government or private bank loan 247.5 9.9 10 Government loan 250.0 10.0 10 Other 0.5 - - Total 2,403.2 96.2 100% Application of Funds Capital expenditures - Project 2,072.5 82.9 86 Debt service (principal and interest:) 307.1 12.3 13 Increase in cash 23.6 1.0 1 Total 2,403.2 96.2 100% 6.13 The above cash flow and project financing plan is based on the assumption that project foreign costs (estimated to be about US$56.2 million plus US$0.5 million in technical assistance after 1979) are to be financed from the following sources: US$33.2 million (plus US$0.3 million in techni- cal assistance after 1979) by the Wcrld Bank, US$23.0 million (plus US$0.2 million in technical assistance after 1979), partly by loans to GPA and partly by GPA's internal cash generation. It has been agreed that GPA will be provided with US$20.0 million for the project, as follows: (a) a US$10.0 million loan, on terms and conditions satisfactory to the Bank, either from the Government or from a private bank guaranteed by the Government, as a condition of loan effectiveness; and (b) another US$10.0 million loan from the Government on terms not less favorable than those of the proposed World Bank loan (Annex 11). As regards the local project costs (US$26.7 million million equivalent plus US$0.2 million equivalent in technical assistance after 1979), GPA will be able to provide the funds from its own resources. 6.14 Forecast balance sheets for GPA are given in Table 4. They indicate that GPA's financial position would be good throughout the forecast period. At the end of 1980, the working ratio (current assets to current liabilities) would be 4.7 and the debt/equity ratio 46/54. Both are satisfactory; however, because of the expected repayment terms of the other foreign project financing, debt service would absorb a very large share of GPA's cash flow. During negotiations, it was agreed that no iurther debt would be incurred unless debt service would be covered at least 1.5 times.  - 23 - 7. AGREEMENTS REACHED AND RECOMMENDATION 7.01 During negotiations, agreement was reached with GPA and the Government on the following matters: (a) With the Government (i) assurances that the Government will take all action to enable GPA to establish salaries and fringe benefits consistent with GPA's need to employ qualified staff for top and middle management posts (para. 3.09); (ii) maintaining of the customs guarantee system if the port becomes congested (para. 3.18); (iii) simplification of customs procedures and auction of abandoned goods (para. 3.1R); and (iv) assurances that Government obligations would be repaid in 1976 and 1978 (para. 6.07). (b) With GPA (i) engagement of port operations experts by end of 1976 (paras. 3.14 and 3.18); (ii) revision of storage rates (para. 3.18); (iii) GPA to carry out a study on the impact of the conditions of employment upon the efficiency of port operations and, after consultation with the Bank, to implement the study's recommendations (para. 3.25); (iv) GPA to seek approval of the Bank to undertake construction of fourth berth (para. 4.04); (v) technical assistance to improve port operations, establish a training program and manage the bulk terminal; continuation of the technical assistance for bulk terminal management until the Bank is satisfied that the staff is trained (paras. 4.09 and 4.10); (vi) new statistical and cost accounting systems to be devised by consultants by end 1976 (para. 6.01); (vii) improvements in internal audit system by end 1976 and a system of inventory controls (para. 6.03); (viii) maintaining of adequate insurance (para. 6.04);  _ 24 - (ix) revaluation of fixed assets by end 1976 (para. 6.06); (x) rate of return covenant (para. 6.11); and (xi) debt service coverage (para. 6.14). 7.02 Retroactive financing is recommended for foreign expenditure up to US$180,000 incurred for engineering services after January 1, 1976 (para. 4.07). 7.03 It would be a condition of loan effectiveness that a financing con- tract with the Government be duly signed on terms and conditions satisfactory to the Bank (para. 6.13(a)). 7.04 The project provides a suitable basis for a Bank loan of US$33.5 million equivalent for a term of 24 years, including a grace period of four years. April 20, 1976  APPRALIAL OF A SZCCND oui AQUL PORT PROJECT Cost Estimates % of Total Locsl bLei TI ForeiLgn Tt- l Ctl - - - - - (S/O 0OO0O) - - - - - )- I. DRIDMING Dredging including mobilization 20.30 109.38 129.68 812 4,375 5,187 S9ndfill and surcharge 45.05 177.50 222.55 1,c02 7,100 8,902 Sub-total 65.35 286.88 352.23 2,614 11,475 14,089 16.8 II. CSnRuuTIoN (a) Wharf Construetion General Cargo Bertha (3) 103.07 346.73 449.80 4,123 13,869 17,992 Bulk eargo pier 13.42 40.53 53.95 537 1,621 2,158 Srall boats moering 0.25 1.00 1.25 10 40 50 Sub-total I16.74i 388.26 505.00 4,670 15,530 20,200 24.1 (b) Landworks Transit Sheds and Other Buildings 87.62 119.58 207.20 3,505 4,783 8,288 Open storage areas and roads 126.80 24.12 150.92 5,072 965 6,037 Utilities and Services 4i0.50 62.83 103.33 1.620 2.513 4.133 Sub-total 254.92 206.53 461.45 10,197 8,261 18,458 22.1 III EQUPET (a) Bulk Terminal Loading/unloading Gentry 1.80 42.20 44-00 72 1,688 1,760 Grain Silos 10.75 50.13 60.88 430 2,005 2,435 Raw Sugar Storage 15.98 52.95 68.93 639 2,118 2,757 Liquid Cargo Storage 6.82 26.88 33.70 273 1,075 1,348 (b) Cargo handling 5.25 29.75 35.00 210 1,190 1,400 (c) Workshop and Maintenance 0.25 2.25 2.50 10 90 zO Sub-total III 40.85 204.16 245.01 1,634 8,166 9,800 I1.8 IT. CONSULTAXT SERVICES 61.50 41.00 102.50 2,460 1,640 4,100 5.0 V. TECHNICAL ASSISTANCE 5.00 7.50 12.50 200 300 500 0.6 Total I, II, III, nv & V 544.36 1,134.33 1,678.69 21,775 45,372 67,147 VI. CONTINGENCIES Physical / 23.75 52.58 76.33 950 2,103 3,053 3.6 Price f 105.50 230.50 336.00 4,220 9,220 13.440 16.0 Sub-total 129.25 283;08 412.33 5,170 11,323 16,493 GRAND TOTAL 673.61 1,417.41 2,091.02 26,945 56,695 83,640 100.0 V 5% on items I, II & III(a) 2J Based on assumed annual percentage price increases as followse 1976 19177 1978 V279 Civil Works 13 12 12 12 Squipant 9 8 8 8 Source: Appraisal Updating Mission April 1976  TAELE 2 ECUADOR APPRAISAL OF A SECNID GUAYAQUIL PORT PROJECT Estimated Schedule of Disbursement (us$ 000) Contract Awarded June 1, 1976 Disbursement (US$ 000) During the Quarter Cumulative Year and Quarter FE 1977 September 30, 1976 2,000 2,000 December 31, 1976 2,100 4,100 March 31, 1977 2,300 6,400 June 30, 1977 2,300 8,700 FT 1978 September 30, 1977 2,400 11,100 December 31, 1977 2,600 13,700 March 31, 1978 2,600 16,300 June 30, 1978 2,600 18,900 FY 197