Bolivia - Aviation Development Project

Report No. 1458b-BO FILE Copy Bolivia: Appraisal of an Aviation Development Project April 28, 1977 Latin America and the 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 1 Bolivian Peso ($b) = US$0.05 US$1.00 = 20.0 Bolivian Pesos ($b) 1 million Bolivian Pesos ($b) = US$50,000 System of Weights and Measures Metric US Units 1 kilometer (km) = 0.62 mile (mi) 1 meter (m) 5 3.28 feet (ft) 1 liter (1) = 0.26 US gallon 1 kilogram (kg) = 2.20 pounds (lb) 1 ton = 2,205 pounds Fiscal Year January 1 to December 31 Abbreviations and Acronyms AASANA Airports and Air Navigation Services Administration AGA Aerodromes and Ground Aids ATC Air Traffic Control COM Communications CNA National Aviation Council DGAC Directorate General of Civil Aviation DGTTA Directorate General of Air Transport and Aerial Work DME Distance Measuring Equipment ECLA Economic Commission of Latin America FAB Bolivian Air Force HF High Frequency ICAO/OACI International Civil Aviation Organization ILS Instrument Landing System ISB Independent Side Band LAB Lloyd Aerea Boliviano LRB Locating Radio Beacon MTCCA Ministry of Transport, Communications, and Civil Aviation NAVAID Navigational Aid NDB Non-Directional Radio Beacon RX Receiver SAC Under-Secretary for Civil Aviation SSB Single Side Band TX Transmitter UNDP United Nations Development Programme VASI Visual Approach Slope Indicator VHF Very High Frequency VOR Very High Frequency Omni-Directional Radio Range Aircraft Nominal B-727-100 Boeing three-engine jet 119 seats 2 tons belly load B-727-200 140 seats 4.5 tons belly load CV-580 Convair twin-engine turbo propeller 8 tons pay load F-27 Fokker twin-engine turbo propeller 40 seats or 5 tons pay load C-46 Curtiss twin-engine piston propeller 5.5 tons pay load DC-3 Douglas twin-engine piston propeller 28 seats 3 tons pay load  FOR OFFICIAL USE ONLY BOLIVIA APPRAISAL OF AN AVIATION DEVELOPMENT PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS .......... ...... .. ....................... i-ii 1. INTRODUCTION ............................................. o............. 1 2. BACKGROUND ................................................ 1 A. General ............................................... 1 B. The Transport Sector ..................................... 2 C. Transport Planning and Coordination ................... 3 D. Development Plan ...... ................................ 4 3. BOLIVIAN AVIATION ........................................................ 5 A. Existing Air Transport ..... ........................... 5 B. Present Air Traffic ...... ...................... 6 C. Traffic Forecasts (Project Airports) ............ ...... 7 Passenger Forecast ..... .......................... 7 Cargo Forecast ............... ........... ........ 8 Aircraft Movements .......... 8 D. Existing Organizations ................................. 8 E. The Borrower - AASANA ...................................... 9 4. THE PROJECT . . ........... 10 A. Objectives ... ......................................... 10 B. Description ................................ *............... 10 Airport Construction and Improvements ............ 11 Design and Supervision of Construction ........... 11 Design of Cochabamba Runway ...................... 12 Provision of Equipment ........................... 12 AASANA Technical Assistance and Staff Training ... 13 C. Special Components of the Project ..... ................ 13 D. Ecology ............................................... 13 E. Cost Estimate ......... ....... 14 This Appraisal Report has been prepared by Messrs. B. Bostrom (Aviation Economist), J. Bowlin (Financial Analyst) and W.B.R. Zetterstrom (Aviation Engineer) and Ms. V. Foster (Editor). This docuwmnt has a retnctod distribution and may be used by recipients only in the performance of their official dutie. Its contents may not otherwise be disclosd without World Bank autmrlaaton.  TABLE OF CONTENTS (Cont'd) Page No. F. Execution ......................... 15 G. Procurement ....... .................. 15 H. Disbursements .................................... 16 5. ECONOMIC EVALUATION ........................ .. 16 A. General ................ 0.. *.*............ ..... 16 B. Economic Analysis ... ............... . ................. 17 C. Cost Savings ... ............................ 18 D. Project Return .. ................................. 19 6. FINANCIAL EVALUATION .................. . ................. 19 A. Existing Situation ............................... 19 B. Financial Objectives .......................... ....... 20 C. Financial Plan ... ................................. 21 D. Financial Projections ............................... 21 7. AGREEMENTS REACHED AND RECOMMENDATION ..................... 24 TABLES 1. Total Freight Movement in Bolivia 2. Comparative Economy Air Fares, 1976 3. Names and Abbreviations of Airports 4. Forecast Passenger and Freight at Project Airports 5. Forecast Aircraft Traffic 6. Cost Estimates 7. Disbursement Schedule 8. Estimated Aircraft Cost Savings in 1981 9. Quantified Project Benefits 1978-1998 10. Sensitivity Analysis of Economic Rate of Return 11. Balance Sheets 1970-1974 - AASANA 12. Statement of Revenues - AASANA 13. Projected Operating Statements - AASANA 14. Projected Project Airport Operating Statements - Riberalta Airport 15. Projected Project Airport Operating Statements - Santa Ana Airport 16. Projected Project Airport Operating Statements - San Borja Airport 17. Projected Project Airport Operating Statements - Tarija Airport 18. Project Cash Flow - AASANA 19. Projected Balance Sheets - AASANA 20. Schedule of Selected Financial Indicators  TABLE OF CONTENTS (Cont'd) ANNEXES 1. Bank Group Projects in the Transport Sector 2. Bolivia Aircraft and Airport Inventory 3. Aircraft Accidents in Bolivia 4. Traffic Forecast Methodology 5. Existing Airport Conditions and Proposed Improvements 6. Location List for Equipment Included in the Project 7. Regional Maintenance Equipment 8. Draft Technical Assistance Job Descriptions 9. Special Components of the Project 10. Project Progress Monitoring Indices 11. Summary and Conclusions of Bolivia Transport Sector Report 12. Details of the Economic Evaluation 13. Financial Assumptions CHART 1. Organization Chart MAPS IBRD 12654 - Project Airports IBRD 12655 - Telecommunications Network   BOLIVIA APPRAISAL OF AN AVIATION DEVELOPMENT PROJECT SUMMARY AND CONCLUSIONS i. This report appraises a project comprising: (a) the construction of two new domestic airports (Riberalta and San Borja) and major improvements at two others (Santa Ana and Tarija); (b) the design and supervision of construction in (a); (c) the provision of air navigational aids (Navaids) and communica- tions (Com) equipment at the project airports and new country- wide Navaid and Com systems; (d) the provision of general maintenance equipment and runway maintenance equipment; (e) the provision of technical assistance and staff training to the Borrower; and (f) the design of a new runway, aprons and related works at the Cochabamba Airport. ii. The difficulties for surface transport created by topography and population distribution are reflected in high infrastructure costs. Given the scarcity of surface transport and the low population density in the lowlands, the Government is emphasizing the development of aviation for this and other isolated parts of the country. iii. The project, to be administered by Administracion de Aeropuertos y Servicios Auxiliares a la Navegacion Aerea (AASANA), will enable the domestic airlines and, in particular, the almost wholly Government-owned Lloyd Aereo Boliviano (LAB), to use larger, more productive aircraft, which already exist in their fleets, at a higher daily utilization rate with correspondingly lower unit costs. The project will also reduce the delays, cancellations and diver- sions for aircraft through improved aeronautical communications, navigational aids and runway maintenance equipment. The technical assistance and training element are intended to strengthen the planning, maintenance and construction units responsible for civil works and equipment of the borrower. The inade- quate length and poor orientation of the present runway at Cochabamba, the main base of LAB, make it advisable to construct a new runway. It is desir- able to support the project by providing funds for its detailed design. How- ever, it is not possible at this stage to include the construction of the new runway in the present loan because of limited funds.  - ii - iv. The proposed US$25.0 million Bank loan represents the 60% foreign exchange component plus 8.4% of the local cost component (expenditures for local consultants) of the US$39.5 million required for the project. The remaining local costs will be financed by an equity investment from the Government, which will exempt project items from taxes and duties. v. Contracts would be awarded through international competitive bidding in accordance with Bank Guidelines. Retroactive financing would be required for design and supervision at three airports as well as paving and supervision at one airport (Tarija). Such amounts should not exceed US$1.7 million. vi. The main project benefits are cash savings to LAB from better uti- lized, more efficient and productive aircraft. The transport to or from isolated communities by non-scheduled Bolivian cargo airlines would also be assisted by the provision of better communications, air navigational aids and runway maintenance. In addition, unquantified benefits include time savings to passengers and prevention of spoilage of air cargo, improved air safety and better inter-regional integration of the country. The quantified economic return ranges from 12% to 24% for individual project items, with an average of 19% for the project as a whole. vii. The financial evaluation is based on the assumptions of tariff increases to cover operating costs for AASANA's entire system by 1980 and to give a return on fixed assets of 4% from 1985 onward. Even with these tariff increases, substantial benefits will still accrue to LAB, which, however, will be required for its continued fleet modernization. viii. This report is based on economic and engineering studies made by the proposed Borrower and its consultants. It would be the fourth Bank Group transportation project in Bolivia and the first in aviation development. ix. The proposed project is suitable for a Bank loan of US$25.0 million to AASANA, with a Government guarantee. The term would be 20 years, including a grace period of four and one-half years.  BOLIVIA APPRAISAL OF AN AVIATION DEVELOPMENT PROJECT 1. INTRODUCTION 1.01 The Government of Bolivia has requested Bank Group financial assis- tance in upgrading its air transport system to meet domestic transport needs more adequately. The project selected as the most appropriate concentrates on construction or reconstruction of four airports in isolated parts of the country: Riberalta, Santa Ana de Yacuma and San Borja in the northern depart- ment of Beni and Tarija in the south. The project also includes design for a new runway, taxiways and apron at Cochabamba; aeronautical communications and air navigational equipment; and runway maintenance equipment and technical assistance and training for the operating agency, Administracion de Aeropuertos y Servicios Auxiliares a la Navegacion Aerea (AASANA), the proposed borrower. 1.02 This would be the first Bank Group aviation project in Bolivia. Annex 1 gives details of previous Bank Group loans and credits for Bolivian transportation projects (railways and pipelines). 1.03 Project cost is estimated at US$39.5 million (net of taxes and duties) with a US$23.7 million, or 60%, foreign exchange component. The pro- posed loan of US$25.0 million would cover this foreign exchange requirement plus US$1.3 million equivalent to cover a part of the costs of consultant services for detailed engineering design (paras. 4.08 and 4.10). 1.04 This report is based on the technical and economic studies prepared by AASANA and its various consultants and on the findings of a Bank appraisal mission comprising Messrs. B. Bostrom (Aviation Economist), W.B.R. Zetterstrom (Aviation Engineer) and J. Bowlin (Financial Analyst), which visited Bolivia in November 1976. The report has been edited by Ms. V. Foster. 2. BACKGROUND A. General 2.01 Bolivia has an area of 1.1 million km2, which can be roughly divided into the barren highlands "Altiplano" in the western part of the country, where most of the country's population lives; the central valleys in the midwest, and the lowlands to the east and the north. The departments of Pando, Beni and Santa Cruz are in the latter area and represent more than half the territory of the country, but contain only a small part (19%) of the population. Because of topographical barriers and long distances, transportation's role of encour- aging overall economic development through an interchange of production among regions is unusually difficult. The provision of adequate transportation is further complicated by low traffic densities. 2.02 The difficulties caused by topography and population distribution are reflected in high transport infrastructure costs, necessitating a very  careful analysis of the most appropriate modes of transportation and potential projects for investment. After such an analysis, the Government is emphasizing the development of aviation for isolated parts of the country. Of the total transport projects in the five-year plan 1976-1980, an allocation of 21% has been made to investments in civil aviation. B. The Transport Sector (See Table I for comparison of traffic by modes) Railways 2.03 The railway is a very important transport mode as a result of the focus on mining as the prime activity for the modern sector of the econ- omy. The system consists of about 3,400 km of meter-gauge Government-owned single track line (Map IBRD 12654). The most important route is the line con- necting the mining areas and La Paz with the Chilean ports of Arica and Antofagasta. This western network is not directly connected to the eastern lines linking Santa Cruz with the Argentine and Brazilian meter-gauge networks; the only connection between the two networks is through Argentine territory. Although less important in terms of traffic, the line between Brazil and Santa Cruz is vital since it is the only surface mode of transport in this area and the natural import route for this rapidly growing part of the country. As a result of improvements in management and operation through two Bank-financed projects and tariff increases in 1975 and 1977, the railway is presently operating at a profit. A third railway project is being considered for Bank financing. Highways 2.04 The present road system consists of about 38,000 km, of which 3% (1,166 km) are paved, 17% (6,559 km) are gravel surfaced and the remainder, 80% (29,831 km), are unimproved earth roads. The most important part of the network is located in the highlands and valleys, where 84% of the population is concentrated in 34% of the territory. In contrast, the lowlands of the northern and eastern regions, which have twice the area of the other two regions, are insufficiently serviced by a few low standard roads. The road network generally is laid out in the form of a "Y" with Oruro as center; the main stem pointing to the south toward Sucre, Potosi, Tarija and through Villazon and Bermejo into Argentina; the left arm stretching through La Paz into the Titicaca and Yungas regions; and the right arm leading through Cochabamba into the lowlands of Santa Cruz. In view of the road conditions, road transport is primarily important only on relatively short hauls. Waterways 2.05 The river transport system is made up of an extensive network of inland waterways located in the eastern and northern parts of Bolivia, mea- suring about 1,600 km. Minimum channel depths vary from 1.0 to 3.5 m, with seasonal variations of up to 9.0 m. The system consists of five main water- ways, as shown on Map IBRD 12654. These rivers represent the only available transport mode for commodities whose value is too low to justify movement by air. As such, they perform a vital function even though the quantities moved are small.  - 3 - 2.06 Lake transport is limited to Lake Titicaca, the highest navigable lake in the world. Its primary function is that of an alternate transport corridor to the Pacific Ocean through the Peruvian lake port of Puno, by rail and road to the seaports of Matarani and Mollendo. In terms of ton-km of freight traffic, lake traffic is more important than river traffic. Pipelines 2.07 The state oil company operates 2,462 km of oil pipelines and 754 km of gas pipelines. The oil pipelines allow access from the major production fields to the Pacific seaport of Arica and to the Argentine border. The Bank-financed natural gas pipeline (Loan 635-BO) conveys gas to Argentina. Depending on the success of intensive exploration efforts now under way and the confirmation of identified reserves, significant new pipeline construction may be undertaken. Aviation 2.08 The aviation sector is discussed in Chapter 3. C. Transport Planning and Coordination 2.09 Important issues related to transport planning and coordination in Bolivia need attention. As an example, during the next 20 years, there is little doubt that Bolivia will have to construct and improve a substantial number of roads. This program, which could cost several hundred million dollars, must be carefully defined and evaluated against the alternatives offered by the other transport modes. 2.10 A National Transport Survey for Bolivia, financed by UNDP, was completed in 1969, with the Bank acting as Executing Agency; it proposed a program for integrated transport development over the following ten years. One of its main recommendations was that a Directorate of Planning and Coor- dination should be created. The Directorate was created and, for a time, was attached to the Ministry of Coordination and Planning, but is now in the Ministry of Transportation, Communications and Civil Aviation (MTCCA). 2.11 For achieving better planning and coordination, the Bank, in 1972, assisted in the preparation of terms of reference for a UNDP-financed tech- nical assistance program to strengthen this Directorate. This program, with ECLA acting as executing agency, was cancelled in 1976 due to lack of funds after only partial implementation (a consultant worked for a few weeks at MTCCA and assisted in the preparation of projects to be included in the National Five-Year Investment Plan, 1976-1980). 2.12 The gap in knowledge regarding transport facilities and equipment, their condition, their age and their ability to meet expected demands is serious. Although individual project studies have been undertaken, there has been no real coordination among them. The Government has decided to update its National Transport Plan again under the direction of the Directorate of Planning and Coordination. The main objectives of the Plan would be to:  -4- (a) analyze and project the transport demand in relation to planned development of the economy; (b) review existing capacity and operations; (c) determine the role of each mode in relation to the demand; (d) recommend policies and operational improvements designed to make best use of available capacity; and (e) prepare a program of investments necessary to improve and expand capacity to meet projected demand. 2.13 Due to the limited funds available, UNDP and the Government have requested that financing of the program be taken over by the Bank. Funds for the needed updating of the National Transport Plan and for a technical assistance contract for its implementation are being recommended in the Third Railway Project now under consideration (para. 2.03). D. Development Plan 2.14 The Government's main transport strategy (except for pipelines, planned by the Ministries of Mines and Industry), for the five years 1976- 1980 can be summarized as follows: (a) extend and improve the road network to meet national and regional development related to high priority sectors in the economy; (b) continue the rehabilitation of the state railway; (c) modernize air transport through improvement and reequipment of infrastructure, ensuring permanent availability of smaller airports, particularly in the north and northeast; (d) extend the river and lake fleet and improve port facilities and river navigation; and (e) achieve an efficient operation of each transport mode in such a way that costs are low and services satisfy the demand. 2.15 The present MTCCA plan calls for investment, during 1976-1980, in projects already under execution totalling US$475 million in transport, excluding pipelines; of this total, US$266 million is for highways, US$107 million is for railways, and US$102 million is for aviation. In addition, projects of US$439 million are under study, with an aviation share of US$111 million and the rest for highways. This may be compared to total public sector investment of US$2,436 million, or almost 20%. Productive sectors (industry, mining, hydrocarbons and agriculture) will use about 60% of the public sector investment, and energy and public services will use the rest. About 62% of the transport investment is in foreign exchange and is likely to require external financing. Continued sector planning and coordi-  - 5 - nation are required to ensure that the projects under study are justified in their overall context and are well-timed. Of the US$102 million 1976-1980 investment for aviation, the major part is for airport improvement and air- craft purchases for the national airline, Lloyd Aereo Boliviano (LAB). This planned investment is ambitious, but seems achievable. 2.16 In addition to the proposed project and other Government investments in the five-year plan above, it became apparent during appraisal that, because of a recent aircraft accident at Santa Cruz, a great deal of public pressure was being exerted to relocate the existing airport to a site some 15 km north of the town. However, various Government officials (notably in finance and planning) raised serious reservations to this proposed construction, primarily due to the 1976 completion of a new terminal building at the existing airport, the high interest rates and short payback period for the money to be borrowed, and the probable necessity to have the airport designed, constructed and financed by a consortium of firms as a turnkey project with its inherent risk of over-design and high construction costs. Since the probability of construc- tion of this proposed airport is unknown, as well as its likely timing, costs of construction and financing, such costs have not been included in the financial projections for the project. It is assumed that, if such an airport were constructed, AASANA would be the operator of the airport only, not the owner. Assurances were obtained during negotiations that assets for a new Santa Cruz airport would not be transferred to, nor debt service cost borne by, AASANA until it can be demonstrated that such a transfer will not prevent AASANA from complying with the relevant financial covenants of the Loan Agreement (para. 6.08). 3. BOLIVIAN AVIATION A. Existing Air Transport 3.01 Civil aviation in Bolivia is, to a considerable degree, a relic of the 1940's (Annex 2). The communications (Com) equipment and navigational aids (Navaids) and some of the airfields date from that era, and the backbone of the domestic flying industry has basically consisted of aircraft of about 1945 vintage, relatively low in capital cost and operated with a minimum of maintenance. Airports have been difficult and costly to build; the electronic equipment, although good in its day, is now old, unreliable, and difficult and costly to maintain. Operating costs, as well as availability, of the older aircraft and spare parts are becoming a matter of concern. Runways, buildings, roads, power plants, radios, beacons and other components have received very limited maintenance and improvement. The Government, in view of other demands on its resources, did not, in the past, feel that expenditures in the field of air transport were of high priority since the system, under the conditions and with the aircraft types in use, presumably would continue to function to some degree. The high (reported) accident rate (Annex 3) and other unreported incidents, however, have led to a change of view. The Government is aware of the vital role of civil aviation in the country and is anxious to improve the existing situation. Some progress has been made, and air transport within Bolivia is now in a state of transition. LAB is completing a change in aircraft  -6- which involves an upgrading of service so that certain airports previously served by piston-engined Douglas DC-3 aircraft will change to turbo-propeller- driven Fokker F-27 and certain F-27 airports will be served by jet aircraft (Boeing 727). Comparative airline economy tariffs are shown in Table 2. 3.02 About 30 airports are managed by AASANA and served regularly by LAB flights (Table 3). The four major cities--La Paz, Cochabamba, Santa Cruz and Trinidad--account for more than 80% of the regular passenger and 70% of the cargo traffic. All of these airports, with some weight restrictions, are used by jet aircraft such as the Boeing B-727-100. The other airports are in poor condition and can accept only small propeller-driven aircraft. During the wet season, several of these airports are closed for considerable periods. This can be a serious limitation since it coincides with the time when all other modes of transport, except limited river transport in certain areas, are also out of service. 3.03 Air transport is a vital means of communication, despite its rela- tively high cost, and is likely to remain so due to the topography of the country. The areas where the greatest potential for development could be assisted by improved air transport are northeast of the mountain area and in the south. The departments of Beni and Pando are accessible only by river, and then for only part of the year. At present, air transport is the only practical mode for passengers and high-value or perishable goods. This may gradually change when penetration roads from La Paz are built. Nevertheless, the quality of the roads that can be built at reasonable cost in this area is likely to be such that air transport will remain dominant for many years. In addition, the sparse population would make air transport the most econ- omical mode. Trinidad, the capital of Beni, has the only airport of the two departments which is usable regardless of weather conditions. B. Present Air Traffic 3.04 The traffic of LAB has developed substantially since 1965 with the most rapid growth occurring over the past five years. Domestic passenger traffic has increased at a yearly rate of 14.5%, as a result of improved air services responding to the demands of a rapidly growing economy. Domestic air cargo, on the other hand, has been almost stable for the country as a whole because of airport and aircraft limitations. 3.05 Scheduled cargo and passenger traffic is monopolized by LAB, but unscheduled cargo service is split among several private operators. These private cargo operators are normally engaged in transporting meat from the Beni area and are owned by meat wholesalers, cattle owners' associations, and slaughterhouse companies. Conditions under which these flights are operated present major problems. The availability and low capital cost of old second-hand cargo aircraft have been attractive in the short run, particularly in view of the airport limitations and the ability of these aircraft to operate successfully from them. Of about 50 aircraft (Annex 2), only two are less than 20 years old. The most typical is the 30-year old C-46, which  - 7 - carries 5 to 6 tons fairly efficiently on short flights; however, its oper- ational capabilities are marginal for the high mountains which have to be passed to and from Beni. 3.06 About 250 small aircraft are operated by air taxi companies and individuals and, although the number of passengers and cargo transported is small, these aircraft do provide vital services to the large areas of the country which lack all-weather roads. A comparison of traffic of the various types of carriers follows: Traffic by Carrier Type in 1975 Passengers Cargo (tons) LAB 396,000 4,300 Air Taxi Operators 30,000 1,600 Transportes Aereos Militares 16,500 200 Government Oil Company 11,700 - Non-Scheduled Cargo Airlines 9,000 32,000 The air passenger traffic of 463,200 may be compared to the railway traffic of 832,000 passengers for the western system and 317,000 for the eastern system in 1975; the highway traffic to the eastern sections was negligible. C. Traffic Forecasts (Project Airports) 3.07 The passenger traffic forecasts for the project airports, prepared primarily by AASANA, Oficina de Planificacion, and its consultants Ingenieria Politecnica Americana (Bolivian), in consultation with the Bank, took two factors into consideration: (a) the general traffic trend, based on such matters 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 in Bolivia after the introduction of jet service. Passenger Forecast 3.08 The AASANA passenger forecast growth rates, based on historical traffic adjusted by the Bank to reflect 1975-1976 actual traffic, generally reflect the current traffic trend. This methodology was also used for transit traffic at all airports. At the time of completion of the project airports, the number of transits will reduce at Riberalta, Santa Ana de Yacuma and Tarija. At the same time, in Riberalta, the origin and destination traffic will be increased by a diversion of one-half the forecast traffic from Guayaramerin. These two towns, which are only 95 km apart, are connected by a good all-weather gravel road. The actual average growth rate has been about 15% per year. The forecast tapers this rate to about 6% between 1985 and 1990 to reflect a more mature market. For details of passenger and cargo forecasts, see Table 4 and Annex 4.  -8- Cargo Forecast 3.09 Cargo traffic is of comparatively minor importance on a system basis. However, it constitutes a significant and growing portion of traffic at three of the project airports (Riberalta, Santa Ana de Yacuma, and San Borja). AASANA's cargo forecast growth rates were used, with an adjustment to consider 1975 traffic. Until completion of the improvements at the project airports, the growth is generally based on the current traffic trend. The forecast cargo growth for the three project airports is 14% through 1980, reducing gradually to 8% between 1985 and 1990. Aircraft Movements 3.10 Aircraft movement forecasts (Table 5) were developed primarily by AASANA and its consultants. These were adjusted by the Bank in line with the traffic forecasts and with consideration of the impact of larger, more effi- cient aircraft types. D. Existing Organizations 3.11 The present organization of civil aviation in Bolivia is relatively complex for the size of the country (Chart 1). Overall control is exercised by MTCCA, in consultation with the National Aviation Council (CNA). The latter--which consists of the Commander of the Bolivian Air Force (FAB), the Minister of Foreign Relations and the Minister of MTCCA--is primarily con- cerned with the approval of new national airlines, operations, establishing of the level and structure of national passenger and freight tariffs, bilateral agreements for international carriers operating in and over the country and the conditions under which airlines may operate in Bolivia. The Under- Secretary of Civil Aviation (SAC), the entity primarily concerned with ongoing operations of aviation in Bolivia, is supported by the Directorate General of Civil Aviation (DGAC), the Directorate General of Air Transportation and Aerial Works (DGTTA) and AASANA. The principal responsibility of DGAC is the setting of safety standards for the airports and those airlines which use them, in addition to the licensing of pilots and certification of aircraft airworthiness. DGTTA deals with the applications for establishing new national airlines, setting the level and structure of national passenger and freight tariffs and arranging bilateral agreements. AASANA is the entity concerned with the planning, construction and operation of the airport and navigation facilities to support the air transport system. LAB, the national airline, and other non-scheduled airlines are the principal users of these facilities. A total of about 2,000 people are employed in the aviation sector, not counting those in associated activities such as customs, air cargo handling, and catering. AASANA has about 550 employees, compared with 750 for the almost totally Government-owned airline, LAB. The remaining personnel are spread over several small charter airlines and the two directorates (DGAC and DGTTA). The Bolivian Air Force has long been engaged in civil air transport and, although its civil activities have been curtailed, it continues to provide a service on some of the uneconomic, low-density routes.  -9- E. The Borrower - AASANA 3.12 AASANA was created by Law No. 08019 in 1967 and formally established on April 17, 1968 as a Government entity with operational autonomy for its specific administrative functions. The most important of these are to admin- ister, plan, maintain, operate and improve the network of national airports for regular public use as well as related services to aircraft flying between airports. To perform these functions, AASANA may enter into all types of agreements and contracts in accordance with established legal requirements; AASANA is exempt from taxes and duties. The legal domicile is in La Paz, but AASANA may establish offices in other parts of the country as required. In accordance with the Law of Public Institutions, AASANA has a Board of Directors, but the direction and decisions regarding AASANA's daily operations are the full responsibility of the Executive Director and the Technical Director of AASANA. 3.13 As detailed in Chart 1, the main functions are carried out at the headquarters, with regional airports divided into four groups. I4ore than half of the staff is located in La Paz. The effect of an extensive reorganization in 1975 has left AASANA with an essentially well structured organization. However, inherent in this reorganization is the reliance on a limited number of qualified staff members, such as the Technical Director and Department Heads of Administration, Operations, Civil Works and Electronics. These staff members--together with the Chiefs of Auditing, Planning, Legal and Personnel offices--comprise the Council of Executive Coordination, which is presided over by the Executive Director. In view of the responsibilities of the Technical Director (described in Annex 8), an advisor is being proposed to assist in daily operations. With these improvements, it is felt that AASANA will be able to implement the proposed project. 3.14 Present assets of AASANA are very modest compared to the needed investment. They consist mainly of the old assets transferred from LAB as part of the Bolivian Government equity at the time of the creation of AASANA, USAID capital assistance totalling US$7.3 million (the last part committed in 1968), with Bolivian Government counterpart contributions and operating sub- sidies for several years thereafter (para. 6.04). These limited funds con- stitute one cause of the present constraints of the borrower, which have been partly remedied by substantial tariff increases in 1975. 3.15 Another factor is that of the limitations on staff and organization, which again were subject to internal changes and significant salary increases in 1975 in order to retain qualified staff in an improved administration. Despite a more progressive management, much remains to be done in order to improve the efficiency of the proposed borrower. Some essential technical training has been provided by International Civil Aviation Organization (ICAO) experts, but management experience, particularly in implementing a large scale investment program of civil works and electronics, is still very limited, and it has not been possible to recruit or retain certain individual technical staff members. It was agreed during negotiations that salaries for technical  - 10 - specialists will be continually adjusted by AASANA in order to be competitive with alternate employment in Bolivia. It is still too early to evaluate the results of the reorganization, but it is clear that more experienced staff at certain levels are required. 3.16 The operations of, and maintenance by, AASANA are closely related to the requirements of air transportation. In the general shortcomings explained above (para. 3.01), the lack of functioning aids and equipment for civil aviation plays a significant part. AASANA has been slow in catching up because of obsolete equipment. The provision of inadequate services, partic- ularly for domestic flights, is due to managerial problems, to the lack of sufficient numbers of specialized technical staff, and to difficulties in- volving weather and topography. It is expected that the combination of assistance by the Bank project and ICAO will continue to improve substantially the maintenance of both airports and equipment. 4. THE PROJECT A. Oblectives 4.01 The Bolivian Government is attempting to integrate the widely dis- persed and sometimes isolated communities of the department of Beni into the economic and social life of the country by developing a dependable air trans- port system. To help meet this objective, the project aims at providing a nucleus of airports in Beni which can handle larger and more efficient aircraft than at present; developing rational countrywide systems of Navaids and air/ ground and point-to-point Com equipment; and providing technical assistance for the administration, maintenance and operation of the airport system. The Government wishes to improve the inadequate airport runway at Tarija, to establish a ground maintenance capability and also to realign the runway at Cochabamba. B. Description 4.02 The project would consist of: (a) the construction of two new domestic airports (Riberalta and San Borja) and major improvements at two others (Santa Ana and Tarija); (b) the design and supervision of construction in (a); (c) the provision of Navaids and Com equipment at the project air- ports and new countrywide Navaid and Com systems; (d) the provision of general maintenance equipment for AASANA and runway maintenance equipment for Santa Ana Airport;  - 11 - (e) the provision of technical assistance and staff training for AASANA; and (f) the provision of final design for the construction of a new runway, apron and taxiways for the Cochabamba Airport. Airport Construction and Improvements 4.03 A detailed description of existing conditions at the four project airports and Cochabamba as well as the proposed construction and improvements are given in Annex 5. Improvements are summarized in paragraphs 4.04 through 4.07 following. 4.04 Riberalta. The construction of a new medium range jet (B-727) airport at Riberalta would include earthworks; drainage; paved 2,000 x 45 m runway; lead-in taxiway; apron; fuel farm; terminal building; control tower; a maintenance/crash fire, rescue vehicle shed; fencing, access and ancillary roads and all necessary utility systems. 4.05 San Boria. The construction of a new turbo-prop (F-27) airport at San Borja would be similar to that at Riberalta except that the paved runway would be 1,800 x 30 m. 4.06 Santa Ana. The construction of a new (F-27) runway at Santa Ana would include earthworks; drainage; a sealed 1,800 x 30 m runway; lead-in taxiway; apron; fuel farm; renovation of existing terminal building and tower; a maintenance/crash fire, rescue vehicle shed; fencing and necessary access road improvements. 4.07 Tarila. The construction of a new (B-727) runway at Tarija would include paving of the newly constructed 2,800 x 45 m runway, a lead-in taxiway and apron, construction of a drainage canal around the southeast end of the runway, and fencing. Since the base course of the new runway would be com- pleted by February 1977, the paving and drainage should be done as soon as possible to avoid weather damage to the new construction. Thus, the contract for the paving is likely to be let prior to signing of the loan. Design and Supervision of Construction 4.08 AASANA plans to engage local consultants to do the final engineering and supervision of construction of the three Beni airports. The engineering at Tarija has already been done, but AASANA will engage a local consultant for the construction supervision. It is expected that the work of these consul- tants will be satisfactory. To assist in further developing this newly emerging local industry, as a substitute for the estimated foreign component cost if a foreign consultant were hired, the project will provide 70% of the total costs of design and the subsequent supervision of construction of the three Beni airports and 70% of the cost of supervision of the construction at Tarija Airport. Because these contracts are to be let before the proposed loan will be presented to the Board, costs incurred for consultant services after December 31, 1976 (estimated at US$0.7 million) are proposed to be included in the loan.  - 12 - 4.09 Supervision of construction would be required through the last quarter of calendar year 1981. For the sake of continuity, it would be desirable that the consultants selected for the design work be retained for the supervision of construction. Design of Cochabamba Runway 4.10 The runway at Cochabamba Airport, the home airport for LAB, is so oriented that obstructions impose weight restrictions on the larger aircraft now being flown by LAB. Such restrictions have become an operational and financial burden for LAB, and they will become more serious as operations increase and larger aircraft are acquired. To alleviate this problem, a new runway, oriented about 90 degrees from the existing one, was proposed by a feasibility study prepared last year. A preliminary analysis by Bank staff indicated that such a runway would be justified in the early 1980's. Con- struction at Cochabamba is included in AASANA's program for 1979-1980. Since it is difficult for AASANA to obtain other than operational funds from either its revenues or the Government, 70% of the estimated costs of the detailed final engineering design for this high priority item have been included in the project. Provision of Equipment 4.11 Air Navigational Aids and Communications Equipment. At each of the project airports except Santa Ana, Navaids (VOR/DME) 1/ would be installed as approach and enroute aids. At all project airports, locator beacons (NDB) 2/ would be installed. New VHF 3/ air/ground and HF-SSB 4/ point-to-point voice and teletype communications would be installed between the project airports and system hubs at La Paz, Cochabamba and Trinidad. Other Navaids and Com equipment would be installed at selected points to fill out complete systems for the country (Map IBRD 12655), except for those air traffic areas con- trolled from Santa Cruz, omitted because of lower priority and fund limita- tions. Lists of this equipment and its locations are given in Annex 6. Engineering for the systems would be performed by the ICAO technical assis- tance personnel now assigned to AASANA. Design and installation of certain teletypewriter systems would be done by the equipment manufacturer, selected through international competitive bidding (para. 4.26). 1/ Very High Frequency Omni-Directional Radio Range/Distance Measuring Equipment 2/ Non-Directional Radio Beacon 3/ Very High Frequency 4/ High Frequency Single Side Band  - 13 - 4.12 Visual Aids. Runway, taxiway and apron lighting would be installed at all project airports. At San Borja, the runway lighting would be spaced for a 45 m wide runway rather than a 30 m one in order to allow for the expected early widening of the runway to B-727 standards. Rotating beacons and obstruction lights would be provided at each project airport. VASI's 1/ would be installed at project airports as well as certain other selected airports in the country. Each of the project airports would be provided with basic runway marking (Annex 6). 4.13 Maintenance Equipment. For AASANA to maintain the various airports under its control properly, equipment would be required which would have to travel on a planned basis around the system. Since most of the airports are unpaved, the greater portion would consist of earth moving, compaction and grading equipment. Light asphalt spraying equipment would be stationed at Santa Ana to maintain the sealed surface which would be provided at this airport. Lists of both sets of equipment are given in Annex 7. AASANA Technical Assistance and Staff Training 4.14 To strengthen its airport administration and maintenance capabil- ities, AASANA would engage a team of five Spanish-speaking experts for the following positions for a five-year period: Technical Director Advisor, Chief Budget and Accounting Division, Chief Telecommunications Maintenance Division, Chief Navaids Maintenance Division and Chief Airport Construction and Mainte- nance Combined Divisions. Draft job descriptions for these various positions are given in Annex 8. In addition, 30 man-years of training for AASANA per- sonnel outside Bolivia would be provided. The foreign exchange costs of the experts and the training would be financed from the Bank loan. C. Special Components of the Project 4.15 These special project items of a minor but essential support nature are to be financed by the proposed loan, except as indicated in Annex 9. D. Ecology 4.16 The ecological and environmental effects of the development of the project airports and the proposed reorientation of the main Cochabamba airport were taken into account during the siting and preliminary design studies. Two of the airports (Riberalta and San Borja) are being relocated to remove them from the immediate vicinity that they serve, thus making more remote the noise, fumes and safety problems associated with the approach and departure paths of aircraft. Land being released at Riberalta and San Borja would become available for further expansion of the two towns; the land being taken in the one place is unused rain forest between river banks and, in the other, is low lying grazing land. The Santa Ana and Tarija developments are on existing airport land. Drainage improvements at all four airports would reduce the possibility of stagnant, insect breeding pools. 1/ Visual Approach Slope Indicators  - 14 - 4.17 The reorientation of the main runway at Cochabamba would relocate the heavy aircraft flight paths from over the city to over agricultural land. The obvious effect of this is the reduction of noise for the city population, but more important is the reduction of risk associated with the existing requirement for aircraft to make low level turns above the city because of high ground obstructions in the normal flight pattern. Zoning restrictions for the new runway would be developed by the Government. A copy of a suggested regulation will be provided to the Government. E. Cost Estimate 4.18 The total project cost, including contingencies, is US$39.46 million. The foreign exchange component is US$23.67 million, or 60% of the total project cost. This project is exempt from taxes and duties (para. 3.12). 4.19 The cost estimate shown below (in prices expected at the end of June 1977) is categorized by type of work. A detailed itemization of the project components is given in Table 6. % of $b (million) US$ (million) Project Local Foreign Total Local Foreign Total Content Civil Works 175.9 225.2 401.1 8.80 11.26 20.06 50.8 Engineering Design and Supervision 32.1 8.0 40.1 1.60 .40 2.00 5.1 Aviation Equipment 11.8 70.4 82.2 .59 3.52 4.11 10.4 Maintenance Equipment 1.6 15.8 17.4 .08 .79 .87 2.2 Technical Assistance 7.6 22.7 30.3 .38 1.14 1.52 3.9 Training .2 4.6 4.8 .01 .23 .24 .6 Cochabamba Design 16.0 4.0 20.0 .80 .20 1.00 2.5 Contingencies: Physical 10% 20.9 36.7 57.6 1.05 1.83 2.88 7.3 Price 22.8% 49.7 86.0 135.7 2.48 4.30 6.78 17.2 Total 315.8 473.4 789.2 15.79 23.67 39.46 100.0 4.20 The cost estimates were developed originally by the engineering con- sultants responsible for the feasibility studies. They were updated during the appraisal by AASANA engineers using known costs in the various localities. These costs are considered reasonable. Construction at Tarija and Santa Ana would take place on the existing airport property. The land at Riberalta has already been transferred to AASANA by the town at no cost, and the land at San Borja would be purchased by AASANA. This is not expected to delay the project. Land cost is included in the estimates of local costs. 4.21 Physical contingencies amounting to 10% have been included in the cost estimate. An additional item for price contingencies, of an average of  - 15 - 7.70% on the local component and 7.75% on the foreign component, compounded quarterly, has been included to allow for anticipated increases in labor and material costs, which, in this case, are approximately equal. Foreign compo- nent contingencies are slightly lower than those in the Bank guidelines because of expected lower equipment cost escalation. F. Execution 4.22 The project would be executed by AASANA. The civil works contracts for Tarija are expected to be awarded prior to signing of the loan. The civil works contracts for Riberalta, San Borja and Santa Ana are expected to be awarded by October 1978. The work is expected to take about one and one- half years at Tarija and to provide employment for about 150 men. The work at the other three airports would take about three years and would provide employment for about 500 men each at Riberalta and San Borja and 250 at Santa Ana. Tarija is expected to be completed by January 1979, followed by Riberalta, San Borja and Santa Ana by December 1981. The technical assistance portion of the project would run through September 1982. 4.23 AASANA would handle all Navaid and Com equipment procurement without assistance from consultants. Part of this equipment would be installed by AASANA and part by the equipment manufacturers. 4.24 AASANA would administer the 25 man-year technical assistance portion of the loan and also the 30 man-year training component. During negotiations, job descriptions for these positions were agreed upon (para. 4.14 and Annex 8). A training program should be prepared by AASANA and its technical experts, after their engagement, to begin no later than October 1978 and to last for a period of three years. 4.25 During negotiations, a project implementation schedule was agreed. The estimate of project execution is given in Annex 10. G. Procurement 4.26 Contracts for civil works (earthworks, paving, drainage, water and electrical supply and distribution, sewerage, buildings, etc.) at Riberalta, San Borja and Santa Ana airports, and visual aids, Navaid and Com equipment and installation would be awarded after international competitive bidding by prequalified contractors. Since equipment is not produced locally, no local suppliers are expected, but local bidders would be granted a margin of prefer- ence by adding 15% to the CIF value of foreign bids (or the applicable customs duties, whichever is lower). 4.27 Although the paving contract at Tarija would be awarded prior to the signing of the loan documents (para. 4.07), it would be awarded in accordance with the Bank "Guidelines for Procurement," but after only limited advertise- ment because of the urgency of the work and the remote character of the proj- ect location. Foreign contractors are not excluded. The drainage contract was added to the existing civil works contract proper at unit costs established in April 1975. The original contract was awarded in accordance with Bank "Guidelines," but after only local advertisement. In view of the urgency of the work, the relative smallness of the contract and the favorable prices,  - 16 - Bank financing for this contract would be justified. Because these contracts were or will be let before the proposed loan will be presented to the Board, costs incurred after February 28, 1977 (estimated at US$1.0 million) are proposed to be included in the loan. The engineering contract (an estimated 40 man-years at US$50,000 per year) for the design and supervision of the construction of the four project airports would also be awarded, prior to signing of the loan, to local Bolivian engineers. The award of the estimated 20 man-year contract (at US$50,000 per year) for the engineering for Cocha- bamba would be similar, except that it would not be awarded until after signing of the loan. Consultants' terms of reference and contracts should be acceptable to the Bank. 4.28 A negotiated contract for 25 man-years at an estimated US$50,000 per man-year would be executed by AASANA for the provision of the five-man technical assistance team. Training would be arranged individually through UNDP/ICAO or technical training schools at rates not exceeding approximately US$6,000 per year per candidate. H. Disbursements 4.29 Disbursement of funds from the loan would be on the following basis: (a) 100% of foreign expenditures for equipment and its instal- lation; (b) 100% of foreign expenditures for technical assistance and training; (c) 56% of total expenditures for civil works; and (d) 70% of total expenditures for engineering services. A schedule showing the estimated rate of disbursement is given in Table 7. Retroactive financing of civil works undertaken after February 28, 1977 up to US$1.0 million and of engineering services after December 31, 1976 up to US$0.7 million, for a total of US$1.7 million, is proposed. 5. ECONOMIC EVALUATION A. General 5.01 In Bolivia, the need for air transport is greatly reinforced by the topography of the country. The summary and conclusions of the latest trans- port sector report for Bolivia are given in Annex 11. The presence of flat lowlands partly flooded and isolated for several months each year, separated by high mountain ranges from the most populated part of Bolivia, creates formidable obstacles for any development of transport. These lowlands, particularly in the northeast, will have to be developed over an extensive period in order to relieve the population pressure on the barren Altiplano. A main solution has been attempted in the development of the present road  - 17 - from La Paz to the Yungas (eastern valleys), crossing over one of the highest passes in the Andean mountain range (4,600 meters). Despite heavy investment, it will be many years before this road can penetrate into more than a small part of the department of Beni, and, more important, be reliable under all- weather conditions. 5.02 To integrate this part of the country, the primary transport modes would have to continue to be river transport for bulk goods and air transport for passengers and for valuable and/or perishable goods. Air transport to this area has not changed character in many years due to the infrastructure limitations. Only one airport in the area, Trinidad (since 1975), is capable of receiving more cost-effective jet aircraft. The most important part of the proposed project, therefore, addresses the problem of improving air transport to the main centers by providing better airports. When making agricultural loans, the Bank has recognized the lack of adequate airports as a limitation to the growth of the cattle industry. 5.03 A similar, but not quite so serious, situation exists in the south, where Tarija is the main town, 935 km from La Paz, with poor road connections. 5.04 Another main part of the proposed project is the improvement of the general infrastructure for air navigation in Bolivia, where obsolete naviga- tional aids and aeronautical communications create not only hazardous safety conditions but also high costs in the form of low aircraft utilization, many cancelled and delayed flights and other indirect effects of unreliable ser- vices. 5.05 The proposed project responds to the most urgent needs of a rela- tively large program of well justified aviation infrastructure improvements (para. 6.13). 5.06 The areas in Bolivia which will be served primarily are the towns of San Borja, Santa Ana de Yacuma and Riberalta - Guayaramerin in the northern part with a total population of about 50,000 and Tarija in the south with about the same population. These are both relatively poorly developed agricultural areas which have suffered from isolation from the rest of Bolivia. The main activities are cattle raising in Beni (Santa Ana and San Borja), exploitation of rubber and nuts at Riberalta and grains, vegetables and vineyards around Tarija. Of these four towns, only Tarija is connected by road to other parts of Bolivia. The road under construction from La Paz to San Borja and Trinidad will probably be usable only part of the year until it can be upgraded to an all-weather road--an undertaking which may take a long time. Santa Ana and Riberalta are likely to be without road connection to the rest of Bolivia for at least another 15 years. B. Economic Analysis 5.07 Details of the economic analysis are set forth in Annex 12 and are summarized below. Since air transport is clearly essential for the development of these isolated areas of Bolivia, the economic case for the project depends on its ability to provide transport capacity more efficiently than do the exist- ing air services. The construction and equipment costs, as well as the physical contingencies, have been included as an economic cost of the project.  - 18 - 5.08 The major source of quantifiable benefits for the project airports is the much lower operating cost of more efficient aircraft, already in the fleet, which these airports would allow after the improvement. Other factors which have been considered are aircraft delay savings and values of released urban land where the airport has been moved to a new site. These are very small portions of the justification since the most important factor - increased reliability of services - can be quantified only with respect to improved utilization of aircraft. Without the project, higher aircraft operating costs could lead to airline tariff increases or service deterioration. No passenger or cargo time savings have been included. C. Cost Savings 5.09 Transport cost savings over the routes from each airport were cal- culated per passenger or ton based on the unit cost differential between better aircraft and presently used aircraft (Annex 12 and Table 8). This situation differs among the airports. In the cases of Riberalta and Tarija, the air- craft are now F-27, to be replaced by B-727-100 for passengers and 50% of the air cargo. For San Borja and Santa Ana, the situation is more complex. Presently, passenger traffic has been handled by F-27 and DC-3 aircraft and cargo by a variety of aircraft, with the predominant being DC-3 and Curtiss C-46 piston-engine aircraft carrying 3 to 6 tons per trip. The most appropriate replacement aircraft for future cargo traffic, in particular, is difficult to establish in view of the fragmentation of the air cargo trade into 25 different companies with an attendant lack of long-term planning. It is expected, however, that the existing piston aircraft will be replaced by small jet or turbo-prop aircraft for passengers and a turbo-prop aircraft, such as the CONVAIR CV-580, for cargo. For the economic evaluation and traffic forecasts, this aircraft has been used for providing cost character- istics and capacity. 5.10 A serious problem for Bolivian aviation is the lack of a reliable aeronautical communications network and air navigational aids. This lack, together with the runway conditions at the project airports, has caused very poor regularity for both scheduled and non-scheduled air services. In 1975, as an example, more than 1,500 hours of aircraft time were lost for LAB DC-3 and F-27 aircraft in delays and cancelled flights; this is almost equivalent to a requirement for one additional aircraft. Some of these delays would still continue as a result of weather conditions, but a significant reduction of hours lost to the level now achieved by B-727 aircraft at the four main air- ports should be possible. 5.11 A similar limitation exists, particularly for the airports in Beni, because of the lack of a properly-equipped unit for runway preventive mainte- nance. In the rainy season, a number of AASANA airports are out of service because of the condition of their runways. Some closures during heavy rains or inundation are unavoidable, but certain aircraft delays and cancellations would be avoided by improved runway maintenance. This type of savings could be quantified only for LAB scheduled flights and, thus, underestimates these benefits considerably in view of the present large volume of non-scheduled flights in Beni.  - 19 - D. Project Return 5.12 Excluding any savings of passenger time or cargo spoilage, the total return of the project is 19% (for project benefits, see Table 9); this approxi- mates the discounted cash flow financial return for the combined airport- airline system as far as these airports and airway facilities are concerned. For San Borja and Santa Ana, part of the savings accrue to private cargo airlines, but, for the major part of the project investment, the main bene- ficiary is the Bolivian Government, through its almost complete ownership of LAB. Since, without the project, it would probably be necessary to make larger fare increases, some of the benefits would be passed on to the Bolivian users. 5.13 Based on quantified benefits, the best estimate of economic return for San Borja and Riberalta is 24% for each, for Tarija 15%, and for Santa Ana de Yacuma 12%. There are substantial unquantified benefits, for Santa Ana in particular. This community is, and for many years will remain, isolated except by river. The present closures of the airport have serious effects on the unscheduled flights, but, because of lack of adequate data, only delays to scheduled flights have been quantified. The return for the aeronautical communications and electronic aids is 18%, and, for the runway maintenance equipment, the return is 16%. 5.14 The results of the sensitivity analysis for all the project compo- nents are shown in Table 10. Cost increases are considered the most signif- icant risk. However, even if costs increase by 15%, the overall rate is still 17%. The effect of road improvements to San Borja has been tested under various assumptions. The most serious, but unlikely, assumption of no air cargo at all after 1985 still gives an economic return of 14% at this airport. The first year return of the total project is almost 17% and is satisfactory for the individual project components. 6. FINANCIAL EVALUATION A. Existing Situation 6.01 AASANA has essentially been a breakeven entity in recent years, covering only working expenses. It operates under a budgetary system whereby a general budget of anticipated revenues and working expenses is developed and submitted to the Ministry of Finance for approval. Any unusual expenditures outside the budget must receive prior Government approval. 6.02 AASANA maintains control over revenues and operating expenses. Revenues collected are deposited in the AASANA account, and checks for pay- ment are drawn against this account. Any excess of revenues remains with AASANA.  - 20 - 6.03 Accounting records of the revenue and expenditure items are kept at AASANA headquarters. The records are not maintained so that revenues and expenses can be readily identified by airport and type of service but, rather, for the system in total. However, the Bank staff was able to obtain a reason- able breakdown of revenues and expenses for the project airports for 1975. 6.04 Capital items are supplied for the most part directly by the Government as equity inputs, with additional assistance by USAID. However, the receipt of assets from LAB, approximately eight years ago, and subsequent investment, as reflected in AASANA's books, may be understated to some extent. Due to this fact and to the inconsistent treatment of assets and liabilities from one year to the next in the balance sheets, it is currently difficult to make a proper assessment of AASANA's financial posture. After analyzing available information, the Bank staff prepared balance sheets for 1970 through 1974 (Table 11). A high percentage of the assets at small airports have been in service beyond what is normally considered the economic life for such items and should be replaced in the immediate future. 6.05 The accounting system is inadequate and should be redesigned to supply information by individual airports and by classifications necessary to formulate and review user charges. Following these improvements, the struc- ture and level of airport tariffs should be reviewed. The accounting system should also include provision for the proper valuation and disposal of assets. AASANA realizes these deficiencies and needs assistance for improvement in this area. This assistance would be provided by a foreign expert to be engaged as Chief of the Budget and Accounting Division (para. 4.14). It was agreed during negotiations that AASANA would consult periodically with the Bank on structure and level of airport tariffs. 6.06 The accounts are currently subject to review by the Government at irregular intervals. During negotiations, an agreement was reached with AASANA that certified copies of the audited annual accounts beginning with the year ending December 31, 1978 would be furnished to the Bank, not later than four months after the end of each calendar year, by independent auditors satisfactory to the Bank. B. Financial Objectives 6.07 Government policy has been to maintain AASANA's tariffs at a low level in order to assist aviation development. However, in 1975, landing fees were increased for LAB and foreign carriers by 60%; for non-scheduled carriers and general aviation, they remained at previous levels. At the same time, salaries of AASANA personnel were increased by an average of 60% to compensate for the cumulative effect of inflation and in accordance with reorganization efforts to maintain qualified personnel. These circumstances have made it barely possible for AASANA to cover working expenses. As a result, the new infrastructure requirements would have to continue to be met by the Government and outside sources. In the future, any surplus resulting from AASANA oper- ations could be applied to acquisition of capital assets. Agreement was  - 21 - reached with the Government and AASANA regarding more specific financial objectives of a k-nd typical for a prudently managed independent public agency, as further described below. The financial projections contained in the following paragraphs reflect these objectives and assumptions. 6.08 AASANA revised its scheduled service landing fee tariffs in 1975, and the Bank has discussed with AASANA the need for a prompt increase in user charges. However, the current level of tariffs will not be sufficient to cover the operating expenses for the project period (1977-1981). Therefore, it has been assumed in the projections in this report that future tariff increases would result in total revenues being increased by 20% in 1977, 20% in 1979, 10% in 1980, 10% in 1982 and 10% in 1984. It was agreed during negotiations that, before November 1 of each fiscal year, a review of user charges will be made on the basis of realistic traffic forecasts, and such adjustments as are necessary will be applied in order to attain an overall working ratio of no more than 75% in 1978, 60% in 1979-1982, and a return on revalued net fixed assets no less than 2% in 1983-1984 and no less than 4% in 1985. Due to the scale of investment in a few years, the project airports cannot meet the rate of return covenant, but it was agreed that the combined working ratio for the project airports would be no more than 85% in 1985. C. Financial Plan 6.09 The total cost of the project is estimated to be US$39.46 million, of which approximately 64% of the financing would be in the form of a Bank loan to AASANA. The balance, including any cost overruns, would be equity provided by the Government. US$ $b Million Million a. Bank loan to AASANA 500.00 25.00 b. Government Equity 289.20 14.46 789.20 39.46 6.10 It was agreed during negotiations that the Bank will be consulted before any investment in any of AASANA's facilities of over US$1.0 million, in any one year, is undertaken. D. Financial Prolections Operating Results 6.11 AASANA operating revenues by category for 1975, and projected through 1990, are set out in Table 12, and the projected operating statements are given  - 22 - in Table 13. Financial assumptions are detailed in Annex 13. Summarized forecast results for 1977, 1980, 1985 and 1990 are as follows: 1977 1980 1985 1990 ---------- $b Million --------- Revenue 93.7 170.7 311.5 419.9 Expenses 75.7 98.4 112.0 124.5 Operating Surplus 18.0 72.3 199.5 295.4 Depreciation 32.9 69.3 94.5 101.3 Operating Income/(Loss) (14.9) 3.0 105.0 194.1 Interest - 21.8 32.3 19.1 Net Profit/(Loss) (14.9) (18.8) 72.7 175.0 Throughout the projection period, revenues cover all working expenses, includ- ing depreciation, with the exception of 1977 and 1978. The years of 1980 and 1981 barely meet this goal. This occurs because three of the four project airports and other Government investments are completed in these years, and the increase in the depreciation provision is not immediately compensated by comparable traffic and tariff increases. However, depreciation exceeds debt service, and the financial objectives would be met in all years of the project (para 6.08). 6.12 The projected operating results of the four project airports are set out in Tables 14, 15, 16 and 17. All project airports develop sufficient traffic to generate revenue greater than working expenses by 1984; however, none of the airports would be able to cover operating expenses after project completion. Non-project airports would receive increased revenues in the form of increased landing and navigational fees, as a result of the project. The financial objectives for the project airports would be met after 1984 (para. 6.08). Cash Flow 6.13 A projected cash flow for AASANA, based on the assumptions contained in paragraph 6.09, is shown in Table 18. Provision has been made for the replacement of assets included in the project, when required, and for the addition of other necessary items (para 6.04). A summary of the cash flow for the construction period is set out below:  - 23 - 1977 1978 1979 1980 1981 1982