Colombia - Domestic Aviation Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 2039b-CO FILE C'O'"PY STAFF APPRAISAL REPORT DOMESTIC AVIATION DEVELOPMENT PROJECT COLOMBIA September 28, 1978 Projects Department Latin America and the Caribbean Regional Office 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 Colombian Peso (Col$) = US$0.03 US$1.00 = 37.6 Calombjan Pesos (Col$) 1 million Colombian Pesos = US$26,600 System of Weights and Measures Metric 1 kilometer. (km) = 0.62 mile (mi) 1 meter (m) = 3.28 feet (ft) 1 kilogram (kg) = 2.20 pounds (lb) 1 metric ton = 2205 pounds 1 metric ton-kilometer = 0.69 short ton-mile 1 passenger-kilometer = 0.62 passenger-mile Fiscal Year January 1 to December 31 Abbreviations and Acronyms Aerocondor Aerovlas Condor de Colombia S.A. Aerotal Taxi Aero el Llanero S.A. Avianca Aerovlas Nacionales de Colombia S.A. CFR Crash, Fire and Rescue Buildings and/or Equipment CIF Including Costs, Insurance and Freight CNR Colombian National Railways CNT Corporaci6n Nacional de Turismo CONPES Economic Committee of the Cabinet DAAC Departamento Administrativo de Aeronautica Civil DAINCO Department of National Territories DANE National Statistics Department DNP National Planning Department FALPRO Facilitation Program of UNCTAD FAN Fondo Aeronautico Nacional FFI Flight Facility Inspection Aircraft and/or Equipment FONADE Fondo Nacional de Desarrollo IATA International Air Transport Association ICAO International Civil Aviation Organization IDA International Development Association IDB Inter-American Development Bank INTRA National Transport Institute MOP Ministry of Public Works (up to January 1976) MOPT Ministry of Public Works and Transportation (after January 1976) NPA National Plan of Airports NPAN National Plan for Air Navigation SAM Sociedad Aeronautica de Medellin Consolidada S.A. Satena Servicio de Aeronavegacion a Territorios Nacionales TAC Aerovias del Cesar Ltda. UNCTAD United Nations Committee for Trade and Development UNDP United Nations Development Program VOR Very High Frequency Omni Directional Radio Range Less than 1  FOR OFFICIAL USE ONLY STAFF APPRAISAL REPORT DOMESTIC AVIATION DEVELOPMENT PROJECT COLOMBIA TABLE OF CONTENTS Page No. Is THE TRANSPORT SECTOR .. .................... . . . * . ............**** 1 A. General ............. . .. ........................... * ...... *...* * * .... * . 1 B. Railways ................................................ 3 C. Inland Waterways ........................... ...... ............ 4 D. Highways ............................................... . 4 E. Ports .................................. ............... ..*.......... 5 F. Investments, Regulation and Coordination ................ 6 G. Ban,k Involvement in the Transport Sector ................ 7 II. THE AVIATION SUBSECTOR . ........................... ... s ..... . 8 A. Subsector Characteristics . 8 B. The Aviation Network and Traffic Growth ............ 8 C. Regulation and Planning . ............. ... ............... . 10 D. The Commercial Airlines * .......... ................. 11 E. Demand and Market Aspects .... .....................s. 12 F. Traffic Projections ... ............. . ......... . .. ................. 13 G. Aviation Infrastructure ....... .. .... . .... . ............. . 15 III. THE EXE(:UTING AGENCIES ....................................... 16 A. Avi.ation Administration ..... ....................... ..... 16 B. Financial Management .............o.... %............. 18 C. Accounting ........ 0.............................. ....0.... 18 D. AviLation Planning ........ ............................... 19 E. System Engineering . .....so........ ...so................... 19 F. System Maintenance . ........................ ...... . . . . . 20 G. System Operation ......... . . . .. . . ................... .... . ............. . 20 IV. THE PROPOSED PROJECT . ............... ... ...................... 20 A. Oblectives ..... ............................................. 20 B. General Description ........ . . . . . . . ................................. ...s.o. 20 C. Cost Estimate ...........*.. ............................. 21 This report is based on the findings of an appraisal mission which visited Colombia during January-February 1978. The mission comprised Messrs. W.B.R. Zetterstrom (Senior Aviation Engineer), John R. Bowlin (Financial Analyst), Renato Schulz (Country Transport Economist) and Mrs. Jenifer A. Wishart (Economist). The report has been edited by Miss Virginia R. Foster. This document has a restricted distribuiion and may be used by recipients only in the performance of their officiial duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - TABLE OF CONTENTS (Continued) Page No. IV. THE PROPOSED PROJECT (Continued) D. The Project Components . ......... .. . ...................... . 22 (i) Medellin -Rionegro Airport ..# ..................... 22 (ii) Cartagena -Crespo Airport . ............. 0 ......... , 23 (iii) Bogota - Eldorado International Airport ..0.......... 24 (iv) Bogota -Second Runway .......................... 25 (v) Bogota -Customs Facilitation ................... So. 26 (vi) Flight Facility Inspection (FFI) Aircraft .......... 26 (vii) Technical Assistance and Training .... .............. 27 (viii) Financial Consultants ......o ................. .. 28 E. Execution ................................. o .o...o.....&...... 28 Fo Procurement .. ...... ....................... . ................ 29 G. Financing and Disbursement . .................. ....... 29 H. Ecology.. . ................ 29 V. ECONOMIC EVALUATION. ... 30 Ao Medellin ...............o ....... 30 B. Bogota ...35 C. Cartagena..... . ......... . 35 D. FFI Aircraft .. 36 E. Overall Project Returns and Benefit Distribution 37 F. Project Risks . . 37 VI. FINANCIAL ANALYSIS ................ o ............. o........... 38 A. Existing Situation ................ o................... ...... 38 B. Financial Objectives . ............... ... . ...o...... ....... 40 C. Financial Plan .... .. ......... .. ............... .......... 42 D. Financial Projections o. .o .......................... 42 VII. AGREEMENTS REACHED AND RECOMMENDATION ..o .... .......... o...... 45  - iii - TABLE OF CO'NTENTS (Continued) Page No. TABLES 1.1 - Intercity Transport by Mode .......... 6 . ................ 47 1.2 - IBRD-IDA Involvement in Colombia Transport .48 2.1 - Airport Traffic .49 2.2 - Domestic Traffic Flows 1976 . .50 2.3 - Domestic Air Fares - Colombia .51 2.4 - Visitor and Hotel Capacity - Cartagena (2 pages) 52-53 2.5 - Air Traffic Forecasts (2 pages) .54-55 3.1 - Planned Non-Project Investments, DAAC. 56 4.1 - Cost Estimates (3 pages) ... 57-59 4.2 - Disbursement Schedule .60 5.1 - Vehicle Operating Costs .61 5.2 - Domestic Passenger Time Values, Medellin 1977. 62 5.3 - Economic Rates of Return .63 5.4 - Cost and Benefit Streams .64 5.5 - E'roposed Flight Inspection Program. 65 6.1 - DAAC/FAN Operating Statements .66 6.2 - DAAC/FAN Cash Flow.... . .67 6.3 - DAAC/FAN Summary Balance Sheets as of December 31 68 6.4 - DAAC/FAN Statement of Revenues .69 6.5 - D)AAC/FAN Projected Operating Statements .70 6.6 - Mledellin Airport - Projected Operating Statements 71 6.7 - Bogota Airport - Projected Operating Statements .72 6.8 - Cartagena Airport - Projected Operating Statements 73 6.9 - DAAC/FAN Projected Cash Flow .74 6.10 - D)AAC/FAN Projected Balance Sheets as of December 31 75 ANNEXES I - Outline Advisor Job Descriptions .......... ............. 76-80 2 - Training ............................................... 81 3 - DAAC/FAN Schedule of Selected Financial Indicators ..... 83 4 - 'Financial Assumptions ............... .. ................. 84 5 - Selected Documents and Data Available in the Project File ............... .. ................. 86 CHARTS World Bank 18901 - DAAC/FAN Organization World Bank 18893 - Implementation Schedule MAPS IBRD 13569 - Location of Project Airports IBRD 13570 - Location of Proposed Airport at Rionegro IBRD 13571 - Master Plan of Proposed Airport at Rionegro IBRD 13572 - Proposed Project Works at Cartagena Airport IBRD 13573 - Proposed Project Works at Bogota Airport IBRD 13574 - Second Runway Proposals for Bogota Airport   I. THE TRANSPORT SECTOR A. General 1.01 Colombia has coastlines on both the Pacific Ocean and the Carib- bean Sea, but this advantage of having two coastlines is offset by the dif- ficulty of movement between the coasts and the interior. The three mas- sive ranges of the Andes Mountains which run from south to north present formidable barriers to communication between the main areas of population, which, until recently, developed as separate and almost isolated communities. Transport investment policy over the past 20 years has been aimed at national integration and at overcoming the situation imposed by topography. 1.02 It was not until the early 1950s that Colombia's largely regionally oriented ground transport system began to evolve into a national system. For a long time, the Magdalena River was the only workable transport route between the central region and the Atlantic coast. Since 1961, the Atlantic Railroad, which was constructed with Bank assistance, has provided an all-weather connection to the north to the port of Santa Marta. Colombia was developing its trunk highway system at the same time. By the early 1960s, construction and upgrading of the Western Trunk Road (Cartagena-Medellin-Cali-Pasto), the Eastern Trunk Road (Santa Marta-Bucaramanga-Bogota-Neiva) and the two main transverse roads that connect the eastern and western trunk roads in the central regicn were substantially complete. The highway system has since been a catalyst of national integration. 1.03 In the early 1950s, roads accounted for about 43% of total freight movements; inL the mid-1960s, that share had risen to about 53%, and, in 1976, although no a6dequate statistics exist, the share was estimated to be close to 70% of all irLterregional and international traffic (60% of domestic traffic). River transpcrt and coastal shipping account for about 30% and railways for another 9% of domestic freight traffic. 1.04 Ovetrall total domestic freight traffic has grown in the last decade at rates close to that of GDP, 6% to 7% p.a. While rail traffic has grown very little, and inland shipping has grown at about 4% p.a., road traffic has been growing faster than the average, around 8% p.a. 1.05 The role of the aviation system (discussed in more detail in Chapter II) has traditiorLally been that of long distance passenger transport, and, prior to the construction of the major highway and rail links, air services provided the only reliable regular connections between many centers. The table on the next page shows available data on the modal distribution of intercity passenger and freight transport. Historical data are given in Table 1.1.  -2- Colombia, Intercity and International Passenger and Freight Transport 1976 Passengers Freight Intercity Transport No. Pass-km Tons Ton-km (000) (million) (000) (million) Domestic Rail 4,041 511 2,411 1,159 River negligible negligible 3,269 1,686 Coastal Shipping negligible negligible 2,067 2,494 Road na na na 8,086 1/ Air 3,807 1,534 66 40 International Colombian Foreign Imports Exports Departures Arrivals (tons) (tons) (000) (000) (000) (000) Sea - 2 1,813 2,342 Road 47 241 94 740 Air 180 279 24 27 1/ Assuming 60% share. 1.06 Over the last 10 years, rail passenger traffic has fluctuated widely and has now regained the mid-1960s level, but only the Magdalena route has offered significant competition to air transport. Strictly comparable data are not readily available, and the recorded rail distances are affected by terrain; however, a broad picture of air and rail passenger traffic on different parts of the network is indicated on the next page. Comparable data for road passenger traffic are not available although recent figures suggest that it would be the predominant mode.  Passenger Traffic, Rail and Air 1974 Rail Air, Major Flows Division Pass Average Airport Pass Average (000) Distance (000) Distance Traveled Traveled (km) (km) Antioquia 498 120 Medellin 912 325 Central 826 155 Bogota 2,713 444 ( Barranquilla 499 641 Magdalena 340 338 ( Santa Marta 125 641 ( Cartagena 271 605 Pacifico 1,386 75 Cali 567 708 Santander 535 116 Bucaramanga 170 296 Totals 3,585 131 2,635 478 Passenger transport on the Magdalena river has also shown wide fluctuations, but its volume is small (15,000 passengers in 1974); it is predominantly a short-haul mode, with Magangue and smaller ports accounting for most of the traffic generation. B. Railways 1.07 The railway system in service consists of about 2,912 km of single- track narrow gauge (0.914 meters) Government-owned lines. The most important routes are those between Santa Marta-Bogota and Santa Marta-Medellin -- the Atlantic Lines -- which carry over 70Z of the total railway traffic. The Pacific Line, which formerly connected Buenaventura and Cali with the Atlantic Lines via Medellin, is now cut just south of Medellin for about 140 km and is not planned to be reconnected. 1.08 After the Bank's appraisal of the Sixth Railway Project in 1972, the Colombian NaLtional Railways (CNR) started showing improvements. Freight traffic increased from 1.2 billion ton-km in 1972 to 1.4 billion in 1974, and passenger traffic increased from 398 million pass-km to 482 million pass-km for the same period. The working and operating ratios were even better than appraisal targets, ancL, instead of the Col$ 120 million operating deficit in the appraisal forecast for 1974, CNR produced a Col$ 10 million surplus. However, after 1974, CNR encountered technical, financial and management difficulties which caused the railways' performance to deteriorate in 1975/76. Freight ton-km decreased to 1.2 billion in 1976 because of a countrywide economic slowdown and Government restrictions on imports of wheat and fertilizer which had been transported by CNR. The poor availability of diesel locomotives due to mechanical failure also presented a serious problem. The high incidence of  - 4 - deraiiments and accidents, the increase in staff costs and the decrease in freight traffic created serious financial difficulties in 1975/76. Government interest in the railways also appears to have weakened during this period. 1.09 In 1977, however, improvements were noted in several areas. CNR's management, which had been weak between mid-1974 and mid-1977, improved under the guidance of a newly appointed General Manager. Freight traffic, which is the major source of income, increased 15% in the first 10 months of 1977 over the corresponding period in 1976. Technical and financial performance also improved. Tariffs were increased substantially in 1977 (freight 52%, passengers 22%), and the total staff was reduced by about 9%. Further action is being taken on these matters in 1978. The Government took certain steps in favor of the railways; the Economic Committee of the Cabinet (CONPES) approved recommendations by the National Planning Department to provide adequate financial assistance to CNR to meet substantial operating deficits and investment requirements, including planning and design for the proposed Saboya-Carare rail link. The main purpose of this link would be to serve coal exports expected to be mined in the vicinity of Saboya; it would also provide an improved connection between Bogota and Santa Marta. The Ministry of Public Works and Transportation (MOPT) is currently carrying out studies leading to the preparation of a National Transport Plan. The studies, to be completed in the latter part of 1978, would define the future role of the railways. The Government generally is of the opinion that the railways have an important role to play in transporting bulk commodities over long hauls. C. Inland Waterways 1.10 Although the traditional importance of inland shipping has decreased because of the development of rail and of road transport, it is still signifi- cant. Both the Magdalena and the Cauca rivers are navigable, and they account for almost all inland shipping. The Magdalena river carries over 95% of the traffic and, although of difficult navigation, is quite dependable in all seasons to Gamarra (about 470 km from the Barranquilla river-sea terminal); beyond there to Salgar (930 km from Barranquilla), navigation is only season- ally possible. Bulk goods, especially petroleum and fertilizer products, constitute the main freight movement, but there is still competition for this traffic from other modes. Total traffic in 1976 was about 3.3 million tons, of which 74% was petroleum products. Passenger traffic on the river is negligible. Inland shipping has complemented rail traffic to some extent, particularly for goods originating from and destined to the port of Cartagena, which is connected to the Magdalena river by a man-made canal (Canal del Dique). Transshipments to both rail and road can be effected at Cienaga and a number of river ports further upstream; yet, the comparative advantage of road transport vis-a-vis the combined river-rail or river-road movements makes these combina- tions viable for just a few products. D. Highways 1.11 Colombia has a road network totaling about 51,000 km, of which 21,000 km are national highways under the jurisdiction of MOPT. Almost all the remainder (27,500 km) are the responsibility of the departments. Only about one-third of the national system and about 3% of the departmental roads  - 5 - are paved; the rest are gravel or unsurfaced roads. The national highway system includes the trunk road network which connects the main economic centers and ports as well as secondary roads linking smaller towns to the trunk roads. The two major transport corridors run north-south along the Cauca and Magdalena valleys and are connected by two paved roads in the central region, one via Ibague-Armenia and the other via Honda-Manizales. 1.12 There are about 500,000 motor vehicles in Colombia, of which roughly three-quarters are passenger vehicles, mainly automobiles, and the rest are freight trucks. The fleet has grown at a rate of about 9% per annum over the five years 1970-1975. The number of trucks has been lucreasing faster than the number oE automobiles (12% per annum compared with 7% per annum for automobiles). There are no reliable statistics on the composition of the fleet, but a survey carried out in 1973 by the Transport Finance Corporation, a Government agency, showed that 60% of the truck fleet has a payload capacity of less than 7 tons, 30% of between 7 and 10 tons and only 10% of over 10 tons. About 90% of the trucks are single rear axle vehicles, and overloaded vehicles are common on the roads. Colombia instituted vehicle weight control regula- tions in 1955, but they have been enforced sparingly. Under the Loan Agree- ment for the Seventh Highway Project (1471-CO), the Government has undertaken to develop and implement a plan of action acceptable to the Bank to control vehicle weights. The proposed plan of action is now being prepared and would be ready for review by October 31, 1978. 1.13 Traffic on the main trunk network of the country has been growing at an average rate of 8% per annum. Traffic volumes on most paved roads are in the 1,000 to 2,000 vehicles-per-day range, except around the major urban centers of Bogota, Cali and Medellin, where they amount to about 4,000 to 6,000 vehicles per day. The average composition of traffic is about 30% to 40% automobiles, 10% to 20% buses and 20% to 40% trucks. Road transport is heavily regulated in Colombia; entry into the industry is regulated by the provisions of the National Transport Statute, and supply, measured by the number of trucks that can be licensed every year, is tightly controlled by the National Transport Institute (INTRA), the regulatory arm of MOPT. These rather stringent controls on the supply of trucking capacity have created a situation in which prices, which are not controlled, have increased to comparatively high levels, vis-a-vis other modes of transport and the costs of generating the services involved. The Government is considering measures to facilitate entry into the industry; it is likely that this will be a slow process. E. Ports 1.14 The principal seaports of Colombia are Cartagena, Barranquilla and Santa Marta on the Atlantic coast and Buenaventura on the Pacific coast. Between 1966 and 1976, the traffic in the four main ports (about two-thirds imports and one-third exports) increased from 2.1 million tons to 3.0 million tons. With the improvements of the transit storage and cargo-handling facili- ties carried out with Inter-American Development Bank (IDB) financing, the four main pcrts are now able to handle over 4 million tons of general cargo per year. Consequently, there should be no overall capacity problem in the  -6- foreseeable future. Bottlenecks may occur for certain products requiring specialized handling and storing facilities, e.g., in Cartagena for the handling of fertilizer, Santa Marta for bulk grain and Buenaventura for coffee. F. Investments, Regulation and Coordination 1.15 The effort to complete the basic transport network has required a considerable proportion of the country's total investment. Transport repre- sented between 10% and 15% of domestic investment and about half the Central Government's investment in the late 1950s. When the trunk highway system and the Atlantic Railways were being completed, that proportion rose to more than 60% of Central Government investment. More recently, however, the proportion has been declining; in the late 1960s, it was about 35%, and, since 1970, it has been about 25% of total public investment. In 1975, Col$ 3,200 million were invested in the transportation sector (around US$107 million); of this, about 60% went to road transport, 18% to rail transport, 11% to aviation, 8% to ports and marine transportation and 3% to shipping and inland waterways (see table below). On the whole, this distribution reflects the present economic importance of the different modes of transport. - Public Sector Investment in Transport (1971-1975) (Millions of Current Col$) Inland Year Road I/ Rail 2/ Marine Water Air Total 2/ 1971 1,956 185 88 44 168 2,441 1972 2,146 289 51 65 172 2,764 1973 2,062 299 61 79 211 2,712 1974 2,360 344 222 100 436 3,462 1975 1,908 540 240 112 350 3,150 1/ Does not include investments by departments, municipalities, regional authorities, or private entities. Refers only to infra- structure and not to vehicles, which are included in other modes except air. Also includes maintenance, which is treated as an investment, although a proportion of expenditures is for salaries for an excessively large work force. 2/ Investment in 1971 in local currency only; 1972-1975 includes local investments contributed by the Government and railways self-financing and foreign investment contributed by Bank Loans (551-CO and 926-CO). 1.16 Several studies, the last of which was the "Magdalena River Basin Transport Study" (Netherlands Economic Institute, 1974), have not had a sig- nificant impact on creating a framework for improved transport coordination.  -7- Until 1966, when Decree 3160 attempted to tie in the various entities responsible Eor transportation with the Ministry of Public Works (MOP), no form of central coordination was imposed. Before that, responsibility for the administration of the transport system was divided among a number of agencies and decentraLized organizations, the largest being MOP itself. Decree 3160 made the MinLster of Public Works an ex-officio member of the boards of all these agencies. Yet Ministerial control remained limited, and the lack of central coordination of the different modes persisted. 1.17 More recently, however, coordination of the modes has been tightened up considerably. Decree 154 of January 27, 1976 restructured MOP and turned it into MOPT. The objectives, functions and structure of many of the Departments, Divisions and Offices within MOPT and some of the decentralized institutions were redefined. Article 12 of the Decree refers specifically to the planning and coordinating functions of the restructured Planning Office in MOPT and assigns to it all functions necessary to effect intermodal planning and coordinaltion for the transport sector as a whole. Moreover, expanded Ministerial powers now include approval of the annual budget and investment programs for all modes except aviation. 1.18 Experience with the new MOPT organization has been short, and no assessment of its effectiveness can yet be made; however, there is now a reasonable expectation that improvements in intermodal planning would come about in the future. An example of this is the proposed intermodal development study which ithe Planning Office of MOPT is preparing to undertake, with its own staff, during the fall of 1978, of the Llanos area. This study would compare the requirements of roads, inland waterways and aviation and determine in a general way which mode should be developed to serve which points. 1.19 Since June 1976, the Government of the Netherlands has been pro- viding technical help in MOPT's Planning Office: in defining its activities, in on-the-job staff training and in initiating the preparation of a National Transport Plian, which should provide the base for proper planning. G. Bank Involvement in the Transport Sector 1.20 The Bank has played an important role in the development of Colombia's transport sector. Since 1950, it has lent a total of US$345.1 million. Bank Group financing for the Colombian transport sector is shown in Table 1.2. Over the period 1953-1977, Bank disbursements accounted for about 10% of total investment for highways and 30% for railways. The Bank started financing transport investments as a result of the findings of the 1949 General Survey Mission, which found the transport system in exceptionally bad condition. The Bank has made 12 loans and one IDA credit to the sector. Seven loans and one IDA credit totaling US$225.6 million have assisted construction and upgrading of the trunk highway network. Two loans for US$40.9 million financed the construction of the Atlantic Railroad, from La Dorada, near Bogota, to Fundacion, n,ear the port of Santa Marta, a distance of 672 km. Four loans totaling US$78.7 million supported a railway rehabilitation program, which helped to provide rolling stock for the new Atlantic Railroad and to rehab- ilitate many sections of track.  -8- 1.21 The early highway projects, although beset with delays and cost overruns, resulted in the reconstruction or upgrading of 3,200 km of trunk roads a.d co.aLributed to the development of a unified trunk road system and to the emergence of road transport as the main means of freight transportation. The later highway projects were also delayed in execution because of a general economic slowdown which resulted in delayed provision of local funds, poor contract management and insufficient supervision and coordination by MOP. Nevertheless, the Fifth and Sixth Highway Projects, despite their short- comings, have made important contributions to the trunk road system and assisted in the establishment of better engineering practices and improved contractual procedures. Furthermore, they contributed to the development of the local consulting and construction industries. 1.22 The latest Bank loan (Loan 926-CO) also helped in the rehabilitation of the Colombian Railways. The ongoing project had some difficulties mainly due to changes in the management; however, significant improvements have been noted recently (para 1.09), and the Government is now considering long term arrangements for the development of the Railways. 1.23 A transport sector mission visited Colombia between March 27 and April 14, 1978 to review recent developments and future requirements of the sector and to outline areas suitable for future involvement of the Bank. II. THE AVIATION SUBSECTOR A. Subsector Characteristics 2.01 In recognition of the major problems caused by the topography to surface transportation, Colombia very early turned to aviation for at least a partial solution and, in 1919, established what is now the second oldest continuously operated airline in the world, Avianca (Aerovias Nacionales de Colombia, S.A.), which serves international and domestic points. Two other Colombian firms are currently engaged in international service, Aerocondor (Aerovias Condor de Colombia, S.A.) and SAM (Sociedad Aeronautica de Medellin Consolidada, S.A.). Eleven foreign airlines serve Colombia, and there are 10 additional scheduled domestic airlines. Supporting these scheduled carriers are many charter and non-scheduled foreign airlines plus a domestic fleet of about 800 non-scheduled commercial, general aviation and private aircraft. 2.02 Air transport in Colombia is a major passenger transport mode for both international and inter-city travel (para 1.05), and, while air freight represents only a very small proportion of the total transport operations, air exports are among the fastest growing (para 2.08). B. The Aviation Network and Traffic Growth 2.03 One-third of domestic air passengers travel between the principal cities and Bogota; the four largest airports -- Bogota, Medellin, Cali and  - 9 - Barranquilla -- together handle two-thirds of all traffic. Traffic flows and airport traffic data are shown in Tables 2.1 and 2.2. The domestic air passenge& iiarket is dominated by business travel; surveys put the propor- tion between 50% and 65% on the major routes. Long term growth in the domestic passenger market has averaged 4% p.a. over 1967-1976 compared with a 2.7% p.a. growth in GNP per capita, and 2.8% p.a. in population. Domestic passenger traffic has grown by 13% p.a. on average since 1974. 2.04 Domestic freight tonnage has declined in recent years although, in terms of ton-km, the volume has remained stable. Most noticeable has been the decline in freight handled at Bogota, reflecting the decline in the volume of engine parts carried between Bogota and Medellin, following improvements in road conditions. A further contributing factor has been the spread of direct international flights, which avoid domestic transshipment of air exports and imports. 2.05 International passenger and freight flows are similarly concentrated over a few imnportant routes as shown in the following table: International Air Transport Flows 1976 Passengers Freight (tons) Colombians Foreigners Exports Imports Departing Arriving North America 64 23 68 72 Central America 12 6 11 9 Caribbean 2 4 11 9 South America 15 55 12 12 Europe 7 10 9 7 Other 2 - - Total 100 100 100 100 2.06 Foreign tourism has grown at an annual rate of 19% since the late 1960s, with Venezuelan and Ecuadorian travel (mostly by road) showing partic- ularly high growth since 1973. European and North American travel to Colombia (by air) is averaging 11-12% annual growth. Unlike the domestic air market, foreign air travel to Colombia is mostly for recreation (62%), with only 15% for business. The remaining 23% of travel takes place for health, education and family visits. International passenger traffic accounts for 12% of total passenger movements. 2.07 Air freight exports (Table 2.1) have grown at over 20% p.a. since 1966, and air trade with North America has grown at nearly 30% p.a. Around 80% of all export freight uses Bogota airport, and most of that consists of perishable items such as cut flowers and tropical fish. Colombia has a well established major market in the United States and now supplies 6% of the fresh flower imports of Western Europe. Small but rapidly growing industries relying on air freight have also sprung up around Medellin and Cali (see table following).  - 10 - Air Freight Exports 1975 Bogota Barranquilla Medellin Cali Tons Col$ Tons Col$ Tons Col$ Tons Col$ (million) (million) (million) (million) Cut Flowers 10,108 531.9 - - 1,240 61.5 87 4.1 Ornamental Fish 134 33.9 - - - - 1 71.8 Meat 1,680 61.6 ) - - 50 2.3 3,424 Other 7,313 na ) na 1.105 na 766 na 19,235 na 3,424 na 2,345 na 904 na 2.08 Air freight imports are about 10% less than exports and have been growing at a slightly higher rate (22%) and include, predominantly, manufactured goods and specialized items. About half of the air freight -- domestic and international -- is carried in all cargo aircraft. 2.09 East of the Andes in the Llanos and Amazonas regions, air services provide the only year-round connections for many centers. Air services are provided by Satena -- a military airline set up to provide services in remote areas -- and a number of smaller airlines serving the more profitable routes. Overall traffic levels in the region are low, about 4% of total domestic passengers and 6% of freight. About 60%, by weight, of the traffic in these regions is freight, chiefly imports to these regions of food, seeds, drugs and tools. An overall transport strategy for this region is to be studied (para 1.18). C. Regulation and Planning 2.10 The Departamento Administrativo de Aeronautica Civil (DAAC) formulates and then administers Government policies for the aviation subsector in addition to planning, operating and maintaining the airport and air navigation facility network and setting and enforcing standards through personnel licensing, aircraft registration and specification of procedures. Chapter III examines the operations of DAAC in more detail, and the following paragraphs discuss those functions particularly relevant to airline performance. 2.11 DAAC is advised on policy and regulatory matters by the Superior Council of Civil Aeronautics, which includes representatives of other relevant public bodies such as the Ministries of Foreign Affairs, Finance, Public Works and Transportation, Department of National Planning and the Colombian Air Force. At its regular weekly meetings, this Council receives submissions and representations from the airlines and other interested parties on matters such as fares, routes, fleets and user charges. The Director of DAAC, however, has final responsibility for formulating and implementing policies for the orderly development of aviation. Under its general mission to "direct, regulate, coordinate and control" aviation activity in Colombia, DAAC has specific regulatory authority only in the matters of setting both user charges and airline tariffs. However, under its general direction, and  - 11 - through its responsibilities to provide and operate airport and airways facilities, DAAC exerts a wide ranging influence on commercial aviation activities. 2.12 The combination of responsibilities for infrastructure and those affecting traffic development potentially provide the opportunity for the preparation of coordinated plans reflecting traffic requirements and the broad scale of resources available. However, until recently, the DAAC Planning Department played only a minor role in investment planning, and the use of economic and. financial, as well as technical, tests of facility requirements was not widely practiced. As a result, insufficient consideration has been given to the priority of projects, and past investment programs have exceeded the funds available (Chapter III and paragraph 5.33). Also, there has been no regular review, through the planning process, of the effects of regulatory practices On the aviation system and its costs (paras 2.15-2.17). 2.13 Over the past 18 months, the Planning Department developed a central role in investment planning and consequently became overburdened by these new responsibiliLties. However, with the reorganization of DAAC approved in 1977 (para 3.06) and the technical assistance in planning envisaged in the project (para 4.39). a strong planning and research group would be organized, consoli- dating improvements already made. D. The Coimmercial Airlines 2.14 The airlines in Colombia are all privately owned and, in general, efficiently managed. The three trunk airlines, Avianca, SAM and Aerocondor, serve the major domestic and international routes, while the ten smaller airlines operate supplementary services. The main inter-city passenger services are provided by Boeing 727-100 or Boeing 720-B aircraft; other services are offered by Fokker F-27, De-Havilland DHC-6 and a variety of older aircraft. 2.15 Unlike the situation in many countries, the domestic airlines offer different fares over the same route sectors and hence compete, within the regulated environment, in terms of both fares and frequencies. Domestic air fares in Colombia are very low--both in relation to costs and by comparison with other countries (Table 2.3). Two of the major airlines have submitted applications to DAAC for fare increases averaging 50% over the next six months to cover increased operating costs. The last fare increase (approved in 1977) of around ].4% was in response to cumulative cost increases from 1974. 2.16 The policy of maintaining low domestic fares and tariffs to facilitate aviation development seems now to be counterproductive. Low fares, combined with rising financing rates, make new domestic capital ventures unattractive to investors and financing of new aircraft for internal services uneconomical for the airlines. Maintenance costs are particularly high because of a combination of high import and sales duties on spare parts, and, because of a relatively inefficient labor force, much of Avianca's formerly growing business in providing maintenance and overhaul services for foreign airlines has now been lost. The three major carriers are maintaining profitability through intensive equipment use with high rates of aircraft utilization and load factors of about 70%. The difficulty in raising capital or financing on suitable terms was a major factor in poor aircraft choices for three airlines: SAM, which retired its Electra fleet in favor of ex-Avianca B720s; and Aerotal  - 12 - and TAC, which purchased ex-LAN Chile Caravelles. All the airlines, however, are constrained in their ability to replace older, costlier aircraft with more efficient types. It is estimated that fare levels on major services are now some 6-25% below the economic costs to the airlines and should be increased, both to maintain efficiency in current service levels and to provide a base for future expansion. The environment in Colombia tends to ensure efficiency in domestic operations and high equipment use factors. 2.17 Since the continued development of the industry depends upon adequate pricing of its services, a review of current tariff policies is necessary. This matter was discussed with DAAC at the time of negotiations. The Bank received assurances that DAAC would, with technical assistance to be provided to its Planning Department under the project (para 4.39), undertake a review of its tariff-setting procedures and establish improved guidelines for approving fare adjustments. It was agreed during negotiations that the review of the guidelines would be submitted to the Bank for comments by January 1, 1980 and that the agreed results would be established by June 30, 1980. 2.18 The same factors are not so restricting on the main international services. Both Avianca and Aerocondor have recently introduced wide-body aircraft in response to competitive pressure, and both are planning additional aircraft within a few years. On the major routes, Colombian airlines have adopted a common fare structure with other carriers, and, overall, achieve a 50% market share in passenger traffic and almost 70% of the freight traffic. E. Demand and Market Aspects 2.19 Passenger demand on the main domestic routes has been largely unaffected by the development of the primary road system, and growth is much more closely aligned with population and income trends. For the shorter services, however, there is some indirect evidence that road transport opera- tions have become relatively more important, with air services tending more and more to concentrate their primary role upon long distance operations. Similar trends are observable in domestic air freight flows. These trends are indicated in the following table: Indices of Domestic Air Traffic Passengers Freight % Passengers % Passengers % Freight % Freight on majoy1 on minor on majorA on minor routes routes routes routes 1967 1976 1967 1976 1967 1976 1967 1976 Bogota 50 51 19 12 60 54 17 16 Barranquilla 51 74 35 15 82 86 13 7 Cali 72 78 25 18 64 75 35 19 Medellin 57 62 29 23 58 60 31 23 Average Percent Change +15.2 -37.1 +4.2 -32.3 /1 Between the four cities listed. 2.20 Passenger growth on the main routes has been substantially above the overall national trend. For Colombia as a whole, traffic is increasing at  - 13 - around 13% per year after a relatively stable period between 1970 and 1974, which is reflected in the table on the preceding page. Passenger traffic between BogotaL and the three next largest cities has grown at a long term annual rate of over 7% and at 18% p.a. since 1974; traffic among the three cities themse].ves shows a long term growth of 6% with increases of 13% per year since 1974. Cartagena, a relatively small city in the Colombian setting, generates a disproportionately high demand for air travel because of its attractiveness to domestic holiday-makers and has exhibited a long term growth trend of around 9% with recent increases of around 16% p.a. Traffic on minor routes shows slide fluctuations from year to year and, particularly on the Atlantic Coast:, has declined significantly. F. Traffic Projections 2.21 Forecasts for domestic air passenger traffic at the project airports (see table beLow), prepared by the consultants (Restrepo y Uribe Ltda. for Bogota and Cartagena and Compania de Estudios e Interventorias, CEI Ltda., for Medellin) and modified during appraisal, are based on separate analyses of growth trends, relationships between traffic, income and population growth, and the overall share of each airport in Colombian air traffic. The adopted forecasts are a blend of five different projection methods and most nearly reflect the average between the upper and lower ranges. The effect of this forecasting method is to even out the very high growth rates since 1974, and, for the next two to three years, traffic would probably exceed the forecast trend. For Colombia as a whole, forecasts are based on estimates for other airports which, together with Cartagena, Bogota and Medellin, handled 70% of all passenger traffic in 1976. Forecasts of Domestic Passengers and Cargo Passenger Departures and Cargo Handled Bogota Medellin Cartagena Colombia 5assengers Cargo Passengers Cargo Passengers Cargo Passengers Cargo (000) (000) (000) (000) (000) (000) (000) (000) tons tons tons tons 1976 (Actual) 1,249 61 568 13 185 7 3,848 66 1980 1,699 69 685 14 270 7 5,080 78 1990 3,295 109 1,005 21 582 12 9,160 121 2000 - - 1,459 25 - - - - Average growth over forecasi: period 7.2% 4.3% 4.1% 4.8% 8.5% 4.0% 6.4% 4.4% 2.22 Domestic cargo projections are made difficult by the changing market patterns, and forecasts have been based on an assessment of trends for different city pairs with, for individual airports, an allowance for the increasing volume of transshipped cargo. While, on many routes, cargo traffic is still declining, the decline appears to have been arrested on others. Particularly for Cali, Bucaramanga, Cucuta and San Andres, volumes for major flows have been increasing steadily over the past three to four years. On  - 14 - this basis, it could be expected that, within the next few years, other routes would also reach a basic level reflecting wholly domestic air transport requirements, from which an overall but slow growth would occur. For the project airports and Cali, projections were made for each major cargo flow, and forecasts for Colombia as a whole are built from the overall trends in main flows for these and other airports. 2.23 Forecasts of domestic aircraft traffic (see table below) are based on airline plans and projected fleet composition in key years of the forecast period, which, with assumed load factors, lead to a trend in average passengers per aircraft. In forecasting aircraft traffic, allowances are made both for the availability of capacity on domestic sectors of international services and for freight carried in the holds of passenger aircraft. Forecast of Domestic Aircraft Traffic Passenger and Cargo Aircraft Movements Bogota Medellin Cartagena Colombia No. Av. pass No. Av. pass No. Av. pass No. Av. pass 1976 (Actual) 46,133 54 32,174 35 12,443 31 111,430 /1 37 1980 51,850 62 38,970 35 10,970 41 127,300 40 1990 84,100 71 51,300 39 18,840 52 190,500 48 2000 - - 60,800 48 - /1 1977 2.24 Forecasts for international traffic were made in a similar way, adjusting trend projections for each city for its share in the overall inter- national market, and basing aircraft movement forecasts on projections of fleet composition and average loads. For Cartagena, forecasts of international charter traffic were made using a conservative 3% growth, consistent with accommodation levels that would be available in 1980 (Table 2.4), and assuming that the DC-8 and B707 aircraft to be used on these services are fully occupied. The official forecasts of the Corporacion Nacional de Turismo (CNT), used as a check against the adopted forecast, project foreign tourism to all destina- tions in Colombia at an average growth of 14% p.a. up to 1985, and, to Bogota, Cartagena and Medellin, at 11.1% p.a., 29.6% p.a. and 26.5% p.a. over the next three years respectively. On this basis, it is expected that charter traffic would represent 60% of all foreign visitors to Cartagena in 1980 compared with 75% in 1977. 2.25 Traffic forecasts are summarized in the following table, and further details of the forecasts for project airports are given in Table 2.5.  - 15 - Summary Forecasts of International Traffic Departing Cargo Aircraft Passengers Tons Movements (000) (000) Bogota 1976 (Actual) 296 36 12,217 1980 434 67 14,500 1990 998 175 24,960 Average Annual Growth 9.1% 11.9% 5.2% MedellirL 1976 (Actual) 42 4 1,357 1980 70 10 2,200 1990 188 41 4,900 2000 392 107 8,000 Average Annual Growth 9.7% 14.7% 7.6% Cartagena 1976 (Actual) 23 - 381 1980 36 - 570 1990 76 - 1,230 Average Annual Growth 8.7% - 8.7% Colombia 1976 (Actual) 494 51 23,170 1980 736 106 25,760 1990 1,700 288 33,720 Average Annual Growth 9.2% 13.2% 2.7% 2.26 The lowest of the projection methods, reflecting arithmetic traffic growth trends between 1966 and 1976, was used to test the sensitivity of the economic analysis to traffic projections. The average annual compound growth rates implied in this projection are 4% for domestic passengers and 8% for international passengers, compared with the best estimates of 7% for domestic passengers and 10% for international passengers. G. Aviation Infrastructure 2.27 Because of the wide variation in temperature, rainfall, elevation,, soil condition and traffic, the 70-odd airports in Colombia vary widely in their development and condition. In general, those in the western half of the country (within and west of the mountains) are more fully developed than those in the east (in the Llanos and Amazonas). 2.28 At present, there are seven airports in mainland Colombia, with one additional on the island of San Andres in the Caribbean Sea, which are primarily domestic airports but also serve international flights. Of these, in accordance with the National Plan for Airports, Cali, San Andres, Barranquilla, Leticia and Bucaramalnga are relatively new or expanded, but the airports at Bogota and Cartagena need moderate improvements, and Medellin requires a replacement airport. All eight airports are paved and can accept, either readily or with some degree of restriction, modern jet aircraft.  - 16 - 2.29 The rest of the airports in Colombia range from semi-improved gravel strips to cleared areas on relatively ungraded fields. These latter are typical ot the airports in the Llanos and Amazonas areas where air service is the most nearly continuous mode of transportation since it operates through- out the year except for periods of extended rain, when the dirt runways become soft. Traffic at these airports is light, and the aircraft used are generally the smaller and older piston engine transports. 2.30 Air navigational aids and communication systems in Colombia are minimal and, at present, exist only at the major airports. Regional air traffic control is handled by Bogota, but each of the major airports has its own control tower for area traffic. Many of the newer minor airports throughout the country have been provided with control towers, but they are not operated because of lack of staff. Three radar systems, which will provide coverage for most of the country, are in the process of being installed, but this system will not be fully operational for another five years. The navigational aids that do exist are rarely calibrated and, as a result, are not fully reliable (paras 4.34-4.40). III. THE EXECUTING AGENCIES A. Aviation Administration 3.01 Aviation in Colombia is governed by DAAC, a governmental agency directly responsible to the President of the Republic, which was established by Decreto Ley 3140 of December 26, 1968. This law also established the Fondo Aeronautico Nacional (FAN), which functioned as the financial and investment entity in support of DAAC. During the ensuing years, it was found that the organization set forth in Law 3140 was not adequate because the administrative divisions between DAAC and FAN were not well defined, and a new law was passed which corrected these shortcomings (Law 3, January 21, 1977). 3.02 DAAC's primary areas of responsibility are the setting of aeronauti- cal policy, control of aeronautical communications, execution of studies and works (with financing through FAN), administration and operation of airports and aeronautical installations, ensuring safety and efficiency in the air transportation industry, and establishing the level and structure of airport user charges, passenger fares and freight rates. These functions are performed by a total staff of about 3,000 employees, of whom 800 are in the headquarters in Bogota and 2,200 work throughout the system at the regional airports. The technical staff (professionals, technical aviation inspectors, instructors, air traffic controllers, communicators, meteorologists, flight inspectors, pilots, engineers and technicians) consists of 1,135 people, of whom 335 are located in Bogota and 800 are at the outlying airports. All of these areas of expertise require improvement to meet the increasing demands placed on DAAC by the growing civil aviation industry. This need has been recognized by DAAC, and training for key technical staff is under way, but limited because of financial constraints. Funds for additional training are provided in the project (para 4.40).  - 17 - 3.03 FAN is an autonomous public entity with legal personality, which func- tions in the same manner as the National Highway Fund of the Ministry of Public Works and Transportation, with the exception that FAN may not contract with individuals. It is essentially a bank account for DAAC, with all FAN personnel requirements being met by DAAC staff. The Director of DAAC, who is appointed by the President of the Republic, is the legal representative of FAN and also its administrator. FAN's primary function is the provision of funds for studies, construction, maintenance, improvements, operations, supervision of construction and acquisition of movable and fixed assets in accordance with the established needs of DAAC. However, before any project may be undertaken by DAAC, FAN must satisfy the Ministry of Finance, after a review by the National Planning Department (DNP), that adequate financing would be available to ensure an orderly progress and completion of the project. Law 3 provides the following sources for funds for FAN: (a) from the national budget, (b) sale of property, (c) financing through local or foreign debt (which may be guaranteed by the Government), and (d) revenues from operation of DAAC. The primary source of funds is the collection of revenues for services provided by DAAC, of which the most important are the airport passenger fees and landing fees, representing 86% of total revenues in 1977. A more detailed explanation of the relal:ionship of DAAC and FAN is given in Chapter VI. 3.04 Law 3 provides for the transfer of land owned or to be acquired by DAAC to the National Government without charge. This was an administrative move only to avoid local taxes. However, DAAC is still responsible for administering this land, and , if no longer required for aeronautical purposes, FAN would receive the proceeds of the sale of such land in accordance with Articles 8 and 13 of Law 3. 3.05 In the past, DAAC/FAN suffered from poor financial management which resulted in heavy investment in navigational aids and communications equipment when the associated debt service for this equipment could not be covered by its own revenues. Contracts were also let to construct terminal buildings at Cartagena and Barranquilla. Construction of the terminals was only partially completed when the funds were exhausted. In 1976 and 1977, the Government provided additional budget funds to pay for the debts incurred and payable during this period. As a result, after a long delay, installation of the equipment and construction of the buildings are proceeding. 3.06 An important provision of Law 3 empowered the President of the Republic to make the following changes: (a) Reorganization of DAAC, which, after considerable time and effort, hbas been accomplished and has already improved the performance of DAAC. The new organization is shown on Chart 18901. (b) Establishment of a career program for technical personnel, with a special emphasis on selection and salary review; this program is under way and will make for a stronger technical group by keeping compensation in line with job responsibilities. (c) IReview, and changes as required, for the compensation of employees. This has been carried out; Col$ 70 million were allocated for l-his purpose for 1978.  - 18 - B. Financial Management 3.07 DAAC/FAN operates under budgetary systems whereby a general budget of anticipated revenues, borrowings, maintenance, investment and debt service is developed and submitted to DNP for approval. Once the budget is approved by DNP, it is presented to the Ministry of Finance for approval. The annual budget for DAAC/FAN for salaries and miscellaneous expenses must be reviewed and approved by the Ministry of Finance only. Any unusual expenditures outside the budgets which might arise during the year must receive prior approval from DNP and the Ministry of Finance as appropriate. 3.08 Under present arrangements, FAN receives all revenues generated from services provided by DAAC. DAAC does not have any direct revenues. FAN transfers up to, and not more than, 10% of its estimated total annual revenues to the Ministry of Finance, which, in turn, provides FAN with resources to cover salary requirements and miscellaneous expenses (utilities, office supplies and cleaning materials) of DAAC. The balance of the FAN revenues is used to meet the maintenance, investment and debt service requirements of DAAC. Capital items, both current payments and debt service, are normally paid by revenues collected by FAN. When FAN is not able to cover all of its financial obligations, the Ministry of Finance provides budget allocations to DAAC/FAN to make up the difference. Any excess revenues for the fiscal year remain with FAN. 3.09 Because of inadequate collection procedures, it is estimated at the present time that possible revenues for the passenger departure fees are being only 80% realized for domestic and 90% for international fees (para 6.08). Additionally, no revenues are collected for services provided at approximately 50 of the 80 airports under DAAC administration. This situation exists because DAAC feels that the level of services currently provided does not justify charges, and that the lack of charges at these airports will help to stimulate air transport in the remote regions of Colombia and provide an important social service. Such an approach is considered reasonable at certain airports since this is the only practical mode of transportation for most of the Llanos, Amazonas and Pacific coast regions. C. Accounting 3.10 DAAC has recently brought its financial statements up to date through the fiscal year ended December 31, 1976. The new balance sheets reflect a revaluation of assets. The financial statements for the fiscal year 1977 have been completed and were approved by the Government in June 1978. However, the statements have not been received by the Bank and a proforma balance sheet for 1977 was obtained and is shown in Table 6.3. This is the first time in the history of DAAC that this task has been accomplished in a timely manner. 3.11 In an effort to strengthen the accounting capability, DAAC is preparing to undertake a study of its accounting system and, at the same time, to determine if the volume of activity warrants computerization. This study would be conducted by a consultant with a loan from Fondo Nacional de Desarrollo (FONADE). During negotiations, the Government confirmed that this study would be completed by July 1, 1979, that the Bank would be consulted about the implementation of the recommendations of the study and that the recommenda- tions accepted would be implemented by December 31, 1979.  - 19 - D. Aviation Planning 3.12 DIAC has been operating on a ten-year National Plan for Airports 1970-1979 (IPA), which was substantially modified in 1973 by the National Plan for Air Navigation 1973-1983 (NPAN). The NPAN recommended a first phase development (1973-1976) which would provide a navaid system approximately five times larger than the navigational aids and communications component of the orginal NPA.. Contracts were entered into without determining where the funds for payment or installation would come from. Later, DAAC engaged foreign consultants to establish priorities for the optimal installation and utili- zation of the equipment. Their report is now being studied by DAAC to deter- mine how installation can proceed within funds available. Since this high- lighted the weaknesses within the Planning Department of DAAC, the project provides for the strengthening of this department further described in paragraph 4.39. 3.13 Coordination of aviation plans with other Government programs is maintained through review by DNP, and, for proposals in the Llanos/Amazonas regions, by joint planning efforts with the Department of National Territories (DAINCO), which is responsible for coordinating all public programs in these areas. Informal contact is maintained with the Sectoral Planning Office of MOPT, and these ties would be strengthened during the forthcoming transport study for the Llanos area (para 1.18). The Sectoral Planning Office has no formal authority to review aviation budgets, and there seems to be no advantage in altering the present arrangements. 3.14 DAAC's overall investment program to 1983 was reviewed by the mission and adjusted, by agreement, in the light of projected cash requirements. Overall, the program includes expenditures of Col$ 9,243.4 million, of which the project accounts for 63%. Non-project investments (Table 3.1) contain complementary improvements at other domestic airports, including completion of the terminal buildings at Cartagena and Barranquilla and the provision of facilities for domestic services of other airports. Overall, civil works amount to 51% of the planned non-project items, with the installation program for navigational aids accounting for an additional 40%. The program reflects the implementation of the national plans for airports and air navigation, and investments in 1978 and 1979 are largely the completions under existing contracts. New projects included in the 1980-1983 period are justified in the light of expected traffic growth and changes in service patterns. 3.15 It was agreed during negotiations that the non-project investment plan would be reviewed annually by DAAC and the Government,in consultation with the Bank, until the closing date of the project. E. System Engineering 3.16 TChe electronic and airport engineering sections of DAAC are suitable for small projects but require assistance when large projects are attempted. To solve their inadequacies, DAAC customarily engages consultants. However, for very large projects, DAAC engineers would be unable to provide the necessary supervision of the consultants (para 3.21).  - 20 - F. System Maintenance 3.17 With the rapid growth of the system, DAAC is unable to maintain its navigational aids and communication equipment adequately. In some instances, equipment is installed but has never been placed in operation, a situation which could cause early deterioration due to corrosion. With the introduction of new equipment types, staff hiring and training has become a large problem (para 3.21). 3.18 Airport maintenance is also neglected (para 3.21). Funds are seldom forthcoming to provide proper preventive or corrective maintenance in a timely manner. To help solve this problem, funds have been included in the financial projection to provide adequate maintenance (para 3.21 and Table 6.5). It was agreed during negotiations that adequate maintenance in accordance with accepted practices and good engineering concepts would be provided at all facilities of DAAC/FAN. G. System Operation 3.19 There are not enough personnel engaged in air traffic control. Generally, those at the major airports are properly trained, but outlying airports lack trained personnel. Even the personnel at the major airports are in need of refresher courses in modern jet aircraft procedures and in the use of new types of navigational aid equipment (para 3.21). 3.20 The enlargement of the airports is also causing a problem because of the lack of adequate airport operational and management personnel. 3.21 These problems (paras 3.16 through 3.20) would be addressed in the proposed project through the provision of technical assistance experts and training (paras 4.39 and 4.40). IV. THE PROPOSED PROJECT A. Objectives 4.01 The project, consisting of the highest priority items with major foreign exchange components in the five-year investment plan (para 3.14 and Table 3.1), is designed to improve the flow of air traffic within Colombia. To do so, it would remove the constraints to air traffic growth at the airports of Medellin, Cartagena and Bogota, provide flight calibration equipment for use on the airways throughout the country and strengthen the administration, planning and financing procedures of DAAC. B. General Description 4.02 The project, to be implemented by DAAC over a five-year period, would consist of: (a) lengthening and strengthening the runway at Cartagena, enlarging the aircraft apron, improving landside access, providing automobile parking areas, improving the drainage and providing navaids and communications; (b) strengthening taxiways and existing aircraft aprons at Bogota, enlarging the international and domestic passenger terminal fingers, improving the cargo facilities, enlarging the passenger terminal aprons (including the necessary relocation of the access road to the military aircraft area), enlarging the automobile parking area and providing additional navaids; (c) providing a complete new airport at Rionegro as a replacement for the existing Medellin  - 21 - airport, to consist of a 3,000 m runway with parallel taxiway, terminal building and tower crash, fire and rescue (CFR) building and equipment, general aviation and cargo areas, automobile parking areas, access road and navaids and communication equipment; (d) providing technical assistance and training for DAAC and consultants for financial, airport planning and customs assistance; and (e) providing flight and ground air navigational calibration equipment (Map IBRD 13569). C. Cost Estimate 4.03 The total estimated project cost, including contingencies, is US$97.8 million. The foreign exchange component is US$61.3 million, or about 63% of the total project cost. The local component includes import taxes and duties. 4.04 The cost estimate shown below (in prices expected at the end of June 1978) is categorized by type. A detailed itemization of the project components is given in Table 4.1. % Foreign Col$ (million) US$ (million) Component Local Foreign Total Local Foreign Total Airport Construction Land Acquisition 45 45 1.2 1.2 0 Civil Works 640 972 1,612 17.0 25.8 42.8 60 Buildings, etc. 212 191 403 5.6 5.1 10.7 47 Lighting Navaids and Equipment 50 205 255 1.3 5.5 6.8 80 Engineering 82 82 164 2.2 2.2 4.4 50 Technical Assistance and Trainiqg 7 41 48 .2 1.1 1.3 87 Consultants 13 27 40 .4 .7 1.1 67 FFI Aircraft,, Equipment Spares and Training 56 168 224 1.5 4.5 6.0 75 SubtotaL 1,105 1,686 2,791 29.4 44.9 74.3 Physical Contingency (10%)110 169 279 2.9 4.5 7.4 Price Contin4ency 1/ 945 1,824 2,769 4.2 11.9 16.1 Total 2,160 3,679 5,839 36.5 61.3 97.8 63 Source: Consultants, DAAC and IBRD Mission, February 1978. 1/ See para. 4.07.  - 22 - 4.05 The cost estimates for the construction portions of the project were developed by the consultants, based on nearly complete final engineering; they are considered reasonable and reflect recently awarded contracts for similar work. They were updated to the end of June 1978 during appraisal. The estimates for the other components of the project were developed after verifying costs with the industry. Construction at Cartagena and Bogota would take place on land already owned by DAAC with the exception of the automobile parking areas at Cartagena. This land is now in the process of being acquired. Most of the land at Rionegro has been acquired by DAAC, and the rest is now in process of acquisition. Land acquisition is not expected to delay the project. 4.06 Physical contingencies amounting to 10% of all items have been included in the cost estimates. 4.07 Price contingencies were estimated separately for the local and foreign components. The annual rate of price increase for the local component was estimated at 26% in 1978 and declining to 12% in 1981 and subsequent years. The annual rate of price increase for the foreign component was estimated at 7.5% in 1978 and 6.5% in 1980 and thereafter. It was also estimated that the relationship between the US$ and Col$ would be US$1 equals Col$ 37.6 in 1977 and increase to Col$ 75.4 in 1983. D. The Project Components 4.08 The project would consist of the following eight components. (i) Medellin - Rionegro Airport (Map IBRD 13570) 4.09 Background and Preparation - The existing airport, Olaya Herrera (elevation 1,506 m), is in a narrow valley over 1,000 m below the adjacent mountains. There is a hill at the south end of the single north-south, 2,500 m runway which forces all heavy aircraft operations to land from the north and take off to the north. This greatly reduces the capacity of the runway. In addition, the city is located at the north end of the runway, and all low level turns required during landing or takeoff operations occur over heavily built-up and populated areas; operations are forbidden when winds above 10 knots blow from the north, when a cloud base is less than 1,847 m above the runway surface (less than 3,353 m elevation), when visibility is less than 9.65 km, or during the hours of darkness. 4.10 Because of the significant operating restrictions which result from these terrain and weather conditions, DAAC engaged a local consulting firm (whose foreign partner was an aviation expert) to select a site for a new airport which would have an unrestricted 3,500 m runway capability. A new site was chosen in a high valley about 23 km to the east of the existing airport near the community of Rionegro at an elevation of about 2,200 m. With the aircraft in the present commercial air fleet in Colombia and the temperatures, expected runway gradient and elevation, the new site, while designed for domestic operations, would allow unrestricted non-stop operations from Medellin to New York for all but the smallest aircraft in the fleet. Such operations are expected within the forecast period. 4.11 The consultant is now in the process of preparing final engineering drawings and contract documents for the proposed new airport.  - 23 - 4.12 Proposed Development - The airport would consist of a 3,000 m runway with parallel taxiway constructed with a flexible pavement. There would be a 20,000 m2 passenger terminal building with an aircraft apron capable of holding six large commercial passenger aircraft. In addition, there would be the following supporting facilities: a general aviation area with apron, a cargo shed with apron, a CFR building with equipment, a control tower with equipment, automobile parking areas, air navigational aids, approach and airfield lighting and all necessary ancillary works such as drainage, fencing, public services and internal access roads (Map IBRD 13571). 4.13 Future Use of Existing Airport - Since the existing airport, Olaya Herrera, is so poorly located for aviation purposes and is occupying much needed land for the expansion of the City of Medellin, an agreement was reached during negotiations that Olaya Herrera Airport would be closed upon completion of the new airport at Rionegro, the land sold, the proceeds of the sale turned over to FAN, and that, prior to the sale of the land, a study of potential uses of the site would be made by the Government or its consultants, in consultation with the Bank, by the beginning of 1981. 4.14 Access Road - A portion (about 33 km) of the Bank--financed highway between Medellin and Santuario would be used for access to the general airport area. A 10-km airport access road would be constructed as part of the project from this highway to the airport site. During negotiations, the Government confirmed that the portion of the airport access road outside of the airport property line would be turned over to MOPT for ownership and maintenance. (ii) Cartagena - Crespo Airport 4.15 Background and Preparation - Since 1974, hotel capacity in Cartagena has trebled. A new 600-bed hotel is due to open in 1979, largely catering to and dependent upon air charter traffic from the U.S. midwest and Canada. Avianca has recently opened an office in Vancouver to promote tourism from the west coast of North America, and traffic rights for scheduled services to the eastern region of Canada are being negotiated. The short (2,245 m) and understrengtb runway increases operating costs for these aircraft by requiring enroute stops for fuel that cannot be lifted at Cartagena. The small and weak aircraft apron also increases costs because of increased turnaround times necessitated by remote aircraft positioning. 4.16 Proposed Development - The runway would be strengthened by means of an overlay and lengthened by 355 meters. Since there is no parallel taxiway, a turnaround loop would be constructed at the south threshold of the runway both to facilitate the turning of aircraft proceeding to the end of the runway for takeoff and to act as a holding apron for aircraft waiting for other aircraft to land so that they might take off. The existing aircraft apron in front of the terminal building would be removed and replaced with a stronger and larger apron suitable for the aircraft types expected. Although the existing terminal is now being replaced by a modern building (the domestic section is complete and in use), no provision has been made for landside access or for automobile parking. The project would improve the access and provide automobile parking areas. It would also provide a standby electrical plant, runway lighting, drainage syst:em improvement and a CFR building (Map IBRD 13572).  - 24 - 4.17 Future Development - The location of Crespo Airport relative to the city of Cartagena and its development is not suitable for the long range developrent of aviation in the area. The airport hinders further development of the residential areas and restricts access to the villages along the beach to the northeast. Terrain near the airport penetrates the standard flight clearance air space, and flight paths cross over heavy industrial and residen- tial areas at low levels. Ground access to the airport is constrained because of its location at the end of a narrow peninsula. Further expansion of the runway or even construction of a parallel taxiway would be very expensive because it would require filling ocean and lagoon areas. A 1972 study by Dutch consultants identified potential sites for a new airport. 4.18 While the construction proposed at this time is needed now, it should be considered as an interim solution only and no further construction should be considered at this site. The economic studies have shown that, while the proposed construction is economically justified within the 10-year life projected, the construction of an entirely new airport is not justified at this time, but would be in the early 1990s. 4.19 Since future development of Cartagena and nearby tourism facilities would require expansion of portions of the airport in about ten years to serve their needs and since the Crespo Airport is not technically suitable for further expansion, agreement was reached during negotiations that no additional works other than the proposed project and other investments in the approved plan would be carried out at Crespo and that, in consultation with the Bank, DAAC would prepare an aviation master plan for the Cartagena area through the year 2000 and present it to the Bank for review by June 30, 1980. (iii) Bogota - Eldorado International Airport 4.20 Background and Preparation - Eldorado is the most important airport in Colombia in terms of passenger, cargo and aircraft movements. It is also a very important domestic terminal as indicated by the fact that 78% of its traffic is domestic. The taxiways and aprons are under-strength for the type of aircraft now using the airport. This causes aircraft operational delays when these areas are closed for repairs. The passenger terminal building and its aprons are now operated at full capacity during peak periods of traffic. Much of the air cargo handled at this airport is either received from or bound to international points. Its quantity has overwhelmed the capacity of the cargo facilities. Huge amounts of cargo now stand on the open apron awaiting clearances or shipment and sustain weather damage as a result. 4.21 To rectify these problems, DAAC has adopted a system of pavement strengthening consisting of grouting the base materials with Portland cement and sand and overlaying the pavement with hot mix asphaltic concrete. The architects within DAAC have also designed improvements to the terminal and cargo building with the assistance of IATA. These designs are expected to be ready for advertising by October 1978. 4.22 Proposed Development (Map IBRD 13573) - The project would consist of strengthening the taxiways and passenger terminal aprons, relocating the access road to the Colombian Air Force facility so that the passenger terminal aprons may be enlarged, enlarging the cargo facility, and improving drainage of the aircraft operating areas. The duty-free shops in the international finger would be relocated to a new area to be constructed above the existing employees' cafeteria. The released area would be enlarged to provide nine  - 25 - international holding rooms and gate positions (ten more aircraft positions would be available on the expanded international apron). The existing arriving baggage and customs area would be enlarged to accommodate 50% more traffic. The domestic finger would be enlarged to provide eight waiting rooms and gate positions (eight more aircraft positions would be available on the expanded domestic apron). The arriving domestic baggage area would also be enlarged by 50%. In addition to the physical improvement of the existing facilities, new air navigational facilities would be installed for approaches to Runway 30 (paras 4.27 and 4.30). These improvements would provide adequate capacity for the projected passenger and aircraft traffic until the early 1990s. (iv) Bogota - Second Runway 4.23 Background and Preparation - While the 75,000 annual aircraft movements now occurring at Eldorado could be handled relatively easily by a single runway under normal circumstances, conditions at Bogota are complicated by the elevation of the airport (2,546 m), the high surrounding terrain (2,800 to 3,300 m) and poor visibility generally during early morning hours, which combine to cause aircraft delays both on the ground and in the air. There are air navigational aids and an instrument procedure for approaches to and landings on Runway 12, but landings on Runway 30 (the same runway with approach from the opposite direction) must use the approach aids for Runway 12 to descend from altitude through clouds, which flight path would also be utilized by aircraft taking off from Runway 30 in the opposite direction. Thus, the capacity of Runway 30 is limited by this conflict and the time necessary to clear each aircraft either arriving or departing, which, in effect, limits the annual capacity of the airport. 4.24 DAAC has had several studies made over the years to find a solution to this problem. The last, a study of airport capacity, was initiated at the suggestion of the Bank. 4.25 Air Traffic Delays - The latest capacity study determined the amount of aircraft time lost because of the opposite directions necessary on the approach/departure paths of Runway 30. In addition, the capacity of the airport under existing conditions was determined. 4.26 Second Runway Solution - The long-term solution to the problem, undoubtedly, is to construct a second runway along with its associated navaids. The second runway in itself is only part of the overall problem; the ultimate capacity of the airport must also be considered. This necessitates including the study of a third runway and its location within the second runway site selection study. Various proposals have now been narrowed down to the three shown on Map IBRD 13574. 4.27 Adlitional Air Navigational Aids - Interim Solution - While it is acknowledged that a second runway would ultimately be required to increase the capacity of the airport, an interim solution which would solve the problem of approaches to Runway 30 would delay the need for such construction until after 1993. The aiLrport capacity study (para 4.24) proposed the installation of new navaids which would provide an approach path parallel to that for Runway 12 and guidance to Runway 30. This solution, while partially acceptable, would require aircraft to descend toward high terrain before turning toward the ru-nway. Since this is not a fail-safe procedure, a counter proposal was made  - 26 - during appraisal to install a navaid to the northeast of the airport. By locating it in this position, a descent path parallel to the high terrain could be established. This alternative procedure is still being studied by DAAC, but has been delayed because the flight test aircraft is grounded for maintenance. The acceptability of such a solution will be verified as soon as the aircraft is able to fly again. In the meantime, no further site selec- tion can be done. Although this facility would be useful now, its immediate need is still a year or more away. 4.28 Proposed Master Plan - Zoning restrictions now applied over a wide area surrounding the Eldorado International Airport pending resolution of the location and orientation of a second runway must be reviewed. Although, in light of the airport capacity study, the second runway would probably not be justified before the early 1990s, a review by consultants of the existing master plan and other planning studies would permit a selection to be made among the three proposals and appropriate acquisition and zoning policies to be adopted. 4.29 To settle the question of the future development for the Bogota airport, the project would provide funds for consultants' services to review and update the existing master plan for the airport. 4.30 Proposed Development - The project would provide the navaids deter- mined to be necessary for an acceptable independenit approach to Runway 30. This would involve direct4onal as well as position-locating equipment. (v) Bogota - Customs Facilitation 4.31 Background and Preparation - Although additional air cargo terminal and warehouse space as well as apron area is needed, at the same time institu- tional improvements in customs procedures would reduce part of the problem and are urgently required. Under financing provided by UNDP (US$70,000), a study of customs procedures is being made by FALPRO, a unit of UNCTAD in Geneva. This study constitutes about one man-year's work. It would first identify the problem areas and make recommendations for their elimination and then provide the technical assistance necessary to implement the recommendations. 4.32 Terms of reference have been prepared by FALPRO and reviewed by the Government. The Government has requested UNDP to initiate the study. UNDP is now in the process of selecting consultants. 4.33 Proposed Development - It was agreed during negotiations that the Government would carry out this study and implement the recommendations of the study agreed between the Government and the Bank before June 30, 1979. (vi) Flight Facility Inspection (FFI) Aircraft 4.34 Background and Preparation - Periodic inspection of the various aids to air navigation is recognized internationally as a vital requirement for the safe operation of aircraft. This involves precision flying near each radio navigational aid and measurement of the signal received by the FFI aircraft.  - 27 - If the signal is not within prescribed limits, ground adjustments must be made and the navaid. tested again. In addition to the radio aids, approach and air field lighting, runway marking or painting and radar accuracy must be inspected. 4.35 At the present time, DAAC owns and operates a Douglas DC-3 FFI aircraft. Because of the size of Colombia and the relatively slow speed of the DC-3, it is unable to perform all of the flight inspections necessary to keep the increasing number of navigational aid facilities properly calibrated in accordance with the accepted standards. 4.36 Cost: estimates for budgetary purposes have been received from several aircralft and electronic equipment manufacturers. Operational speci- fications have been prepared as well as a method for procurement evaluation. 4.37 Prop)osed Procurement - The project would include the purchase of a suitable aircraft for FFI equipped with a flight inspection console. There would be a second console to replace the aging unit in the existing DC-3. Ground equipment for the calibration of these units and for the ground tech- nicians during flight inspections would be provided. Conversion training for the flight and electronic technicians on this aircraft, as well as new equip- ment, would aLso be provided. (vii) Teclnical Assistance and Training 4.38 Tec]hnical Assistance - DAAC's electronic engineering and maintenance staff need upgrading training in order to service adequately the additional navigational aids and communications equipment now being installed. Air Traffic Control procedures need updating to handle the increasing numbers of jet air- craft and the increased traffic. Together with the airport expansion included in the project, additional airport engineering assistance is required. Enlarge- ment of the terminal buildings would require trained staff and management. Increased size of facilities would necessitate new concession contracts and air- port user charges. Technical assistance for these purposes would be necessary. 4.39 The project would include 13 man-years of technical assistance for DAAC. The areas to be covered would be: air traffic control (1 year), electronic engineering or maintenance (2 years), spares procurement and warehousing (2 years), airport and terminal building management and operation (3 years), airport accounting (3 years) and planning (2 years). This assis-, tance very likely would be provided by the International Civil Aviation Organization (ICAO) or other suitable entity. Agreement was reached during negotiations that all advisory personnel assigned to this project would be selected in consultation with the Bank. Outline job descriptions are shown in Annex 1. 4.40 Training - Although DAAC has been attempting to maintain a level of competent staff commensurate with its responsibilities through the means of its existing training procedures, demands of a rapidly changing industry and increasing numbers of infrastructural units have combined to throw DAAC far behind its requirements. A detailed study of training requirements done by ICAO in 1975 (Annex 2) for DAAC indicated a need for about 950 new personnel in various categories over the next five years. All of these would require some type of training as well as upgrade training for about 325 of the residual personnel. Since that time, DAAC has been training some of the personnel but  - 28 - requires financial assistance to train them as fast they are needed. To assist D)AAC, the project would include funds for about 100 man-years of train- ing, which would reach approximately 400 of the remaining untrained technical and professional staff through two-, four- and six-month training courses at appropriate schools. DAAC would be able to cover the rest. During negotia- tions, agreement was reached that a training plan would be prepared by DAAC, with suitable assistance and in consultation with the Bank, by January 1, 1979. It would be a condition of disbursement on the training and technical assis- tance components of the loan that contracts agreeable to the Bank, between a suitable entity and DAAC, covering such training and technical assistance, would have been entered into by that entity and DAAC. (viii) Financial Consultants 4.41 Background - In order to strengthen its accounting capability, DAAC is preparing to undertake a study of its accounting system and, at the same time, to determine if the volume of activity warrants computerization (para 3.11). Consultants funded through an approved loan from FONADE would carry out the study. In addition, DAAC's user charges, rental charges, concessionaries' contracts and revaluation of assets need to be updated (paras 6.12 and 6.21). 4.42 Proposed Assistance - The project would include consultants' services to review DAAC's user charges, rental charges and contracts, to recommend revisions, to assist DAAC in implementing the reconimendations and improving its cost accounting system and to assist FAN in revaluing its assets. During negotiations, it was agreed that the consultants' final report would be completed by January 1, 1980 and that DAAC would implement those recommenda- tions agreed upon in consultation with the Bank. E. Execution 4.43 The Government would be the borrower but FAN would carry the foreign exchange risk. The proceeds of the loan would be transferred to FAN through a Subsidiary Agreement satisfactory to the Bank, execution of which would be a condition of loan effectiveness. The project would be executed by DAAC with the assistance of consultants (para 4.49). The first civil works contracts are expected to be awarded by the end of 1978. The construction is expected to take about one-and-one-half years at Cartagerna, three years at Bogota and four years at Medellin. About 150 men would be employed at Cartagena, 500 at Bogota and 1,500 at Medellin. Cartagena is expected to be completed in June 1980, Bogota in December 1981 and Medellin in December 1982. 4.44 Navaids and communication equipment would be purchased and installed by DAAC in Cartagena and Bogota and by the lighting contractor in Medellin. 4.45 DAAC would administer the 13 man-year technical assistance portion of the loan and also the 100 man-year training component. DMAC would also administer the contracts of the construction supervision and financial consultants. 4.46 It is expected that the contract for the FFI aircraft and the FFI equipment and training would be awarded by March 19a79 and that the aircraft and equipment would be delivered by June 1980.  - 29 - 4.47 During negotiations, the project implementation schedule (Chart 18893) was agreed. F. Procurement 4.48 Contracts for civil works (earthworks, paving, drainage, water and electrical supply and distribution, sewerage, buildings, etc.) and visual aids, navaid and communication equipment and installation would be awarded after international competitive bidding by prequalified contractors. Each of these is expected to be separate contracts at Medellin. All work at Cartagena is expected to be issued as one contract and, at Bogota, as two (paving and buildings). Foreign contractors are expected to compete at Medellin and local at Cartagena and Bogota. The contract for the FFI aircraft and associated equipment would also be awarded after international competitive bidding. Since aircraft are not produced locally, no local suppliers are expected to bid on this Ltem. On all other equipment contracts, local bidders would be granted a margin of preference of 15% of the CIF value of foreign bids or the applicable customs duties, whichever is lower. 4.49 An agreement for 13 man-years at an estimated US$5,000 per man-month would be executed by DAAC for the provision of the technical assistance per- sonnel through ICAO/UNDP or other suitable entities. Training would also be arranged through ICAO/UNDP or other suitable entities at rates not exceeding approximately US$4,000 per year per candidate. The master planning contract would involve about 75 man-months at US$8,000 per month, the financial consultant contract about 50 man-months at US$7,500 per month, the FALPRO contract about 12 man-months at US$6,000 per month and the construction super- vision contracts about 625 man-months at US$7,000 per month. G. Financing and Disbursement 4.50 Apart from the UNDP-financed customs facilitation study (para 4.31), the proposed. Bank loan would furnish the funds to cover the foreign exchange component (para 6.15). FAN would furnish the remainder from internally generated funds. 4.51 Disbursement of funds from the loan would be on the following basis: (a) 100% of foreign expenditures for equipment and its installation; (b) 100% of foreign expenditures for technical assistance and training; (c) 100% of foreign expenditures for foreign consultant services and 50% of total expenditures for local consultants; and (d) 59% of total expenditures for civil works. A schedule showing the estimated rate of disbursement is given in Table 4.2. Disbursement is expected to run through June 1984. The closing date should be December 31, 1984. H. Ecology 4.52 The ecological and environmental effects of the development of the project airports were taken into account during the siting and preliminary design studies for the new Rionegro Airport at Medellin and the expansion of  - 30 - Crespo Airport at Cartagena and would be a major factor to be considered during the evaluation of the second runway site for Eldorado and the revised Master Plan. 4.53 Closing the existing airport at Medellin would eliminate the aircraft noise problem there. The release of the existing airport land at Medellin would place much needed land back in the hands of the city for urban develop- ment. This land could support 8,000 to 10,000 families if used for residential purposes. The new airport would take 580 hectares out of agricultural pro- duction and would displace about 100 families. The new site does not contain any historical sites or other areas needing preservation, and no wildlife of significance would be affected. 4.54 The expansion of the Crespo terminal building would require acquisi- tion of about 30 low value houses. The expansion of the runway would take place on unproductive land already impacted by low flying aircraft. 4.55 The proposed development at Eldorado would occur on airport land and would not affect the environment except for a possible increase of activity as time goes on. V. ECONOMIC EVALUATION 5.01 The project would result in significant savings in costs for Colombian domestic and international air transport through more efficient use of aircraft and improvements in the reliability of services. The improvements would provide facilities to cope with the increasing volume of air traffic and remove significant restrictions now imposed at Medellin and Bogota in order to maintain acceptable safety standards. Both the costs and designs for the facilities proposed were reviewed during appraisal to assure that the minimum cost solutions would be adopted. Benefits and costs for each major project component are discussed in the following section. A. Medellin 5.02 At Medellin, the need for a new airport, and the principal justifi- cation for the project, stems from the inability of the present airport to cope with traffic demand in the foreseeable future and the dependence of the city on air services for business and personal contacts with other cities in Colombia. It is estimated that, from around 1983, airspace limitation would impose increasing traffic congestion, and, even with allowances for improved aircraft handling techniques, limits to the volume of traffic that could be accommodated would be reached by about 1988. The new site at Rionegro provides a viable solution for maintaining accessibility to Medellin and, at the same time, provides opportunities for improved services by removing operating restrictions. 5.03 One of the aviation-oriented industries particularly favored by the new airport is the small but rapidly growing flower farming centered at Rionegro itself. Just as export flower growing has spread from the Bogota savannah to neighboring Cundinamarca, so these activities have sprung up  - 31 - around other international airports at Cali and Medellin. At Medellin, the new site would remove restrictions imposed by the closure of the airport at sunset on the time available for harvesting, and the avoidance of flight cancellations in poor visibility would tend to improve average prices received for the flowers by assuring prompt delivery. 5.04 Closure of the present airport also has important economic -nefits for the city of Medellin through the potential urban uses of the land. Urban population growth, at 4.2% p.a., is among the highest in Colombia, while land within the Valle de Aburra suitable for urban uses is becoming increasingly scarce and expensive to develop. It is estimated that the airport site could accommodate one to two years growth for the city, allowing suitable areas for commercial, residential and recreation uses, with significant savings in the costs of utilities and services, and in urban transport for residents and workers. 5.05 Calculation of the rate of return for the new airport takes into account the net savings in aircraft and passenger time costs through the avoid- ance of delays and congestion, an estimate of the benefits for the additional passenger capacity of the new airport, the net effect on freight shippers from the under-avaLilability of freight services, and savings in urban development costs through the redevelopment of the existing airport. Costs include con- struction of the new airport, its access link and maintenance and operating costs for the new site. Capital costs otherwise necessary at the present airport have been deducted. 5.06 Vehicle costs, obtained from the airlines and estimated by the consultants, were adjusted for the taxes and duties on imported equipment and spare parts, and to reflect the landed rather than market price of petroleum. For ground public transport vehicles, 67% of salary costs were used to reflect the shadow price of unskilled labor. The overall estimates were then adjusted to reflect the expected relative price changes between local and foreign elements of operating costs. Table 5.1 shows average cost by vehicle type used in the evaluations. 5.07 Domestic time values are based on passenger survey data for 1972 and 1977, showing journey purpose and household income for air passengers. Air passenger income levels from the 1972 survey were updated to 1977 on the basis of general trends in income levels. These estimates are shown in Table 5.2., No time values are applied in cost or benefit streams for international travelers. (i) Betnefits Involving Time Savings (a) Weather Delays 5.08 Delays due to early morning cloud and other weather conditions at Olaya Herrera were compared with estimates for Rionegro based on a comparison of airline schedules and meteorological data for the new site for 1976 and 1977. From the resulting estimate of net additional delays per aircraft, passenger delays were estimated by applying average passengers per aircraft for each type, and allowing for the double delay to departing passengers for both the late arrival of the aircraft and the departure delay itself. Thus  - 32 - the average delay saving of around 650 aircraft hours for 1976/77 is equiv- alent to around 85,300 passenger hours. Costs were estimated using the time and vehicle cost values given above and were projected, making allowance for the change in aircraft mix. Benefits from savings in weather delays are held constant after 1988 when it is estimated that physical saturation of the existing airport would occur. (b) Flight Cancellations 5.09 Flight cancellations at Olaya Herrera affect mainly afternoon flights when meteorological conditions force early closure of the airport. Since night flights are not permitted, passengers are delayed overnight, either in Medellin or elsewhere. At Rionegro, on the other hand, the airport would be fully equipped for instrument and night flying, and such cancellations would be very rare. Since it seems reasonable to presume that passengers at this time of day would be completing rather than starting journeys, the passenger cost has been estimated at 12 hours at the leisure rates. The number of passengers affected for 1977 is projected, making allowance for the changing aircraft mix up to 1988, and thereafter held constant. No allowance is made for accommodations or other costs. Aircraft costs for the domestic fleet have been estimated at two hours, being the average difference between the sunset and the normal cessation of service. (c) Capacity Delays 5.10 In 1983, it is projected that traffic at Medellin would reach the practical capacity of Olaya Herrera, estimated from air traffic control records and other data at 30 movements per hour or 65,000 movements per year. This is well below the 48-55 movement rate that would be expected with two-way instrument runway operations, and, hence, the move to Rionegro would avoid significant delays during good weather periods due to traffic congestion. Forecasts of congestion delays at Olaya Herrera and Rionegro are based on standard techniques developed by the US Federal Aviation Administration 1/, and the difference is converted to passenger time savings using average passengers per aircraft for the different type groups. Because the limitation at Olaya Herrera is one of airspace rather than ground facilities, airspace saturation would be reached fairly quickly, so that not even by increasing delays would the amount of air traffic be increased. It has been estimated that this physical limit would be approximately 20% above the practical capacity or 78,000 movements per year and would be reached in 1988. (d) Shorter Flight Time 5.11 The new site of Rionegro is located close to the flight paths for the existing airport and in the locality of the VOR beacon at Santa Helena. All aircraft using instrument navigation and all those flying visual flight rules except on north-south routes pass over this aid enroute to Olaya Herrera (approximately 90% of all flights). Shorter flight distances and times are therefore involved at Rionegro for air traffic to and from Medellin -- averaging between 5 and 12 minutes per movement, depending on the aircraft. Cost savings were estimated taking into account the changing aircraft mix in the forecast years. 1/ Techniques for Determining Airport Airside Capacity and Delay, Report No. FAA-RD-74-124, June, 1976.  - 33 - (e) Ground Access 5.12 Access to Rionegro involves, on average, an additional 27-km surface journey. Costs involved were calculated assuming a 50% split for domestic business travelers between private automobiles and taxis, with all other domestic passengers traveling by bus. International passengers were split 50-50 between cars and buses. The calculation of vehicle costs takes account of the effects of different types of terrain and the projected domestic passenger time costs, considering the average speed achievable under different road conditions. The vehicle flow projection of 50 vehicles per hour in 1983 increases to 113 vehicles per hour in 2000 - both well within the estimated capacity of the existing main highway; therefore, no allowance has been made for upgrading or expansion of this highway in the future. An allowance of Col$ 3 million per year has been included in the economic cost stream to reflect additional maintenance requirements. (f) Overall Time Savings 5.13 Overall, the time savings result in net discounted vehicle cost savings of :ol$ 6,569 million and estimated additional passenger time costs of Col$ 915 million (Table 5.3). (ii) O)ther Benefits 5.14 Other benefits included in the analysis are discussed in para- graphs 5.15 through 5.19. (a) Oversaturation 5.15 After 1988, the amount of traffic that could not be handled at Olaya Herrera quickly becomes very significant. By 1995, it represents over one-quarter of the domestic aircraft movements. Because this represents a much more than marginal change in travel patterns, it is reasonable to presume that some passengers would undertake journeys on the next best alternative. As a proxy for the economic benefits of the additional traffic handling capacity at Rionegro, calculations have been made of the additional user costs involved in transporting the "denied" passengers by surface modes. The calculations are based on a unique demand curve for travel, covering all trip purposes and modes. 5.16 Estimation of the volume of traffic using alternative transport after 1988 is made under the assumptions that diverted traffic has the same general characteristics as the peak hour flow and that all international flights are: completed. Both assumptions lead to a lower overall estimate of alternative transport costs. For each origin and destination and for each journey purpose, costs per passenger for bus and taxi modes were calculated and the lower compared with the corresponding air journey cost, calculated on a city center to center basis. In neither case was the effect on infrastruc- ture costs included. The resulting benefit stream, reflecting the lower economic net costs in air transport for passengers, rises from Col$ 73 million in 1990 to Col$ 1,329 million in 2000.  - 34 - (b) Urban Uses of the Existing Site 5.17 Benefits from the use of the existing airport site were calculated by comparing alternative proposals for its urban use with costs of providing an equivalent development in typical fringe areas around Medellin. The alternatives for the Olaya Herrera site are consistent with the parameters used in the redevelopment of the airport site at Bucaramanga, based c the concept of an integrated medium/high density development, while fringe devel- opment around Medellin is much more dispersed, usually with no provision for employment or industrial areas. Development of the site is estimated to result in savings in the costs of providing roads and basic services of between Col$ 360 and Col$ 570 million, approximately Col$ 170 million per year in urban transport costs of residents of the new area, and Col$ 12-23 million in general congestion of major access links in the city. It is estimated that the redevelopment could be accomplished within five years after the closure of the airport. (c) Air Freight 5.18 Air exports and imports at Medellin have been growing at an average rate well over 30% p.a. for the last ten years, which is considerably above passenger growth. A significant portion of this freight travels via domestic services to other gateway airports and is expected to continue to do so throughout the forecast period. At Rionegro, this traffic could be easily accommodated, given the very high load factor (70%) of belly-hold cargo space in Colombia. At Olaya Herrera, however, the capacity limit would lead to a reduction in the volumes that could be carried, beginning at around 2,000 tons each for imports and exports in 1990 and rising rapidly thereafter. For imports, the costs so imposed have been estimated as an additional day's stockholdings on the assumption that, in such circumstances, some form of express land transport would be available to make connections at other inter- national airports. The stockholding cost is estimated at 12% of the average capital cost for one day's imports susceptible to air freight. Since most of the air exports are expected to be perishables (flowers, vegetables), costs have been estimated at the value of lost production to Colombia. For non- perishable air exports (e.g., fashion goods), additional transport costs exceed value added, and it is assumed that these would also be suppressed. The benefit stream for Rionegro increases from about Col$ 13 million in 1990 to about Col$ 100 million by the turn of the century. 5.19 Overall, the majority of the net benefits for the new airport at Rionegro accrue to domestic airlines and passengers, with most of the rest going to residents of the area. Discounted at 12%, the net benefits to air- lines and passengers are Col$ 5,300 million and for the general public are Col$ 1,400 million, not including benefits from reduced noise and pollution in the city. Table 5.3 illustrates the composition of the benefit flows. The rate of return on the new airport is 24%, reducing to 14% for the low traffic forecast. Excluding time values, the project shows a 27% return, since overall time savings are negative. Table 5.4 shows details.  - 35 - B. Bogota 5.20 Bogota is the principal focus of air traffic in Colombia, and con- ditions there affect the efficiency and reliability of services throughout the network. Expansion of the loading areas, aircraft parking and improvements in passenger traffic flow and baggage claim would shorten the time required for aircraft loading and unloading and, hence, improve fleet utilization. The mainline domestic fleet aircraft in Colombia are in service for 13-14 hours per day, including about 7-1/2 flying hours. For aircraft based at Bogota and flying an average of six hub and spoke flights per day, the savings in turn- around time would accumulate to the equivalent of an additional flight per day. Provision of additional positions at the international finger (which also copes with domestic overflow) would avoid aircraft delays while waiting to unload, arising from both the increasing traffic and the greater use of large-capacity aircraft. Strengthening the taxiway at Bogota would also avoid the imposition of weight/range limitations on these larger aircraft which would otherwise negate the economies which they offer. 5.21 Benefits are calculated on the savings to the domestic fleet through faster turnaround of aircraft, reduced delays to Colombian aircraft in inter- national operations and the avoidance of the weight penalties on Colombian wide-bodied, aircraft. The terminal expansion is expected to provide adequate capacity until the early 1990s while the normal life for the taxiway strengthen- ing is seve!n years. Unquantified benefits include unobstructed passenger flows, particularly for arrivals, greater efficiency and security in baggage claims and improved facilities for handling freight carried on passenger aircraft. 5.22 Ihe rate of return on the improvements is 20%, reducing to 16% for the low traffic forecast. C. Cartagena 5.23 At Cartagena, the airport works are part of a general expansion of tourism facilities. In the past three years, bed capacity has trebled, and when the 600-bed Cartagena Hilton opens in 1979, there will 8,600 beds avail- able, including apartment and guest house accommodations. Improvements are being made to water supply and sewerage systems, and the city has embarked on a scheme to redevelop the old market site and nearby waterfront as a convention center and yacht marina. 5.24 Although foreign tourism is very visible in the city, domestic tourism represents the majority of visitors and facilities. Less than a quarter of the accommodations in the city are of the standard typically used by foreign tourists. The average length of stay for non-charter traffic is three nights. Because of the preponderance of domestic tourists in the overall traffic, improvements in the terminal area would provide benefits mostly to them. 5.25 The majority of foreign tourists arrive from North America by charter flight, arranged by three large tour operators. Avianca has recently opened a sales office in Vancouver, and Colombia is negotiating scheduled traffic rights to eastern Canada. The main tourist season is between November and March, with a minor domestic peak during July and August.  - 36 - 5.26 Lengthening and strengthening the runway at Cartagena would allow aircraft to fly non-stop to Canada and the midwest of the United States, significantly reducing the costs of flights and improving Cartagena's relative attractiveness while opening new potential markets. The apron expansion, access roads and carparks are complementary to the new terminal buildings being constructed. Together, the new facilities would be sufficient for normal traffic requirements until the early 1990s. 5.27 The promotion of Cartagena as a tourist destination began in 1974 when Colombian rules governing charter operations were relaxed, and it has coincided with a general slackening in Caribbean tourism. However, with the apparent revival at many well established destinations during the 1978 season, it is not certain that Cartagena could retain its present market position, taking into account the relatively higher costs for tour operators and the wide range of alternative destinations. Nevertheless, Cartagena has an interest in the tour visitors, anticipating the prospects for developing a wider range of regular air connections for the city and its industries. 5.28 Since the airport improvements are part of a wider tourism infra- structure program, it is difficult to separate precisely the benefits attri- butable to them. The approach has therefore been taken of including, for international traffic, only payments made by tour operators and passengers for the use of airport facilities and gross margins on spending related to exist- ing hotel capacity. For domestic traffic, benefits include savings in apron delays and unquantified savings in road and carpark congestion. The return on the project is 14%, rising to 17% for the low traffic forecast because of the increased useful life of the facilities to be provided and the greater influence of the rapidly rising benefits to domestic traffic. D. FFI Aircraft 5.29 Between 1972 and 1979, when the current installation program is completed, the number of enroute and terminal area navigation aids in service in Colombia will have doubled. These aids will provide safe and reliable navigation on the major domestic routes of the country and, for the first time, in the Llanos and Amazonas areas. The task of inspecting, calibrating and, when necessary, recalibrating these aids is now beyond the capabilities of the existing DC3 FFI aircraft. First, the number of test hours required has more than doubled from 1,320 hours in 1972 to 2,760 hours in 1979 plus about 150 additional ferry hours; and, second, the older equipment now installed in the DC3 requires recalibration between test flights in the higher, cooler areas and those on the coast. Additionally, the aircraft does not have the speed or altitude capabilities necessary to provide reliable enroute checks for jet aircraft aids. 5.30 The proposal to purchase a second aircraft to perform flight checks on main route navigation equipment and to re-fit the existing aircraft for permanent duty in coastal and other low altitude areas was tested against the alternative of hiring a suitable test aircraft from a neighboring civil aviation administration, at the going rate of US$700 per hour. Based on the proposed flight plan for the two aircraft (Table 5.5), the options would be:  - 37 - Annual Cost US$ (million) (a) hire aircraft for all checking and testing 2 (b) use the DC3 in coastal areas (1,010 hrs) and hire aircraft for main routes (1,750 hrs) 1.5 (c) hire aircraft for coastal areas (1,010 hrs) and purchase a new aircraft for major routes (1,750 hrs) 1.2 (d) uEe the DC3 for coastal areas (1,010 hrs) and purchase a new aircraft for major routes (1,750 hrs), as proposed 0.7 5.31 Option (a) is the highest cost solution and is rejected; option (c) has a lower cost than (b) but does not avoid the purchase of a new aircraft. The benefits of the proposal, option (d), are therefore taken as the cost savings of approximately US$775,000 per year by comparison with option (b). At an estimated capital cost of US$4.5 million, including the necessary training, the rate of return is 15%, independent of traffic fore- casts. E. Overall Proiect Returns and Benefit Distribution 5.32 The economic return is estimated at 24% for Medellin, 20% for Bogota, 14% for Cartagena and 15% for the flight inspection aircraft. Overall, the project has a return of 22%, reducing to 13% for the low traffic forecasts. Benefits considered accrue initially to Colombian airlines and passengers, mainly on business journeys (Table 5.3). The efficiencies for the airlines, and resulting lowering in future real travel costs, would assist in easing constraints on long distance passenger travel and in facilitating the expan- sion of business activity depending on air freight. The direct savings for airlines arLd users over the period are the equivalent of a reduction of 5-6% in reall domestic fares and freight rates over the first ten years of the project. Although it is difficult to determine precisely which activities would be most favorably affected by the project, the principal users of both passenger and freight services are the manufacturing sector and perishable export producers, while agricultural processing industries and the commercial sector are proportionately important users. Apart from the tourism and re- lated industries in all three cities, the principal non-user benefits from the projeci: accrue to the residents of Medellin, both through the more efficient use of land within the Valle de Aburra and through the provision of an employment pole at Rionegro. Studies are to be made to determine the most appropriate means of achieving these last benefits. F. Project Risks 5.33 Two types of risk affect the project. First, the need to seek financing for some project items arose in part from poor planning coordination  - 38 - within DAAC and the implementation of a large equipment purchase and instal- lation program in 1974 which exhausted funds originally allocated to ongoing civil works. Since then, subsequent administrations in DAAC have taken a variety of corrective measures (paras 3.07 to 3.11), and the DAAC Planning Department now plays a central role in setting priorities and the preparation of forward investment plans (para 2.13). Additionally, the preparation of a comprehensive financing plan covering DAAC's entire investment program (Chapter VI), coupled with improved planning and carefully prepared implemen- tation arrangements (Chapter IV), would tend to ensure that the risk of poor performance is minimal. 5.34 The second type of risk, related to possible variations in traffic levels and project costs, would affect the econo'mic return. As noted above, the project has an acceptable return (13%) under the low traffic forecast, which averages 4% for domestic traffic and 8% for international traffic. In other sensitivity tests, project costs were increased by 20%, leading to returns of 16%, 20%, and 10% for Bogota, Medellin and Cartagena respectively, with an overall return of 19% (Table 5.3). 5.35 Since the viability of the project for a new airport for Medellin is not solely tied to potential savings in aircraft operating costs but is crucially linked to the willingness of all passengers to triavel an additional 40-50 minutes to a more distant site in order to avoid delays to some passen- gers because of operating restriction at Olaya Herrera, domestic passenger time has been included in the central rate of return estimate. Overall, net time savings for passengers are negative, and, if excluded entirely, the return on the Medellin project would be 27%. If Olaya Herrera Airport were not closed but remained open for light aircraft traffic, the rate of return would drop to 16%. VI. FINANCIAL ANALYSIS A. Existing Situation 6.01 For the period 1970 to 1977, DAAC/FAN has been able to maintain its working expenses at a reasonable level considering the increases in volume of traffic and prices. For this period, the average annual increase was 36%. These increases in working expenses were more than offset by DAAC/FAN-generated operating revenues, which also experienced annual average increases of 36%. These increases in revenue were caused by substantial traffic growth supplemented by tariff increases beginning January 1, 1976. 6.02 In every year, revenues generated by DAAC/FAN were sufficient to cover working expenses and debt service and make a contribution to investment except in 1976. During this period, DAAC/FAN made significant improvements in covering its total cash requirements from FAN-generated revenues for each year. The contributions toward total cash requirements increased from 47% to 70% through the years 1970 to 1977. The Government made budget transfers as necessary which covered approximately 90% of DAAC/FAN investments in this period and 40% of debt service in 1976. However, as the financial performance of DAAC/FAN improved, the percent of total cash requirements received from the Government was reduced substantially from 67% to 17% through the years 1970 to 1977. The amounts of Government inputs equivalent to equity and their percent- ages of working expenses, investment and debt service covered are as follows:  - 39 - % of Total Cash Requirements Government Inputs for Operations, Investment and Year Equivalent to Equity Debt Service (Col$ millions) (Current prices) 1970 125.8 67.5 1971 115.0 44.6 1972 135.9 46.8 1973 84.6 23.7 1974 189.4 24.5 1975 56.7 5.9 1976 206.7 26.9 1977 185.1 16.9 The Government inputs are shown in Tables 6.1 and 6.2. 6.03 Ia 1974 and 1975, a relatively large investment program was undertaken in civil works, navigational aids and communications equipment. This investment, which should have been phased in over a period of several years, unfortunately incurred external debts for DAAC/FAN for the navigational aids and communications equipment for 1974 and 1975, amounting to Col$ 202.8 and Col$ 414.6 million respectively. In 1976, when the first large debt service payments were due, DAAC/FAN did not have sufficient funds available to meet this obligation, and great difficulties were encountered trying to install the navigational aids and communications equipment. As a result, the Government made a large input in 1976 to cover the shortfall (Tables 6.1 and 6.2). 6.04 ]n the latter part of 1976, a new Director took charge of DAAC/FAN. Since then, there have been improvements. Approximately 90% of the naviga- tional aids and communications equipment have been installed. A reasonable five-year civil aviation investment plan has been prepared for the whole of Colombia, and Law 3 of 1977 has been enacted, which permits a better adminis- trative reLationship between DAAC and FAN, wherein the head of DAAC is also the legal head of FAN. The new head of DAAC gave full support to the financial aspects of FAN and, as a result of much effort, was able to bring the financial statements up to date. 6.05 Accounting records of the revenue and expenditure items are kept at DAAC/FAN headquarters. The records are maintained so that revenues and expenses are identified for principal airports, but expenses are not allocated by type of service (para 6.12). A reasonable breakdown of revenues and expenses for the project airports for 1976 was obtained. A review of the financial state- ments shows that increasing delays have occurred in the collection of revenues. If this condition continues, DAAC/FAN would encounter difficulties in meeting its cash requirements (para 6.13). 6.06 Accounts are currently subject to review by a Government comptroller who works with DAAC/FAN. With his assistance, DAAC/FAN has been able to produce current financial statements through 1977. The assets of DAAC/FAN have been revalued, and this is reflected in the balance sheets for 1976 and 1977 (TabLe 6.3). Although the comptroller performs some of the functions of an auditor in his review, the financial operations of an entity the size of DAAC/FAN should be reviewed by an independent external auditor (para 6.14).  - 40 - B. Financial Obiectives 6.07 Government policy has been to maintain DAAC/FAN domestic tariffs at a low level in order to encourage aviation development. The domestic passenger tax is 15% of the amount charged to international passengers, and the domestic landing fees are 28% of those charged for international landings. The current level of tariffs would not permit DAAC/FAN to cover its maintenance, investment and debt service requirements for the planned development program (1978-1983). DAAC/FAN should develop a rational plan for covering all working expenses, including salaries and miscellaneous expenses, in order that the Government would no longer need to cover these expenditures, as at present. However, during the period 1978-1982, even with the tariff increases provided for (para 6.09), Government inputs equivalent to equity are necessary. The Government proposes to provide these inputs by continuing to help DAAC/FAN meet its salaries and miscellaneous expenses. The net amounts of these estimated inputs (National Budget Allocation, less 10% transfer of revenues from FAN to the Ministry of Finance), which are specifically designated for payment of DAAC salaries and miscellaneous expenses, in accordance with Law 3, and their percentage of working expenses, investment and debt service, are as follows: % of Total Cash Requirements for Operations, Investment and Year Net Government Inputs Debt Service (Col$ in millions) (current prices) 1978 514 34.1 1979 659 20.9 1980 779 23.8 1981 897 22.9 1982 1,036 23.6 Total 3,885 These percentages are approximately the same as those experienced by the Government in the period 1970-1977 (para 6.02). While this arrangement is different from those experienced in other countries, it is the only way in which the Government can contribute equity toward the investments of FAN under existing law. It is a common practice in the developing countries for Governments to make equity inputs to the aviation authorities. It is important to note that the Government inputs are not required for the project but would permit DAAC/FAN to carry out the non-project investment program. 6.08 The current leakage of FAN revenues should be corrected in such a manner that DAAC/FAN would receive compensation for services rendered to passengers (para 3.09). It was agreed during negotiations that DAAC/FAN would make the necessary arrangements to collect all revenues in accordance with the current tariff regulations.  - 41 - 6.09 WhiLe it would be desirable for DAAC/FAN to cover all of its oper- ations, maintenance, investment and debt service requirements during the period (1978-1982), this is not possible with the proposed level of investments. The Ministry of Finance would need to continue to cover all salaries and miscellaneous expenses of DAAC/FAN during these years (para 6.07). It was agreed during negotiations that tariffs and other charges would be main- tained to keep them constant in real terms at their 1977 year end level for the period 1979 through 1982. It was also agreed during negotiations that the Government would make available to DAAC/FAN, annually, sufficient funds to cover its salaries and miscellaneous expenses for the period 1978-1982. The financial projections reflect these agreements. 6.10 Even with these increases, in 1984 and thereafter DAAC/FAN would not be able to cover total working expenses (including salaries and miscellaneous expenses), investment and debt service without further tariff increases. Therefore, in. the projections, total revenues have again been adjusted in 1984 to reflect inflation in the year 1983. As a result of these tariff increases, DAAC/FAN would be financially self-sufficient and would not require budget transfers from the Ministry of Finance in 1983 or thereafter (Tables 6.4 and 6.5). It was agreed during negotiations that such adjustments to tariffs as are necessary would be applied to produce sufficient revenues to allow DAAC/FAN to cover all working expenses, investment and debt service after 1982 and to achieve a return on annually revalued net fixed assets of no less than 6% in 1980, 7% in 1981 and 8% in 1982 and thereafter. It was also agreed during negotiations that the project airports would meet the following individual financial goals: operating ratios would be no greater than 85 at Medellin, 45 at Bogota and 45 at Cartagena by 1983 and gradually decline thereafter (Annex 3). Because of the tariff increases necessary in 1979 through 1984 for DAAC/FAN to meet its operating, investment and debt service requirements, satisfactory rates of return on net fixed assets are possible in the years following the physical completion of the project. 6.11 Since DAAC/FAN may finance new investments through debt, it was agreed durinig negotiations that FAN would not incur any long-term debt unless its net revenues for the fiscal year next preceding such incurrence or for a later twelve-month period ended prior to such incurrence, whichever amount is greater, shall not be less than 1.5 times the maximum long-term debt service requirements for any succeeding fiscal year on all long-term debt, including long-term debt proposed to be incurred. Debt service coverage indicators are shown in Annex 3. 6.12 The accounting system is inadequate and should be redesigned to supply information for each individual airport and by classifications necessary to formulate and review user charges. Following these improvements, the structure and level of airport tariffs should be reviewed. The accounting system should also include provision for the proper valuation and disposal of assets. DAAC/FAN realizes these deficiencies and needs assistance for improve- ment in this area. The assistance for the redesign of the accounting system would be provided by consultants funded through a loan which has been obtained  - 42 - from FONADE. In addition, the project would provide funds for a consultant to review and make recommendations on the structure and level of user charges (para 4.42). Agreement on implementation of this study was reached during negotiations. Also, during negotiations, it was agreed that, after implemen- tation of the new accounting system and review of user charges, an improved structure of airport user charges would be set and collected at all airports, where feasible, and that the tariff study would be sent to the Bank for comment by January 1, 1980 with implementation by June 30, 1980. 6.13 At the time of negotiations, it was agreed that receivables and payables would not be more than 25% (which approximates 90 days receipts and payments from the date of billing) of operating revenues and working expenses respectively (para 6.05). 6.14 During negotiations, an agreement was reached with DAAC/FAN that certified copies of the audited annual accounts by independent auditors satisfactory to the Bank would be furnished to the Bank not later than four months after the end of each calendar year. C. Financial Plan 6.15 The total cost of the project is estimated to be US$97.76 million, of which approximately 62% would be in the form of a Bank loan to the Govern- ment, the proceeds of which would be transferred to FAN. Except for UNDP financing for the customs facilitation study (US$70,000), the balance would be provided by FAN from its revenue generation: 1978-1983 Col$ Million US$ Million (a) Bank loan 3,893.8 61.00 (b) FAN 2,160.0 36.76 6,053.8 97.76 6.16 Since it is expected that providing these funds would exhaust DAAC/FAN internally generated revenues, it was agreed during negotiations that DAAC/FAN would consult with the Bank on, and not undertake, any invest- ment above US$1.0 million at any one airport until the closing date (except for investments in the approved five-year plan), unless it is economically and technically justified, and FAN has obtained financing which will not adversely affect its financial condition, or the carrying out of the project. It was also agreed that FAN would obtain the concurrence of the Bank before committing itself to any other capital expenditure which would be greater than 20% of planned investments in the agreed development program in any given year. D. Financial ProJections (i) Operating Results 6.17 DAAC/FAN operating revenues by category for 1978 and projected through 1990 are set out in Table 6.4, and the projected operating statements are given in Table 6.5. The financial assumptions on which these are based are listed in Annex 4. Summarized forecast results for 1978, 1980, 1985 and 1990 are as follows:  - 43 - DAAC/FAN 1978 1980 1985 1990 ----------Col$ Million---------- Revenue 1/ 1,534 2,801 4,375 6,270 Expenses 1/ 861 1,303 2,400 2,729 Working Surplus 673 1,498 1,975 3,541 Depreciation 302 447 960 973 Operating Income 371 1,051 1,015 2,568 Interest 124 261 432 203 Net Surplus 247 790 583 2,365 1/ Assumes that the Government would cover salaries and miscellaneous expenses, which are included, through 1982, which would permit DAAC/FAN to cover its maintenance, investment and debt service requirements. DAAC/FAN would cover these expenditures and discontinue the 10% transfer of revenues to the Ministry of Finance in 1983 and thereafter. 6.18 In every year throughout the projection period except 1978, FAN revenues cover all working expenses, including depreciation or debt service, whichever is greater. The budget allocation by the Government is required for salaries and miscellaneous expenses from 1978 through 1982 so that FAN may cover its maintenance, investment and debt service. Therefore, the financial objectives could be met in all years of the project (para 6.10). 6.19 The projected operating statements for the project airports are set out in Tables 6.6, 6.7 and 6.8. All of the existing project airports develop sufficient traffic to generate revenues greater than operating expenses beginning in. 1978 through the project period and thereafter. The working surplus from these major domestic airports would make a contribution toward covering the local funds required for investments and associated debt service of the project. (ii) CaLsh Flow 6.20 A projected cash flow for DAAC/FAN, based on the assumptions contained in paragraph 6.09, is shown in Table 6.9. Provision has been made for the rep]acement of assets included in the project, when required. A summary of the cash flow for the construction period is set out below:  - 44 - DAAC/FAN 1978 1979 1980 1981 1982 1983 ------------------Col$ Million-------------------- Source of Funds From Operations 673.0 1153.0 1498.0 1918.0 2398.0 1504.0 Loan - World Bank - 289.4 855.4 819.7 1086.9 575.1 7/ Other I/ 131.0 - - - - - Government Equity 2/ - 450.0 - - - External Loan 3/ - 165.0 168.0 - -- Sale of Land 4/ - - - - - 1025.0 Total 804.0 2057.4 2521.4 2737.7 3484.9 3104.1 Application of Funds Capital Investments 5/ 533.0 1883.0 1646.8 1986.1 2141.0 1068.5 Repayment of Loans - Principal 127.4 180.9 246.2 311.2 337.7 716.9 Interest 124.4 162.0 260.9 322.0 395.8 458.9 Total 784.8 2225.9 2153.9 2619.3 2874.5 2244.3 Cash Surplus 19.2 (168.5) 367.5 118.4 610.4 859.8 Opening Balance 153.3 172.5 4.0 371.5 489.9 1100.3 Closing Balance 172.5 6/ 4.0 371.5 489.9 1100.3 1960.1 1/ Includes 45 million surplus from operations and 86 million received from the Ministry of Finance for investment. 2/ Bilateral agreement with the Government of France for navigational aids. 3/ External loan for cash requirements in 1979 and for acquisition of Crash, Fire and Rescue Equipment in 1980, to be repaid by the Government of Colombia. 4/ Sale of land at present Medellin airport. 5/ Includes all items with the Investment Plan including the proposed project. 6/ Assumes DAAC/FAN would retain two months working expense for 1979 and the balance of year 1977 cash would pay for work already contracted prior to 1978. 7/ Does not include the Col$ 267.3 million, since this disbursement in 1984 is after project works are completed and is the result of six-month period to effect disbursements. 6.21 Projected balance sheets for 1978-1990, which reflect revalued assets, are included in Table 6.10. Since it is not certain that the current asset base has been adequately revalued or what the actual future price increases will be, it was agreed during negotiations that a study would be carried out by a consultant who would provide for the valuation and revaluation of assets in subsequent years. A provision for this study is included in the loan (paras 4.42 and 6.12). The final report should be completed by January 1, 1980, and DAAC should implement the recommendations agreed upon in consultation with the Bank. Rates of return for DAAC/FAN (para 6.10) would be reviewed in light of the results of this study. Agreement on these points was reached during negotiations.  - 45 - VII. AGREEMENTS REACHED AND RECOMMENDATION 7.01 During negotiations, assurances were obtained from the Government regarding the following: (a) that DAAC would, with technical assistance to be provided under the project, undertake a review of its tariff-setting procedures, provide such review to the Bank for comments by January 1, 1980 and establish improved guidelines for approving fare adjustments by June 30, 1980 (para 2.17); (b) that a study of DAAC's accounting system and a determination of whether its volume of activity warrants computerization would be conducted by a consultant with a loan from FONADE and completed by July 1, 1979, that the Bank would be consulted about the implementa- tion of the recommendations of the study and that the recommenda- tions accepted would be implemented by December 31, 1979 (para 3.11); (c) that, until the closing date of the project, the non-project investment plan would be reviewed annually by DAAC and the Government in consulta- tion with the Bank (para 3.15); (d) that adequate maintenance in accordance with accepted practices and good engineering concepts would be provided at all facilities of DAAC/FAN (para 3.18); (e) t.hat Olaya Herrera Airport would be closed upon completion of the new airport at Rionegro, the land sold, and the proceeds of the sale t:urned over to FAN and that, prior to the sale of the land, a study of potential uses of the site would be made by the Government or its consultants, in consultation with the Bank, by the beginning of 1981 (para 4.13); (f) t:hat the portion of the new Medellin airport access road outside of t:he airport property line would be turned over to the Ministry of Public Works and Transport for ownership and maintenance (para 4.14); (g) that no additional works other than the proposed project and other investments in the approved plan would be carried out at Crespo and that, in consultation with the Bank, DAAC would prepare an aviation master plan for the Cartagena area through the year 2000 and present it to the Bank for review by June 30, 1980 (para 4.19); (h) that a study of customs procedures would be made by FALPRO and that the recommendations of the study would be implemented as agreed between the Government and the Bank before June 30, 1979 (para 4.33); (i) that all advisory personnel assigned to this project would be selected in consultation with the Bank (para 4.39); (j) that a training plan would be prepared by DAAC, with suitable assis- tance and in consultation with the Bank, by January 1, 1979 (para 4.40); (k) that the financial consultants' final report would be completed by January 1, 1980 and that DAAC would implement those recommendations agreed upon in consultation with the Bank (paras 4.42 and 6.21); (1) that DAAC/FAN would make the necessary arrangements to collect all revenues in accordance with current tariff regulations (para 6.08);  - 46 - (m) that tariffs and other charges would be maintained to keep them constant in real terms at their 1977 year end level for the period 1979 through 1982 (para 6.09); (n) that the Government would make available to DAAC/FAN, annually, sufficient funds to cover its salaries and miscellaneous expenses for the period 1978-1982 (para 6.09); (o) that such adjustments to tariffs as are necessary would be applied to produce sufficient revenues to allow DAAC/FAN to cover all operating expenses, investment and debt service after 1982 and to achieve a return on annually revalued net fixed assets of no less than 6% in 1980, 7% in 1981 and 8% in 1982 and thereafter (para 6.10); (p) that the project airports would meet the following individual financial goals: operating ratios would be no greater than 85 at Medellin, 45 at Bogota and 45 at Cartagena by 1983 and gradually decline thereafter (para 6.10); (q) that FAN would not incur any long-term debt unless its net revenues for the fiscal year next preceding such incurrence or for a later twelve-month period ended prior to such incurrence, whichever amount is greater, shall not be less than 1.5 times the maximum long-term debt service requirement for any succeeding fiscal year on all long- term debt, including long-term debt proposed to be incurred (para 6.11); (r) that the new accounting system would be implemented and a review of user charges completed by a consultant and sent to the Bank for comment by January 1, 1980 followed by preparation of an improved structure of airport user charges by June 30, 1980 (para 6.12); (s) that receivables and payables would not exceed 25% of operating revenues and working expenses respectively (para 6.13); (t) that DAAC/FAN would furnish to the Bank certified copies of the audited annual accounts by independent auditors satisfactory to the Bank, not later than four months after the end of each calendar year (para 6.14); and (u) that, except for investments already in the approved five-year plan, FAN would consult the Bank on any investment above US$1.0 million at any one airport until the closing date and that FAN would obtain the concurrence of the Bank before committing itself to any other capital expenditures which would be greater than 20% of planned investments in the agreed development program in any given year (para 6.16). 7.02 It would be a condition of disbursement on the training and technical assistance components of the loan that contracts, agreeable to the Bank, between a suitable entity and DAAC, covering such training and technical assis- tance, would have been entered into by that entity and DAAC (para 4.40). 7.03 It would be a condition of loan effectiveness that a Subsidiary Agreement satisfactory to the Bank, between the Government and FAN, would have been executed and delivered (para 4.43). 7.04 The proposed project constitutes a suitable basis for a Bank loan of US$61.0 million to the Republic of Colombia for transfer to FAN. The terms would be 17 years, including a grace period of four years. September 28, 1978  -47- TABLE 1.1 COLOMBIA DOMESTIC AVIATION DEVELOPMENT PROJECT Intercity Transport by Mode PASSENGER KILOMETERS 1/ FREIGHT-TON KILOMETERS (Million) (Million) (excluding pipelines) AIR RAIL RIVER RAIL HIGHWAY RIVER COASTAL AIR SHIPPING 1966 946 491 2 1114 3383 1125 837 34 1967 952 418 1 996 3566 1317 860 33 1968 917 351 1 1125 3770 1312 890 35 1969 1018 273 6 1159 3985 1314 736 36 1970 1181 235 1 1173 4236 1333 786 45 1971 1198 267 7 1150 4497 1359 843 40 1972 1276 380 4 1198 4765 1397 2087 43 1973 1325 411 4 1331 4720 2003 2482 48 1974 1264 467 4 1329 4790 2585 3240 51 1975 1398 508 4 1139 6138 2366 2476 46 1976 1525 511 5 1159 8090 1686 2494 40 1/ Comparable data for road passenger traffic an not available, although vehicle count data suggest- it would be the predominant mode. Source: Departamento Administrativo Nacional de Estadistica, Ministry of Public Works and Transport, DAAC and Mission Estimates May 1978  -48- TABLE 1.2 COLOMBIA DOMESTIC AVIATION DEVELOPMENT PROJECT IBRD-IDA Involvement in Colombia Transport Highways Loan 43-CO 1951 US$ 16.50 First Highway Project Loan 84-CO 1953 US$ 14.35 Second Highway Project Loan 144-CO 1956 US$ 16.50 Third Highway Project Loan 295-CO 1961 US$ 19.50 Fourth Highway Project Credit 05-CO 1961 US$ 19.50 Loan 550-CO 1968 US$ 17.20 Fifth Highway Project Loan 680-CO 1970 US$ 32.00 Sixth Highway Project Loan 1471-CO 1977 US$ 90.00 Seventh Highway Project 225.55 Railways Loan 68-CO 1952 US$ 25.00 First Railway Project Loan 119-CO 1955 US$ 15.90 Second Railway Project Loan 267-CO 1960 US$ 5.40 Third Railway Project Loan 343-CO 1963 US$ 30.00 Fourth Railway Project Loan 551-CO 1968 US$ 18.30 Fifth Railway Project Loan 926-CO 1973 US$ 25.00 Sixth Railway Project 119.60 GRAND TOTAL 345.15 Source: IBRD April 1978  -4 9- TABLE 2.1 COLOMBIA DOMESTIC AVIATION DEVELOPMENT PROJECT Airport Traffic 1. Domestic Services Departing Passenger 000 Cargo Embarked, Tons 1972 1973 1974 1975 1976 1972 1973 1974 1975 1976 Barranquilla 240 256 262 279 290 18948 23506 19727 16093 11692 Bogota 807 889 895 1053 1240 33170 35897 34169 39614 42267 Bucaramanga 91 79 90 85 105 873 734 541 617 616 BarrancabermejaL 28 23 17 16 18 146 160 151 59 143 Cali 299 318 289 361 418 4497 4392 4447 4886 5675 Cartagena 119 133 137 156 185 3766 6078 4656 3878 3047 Cucuta 114 117 111 140 200 2756 2340 1984 2299 2792 Leticia 5 7 9 10 11 713 1059 1791 1250 1877 Medellin 477 490 473 501 568 7033 6992 6286 7547 7098 Monteria 33 34 37 38 40 234 171 303 812 308 Pasto 25 38 36 37 47 345 309 267 217 68 San Andres 97 104 103 113 116 133 217 208 363 320 Santa Marta 73 76 63 72 87 761 928 1320 1332 917 Others 480 514 489 465 523 7935 11672 13618 6201 7934 TOTAL 2888 3078 3011 3326 3848 81310 94455 89468 85168 84754 2. International Services Departing Passengers 000 Cargo Handled, Tons 1972 1973 1974 1975 1976 1972 1973 1974 1975 1976 Barranquilla 48.9 54.3 60.5 62.9 63.8 7492 6261 8128 6648 4155 Bogota 204.9 240.8 269.9 285.2 296.4 19066 19732 29419 31566 35824 Cali 22.4 23.0 26.7 28.0 30.1 1199 1859 2323 2796 Cartagena 3.8 5.1 6.3 7.2 8.8 93 112 138 137 483 Medellin 25.4 30.2 33.5 35.8 42.6 1274 1853 3022 4217 4301 San Andres 17.4 18.0 29.2 35.2 29.0 1029 1191 1563 1395 Others 3.6 5.3 3.4 4.3 - 26 517 2003 1390 1874 TOTAL 325.7 376.6 429.4 458.4 470.7 27951 30703 45760 47844 50828 Source: DAAC, DANE April 1978  -50- TABLE 2.2 COLOMBIA DOMESTIC AVIATION DEVELOPMENT PROJECT Domestic Traffic Flows 1976 1. Passengers 000 Destination -------------------------Origin-------------------------- Bogota Medellin Barranquilla Cartagena Cali National Barranquilla 150 44 - 5 17 290 Bogota - 248 146 107 245 1264 Bucaramanga 61 17 11 4 111 Cali 242 64 17 11 - 413 Cartagena 105 28 3 - 12 180 Cucuta 110 28 13 6 1 182 Medellin 242 - 45 28 63 569 Pereira 79 38 5 5 16 155 San Andres 52 16 12 11 16 118 Santa Marta 49 11 .. 6 5 82 Others 149 76 26 2 43 443 2. Freight, tons Destination -------------------------Origin-------------------------- Bogota Medellin Barranquilla Cartagena Cali National Barranquilla 7731 607 - 36 805 9842 Bogota - 1623 7701 2250 2753 19857 Bucaramanga 815 159 188 29 .. 1262 Cali 3851 458 593 124 - 5513 Cartagena 2860 292 172 - 437 3881 Cucuta 1761 277 182 35 4 4221 Medellin 3727 - 666 211 545 5995 Pereira 854 198 67 90 74 1320 San Andres 1298 283 342 97 296 2355 Santa Marta 666 101 61 4 52 932 Others 4534 514 407 18 478 10547 Source: Departamento Administrativo Nacional de Estad'stica April 1978  -51- TABLE 2.3 COLOMBIA DOMESTIC AVIATION DEVELOPMENT PROJECT Domestic Air Fares - Colombia Route Distance Fare Km $US US