Papua New Guinea - Second Port Project

v i / Report No. 1710a-PNG Papua New Guinea Appraisal of a FILE COPY Second Port Project April 3, 1978 Transportation Division Projects Department East Asia and Pacific Regional Office FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency unit = Kina (K) US$1 K 0.72 K 1 US$1.38 K 1 million = US$1,380,000 WEIGHTS AND MEASURES Metric British/US Equivalent 1 meter = 3.2808 feet (ft) 1 kilometer = 0.6214 mile (mi) 1 square kilometer (sq km) - 0.3861 square miles (sq mi) 1 kilogram (kg) = 2.2046 pounds (lbs) I metric ton (ton) = 2,204 lbs or 1.1023 short ton 1 revenue ton = approx. 0.6 ton ABBREVIATIONS AND ACRONYMS ADB - Asian Development Bank DWS - Department of Works and Supply GNP - Gross National Product LWOST - Low Water Ordinary Spring Tides MOT - Ministry of Transport and Civil Aviation PNG - Papua New Guinea PNGHB - Papua New Guinea Harbours Board FISCAL YEAR July 1 - June 30 (until December 31, 1977) January 1 - December 31 (from January 1, 1978) N.B. All water depths given in this report are below LWOST.  FOR OFFICIAL USE ONLY PAPUA NEW GUINEA APPRAISAL OF SECOND PORT PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS . . . . . . . . . . . . . . . . . . . -ji 1. INTRODUCTION . . . . 1 2. BACKGROUND .... . . . . . . ..... .. .... . . . . 2 A. Economic Setting .... . . . . . . . . . . . . . . . . 2 B. The Transport Sector . . . . ......................... . 2 C. Transport Administration, Planning and Coordination . . 4 3. PORT FACILITIES, ORGANIZATION AND OPERATIONS. . . . . . . . 5 A. Existing Facilities .... . . . . . . . . . . . . . . . 5 B. Organization, Finances and Staffing . . . . . . . . . . . 6 C. Cargo Handling Operations at Port Moresby . . . . . . . 7 4. THE PROJECT .... . . . . . . . . . . . . . . . . . . .. 9 A. The Capital Investment Program . . . . . . . . . . . . . 9 B. The Project . . . . . . . . . . . . . . . . . . . . . . . 9 C. Project Cost Estimates ... . . . ..... . . . . . . 10 D. Disbursement . . . . . . . . . . . . . . . . . . . . . . 11 E. Engineering Services and Technical Assistance . . . . . . 11 F. Procurement . . . . . . ... . . . . . . . . . . . . . . . 11 G. Project Execution ... . . . . . . . . . . . . . . . . . 11 H. Ecology .... . . . . . . * . . . . . . . . . . . . . . 12 J. Employment . . . . . . . . . . . . . . . . . . . . . . . 12 5. ECONOMIC EVALUATION . . . . . . . .. . . . . . . 12 A. General ..12 B. Traffic Forecast ... 13 C. Project Benefits . . . . . . . . . . . . . . . . . . . . 13 D. Economic Return, Sensitivity Analysis and Risks . . . . . 15 6. FINANCIAL EVALUATION .... . . . . . . . . . . . . . . . . 15 A. General ..... . . . . . . . . . . . . .. . . . . . . 15 B. Rates and Charges .... . . . . ...... . . . . . . 15 C. Past Earnings and Current Financial Position ... . . . 15 This report was prepared by Messrs. F. Higginbottom (Engineer), R. Roberts (Economist) and L. Seigel (Financial Analyst). 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.  -2- Page No. D. Future Earnings and Financial Position . . . . . . . . . 16 E. Cash Position and Financial Plan . . . . . . . . . . . . 18 F. Port Moresby: Past and Future Earnings . . . . . . . . . 19 G. Audilting and Insurance . . . . . . . . . . . . . . . . . 20 7. AGREEMENT'S REACHED AND RECOMMENDATION . . . . . . . . . . . . 21 ANNEXES 1. Works Financed Under Credit 326-PNG 2. Papua New Guinea Harbours Board Outstanding Leases 3. Ports Administered by the Papua New Guinea Harbours Board 4. Training and Technical Assistance 5. Terminal Operating Company Contract 6. Details of the Project 7. EconomiLc Benefits 8. Assumptions Used in Financial Forecasts TABLES 1. Port Moresby - Operational Performance Indicators 2. PNGHB Capital Investment Program (1978-82) 3. Detailed Cost Estimates 4. Estimat:ed Annual Project Expenditure 5. Estimated Disbursement Schedule 6. Actual and Forecast Traffic - All PNGHB Ports 7. Actual and Forecast Traffic - Port Moresby 8. EconomiLc Costs and Benefits 9. PNGHB T'ariffs: Current and Recommended 10. PNGHB Income Accounts: 1974-82 11. PNGHB Balance Sheets: 1974-82 12. PNGHB Cash Flow Data: 1978-82 13. PNGHB Debt Service 14. Port Moresby Income Accounts: 1976-82 CHART World Bank No. 17857, Berthage/Wharfage Combinations Yielding 7% Return World Bank No. 18839, Construction Schedule MAP IBRD 13007  PAPUA NEW GUINEA APPRAISAL OF SECOND PORT PROJECT SUMMARY AND CONCLUSIONS i. Port Moresby, the capital city of Papua New Guinea (PNG), handles virtually the whole of southern Papua's external trade, in addition to a substantial volume of coastal traffic. About 50% of the port's overseas traffic consists of trade with Australia, and the shipping lines carrying this trade have converted their operations from palletized general cargo to con- tainers. The increased efficiencies of container shipping will be largely lost unless Port Moresby makes adequate provision for the handling of con- tainers. In addition, ocean freight rates to and from Port Moresby will ultimately rise without better container facilities in the port. ii. The Government of PNG has asked the Bank and the Kuwait Fund for Arab Economic Development (the Kuwait Fund) to assist in financing a project for a 125 m berth, and backup facilities to handle containers at Port Moresby; improved access to the port, and pilot launches would also be provided. The proposed project, which would also include a coastal berth at the port of Samarai (off the coast of southern Papua), to replace the existing dilap- idated wharf, is based on studies by Maunsell and Partners Pty. Ltd. (Australia), and Port Operations Consultants (U.K.); the project forms a major part of the investment program of the Papua New Guinea Harbours Board (PNGHB) for the next five years. iii. The proposed project would be implemented, with consultant assis- tance, by PNGHB. It is a statutory corporation with adequate powers to conduct its affairs and to enter into contracts and agreements, and has autonomy in day-to-day matters, subject to the usual policy directives of the Minister of Transport. It assumed operational responsibility for the prin- cipal ports in July 1967 and financial responsibility on January 1, 1968; it became the sole pilotage authority in PNG on January 1, 1977. PNGHB's revenues in recent years have not kept pace with increased operating costs and the return on its net fixed assets in use has been consistently less than the 8% required by the Project Agreement for the First Port Project. A tariff increase in late 1976 has improved the financial position in 1977, but further tariff increases will be required. iv. The total project cost is estimated, on the basis of detailed designs, at US$10.5 million with a foreign exchange component of US$7.0 mil- lion equivalent, which would be financed by the proposed loan and a Kuwait Fund loan. v. Contracts for construction and procurement would be awarded on the basis of international competitive bidding, in accordance with Bank guidelines. Retroactive financing of foreign exchange expenditures on one of the pilot launches would be required, amounting to about US$100,000.  - ii - vi. The proposed project would furnish adequate and efficient facil- ities for handling containers at Port Moresby. The new berth would also free space at the existing international wharf for use by coastal shipping, and thereby avoid the need for constructing a replacement for the present coastal wharf, which is in very poor condition. The project would reduce transport costs by: (a) reducing ship-waiting and turnaround time in the port; (b) eliminating the present movement of containers between the Main Wharf and the container freiglat station; (c) avoiding the transfer of goods to bonded storage outside the port which is necessary at present in order to keep the transit sheds clear; and (d) reducing cargo handling costs. These benefits yield a return of about 14% on the proposed project, which is the least cost alternative. vii. The proposed project provides a suitable basis for a Bank loan of US$3.5 million equivalent to the Government of Papua New Guinea for a term of 20 years including a five-year grace period. The Kuwait Fund would also provide a loan of US$3.5 million equivalent. The Government would relend both loans to PNGHB at the Bank's interest rate for a term of 20 years, including a grace period of four years. March 1978  1. INTRODUCTION 1.01 The Government of Papua New Guinea has asked the Bank to help finance a Second Port Project consisting of: (a) at Port Moresby, a 125 m berth, built to handle containers, with a 1.6 ha extension of the filled area provided under Credit 326-PNG and a 3,300 sq m extension of the existing shed; improvements to the access road, and pilotage launches; (b) at Samarai (located on an island off the coast of southern Papua), a 30 m coastal berth with about 0.1 ha of reclaimed land; and (c) engineering services for detailed design and supervision of the foregoing construction, together with technical assistance and training. The project, together with work already completed under Credit 326-PNG, would provide adequate and efficient facilities for handling developing container traffic at Port Moresby; and it would provide adequate coastal facilities at Samarai to replace the present dilapidated and unsafe wharf. 1.02 The Bank Group's assistance in the transport sector has included acting as executing agency for the UNDP-financed Transport Survey of 1968-69; and financing for the First Highway Project (Credit 204/Loan 693-PNG) in 1970, which provided US$9 million for construction and improvement of 150 km of the Highlands Highway. It also included the First Port Project (Credit 326-PNG) in 1972, which provided US$9.2 million for improvements at the ports of Kieta, Lae and Port Moresby and for a new overseas port at Alotau (Annex 1). The Second Highway Project (Credit 677-PNG) in early 1977, provided US$19 million for further improvement of the Highlands Highway to an all-weather standard. Work on the First Highway Project was satisfactorily completed in 1973, but with a 90% cost overrun due mainly to higher than expected bid prices. 1.03 Work on the First Port Project was satisfactorily completed at the end of 1976, except for a barge ramp at Alotau, which has had to be redesigned, and additional work at Kieta and Port Moresby to which the Association agreed following substantial completion of the original works at a significant cost saving. This additional work, which was completed in July 1977, included reclamation of additional land at Port Moresby to increase the land available for stacking the growing number of containers, pending completion of the proposed project. PNGHB's performance has been satisfactory: it managed the project well and has improved its administra- tive and financial procedures since 1972. However, it has not met the full requirements of the Project Agreement for Credit 326-PNG in regard to cost- based tariffs (para 3.08) and has not achieved the required 8% rate of return on net fixed assets (para 6.03) because revenues have not kept pace with increased operating costs. 1.04 This project was appraised in March 1977 by a mission comprising F. Higginbottom (Engineer), R. Roberts (Economist) and L. Seigel (Financial Analyst) and is based upon their findings and studies by Maunsell and Partners (Australia), and Port Operations Consultants (U.K.), together with data supplied by Papua New Guinea Harbours Board (PNGHB). Subsequently, it was necessary to undertake a post appraisal in January 1977 as the Government wished to review the location of the next stage of port development (para 4.01). Following a study carried out by consultants, the Government decided not to change the location which would have affected the design and cost of the proposed project.  - 2 - 2. BACKGROUND A. Economic Setting 2.01 Papua New Guinea (PNG) became independent from Australia in September 1975.. Physically, PNG comprises the eastern half of the island of New Guinea (the mainland) and some 600 smaller islands, including those of New Britain, New Ireland and Bougainville. PNG has a land area of about 477,000 sq km (about the same size as Spain) spread over some 2,000,000 sq km oi the Western Pacific Ocean. The indigenous population numbers about 2.8 mil- lion and is growing at 2.8% p.a. The non-indigenous population (largely from Australia) in 1975 numbered about 40,000 persons, which is a decrease from 54,000 in 1971. Since independence, the rate of decrease in the expatriate population is gradually slowing. 2.02 The country is at an early stage of development, with an economy based on primary production. The non-monetized sector, which provides the indigenous population with most of its necessities, accounts for about one-third of the Gross National Product (GNP) and is growing at an estimated rate of less than 1% p.a. The monetized sector has been growing at more than 10% p.a. in real terms over the last 10 years. The economy is heavily dependent on external trade; exports in 1975/76 were valued at about K 357 million, about one-half of which was accounted for by copper concentrate exported from Bougainville. The Government estimates that exports in 1976/77 reached some K 490 million with again one-half comprising copper concentrates. The decrease iin world copper prices in recent years has adversely affected the trade balaace which, in 1975 and early 1976, was in deficit; since April 1976, however, it has shown some surplus. Other export commodities are coffee, cocoa beans and copra. B. The Transport Sector (a) General 2.03 The terrain of PNG's mainland is unfavorable for development of land transport inland from the ports. Generally, the coastal plain is narrow and terminates in formidable mountain ranges; even where the plain extends some distance inland, as in the southwestern part of the mainland, it tends to be intersected by major rivers and to be low-lying and swampy. Histori- cally, the centers of economic activity in PNG, such as Port Moresby (Papua), Lae and Madang (New Guinea), and Rabaul (New Britain), were no more than economic enclaves supplied by sea and, later, also by air, and little develop- ment took place in the interior of the country. In the last few decades, the economic potential of the interior, notably that of the Central Highlands in the west-central part of the mainland, has begun to be developed, initially supported almost entirely by air transport. Now, the Highlands Highway, which was partly financed by the Bank and IDA (Loan 693, Credit 204 and Credit 677), runs 600 km from Lae into the Central Highlands. It provides access to the sea for the estimated one million people living there, and is contributing to the rapid development of cash crops, notably coffee and tea.  - 3- (b) Highway Transport 2.04 The road system, though expanded considerably since World War II, is still comparatively limited considering the size of the country. It is estimated that the system totalled about 18,300 km in 1975, representing a nine-fold increase during the post-war period. The vehicle fleet, more than half of which consists of motor cars and motorcycles, has increased by about 12% p.a. since 1963 and now numbers nearly 40,000. (c) Civil Aviation 2.05 Air transport is a major mode of domestic and international passen- ger travel, and increased steadily by about 10% p.a. between 1964 and 1974. Freight is also moved by air, particularly to the more isolated areas, but its importance has declined substantially in recent years with expansion of the road system. Port Moresby has the only international airport; however, a new airport was opened in 1977 near Lae, financed in part by the Australian Government, which may become a second international airport. PNG is ade- quately served by international flights from Australia, Hong Kong, the Philippines and Japan; internally, scheduled services are provided by Air Niugini (84% Government owned) which has a low aircraft utilization rate due to restriction of most flights to daylight hours. (d) Ports and Shipping 2.06 Most of PNG's overseas trade is handled by nine main ports: Port Moresby, Lae, Madang, and Wewak on the mainland; and Rabaul, Samarai,/l Kavieng, Kieta and Kimbe on other islands. In addition, Oro Bay, on the mainland, handles a significant volume of coastal traffic. These ten ports, together with six smaller ports, are administered by PNGHB and handled a total of 1.3 million revenue tons in 1975-76, of which Port Moresby's traffic was 0.3 million tons. The Government, under the Harbours Board Act, may, at any time, direct PNGHB to assume control of additional ports. Development of the ports of Port Moresby, Lae, Kieta and Alotau (one of the six smaller ports) has been under way since 1972, partly financed by Credit 326-PNG (Annex 1). All work was completed in 1976 except for agreed addi- tions to the works at Kieta and Port Moresby which were completed in July 1977, and a barge ramp at Alotau. 2.07 Overseas shipping services are provided by ten foreign shipping lines. Coastal and inter-island services are provided by about 240 Government-licensed and locally-owned small vessels greater than 10 m in length. The Government is contemplating a substantial investment, through the newly established PNG Shipping Corporation, in specially designed coastal ships for main port services and is studying, with Norwegian assistance, the feasibility of regularly scheduled services between those ports. At present, /1 lt is expected that Samarai's overseas traffic will be assumed by Alotau following the dismantling of Samarai's present dilapidated overseas wharf and the replacement of its coastal wharf (para 4.02).  - 4 - a --ernFer:-owned fleet of 87 small vessels provides passenger services to remote communities and carries a small amount of cargo. A five-year program for replacement of old vessels in this fleet is expected to commence in FY78. The Bank is discussing with the Government a possible project for improving coastal shipping operations. C. Transport Administration, Planning and Coordination 2.08 The transport sector is administered by the Ministry of Transport and Civil Aviation (MOT); its main functions are: (i) to define and develop a national transport network; (ii) to develop national policy for land, sea and air transport; (iii) to undertake necessary economic studies and surveys related to the national transport network; (iv) to prepare, evaluate and revise, as necessary, the capital and recurrent expenditure plans for the national transport net- work; and (v) to administer the regulations for national transport services. The Provincial Governments are expected to assume increased responsibility in respect of the transport network, particularly roads, lying outside the national network. 2.09 MOT prepares plans for national roads in conjunction with the Depart- ment of Works and Supply (DWS), which is responsible, inter-alia, for construc- tion and maintenance of national roads. Provincial roads are constructed by the Provinces, who maintain them with the assistance of DWS. MOT undertakes the economic evaluation of projects and DWS provides cost data and implementa- tion expertise. As regards ports, investment proposals prepared by PNGHB are reviewed with MOT and implemented under PNGHB's supervision. 2.10 MOT is preparing a policy statement for overall transport develop- ment, and a National Transport Plan, providing a phased program for transport investment. A key transport investment problem is the high and increasing cost of highway maintenance; if the present trend continues, highway mainte- nance, which is particularly heavy on unsurfaced roads in mountainous terrain, will absorb, by 1982, most of the funds available for highway investment; accordingly, the Government plans a five-year program of road surfacing, tied into the road maintenance program, estimated to cost US$12.5 million, which the Bank may assist in financing. Problems of intermodal coordination include the role of air transport in the face of continuing development of road transport, and the relative economic merits of coastal shipping versus overland or air transport. A trans-island highway from Port Moresby to Lae is under consideration by the Government; however, it is likely to be diffi- cult to justify in view of the heavy capital cost and the availability of alternative modes.  - 5 - 3. PORT FACILITIES, ORGANIZATION AND OPERATIONS A. Existing Facilities 3.01 The main port installation is located in a well protected deep- water bay and is adjacent to the center of Port Moresby (Map 13007). Its berthing facility is an 18.2 m wide T-head jetty (the Main Wharf) with an outer berth for overseas traffic 213 m long (7.6 m depth alongside /1) and inner berths 118 m long (4.6 m depth alongside) and 67 m long (3.8 m depth alongside). The approach from shore is 80 m long by 11 m wide. The wharf's design load is 2.4 ton/sq m, too low for the efficient handling of containers, and its condition is such that it requires heavy maintenance, which will be further increased when substantial container traffic is handled. Its life is estimated to be no more than 10 years whatever the traffic. Total available land area at the shore end of the approach is some 2 ha which accommodates two closed storage sheds and one open shed leaving open storage space of only 1 ha. 3.02 There is also a coastal berth (the APC Wharf) 24 m long by 12 m wide connected to shore by a 67 m long by 5 m wide approach, located some 250 m east of the main port. It has a barge ramp and a small open storage area of about 0.1 ha adjacent. The wharf, which has reached the end of its useful life for cargo handling, is in bad structural condition; it can accept nothing heavier than light forklift trucks, and even these must operate very slowly due to the open timber deck. The condition of the wharf makes the berthing of the larger coastal ships difficult and potentially hazardous to the wharf's structure. PNGHB has agreed to close the APC Wharf to cargo ships over 10 m length when the proposed project is completed (para 5.11) and, thereafter, coastal vessels will be handled at the Main Wharf. Between the APC Wharf and the main port there are three privately-owned finger piers. Petroleum products are handled at anchorages located in the upper harbor and connected to shore by pipelines. 3.03 No land is available for expansion in the area of the Main Wharf and, therefore, the First Port Project provided open storage in the area identified for long-term port development about 1/2 km east of the Main Wharf by reclaiming 1.3 ha land with a shed for general cargo (Existing Shed Area, Map 13007). Subsequently, the Association agreed to the reclamation under Credit 326-PNG, of an additional 1.3 ha adjacent to this area to increase the land available for stacking the growing number of containers, pending comple- tion of the proposed project, the original shed being used as a container freight station. PNGHB's headquarters is located alongside this land and has a small boat berth (pilotage) adjacent. 3.04 The Government has not yet granted leases to PNGHB covering all the present port area and all the improvements at other ports under PNGHB juris- diction, notwithstanding a requirement to do so contained in the Credit /1 All depths are at Low Water Ordinary Spring Tides (LWOST). Tidal range is 1.7 m spring tides and 0.5 m neap tides.  Agreement of Credit 326-PNG (Section 3.02). The absence of land records and high staff turnover in the Department of Lands are the chief causes of delay. The current position is shown in Annex 2. A new law will make possible the granting of the necessary leases and appropriate arrangements are being made. The Government lhas agreed that a lease covering the area of the proposed project will be granted to PNGHB not later than January 1, 1979 and has indicated that the processing of PNGHB's other outstanding leases will now proceed expeditiously. B. Organization, Finances and Staffing Organization 3.05 PNGHB, a body corporate capable of acquiring and disposing of real and personal property, was created by the Papua New Guinea Harbours Board Ordinance 1963. It consists of a Chairman and six members, appointed by the Minister of Transport. The functions of the Board are comprehensive and it has adequate powers to perform these functions and to enter into contracts and agreements as necessary. PNGHB has made By-laws for the control, regula- tion and management of the ports for which it is responsible. It assumed operational responsibility for the principal ports in July 1967 and financial responsibility on January 1, 1968. It became the sole pilotage authority in PNG on January 1, 1977. The 16 ports under PNGHB control are shown in Annex 3. 3.06 PNGHB's day-to-day operations are controlled by the General Manager, Secretary/Chief Accountant, Chief Engineer and Superintendent of Pilotage. Its autonomy in day-to-day matters is subject to policy directives given by the Minister of Transport. Such a provision is normal and necessary to the responsible Minister, and has been exercised in a satisfactory manner. 3.07 Each PNGHB port has a Port Advisory Committee of five to nine appointed members representing port users and labor interests. The Committee is empowered to make local rules under the Ordinance and By-laws on matters relating to port operations, subject to PNGHB approval. Finances AccouLnting and Costing Systems 3.08 Over the past two years, PNGHB has introduced a system of respon- sibility accounting which provides relevant statistical data, revenue and expense information on a port-by-port basis within three weeks of the end of each four-week accounting period. The system represents a substantial improvement over the methods employed in the past. It is simple, workable and capable of easy assimilation by indigenous staff, and it provides an adequate information base for proper management of PNGHB. However, costing of individual port services and facilities, such as is required by Section 4.04 (b) of the Pro-ject Agreement for Credit 326-PNG, has to be carried out as a special exercise, and has not yet been undertaken. For this reason, PNGHB is not in compliance with Section 4.04 (c)(iii) of the Project Agreement, which  - 7 - requires dues and rates to be cost-based. As a necessary first step toward meeting its obligations under this section of the Project Agreement, PNGHB has agreed to undertake by December 31, 1978, a costing study satisfactory to the Bank, with consultant assistance if necessary (Annex 4), which will provide the costs of its various services and facilities at each of its main ports and will implement the findings of the study. Subsequently, the costs will be reviewed annually in relation to the revenues derived from each of the services. PNGHB has also reaffirmed the basis of its tariff of dues and rates as set forth in Section 4.04 (c). Asset Value 3.09 Late in 1974, PNGHB commissioned consultants to carry out a com- plete revaluation of its operating assets. The assets were revalued as of October 1974 and again twice subsequently through the application of an indexing formula derived by the consultants. These valuations, which are reasonable, are used in the current appraisal report. Staffing 3.10 Headquarters management comprises 13 officers, including two works officers located at out-ports. Of these, an Assistant Chief Engineer and two accountants are indigenous, but have little experience. The operational management at the 16 ports comprises 42 officers from Port Manager to Assistant Wharf Superintendent and all are indigenous except four Port Managers. There are, in addition, seven indigenous staff currently on training courses overseas or in local technical colleges (Annex 4), and PNGHB's training school antici- pates training a further 36 staff for operational positions in the next two years. Substantial losses of trained local staff to other organizations has been experienced over the past few years due to the general shortage of trained indigenous staff in the country. It is inevitable in the current stage of PNG's development that such losses will continue for some time. The training program included in the project will continue to provide replace- ments for these losses. 3.11 In line with Government policy, PNGHB is endeavoring to increase the number of its indigenous officers, and it is expected that a number of the more senior positions will be filled by indigenous staff over the next few years. However, the experience of such staff will inevitably be limited, especially in management and in the fields of accounting and engineering. Thus, it may be necessary to maintain a strong expatriate presence at senior management levels for some time. PNGHB has agreed that it will retain suffi- cient competent staff and that, in the case of the Chief Financial Officer and Chief Engineer, their qualifications and experience will be acceptable to the Bank. Funds are included in the project for the training of indigenous staff in the fields of engineering and accounting and for consultancy ser- vices (Annex 4). C. Cargo Handling Operations at Port Moresby 3.12 Cargo handling at Port Moresby, from ship's hold to consignee's truck is performed by four private stevedoring companies, licensed by PNGHB  - 8 - and selected by the shipping companies. These companies supply all necessary equipment and labor, and are efficient. The operations of the companies are controlled by PNGHB through their Port Manager, Assistant Port Manager, and through three Wharf Superintendents, permanently located in the port area, who allocate berths and storage space. Cargo from each ship has a separate rotation number for ease of identification, which is used for all billing and documentation. A priority berthing system is operated for unitized and containerized cargo ships, in accordance with regulations laid down by PNGHB. 3.13 Cargo movements over the Main Wharf cover three major categories - palletized overseas (about 59% of overseas), non-palletized overseas (41% of overseas) and coastal (25% of total port traffic). The following satisfac- tcry handling rates are achieved: palletized cargo about 27 tons/gross gang hour, and non-palletized about 12 tons/gross gang hour (Table 1). How- ever, productivity is reduced if more than one ship is alongside, due to the restricted space available at the Main Wharf and the fact that not all hatches can be worked. PNGHB will endeavor to improve these performance figures, and has indicated that it expects to achieve, by 1980, the cargo handling rates indicated in Table 1. The handling rates of coastal cargo at the APC Wharf are very much less (about 4 tons/gross gang hour) because the wtharf's conditiLon prevents the use of mobile cranes and hinders the operation of forklift trucks, and because of the low capacity of cargo derricks on many coastal ships. All cargo is moved from the hold by ship's gear, except that mobile cranes are available, on request, for coasters at the Main Wharf. 3.14 The provision of the additional shed and storage space under Credit 326-PNG has improved operations at the Main Wharf and permitted more orderly stacking, sorting and delivery of cargo, as well as providing space for the handling of vehicle imports and containers. However, the additional shed and storage area is not adequate to handle the expected future volume of containers. 3.15 There are about 160 personnel permanently employed by the stevedore companies and an additional 220 registered port employees who are allocated daily to make up the required labor force. Allocation is from a labor roster, those presenting themselves for employment but not employed on a particular day moving up the list for future employment and being paid attendance money. The scheme is operated by the Port Labor Committee, com- posed of PNGHB's labor allocator, a union representative, and a licensed stevedore representative; it is financed by a separate levy of K 0.07 per ton of cargo handled. Additional casual labor is available if required. Gangs consist for overseas ships of 20/30 men per hatch, with about 2 hatches worked, plus a shed gang; coastal ship gangs consist of about 10 men. Normal working hours are 0800 hours to 2200 hours. Overtime is worked at the ship's option. 3.16 Cargo stored in sheds or on open storage areas can remain in the port for four working days free of charge (overseas) and one working day (coastal). Charges are then levied for up to seven days further storage; if the cargo is not collected after seven days, it is moved to storage outside the port. Cargo already cleared by Customs, is removed to a non-bonded warehouse for eventual collection; cargo not cleared by Customs is placed in  - 9 - a Customs-nominated bonded store for clearance before collection. All such movement and storage is to the consignees' account. By providing additional storage in the port, the proposed project will reduce the volume of cargo which has to be moved to outside storage. 3.17 For efficient operation of the proposed facility, it is essential that one stevedoring organization (either a firm or a consortium) be respon- sible for all container operations and, during negotiations, PNGHB and the Government have agree to make, by January 1, 1979, appropriate arrangements, satisfactory to the Bank (Annex 5), to effect this and to appoint a suitably qualified PNGHB officer to superintend these operations. 4. THE PROJECT A. The Capital Investment Program 4.01. PNGHB's capital investment program for 1978 through 1982, which has not yet been fully approved by the Government, totals K 13.4 million (US$18.4 million) (Table 2). Besides expenditures in 1978 through 1980 on the proposed project,ll the program includes coastal shipping facilities at Rabaul; a cargo shed at Kavieng; a new wharf at Madang; construction of breasting dolphins, an extension of the coastal facilities and the first stage of a tidal basin at Lae; and minor works at other ports. Not included in the program is a replacement for the existing Main Wharf which will be required by about 1987 and will take the form of a coastal wharf on an area to be reclaimed, contiguous with and to the north of the proposed project. The replacement wharf and the related filled area will constitute the next port development at Port Moresby. The Government and PNGHB have agreed that the next port development, when required, will proceed on the above basis. B. The Project 4.02 The project would provide, at Port Moresby, adequate and efficient facilities for handling containers, including an extension of the available land area and of the existing container freight station, and facilities for refrigerated container cargoes; it will provide adequate capacity to handle the forecast traffic until the next port development is required about 1987. If the Ok Tedi copper mine project is implemented (para 5.05) ore exports would be handled at separate facilities across the bay from the present port. Inward shipments of supplies could be handled over the proposed or existing facilities, and heavy machinery would be handled by barge in the stream. The proposed project would also provide a new coastal facility at Samarai (Map 13007) to replace the existing wharf which is in an extremely dilapi- dated and unsafe condition. Overseas ships which now use the port will be diverted to Alotau, on the mainland near Samarai. The project, which is based on consultants' recommendations, as amended following the Bank's review, would comprise: /1 The full container terminal comprises the proposed project and the Exist- ing Shed Area works provided under Credit 326-PNG (Map 13007).  - 10 - (a) additional reclaimed land adjacent to that provided under Credit .326-PNG to increase the total area available for containesr operations by about 1.6 ha to about 4.2 ha; (b) a new 1:25 m berth on the seaward face of the reclamation built to handle containers and with 10 m depth of water; (c) a 3,300 sq m extension to the existing container freight station; (d) improvements to about 400 m of the access road adjacent to the port; (e) a 30 m long sheet-piled coastal berth at Samarai with 5 m depth alongside (Map 13007); (f) pilotages launches for other ports; and (g) consult:ing services for design and construction supervision and teclnical assistance and training. The road improvements referred to in para (d) above will meet the port's immediate access requirements; it is expected, however, that within a few years, the roads between the port and the industrial area, a distance of about 15 km, will have to be improved. The Government has agreed to take appropriate action to improve such access roads before January 1, 1982, including the completion of a feasibility study not later than January 1, 1980.. C. Project Cost Estimates 4.03 The total cost of the proposed project is estimated at K 7.6 mil- lion (US$10.5 miLlion equivalent), with a foreign exchange component of K 5.1 million (US$7.0 million equivalent). The estimate is based upon final design and unit costs for similar ongoing or recently completed works in PNG and is considered adequate; it includes physical contingencies of about 10% of the cost of civil works; and an allowance for future price increases of 9% in 1978 and 1979 and 8% in 1980. Details of the costs are given in Table 3, and are summarized below: K Million US$ Million Local Foreign Total Local Foreign Total 1. Civil Works 2,020 3,420 5,440 2,750 4,670 7,420 2. I'ilotage Launches 25 225 250 30 310 340 3. Engineering and Supervision 25 345 370 30 470 500 4. Technical Asslstance and Training 15 185 200 20 250 270 Base Cost Estimate (BCE) 2,085 4,175 6,260 2,830 5,700 8,530 Physical Contingencies 200 340 540 270 500 770 Expected Price Increases (14% of BCE) 245 555 800 400 800 1,200 Total 2,530 5,070 7.600 3,500 7,000 10,500  - 11 - Estimated annual expenditures for the project are given in Table 4. The proposed loan to the Government would cover 50% of the estimated foreign exchange costs of US$7.0 million; the balance would be provided by the Kuwait Fund. The full amount of US$7.0 million would be relent to PNGHB. Local currency costs will be provided by PNGHB. D. Disbursement 4.04 The foreign exchange content of the civil works of the proposed project is estimated at 64%. Disbursement for civil works would be on the basis of this percentage of total cost. For technical assistance and train- ing and consulting services, disbursement would be on the basis of 100% of total costs. Disbursement for the pilotage launches, which are being pro- cured locally, would be on the basis of 90% of total costs. Bank disburse- ments would amount to half the above percentages, with the remainder being disbursed by the Kuwait Fund. The estimated schedule of disbursements is given in Table 5. E. Engineering Services and Technical Assistance 4.05 Final engineering has been completed by Maunsell and Partners (Australia), who have also been appointed for construction supervision and are acceptable to the Bank. Technical assistance will finance overseas training of PNGHB staff and 36 man-months of consultancy services in the fields of management, accounting and data collection, estimated to cost US$6,000 per man-month, excluding travel and local subsistence allowances (Annex 4). F. Procurement 4.06 Contracts for construction and supply for all items in the proposed project will be awarded on the basis of international competitive bidding, in accordance with Bank guidelines. These procedures are acceptable to the Kuwait Fund. The contract for pilotage launches has been let to a local firm, following international competitive bidding in accordance with Bank guidelines. It is anticipated that retroactive financing of foreign exchange expenditures on one of the pilotage launches may be required, amounting to approximately US$100,000. Because of the urgency to provide the container facilities PNGHB is preparing all contract documentation and will call for tenders in accordance with Bank guidelines prior to loan signature. The tender will be let after loan signature. G. Project Execution 4.07 PNGHB, with the assistance of the consultants, would be responsible for the execution of the project. Construction is expected to commence in June 1978 and will be completed in June 1, 1980. A construction schedule is shown in Chart 18839. 4.08 The area to be reclaimed for the container operations is founded on a 9 m depth of silt/coral matrix which has provided an adequate foundation in the Existing Shed Area provided under Credit 326-PNG. However, to ensure  - 12 - that the risk of a slip failure is eliminated, about 35% of this material under the seaward end of the new reclamation will be dredged and replaced by excavated fill. Rock armoring under the new berth and the piling, is designed to permit future deepening to 12 m. H. Ecology 4.09 The proposed reclamation of land for the port works at Port Moresby is similar in all respects to that undertaken for Credit 326-PNG, which had no adverse effects on the harbor ecology; the proposed dredging is not excessive and the spoil would be dumped beyond the existing coral reef. No other environmental effects will ensue from the proposed project. J. Employment 4.10 It is expected that most containers landed will contain cargo for more than one consignee and will therefore have to be unstuffed in the port. Accordingly, any reduction in employment on the wharf resulting from the increased efficiency of container operations, is likely to be largely offset by an increase in shed labor. The effect of the introduction of containers on port labor is therefore expected to be limited. 5. ECONOMIC EVALUATION A. General 5.01 Port Moresby handles virtually the whole of the southern mainland's external trade, in addition to a substantial volume of coastal traffic. About 50%; of the port's overseas traffic consists of trade with Australia, carried by Australian owned shipping lines which have converted their operations from palletized general cargo to containers. Without adequate provision for the handling of these containers, the increased efficiencies of container ship- ping would be largely lost. In addition, ocean freight rates would ulti- mately rise without better container facilities in the port. 5.02 The economic evaluation derives the economic benefits from a com- parison of the situation with and without the proposed project. As previously noted, the APC Wharf is in very poor condition and will have to be closed to cargo ships by aLbout 1980. Thereafter, without the proposed project, the Main Wharf would have to handle the whole of the port's traffic, and substantial ship-waiting tinme would result; in addition, it is probable that some of Port Moresby's exterrLal trade would be lost. 5.03 Accordingly, the principal economic benefits of the proposed proj- ect consist of the avoidance of ship-waiting time, faster ship turnaround time, reduced inland transport costs and reduced cargo handling costs (paras 5.08-5.11). 5.04 As previously noted, the Main Wharf will have to be replaced by about the end of 1987 as part of the next port development. Without the proposed project, this Main Wharf replacement would have very large benefits  - 13 - since the alternative, lightering of cargo, would involve substantial ship- waiting time and cargo handling costs, and would probably result in a sub- stantial loss of trade. The evaluation omits both the costs and the benefits of this further port development from the cost and benefit streams of the proposed project in order clearly to distinguish the effects of the proposed project from those of the next port development. However, if the costs and benefits of this development are included in the cost and benefit streams of the proposed project, the rate of return is increased (Annex 7, Table A). B. Traffic Forecast 5.05 Traffic statistics kept by PNGHB provide no breakdown by commodity; therefore, it is not possible to project traffic on a basis related to over- all economic trends. Accordingly, the traffic projections for all PNGHB ports (Table 6) and for Port Moresby (Table 7) are based on statistical analyses of past traffic data for imports, exports, and inbound and outbound coastal traffic. Data for overseas traffic, although showing year-to-year fluctuations of up to 19%, are essentially trendless and, therefore, a zero growth rate has been used for both Port Moresby and PNGHB overall. Using a three-year moving average, analysis of coastal traffic data indicates an annual growth rate of about 5% for PNGHB overall, although year-to-year fluctuations of 15% have been experienced; at Port Moresby traffic shows a 3.5% increase per annum for outbound and zero growth for inbound. These growth rates have been used in the projections and result in an annual growth in total traffic of 1.6% for all PNGHB ports, from 1,453,000 revenue tons in 1977 to 1,681,000 in 1986; and 0.6% for Port Moresby, from 339,000 tons in 1977 to 357,000 in 1986. This modest growth rate is unlikely to be increased by any foreseeable developments in the Port Moresby area. Major natural resource developments, such as the Ok Tedi project now under study, are too uncertain at present to take into the forecast. 5.06 The projection of the volume of containers for PNGHB is based on the expectation that all of the Australian trade through Lae, Port Moresby and Rabaul, will be moving in containers by mid-1978. This would account for 40% of total PNGHB imports and 50% of imports through these three ports. Containerized imports, taken at 20 revenue tons per container, amount to about 15,000 containers for PNGHB overall; the same number of containers will move outwards. Similarly, at Port Moresby, the number of inward containers is forecast to be 5,275 and total containers 10,550. 5.07 The present statistical breakdown of traffic for the main PNGHB ports is insufficiently detailed for port planning purposes. The proposed project would provide funds for technical assistance in setting up a data collection system which would provide a commodity breakdown of traffic statistics (Annex 4). C. Project Benefits 5.08 The proposed project would avoid substantial ship-waiting time which would otherwise be incurred when the APC Wharf is closed to cargo ships, about 1980. Without the proposed project, ship-waiting time of overseas ships is estimated at about 2,900 hours in 1980 and that of coastal ships at about  - 14 - 10,000 hours. The total cost of ship-waiting time is estimated at US$681,000 in 1980, and is held constant thereafter on the assumption that high costs in the "without" case would eliminate the forecast growth in coastal shipments. 5.09 The proposed project would reduce ship turnaround time signifi- cantly, because: (a) container ships using the proposed container berth would benefit from elimination of the transport of containers between the Main Wharf and the Existing Shed Area (Map 13007), which at present results in significant loading or unloading delays; (b) overseas shipping continuing to use the Main Wharf would benefit from a reduction in the congestion on the narrow Main Wharf which presently hampers cargo handling; and (c) coastal shipping transferred from the APC Wharf to the Main Wharf would benefit from an increase in cargo-handling productivity (para 5.11) resulting in an average reduction of 20 hours per ship in turnaround time. The benefits from reduced ship turnaround time would total US$393,000 in 1981, rising to US$425,000 in 1987. Port tariffs will be adjusted to ensure that the whole of the benefits of avoided ship waiting time and faster ship turnaround accrues to the PNG economy. In 1981, foreign shipowners would receive benefits from the project amounting to about US$480,000, whereas tariff increases necessary to produce the required rate of return (para 6.05) will yield in 1981 incremental cash proceeds of about US$980,000. 5.10 The proposed project would avoid the necessity of transporting containers between the Main Wharf and the Existing Shed Area at a cost of US$18.75 for the two-way movement. In addition, the extension to the shed would permit a reduction in the volume of cargo which has to be transferred to outside storage in order to keep the transit sheds clear, from the present 5% of cargo (excluding direct deliveries) to 1.5%. The saving, which includes transport and double handling, is estimated at US$20 per ton, or US$237,000 per annum. 5.11 The proposed project would significantly reduce cargo handling costs. The existing congestion on the narrow Main Wharf would be greatly reduced by the proposed berth, which would handle most of the larger overseas ships, and this would permit an increase in overseas general cargo-handling productivity of about 14%, from the present 12.3 tons per gross gang hour to aba,ut 14 tons (Table 1). Transfer of coastal shipping from the inefficient APC Wharf to the Main Wharf would permit an increase in cargo handling productivity frcom the present 4 tons per gross gang hour to about 10 tons on about 60,000 tons per annum. The foregoing cargo handling savings total US$237,000 in 1980, rising to US$261,000 in 1987, and are largely in terms of equipment and casual labor. The value of the labor savings is taken at 50% of the market value. To ensure that these benefits are derived from the prcject, PNGHB has agreed to close the APC Wharf to cargo ships of over 10 m length. The APC Wharf will not be demolished, as it is useful for Government passenger launchtes and should have a remaining useful life for this purpose when cargo ships; cease to use it. The capital costs and benefits of the proposed project are shown in Table 8 and additional details of the benefits in Annex 7. The economic costs used in the analysis comprise about 81% of the total project cost. Items excluded from the economic costs include  - 15 - technical assistance, which is for the benefit of PNGHB overall and is not related to the proposed works; and the cost of pilot boats, which are intended for ports other than Port Moresby. D. Economic Return, Sensitivity Analysis and Risks 5.12 The foregoing benefits yield an economic return of 14% on the proposed project. The return was tested for sensitivity to changes in the values of the key variables, and was found to be sensitive to an increase in capital cost or a decrease in benefits; a 25% increase in capital costs would reduce the return to 10%; a 15% decrease in benefits would reduce the return to 12%. However, reduction in the traffic projections to a zero growth rate, regarded as the minimum feasible level, would have a negligible impact on the return. Since, as already noted, the whole of the Australian trade has been containerized, and no significant change in the volume of the Australian trade is foreseen, the number of containers seems unlikely to fall below that forecast. The project is not subject to any unusual risks. 6. FINANCIAL EVALUATION A. General 6.01 PNGHB's revenues in recent years have not kept pace with increased operating costs and, in 1976, an operating deficit was incurred (para 6.03). The situation is readily rectified by the tariff adjustments recommended in para 6.05. The projected cash flow will then be sufficient to finance current operations, the capital investment program, the servicing of debt, and to provide for an adequate dividend for the Government from 1980. The assumptions underlying the financial projections are given in Annex 8. B. Rates and Charges 6.02 PNGHB's tariffs were last revised in 1976, with new dues and charges taking effect September 30, 1976. The principal changes affecting revenues included an average 20% increase in overseas wharfage rates, a 23% increase in coastal wharfage rates, and a 100% increase in overseas berthage rates. On this basis, the revenues derived per container (20 revenue tons) are estimated to be equivalent to K 38 (US$52.44), which is recognized as low by international standards. PNGHB has applied for a container tariff increase which would yield about K 150,000 in the half year from July 1, 1978. A summary of the schedule of present and recommended rates is set forth in Table 9. C. Past Earnings and Current Financial Position 6.03 A summary profit and loss statement for the fiscal years 1974-77 is set forth in Table 10. The following ratios reflect the earnings of the 1975-77 period; ratios for 1974, derived relative to an unrevalued asset base, are not comparable and thus are not included:  - 16 - 1975 1976 1977 Operating 74 107 74 Return on Average Net Fixed Assets in Use 3.5% (0.8%) 3.9% The financial performance in 1975-77 was substantially weaker than the appraisal forecast of the first port project and the returns on fixed assets in use were consistently less than the 8% required under Section 4.03 of the Project Agreement for Credit 326-PNG. PNGHB's financial experience in these years can be largely explained by the Government's failure to increase tariffs sufficiently to offset static traffic and the unanticipated increase in operating expenses. During this period, depreciation nearly tripled, reflecting the enhanced valuation of port assets, and total operating expenses more than doubled, primarily because of an increase in salaries and staff. As a result of these trends, PNGHB incurred an operating deficit in 1976. Even in 1977, which included the full effect of the September 1976 tariLff increases, the above estimated ratios need further improvement, as shown. Appropriate steps to strengthen PNGHB's financial condition are discussed in para 6.05. 6.04 Balance sheet data for fiscal years 1974-77 are presented in Tab:Le 11. In 1975, the balance sheet figures changed abruptly with PNGHB's assumption of substantial additional debt (Credit 326-PNG) and with the revaluation of its assets which resulted in an 80% increase in the equity account. Further balance sheet changes occurred in 1976 and 1977 with annual revaluations of PNGHB's assets and related adjustments to the accumulated depreciation account. Throughout, the debt/equity ratio remained modest, rising from 18/82 in 1974 to only 25/75 in 1977, and the current ratio improved from l.5x in 1974 to 2.3x in 1977. PNGHB's historical balance sheets are satisfactory. D. Future Earnings and Financial Position 6.05 The projected income accounts for PNGHB for 1978-82 are given in Table 10. If PNGHB is to achieve the projected improvement in its return on existing assets and realize an appropriate return on new assets it is essential for its tariffs to be increased. The proposed tariffs are pre- sented in Table 9 and summarized below:  - 17 - Recommended Tariffs and Charges Effective Date Containerized Cargo (a) At Lae, K 97 (US$134) per container replacing berthage and wharfage charges on containerized cargo and ships January 1, 1979 (b) Same as para (a) for all PNGHB ports January 1, 1980 Uncontainerized Cargo (c) 70% increase in overseas berthage rates January 1, 1980 (d) 30% increase in overseas wharfage rates January 1, 1980 (e) 10% increase in coastal berthage and wharfage rates January 1, 1980 Stevedoring Charge An annual rental charge to stevedoring companies for the use of PNGHB's container facilities at Port Moresby K 150,000 January 1, 1979 K 350,000 January 1, 1981 Alternative methods of achieving the projected revenue in 1982 by varying berthage and wharfage rate increases are displayed in graphical form in Chart 17857. PNGHB and the Government have agreed that, effective January 1, 1979, tariffs will increase as above or in such other manner as will produce the required rate of return (para 6.09). They have further agreed that PNGIIB will impose tariffs for the handling of containers at Port Moresby sufficient to produce, in 1981 and thereafter, a 10% return on the initial costs of the project items in use at Port Moresby. 6.06 On this basis, the forecast revenue in 1981 and beyond is static, reflecting the no-growth projection for overseas traffic and the resulting constant volume of container traffic. Towards the end of the forecast period, operating expenses are expected to increase at more than K 300,000 p.a., and interest on outstanding debt, estimated at more than twice its 1976 level, is scheduled for continued growth. In view of the projected steady revenues and increasing costs, the Government and PNGHB have agreed to review the tariffs from time to time to ensure an adequate return on assets (para 6.09). 6.07 The income account performance ratios reflecting the earnings pro- jections for the 1978-82 period are set forth below: 1978 1979 1980 1981 1982 Operating ratio 79 73 64 64 68 Times interest earned 1.6x 2.Ox 3.Ox 2.9x 2.5x Debt service coverage 1.9x 2.4x 3.2x 3.1x 2.8x  - 18 - These ratios are satisfactory after 1979 with the full introduction of the assumed tariff changes. PNGHB has reaffirmed Section 4.05 (a) of the Project Agreement of Credit 326-PNG, which requires PNGHB not to incur additional debt if its net revenue is less than 1.5 times the maximum debt service requirements. 6.08 The estimated balance sheet summaries for 1978-82, are presented in Table 11. The debt/equity ratio is satisfactory, rising from 27/73 in 1977 to 36/64 in 1982. The forecast current position is favorable, with working capital more than adequate to finance current operations. 6.09 Estimated rates of return on the average net fixed assets in use for the 1978-82 period are as follows: 1978 1979 1980 1981 1982