Peru - Port of Callao Expansion Project

R ETURN T R E S T R I C T E D REPORTS DESs wITHiN Report No. TO-183a ONEWEKL IL Ct?Y- This report was prepared for use within the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT ON THE PORT OF CALLAO EXPANSION PROJECT PERU September 8, 1958 Department of Technical Operations  CURRENCY EQUIVALENTS 1952 US$ 1.00 a 16.0 soles I Sol = US$ .062 1953-1957 US$ 1.00 = 19 soles 1 Sol = US$ .053 1958 and onwards US$ 1.00 = 23 soles I Sol _ US$ .043  p E R u Report on the Port of Callao Expansion Project Table of Contents Page Sunmary 1 I. Introduction 2 II, General 2 - 5 III. Traffic Through Port 6 - 8 IV. The Project 9 - 11 V. Benefits from Project 12 - 13 VI. Financial Aspects of the Project 14 - 16 VII. Conclusions and Recommendations 17 Appendices A - Cargo Loaded and Dischlarged 1952-1957 B - Forecast of Traffic 1956-1963 C - Estimate of Cost of Project D - Comparative Balance Siheets 1953-1957 E - Income Statements 1953-i957 F - Forecast Income and TEpense 1958-1962 G - Application and Sources of Funds 1958-1962 i - Forecast of Hinirrum Earning Power I - Savings from Use of Hlineral Loading Plant Miaps 1 and 2 Illustration  - 1 - P E R U REPORT ON THE PORT OF CALLAO ExPANSIOi' PROJECT (i) The Port of Callao Authority has asked for a loan of $6.575 million equivalent to rmeet the foreign currency cost of the expansion of the Port of Callao. Legislation permitting the Authority to borrow and authorizing the Governxaent to gaarantee the loan has been approved by Congress. In 1952 the Bank made a loan of $2.5 million to the Republic of Peru (Loan No. 57-PE) for the purpose of constructing bulk grain dis- charging facilities and purchasing m,echanical cargo handling equipment for the port. (ii) Callao is the principal port of Peru and handles 60 of the country ts imports and exports. Traffic through the port is steadily in- creasing. Certain of the existing facilities are inadequate for their purpose and give rise to hazards, delays and expensive working. The expansion prograni will provide additional accommodation for the expected increase irn traffic and will replace existing unsatisfactory facilities by modern installations. (iii) The investment irnvolved will be justified by the operational needs of the port, by the benefit to shipping of improved turn-round, by reductions in the cost of handling Peruts main exports and by the advantage to the country of ens-ring that its principal port will be free from congestion. (iv) The Port of Callao Authority which has operated profitably since its inception in 1952 should continue to be a profitable undertak- ing after the project is completed. (v) The project is generally sound. Design and supervision will be entrusted to coipetent consultants well experienced in such work. Construction will mainly be carried out by contracts awarded after the invitation of international tenders. (vi) The project is suitable for a loan of 66.575 million equiva- lent. A term of 20 years with a four and one-half yearst period of grace would be appropriate.  - 2 - I. INTRODUCTION 1. The Bank has been asked by the Port of Callao Authority for a loan of $6.575 million equivalent to meet the foreign currency costs of the expansion of the Port of Callao. The loai will be guaranteed by the Government and legislation permitting such a guarantee has already been approved by Congress. In 1952 the Bank made a loan of $2.5 million to the Republic of Peru (Loan No. 57-PE) for the purpose of constructing bulk grain discharging facilities and purchasing mechanical cargo handling equipment for the port. 2. The expansion program consists principally of the construction of a new petroleum handling pier, a new mineral pier with mechanical loading equipment, two new general cargo berths, the acquisition of a dredger and dredging, new sheds and passenger accommodation, and various minor items. The total cost of the program will be approdLmately $12 million equivalent and construction is planned to take place during the years 1958 to 1962. 3. The follovring report is an appraisal of the project. It is based on the findings of a Bank mission wthich visited Peru in October 1957, on a report prepared by Messrs. Parsons, Brinckerhoff, Hall and Macdonald, consulting engineers, in August 1956 and on an economic report prepared by Humboldt of South America Incorporated in May 1957. II. GENERAL Situation of the Port of Callao 4t. As shown on Map 1 the Port of Callao stands at the mid point of the Pan American Highway which traverses Peru betveen the Ecuadorian and Chilean frontiers. It is the terminus of the Central Railway and the Central HighwTay, vhich connect the mining and agricultural areas of the Central Sierra to the capital, Lima, and to the sea. Lima itself, some five miles inland from the port, is the most important commercial and industrial center in the country. Other Peruvian Ports 5. The other principal ports on the Peruvian coast are Paita, Pacasmayo, Salaverry, Chimbote, Pisco and Matarani-Mollendo. They are either lighterage ports or have a pier at i4hich ocean going vessels of limited draft can lie. In general their traffic derives only from a comparatively small surrounding tributary area and in no case does it amount to more than about 10 percent of that of Callao. History and Description of the Port (See Map 2) 6. The earliest port facilities at Callao consisted of a small basin, built towvards the end of the nineteenth century. The basin, knovm  - 3 - as the Old Darsena, is still in daily use by smaller vessels, principally those engaged in the coastal trade and requiring depths of less than twenty feet. In 1929-31 an artificial harbor was created by the construc- tion of breakwaters protecting the Old Darsena and an area for subsequent development. 7. In 1934 a modern terminal for ocean going ships was completed within tVe harbor. It consisted of four reinforced concrete piers each 600 feet long, two of whlich carried transit sheds, At the same time a marginal deep sea wharf was constructed between the piers and the Old Darsena. Together, the piers and wharf provide bertvhage for eleven ocean going vessels, and constitute the essential features of the port as operated today. After over twenty years they remain in excellent struc- tural condition. All of the piers and the marginal wharf are served by both rail tracks and paved roads. WSith the exception of some heavy lifts all cargo is handled by ships' gear. Facilities for discharging bulk petroleum products are provided at the northernmost pier, whence pipe- lines lead to storage tanks in Callao. 8. At the northern end of the harbor lies the Peruvian Naval Dock- yard, which nuibers among its facilities a slhip-building berth and a dry- dock capable of taking medium size cargo vessels. This drydock, together with the adjoining workshops, is muade available for repairs to privatoly owned craft when not required for priority naval purposes. Previous Loan 9. Loan No. 57-PE, made by the Bank to the Government of Peru in January 1952, was for the purpose of constructing bulk grain discharging facilities and the purchase of mechanical cargo handling equipinent. The former, sited at the south end of the marginal wharf, were completed in 1956 and are operating successfully. They are considered by all those concerned in the working of the port to have been a most useful addition to the port facilities. The cargo handling plant comprising fork-lift trucks, cargo trailers and tractors, etc., is also being successfully used. The equipment remains in excellent condition. 2ron of the Port 10. The Port is operated by a quasi-autonomous "Port Authority" set up in conformity with the terms of Loan No. 57-PE. Under the provisions of its organic law, the Authority is empowered to fix its own charges,but transfers to the Government surplus earnings remaining after payment of the cost of its operations including the maintenance and installation of facili- ties, provision for renewals and social insurance, and debt service includ- ing amortization. The law also provided that the Authority should assume responsibility for the service of Loan 57-PE which had been made to the Government prior to the formation of the Authority. The Board of Directors of the Authority has five members: the Ni,nister of Finance and Commerce who is its Chairman, three members representing commercial interests, and the Technical Director of the Authority. The last named is in effect the General Mianager of the undertaking and the appointment is filled by a  - 4 - foreign specialist. The Authority's staff is well organized on modern lines and operates efficiently, the up-to-date methods which are used in training Peruvian subordinate personnel being particularly corimendable. 11. STe present Technical Director of the Authority is a non- Peruvian with previous experience of port work in other countries. He has among his Peruvian staff men who are capable of effectively si4erintending normal operations. During the execution of the project, however, a some- what higher degree of administrative ability and experience iill be called for. The extent of the harbor is limited, and careful planning of port activities will be necessary to ensure that while construction is permitted to go ahead, the handling of shipping and other operations are not unneces- sarily impeded. The Authority has therefore undertaken that it will con- tinue to employ an experienced port administrator, mutually satisfactory to the Authority and to the Bank. Port Authority Charges 12. The Authority undertakes all pilotage and tow-Tage. It also handles all cargo from the ship's side to transit shed or other storage, and vice versa. Although certain operations involved in this cargo handling are per- formed by casual labor employed on a piecework basis, in the main the work is carried out by monthly paid men on the regular staff of the Authority. These men do not belong to trade unions but have "associations" recognizad by the Government and the Authority, one for employees, i.e., clerks, checkers and the like, and another for manual workers. It was recently de- cided by the Government that the "employeest' should have Civil Service status. 13. When cargo handling to or from the ship's side is done during normal working hours the Authority is reimbursed by means of tonnage rates charged to the importer or exporter on the tonnage of cargo handled. When, however, working outside normal hours is involved, an additional charge is made, in this case billed against the shipping company-, based on labor costs plus an allowance of 20 for administration. The amount involved in this "overtime" charge amounts to about 25 of out-of-pocket "ship in port" costs and the shipping companies are critical of the manner in which it is assessed, saying that it is impossible for them to calculate in advance the amount that would be involved in working a particular vessel after normal hours, also that amounts charged are excessive. As a measure towards meeting this criticism the Authority has already published lists specifying in detail the rates of pay of the personnel concerned in over- time working and the numbers and categories of persoLnnel for which charges are made under various circumstances. In order to ensure that the compu- tation of the charges is equitable to the shipping companies the Authority has further undertaken to arrange for an enquiry into the present methods of billing. The enquiry wvill be carried out by the Authority's Internal Auditor in collaboration with an independent firm of accountants.  - 5 Non-Port Authority Costs to Shipping 14. As is commonly the case, the handling of cargo from the ship's side into the hold and vice-versa is carried out by gangs directly employed by the steamship conpanies, generally on a piecework basis. The use of this labor is regulated bv a committee established by Presidential Decree, known as the t"Control Commission for IMaritime Labor". Until recently the stated membership of the Commission, which also has jurisdiction over labor affairs in ports other than Callao, comprised a naval officer representing the MNinistry of Marine, the head of the Departrent of Quays and Wiarehouses in the Customs Service, the Director General of Labor in the Mlinistry of Justice and Labor,and the head of the Department of Ports in the 1dinistry of Finance and Commerce. In practice however the Commission seldom met and stevedore labor was controlled by the representative of the Ministry of Miarine, in consulta- tion with shipping and other interests. 15. W;thile the average turn-round time of ships using the port com- pares satisfactorily vith that prevai1ing elsewuhere, there has recently been a tendency for the prodctivity of the labor employed by the sh-pping companies to fall and for the out of pocket "ship in port" costs to ship- ping companies to becomre somewhat higher in Callao than in other South American ports. It appears evident that in the main these tendencies arise directly and indirectly from restrictive practices on the part of the several labor unions involved and that they are not attributable in any substantial degree to matters under the control of the Port Authority. 16. In April 1958, i.e. after the visit of the Bank M.1ission, the various "Conferences" of shipping lines using the port announced their intention to imoose a surcharge of approximately `2.00 per revenue ton on freight consigned to Callao as from June 1, 19"8 on, the grounds of "excessive operational costs" at the port. Detailed reasons for this action were not published, but it is understood that these principally comprised the matters mentioned in paragraph 15 above and do not primarily arise from practices under the control of the Port Authority. The Government is already discussing vrith the shipping companies the measures necessary to obviate the excessive costs complained of. As a first step it has arranged for improvements in the composition of the Control Commission for Maritime Labour, which will now comprise representatives of the I inistry of Finance and Commerce, the ;inistry of Labor, the Callao Port Authority, the Callao Chamber of Commerce, the Ml1aritime Ass ciation of Peru, and the Callao Stevedores Union, under the chairmanship of a representative of the Ministry of Marine. 17. Of the items of the project only the provision of the mineral handling plant and berth vrill appreciably affect the shipping companies, difficulties-with their labor. This plant will mechanize the handling of a substantial proportion of the traffic of the port and so reduce the extent to wlhich such labor is required.  III. TPAFFIC ThROUGH PORT Existing and Past Traffic 18. The Port tributary area, consisting, as already described, of the mining and agricultural areas of the Central Sierra and the commercial and industrial areas of Lima, comtrises 19% of the area of the country. In 1956, it contained 37% of the population and produced 58%o of tlle national income. In the same year 60% of the total value of the exports and imworts of Peru passed through the Port of Callao. The principal categories of exports, reg?rded from the noint of view of tonnage are minerals (under which heading are included metallic concentrates and barytes), refined metals, and general cargo such as cotton, wool, hides, fishmeal, canned fish, et-c. The chief import tonnages are petrolein products, wheat, and general cergo comriprising automobiles, machninery, lumber, ne7,isprint, chemicals, and the like. Some transshipmerttakes place and there is a considerable volume of coastal traffic, the latter being dealt pith almost entirely in the Old Darsena. During recent years the total volume of traffic through the -ort has increased at a generally evenrate, rising from 2,362,791 revenue tons in 1951 to 3,357,000 revenue to13 in 1957. Details of the growTth in respect of the erincipal categories are given in Appendix A, Probable Future Traffic 19. 1957 was in manv respects an abnormal year. The prospects of an increase in United States im9Dort duties boosted export tornages of metallic concentrates and refined metals to a higher amount than would otherwise have been expected. Unfavourable weather reduced the cotton crop in the area with a consequent decrease in cotton exports. Expectation that the currency was about to be devalued led to a sharn rise in the tonnage of general cargo imports. Forecasts of future traffic have accordingly been projected from the traffic recorded during 1956 rather than from the 1957 figures vhich are re- garded as uncharacteristic. Minerals 20. Over one-half of the minerals exported consists of metallic concen- trates, of ahich about 80% are zinc concentrates and most of the remainder lead concentrates. The exnort of these materials is at all times liable to fluctuate according to market conditions. It is also possible that export might be affected by an increase in refining capacity vithin the country. In contra- diction to the view held some years ago the principal mining companies now think it improbable that there waill be any major increase in refining capacity for either lead or zinc, as in both cases more capacity exists than is at present beirg used. They further consider that any decrease in exnorts of the concentrates resulting from minor additions to refining capacity or from fuller use of the existing capacity will ultimately be more than made up. for by in- creases in world demand. Future emport tonnage of concentrates may accordingly be expected to remain at about the present level. The remainder of the item consists mainly of the non-metallic ore barytes. This is less liable to fluctuation in demand, and in its case also, it is expected that export will remain at ap-roximately the iiresent figure. Future mineral traffic as a whole  - 7 - is therefore conservatively estimated to remain constant at an amount somewhat less than current figures. Refined lMletals a . Virtually the whole of the production of refined metals in the Callao tributary area, comprising zinc, lead, and copper, is in the hands of the Cerro de Pasco Corporation. Using existing refining caoacity this company plans to increase its output substantially durirng the years 1958-61. Wihile the prevailing low level of world prices and protective measures t2ken by the United States may retard this program to some extent, it is expected that by 1959 the export of refined metals through Callao may t-ell resume an upward trend. Exnort of General CGrgo 22. With the exception of the falling off in 1957 referred to in paragraph 19 the export of cotton, wool, hid-es, etc. has risen steadily during recent years. The trend may be arrested for the time being by the present falling off in tcorld demaprd for raw materials but should eventually resume its upward course in lkeening writh the long-term growth of agriculture in the -nort tribt- tary area. Petroleum Products 23. As a result of the growth of population, the improvement of roads and increasing mechanization, it is foreseen that the import of netroleum -roducts vfill steadily increase during future y1ears. The Internationa1 Petroleum Com- pany, (a subsidiary of Standard Oil of NlewT Jersey) which handles all such traffic through Ccllao estimates that the total import will rise by an average of 8% -er annum during the years 1956-63. Hot ever, the appreciable increase in the tax on certain of these products recently imposed by the Government will undoubtedly have some retarding effect. This is considered likely to be ten- porary so that while traffic may remain at approximately current figures during 1958, growth of the order envisaged by the International Petroleum Company may be resumed thereafter. W1Iheat 24. The demand for wheat in Peru will continue to increase for some years as a result of growth in copulation, and rising standards of living. It is expected that greater Peruvian production resulting from improved irrigation and methods of cultivation will only partly meet this increase in demand. Imports are therefore expected to continue to increase at a noderate average rate. Import of General Cargo 25. Prospects for export earnings and capital inflowT in the rext four to five y,ears are such that they could not permit a continuation in the recent rising trend of imports of general cargo fnd it is anticipated that during the next tbree years such tonnage will amount to only 90% of the 1956 figure.  - 8 - Subsequently net export earnings should increase and import tonnages of general cargo may be expected to resume thaeir uoward trend, Transdiiment and Coastal Traffic 26. ilo great change is anticipated in the amount of transshioment or coastal cargo handled. Forecast of Future TrafLic 27. Aopendix B gives the estimated tonnage of exports and imTorts of all categories of cargo during the coming five vears. As will be seen, an in- crease in total traffic of 770,CO0 tons, or 25i' is exoected to have occurred between the years 1956 and 1963. Of this increase, 427,505 tons, or 18% will have been in resoect of petroleum products. Effect on Future Traffic of Devaluation of Sol and Increases in Labor Rates ancd Customs Dutiese 28. The effect on future traffic of the devaluation of the Sol in Ja.nuary 1958 and of recent incre1ses in labor rptes is difficult to assess. Devalua-- tion might be expected to stimulate exports, rising labor costs having the opposite effect. As regards imports, devaluation w.ll no doubt tend to reduce total value, but miiht not affect tonnage a-.preciably, because of the basic character of the tonnage commodities involved. The recent increases in customs duties are likely to reduce the total velue of imports but the reductions in tonnage involved will probably be small because the increased duties mainly apply to lwrury goods the volume of which is small in relation to value. On the whole it is therefore probable that notwithstanding these various uncertainties, a moderate increase in traffic of the order g-iven in Appendix B is still to be expected. This view is supported by the figures for the first five months of 1958, whicih are substantially in agreement with the forecast tonnage for the year given in the Appendix. Other Peruvian Ports 9. The Government is examining the ouestion of irnproving other constal ports. Those involved which are nearest to Callao are the existing lighterage Ports of Salaverry, 3ts0 miles to the north, and Pisco, 165 miles to the south. It would anpear that while some changes in the pattern of traffic may result from such develorments, the changes Aill be small in amount and their overall result may not necessarily be to reduce Callao traffic. Special consigrfnents at present discharged at Callao because of its superior facilities and trans- ported 'long distances byroad alonr the Pan-4merican HIghway, may in future be off-loaded at the imnproved minor Dorts. On the other hand, coastal traffic may well increase, as a result, for instance, of the carriage of local agri- cultural ard other produce to Lima by sea being made economaic by the improve- ments of such ports. On the whole, it is considered that improvements to the minor ports will ircrease traffic through them byr stimulating the development of their hinterlands rather than b-r diverting traffic from Callao.  - 9 - IV. THE PROJECT General 30. As has already been described, the volume of traffic passing through the Port of Callao is expected to increase steadily in coming years. The purpose of the project is to expand the existing facilities of the port so as to permit such increase to be dealt with and also to enable certain classes of traffic to be more effectively handled than is at present possible. 31. The expansion proposed comprises a new two-berth petroleum han- dling pier, a new berth with mechanical equipment for the leading of miner- als, two new general cargo berths, the purchase of a cutter suction dredger and the carrying out of dredging in,the harbor, three new storage sheds- improved passenger handling facilities and a number of minor improvements. The siting of the principal of the foregoing items is shomTn on Map 2. The new facilities h?ra been planned as part of a larger long-term expansion program. This program provides for the construction at a later date of an extension of the mineral loading berth and storage area and one additional general cargo berth, should these itens prove to be necessary. Estimated Cost of the Project 32. The estimated cost of the project is S/ 271,000,000 (US$ 11-8 million equiyalent) approximately, of which foreign currency costs will amount to S/ 151,000,000 (US$ 6,575 million equivalent). These figures do not include the cost of engineering or interest during construction which will be met by the Borrower out of revenue. The estimate is con- sidered to be satisfactor2y. To an appreciable extent it is based on firm tenders already received. Normal provision for construction contingencies has been made as well as a reasonable allowance for expected increases in local costs, and unless an unforeseen degree of inflation occurs during the construction period the estimated total cost should not be exceeded. The folloiving is a summary of the estimate, details of which are given in Appendix C. Million Soles Petroleum pier and pipelines 37.4 M4inerals berth and equipment 70.4 Cargo berths 51.4 New dredger and dredging 51.5 Storage sheds and yards 22.0 Passenger accommodation and gantries 13.9 Maintenance wuorkshop, etc. 5.8 Harbor tugs 18.8 Total 271.2 US ,,., million equivalent (11.8)  - 10 - Expenditure is scheduled approximately as follows: Local Currency Foreign Currency T o t a 1 Million Soles Thousand US5 Million Soles Thousand USS5 1958 3.5 625 17.9 778 1959 24.5 2,138 73.7 3,200 1960 51.3 2,269 103.5 4,500 1961 34.5 1,287 64.1 2,789 1962 6.2 256 12.1 525 Total 120.0 6,575 271.3 11,792 New Petroleum Pier 33. The new petroleum handling pier will consist of a two-berth load- ing head approached by a light trestle carrying pipelines and an access-lwray for light vehicles. In considering the design of the pier, the possibility of locating it ov'tside the harbor was studied. It was,holw?ever, concluded that the disadvantages arising from the lack of protection from wave action and the heavy dredging costs likely to be rmqet with would out-weigh any ad- vantage attached to such a siting. 34. Special agreements with the present users exist in respect of the existing petroleum handling facilities. It may be necessary to enter into fresh agreements regarding usage of the newT facilities by third parties and the Port Authority has agreed that the position in this respect will be clarified before construction of the pier is begun. New Mineral and General Cargo Berths 35. These will be sited on a "finger" pier to be constructed on a northwesterly alignment from the root of the northernmost existing pier. It is envisaged that at a later date this pier may be extended to provide additional mineral loading berthage and a third general cargo berth. The mineral loading plant initially installed will have not less than 20,000 tons storage capacity and will be capable of mechanically loading into the ship's hold at the rate of 600 tons per hour. As the volume of mineral export varies from time to time, care vill be taken to design the loading berth so that it can be used effectively for general cargo when the level of mineral shipment is lor. New Dredger and Dredging 36. The new dredger will be a self-propelled suction dredger having a bottom dumping hopper of about 800 cubic meters capacity. It will be designed so as to operate as a drag suction or a cutter suction dredger in depths up to 55 feet below water level when light. The present proposals involve dredging the entrance channel and the approaches to the new piers, the total volume of dredging involved in the project being approximately 4,200,000 cubic yards. As far as is feasible, the dredger vill be designed so as to be suitable for work in other Peruvian ports at which dredging is contemplated.  - 11 - New Sheds and Passenger Facilities 37. The new storage sheds will comprise a long-term storage warehouse and two transit sheds. Housed in one end of one of tbe latter there will be a transit cold store of 600 tons capacity. An area of approximately 75,000 square yards in the vicinity of the sheds will be fenced and paved to provide additional secure open storage. The new passenger handling facilities Trill conprise access bridges, wvaiting rooms, etc., which will be sited at the existing piers. New Miaintenance Shops, etc. 38. The nevw maintenance shops rill be equipped with a suitable range of light machine tools required for the running maintenance of the Authority's tugs, dredger, buildings, etc. The new stevedores' gear store will accom- modate miscellaneous handling equipment used by shipping companies, for wihich storage facilitlies are at present lacking. Ttsro modern 750 hp diesel tugs are to be provided, each fully equipped with the latest type of fire-fighting equipment. Engineering and Pr,ocurement 39. As the engineering staff of the Port Authority has been kept at a minimum, the whole of the design work, preparation of specifications and engineering supervision involved in the program will be entrusted to a firm of consulting engineers well-experienced in work of this nature. The dredging involved will be carried out by the Authority, using the dredger to be purchased as part of the project, but the remainder of the project, including the provision of the dredger, will be carried out under contracts awarded after the invitation of international tenders.  - 12 - V. BEITEFITS FROM -RCJ!CT 40. The project as a whole will make Callao a faster, safer port, capable of handling more goods at low7er costs and equipped with essential facilities it now lacks. Each individual part of the oroject meets some definite operational need such as the achievement of higher standards of safety, the speedier turn-round of ships, the mechanized handling of bulk freight, the making available of spare berths, and the provision of passenger amenities. hi. The provision of the new petroleum pier is an overdue safety measure. All petroleum tankers are now discharged at the northern side of the north- ermost pier, from which pipe lines run to storage tanks about a mile inland. Nhen berths are lacking elsewhere, it is necessary to berth a general cargo ship on the south side of this pier while a tanker may be discharging gasoline, aviation fuel, propane, etc. on the north side. The procedure is hazardous despite the strict precautions observed; a single mishap could easily cause several times maore danage than the whole cost of the new y)etroleum pier, approximately $1,600,000 equivalent. 42. The new pier will permit tankers discharging flammable loads to berth aaway from other ships, and thus greatly reduce the present risks of explosion and fire. At the same time, an additional berth will be released for general cargo ships. 43. The vorld comnetitive position of Peru's mineral industries will bu greatly improved by the new facilities for the mechanized handling of bulk minerals at a special berth. The planned installation will be capable of moving up to 14,C00 tons of minerals daily as a routine operation, in com- parison with a loading rate of between 500 tons and 850 tons per day using present methods. 44. All loading at present is by primitive means using bags, canvas slings, steel cannisters, and hand labor. The work is slow-Y and expensive, involves considerable waste, and creates health hazards due to dust. It is estimated that using the mechanized loading plant on the new pier, there will be savings of approximatelv ,J3.75 a ton in reduced loading cost, reduced expenditure on sacks, and reduced loss from spillage. The Port Authority proposes to recapture part of this saving by imposing a loading charge of ?l.C0 a ton on minerals in addition to the charges now applicable. After allowing for this additional charge, the aggregate saving to exporters, assuming a normal future traffic of 350,000 tons a year, would be 4$950,000 per year. Details of the conmutation of this figure are given in Appendix I. 45. Furthermore, the ships which call at Callao for minerals will be able to load and leave much faster. The new installation will thus help to keep down ocean freight rates and thereby strengthen Peruls position in world markets and the country's balance of payments. As an incidental benefit, the equivalent of a full berth now used for mineral traffic will be released for general cargo and refined metals traffic, lessening congestion at Dresent periods of neak activity and providing additional capacity to meet future expansion,  - 13 - 46. The new general cargo berths which the Authority plans to build are not urgent in the sense that deferring their construction would impair the immediate efficiency of the port. Some eight berths are now in use for general cargo and refined metals and two additional berths -oill be released when the new-T minerals and petroleum piers are commissioned. Severe congestion is there- fore unlikely during the next 5 - 10 years. 47. There are nevertheless good reasons for building the proposed two new berths at the present time. To some extent they will be an insurance against increasing ocean freight rates because they wi'l tend to reduce the frequency of the vessel delays which now occasionally arise frorm peak cargo movements and the bunched arrival of ships. There can be little doubt that additional berths will eventually be needed to cope wNith the long-term growth of the gereral cargo and refined metals traffic. Substantial economies of construction cost can be realized by building the berths now, as tart of the total -project, cnd these economies may well equal or outweigh the extra financial charges incident to immediate construction. Because of the relatively restricted extent of the harbor, traffic and the movement of shipping will be hampered while construction is in progress and this effect will be lessened if the -oroject is carried out in one stage. 48& The miscellaneous works and equipment comprising the remainder of the project are needed for the good management of the port. The dredger wi%ll be used for wTork in connection wi-th the construction of the new piers and to restore the harbor whicch has badly silted un during recent years to the recluired depth. Subsequently it -will be used for harbor maintenance and for wiork ai other ports, for -0hich no suitable equipment is at present available. The new transit sheds and warehouses will reduce transfer costs between piers and sheds and provide long-term storage caoacity wThich is at i0resent lacking. The new passenger terminal will provide adequate accommodation for the purpose and at the same time eliminate delays to shipping and traffic which now arise because of the lack of such facilities0, The new maintenance shops, gear store and tugs are required to renlace existing facilities which are inadequate and obsolete.  - 14 - VI. FINANCIAL ASPECTS OF THE PROJECT Authority's Financial Record 49. The Authority has had a satisfactory financial record; it has earn- ed large profits and has paid substantial amounts to the Peruvian Government since its inception in 1952. The Authorityts fiscal year is the calendar year. Balance sheets for the year end and income and surplus statements for the corresponding periods, certified to by independent accounts - Messrs. Price, Waterhouse, Peat & Co., are summarized in Appendices D and E for the years 1953-1957 inclusive, Annual operating results have been on a compa- rable basis only since 1955, when all its present sources of revenue became available to the Authority. 50. The folloving is a summary of the income statements given in detail in Appendix E. 1953a/ 1954 1955 1956 1957 TS/ Million) Operating revenues 52.8 72.1 99.8 114.6 134.0 Operating expenses and pro- visions for renewals Y 37.8 46.8 51.6 67.5 86.1 Net operating income 15.o 25-3 9-2 147.1 47.9 Interest on IBRD loan 0.9 1.2 1.5 1.6 1.6 NIet income 11.1 467 -.5 46.3 Payments to Government 7.0 18.2 24.3 29,2 28.9 Balance 7.1 225.12 16:- T1-7 In the above five-year period, net income totaled S/ 176.7 million, of fhich 107.6 million or 61% has been paid to the Government. The Government's original investment was approximately S/ 72.0 million, consisting of S/ 50.5 million in fixed assets valued at pre-1952 acquisition cost plus S/ 21.5 million in contributed working capital. The surplus revenue Nhich has been paid to the Government from 1953 through 1957 therefore represents a return of approdimately 30% annually on the original investment as described above. In addition the Authority ess added S/ 81.0 million to its fixed assets and S/ 22.0 million to its working capital, out of retained earnings and renewals provisions supplemented by the outstanding balance, S/ 31.7 million, of Loan 57-PE. 51. Net operating income last year was S/ 47.9 million and represented a return of 27% on the invested capital (net fixed assets plus wvorking capita:). Interest vuras covered 30 times and debt service was earned 11 times. a/ 10 months beginning March 1. b/ In the auditorst reports, certain items of operating revenue are shown net of the corresponding direct expenses. The income statements includ- ed in this report show the gross amounts, both of operating revenues and of operating expenses.  - 15 - 52. Despite sustained good earnings an increasing proportion of operating revenues is being absorbed by labor and other operating costs. The ratio of operating expenses to operating revenues has increased from 52% in 1955 to 64% in 1957. This has resulted from the impact of infla- tion on wages of port labor and on prices paid by the Authority for rmaterials and supplies. The recent devaluation of the sol from 19 to 23 per U. S. dollar has already led to further wage and price increases, vrhich may continue, and has automatically increased the debt service of the IBRD loan (No.57-PE). These effects however, should be largely offset by increasing revenues as a direct result of currency devaluation; about 55% of the Authority's current revenues is contributed by tariffs expressed in U.S. dollars and payable in the sol equivalent thereof. 53. The Authority's balance sheet as of December 31, 1957, summarized below, showTs a strong liquid position. The Authority has ample working capital, its debt burden is light, its plant is conservatively valued, and its equity approximates 80% of net tangible assets. (S/ idillion) Assets Liabilities and Equity Current assets 49.9 Current liabilities 6.1 Fixed assets in service, Renewvals reserve 13.1 / at cost 133.4 al Other reserves 1.9 IVork in progress 9.0 IBRD loan 31.7 Exchange difference-suspense 2.9 / Government equity 142.4 i Total 195.2 Total 195.2 54. As shown above, net fixed assets were S/ 120.3 million, vworking capital was 43.8 million and net tangible assets 173.1 million. The current ratio was 8.1:1, the debt-equity ratio 1:4.5. These are satisfactory ratios. Planned Financing of Project 55. The Authority wishes to borrow from the Bank the full foreign ex- change costs, equivalent to S/ 151 million, and will undertake to provide from future revenue the full local currency costs amounting to S/ 120 million. Surplus earnings during the construction period should be sufficient for this purpose. a/ Of which S/ 60.9 million is pre-1953 plant, carried at pre-1953 costs. 9/ Reflects lump sum annual provisions in lieu of depreciation charges. 2/ Consists approximately of: S/ Million Fixed asset account 104.8 Working capital account 21.5 Surplus 16.1 142.4 / Reflects effect of currency devaluation on sDl equivalent of principal of loan 57-PE.  - 16 - 56. Appendix F showvs a forecast of earnings for the five-year construc- tion period, 1958-1962 inclusive. The estimates are based on the detailed forecast of traffic volume given in Part III, allovr for higher wage and materials costs and for higher debt service charges as a result of the recent devaluation of the sol, allao for the increased revenue accruing to the Authority out of tariffs expressed in dollars, and provide for depreciation by assuming a 40-year service life for the fixed assets, valued at cost. A cash flow forecast is set forth in Appendix G. It shows that adequate sums should be available throughout the construction period not only for the project itself, but also for certain minor works now in progress, for renewals of operating equipment, and for principal payments on Loan 57-PE. 57. Net income during the construction period should total S/ 187 million (Appendix F) in 1962. Various ratios are shown in Appendix F, all of which decrease as the construction program progresses. For 1962 interest would be earned 4.7 times, debt service would be covered 3.8 times and the return on average fixed assets in service would be 16%. Future Earnings anI Finance 58. Starting with 1963, after the new facilities had been in opera- tion for a full year, the Authority should be able to bring in net opera- ting income of at least S/ 55 million (Appendix H). Net earnings after interest would be at least S/ t5 million a year or 16% on the equity. Maximum interest charges on the Bank loans vrould be earned 6.0 times and debt service would be met 3.3 times. 59. The Authority's balance sheet as of December 31, 1962 would be approximately as followirs: S/ Million Assets Liabilities and Equity Cash and receivables 58.0 Current liabilities 13.0 liaterials and supplies 5.2 Long-term debt IBRD present 1-77. Long-term debt IBRD proposed 145.1 Total current assets 63*2 Total 162.7 Fixed assets 418.7 Reserve for renewals 34.0 Exchange difference- Other reserves 3.8 suspense 9.6 Government equity and surplus 278.0 Total 491.5 Total 491.5 Total debt, excluding the portion currently due, wrould be S/ 163 million or 42% of net fixed assets, S/ 385 million. The Government's equity inclu- ding surplus, S/ 278 million, would give a debt-equity ratio of 1:1.7. Working capital would be S/ 50 million and the current ratio 5:1. These are satisfactory ratios. a/ Reflects effect of currency devaluations on sol equivalent of principal of Loan 57-PE.  - 17 - VII. CONCLUSIONS ANqD RECOLaMNDVTIONS 60. The project for the expansion of the Port of Callao is sound and well justified. It will provide the additional berthage needed to accommodate the growing traffic of the port. The modern plant for the mechanical loading of ores and concentrates wzill substantially inprove the competitive position of Peru's mineral industries. The new petroleum handling pier will eliminate a serious hazard besides making existing berthage available for general purposes. The modernization of passenger and other facilities will add generally to the efficiency of the port. 61. The Port of Callao Authority has an excellent financial record. There is every prospect that it will continue to be a profitable under- taking when the project has been completed. 62. The project is suitable for a loan equivalent to 46,575,000 to be made to the Port of Callao Authority. A term of 20 years including a grace period of approximately four and one-half years is considered appropriate for the project.  PO.RT OF CAL1LAO Cargo Loaded and Discharged 1952-57 (Revenue tons) i1 TON1LGE OF CARGO SH&IPPED 95_ 19f3 19S4 1256 1956 1957 (a) Minerals 280,356 196,513 202,060 309,292 320,204 457,000 (b) Refined Metals 65,940 94,377 101,879 113,961 100,520 137,000 (c) General Cargc 81,304 83,407 110,673 133,137 179,012 129,000 (d) Transshipments 24,432 20,172 25,341 32,245 28)770 32,000 TCONAGE CF CARGO DI SCHARGED (e) Petroleum Products 798,487 827,316 995,194 1,073,490 1,152,495 1,170,000 (f) Wheat 212,521 242,833 199,142 273,948 246,074 270,000 (g) General Cargc 694,041 720,989 612,257 754,341 852,275 956,ooo COAST1ISE TONNAGE (h) Shipped and Discharged 21SqQ,1 _ 1(.51 2iOXQ4 _+21 22&5,392 206.000 TOTAL 2,376,112 2,3&63,957 2,456,940 2,907,628 3,104,742 3,357,000 a/ i.e. either metric or measurement tons according to the manrer of assessment of p6rt charges. In effect items (a) (b) (e) and (f) are in metric tons, the remainirg items mainly in measurement tonso  PORT OF CMA1LAO Forec&st of Traff4is 1956-63 (Revenue tons) ej ESTIM2TED TO0SrAGE OF CARGO SHIPPED 1956 L957 1958 1959 1960 i2_ 1962 1963 (a) Minerals 320,204 457,000 350,000 350,000 350,000 350,000 350,000 350,000 (b) Refined Metals 100,520 137,000 100,000 140,000 150,000 160,000 160,000 170,000 (c) General Cargo 179,012 129,000 180,000 200,000 220,000 240,000 260,00o 270,000 (d) Transshipments 28,770 32,000 30,000 30,000 30,000 30,000 30,000 30,000 ESTIMATED TONNAGE OF CARGO DISO,RhdGED (e) Petroleum Products 1,152,495 1,170,000 1,170,000 1,210,000 1,320,000 1,450,000 1,580,000 1,710,0OO (f) Wheat 246,074 270,000 254,000 264,000 270,000 276,000 282,000 290,000 (g) General Cargo 852,275 956,000 765,000 765,000 765,000 785,000 805,000 825,000 ESTLMATED TONliAGE OF COASTAL CARGO (h) Shipped and Discharged 225,392 206,000 230,000 230,000 230,000 230,000 230,000 230,000 Tt^TAL 3,1CV,742 3,357,000 3,081,000 3,189,000 3,335,000 3,521,000 3,697,000 3,875,000 a/ i,e. either metric or measurement tons accordinig to the manner of assessment of port charges. In effect items (a) (b) (e) and (f) are in metric tons, the remaining items mainly in measurement tons.  Appendix G Port of Callao Expansion Project Estimate of Cost Local Foreign Item Currency Cost Currency Cost Total Cost - (Soles) (TiSF Equivalent) Soles (USa Equivalent (a) Petroleum handling pier and pipelines 17,095,000 884,300 37,433,900 1,627,561 (b) Few minerals berth and mineral handling equipment 33,981,000 1,585,100 70,438,300 3,062,535 (c) Two new cargo berths 33,510,000 780,300 51,h56,900 2,237,256 (d) NJew dredger and dredging 8,855,000 1,852,635 51,465,600 2,237,635 (e) New storage sheds and yards 15,980,000 261,000 21,983,000 955,783 (f) New passenger accom- modation and gantries 8,597,000 230,000 13,887,000 603,782 (g) New maintenance work- shop and equipment 1,820,000 146,165 5,181,800 225,296 (h) New gear store 162,000 20,000 622,000 27,0143 (i) Two harbor tugs - 815,500 18,756,500 315,500 Total 120,000,000 6,575,,000 271,225,000 11 ,792 ,391  Appendix D Comparative Balance Sheets As of December 31 1.953 1954 1955 1956 1957