Philippines - Third Ports Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 7570 PROJECT COMPLETION REPORT PHILLIPINES THIRD PORTS PROJECT (LOAN 1855-PH) DECEMBER 30, 1988 Infrastructure Division Country Department II Asia Region Tb"is doemenet has a restricted distribution and may be used by recipients only in the performance of their offcial duties. Its contents may not otherwise be disclosed without World Bank authorization.  FOR OUIItAL USB ONdLY TM WORLD BANK WashmNgton. D.C. 20433 U.S.A. Okce Of.cswaI 0atw Ivakt December 30, 1988 MEMORANDUM TO TUE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Philippines Third Ports ProJect (Loan 1855-PH) Attached, for information is a copy of a report entitled "Project Completion Report on Philippines Third Ports Project (Loan 1855-PH)" prepared by the Asia Regional Office. Further evaluation of this project by the Operations Evaluation Department has not been made. Attachment This docum hkm a rsticeddiibuton and may be used by nrpiena ony th wporusmae of thdir offc dutieas.It conants may nsot oterwie be diclosed without Wold Bank autoitndm.  FOR OFFICILU USE ONLY PHILIPPINES THIRD PORTS PROJECT (LOAN 1855-PH) PROJECT COMPLETION REPORT Table of Contents Page No. BASIC DATA 3E ............,i BAIC DAT IET8............................................................. iii r. * NTRODUCTION ................................................. I. Ir. PROJECT IDENTIFICATION, PREPARATION AND APPRAISAL.......... oo. 2 A* Background e o o o * o o o o o o s o * e e ........oeo........................ee.... 2 B. Project Description.........o..o .ooe....o.....e.eo..o.o 3 III IMPLEMENTATION oe................... eee.............. S*eooee 5 A* Effectiveness .............................. ............. 5 B. Revisions to the Project ...c...... ...................c.. 5 C. Physical 6............................................... 6 D. Reporting and Procuremente.o.e....co..e............ce... 9 F. Disbursements ...... .. 10 C. Performance of Consultants, Contractors and Suppliers... 10 IV. OPERATING PERFORMANCE............ .................... 10 V. FINANCIAL PERFORMANCEze....e.c..eeeeeeee..........eeeccc. c 12 A. Operating Results .................................... 12 B. Effects of Inflation ................................... 13 vr. INSTITUTIONAL PERFORMANCE AUD DEVELOPMENT ......e .cceece 13 A. Organizational Autonomy.;............................... 13 B. Management..e........... ..........*. ...... 14 VII. ECONOMIC RE-EVALUATION ......... eec...... c....... eccc ee e. 14 VIII. BANK PERFORMANCE ........e.. .... 16........ c6 IX. CONCLUSIONS .......................... ...... eec...... 17 This document has a restricted distribution and may be used by recipients only In the performance of their official duties. Its contents may not othefwise be disclosed without World Bank authotization.  TABLES 1. Actual and Expected Project Implementation 2. Percentage of Work Completed 3. Status of Major Loan Covenants 4. Summary of Actual and Original Estimates of Project Costs 5. Schedule of Disbursements 6. Disbursements by Category 7. Actual and Original Expectation of Project Financing 8. Comparison of Traffic Crowth 9. Traffic at Government and Private Ports 10. Port Traffic in the Philippines 11. Actual and Projected Income and Expenditure Accounts for PPA, 1980-1986 Ila. Actual and Projected Income and Expenditure Accounts for Cebu, 1980-1986 llb. Actual and Projected Income and Expenditure Accounts for rloilo, 1980- 1986 llc. Actual and Projected Income and Expenditure Accounts for Cagayan de Oro, 1BO-1986 lld. Actual and Projected Income and Expenditure Accounts for Zamboanga, 1980- 1986 12. Actual and Projected Balance Sheet of PPA, 1980-1986 13. Economic Reevaluations Project Costs and Benefits MAPS 1. Port of Cebu 2. Port of Cagayan de Oro 3. Port of Iloilo 4. Port of Zamboanga  PHILIPPINES THIRD PORTS PROJECT (LOAN 1855-PH) PROJECT COMPLETION REPORT Preface This is a Proje;.t Completion Report (PCR) for the Third Ports Project for which Loan 1855-PH was approved on May 27, 1980 in the amount of US$67.0 million. The entire amount was passed on to the Philippine Ports Authority (PPA) as a loan on the same terms as the Bank loan. The original closing date of the loan was extended by twelve months to June 30, 1986, and the final disbursements were made in December 1986. The unused balance of the loan, totaling US$134,000, was cancelled at loan closing. The PCR was prepared by the Asia Country Department II Infrastruc- ture Division and was based on a PCR prepared by PPA and other documents contained in the project file. The PCi was discussed with PPA and the govern- ment staff involved during a visit in February 1988 and their comments have been incorporated in the report. The valuable assistane: provided by the project staff during preparation of this report is gratefully acknowledged. Tn accordance with the revised procedures for projact performance reporting, this PCR was read by the Operations Evaluation Deparoment (ORD) but the projact ws. not audited by ORD staff. The draft PCR was sent to the Borrower on September 13, 1988. No coments were received.  - ii - PROJECT C !P"ttOM REPORT 9ASIC DATA SHEET PHtLtPP:NES: THIRD PORTS PROJECT (LOAN t855-PH) KEY PROJECT DATA Appraisal Accual Yr Item expeccation current esttsace Total Project Cost (USS million) ts5.o _____' Inderrun (:) 3 31* Loan/Credit Amount (USS million) 67 0_S6 _47 Disbuiesd ) - -_ _.d_7 Cancelled ) - ______ Repaid to ) - - Outstanding to ) DaSo Physical Cooponents Completed 06/84 11/86 Proportion Completed by Above Dace (2) ____ _ oe Proportion of rtne Overrun (2) Economic Rate of Return (t) lot 'l' financial Performance Good Good tnatitutional PerfoCIneo Good Good OTHE0 PROJECT DATA OrigInL Actual or ttem Pltn Revisions Est. Actual Firsc Mention tn Ftles or Timetable ! / / / 06/06/73 Governments Applicatlon i7 / I t 1-_ Negotiations -7 I 1 04/t 870 Board Approval I/07 80 Loan/Credit Agreement Date I 6I / 06/1380 Effectiveness Date I I I9/ CloSing Otte 178S 07/01/8S 06/30/96 sorrowur RePubic of the Phillptneo Executing goncy Philiopine Potrs Authortty Fiscal Yost of Uorrowr J y 1 - December 31 Follom-on Project fame Provtncial Ports Probeet Loan/CredIt lSmbr Loan 2533-PU mount (USS Million) 32.0 Loan/Credit Agreement Date 06130/87 MISSION DATA No. of !o. of Date of It" Month. Tear Weeka Percona Man-weeke 8eort Identificatton 01/79 2.0 2 4.0 OV13/79 Preparation 03179 7 ir t 0 o `1179 Preappraisa 07/79 2.0 3 6.0 08/03/79 Appraisal O79 4.0 3 1.0 1113/79 Total 5 r 2T.0O Supervision 1 10/80 1.0 12/18/80 Supervtsion tt 03/81 1.0 1 1.0 -0O4/0)181 Superviston tl2 07181 l07/2 718 Supervistin IV t/781 0.5 l 0.5 11/23/81 Supervttion V 05182 - 0l1 u77'18_ Supervtsion Vt 01/83 -. l2.0 03/)8/83 Sugervtsion VII 02183 0 I l. 03/25i8 Supervtsion VIII 02/84 1.3 2 3.0 03/23/84 SupervIston LI 07/14 t.0___ 207/847M Supervision X 02/85 .3 1. 0 04/08/85 Superviston X1 034/86 7 T1.0 0 1370 Completion ______ 10 _8a 0614/88 Total 1. COUNTRY EXCUAIGC RATES Name of Curreney (abbreviation) Peo C P ) Years Apprasla Veer Average 1979 Exchange pAtes US$I * 7.30 lanterning Teara Average 1980-85 US$1 P Completion yer I19 USSI * P 20.S,3  - iii - PHILIPPINES THIRD PORTS PROJECT (LOAN 1855-PH) PROJECT COMPLETION REPORT Highlights i. The project, designed to be an integral part of the country's port investment program, was based on a National Transport Systems Study issued in 1978. That report identified the project ports at Cebu, Iloilo, Cagayan de Oro and Zamboango as high priority candidaten for expansion to help meet projected traffic growth until about 1990. The objectives of the project were to (a) increase the operating efficiency and throughput capacity at these ports through the introduction of improved port management and maintenance and the provision of additional berths and ancillary services; and (b) stimulate growth in the metropolitan areas of these ports to support the Government's strategy of dispersing industrial development away from metropolitan Manila. The project succeeded in meeting the initial objective of providing improved facilities and operating procedures. Regarding the second objective of stimulating economic growth in the areas supported by the project ports, the macro-economic and political conditions during the project implementation period caused an overall decline in the economy, and consequently, the appraisal expectations have not been met. However, the gains made in improv- ing operating efficiency and in increasing port's capacity should facilitate economic growth in the project areas in the future. ii. In 1986, port traffic totalled 2.5 million tons at Cebu, 0.9 million tons at Iloilo, 0.8 million tons at Cayagan de Oro, and 0.4 million tons at Zamboango. This was below the levels projected at the time of project appraisal, when traffic at these ports in 1986 was expected to total 3.6, 1.5, 1.1, and 1.0 million tons, respectively. This significant shortfall in actual port throughput reflects the lower than expected growth of the areas served by the ports and, in curn, the lower than expected growth of the Philippine economy during period 1983 to 1986. Until 1983, the appraisal forecast was reasonably accurate. In sharp contrast to average annual real GNP growth rates of 5.0% and 6.02 in the 19609 and 1970s, growth in the Philippines contracted to an annual average of 3.02 during 1980-83, and to a negative rate for almost three years from late 1983 to mid-1986. These declines were due to external factors such as the worldwide recession that followed the second oil shock and to domestic economic and political problems triggered by the death of former Senator Benigno Aquino in August 1983. From 1983 to 1086, the currency was devalued by approximately 802, restrictions were placed on imports, inflation increased by approximate'y 85%, and cash flow problems resulted from a decline in the volume of credit available to the private sector as a result of the Government's need to source its financing domes- tically within tight monetary conditions. These economic problems reduced traffic levels throughout the Philippines and traffic is still, in many cases, below the levels achieved in 1983. However, there are i.dications that the negative growth has been arrested. A small positive growth rate of 1.52 of  - Lv GNP was recorded for 1986 with a strong second half performance compensating for first half dedilne, and prelLminary estimates for CNP in the first half of 1987 show 5.1X growth, largely under the Impetus of a strong performance Ln the industrial sector of 8.32. If thli growth continues, the intended project benefits will be realLed. iil. Completion of the project was delayed by approximately two years, primarily due to management and cash flow problems experienced by contractors at the ports of Zamboanga and Cagayan de Ora. Many of the linancial problems were due to the country's severe economic problems during 1983-85. PPA was nevertheless able to complete all originallv agreed works as well as addi- tLonal project work at two ports for an amount significantly below the origi- nal US dollar cost estimate. Although the physLcal Lnvestments encountered some early technical problems, these were all overcome and final construction was generally satisfactory. iv. The project was successful in that lt provided the port infrastruc- ture and improved operating procedures needed to support economic growth in the regLonal areas surrounding the project ports. It also contributed to improving the efficLency of the national port system by designing a management Lnformtion system to be lmplemented ln eLther a computerized or manual form. The main lesson to be learned from this project is that if too much emphasis Ls placed on the tiLmng of realizing economic benefits in specific areas of a country, the risks associated with that project will increase signLficantly. for a project to be well balanced and project risks minimized, a lavgo portion of the anticipated project benefits should be in broader institutLonal areas that will relate to the entire country not just the regLons directly Lnvolved ln the project. This is especially true when the areas Ln questLoat are attemptLng to attract or develop new industries to make use of fEcLlities beLng constructed by the project.  PHILIPPINES THIRD PORTS PROJECT (LOAN 1855-PH) PROJECT COMPLETION REPORT r . INTMODUCTION 1.1 The Philippine transport system is primarily bimodal, with road and sea transport generally complementing rather than competing with each other. Road transport handles 902 of the country's passenger movements and 652 of the freight movements, while sea transport handles 72 of the passengers and 352 of the freight. One of the Bank's principal objectives in lending to the trans- port sector in the Philippines has been, and continues to be, to improve the infrastructure of the country. The Third Ports Project had as its principal objective to increase the operating efficiency and throughput capacity of the ports of Cebu, Iloilo, Cagayan de Oro and Zamboango through the introduction of improved procedures and the provision of additional berths and ancillary services. It was, therefore, consistent with the Benk's objective in the sector. 1.2 The Bank Croup has assisted the Philippine transport sector since 1961, starting with the first Port Project (Loan 290-PH), which provided US$8.5 million for procurement of dredging equipment. Since then, additional projects, including three port, one shipping, five highway and two rural road improvement projects, have been processed. Lending for highways and rtral roads projects has totaled US$517 million and for ports and shipping projects US$133.6 million, of which US$81.6 million has financed port infrastructure improve ments under three completed ports projects. 1.3 The government agencies involved in execution of the Third Ports Project were the Philippines Port# Authority (PPA) and the Department of Public Works and Highways (DPWH).AL' The management of the project was equally shared by the two agencies. The executive comittee of the project (EXCOM) consisted of three mmbers: the Chairman, a representative from DPWH, and the General Manager (CM) of PPA. The EXCOM may be considered as the policy-making body oi the project. The central Project Management Office (PMO), based in Manila, supervised and controlled actual execution of the project. It was headed by a Project Director from PPA and was staffed with an Assistant Project Director and Division Managers for engineering, monitoring, finance and administration, all of whom were PPA staff. In the field, PHOs were located at the four project ports, with each PHO headed by a Project Manager and assisted by a Project Engineer and his staff. Also assisting the PMOs was a team of expatriate consultants headed by the Project Chief Advisor and 1/ In 1987, the Covernuent chaneed the name of cabinet leveL organizations from Ministry to Department. The title of the head of each organization was changed to Secretary fr% Minister.  -2- comprising specialized consultants in soil engineering, materials testing and fieLd advisors assigned to each port. Local consultants were also utilized to supplement supervising services in the PMO head office as well as the project site. 1.4 The PPA is a Government corporation headed by a CM appointed by the President of the Philippines. The PPA is attached to the Department of Transportation and Communications (DOTC) and has for its policy-making body a Board of Directors comprising a Chairman, who is the Secretary of DOTC, a Vice-Chairman (PPA General Manager), five Cabinet members and a member from the private sector. Under the GM are three Offices for engineering, port operations, and finance and administration, with each office headed by an Assistant General Manager. The Office of Engineering is subdivided into three departments for port planning, maintenance and equipment, and project execu- tion. As the name implies, one of the major functions of the PPA is the planning, execution and maintenance, including procurement of relevant equip- ment, of all ports in the PPA port system. The Office of Port Operations deals with the operations of all major ports and the collection of all port dues and charges through 18 Port Management Units strategically located throughout the country. The Office of Finance and Administration is responsi- ble for the financial and administrative functions of the Authority. II. PROJECT IDENTIFICATION, PREPARATION AND APPRAISAL A. Background 2.1 The Government-Bank dialogue leading up to the project began in 1973-almost seven years before the project loan was negotiated. These discussions started almost immediately after Loan 939-PH for the Second Port Project had become effective. During these seven years, the composition of the project changed significantly. Initially, the project was to consist of a series of investments to improve facilities and operations at the Port of Manila; later. the project was to provide forestry product berths at several smaller ports to support investments in forestry products factories. This later plan was abandoned due to a downturn in the forest products industry and because no significant role could be identified for tile Bank. The present project was based on a study prepared by PPA with assistance from the Inter- agency Technical Committee on Transport Planning (IATC'rP) and advisory services provided by four expatriate experts. The-four project porcs at Cagayan de Oro, Cebu, Zamboanga and Iloilo were identified by this study as in need of early expansion based on projected increases in traffic volumes, che increasing number and size of ships calling at the ports, and their inability to handle containerized cargo. A fifth port, Bacolod-Pulupandan on che island of Nagros, was also studied but traffic projectitns did not warrant its inclusion in the project. 2.2 The project was prepared by the PPA Third Ports Project Feasibility Study Team, which was monitored by a steering committee headed by an Assistant Secretary of Public Works and by Bank staff, who devoted particular attention to the economic studies. The Government decided on this arrangement rather than engaging a foreign consulting firm in order to develop PPA's in-house  expertise in planning and appraisal techniques. The work of this team started in July 1978. 2.3 The project was preappraised in July 1979, and the appraisal was completed in November 1979. The preappraisal mission found the draft final feasibility study to be inadequate for appraisal purposes, and arrangements were made to improve the traffic forecasts and the economic justification data. This delay had been anticipated when the team was established, but the Government decided that the value Df the in-house training of the PPA staff was sufficient to off-set a potential delay in project preparation. It is estimated that the decision to undertake the study in the manner adopted, as opposed to a team of PPA staff assisting a firm of consultants, delayed the appraisal by six months and added four additional man-months of Bank staff time to the project. In retrospect, the project may have been too large to be prepared by inexperienced staff. 2.4 The main issues raised during project preparation and preappraisal were: (a) insufficient land had been allocated to PPA at Cebu; (b) at Zamboanga, impractical assumptions were used to determine the number of berths for stauLl cargo vessels and ferries; (c) at Cebu and Cagayan de Oro, the dialogue with the National Grain Authority concerning silo development had not been sufficient; and (d) soil borings had not started at Iloilo. 2.5 Detailed engineering for the project started in mid-1980 and was completed in late-1981. The Government was represented, in this stage, by PPA and DPWH and assisted by local and expatriate experts. The detailed engineering plans were prepared based mainly on the recommendations contained in thc feasibility study and final appraisal by the Bank mission. B. Project Description 2.6 As appraised, the project consisted of the following: (a) Port of Cagayan de Oro (i) 415 m of quay extension with an alongside depth of 10.5 m below mean lowest low water (MLLW); (ii) one open transit shed for timber products storage and one container freight station-cum-transit shed; (iii) ancillary works including surface roads, services for water, electricity supply, lighting, sewerage and drainage, weigh bridges, separate access gate and security fencing;  -4- (b) Port of Cebu (i) dredging and disposal of spoil for the provision of a deep water access navigation channel; (ii) construction of 550 m of quay with an alongside depth of 9.5 m below MLLW; (iii) one container freight station-cum-transit shed; (iv) ancillary works including surface roads, an administration building, equipment and passenger sheds, and services for water, electricity supply, lighting, sewerage and drainaNie, weigh bridges, access gates and security fencin&l and (v) rehabilitation and upgrading of existing marginal quay aprons and circulation roads; (c) Port of Iloilo (i) *iredging and disposal of spoil, reclamation and fill and dike works, fGr the provision of an island wharf terminal; (ii) construction of 400 m of quay with an alongside depth of 10.5 m below MLLW; (iii) one container freight station-cum-transit shed; and (iv) ancillary works including surface roads, and administra- tion building, fire station, and services for water, electricity supply, lighting, sewerage and drainage, weigh bridges, accesr gate and security fencing; (d) Port of Zamboanga (i) dredging, reclamation and attendant dike works in the proposed extension; (ii) 2GO m of quay extension with an alongside depth of 10 m below MLLW; (iii) one container freight station-cum-transit shed; (iv) ancillary works incLuding surface roads, an administration building, fire station, amenities building for port labor, equipment shed, an office block for customs and relevant government agencies, and services for water, electricity supply, lighting, sewerage and drainage, weigh bridges, access gate and security fencing;  (v) rehabilitation and repair of damaged sections of the existing tee-head jetty; and (vi) addition of a new 50 m pier with mooring dolphins, a new passenger waiting shed and an embarkation area at the existing small craft ferry basin; (e) provision of external access roads for the ports of Cagayan de Oro, Iloilo, and Zamboanga; (f) provision of essential mechanical cargo handling equipment for the project ports; and (g) technical assistance and training for: (i) siltation and hydrographic studies at the ports of Cebu and Iloilo and a study of seabed erosion at Cagayan de Oro, a civil engineering adviser for the duracion of project construction, and staff training for DPWH and PPA engineers and for setting up a hydrographic survey unit within PPA; (ii) a study of the effect of increased container services on the number, type and scheduling of vessels for interisland passenger sea transport, and consequent national port passenger facility development needs; (iii) feasibility studies and detailed engineering for a future ports project; (iv) improvement of PPA's management information system; and (v) engineering services for final engineering, bid evalua- tion, and award and supervision of project construction. III. IMPLEMENTATION A. Effectiveness 3.1 The project was presented to the Bank's Board on May 27, 1980, and the Loan and Project Agreements were signed on June 13, 1980. The conditions precedent to effectiveness, the execution and delivery of the project agreement on behalf of PPA and a subsidiary loan agreement executed on behalf of PPA, were satisfied and the loan became effective as scheduled on September 29, 1980. S. Revisions to the Project 3.2 Substantial savings under the Bank loan were realized as a result af lower than expected contract prices for the work at the four ports and the substantial peso devaluation that occurred during the project period. These savings were made available to the project and were used as follows:  -6- (a) the loan disbursement rate for civil works, originally 482, was increased to 732 from April 1, 1984 until project completion; (b) at the port of Cebu, the quay and back-up area were extended by about 140 m at a cost of about P 22 million; tc) at the port of Iloilo, the following additional inputs were provided: ti) 605 pieces of substructure piles with a steel pile tip (to attain required bearing capacity of the soil foundation) at an additional cost of about P 2.74 million; (ii) additional back-up area for the covered and open storage facilities through dredging and reclamation involving about 222,00 cu m of hydraulic fill and 6,400 cu m of dyke core materials, at an additional cost of about P 11.88 million; and (iii) a Ro-Ro (roll-on, roll-off) facility to be used by the various ship-;i lines, consisting of a pre-cast concrete platform on steel piles, steel ramp and a lifting device, for a total cost of about P 3.19 million. 3.3 All aforementioned revisions, except for the steel piles, were implemented mainly for the benefit of port users in terms of more berthing space, back-up area and a specialized facility for Ro-Ro vessels. The change in the pile design waS done mainly for the stability of the structure (quay), the design of which was based on the original soil exploration results which were not confirmed by any load test pile. C. Physical ProSress 3.4 Project preparation was adequate, the only oversight being the inconclusive information obtained from the original soil exploration works in Iloilo. The PMO therefore requested a foundation expert to review the investigation made and conduct an in-depth soil investigation. Based on the results of this work, a new design was used for the steel piles. The process of confirmation of the soil conditions through additional exploration works may be considered as normal and does not reflect an inadequacy in the preparation and implementation of that aspect of the work. 3.5 Start-up of works at the project ports was delayed by four co nine months. This was primarily due to a requirement that the Office of the President review contracts before issuing the notice to proceed. This re- quirement should have been anticipated in the preparation of the implementa- tion schedule, but since it was not, the overall project was delayed by ap- proximately six months. Several minor technical problems also appeared in the early phase of implementation, but these did not affect the completion date.  3.6 Subsequently, implementation was delayed by an additional year, the major factors causing the delay being technical problems, weather conditions, and financial and management problems. Cebu and Iloilo were mainly affected by technical problems and weather conditions while Cagayan de Oro and Zamboanga suffered from all four factor-. Contractors at Cebu and Iloi'u encountered various types of technical problems which were given prompt attention, discussed and solved by all parties concerned. At Cebu, some of the most significant delays were in dredging, reclamation and rockworks. Cebu also suffered from two major typhoons which damaged some equipment of the concractor: the continuous rains also severely affected the paving works. At Iloi;o, unstable soil conditions necessitated additional soil investigation and the redesign of the steel piles for the quay structure. Other minor problems were intermittent rains. slow production of rock materials and slow delivery of steel frames for the covered storage facilities made in Manila. The technical problems in Cebu and Iloilo were, however, attended to in time and solved immediately so that the contractors were on schedule by the end of 1984 and even slightly ahead of schedule by the middle of 1985. See Tables 1 and 2 for the actual and expected implementation dates for each port and for the percentage of work completed by the original contract completion date. 3.7 The contractor at Cagayan de Oro erz'ountered various technical problems, the most significant of which were: (a) frequent breakdown of equipment; (b) excess of unsuitable materials over that in the contract quantity; and (c) problematic pile driving operations due to erratic behavior of piles during driving. Project management was also a problem in that coordination at the contractor's head and field offices was poor and the Project Manager had to clear all his decisions with his head office before proceeding on them. Although the various technical and management problems were addressed and solved promptly, the contractor's financial problems were less easily overcome. The contractor's cash flow suffered severely because of successive devaluations of the peso and a very low bid price of P 123,456,789 which was about 20% below the approved Government estimate. Aggravated by the devaluation and the increasing cost of construction materials, the contractor decided on a complete shutdown of work on December 14, 1984. At this point, only about 30% of the work had been accomplished in a span of more than two years. The PMO. in an effort to prevent a major delay, called for a series of conferences among all parties concerned. Final negotiations resulted in a co-venture, with the Iloilo contractor acting as the managing principal. Early in 1985, the Iloilo contractor took the major role in implementing the unfinished portion of the project, the completion date of which was revised from August 23, 1985 to November 30, 1986. From then on, although there were some minor problems, the project progressed smoothly and was completed as scheduled. 3.8 At Zamboanga, the contractor had several early technical problems such as:  - 8 - (a) low output in dredging brought about by an inappropriate type of dredger which frequently broke down; and (b) lack of equipment for quarrying, handling and hauling of rocks to the job site. These technical difficulties were aearavated by the folLowing management problems: (a) lach of manpower and skilled supervisors with adequate experience in marine works; (b) improper planning and scheduling of works; and (c) internal conflict of interest between the member contractors of the joint venture. As a result of close supervision by the PMO, these problems were ultimately resolved. However, in view of the delays, the contract time was extended from February 4, 1985 to February 14, 1986. 3.9 With the exception of the financial problems brought about by the deterioration of the national economy, no major management problems were encountered. After the successive devaluations in 1983 and 1984, the PMO was unable to comply with the increased requirement for local counterpart funds to pay the contractors' invoices. The PM0 remedied the situation by processing only that portion of billings covered by the Bank loan, while the local portion was held until funds were released. The Bank also respondex to this problem by increasing its disbursement rate from 481 to 731 starting April 1, 1984, so that the local share decreased from 521 to only 27X. 3.10 Implementation of the insticizxonal components of the project went well. All training programs for PPA technical personnel on the operation of the generator set, electrical system and cargo handling equipment were completed as scheduled. The status of the other project components under the technical assistance program is as follows: Component Status 1. Strengthen.ng of hydrographic Phase I - CompLeted organization and survey Phase II - Deferred 2. tnterisland Passenger Transport Completed Study 3. HIS Improvement Project (Phase Ia) Completed and one micro computer has been acquired 4. Feasibility study for the Fourth Completed Ports Project  - 9 - D. Reporting and Procurement 3.11 Reporting requirements were generally complied with. Monthly, quarterly and annual reports on the progress of the project were prepared by PMO and were regularly submitted to the Bank. 3.12 As Table 3 indicates, all covenants to the Loan and Project Agreements were, with minor exceptions, complied with. 3.13 There were no procurement problems other than those resulting from the country's financia'L difficulties during the project period, avd these delays were minor and did not affect the final completion dates. At the request of the Department of Finance, the Loan Agreement was amended to allow for domestic preference for goods manufactured in the Philippines. Cargo handling equipment was procured by PPA with financing provided by the Overseas Economic Cooperation Fund (OECF). 3.14 International competitive bidding was used for all government- supplied materials and equipment. Japan supplied the rubber fenders, the generator sets, and part of the steel sheet piles together with Luxembourg. The supply of mroring fixtures was awarded to a local manufacturer, crane rails were supplied by the United Kingdcm and weighbridges by Brazil. The largest amount of imported materials (sceel pipe piles) worth P 67 million was from the Peoples' Republic of China. Cargo handling equipment for Cebu and Cagayan de Oro was procured from Japan under the OECF loan credit. 3.15 International bidding was used for civil works and the procurement of all government-supplied materials and equipment. The main benefits derived from international bidding were competitive pricing for the project, high quality materials and the opportunity given to medium-size local contractors to merge with foreign firms and win in the civil works bidding. The procurement of all items was satisfactory. E. Costs 3.16 Actual project costs are compared to appraisal estimates in Table 4. The estimated total project costs at appraisal were US$165.0 million or P 1,204.7 million including local taxes, duties and contingencies. Actual costs were US$103.2 million or 37% below the appraisal estimates, but were 31X above appraisal estimates when expressed in pesos (P 1,577.3) due to the large currency devaluation that occurred during project implementation (P 7.3 a US$l to P 20.4 = USS1). While the cost of imported material almost tripled during implementation, the foreign component of the contracts was small. In addi- tion, the contracts were all expressed in pesos, and even after reflecting the 12Z and later the 30Z escalation clauses in the contracts, the final cost of the project was still lower than originally estimated when expressed in US dollars. The final cost of the project was reduced by P 68 million to reflect the lower than estimated cost of the contract quantities. These cost savings enabled approximately P 98 million of related high priority components to be financed under the project.  - 10 - F. Disbursements 3.17 Accumulated disbursements from the loan by quarter compared with appraisal estimates are presented in Table 5. Disbursements from the various categories of the loan are shown in Table 6. Disbursements took place over six years instead of the five vears planned at appraisal. The delay was primarily due to slower than expected project implementation, and the original loan closing date of June 30, 1985 was extended by one year to June 30, 1986. 3.18 At appraisal, it was estimated that the loan would finance 48% oi civil works and 41% of total project costs. As a result of the high rate of inflatiotn and the large peso devaluations, the disbursement percentage for civil works was increased to 73% of all expenditures incurred after April 1984 and the Bank loan ultimately financed over 65% of the actual costs. Even with the revised disbursement percentages, the Government was not able co utilize the entire loan and US$134,000 was cancelled after loan closing. See Table 7 for a summary of the project's financing. C. Performance of Consultants, Contractors and Suppliers 3.19 The foreign and local consultants contributed substantially to the design and revision of the plans and to the supervision of the project. Their overall performance in the project was considered very satisfactory. 3.20 No major problem arose in connection with the services of the civil works contractors for Cebu and Iloilo. However, in the implementation of the project in Cagayan de Oro and Zamboanga, the contractors were confronted with the problems discussed above (paras. 3.7-3.8). 3.21 Overall, the suppliers of the government-supplied materials and equipment performed adequately, although some minor delays occurred due to the scarcity of foreign currency for imports. IV. OPERATING PERFORMANCE 4.1 When the project was appraised, the forecast for the economy was for continued strong growth. The project ports were expected to benefit from the improving economy, from the policy of increasing the economic rate of growth outside of Metro Manila, and from the increase in containerized cargo. As the data and graphs in Tables 8, 9, and 10 indicate, this forecast was reasonably accurate until 1983 when the country's economy began an almost three-year decline. Since the second half of 1986, the economy has again begun to grow at the rates forecasted at appraisal, and if this growth continues as projected, the traffic originally forecasted for the project ports will ultimately be realized. 4.2 As a result of the poor economy, the actual cargo at the project ports is below the appraisal forecasts and the projected trend to more containerized cargo has failed to materialize. With the exception of Cebu, where the container traffic has grown, the container berths and facilities conscructed under the project are frequently used as multipurpose terminals,  - 11 - and since the totai 1986 traffic in three of the ports is below the 1980 levels, the facilities constructed under the project are generally under- utilized as well. 4.3 In Cebu, domestic container traffic has increased more rapidly than projected at appraisal, and project faciLities at the container terminal are being used to handle both domestic and international cargo. The facilities are, however, still underutilized because domestic shipping companies have been slow to use the new terminal because their container yards are located behind the old terminali and are therefore not as accessible to the project area. PPA is working with the domestic shipping companies on possibLe solutions to this problem. 4.4 In the other project ports, container traffic is minimal, but the additional berthing space has resulted in reduced ship waiting time and general decongestion in the ports. In Iloilo, the projected traffic in refined sugar has not materialzed due to the continued depressed condition of the sugar industry. In Cagayan de Oro, the new terminal is being used by both foreign and domestic shipping lines, but the new operator has not been successful in attracting sufficient traffic away from the operator in the older terminal or in locating new traffic. As a result the new facility is currently underutilized while the older terminal is busy. In Zamboanga, the actual traffic is still below that which existed in 1980, and the efficiency of the terminal is below expectations because of the security problems in the area. 4.5 The management of PPA is aware of the fact that the newly constructed port facilities are not being properly utilized and that the traffic needs to be reallocated in order to maximize the use of all of PPA's assets. One of the reasons for the inadequate utilization of the ports' assets is that there have been frequent management changes in PPA which have prevented a consistent approach to the problem from being implemented. The present management team is experienced and it appears to have the scrong support of the Government. They have initiated the following actions to reallocate the port traffic in order to make greater and more efficienc use of PPA's assets: (a) the Commercial Services Department was established to help market the ports' services; (b) facilities such as the Manila International Container Terminal are being privatized in an accempt to increase their utilization and efficiency; (c) discussions are being held with shipping companies to develop Cebu, and other ports, into consolidation centers in order to promote the greater use of containers and to attract larger ships to these ports; (d) the selection criteria for arrastre companies are being reviewed along with their operating procedures; and  - 12 - (e) as part of the Provincial Ports Project, the port tariff system is being revised to one that is based on cost, and the development of a differentiated tariff structure is being considered. V. FINANCIAL PERFORMANCE A. Operating ResuLts 5.1 For the seven years ending in 1986, PPA's cnerating results have been good even though, during these years, the country has seen the consumer price index increase by approximately 160% and the peso devalued, relative to the US dollar, by a comparable amount (Tables 11 through lld). At the same time, the total cargo tonnage through government ports has increased at an annual rate of less than 2% per year since 1981, while the total cargo has declined at an annual rate of over 1%. Despite these developments, actual operating results were above those forecasted at the time of appraisal in three of the seven project years, and the rate of return on che average amount of fixed assets in operation averaged 5% from 1980 through 1982 and almost 10% from 1983 to 1986. 5.2 The PPA was able to achieve a 23% annual revenue growth rate over the period despite virtually no change in shipping and cargo volume. One factor contributing to this increase was a revision to the billing and collection system used in the ports. The new system revised the source documents so that the reported revenue was based on the actual cargo and not on the information provided by the cargo handlers and ship operators. It is estimated that an additional P 200 million was billed from 1981 to 1983 as a result of this revised system. The other major factor was that PPA was able to introduce eight tariff increases from 1981 through 1986. These increases enabled PPA to keep pace with the large inflationary cost increases occurring at the time. 5.3 The PPA's good financial performance was also due to its control over the growth of working expenses during the period, which increased at an annual rate of 22Z. As a result, the working ratio improved from 45.3% in 1980 to 29.3% in 1986. During this period, management was able to offset relatively large increases in expenses for dredging and administration by restricing annual increases in wages. In addition, growth in working expenses was held down because the amount spent on regular repairs and maintenance was restricted as a result of the controls placed on PPA by Presidential Decree :234 (see para. 6.1). The above factors, combined with a restricted capital nvestment budget, enabled PPA to also reduce its operating ratio from 1980 i65Z) to 1986 (47%). 5.4 As stated earlier, none of the cargo forecasts for the project ports have been realized and in many cases the traffic voLume in 1986 was below 1983 levels. As a result of this Lower than expected volume, none of the project ports were able to achieve the financial results that had been forecast at the time of appraisal.  - 13 - B. Effects of Inflation 5.5 The Philippines experienced annual inflation rates of 50.01 and 23.12 during 1984 and 1985, respectively, and a cumulative inflation of approximateLy 1572 between 1980 and 1986. This has had three major effects on the finances of PPA. First, since PPA's monetary liabilities have generally exceeded its monetary assets, this inflation has resulted in a purchasing power gain of approximately P 100 million. Second, the current value of PPA's fixed assets has increased. The revaluation of these assets will cause PPA's operating ratio in future years to be above its historical levels. PPA revalued its assets based on their replacement cost for the fiscal year ending December 31, 1986. The final item relates to PPA's foreign denominated debt which, between 1980 and 1986, grew rapidly. Despite the large devaluations of the peso, this foreign debt was presented in the balance sheet at historic vaLues until it was restated in 1986. The effect of the fixed asset and debt revaluations has been to double the net book value of PPA's fixed assets, to increase the long-term debt-to-equity ratio by 502 to 0.67:1, and to make all future evaluations of PPA's financial strength and of the results of its operations more meaningful (Table 12). VI. INSTITUTIONAL PERFORMANCE AND DEVELOPMENT A. Organizational Autonomy 6.1 The Presidential Decrees (PD) creating PPA in 1974 and 1975 gave PPA wide corporate powers and made it financially autonomous. As the appraisal report states, these broad powers were largely taken away in 1977, when PD 1234 was issued; the report expressed a concern that this would result in a reduction of funds available for PPA to spend on recurring expenses and on capital expansion. Those concerns proved to be valid because when the Philippines began to encounter economic and financial difficulties in the early 1980s, the Government released less funds than required for operations and the capital investment program. Since cuts in the operating budget primarily affected maintenance, port infrastructure and equipment began to deteriorate and the harbors and approach channels silted-up to the poinc where rehabilitation and dredging work is now required. Also, since 1982 no new releases have been made for investment projects, including those with foreign funding. This led to temporary stoppage of all projects except the Bank- financed Third Ports Project, for which local counterpart funds were available from prior years' savings. However, all of these savings were exhausted in early L985 and, as a result, many local contractors were not paid until the budget was finally approved in November 1985. This situation continued untiL Executive Order 159 was signed on April 13, 1987, exempting PPA from PD 1234 and allowing it to again operate as an independent corporation with control over ics own funds. This Executive Order was issued largely because of Bank pressure to restore PPA's autonomy and the inclusion of this change as a condition of Board presentation for the Provincial Ports Project (Loan 2823- pH). 6.2 This same Executive Order also corrected another probLem that the Bank and PPA had been trying to correct for many years. That was the  - 14 - requirement that all detailed engineering and the construction of ports and harbor projects had to be done by DPWH. As a result of this project, ic became clear that the staff of PPA had the necessary skills and expertise to be responsible for the design and implementation of their own projects. The Provincial Ports Project is the first major project for which PPA will be the sole implementing agency. B. Management 6.3 The quality of PPA management is now and has been generally verv satisfactory. However, as a result of a hiring freeze in effect from 1493 to 1985, the number of permanent employees declined by 165 or 8Z from 1982 levels. The freeze not only prevented the hiring of new people but also prevented the internal promotion needed to fill vacancies created by departing employees. Consequently, many PPA officials perform duties at one level but receive the compensation for a lower one. In addition, there are many casual (nonpermanent, full-time) employees performing the duties that should be done by permanent staff. PPA, with the assistance of the Bank, recognized these problems and, starting in 1986, has been attempting to correct the staffing inequities by formally confirming staff in the positions in which they are actually working. 6.4 The project also initiated actions to improve the reliability of the statistics produced by PPA for planning and management operations. Much of PPA's data previously came from the privately-owned arrastre (Longshore services) operators, and was often of questionable quality. However, a management information system was designed under the project to correct this problem, and is being introduced under the Provincial Ports Project. VII. ECONOMIC RE-EVALUATION 7.1 The project aimed to relieve anticipated traffic congestion and to improve the operating efficiency of the four ports by rehabilitating and expanding berth facilities. The efficiency gains were expected to generate economic benefits in the form of opportunity costs, i.e., savings in what ship operators--and eventually consumers--would otherwise have to pay for the use of port facilities. A full description of these efficiency gains can be found in the appraisal report, pp. 30-35. This section presents an approximation of a Lower bound for these economic benefits in view of the recession in the Filipino economy and concurrent decline in port traffic after 1982. 7.2 Whether significantly lower average ship port time and average handling and cargo loss costs are now technically feasible depends upon how completely the envisioned improvements have been made. Strictly speaking, average cost savings in the operation of the ports also hinge on levels of traffic (for example, in light traffic, the waiting time cost per ton per ship may be close to zero), but for the range of traffic growth considered over the life of the project, per ton savings are not expected to vary much. Apart from managerial considerations, unit savings are largely endogenous to the project.  - 15- 7.3 Since the desired physical facilities have been successfully provided, ex-post expectations of unit cost savings estimated in the appraisal a*e reasonable. As much has been suggested from observations in the short time in which the ports have been fully operational. It is still somewhat early and data are lacking to quantify the full impact of the project on average port use costs, but there appears to be Little doubt that appraisal expectations of lower unit costs have been or will, in learning, be achieved. 7.4 The chief factor now affecting the project's economic benefit stream is the evolution of port traffic following the collapse of the Filipino economy in 1983 and the encouraging resumption of economic growth sometime after 1985. The scale of avoidable lighterage and diversion costs are particularly sensitive on revised projections of traffic with and without the project. Fortuitously, the delay in implementation occurred when the opportunity costs of not having the project had dropped and were declining. The delay in the beginning of the benefit stream avoided low early returns which, with all other project costs being the same, would have caused the stronger, later returns to be discounted more fully than they are in the present analaysis. The spacing out of implementatin also buffered, to some extent, the effect of the economy's downturn upon the project's worth by lowering the present value of the total investment costs. 7.5 The completion of the investment has coincided with rising oppportunity costs that can be attributed to renewed economic growth. In general, traffic growth can be expected to exceed the overall rate of growth in the economy. Thus, although traffic levels at aLl four ports in 1983 feLl far short of those that had been expected, traffic may now be projected to grow by more than 5S a year. The question is how project returns are now expected to compare with appraisal estimates, given that traffic is growing from a lower base for the balance of the project's life. 7.6 Adopting a distinctly pessimistic outlook for future traffic growth, the economic reevaluation addressed this question by reconstructing benefit streams based on cautious assessments of the available efficiency indicators for the ports. Savings in average handling costs are considered to be no greater than originally expected. In the case of Cagayan de Oro, this saving was initially expected to be small and so was not calculated in the reevaluation. Likewise, since there is little information on actual cargo loss savings, these have largely been excluded from the analysis. The appraisal report's analysis kept traffic levels constant after 1993. Here, tra