Somalia - Engineering and Accounting Assistance Project

RESTRICTED Report No. TO-653a This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION PROPOSED CREDIT FOR DETAILED ENGINEERING AND ACCOUNTING ASSISTANCE SOMALIA February 7, 1969 Transportation Projects Department  Currency Equivalents 1 So. Sh = US$0. 14 100 So. Sh = US$14.00 1 million So. Sh = US$140,000 Fiscal Year January 1 - December 31 Units of Weights and Measures: Metric Conversion Metric: British/US 1 kilometer = 0. 62 miles 1 meter = 3.28 feet 1 hectare = 2.47 acres 1 liter = 0. 22 gals. (Imperial) = 0.26 gal. (US) 1 metric ton = 2204 lbs.  SOMALIA PORT OF ik1OGADISCIO PROPOSED CREDIT FOR DETAILED ENGINEERING AND ACCOUNTING SERVICES Table of Contents Page 1. INTRODUCTION 2. BACKGROUND 3 A. General 3 B. Somalia Ports Authority C. Port Authority Organization D. Traffic 4 E. Proposed Port Construction Works F. Economic Justification 6 G. Financial Viability 6 3. THE PROJECT 7 4. CONCLUSIONS AND RECO.4MENDATIONS 9 TABLES 1. Projected Traffic-Port of Mogadiscio 2. Somalia Ports Authority - Estimated Revenues and Expenses 3. Somalia Government Port Debts NtA PS 1. General Location and Relative Location of Ras Sif Site 2. Proposed Development of New Harbor This report was prepared by M4essrs. F. Higginbottom, (Engineer) E.V.K. Jaycox (Economist) and H. Jones (Financial Analyst).  SONALIA PORT OF 1W1OGADISCIO PROPOSED CREDIT FOR DETAILED ENGINEERING AND ACCOUNTING SER.VICES SUIiAaRY i. The Goverinment of Somalia has asked IDA to help finance a project to carry out the detailed engineering of thle Mlogadiscio/Ras Sif port works and to provide accounting consultants to advise on the establislhment of commercial accounting procedures for the Somalia Ports Authority. ii. The total cost of the project Nould be US$610,000 equivalent. IDA would finance the foreign exchange component estimated at US$550,00O equiva- lent. The Government would provide the local currency funds. iii. The proposed credit would be for a termr of ten years including a grace period of two years; it Nould be refunded from the proceeds of an ILDA credit for constnrction of a deep water port at .iogadiscio/Ras Sif if and whien it is approved.  SOMALIA PROPOSED CREDIT FOR DETAILED ENGTI3INEERING AND ACCOUNTING ASSISTANCE 1. IT.ITRODUCTION' 1.01 An IDA mission visited Somalia in 'February 1964 to reviewl the port of Mogadiscio project for which the Government of Somalia was seeking finan- cial assistance. That project would have converted the existing lighterage port into a three-berth deep water port; however, because of the likelihood of siltation and the lack of detailed hydraulic information, the mission reported that studies were needed to determine the best site, form and lay- out of a port. 1.02 Subsequently, a hydraulic and preliminary engineering study by the Societe Grenobloise d'Etudes et d'Applications Hydrauliques (SOGREAH) costing $311,000 was financed_ _ aaBank technical assistance grant approved in Noineem- ber.6 ~ Report No. R64-13h). Thle study was completed in February 1967 and it?' recommended construction of a new two-berth deep water harbor at Ras Sif, located 112 klm southwest of thle existing port, as the best technical solution to the provision of port capacity in the Miogadiscio area. The recommended construction project was appraised in May and an appraisal report prepared in late 1967. 1.03 As there were insufficient IDA funds available to finance the con- struction project, the Government was consulted about the next steps to be taken and agreement was reached to proceed with the final engineering of the Miogadiscio port project. An engineering credit from the Association was then requested early in 1968. This was to include preparation of the tender docu- ments for international competitive bidding for the construction. The final engineering work would take about nine months and would be undertaken by foreign consultants. Accounting consultants would also be employed under the proposed credit to assist the Somalia Ports Authority (SPA) in installing commercial accounting and costing systems, to advise on other financial matters, and to train staff. '.04 The advantages of proceeding in this manner are: (i) all the engi- neering requirements of the project will be completed so that construction can begin without undue delay if and when a credit for construction is pro- vided; (ii) the interim period while engineering is proceeding can be used, (a) to start implementing necessary changes in SPA's accounting system with the assistance of the accounting consultants whose services are L'inanced under the credit, (b) to prepare, in consultation mith bilateral and other international financing agencies, a tentative plan for the financing of con- struction, since the Government of Somalia is expected to be able to make only a small contributions and (c) to better assess the effect of the Sue- Canal situation on the long-term traffic prospects of Somalia's ports. 1.05 This present appraisal report has been prepared to support the pro- posed engineering credit whichl was negotiated in Somalia in July 1968. Pre- sentation of the proposed credit to the Board has been delayed pending the  - 2 - Government's selection of acceptable consultants and determination of the cost of their services. 1.06 This report is based on the findings of the mission consisting oi Messrs. F. Higginbottom, E.V.K. Jaycox and H. Jones which visited Somalia in May 1967 to review the proposal to construct port works based on the SOGREAH report, together with additional information subsequently obtained from the Governraent of Somalia.  2. BACKGROUiND A. General 2.01 The Republic of Somalia covers an area of approximately 6h0,000 sq km and has a coastline of some 1,800 km stretching from the Gulf of Aden, where it is bordered by French Somaliland, to its border with Kenya just south of the equator. It has three major ports: Berbera in the north on the Gulf of Aden; Nlogadiscio, the capital city, in the center; and Chisimain, adjacent to the Kenya border in the south. The latter two ports are on the Indian Ocean. 2.02 The Government has received in recent years a loan for about So.2 51 million from the USSR to improve the port of Berbera, to be completed in 1968, and a grantAioan of So.Sh 70 million from USAID for improvements to the port of Chisimaio, also scheduled for completion in 1968. These ports have their own separate hinterlands and because of long distances and lack of transport facilities there is no practical possibility of traffic moving over- land between these ports and the Mogadiscic area. 2.C3 The existirr artificial harbor at Mogadiscio is protected from the south and east by a breakwater, but is open to the west and southwest; the harbor has four jetties and a berth built on to the landward end of the break- water. Due to silting caused by the littoral drift along the coast and inad- equate maintenance dredging, the harbor can be used only by lighters and tugs, and even such shallow-draft vessels can be handled only at the breakwater berth. 2.0~ Deep-sea vessels calling at the port anchor in the open sea about 1 km from the harbor entrance and cargo is handled overside to and from lighters by shipst gear. Swells up to 2 m are common during the period of the southwest monsoon and frequently reach 3.5 m in June, July and August. Throughout this period lighters can be handled only on the lee side of the anchored vessel, which limits the number that can be worked at any one timee. 2.05 Cperations are slow and hazardous and result in considerable losses and damage to cargo. The average discharge rate for cargo per vessel is aboui, 200 tons per day and the maximum 300 tons per day. Further, the labor employed in cargo-handling operations, both in stevedoring and shore-handling, is eYcese- sive and contributes to the inefficiency of present port operations. B. Somalia Ports Authority 2.06 The Somalia Ports Authority (SPA) was established by the Government in June 1962. SPA operates the ports of Mogadiscio, Berbera, Chisimaio, Merca and Bosaso, as well as ten other small ports. It is responsible for: (a) superintending navigation, and establishing procedures for anchoring and mooring; (b) licensing,pilotage and tug services; (c) providing stevedoring and cargo-handling services, and fixing working hours and wages for labor;  (d) providing and managing warehouse facilities. 2.07 The Governing Board of SPA comprises the President and the Director General,who are the chief executive officers, cormmissioners for each port named above, and one commissioner-at-large representing the other ports. Appointments to the Board are made by the President of Somalia on the propo3al of the Minister of Public Works and Communications. The Board is responsible to the Prime Minister in consultation with a Ports Council composed of the Ifinisters of Public Works and Communications, Finance, and Industry and Commerce. 2.08 The SPA budget does not form part of the national budget but is submitted to the Government for approval after being prepared and approved by the Governing Board. A Board of Auditors appointed by the Prime Minister reviews SPA's budgets and accounts. 2.09 The law establishing SPA does not provide adequate specific powers in important areas of port operation, for example, with respect to shipping movements, where the presence of the Port Captain (see 2.10) causes some confusion. Further, the powers of the Director General are not specified; and there are no representatives of port users on the Board. The financial provisions are not satisfactory in regard to rate-fixing and borrowing powers, and the basis for the transfer of assets from the Government to SPA is not clearly defined. Before a credit is made for the construction of port works at lMogadiscio/Ras Sif, the law would have to be changed to strengthen SPA's financial and operational control of the ports. This will be reviewed by Association staff during the period that the detailed engineering is proceeding. C. Port Authority Organization 2.10 There are five departments: traffic, cargo-handling, accounts, dredging, and engineering. There is also a Port Captain in each port who is not appointed by the Authority. His authority is unclear and conflicts with that of other sections, notably traffic and cargo-handling. This situation should be rectified in order that SPA may assume its full respon- sibilities. In general the administration is inexperienced, and in partic- ular it lacks adequate accounting and engineering departments. The appointment of consultants to provide assistance in establishing commercial accounting s-stems is considered essential at this stage. USAID has been advising on port operations at Miogadiscio and Chisimaio and in training staff, and will continue to supply a port adviser at Chisimaio for at least another year. If a credit is made to construct a new deep-water port at Mogadiscio/Ras Sif, the need for consultants to advise on port operations should be considered at that time. D. Traffic 2.11 About 75 percent of the traffic through the port of Mogadiscio consists of imported goods and materials, and the port handles 45 percent of the total inports of the country. Exports consist largely of live animals, skins and hides; on completion of the proposed new facilities, banana exports frcm the existing lighterage port of Merca will be diverted to Mogadiscio.  -5- 4f.12 Dry cargo traffic through the port has varied from 102,000 tons ln 1960 to 165,000 tons in 1965, but fell in 1966 to 111,000 tons. The main factors affecting traffic have been (a) the rapid growth of population and construction activities in M-ogadiscio since it became the capital of the unified republic in 1960, and (b) speculation on the imposition of import licensing by the Government plus abnormally large grain imports in 1964/65. Preliminary forecasts by the appraisal mission indicate import tonnages should grow at 3.5 percent per annum, from a base tonnage of 106,000 tons, the average of the period 1964-66. Export tonnages are likely to be reduced in the short run after 1967 because the export of charcoal has been banned. Exports are projected to increase at 6 percent per annum on the 1964-66 average excluding charcoal. Details are given in Table 1. 2.13 The initial effect of the closure of the Suez Canal was to materialJJ; reduce the foreign trade of Somalia; subsequently, trade has recovered as traffic shifted to the alternative route around the Cape. The effect of this situation on the assumptions as to traffic growth should be reviewed when considering a future credit for construction of the new port. E. Proposed Port Construction Works 2.14 As previously mentioned, extensive site and hydrological surveys and comparison of costs of providing a deep-water harbor at the present or an alternative site were undertaken by SOGREAH under the terms of the Bank Technical Assistance Grant dated November 12, 1964. 2.15 The proposed works based on these preliminary engineering and hydraulic studies comprise construction of a new deep-water harbor at Ras Sif, located some 3 km southwest of the existing harbor (1Nap 1). At this location an existing headland provides the base for a 750 m breakwater which will gijve protection against the southwest and northeast monsoons (Sap 2). Two 160 m berths are to be provided, backing on to the breakwater with a natural depth of water alongside of 10 m at mean low water and a tidal range of l.h m. This will accommodate general cargo vessels of about 12,000 tons deadweight capaci`ty. Two transit sheds and adequate storage areas are also included together with office accommodation for cargo-handling staff, customs and police. Adequate natural depth exists in the approach from the sea. A third berth can be provided later when required to meet traffic needs without the construction of further protective works, but this berth will require some dredging. The works would take about three years to complete from signature of contract. 2.16 The estimated total cost is So. Sh 103.6 million (US$14.6 million), including 15 percent engineering contingencies and So. Sh 7.5 million (US$1l million) for consultants, US$0.6 million of which are included in the propoc:- credit. The foreign exchange component is presently estimated to be US$12.1 million equivalent (83 percent). This is high because the only local resourc'-: are labor and some building materials.  - 6 - 2.17 The Government of Somalia is expected to be able to make only a small contribution so that additional financing will have to be supplied from other international institutions and if necessary from bilateral sources. Certain bilateral and multilateral agencies have expressed interest in participating in the project. 2.18 Based upon the mission's traffic projections (Table 1) the need for a third berth is expected to arise about 1979, at an estimated cost, at present-day prices, of So. Sh 17.5 million (US$2.5 million). F. Economic Justification 2.19 IDA staff estimates that the investment in the new port (two berths) of US$1h.6 million would yield an adequate economic rate of return. Projected over the 40 years average life of the port facilities, the quantifiable bene- fits are estimated, an the basis of preliminary engineering and cost data, to represent a rate of return of about 11 percent. Economic benefits would consist, in order of importance, of reductions in physical damage to cargo caused by the present open-sea lighterage operations, savings in ship turn- around time, reduction in cargo-handling costs by eliminating lighterage and by more efficient handling on shore, and savings in the cost of handling banaiia exports and general cargo imports diverted from the lighterage port at Yerca. The estimated economic benefits have been further tested by carrying out sen- sitivity and risk analyses with the help of a computer program prepared for the purpose. The sensitivity analysis identified the more important variables., which were then more closely examined. Probabilities were assigned to par- ticular values within a range for each variable having a major effect on the economic return. The results indicate the above probable rate of return of about 11 percent, with a maximum of 15 percent and a very low probability of earning less than 7 percent. The economic analysis will be re-examined on the basis of the revised cost estimates arising from the final engineering. G. Financial Viability 2.20 Preliminary financial forecasts were made by IDA staff for the port of Mogadiscio and for SPA as a whole. Based on projected traffic growth (Table 1) the port of Mogadiscio/Ras Sif could produce sufficient revenues to cover its working costs and earn a satisfactory financial rate of return. As with the economic results, a risk analysis was carried out which indicated a high probability that a 6 percent rate of return would be earned on the average value of net fixed assets at Mogadiscio/Ras Sif throughout their useful life. 2.21 Attached as Table 2 are estimated revenues and expenses for SPA for representative years from 1972 to 1978. Although the Mogadiscio/Ras Sif port and the new port being built at Berbera could be expected to earn a satisfactory rate of return, it is not expected that the other mhajor port at Chisimaio would. do so. Traffic forecast for Chisimaio is so low relative to its capacity and its investment cost that, at least in the early years, it would only just be able to cover its out-of-pocket operating costs. As a result, SPA as a whole  would not earn a satisfactory return on its average net fixed assets until J.977, the sixth year of operation after completion of the NHogadiscio/Ras Sif port works. 2.22 There is also a problem concerning the terms on which the port assets will be transferred by the Government to SPA. This problem is due tc two factors: (a) The large debts incurred by the Government for port works at Berbera and Chisimaio and to be incurred for the proposed port at Mogadiscio, and (b) the low contribution to earnings of SPA by the port of Chisimaio. The accounting consultants will be required to advise the Government on the capital structure of SPA and in particular on the amounts, terms and conditions of compensation to be paid by SPA to the Government for the assets to be vested in SPA. The capital structure of SPA will be based on its earning capacity and the Governmentts requirements for funds to service its port debt obligatior . The interest and debt coverage calculations shown in Table 2 are based on th, assumption that the proceeds of port loans already made and expected (as sumi- marized in Table 3) would be re-lent to SPA on the same terms as those originally extended to the Government except for the IDA credit (So.Sh 51.8 million, representing half of the cost of the Mogadiscio port works) which would be re-lent to SPA on "te b-.si- o -ena--ent i-n T-entv *reDrs Kth interest at 6