Honduras - Second Port Project

LO" 7h'4- HO tLELCpy RESTRICTED Report No. PTR-85a This report was prepared for use within the Bank and its affliated organizations. They do not accept responsibility for its accuracy or cornpleteness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK IOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF THE SECOND PORT PROJECT REPUBLIC OF HONDURAS May 19, 1971 Transportation Projects Department  Currency Equivalents Currency Unit a Lempira (L) US$1 - L 2.00 Li O 50 US Cents Weights and Measures - Metric Metric/Britiah - US Equivalents 1 metric ton - 2,205 pounds 1 kilometer - 0.62 milea 1 meter U 3.28 feet 1 cubic meter - 1.31 cubic yards 1 hectare - 2.47 acres Fiscal Tear January 1 to Deeember 31 Abbreviations BAHINT - Boot, Allen and Hamilton International, Inc. CACH - Central American Common Market ENP - E,presa Nacional Portuaria NEWL - Mean High Water levl )LUl - Mean Low Water Level NEDECO - Netherlands Engineering Conultants TAIS - Tippetts-Abbett-McCarthyStrattan TIR - Tela Railroad Company  REPUBLIC OF HONDURAS APPRAISAL OF THE SECOND PORT PROJECT TABLE OF CONTENTS Page No. SUNMMRY AND CONCLUSIONS i - ii 1. INTRODUCTION 1 2. BACKGROUND 2 A. General 2 B. Transport Sector 2 3. PORT ADMINISTRATION EXISTING ORGANIZATION, FACILITIES AND OPERATIONS 4 A. Organization 4 B. Facilities 5 C. Maintenance 6 D. Operations 6 4. THE PROJECT 8 A. Description 8 B. Cost Estimates 9 C. Project Execution and Financing 10 D. Procurement and Disbursements 10 E. Land Acquisition 11 F. Future Development 11 5. ECONOMIC EVALUATIGN 12 A. Traffic 12 B. Costs and Benefits 13 C. Conclusion 14 6. FINANCES 14 A. Introduction 14 B. Present Finances 14 C. Future Finances 15 7. RECOMNDATIONS 18 This report was prepared by Messrs. A. A. Fateen (Engineer), N. Heggemsnes (Economist) and H. A. Jones (Financial Analyst) and edited by Miss L. Soifer  - ii - ANNEXES 1. Existing Port Facilities 2. Puerto Cortes Project Description 3. Project Description and Requirements for Henecan Port 4. Economic Evaluation TABLES 1. Calculation of 1978 Berth Requirements - Puerto Cortes 2. Actual and Redistribution of Goods Handled at Amapala-El Muerto 3. Distribution of Forecast Traffic at Henecan and Amapala 4. Cost Estimate - Puerto Cortes Project 5. Cost Estimate - Henecan Project 6. Estimated Disbursements 7. International Trade of Honduras 1968-1970 8. Traffic at Puerto Cortes, Actual 1968-1970, Forecast 1972-1980 9. Traffic at Amapala-Henecan, Actual 1968-1970, Forecast 1972-1980 10. ENP Revenue Accounts, 1966-1970 11. EBP Balance Sheets, December 31, 1966-1970 12. ENP Forecast Income Account 1971-1978 13. ENP Forecast Cash Flow 1971-1978 14. ENP Forecast Balance Sheet, December 31, 1971-1978 15. ENP Forecast Revenue Accounts 1975-1978, Puerto Cortes and Henecan MAPS 1. The Honduras Republic 2. Puerto Cortes 3. Amapala, El Muerto, San Lorenzo Channels 4. Henecan Project  REPUBLIC OF HONDURAS APPRAISAL OF THE SECOND PORT PROJECT SUMMARY AND CONCIUSIONS i. Honduras is mountainous with forests covering half of the country. The terrain is rugged and the country only recently started to construct a modern highway network to connect the principal centers. The ports play an important role in the country's transport system handling a very high pro- portion of its international trade, including virtually all of the banana and most of the lumber exports which are vital to the Honduran economy. Traffic threugh Puerto Cortes, in the Caribbean, amounted to 877,000 tons of dry cargo in 1970 (53% of all dry cargo port traffic). Amapala, in the Pacific, handled 177,000 tons (ii%). Almost all the remaining dry cargo was handled at Tela and La Ceiba, banana export ports in the Caribbean. -i. In 1966 the Bank made Loan No.463-HO for the expansion of Puerto Cortes including two new berths and supporting facilities. The project was completed in March 1970 but traffic growth has been such that additional port capacity has to be provided immediately. iii. There are only lighterage facilities on the Pacific coast and because of draft limitations, goods must be discharged into barges at Amapala or El Yuerto for transfer to San Lorenzo some distance away. Operations are slow and costly with consequent delays to ships and some damage to cargo. Traffic has reached a level where the construction of a wharf for direct dis- charge or loading of cargo is justified. iv. The project is designed to provide adequate facilities at Puerto Cortes to handle traffic projected until about 1978. At Henecan, a suitable site some 3 km from San Lorenzo, an alongside facility would be constructed to handle an estimated 90% of the traffic through the Pacific port; the balance, handled in ships whose drafts would prevent them from reaching Henecan, would continue to be transferred to or from barges at Amapala. v. The project is based on studies carried out by Tippetts-Abbett- McCarthy-Stratton (TAMS) and Netherlands Engineering Consultants (NEDECO) for the development of Puerto Cortes and Henecan respectively, the latter financed under Loan No.463-HO. The project at Puerto Cortes comprises construction of two berths for banana and lumber ships, a roll-on/roll-off ramp, a belt conveyor system for banana loading, a tug, supporting facilities and the provision of engineering services. At Henecan the project comprises construc- tion of two berths, supporting facilities, cargo-handling equipment and the provision of engineering services. The total estimated cost is L 19.6 million (US$9.8 million). The proposed loan would be for L 12.0 million (us$6.o mil- lion) which is the estimated foreign exchange component. Contracts would be awarded on the basis of international competitive bidding.  - ii - vi. The loan would be made to Empresa Nacional Portuaria (ENP), an autonomous port undertaking, created in 1965. ENP has until now administered only Puerto Cortes but the Government plans to transfer responsibility for the new facilities at Henecan to ENP. ENP has a sound organization, good management and is carrying out a well-conceived training program. ENP can fill most of the posts to operate Henecan from its own ranks; however, the Port Superintendent will be recxuited from outside ENP. vii. ENP's financial position is strong. A new schedule of port charges, based on a consultant's study financed under Loan No.463-H0, was introduced in 1970. Together with funds on hand at present, ENP will generate sufficient funds during construction to meet the local currency costs of the project. viii. The evaluation of economic costs and benefits shows that the project is justified; the internal economic return at Puerto Cortes and Henecan are 40% and 33% respectively. ix. The project is suitable for a loan of US$6.0 million equivalent repayable over 20 years including a four-year grace period.  REPUBLIC OF HONDURAS APPRAISAI CF THE SECOND PORT PROJECT 1. INTRODUCTION 1.01 In 1966 the Bank made Loan No.463-HO to Empresa Nacional Portuaria (ENP)for the building of two deep-water berths and supporting facilities at Puerto Cortes. Construction was completed in March 1970. During construction the management and operating efficiency of the new port authority (ENP) were improved with the assistance of consultants financed under the loan. It be- came clear during this period that traffic was growing at a much higher rate than had been forecast when the project was designed and a study of the next expansion phase was commissioned. This study, financed by ENP, was carried out by Tippetts-Abbett-McCarthy-Stratton (TAWS), an American consulting firm. The resulting project, which is the subject of this report, covers extension of the wharf, construction of a roll-on/roll-off ramp and provision of sup- porting facilities, handling equipment, a tug and engineering services. 1.02 The project also covers the development of a deep-water facility on Honduras' short Pacific coastline at Henecan to replace the very inefficient lighterage operations now carried out at various points. Funds to finance a feasibility study for such a development were included in Loan No.463-HO and the study was carried out by Netherlands Engineering Consultants (NEDECO). The facility at Henecan will include a new wharf, supporting facilities, han- dling equipment and engineering services. 1.03 The total project cost is estimated at US$9.8 million equivalent; the proposed loan is for the foreign exchange component which is US$6.0 million equivalent. 1.o4 Other than Loan No.463-HO, there have been two credits and four loans for transportation totaling US$36.8 million,all for highways. All are for completed projects except a joint IDA-Bank operation (Cr.71-HO and Loan No4.OO-HO) in 1965 for US$9.5 million and Loan No.495-HO in 1967 for US$8.6 million, both for highways which are about 90% complete. These projects are being carried out satisfactorily although there have been some delays due mainly to unusually bad weather. 1.05 This report is based on the TAMS and NEDECO reports and the findings of an appraisal mission to Honduras in January 1971 composed of Messrs. A. Fateen (Port Engineer), N. Heggemsnes and T. Oursin (Economists) and H. Jones (Financial Analyst). Mr. W. Bannan (Research Assistant) assisted the mission in data collection.  - 2 - 2. BACKGROUND A. General (Map 1) 2.01 Honduras, the most mountainous of the Central American countries, borders on Guatemala, El Salvador and Nicaragua. It covers some 45,000 sq mi and is divided into three climatic zones. The Atlantic Zone comprises the most fertile plateaus and river valleys, featuring regular and abundant rain- falls. The Central Zone is rugged, with less arable land and a marked dry season. The Pacific Zone is more fertile and largely arable, but it also has a severe dry season. Forests cover about half of the country. 2.02 Honduras ranks second in area and third in population in Central America, with about 2.5 million people. Its population is growing rapidly, by some 3.5 percent per year. 2.03 In 1970, GNP was US$679 million equivalent and has been increasing at about 5% per annum; GNP per capita is about US$270. Agriculture accounts for 35% of GNP, industry 14%, commerce ita%, construction 5% and transportation 6%; the remainder consists of services and government administration. B. Transport Sector 2.04 Inadequate transportation infrastructure has been one of the major obstacles to development in Honduras. The terrain is ragged and traversed by many rivers and streams and these features, together with the tropical climate, make road and railroad construction and maintenance difficult and expensive. 2.05 Transport improvements are of high priority in the Government's development plans. Of the L 570 million in the 1970-1974 Public Investment Program, L 240 million (42%) is allocated to the transport sector, of which 81% will be spent on highways, 13% on ports, 5% on railways and 1% on airports. The country only recently started to construct a modern highway network and investments have been concentrated on trunk roads to connect the major pro- ducing and consuming centers and to open new areas. The Government plans to shift the emphasis to secondary and feeder roads in the next phase. Highways 2.06 The road network totals about 5,000 km of which 370 km are paved and 900 km are under construction. By the end of the current planning period in 1974 the country is expected to have a system of paved roads between the main centers. Railways 2.07 Honduras has three small railway lines located on the North Coast adjacent to the major ports. Two lines are owned by foreign fruit companies and are used primarily for shipping bananas to the Caribbean ports and to  - 3 - transport imporued supplies to the plantations. The Uational Railway, own3d and operated by the Government, operates in the Ulua Valley and between San Pedro Sula and Puerto Cortes. It handles banana and lumber exports, wheat and general cargo imports and some local traffic mainly betmeen Puerto Cortes and San Pedro Sula. Air Transport 2.08 Due to the lack of adequate land transportation facilities, air service plays an important role, and provides the only modern means of trans- port for remote areas. Honduras has an extensive air transport network serving many commmnities on a schedule basis, supplemented by air taxi services to practically all parts of the country. As a result of the recent improve- ment of the highway systam, air services to some areas have been discontinued. Nevertheless, total air traffic has been rising steadily, passenger Ica increas- ing at about 10% a year since 1564 to 22 million in 1968. Ports 2.09 The Govermnent attaches high priority to the development of adequate port facilities, which play a key role in the transport system and handled 96% of export and 93% of import tonnages in 1970. There are four deep-water ports on the Caribbean coast. Puerto Cortes, near the Guaternalan border, handles about half of banana exports and is the leading port for otihor cargos. Tela, east of Cortes, was developed by the United Fruit Company for banana exports. La Ceiba, still further east, is used mainly for bzaiana exports by the Standard Fruit Company. At Tela and la Ceiba ships are berthed at unpro- tected piers unusable during storms. Puerto Castilla, located at the mid-point of the Caribbean coast, and Roatan, on a small Caribbean island, handle a very small amount of traffic. 2.10 Amapala, on the island of Tigre, is the only port on the Pacific coast. It is a lighterage port and cargos are transported 30 km to and from San Lorenzo on the mainland. Goods are also handled by lighters at an anchor- age (El Muerto) in the Gulf of Fonseca and transported to and from San Lorenzo some seven km away. 2.11 1970 port traffic,including petroleum products,was as follows: (t'Co Tons) Exports Imports Total % Puerto Cortes 1,078 942 2,020 72 La Ceiba 300 61 361 13 Tela 143 105 2h8 9 Amapala-San Lorenzo 147 30 177 6 Roatan 5 1 6 - Trujillo (Puerto Castilla) 2 - 2 - Total 1,675 1,139 2,814 1C0%  -4- 2.12 Central America has a large number of ports on both the Caribbean and the Pacific coasts. In an effort to provide a framework for rational in- vestment decisions, taking into account national requirements and regional interdependencies, the Bank in 1970 carried out a study of the ports of the region (Central American Ports Study) which provides a model for the opti- mization of port investment decisions. The developments included in the proposed project are supported by the findings of this study. 3. PORT ADMINISTRATION EXISTING ORGANIZATION, FACILITIES AND OPERATIONS A. Organization Puerto Cortes 3.01 ENP, an autonomous port undertaking, was created under a law which came into effect on December 1, 1965, to be responsible for all seaports in the country. The law was acceptable to the Bank, which assisted the Govern- ment in its formulation. Initially, ENP took over Puerto Cortes; the Govern- ment will extend ENP's control to other ports when appropriate. The Government and ENP undertook in Loan No.463-HO that ENP will not undertake the adminis- tration or operation of any other port without affording the Bank a reasonable opportunity to exchange views with the Borrower (ENP). 3.02 ENP has a Board of seven members consisting of three Ministers (Economy and Finance, Cormunications and Public Works, Natural Resources) or senior officials designated by them, a representative from the Economic Planning Council, and three delegates, one each from (a) chambers of commerce and industry, (b) trade unions, and (c) shipping companies. The latter three members are appointed by the President from lists submitted by the respective groups. The Minister of Economy and Finance is chairman. A General Manager is responsible for the administration of ENP as a whole and there is to be a Port Superintendent at each port. There is a proper division of responsibil- ities between the Board and the Manager and ENP's affairs are carried out in an efficient manner. 3.03 The Government consulted the Bank before the first General Manager was appointed in 1966 and in Loan No.463-HO has undertaken to consult the Bank before any change is made (this undertaking would run throughout the term of the proposed loan as both loans would be repaid at about the same time). At the same time, ENP undertook to employ management consultants acceptable to the Bank. Booz, Allen and Hamilton International, Inc. (BAHINT), operations consultants, were appointed at the end of 1966 to provide advice on operating procedhures and eqitrpment procurement and assistance in establishing an admin- istrative organization, installing financial and cost accounting systems, revising tar-ffs and establishin)g and supervising staff trairing schemes. All these aims -lave been achieved and ENP now has a sound organization structure, good management and a satisfactory program for training its staff.  3.04 At present, EiP employs 172 staff in administration and superinten- dence, finance, engineering and maintenance and 345 for cargo-handling and warehousing operations, 112 of whom are hired on a casual basis. The number of staff is not excessive. 3.o5 The Government internds to transfer responsibility to INP for the construction, administration, operation and mainteriance of the new facilities to be constructed at Henecan and it was agreed during negotiations that the contract for construction at Henecan would not be signed until this transfer of responsibility was achieved. ENP expects, reasonably, to be able to provide all but a few of the staff required to operate a new facility at Henecan from its own ranks and to engage the rest, including the Port Superintendent, from outside EXP. ENP undertook during negotiations to consult with the Bank be- fore the first and subsequent appointments to the post of Port Superintendent, Henecan, are made. Other Ports 3.06 Port administration at the other ports is the responsibility of the Directorate General of Customs and Indirect Taxes (Ministry of Economy and Finance). At Tela and La Ceiba some facilities are ouned and operated by private interests (United Fruit and Standard Fruit Companies). The Government at present has no plans to extend ENP operations beyond Puerto Cortes and Henecan and agreement was obtained during negotiations that EQ? will not under- take the administration or operation of ports other than Puerto Cortes and Henecan unless the Government, the Bank and EN? agree that ENP has the re- quiired administrative and financial capacity. There is a possibility that port facilities will be needed at, or in the vicinity of, La Ceiba to accommodate the traffic generated by a pulp and paper plant the feasibility of -which is now being investigated. IFC has an equity in the pilot company that was formed to exploit the forest resources of north central Honduras and has undertaken to help promote the pulp and paper project at the request of the Government. A study may be needed to identify the most suitable location for the related port facilities and it was agreed that such a study should be carried out under the auspices of Ei?P and could be financed from the loan (see para. 4.12). B. Facilities 3.07 Puerto Cortes is situated in a well-protected natural bay with 12 to 16 m depth of water. Tidal range is only 0.3 m. The shore facilities (see Map 2) consist essentially of: (a) Government Wharves No. 1 and 2 totaling 523 m in length completed in 1955 and 1970 used for general cargo, bulk cargo and lumber3 (b) a banana -wharf 292 m long; (c) a petroleum pier constructed in 1959; and (d) two transit sheds and two warehouses. 3.08 The Banana Wharf was constructed in 1919 by Tela Railroad Company (TRR) for the Government. Although ownership was transferred to ENP in 1966, TRR continues to operate it and carry out what little maintenance is done on it (see also para. 3.11). Major setblements have occurred in this wharf and it is in very poor condition.  3.09 Amapala and El Muerto are the only accessible anchorages on the Pacific Coast of Honduras for ocean-going ships. Channels to both Amapala and El Muerto are tortuous and each is about 30 km long (Map 3). Between El Muerto and San Lorenzo barges pass through a creek 7 km long. Amapala has old bulkheads which barges moor alongside during the two hours of high tide. In San Lorenzo old masonry walls accommodate barges during part of the tide. There are four storage sheds at Amapala and nine at San Lorenzo. Details of facilities in Puerto Cortes and Amapala-San Lorenzo-Henecan are given in Annex 1. C. Maintenance 3.10 Maintenance of ENP equipment is good. Forklift and tractor drivers, mechanics and servicemen are well trained. 3.11 TRR would like to rehabilitate the Banana Wharf because its conces- sion agreement exempts it from paying any port charges for its use. However, the wharf is beyond economical repair. TRR is expected to continue using Banana Wharf in its deteriorated condition as long as possible. 3.12 Government WIharf No. 1, constructed in 1955, is already in a state of deterioration. More than 20% of the piles and main beams are cracked, exposing the reinforcement to corrosion. The damage is mainly attributable to inadequate fendering. The fender system was changed in 1970, but the deck was not repaired. Unless these repairs are undertaken as a matter of urgency by a qualified contractor, the remaining effective life of the wharf will be seriously shortened. It was confirmed during negotiations that ENP will have the necessary repair work carried out promptly by a comnpetent contractor. The Bank pointed out that it would not object if this work were included as a separate item in the tender documents for the construction of the project, although the repair work would not be part of the Bank-financed project. 3.13 The fendering systems of both Government Wharves No. 1 and No. 2 have been severely damaged by ships docking or undocking. The majority of these accidents occur because ENP does not employ pilots or tugs to assist in berthing operations. ENP agreed during negotiations that it (i) shall carry out repairs to fenders within a month of their damage and (ii) introduce man- datory pilotage by January 1, 1972 at Puerto Cortes and at Henecan when the project there is completed. A 700 hp tug is included in the project. D. Operations Puerto Cortes 3.14 Puerto Cortes operates 24 hours a day, 362 days a year. Ships handling perishable commodities are given priority and generally, banana ships have highest priority.  - 7 - 3.15 Import cargo-handling at the Government Wharves is by ENP staff. Export cargo is transferred directly to ships from railroad cars or trucks by labor supplied by the ship's agents and all stevedoring is carried out by private contractors. 3.16 Cargo-handling productivity has improved in recent years particularly with the conpletion of the new wharves in early 1970 and the acquisition of modern cargo-handling equipment. A substantial proportion of general cargo is palletized. General cargo is handled at an average of about 11-12 tons per gang hour which is satisfactory. 3.17 United Fruit Company uses four gantry-type conveyor loaders for handling bananas at the Banana Wharf. Standard Fruit Company has four portable conveyor loaders at the Government Wharves and loads ships through side hatches. Productivity is good and averages 100 tons per ship hour for the United Fruit and 60 tons for the Standard Fruit systems. 3.18 Bundled lumber is loaded at all wharves directly from railroad flat- cars by ship's gear. Loading rates average only 16 tons per ship hour mainly because of poor coordination between the lumber ships, with their low priority in berthing, and the arrival of flatcars from the lumberyards. Loading opera- tions are also often delayed by a shortage of switch locomotives and adequate railroad crossovers. These delays will be alleviated in the future by (a) the acquisition of a shunting locomotive by the National Railroad and (b) the new railroad yard and improved layout provided in the proposed project. 3.19 Import cargo is permitted 15 days free storage (reduced in September 1970 from 22 days). ENP plans to reduce this period further as traffic in- creases and agreed during negotiations to reduce the free period to 10 days by January 1, 1974. Export cargo is permitted five days free storage. Am22apala, El_1NVerto2 San Lorenzo 3.20 A 1961 decree prescribes that all goods for Honduras coming via the Pacific Ocean have to be imported through Amapala so all ships anchor there for customs clearance. Easily discernible items such as cars and buses are allowed to be transshipped by barge directly to San Iorenzo. Other goods must be transferred from barges to Customs' warehouses in Amapala and, after custons clearance, reloaded into barges to be towed 30 km to San Lorenzo. These operations are ver-y slow because barges can only berth at Amapala during high tide. Some cargo is handled as often as seven times before reaching San Lorenzo. 3.21 Nlearly all exports are loaded into barges at San Lorenzo wharves for loading into ships at El 1uerto. A small quantity of goods to be shipped by deep-draft ships which cannot reach El Muerto are transported by barges to Amapala for loading. Cargo-handling operations at Amapala and San Lorenzo are done by hand except for heavy pieces which are lifted from barges at San Lorenzo by small, hand-operated cranes. The rates of handling cargo are low.  - 8 - 3.22 With the building of a new port at Henecan the Government intends to modify the 1961 decree and transfer the main Customs office to Henecan. The Government confirmed during negotiations that this will be done by the date the nev facilities in Henecan are ready for operation. 4. THE PROJECT A. Description 4.O1 The project is to expand port facilities at Puerto Cortes and to provide new deep-water berthing facilities at Henecan to accommodate the fore- cast traffic up to 1978. Except for the possible replacement of the Banana Wharf at Puerto Cortes, no further major port expansion is envisaged for several years after project completion. However, both sites have adequate water and land areas for future expansion. Puerto Cortes (Map 2) 4.02 The project in Puerto Cortes is: (i) Construction of a new deep-water wharf 285 m long for banana and lumber loading with a reinforced concrete deck on piles. (ii) Procurement of a belt conveyor system for banana loading. (iii) Land reclamation of about eight acres for a new railroad yard to handle banana and lumber wagons; and construction of the yard. (iv) Construction of a roll-on/roll-off ramp at the junction of Government Wharves Nos. 1 and 2. (v) Construction of roads, with parking, sorting and open storage areas. (vi) Procurement of a tugboat, a pilot boat, forklift trucks and pallets. (vii) Acquisition of about 2.5 acres of land needed for the project. (viiJ) Provision of engineering consultant services. 4.O3 The new wharf, which is an extension of the existing Government Wharf No. 2, will berth concurrently one banana ship and one large or two small lumber ships. The roll-on/roll-off ramp will handle one ship at Govern- ment Wharf No. 1 and one at Government Wharf No. 2. A detailed description of the project at Puerto Cortes is given in Annex 2 and a calculation of the berthage required is given in Table 1.  - 9 - 4.04 Except for banana containerization, with which the United Fruit Company is now experimenting, no significant trend towards containerization is expected at Puerto Cortes in the near future. lNonetheless, the wharf will be designed to handle containers, should the need arise. The additional cost of constructing the wharf so that it can be used for containers is minimal. Henecan (Map 4) 4.05 The project at Henecan is: (i) Construction of a new 'IT" shaped, deep-water wharf 290 m long and 25 m wide with a reinforced concrete deck on piles for lumber and general cargo; an access bridge about 70 m long and 10 m wide to connect the wharf with the shore. (ii) Reclamation of about seven acres of land for storage and parking. (iii) Construction of a transit shed (about 100 m x 30 m) and of administration and operations buildings, utilities and fencing. (iv) Construction of an access road about 2.5 km long to connect the port facilities with San Lorenzo. (v) Procurement of a pilot boat and cargo-handling equipment. (vi) Procurement and installation of navigation aids. (vii) Acquisition of about 15 acres of land needed for the project. (viii) Provision of engineering consultant services. 4.o6 Deepening of the navigation channel is not planned for this project. The new wharf will berth concurrently two general cargo or lumber ships along the outer side and eight barges or two coasters along the inner side. No trend towards containerization at Henecan is expected in the near future. A detailed project description and the requirements for Henecan Port (channel, navigation aids, wharves, buildings, roads and equipment) are given in Annex 3 and Tables 2 and 3. B. Cost Estimates 4.07 The total estimated cost of the project is L 19.6 million (US$9.8 million equivalent) with a foreign exchange component of Us$6.0 million equiv- alent. Details are given in Tables 4 and 5 for Puerto Cortes and Henecan respectively and are summarized below:  - 10 - Cl Foreign Local Foreign Total Local Foreign Total Exchange (L'000) _7USI Os$'ooo Equivalent) 1. Construction 5,160 6,880 12,040 2,580 3,440 6,020 57 2. Equipment 300 1,380 1,680 150 690 840 82 3. Tugboat 100 720 820 50 360 410 88 4. Land 420 - 420 210 - 210 - 5. Engineering 288 1,132 1,420 144 566 710 80 6,268 10,112 16,30 3,13 ,05 ,190 T71 Contin gencies: Physical (15> on 1) 780 1,026 1,806 390 513 903 57 Price (10% on 1 and 2 and 5% on 3) _552 862 1,414 276 431 707 61 7 0J 12,000 19,600 3,500 6,000 9,800 61 __ - - - _ Sub-divided as follows: Puerto Cortes 4,600 7,200 11,800 2,300 3,600 5,900 61 Henecan 3,000 4,800 7,800 1,500 2,400 3,900 61 7,o00 12,000 19,600 3,800 6,000 9 0 61 4.08 The cost estimates are based on TAOS' report for Puerto Cortes and NEDECO's report for Henecan, both as revised by Bank staff. They take account of knomn costs of local labor and materials and imported materials. Duties on imported equipment are included but not those on imported materials for civil works for which ENP as a public corporation wdll be granted exemption. The estimates for civil engineering work include 15% for physical contingencies and 10% for price escalation (5% per year) - based on price increases of labor and materials in the last five years and taking into account a construction period of three years from 1972 through 1974. Price escalation for equipment varies with the expected date of purchase. C. Project Execution and Financing 4.09 EIP, with the help of consultants acceptable to the Bank, will be responsible for carrying out the project. It was agreed during negotiations that consultants will be retained to carry out the additional investigations required for final design (Annex 3, para. 8), prepare tender documents and assist with contract bidding procedures and carry out construction supervision. ENIP has indicated that TA14S and NEDECO will be employed for the project at Puerto Cortes and Heniecan respectively and these firms are acceptable to the Bank. D. Procurement and Disbursements 4.10 Contracts for construction and equipment supply will be awarded on the basis of international competitive bidding in accordance with the Bank's guide- lines. It is unlikely that a local contractor would be awarded the civil engi- neering contract as there are no local contractors specialized in this type of work.  - 11 - 4.11 Construction at both ports is expected to start early in 1972 and will be completed by the end of 1974. A schedule of estimated disbursements by quarter is given in Table 6. Disbursements will be made to cover (a) the estimated foreign exchange component (57%) of all civil engineering works and (b) the actual foreign exchange costs of imported equipment and consultant services. 4.12 A puilp and paper project is under investigation in northern Honduras which may require special port facilities at or near La Ceiba. Consulting services to identify a suitable location for such port facilities may be needed and it was agreed during negotiations that these could be financed from the loan. It is expected that any study which may be required will be small and can be financed from the provision in the loan for engineering services. If any surplus funds are available on completion of the project, it is recommeided that consideration be given at the time to providing additional cargo-handling equipment at Puerto Cortes as some equipment there may need replacement in three or four years. E. Land Acquisition 4.13 About 75% of the land required in Puerto Cortes for the railway yard is to be reclaimed by filling. The rest, about 10,000 m.2 is to be acquired from private owners by purchase or expropriation. In Henecan, ENP will acquire from the Government about 15 acres required for the access road, transit sheds, open storage and parking areas and administration and operations buildings. No difficulties are anticipated because ENP may petition the Government for its expropriation. It was agreed during negotiations that all the land required would be acquired before January 1, 1972 and that a contract for construction at a particular port would not be awarded until the land at that port was acquired. F. Future Development 4.14 In Puerto Cortes, the two sites for port development that are related to the physical arrangement of the town and the existing port facilities are: (a) an area east of Government Wharf No. 2, and (b) the site of the existing Banana Wharf. In both areas the wharves combine naturally with existing nearby commercial and industrial zones to form a consolidated area effectively segre- gated from other areas of the town. At both locations a number of existing small wooden structures in poor condition will have to be removed as the port grows, but neither is threatened by encroachment of future town development. 4.15 At Henecan, the facilities could be expanded along the direction of the proposed wharf, as the natural channel north and south of the new facil- ities is sufficiently wide and deep.  - 12 - 5. ECON\OMIC EVALUATION A. Traffic 5.01 The economy of Honduras is highly dependent on its ports. In 1968 the ports handled some 82% of import and export tonnages; however, because of the war with El Salvador and other problems within the Central American Common Market (CACM), trade with this area decreased and the proportion of foreign trade handled by the ports increased to 94% in 1970. Direct trade between Honduras and El Salvador, major trading partners in the CACM in the past, was completely interrupted and Honduras has now canceled the trade preferences formerly given to the other members of the CACM. It is unlikely that normal relationships amongst the member countries will be resumed in the near future. 5.02 The total international trade of Honduras by cormodities and tonnages moved by sea for the years 1968-1970 is summarized in Table 7 and details for Puerto Cortes and Amapala are given in Tables 8 and 9. Dry cargo traffic through Puerto Cortes has grown rapidly in recent years increasing from 431,000 tons in 1963 to 877,000 tons in 1970. This was wel above the foreast for 1970 of 572,000 tons made in 1965 during the appraisal of the first Puerto Cortes Project when the outlook for lumber exports was uncertain and when it was ex- pected that other ports in the area would be more competitive with Puerto Cortes than they have proved to be. 1970 traffic included 401,000 tons of banana and 161,000 tons of lumber exports. 776,000 tons of petroleum imports and 367,000 tons of petroleum and petroleum product exports were also handled there. At Amapala the 1970 traffic of 177,000 tons included 128,000 tons of lumber and 15,000 tons of cotton and cotton seed exports. 5.03 Traffic forecasts were prepared by the consultants TANS for Puerto Cortes and by NiEDECO for Amapala-Henecan. They have been used with some modi- fications, mainly for lumber, in the project evaluation. The port service areas (Map 1) were detenmined and traffic allocated between them taking into account estimated total transport costs between origin and destination of goods. Consideration was given to the alternative of diverting part of the Henecan traffic through the Port of Corinto (Nicaragua) when the road connecting Choluteca and Corinto is completed. Such diversion was found to be consider- ably more costly than shipping through a new port at Henecan even under the unlikely assumption that Corinto had sufficient excess capacity to handle this traffic. This alternative was therefore rejected. The forecasts (Tables 8 and 9) for individual commodities are discussed in Annex 3. Actual traffic growth from 1963 to 1970 and estimated growth to 1978 are shown below: ('oOO Tons) Puerto Cortes Amapala-Henecan 1963 1970 1978 1963 1970 1978 Bananas 207 401 680 - - - Lumber 72 161 250 48 128 210 Other Dry Cargo 152 315 554 32 49 118 431 877 1,484 80 177 328 c = - - _ _  13 B. Costs and Benefits Puerto Cortes 5.04 The project at Puerto Cortes is designed to increase the capacity and improve cargo-handling rates by better rail access and equipment. Its principal benefits would be: (i) reduction in anticipated ship-waiting time, Whbich will rise sharply if port capacity is not increased; (ii) avoidance of cargo diversion to other ports; (iii) faster turnaround time for ships in port; (iv) lower cargo-handling costs; -nd (v) reduction in wharf damage by employing a tug. 5.05 The procedure followed in quantifying the benefits is outlined in Annex 4. Excluding improvements in port producn2vrity which could be achieved without new investments, these benefits are est.,!ated to yield an internal economic return on the investment, excludinig thie tug, of 40%. The rate is highi because, due to recont rapid traffic growth, the port would soon be congested without the project. 5.o6 A sensitivity analysis was carried out assuming a reduction in traffic of 10% and a change in all cost and benefit parameters in a negative dizection by 10%. Even with these unlikely assumptions the Puerto Cortes project would yield a satisfactory return of 20%. 5.07 The savings in reduced wharf damage by using a tug in docking and undocking operations are expected to amount to at least US$60,000 a year. Thle internal economic return on the investment in the tug will amount to about 13%. Henecan 5.08 The project at Henecan is designed to replace present lighterage operations by handling cargo across the new wharf. Its principal benefits would be: (i) lower cargo-handling costs; (ii) faster turnaround time for ships in port; and (iii) reduced cargo damage. A quantification of these benefits is given in Annex 4. The internal economic return on the investment is estimated at 33%. The return is high because of the inefficiency of the present lighterage operations and the high savings which will result from replacing them.  - 14 - 5.09 A sensitivity analysis was also carried out for the project at Henecan, assuming a reduction in traffic of 10% and a change in all cost and benefit parameters in a negative direction by 10%. The rate of return in this unlikely case is estimated to be a still acceptable 23%. C. Conclusion 5.1o The evaluation shows that the proposed project is economically sound and well justified. Considerable benefits will accrue, in the first instance, to the international shipping industry, but the financial evalua- tion (Chapter 6) demonstrates that ENP will recover substantial amounits through charges against ships calling at the ports. Insufficient port facili- ties would again result in surcharges on ocean freight as in 1969, with ad- verse consequences on the economy as a whole. The project is, therefore, an important contribution to the country's economic development. 6. FINANCES A * Introduction 6.01 Puerto Coites has been the only port operated by ENP and the following comments on the present finances of ENP refer only to that port. No financial infonmation is given on the existing operations at Amapala-El Yuerto-San Lorenzo as these will be replaced by new facilities at Henecan. ENP will operate Henecan and the financial forecasts cover the operations of this port and Puerto Cortes. B. Present Finances - ENP 6.02 Since its establishment in 1966 ENP has produced large operating surpluses and at the end of 1970 its financial position was strong. Operating results given in detail in Table 10 are summarized below for the years 1967 through 1970: (L'o0o) 1961 1968 1969 1970 Operating Revenue 4,209 4,773 5,012 6,555 Operating Expenses 1,458 1 ,686 1,586 2,668 Net Operating Revenue 2,751 3,087 3,,426 3,887 Interest Income 48 115 182 288 2,799 3,202 3,608 4,175 Less Interest Expense - - 352 Net Income 2,799 3,202 3,608 3,823 Operating Ratios 35% 35% 32% 41%  - 15 - 6.03 The operating ratio increased to 41% in 1970 as operating costs increased whei the new facilities cane into use. However, because the level of port charges in Puerto Cortes is generally high relative to costs, the operating ratio is still very low. Harbor dues amounted to L 1.9 million in 1970 although ENP has no breakwater to maintain and does very little dredging. ENP justifies this levy as a source of revenue to be used for port developr!