Philippines - Second Port Project

FILE COPY DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No, 216a-PH PHILIPPINES APPRAISAL OF A SECOND PORT PROJECT September 21, 1973 Asia Projects Department This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CURRENCY EQUIVALENTS 1 Peso (Ps) U US$0.147 Ps 1 million - US$147,000 US$1 - Ps 6.80 WEIGHTS AND MEASURES 1 meter (m) = 3.28 feet (ft) 1 kilometer (km) - 0.62 mile (mi) 1 kilogram (kg) - 2.2 pounds (lb) 1 metric ton = 0.98 long ton (ton) ACRONYMS AND ABBREVIATIONS ADB - Asian Development Bank BOC - Bureau of Customs BPW - Bureau of Public Works DPWTC - Department of Public Works, Transport and Communications dwt - deadweight ton (a measure of weight-carrying capacity) GRT - gross registered ton (a measure of total cubic capacity) KFW - Kreditanstalt fur Wiederaufbau LWOST - low water ordinary spring tides MLLW - mean lowest low water NDP - Net Domestic Product NEDA - National Economic Development Authority NRT - net registered ton (a measure of net cubic capacity) PAL - Philippine Air Lines PNR - Philippine National Railways PPA - Philippine Ports Authority GOVERNMENT OF THE REPUBLIC OF THE PHILIPPINES FISCAL YEAR July 1 to June 30  PHILIPPINES APPRAISAL OF A SECOND PORT PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS ...... ........................ i-il I. INTRODUCTION .....1 II. BACKGROUND .....1 A. General . . 1 B. The Mindanao Economy . . 2 C. The Transport-Sector. 3 D. The Mindanao Transport Sector . . 4 E. Transport Planning and Coordination . .5 III. PORT ORGANIZATION, FACILITIES AND OPERATIONS. . 6 A. Organization and Management . . 6 B. Finances ............ 8 C. Facilities at Project Ports . . 9 D. Operations at Project Ports. 10 IV. THE PROJECT ...11 A. Description of the Project .11 B. Project Cost Estimates .......................... 12 C. Engineering Services and Technical Assistance .... 14 D. Procurement .14 E. Project Execution .14 F. Disbursement .14 G. Ecology .14 V. ECONONIC EVALUATION .14 A. General . .14 B. Traffic Forecasts. 15 C. Economic Benefits ..16 D. Economic Return and Sensitivity Analysis . .17 This report was written by Messrs. Y. Akatsuka, J. Burns and R. H. Roberts.  -2- Page No. VI. FINANCIAL EVALUATION ................................ 17 A. Past Earnings ................................... 17 B. Future Earnings and Financial Objectives ........ 18 C. Auditing and Insurance .......................... 20 VII. AGREEMENTS REACHED AND RECOMMENDATION .... . 20 ANNEXES 1. Main Functions of Proposed Philippine Ports Authority 2. Main Functions of Port Management Units 3. Port Dues Levied Under the Present Tariff and Customs Code 4. Description of Existing Port Facilities 5. Labor Productivity 6. Details of Project Items 7. Estimated Schedule of Disbursements TABLES 1. Cost Estimates 2. Cagayan de Oro - Dry Cargo Traffic 3. General Santos - Dry Cargo Traffic 4. Economic Benefits 5. Port of Cagayan de Oro - Forecast Revenues and Expenditure 6. Port of General Santos - Forecast Revenues and Expenditure 7811 - Proposed Organizational Structure at Project Ports MAPS 10217R - Transport System 10348 - Transport System of Mindanao 10349 - Cagayan de Oro Port Project 10350 - General Santos Port Project  PHILIPPINES APPRAISAL OF A SECOND PORT PROJECT SUMMARY AND CONCLUSIONS i. The Bank has been asked to help finance the expansion of two of Mindanao's principal ports, Cagayan de Oro and General Santos, in order to facilitate the further economic development of Mindanao and to avoid substantial delays to shipping. ii. Ports and shipping have, in the past, played a dominant role in the transport sector of the Philippines and continue to provide an essential means of inter-island transport and communications. The public ports, which handle the bulk of Philippine dry cargo imports and inter-island traffic, are generally small, poorly maintained and not designed for modern cargo- handling methods. iii. The project, which is based on consultants studies financed through the UNDP with the Bank as executing agency, comprises construction of 160 m of wharf at Cagayan de Oro and 300 m of wharf at General Santos and, at both ports, rehabilitation of the existing wharves, construction of transit sheds and ancillary works, and provision of consultants' services and technical assistance. The total cost is estimated at US$12.0 million of which US$6.1 million equivalent is foreign exchange. iv. Contracts for civil works would be awarded through international competitive bidding. Detailed engineering is proceeding and bids could be invited shortly after loan effectiveness. v. The present facilities at the project ports are inadequate to meet forecast traffic and, without the proposed project, would cause serious delays to inter-island ships, which are the principal users of the ports. The proposed project would integrate well with planned and ongoing highway projects, and would facilitate the substantial increase in shipments of agricultural commodities which is expected to result from planned and on- going agricultural projects. The proposed project would also reduce cargo- handling costs. Project execution is expected to take about two years and to be completed by Decenber 1976. vi. Port management and administration, which is, at present, the responsibility of the Bureau of Customs, is unsatisfactory. A Philippine Ports Authority (PPA) would be established by appropriate legislative action. In the interim, certain organizational changes are necessary, both at the project ports and in the departments concerned with port administration and planning. vii. The Government has agreed to impose a wharfage charge on domestic cargo and to increase this as required to cover the cost of providing port facilities and services for inter-island shipping, such as  - ii - those proposed in the present project. With this proposed charge the project ports would generate sufficient cash to meet all operating and maintenance costs and to service the proposed Bank loan. viii. The economic returns on the project, 22% at Cagayan de Oro and 29% at General Santos, are satisfactory. ix. The project provides a suitable basis for a loan of US$6.1 million equivalent to the Government for a term of 25 years, including a four-year grace period, reflecting the life of the assets.  PHILIPPINES APPRAISAL OF A SECOND PORT PROJECT I. INTROD UCTION 1.01 The Government of the Republic of the Philippines (the Government) has requested the Bank's assistance in financing the expansion of two of Mindanao's principal ports, Cagayan de Oro and General Santos, a project which forms a part of the Government's five-year infrastructure program (1973-77). The proposed project, which would be partially financed by a Bank loan of US$6.1 million equivalent, is based on feasibility studies undertaken by consultants (Sir William Halcrow & Partners - UK) with UNDP financing and the Bank as executing agency. The loan would be made to the Government for a term of 25 years, including a four-year grace period, reflecting the life of the assets. 'When established, the Philippine Ports Authority (PPA) would assume a debt to the Government of Ps 41.2 million on similar terms. 1.02 Two previous loans have.been made for transport infrastructure in the Philippines, 290-PH in 1961 for US$8.5 million and 731-PH in 1971 for US$8.0 million. Experience on the first of these, for procurement of dredg- ing equipment, was unsatisfactory, due to failure to operate and maintain the dredgers in an efficient manner, and some US$1.1 million was cancelled. Loan 731-PR (the first highway loan) is, in general, progressing satisfac- torily although work by the contractor was suspended for some time in 1973 by civil disturbances in Cotabato Province. In both these loans the Bank sought to bring about organizational improvements and, in the case of the highway loan, a measure of success was achieved in strengthening the Bureau of Public Highways, particularly its maintenance organization and ability to prepare and execute projects. A second highway project has been appraised for presentation to the Board during this fiscal year. 1.03 In total, the Philippines has received 18 Bank loans and two IDA credits totalling US$302 million, net of cancellation. About half of this total has been for priority infrastructure projects in power, transportation, water supply and education. The remainder has been divided between agri- culture and industry, with US$87 million being used for fisheries, irriga- tion, livestock, rice processing and rural credit, and US$65 million for industry. 1.04 This report is based on the findings of an appraisal mission, composed of Y. Akatsuka (engineer), J. Burns (financial analyst) and R. H. Roberts (economist), which visited the Philippines in December 1972. II. BACKGROUND A. General 2.01 The Phililpines consists of some 7,000 islands with a land area of about 300,000 km (roughly tne same size as Italy). Luzon, on which  -2- Manila is situated, and Mindanao are the two largest islands making up about 70% of the land area. They also account for about three-quarters of the 39 million popul.ac.ion. The annual population growth rate, 3% during 1960-70, is one of the highest in the world. 2.02 Agriculture, the basis of the economy, generates about 32% of the Net Domestic Product (NDP), accounts for about 70% of export earnings (coconut, forestry products and sugar), and employs about 48% of the labor force. About 33% of the land area is cultivated (primarily rice and corn) and about 48% is commercial forest. Manufacturing accounts for about 21% of the NDP, considerably more than in Malaysia, Thailand and Indonesia. Tie Philippines has abundant natural resources, with particular potential for tropical agriculture, forestry and mineral development.(copper, gold, iron, chrome and nickel). B. The Mindanao Eonoiy 2 2.03 Mindanao, with a land area of 102,000 km , is the second largest among the Philippine islands and remains a relatively underdeveloped but potentially ric'h area. it has abundant mineral resources, large primary forests and richi fishing grounds, and considerable agricultural potential is provided by ?lentiful water aind fertile soi'l. 2.04 Econoaic grow6i in 4 indanao irn the past decade, stimulated by the exploitation of extensive virgin lands and forests, has been significantly above the national average. Over 602 of the regional NDP originates in primary activities and almost three-quarters of the population, 1ive by agri- culture. In 1970, direct exports froma the region, principally forest and coconut products and tropical fruit. amounted to US$300 million, approx- imately one-third of national exports. Since recorded imports in the same year were US$116 million (11% of the national total), the regional trade balance was heavily in surplus. A substantiai proportion of the surplus accrues to large corpora&iorns based outside Mindanao and is not utilized for reinvestment or consumption in Miindanao. As a result, regional economic growth has remained unbalanced. 2.05 The region's economic growth has attracted migrants from the overcrowded areas of Luzon and the Visayas and this has contributed to the more than 4.5% annual population growth rate over tlie period 1960-70. Nevertheless, the level of employment in Mirndanao is better than the national average, and population density is still substantially lower. NDP per capita in Mincanao i.s iLigher than for the. Philippinesas a whole and is grawing faster. Nigration has led to comur.al strife which, in the last few years, has caused serious economic dislocation in the province of Cotabato. Up to 1966 this province was an iaportant contributor to Mindanao's foodgrain surplus but since then has become a deficit area. 2.06 'ne province of Bukidnon (roughly coincident with the hinterland of the port of Cagayan de Oro) is one of the most promising agricultural areas in ?indanao, largely consisting of uplands (300-900 m above sea level) with a semi-temperate climate and fertile soil. Crops include corn, vegetables and fruit, and the province is an important beef-producing area. Population  -3- has grown over the past decade at 7.9% per annum, reflecting the pleasant climate and economic opportunities which have attracted many migrants from the Visayas and Northern Mindanao. Given adequate infrastructure, technical assistance and credit facilities, Bukidnon could support a meat and dairy industry large enough to satisfy most of the national requirement. 2.07 The province of South Cotabato (roughly coincident with the hinterland of the port of General Santos) is almost entirely dependent on agriculture, mostly rice and corn production. The Cotabato Lowland, formed by the Mindanao River, with its rich soil and abundant water resources is well suited to further agricultural development, and the Government has plans for rehabilitating existing irrigation schemes and constructing new ones. Further development of the area's potential will also require construction of feeder roads and improvement of secondary roads. C. The Transport Sector (Map 10217R) 2.08 Ports and shipping have, in the past, played a dominant role in the transport sector of the Philippines and continue to provide an essential means of transport and communication between the islands of the archipelago. In recent years, however, an increasing network of highways, particularly on Luzon, has provided access to the interiors of the larger islands, and road transport has played an increasingly important role. The relatively short inland distances have limited the railways to a small fraction of the total traffic. 2.09 Difficult terrain, heavy rainfall and unfavorable soil conditions have been natural obstacles to the provision of transport infrastructure but lack of funds and poor planning and organization have compounded the problem. The lack of finances has made it impossible to maintain or improve transport facilities to an adequate level. Since the imposition of martial law in 1972, there has been a notable increase in the amount of funds made available for infrastructure investment and maintenance. 2.10 The highway network consists of about 16,000 km of paved roads, 38,000 km of gravel, and 20,000 km of unimproved roads. The highways of Luzon and Mindanao comprise three-quarters of the entire system, most of the rest being on the main islands of the Visayas. The condition of the road system is generally poor, with even the national primary and secondary roads in a deteriorated condition, due to inadequate maintenance. 2.11 The most important railway is the Government-owned Philippine National Railways (PNR), which has about 1,000 km- of main line and 1,000 km of branch lines on the island of Luzon. About 760 km of PNR's track was relaid during the 1960's with the aid of Japanese reparations. The remainder is in very poor condition. Management of the railway has been weak, main- tenance of facilities inadequate and operations inefficient and unprofitable. The main line is paralleled by highways for most of its 'Length and it is difficult to visualize the railway ever being competitive with trucks and buses without Government subsidy. However, since PNR is an important employer, it would be difficult for the Government to close it down, and the Government's  -4- present objective is to improve its operations to the point where it is covering all cash costs. 2.12 Manila, the only international airport in the Philippines is served by 15 major international airlines, as well as by the Philippine Air Lines (PAL), which has both international and domestic services. An extensive network of domestic airports is served by PAL and two other major domestic carriers. Domestic passenger traffic has been increasing at about 17% per annum with PAL carrying more than two-thirds of the traf- fic. Despite the high traffic growth PAL has encountered increasing finan- cial difficulties over the last two years due, in part, to an ambitious expansion program. 2.13 There are some 90 national and 390 municipal ports throughout the Philippine archipelago, plus numerous private piers and wharves. Most of the public ports are small and the Government envisages the gradual elimination of the less economic ports from the national system. This will be achieved through the concentration of investment at selected locations, a process which should yield economies of scale. The long-established public ports have generally been sited with a view to natural protection and, in many cases, this has resulted in sedimentation problems. However, the more modern private piers and wharves, which handle most dry cargo exports and imports of oil, have generally been sited to take advantage of natural deep water. Swell is generally a problem only during typhoons and many ports do not have breakwaters. Most of the public ports are poorly maintained and have not been designed for modern cargo-handling techniques. Sheds are often lacking, although private warehouses are usually available nearby. Cargo- handling is generally in the hands of private companies, and many ports lack equipment. Manila, much the largest port, accounts for about 70% of all imports and 5% of all exports. 2.14 The Philippine merchant fleet totalled approximately 1.6 million gross registered tons (GRT) in 1971. This includes 130 ocean-going vessels totalling 830,000 GRT and 157 inter-island vessels of over 500 GRT totalling about 250,000 GRT, the remainder being craft of under 500 GRT each. More than 45% of the inter-island fleet and 41% of the ocean-going fleet were 19 or more years old in 1971. In 1968, seven new cargo/passenger vessels, of 7,000 dwt each, were bought with aid from the Federal German Republic for inter-island services. More recently, a few tankers and cargo vessels have been acquired through private financing. Large, export-oriented companies frequently provide their owr modern, efficient ships to carry commodities such as minerals, sugar, fruit and forest products to overseas markets. D. The Mindanao Transport Sector (Map 10348) 2.15 The transport infrastructure, particularly roads, is generally in a very poor condition and its improvement is a necessary condition of the further economic development of Mindanao. Only about 8% of the 15,700 km of existing roads is paved, and many areas are inaccessible, particularly during the monsoon season. The Government is taking steps to improve a number of Mindanao's national highways, and IBRD, the Japanese Government and the Asian Development Bank (ADB) are assisting in the financing some of  -5- these: IBRD is providing finance for the Digos-Cotabato road (Map 10348), the Japanese Government for the section of the Pan-Philippine Highway from Surigao to Davao and ADB for the General Santos-Cotabato road, and the Iligan-Butuan road. The Government is, itself, financing the improvement of the northern section of the 243 km highway from Cagayan de Oro to Digos. 2.16 To relieve the present congested state of Mindanao's ports the Government is receiving assistance from ADB for the port of Cotabato and from the Federal German Republic (KFW) for the ports of Iligan and Davao. These ports, and the ports of Cagayan de Oro and General Santos (the project ports), were identified as high priority projects by the UNDP-financed Philippine Transport Survey (1970). In addition to the studies on which the present project is based, the UNDP is financing, with the Bank as executing agency, consultants' studies of the ports of Zamboanga, Butuan and Nasipit. The first of these is expected to provide part of a project suitable for Bank financing in FY 75. As in the case of the earlier studies, the consultants are required to take into account, in defining the hinterlands of the project ports, the traffic likely to move through neighboring and competing ports. E. Transport Planning and Coordination 2.17 As a result of a recent sweeping Government reorganization, trans- port planning is now the joint responsibility of the National Economic Dev- elopment Authority (NEDA) and the Department of Public Works, Transportation and Communications (DPWTC). A Planning Service under the office of the Secretary, DPWTC, has a Planning and Project Development Division responsible for intermodal transport planning. There is also a Port Programming and Planning Branch in the Bureau of Public Works (BPW). A Bureau of Transportation within DPWTC, working within policy guidelines laid down by a Board of Trans- portation, is responsible for regulation of all modes of transport except railways. The PNR remains responsible to the office of the President. Exclusion of the railways from the jurisdiction of the Bureau of Transportation militates against effectiveness of the latter as an instrument of transport coordination, but it is too early to tell whether this arrangement will work in practice. 2.18 The Government's five-year public infrastructure program (1973-77) calls for a very substantial increase in public investment, and a large number of transportation projects have been identified. This emphasizes the importance of the role of the Planning and Project Development Division in establishing priorities amongst competing projects, since the Government will not be able to implement all the proposed projects within this period. This Division is already receiving technical assistance, financed by the UNDP, in its physical planning studies. In addition, to make its studies meaningful, a general improvement in the quality of basic data is required. Steps have already been taken to improve the quantity and quality of highway traffic data, and to improve highway project planning and implementation capabilities. A similar improvement in the field of ports is essential. During negotiations, the Government agreed to strengthen, not later than June 1974, the Port Programming and Planning Branch of BPW with a view to organizing the collec- tion of statistics and improving the preparation of projects for all National Ports (para 3.05).  -6- 2.19 Further expansion of the port of Manila will encounter physical constraints, particularly in the landward access to the port, which may be costly to overcome. In view of the importance of Manila port in the exter- nal trade and domestic traffic flows of the Philippines, the Government proposes to develop, with technical assistance, a master plan for the port. The proposed project includes funds for this purpose (para 4.01(c)). III. PORT ORGANIZATION, FACILITIES AND OPERATIONS A. Organization and Management 1. Present 3.01 At present all public ports, with the exception of San Fernando (which is organized as a Port Authority), are under the control of the Bureau of Customs (BOC) within the Department of Finance. In addition to his normal customs collection and anti-smuggling functions, the Commissioner of Customs is responsible for port management and administration and, to carry out this responsibility, he is assisted by the Office of the Special Commissioner on Port Admrinistration. 3.02 For Customs administrative purposes the Philippines is divided into 34 Collect_on Districts of which five are not yet operational. Each District is managed by a Collector of Customs, one seaport therein being designated as the principal Port of Entry with sometimes also one or more sub-Ports of Entry. 3.03 At each principal Port of Entry, the District Collector of Customs is in direct charge of port management and administration. He is responsi- ble for the day-to-day work of the port, ancherages and outports, and, as far as customs regulations are concerned, for the working of ships and cargo at private facilities. In general, however, the Collector, being primarily concerned with Customs duties, leaves routine port operations to ships' agents in association with the stevedoring contractors and does not exercise discernible control over waterfront activities. 3.04 Construction and maintenance at all public ports is the responsi- bility of the Ports and Harbors Division of BPW (a branch of DPWTC). Main- tenance is supervised either directly by this Division as at Manila, or through City or District Engineers in other parts of the Philippines. Cons- truction is nonmally carried out by contractors. Dredging at public ports is the responsibility of the Harbor and Dredging Reclamation Division of BPW, whether undertaken departmentally or by contractors. 3.05 T'lere is no administrative mechanism for coordinating the port- related activities of BOC and BPW, with the result that capital expenditures are often unrelated to operational needs, and maintenance is neglected. Fur- thermore, BOC does not keep adequate records for purposes of port planning; traffic statistics and data on ship movements and delays are either inadequate  -7- or unavailable. This situation will be improved by the strengthening of the Port Programming and Planning Branch of BPW referred to in para 2.18. 2. Reorganization Proposals 3.06 To improve port management, administration, operations and plan- ning, a PPA would be established with responsibility for developing a national policy for ports and with jurisdiction over all the important National Ports ond would become fully operational by January 1976. The main functions to be performed by PPA are indicated in Annex 1. The Government, using technical assistance provided by the project, would: (a) take appropriate legislative action, not later than December 1974, to establish a financially and operationally autonomous PPA with a constitution, including powers and responsibilities, satisfactory to the Bank; (b) carry out a detailed Plan of Action, with a timetable for implementation, satisfactory to the Bank, covering, inter alia: (i) National Ports to be included in PPA. (ii) management and organizational structure for PPA including local Port Management Units for all ports to be included in PPA. In the case of the project ports these Units would be set up not later than June 1974. Annex 2 shows their main functions and Chart 7811, a suggested organ- izational structure. (iii) development of management and administrative functions through the transfer of port oriented personnel from BOC and the hiring of suitably qualified staff. (iv) training for all grades of personnel. (v) accounting systems for PPA and individual ports. (vi) tariff structure for all ports to be included in PPA which would ensure that at each port the charges reflect the costs of the services and provide an adequate return on PPA's net fixed assets. (vii) overall and individual port financial objectives. (c) transfer the Port Programming and Planning Branch and the Ports and Harbors Division to PPA. Agreement on the foregoing was reached with the Government during nego- tiations.  3.07 Pending PPA becoming operational in January 1976, BOC wili continue to be responsible for the administration and operation of National Ports, and the Ports and Harbors Division of BPW for construction and maintenance. 3.08 The achievement of the institutional improvements in port organization, administration and management, a principal objective of the proposed project, will depend to a great extent on the recruitment and retention of suitably qualified and trained personnel for key positions. Although an appropriate training component is included in the proposed project, difficulties may nevertheless be encountered in recruiting sufficient quali- fied and experienced staff, partly due to inadequate Government compensation as compared to the private sector. Improvement in salary levels may be expected, with the creation of PPA, but there may still be some delay in achieving the objectives of the project. B. Finances 3.09 The main sources of finance for the construction and mainteniance of public ports is the Port Works Fund which receives its income from dues and charges raised, in accordance with the Tariff and Custons Code (Annex 4), on cargo imports and exports, from berthing, harbor and tonnage dues levied on ships, storage charges and a percentage of cargo-handling contractors' gross revenue. These charges are collected by the Collector of Customs at all national ports including the project ports. Dues and charges are uniform and are applied at all private ports as wel1 as the National Ports. An exception is storage charges, which are different in Manila from other ports. 3.10 It is laid down by statute that the Port Works Fund will be used to repay loans and redeem bonds; 50% of the balance will be allocated annually for financing port construction and itaproverients and the remainder for financing maintenance and repairs. The Furnd is administered by the Depart- ment of Finance. T he release of funds to finance EPW's expenditure program is determined by the Budget Commissioner and, prior to the iiiposition of Martial Law, had to be approved by Congress. 3.11 The total income generated over the past five fiscal years was: Fiscal Year Ps millions i968 55.0 1969 48.0 1970 50.0 1971 57.0 1972 59.0 Respa;ytive contributions of the various dues and services for FY 72 were:  -9- Ps millions % Wharfage 42.2 73 Harbor, Berthing and Storage 9.6 16 Cargo-Handling Contractors 3.2 5 Ship Tonnage Dues 3.9 6 58.7 100 from which it will be seen that about 80% of income is derived from wharfage and tonnage dues which are levied on foreign ships and cargoes only. In all, foreign trade and vessels provide around 90% of total collections and inter-island traffic only 10%; 85% of total collections are charges on cargo and 15% on ships. It is estimated that the Fund income will be increased by approximately Ps 100 million a year as a result of an increase in dues and charges effected by Presidential Decree in November 1972. 3.12 Separate records are not kept by the Customs of the collections which accrue from public ports, private installations, anchorages or load- ing areas, but it is known that the income from private installations is considerable and could well be 60% to 65% of total port revenues. Eighty percent of the income is derived from three collection districts, Manila and Batangas providing 75% and Davao, 5%. 3.13 Domestic shipping is exempt from tonnage dues and domestic cargoes from wharfage and to the extent that capital and maintenance expenditures are met from the Port Works Fund, foreign traffic is subsidizing domestic. At negotiations, the Government agreed, as a first step in moving to a cost- based tariff to introducej in January 1974, an initial wharfage charge of Ps 1.00 per ton on domestic cargoes, which would be increased as necessary in subsequent years. 3.14 It was further agreed with the Government during negotiations that, in accordance with the principle of financial autonomy, PPA, when established, would assume a debt to the Government, equivalent to the IBRD loan, on similar terms and conditions. 3.15 With the establishment of PPA the Port Works Fund will no longer be required for financing development of the public ports within PPA's jurisdiction. The Government will review the means of financing other port developments and the need for the Fund. C. Facilities at Project Ports 3.16 Cagayan de Oro has an alongside wharf of reinforced concrete open- pile construction 367 m long with an alongside depth of about 6 m at low water. With the mean tidal range of less than 1 m this depth can accommodate ships of about 3,000 dwt. The entire wharf can be easily dredged to 8.5 m without any structural modification to accommodate vessels up to 10,000 dwt. The wharf is generally in good condition, except for the fenders which need replacement. Of the total length of 367 m, 60% is provided with a paved  - 10 - working area immediately behind it. Parts of the wharf are not designed to carry the ca:go-handling equipment in use but can be strengthened econo- mically. The port has no transit sheds, water and electric lighting, fire- fighting system or drainage. Further details of facilities are given in Annex 4. 3.17 The port's fences and boundary wall have prevented the intrusion of squatters into the port working area but numerous buildings have been constructed against the fences on the rock causeways and may need to be removed to facilitate construction. During negotiations, the Government confirmed that steps would be taken, as necessary, to resettle squatters. 3.18 General Santos has a wharf of reinforced concrete open-pile construction 241 m long with an unsurfaced working area immediately behind. The depth alongside the quay is generally 8 m at low water and, with a mean tidal range of 1.5 m, can accommodate ships up to 10,000 dwt. The wnarf is not designed to carry modern cargo-handling equipment but can be strengthened economically. The port has no transit sheds, water and electric supply, lighting, fire-fighting or drainage. Further details of faclfities are given in Annex 4. 3,19 The present access road to the port is unpaved and traffic has to ford two shallow rivers to reach the port. The road will be paved and bridges constructed as part of the Cotabato-General Santos road, financed by ADB. D. Operations at Project Ports 3.20 Cargo-handling operations are entirely in the hands of private enterprise and, at present, fifteen companies at Cagayan de Oro and four at General Santos form a local association for cargo-handling services. Each company is associated with a labor union but the association controls its members' contracts with the labor unions and also the schedule of cargo- handiing charges. The shipping lines, through full or part shareholding, exercise varying degrees of control over the stevedores and are free to choose one organization to handle cargo right through from ship's holds to the warehouse, o?en storage or the cargo owner's vehicle. IHowever, the proliferation of cargo-handling companies tends to result in duplication of plant and equipment and diseconomies in its operatior. as well as in the use of port labor. During negotiations, the Government agreed to reduce, by July 1975, the ni=ber of cargo-handling companies to a maximum of two at each project port. 3.21 Both project ports are geared to round-the-clock working when required. Stevedoring on board ship is carried out by a combination of shipf, - and menual handling. Shore operations are, for the most part, mrechanizeed u. l.zing forklift trucks in conjunction with pallets. The private- sector cargo-handli ng companies own enough equipment to meet present needs. Hlowever, at negotiations, the Government agreed that, if required, additional equip-mert would be orovrided. Labor productivity is low as a result of inadequate operational control (Annex 5).  3.22 Because of a complete lack of transit sheds in both project ports, direct deliveries are often required at ship's side with consignees and shippers providing their own trucks. This practice slows port operations because the narrowness of working area, particularly at Cagayan de Oro, restricts traffic movement. At General Santos, heavy duty vehicles cannot be brought alongside in sufficient numbers to suit operational requirements and cargo-handling equipment cannot operate efficiently because of the weak wharf structure. The movement of cargo stacked on the open area, mostly by forklift trucks, either to vessels or private warehouses often interferes with truck movements. The project would provide ample working space, transit storage areas and upgraded wharf structures which will eliminate the need for the direct delivery procedures and allow the efficient use of cargo-handling equipment. IV. THE PROJECT A. Description of the Project 4.01 The project consists of: (a) at the Port of Cagayan de Oro (Map 10349 and Annex 6); (i) rehabilitation and upgrading of the existing quay; (ii) 160 m quay extension with an alongside depth of 8.5 m at LWOST; (iii) three transit sheds totaling 5,100 m 2 (iv) ancillary works, including surfaced roads and open areas totaling 92,000 m2, an administration building, a fire station, and services for water, electric supply, lighting and drainage; (v) engineering services for detailed design and supervision of construction; (b) at the Port of General Santos (Map 10350 and Annex 6); (i) rehabilitation and upgrading of existing quay; (ii) 300 m quay extension with an alongside depth of 8.5 m at LWOST; (iii) three transit sheds totaling 6,300 m 2 (iv) ancillary works, including surfaced roads and open areas totaling 53,000 m2, an administration building, a fire station, and services for water, electric supply, lighting and drainage; and  - 12 - (v) engineering services for detailed design and supervision of construction; (c) consulting services for preparing a master plan for the future expansion of the Port of Manila; and for detailed engineering of a future Bank project; and (d) technical assistance in the formulation of policies and pro- cedures for PPA and in the training of personnel. 4.02 The items enumerated in (a) and (b) above have been the subject of a feasibility study, financed by the UNDP with the Bank as executing agency, which was substantially completed in November 1972. Assuming bid documents are ready by Jume 1974, construction could start by January 1975 and would be completed by December 1976. 4.03 The rehabilitated and new facilities at both Cagayan de Oro and General Santos would handle forecast traffic for about 8 years after comple- tion. The plamned facilities could be easily expanded should traffic growth warrant it. B. Project Cost Estimates 4.04 The total cost of the project is estimated at Ps 81.3 million (US$12.0 million equivalent) with a foreign exchange component of Ps 41.2 million (US$6.1 million equivalent). The estimates, based on the feasibility study, have been up-dated and are reasonable. The estimates include a 10% allowance for physical contingencies and 7-1/2% p.a. allowance for increase in domestic and foreign prices. Details of the cost estimates are given in Table 1 and summarized below:  - 13 - US$ Equivalent % Total Peso Million Million Expen- Local Foreign Total Local Foreign Total diture 1. Civil Works 25.30 20.93 46.23 3.72 3.08 6.80 57 2. Engineering and Supervision 4.15 2.72 6.87 0.61 0.40 1.01 9 3. Consulting Services and Technical Assis- tance 2.04 9.52 11.56 0.30 1.40 1.70 14 Sub-total 31.49 33.17 64.66 4.63 4.88 9.51 80 Contingencies: Physical (10% on 1) 2.58 2.11 4.69 0.38 0.31 0.69 6 Price (7-1/2% p.a. on 1-3) 6.05 5.92 11.97 0.89 0.87 1.76 14 Sub-total 8.63 8.03 16.66 1.27 1.18 2.45 20 TOTAL 40.12 41.20 81.32 5.90 6.06 11.96 100 Summary Cagayan de Oro 18.02 14.61 32.63 2.65 2.15 4.80 40 General Santos 19.86 15.91 35.77 2.92 2.34 5.26 44 Consulting Services and Technical Assis- tance 2.24 10.68 12.92 0.33 1.57 1.90 16 TOTAL 40.12 41.20 81.32 5.90 6.06 11.96 100 4.05 The foreign exchange component of the project is estimated at about 50% of the total costs and would be financed by the proposed loan. The Government would finance the remainder. It is not easy to foresee whether the civil works would be carried out by local or by foreign con- tractors. The individual contracts (see para 4.09) will be small enough to be within the capability of local contractors, but a foreign contractor may well bid on all contracts together and win the award. The foreign exchange element has been calculated to cover this eventuality. 4.06 The foreign exchange requirements (40%) for engineering services for detailed design and supervision of construction reflect substantial Government assistance. For consulting services and technical assistance the foreign exchange requirements have been estimated by the Bank at about 80% of the total fees. 4.07 The costs of civil works are based on known costs of labor, mate- rials, plant and equipment and on current prices ruling in the Philippines. C. Engineering Services and Technical Assistance 4.08 During negotiations, the Government agreed to retain consultants acceptable to the Bank for all consulting services and technical assistance.  - 14 - D. Procurement 4.09 All civil works contracts, such as those for the construction of wharves and transit sheds, would be awarded on the basis of international competitive bidding in accordance with the Bank's guidelines. There would be no procurement of equipment. The number and size of individual civil works contracts would be determined upon completion of the detailed engineer- ing which is to start soon. It is anticipated that the work would be divided into no more than one or two contracts for each of the two project ports. E. Project Execution 4.10 BPW, with the assistance of consultants, would be responsible for the execution of all project items. F. Disbursement 4.11 Disbursement would be on the basis of 45% of the total cost of civil works and the actual foreign exchange costs for consultants' services and technical assistance. If the civil works are undertaken by domestic contractors, this percentage disbursement would finance about US$1.5 million of local costs (13% of total project costs), in addition to foreign exchange costs. The estimated schedule of disbursements, which assumes loan effective- ness at the end of January 1974, is given in Annex 7. The Government has asked Sir William Halcrow & Partners (UK), who are acceptable to the Bank, to begin detailed engineering for the project as soon as possible. This will involve retroactive financing for approximately US$200,000 equivalent of the foreign exchange costs. G. Ecology 4.12 At Cagayan de Oro, the project will require dredging to be carried out alongside the quay to increase the depth to 8.5 m. All of the dredged spoil, about 215,000 m3 of coarse sand, will be pumped as fill behind the quay structure. At General Santos, about 189,000 m3 of fine sand will be dredged alongside the quay to reclaim the land behind the quay structure, increasing the depth to 8.5 m, and no dredged spoil will be dumped offshore. The project will not adversely affect the ecological and environmental condi- tions at either Cagayan de Oro or General Santos. V. ECONOMIC EVALUATION ., A. General 5.01 The project would assist in the development of Mindanao's substantial economic potential and increase agricultural production by reducing transport costs on capital and consumer goods shipped into Mindanao and on substantial volumes of agricultural commodities produced in Mindanao and shipped through the project ports for consumption in the urban areas of Luzon.  - 15 - 5.02 The proposed project would reduce transport costs through avoidance of substantially increased ship waiting time and through increased cargo- handling productivity. In addition, at General Santos, the proposed project would permit abandonment of a high-cost lighterage operation. 5.03 The proposed project would complement projects, financed by ADB, for the improvement of the highway between Iligan and Butuan (which passes through Cagayan de Oro), and that between Cotabato and General Santos. Improvement of this latter road, together with the proposed project, will reduce the costs of marketing agricultural commodities produced in the province of South Cotabato and will thereby complement ADB- and Government- financed irrigation projects in that province. A planned highway will sub- stantially shorten the distance between Cagayan de Oro and Davao, and is expected to make highway transport between the two cheaper than transport around the coast by ship, thus promoting the flow of domestic cargo through the port of Cagayan de Oro. B. Traffic Forecasts 5.04 Traffic records at both project ports are incomplete and unreliable, and therefore the consultants for the project developed a basis for traffic projections by collecting data from ships manifests, bills of lading, and from information supplied by shipping companies and principal shippers. In general, these data provide an adequate basis for traffic projections al- though, in the case of General Santos, data were only available for the year 1971, and inward cargo flows may have been underestimated because of the incompleteness of the records. The consultants' projections were modified as a result of detailed review by the Bank. 5.05 Growth rates used to project individual commodities and groups of commodities were related to estimated regional growth rates of population and income, supplemented by regional surplus and deficit analyses and by local information. 5.06 Regional income was estimated for the Philippines for 1968-70, broken down by province and by sector, based on estimates of the Unit Value Added for agriculture and mining and the Net Value Added for all other sectors. These were used to estimate income growth in Bukidnon and South Cotabato in the period to 1985 as a basis for forecasting cargo inflows through the project ports. Income growth over the forecast period is estimated at 7.4% per annum in Bukidnon, and at 8.0% in South Cotabato. 5.07 The regional income estimates for 1968-70 were also used to derive regional consumption and production, from which regional surplus and deficit tables were produced for each of the principal commodities. These tables provided an estimate of total cargo outflows through Mindanao ports which were allocated by port, on the basis of minimum transport costs, to derive forecast cargo outflows for the project ports. Care was thus taken in developing traffic forecasts to define the boundaries between the hinter- lands of the project ports and those of neighboring and competing ports.  - 16 - 5.08 he resalting traffic projections for the project ports, which take acco&- o: uncertainties regarding the rate of agricultural development and vro-vision orf pr"ivate facilities, are shown in Tables 2 and 3. The principa:L co.dizty at both ports is corn (including corn products) which, in 1971, ioxmed 2G%' of total cargo through the port of Cagayan de Oro, and 25% of that through. General1 Santos. The forecast growth of corn shipments to 19S0 (O636 per a&,nnum at Cagayan de Oro and 7.3% per annum at General Santos' riflec: tthe inmorttant potential in Buikidnon and South Cotabato for increased 3prodzction of this crop and the expected, strong demand for it in Cebu =d Manila. The growth rate and dominant position of corn in the traffic of Both ?orts is an important factor in the high o-verall growth rate of 5.6% at Cagaar. te Oro and 6.0% at General Santos. The overall growth rates do not a?pear a2acessivelly high in light of the estimates of curreent regional income growta of- 7.4% for Bukidnon, 10.9% for South Cotabato and 7.2% for Mindaao . C. Feono.uidc BEnit:',@ 8S 5.09 '.he economlic benefits of the aropcsed project are derived from a comparison w7ith the -mst economic alternative, namely, lighterage of the volumes of cargo ir excess of the present whiarves' annual capacity. Diversion of traffic to tre naarest port would be a less economic alternative than lighterage for almost all the traffic at both ports. To do nothing would involve unacoeptalbly nigho cosc 4En the form of ship waiting zime wh-ch, without the projee., 4i8 expected to rise exponentially from 1978 at both ports. Si1ce the prolect pvrts are used almost exclusively by i:nter-island ships of the Phillppint IIeet, virtually all the economic benefits would acerue to the Philip ines. 5.10 OnQ- shi`pfing company contineui: to use lighterage at General Santos to load and urload its ships but plans to abandon the operation, because of its high cost, as soon as su