Mexico - Baja California Tourism Project

Report No. 1483-ME Mexico Appraisal of the Baja California Tourism Project April 18, 1977 Tourism Projects Department FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Peso (Mex$) US$1 = Mex$19.9 I/ Mex$1.0 US$0.050 Mex$l million = US$50,251 WEIGHTS AND MEASURES 1 meter = 3.28 feet 1 square meter (m2) = 10.76 square feet 1 cubic meter (m3) = 35.29 cubic feet 1 kilogram (kg) = 2.205 pounds 1 metric ton (ton) = 2,205 pounds 1 hectare (ha) = 2.47 acres 1 kilometer (km) 0.62 miles 1 liter per second (1/sec) = 22,800 US gallons per day 1 cubic meter per day (m3/d) 264 US gallons per day GLOSSARY OF ABBREVIATIONS ASK - Airports and Auxiliary Services Agency MFE - Federal Electricity Commission CORETT - Land Regularization Committee DGCA - Directorate General of Civil Aeronautics FONATUR - National Fund for Tourism Development FOVI - Fund for Operating and Banking Discounts for Housing Hacienda - Ministry of Finance and Public Credit IDB - Inter-American Development Bank 124SS - Mexican Institute for Social Security INFONAVIT - Housing Development Agency NACOA - National Company of Aviation Combustibles NAFINSA - National Financing Agency Patrimonio - Ministry of the National Patrimony and Industrial Development P y B - Ministry of Programming and Budgeting RAMSA - Aeronautical Radio Company of Mexico SAHOP - Ministry of Human Settlements and Public Works SARH - Ministry of Agriculture and Hydraulic Resources SCT - Ministry of Communications and Transportation TELMEX - Telecommunications Corporation of Mexico Turismo - Ministry of Tourism GOVERNMENT OF MEXICO FISCAL YEAR January 1 to December 31 1/ The exchange rate was US$1 = Mex$12.5 until August 31, 1976. The appraisal mission used US$1 = Mex$19.9 to convert base line costs. The peso is now floating.  FOR OFFICIAL USE ONLY MEXICO APPRAISAL OF THE BAJA CALIFORNIA TOURISM PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS ...... ....................... i-iii I. INTRODUCTION ...............................1 II. THE TOURISM SECTOR ..2................................ 2 III. THE PROJECT ......................................... A. Project Background and Objectives .............. 5 B. Project Description ............................ 9 C. Cost Estimates .......O-*..................... 0 ... . .. ......... 12 D. Execution and Operation ............ .. ........... 12 E. Financing Plan and Lending Arrangements ....... . 16 F. Procurement and Disbursement ........ .......... . 16 IV. JUSTIFICATION ....................... ............. A. Market Demand .. ................................ 17 B. Development of Tourism Facilities .. ............ 21 C. Financial Aspects ..... ...... . ................. . 23 D. Economic Justification ..... .................... 25 E. Social Aspects ............ ..................0 30 V. RECCMMENDATIONS ........... .. ...................... ......... . 31 This report is based on the findings of a mission consisting of Messrs. I.A. Menezes, R. Bentjerodt, E. Echeverria, T. Iizuka, P. Murgatroyd and Ms. J. de Regt. While in the field, the mission received assistance from Messrs. L. Vera (tourism), E. Maisch (water supply), R. Overby (environment), and W.B.R. Zetterstrom (aviation). This document hu a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Table of Contents (Continued) Annex No. I. Project Cost Estimates II. Project Description III. Aeronautical Aspects IV. Water Supply and Sewerage V. The Tourism Sector VI. FONATUR VII. Market Demand VIII. Development of Accommodation Facilities IX. Financial Forecasts on Estate Operations X. Economic Justification XI. Social Aspects XII. Environmental Aspects Chart 1. Schedule of Implementation IBRD No. 12647 - Mexico: Project Locations IBRD No. 12650 - San Jose del Cabo Area Plan IBRD No. 12651 - San Jose del Cabo Land Use Plan IBRD No. 12648 - Loreto Area Plan IBRD No. 12649 - Loreto Land Use Plan  MEXICO APPRAISAL OF THE BAJA CALIFORNIA TOURISM PROJECT SUMMARY AND CONCLUSIONS i. This report appraises a project to provide facilities for tour- ism and urban development at Loreto and San Jose del Cabo in Mexico's southern state of Baja California. Tourism infrastructure to be provid- ed includes streets, water, sewerage and drainage systems, and the improvement and expansion of airports, electric power, and telecommuni- cations. Investments in the urban areas are intended to improve and expand the infrastructure in the existing towns and provide such facili- ties as health clinics, parks, marketplaces, and schools. The project also includes recreational facilities, some office and community build- ings, funds for restoration of old buildings, investment promotion, nature conservation, community development activities, and studies. The two sites will in the first stage, covering a period of eight to nine years, comprise hotels with 2,100 rooms, apartels (apartment hotels) with 4,050 rooms, and 960 condominium units and tourist villas. Accommodation included in the project consists of one hotel of 250 rooms at each site. ii. The project is the third major tourism development being under- taken by the Federal Government. In 1972 the Bank made a loan of US$22 million equivalent to help finance the provision of infrastructure for a tourist resort in Ixtapa, near Zihuatanejo, on Mexico's Pacific coast. This project is now nearing completion with all of the loan expected to be disbursed by June 30, 1977. The Inter-American Development Bank has made loans totaling US$41.5 million for a similar project at Cancun, on the coast of Yucatan. iii. Mexico is one of the world's major and most richly endowed tour- ist destinations. Its formidable assets have attracted an increasing flow of visitors which numbered 3.2 million persons in 1975. This represented a slight drop, compared to 1974, in visitor traffic, which has despite its size been growing steadily at an average rate of 10% a year over the last 15 years. Foreign exchange earnings from tourism grew at an annual rate of 11.5% between 1960 and 1975, and amounted to US$800 million in 1975 or more than 13% of exports of goods and nonfactor services. Tour- ism is now Mexico's largest single source of foreign exchange earnings. iv. For the period 1961-1976 accommodation capacity more than dou- bled while visitor arrivals increased by 300%. The fastest increase in capacity has been in hotel rooms of international standard, which con- tinue to enjoy relatively high occupancy rates. Further additions to capacity will be required in order to tap the potential market for Mexico. The costs of correcting the infrastructure and other inadequacies in existing destinations such as Acapulco to allow for such expansion, how-  ever, would be enormous. Further development of the new resorts of Cancun and Ixtapa-Zihuatanejo, which could be done at relatively low cost, will not be sufficient. Assuming improved promotion and better utilization of existing capacity, particularly during the off-season, Mexico in the next four years would need some 25,000 hotel rooms of international standard to maintain an average annual growth rate of 9% in visitor arrivals. Given these circumstances, the Mexican authorities have rightly consider- ed the need to encourage tourism development in new areas while develop- ing plans for improvement and expansion at existing destinations, v. Tourism has been singled out by the Government of Mexico as the most promising sector to bring about social and economic development in Baja California. Its proximity to the western part of the United States, its natural attractions (beaches, sea, climate), and fishing potential provide Baja California with unique assets and an opportunity to tap one of the largest and richest tourist generating regions in the United States. Recognizing this potential and in light of the Government's national poli- cy to diversify geographically Mexico's tourism facilities and its region- al policy to promote Baja California through the establishment of strate- gically located tourism development poles, a total of six areas were se- lected after extensive studies. In 1975 the Government decided to pro- ceed initially with the provision of tourism and other facilities at two of these sites: Loreto, located on the Sea of Cortez, 360 km north of La Paz, the state capital; and San Jose del Cabo, on the southern tip of the peninsula, 200 km south of La Paz. vi. While the principal investments will be in infrastructure for the tourism zones and the airport, the Government would like to repeat in Baja California the successful urban development of the town of Zihuatanejo stimulated by the Bank's first tourism project. Accordingly, the proposed project includes significant investments in the towns of Loreto and San Jose del Cabo, designed not only to improve the quality of life of exist- ing and future inhabitants of the towns but particularly to tackle the problems of the poorest sections of the population with sites and services, and guided self-help programs. vii. Although strong interest in the proposed developments has been ex- pressed by potential investors, no binding commitments have yet been made. Hotel investors are reluctant to be first in a new destination and general- ly tend to wait until the tourism infrastructure is in place before invest- ing, which may be at least a year later than desirable from a financial and economic point of view. Moreover these first investments in superstructure facilities are crucial in setting the architectural tone, and demonstrating proper environmental standards for the resort. Accordingly, provision is made in the project for the construction of a first hotel of 250 rooms of medium category. viii. The project is estimated to cost US$84 million, including contin- gencies. The proposed Bank loan of US$42 million would cover the foreign exchange component of the project. The Federal Government would provide the balance of the funds required to finance the project as well as any cost overruns.  - iii - ix. Major civil works and equipment contracts would be awarded on the basis of international competitive bidding. Project items have been group- ed into packages in order to encourage such competitive bidding, but the bidder would also be able to bid on individual items. Some contracts, how- ever, would be too small to attract foreign bids and it is proposed that they be awarded on the basis of locally advertised bids. The total value of such contracts is estimated not to exceed US$4 million equivalent. Be- cause of the need for standardization, navigational equipment for the air- ports (costing US$0.7 million) would be negotiated directly with the com- pany supplying such equipment to Mexico. In evaluating international bids for equipment and furniture, local manufacturers would be allowed a prefer- ential margin of 15% of the c.i.f. price of competing imports or the pre- vailing level of customs duties, whichever is lower. x. Basic responsibility for executing the proposed project would rest with FONATUR (Fondo Nacional de Fomento al Turismo) with the exception of electric power, telecommunications, and the airports, which would be carried out by other government agencies. FONATUR is a government agency charged with planning and promotion of integrated resort developments, including fi- nancing of needed infrastructure investments, hotels, and other tourism superstructure. FONATUR is well managed and fully qualified to execute, op- erate, and maintain the components of the project for which it is responsi- ble. FONATUR would contract with the Federal Power Commission (CFE) and the Telecommunications Corporation (TELMEX) to design and construct the electric power and telecommunications networks. Responsibility for design and con- struction of the airport facilities would lie with the Ministry of Human Settlements and Public Works (SAHOP). All these agencies have considerable experience and the competence to execute their respective components. xi. The economic rate of return on investments in Loreto would be 19% and in San Jose del Cabo 21%. When implemented, the project would directly employ 12,000 persons in hotel and other tourism facilities. Employment generated in construction, transportation, handicrafts, and other services would account for an estimated 13,000 additional jobs. Unskilled labor would fill more than 60% of the jobs created, and almost 40% of the jobs could be filled by women. Net foreign exchange earnings generated by the project are expected to be US$19 million in 1985 and US$89 million a year from 1990 on- wards. xii. As presently designed, no significant external environmental or social problem will result from the developments; rather than impoverishing the physical and social environment, the project will induce changes to the contrary. xiii. The project is considered suitable for a Bank loan of US$42 million equivalent for a term of 17 years, including a grace period of 3-1/2 years.   MEXICO APPRAISAL OF THE BAJA CALIFORNIA TOURISM PROJECT I. INTRODUCTION 1.01 In 1968 the Government of Mexico indicated an interest in obtain- ing assistance from the Bank for financing new tourism infrastructure. In 1972 the Bank made a loan of US$22 million equivalent to help finance the provision of infrastructure for a tourist resort in Ixtapa, near Zihuata- nejo, on Mexico's Pacific coast. After encountering some delays due large- ly to land acquisition problems, the project is now nearing completion with the loan expected to be disbursed by June 30, 1977, with the exception of some funds allocated to a small hotel school (US$900,000) which has not yet been implemented because of jurisdictional problems (para. 2.12). In the tourist zone of Ixtapa, two hotels are open for business (534 rooms) and several others are under construction. By June 1977 over 1,500 rooms are expected to be available. The airport financed under the project is serv- ing both Ixtapa-Zihuatanejo and the rapidly expanding industrial town of Lazaro Cardenas, an hour's drive from the airport. 1.02 In 1974, in continuance of its policy of geographic diversifica- tion of Mexico's tourism facilities, the Government, after extensive stud- ies financed with local funds, requested that the Bank consider several sites for development along the Baja California peninsula. Subsequently, in the course of project identification and preparation missions in 1975 and 1976, agreement was reached to focus attention on two sites: Loreto, located on the Sea of Cortez, 360 km north of La Paz, the capital of the state of Baja California South; and San Jose del Cabo on the southern tip of the peninsula, 200 km south of La Paz. 1.03 The project consists of infrastructure and related facilities re- quired for development of the two sites, which in the first stage will comprise hotels with 2,100 rooms, apartels with 4,050 rooms, and 960 con- dominium units and tourist villas. The financing of a first hotel at each site is included in the project. In addition, the Government would like to repeat in Baja California its successful efforts in urban develop- ment of the town of Zihuatanejo, and has hence included infrastructure and other investments in the project that would provide a significant improve- ment in facilities and services for the residents of the towns of Loreto and San Jose del Cabo. 1.04 Due to its complexity and the difficult land tenure and water sup- ply problems in Baja California, the preparation of the project has re- quired about two years. These problems were solved and the studies com- pleted in time for an appraisal mission to visit Mexico in October 1976. The mission included Messrs. Menezes, Bentjerodt, Echeverria, Iizuka, Murgatroyd, and Ms. de Regt. While in the field, the mission received assistance from Messrs. Vera, Maisch, Overby and Zetterstrom. A further visit was made by Messrs. Menezes and Vera in February 1977, for discus- sions of certain project issues with the new Government.  - 2 - II. THE TOURISM SECTOR 2.01 Mexico is one of the world's major and most richly endowed tour- ist destinations. Its attractions include the architectural remains of a series of major civilizations, entertainment that ranges from traditional to modern, a wealth of contemporary creative arts, shopping opportunities, an agreable climate, excellent beaches along the Pacific and Caribbean sea coasts, and street scenes that reflect the varied cultural background of Mexico's multiracial populace. In addition, Mexico is an accessible and truly foreign destination for the United States and Canada, which make up one of the world's largest source of foreign tourists. 2.02 These assets have attracted an increasing flow of visitors in the past and constitute an important pot ntial for the future. In 1975, over 3.2 million persons visited Mexico.17 This represented a slight drop com- pared to 1974 in visitor traffic. Historically, visitor arrivals grew at a rate of 13.9% annually between 1961 and 1965, 10.1% between 1965 and 1970, and 6.7% between 1971 and 1975; an average of 10.4% from 1961 to 1975 (Annex V). Growing prosperity in the US and Canada, the provision of direct air access, and rapid expansion in accommodation and infrastructure combined to make this growth possible. The declining growth rate in the 70s is mainly attributable to the economic recessions in the US and to Mexico's uncompetitive position resulting from an overvalued peso. 2.03 Nearly 90% of visitors to Mexico are from the US and access from the US is excellent by every transport mode. In the past, a majority of foreign visitors traveled to Mexico by road, the bulk from the border states of Texas, California, Arizona and New Mexico. The pattern has now changed with air transportation becoming the dominant mode of access, as more distant destinations are opened up and the cost of air travel de- clines (Annex V). 2.04 Foreign visitors to the interior of Mexico (i.e., beyond the bor- der zone) have in the past often visited more than one destination within the country and almost always included Mexico City in their itineraries. This pattern is also changing with a growing number of tourists visiting a single destination only, generally a beach based resort. An analysis of income levels of visitors indicates that Mexico seems to be geared toward a more diversified market and is attracting more lower- and middle-income visitors than the Caribbean, with which it is in competition. It has still to tap the full potential represented by this market, however (Annex VII). 2.05 An important phenomenon in Mexico in recent years has been the burgeoning domestic tourist market. It is estimated that Mexicans account- ed for 14.8 million visits in 1975, or a total of 28.4 million visitor nights. A growing number of Mexicans are also buying second homes, 1/ These visitors tour the interior of the country and are to be distinguished from the Mexican/US border traffic, estimated at more than 70 million in 1975.  apartels, or condominiums, particularly along the coasts. 2.06 Because climatic conditions make Mexico an all-year-round resort area, visitor flows to Mexico show only a minor degree of seasonality. As a result, tourist facilities generally experience relatively high occu- pancies, much above those prevailing in many other tourist areas. 2.07 With high occupancies making investment in new capacity attrac- tive, hotel and other accommodation capacity more than doubled, from 91,000 rooms in 1961 to 191,000 rooms in 1975, while visitor arrivals in- creased by 300%. The fastest increase in capacity has been in hotel rooms of international standard, which, in spite of the slowdown in the growth of visitors in 1974 and 1975, have continued to enjoy high occupancy rates. 2.08 Studies show that Mexico in the next four years will need some 25,000 additional hotel rooms of international standard to accommodate projected visitor growth rates of 9% per year. The appropriate strategy will include: (a) improved promotional efforts aimed at segments of the market which would result in even more visitors during the off-season, resulting in improved uti- lization of existing capacity (and yielding high returns); (b) expanding existing resorts, where new infrastructure requirements would be relatively inexpensive; and (c) encouraging development at new sites which might, through the diversification of attractions, en- able Mexico to tap new markets. With respect to promotional efforts, studies are required and both techni- cal and financial assistance have been requested from the Bank (para. 4.26). With regard to existing areas, further expansion of accommodation at new resorts such as Cancun and Ixtapa-Zihuatanejo would be possible at rela- tively small cost. The costs of improving infrastructure and correcting other inadequacies in established sites such as Acapulco, however, would be enormous. While the Government proposes to continue encouraging the expansion of Cancun and Ixtapa-Zihuatanejo, as well as established resort areas, it has also rightly considered the need to encourage development at other sites to be able to tap fully the potential market of Mexico. 2.09 Until the 70s, government institutions concerned with tourism had little impact on the sector's development. Public sector expenditures for tourism development had been modest, and no coherent set of fiscal, credit or other specific sector policies had been instituted to stimulate the growth of the industry. Nevertheless, the private sector responded vigor- ously to the rapid growth in demand, with little or no government assist- ance except for uncoordinated efforts by federal, state, and municipal agencies to provide infrastructure facilities. Such private development tended, however, in the absence of well conceived government policies, to stress short-term profitability with little regard to the longer run impact of their activities on the social situation, the economy and the environment.  2.10 In response to these deficiencies and recognizing the importance of the sector, the Government created a special fund (INFRATUR) in the Banco de Mexico in 1969, to plan and promote integrated resort develop- ments, including financing of needed infrastructure investments. Because ofa growing scarcity of loan capital, the Government had a few years ear- lier established a trust fund (FOGATUR) in NAFINSA for the purpose of fi- nancing hotels and other tourism superstructure. In 1974, these two funds were merged. The new fund, called Fondo Nacional de Fomento al Turismo (FONATUR) integrates most activities of the public sector in the tourism field and strengthens the Government's hand in controlling the quality and pace of development of the sector (Annex VI). 2.11 FONATUR has mainly concentrated its development efforts in two sites: Ixtapa-Zihuatanejo on the Pacific coast and Cancun on the Caribbean coast, These projects, financed in part by the Bank and the IDB respec- tively, are nearing completion. To date FONATTJR has invested Mex$l.l billion to develop infrastructure in Cancun and Mex$0.7 billion in Ixtapa- Zihuatanejo. FONATUR has already earned a significant surplus in cash flow terms on its land development operations at Cancun and Ixtapa-Zihua- tanejo, amounting to Mex$37 million in 1973 and Mex$240 million in 1976. In addition, over 4,000 hotel and other rooms are expected to be available in the two sites this year. The volume of FONATUR's hotel credit opera- tions has expanded much faster than its investments in infrastructure de- velopment. As of August 31, 1976, FONATUR had approved 378 credit appli- cations for a total of Mex$2.8 billion to finance 19,000 new rooms throughout the country. 2.12 Serious attention is being given to employment in the sector, especially since tourism has become instrumental in creating a more bal- anced regional distribution of economic activities in Mexico. Recent studies estimate that direct employment in tourist activities amounts to between 300,000 and 400,000 persons. Significantly, most of those em- ployed are drawn from the unskilled sector of the population and they have obtained relatively well paid jobs after little investment in training. Even a modest increase in training would improve the professional compe- tence of personnel. Existing training institutions concentrate on train- ing for higher management and supervisory levels, when the most pressing need is for trained staff at the lower and intermediate levels. Moreover, local unions have traditionally attempted to control these institutions further complicating the situation. There is also no clear delegation of responsibility for hotel and tourism training to a single organization ca- pable of drawing up the necessary programs and implementing them. The new administration is pledged to revamping all vocational training with a view to improving the situation. 2.13 While views about the efficacy of Mexico's air access policies differ, it is clear that efforts to protect interests both in Mexico and the US have hindered the growth of tourism, particularly to new destina- tions. No bilateral agreement with the US (which generates nearly 90% of the visitors to Mexico) has been signed in the last six years, and even some of those airports currently in the agreement are not all being served by US carriers. Fortunately, charter traffic has provided some relief to the tourist industry. Bilateral negotiations with the US are scheduled for mid-1977 when the relevant issues are expected to be reviewed.  -5- 2.14 Current terms of lending for hotels in Mexico are from 10-15 years, 2-3 years grace, with 10% to 15% interest, and are attractive but less generous than in many other tourist receiving countries. 2.15 With relatively moderate investment costs and high occupancies, Mexican hotels in general are profitable. Hotel tariffs are controlled by the Government and increases are permitted only about every four years; however, hoteliers have in practice some flexibility in the rates they charge. Net profits may not be high, but other aspects of hotel invest- ments are attractive, such as long-term capital gains, and high cash flow generation. With the expected upsurge in visitor traffic resulting from the devaluation of the peso, hotels in Mexico should in principle be further able to increase occupancies and profitability, but much would de- pend upon what happens to local costs and prices. 2.16 Average tourist expenditures in Mexico are high (about US$24 a day) with even higher averages (US$38 a day) for visitors arriving by air. In 1975, Mexico's gross foreign exchange earnings from tourism amounted to US$800 million, excluding visitor transportation and border traffic earnings, and represented more than 13% of total exports of goods and non- factor services. The growth rate averaged 11.5% a year between 1960 and 1975 as compared to a growth rate of 10.7% annually in earnings from ex- ports of goods and services. In the period 1970-1975, tourism earnings in- creased at a rate of 14% a year, despite a slowing down in the growth of visitor arrivals. 2.17 Handicrafts play an important role in distributing the benefits of tourism, particularly affecting the incomes of the very poor. In 1975, it is estimated that sales of handicrafts totaled Mex$1.6 billion. This revenue directly affected the lives and incomes of at least 5 million Mexicans. III. THE PROJECT A. Project Background and Objectives 3.01 Baja California, the 1,300 km long rocky, desert peninsula stretching southward from the US border along Mexico's west coast, has been recently selected by the Government of Mexico for development that would also aim at preserving the delicate environment surrounding vast open spaces and kilometers of coastline that hold promise of providing sizeable tourist revenues. On the east side of the peninsula is the Sea of Cortez (Gulf of California); on the west, the Pacific Ocean. The climate is pleasantly dry, the vegetation is typical of desert lands. The peninsula's proximity to the west coast of the US, its natural attrac- tions (beaches, sea, climate), its duty free status, and fishing potential provide Baja California with unique assets and an opportunity to tap one of the largest and richest tourist generating markets in the US. For this reason, tourism has been singled out by the Government of Mexico as the  - 6 - most promising sector to bring about social and economic development in Baja California, especially in the southern part of the peninsula. 3.02 Tourism traffic to the southern part of the peninsula is limited, primarily due to lack of facilities. Population is sparse and the level of economic activity low, except in the capital city of La Paz. Tourists to this region in the past consisted of the wealthy who visited various points of interest in their own aircraft or yachts, particularly in the Cabo San Lucas area at the tip of the peninsula. 3.03 Recognizing this area's potential and in light of the Government's national policy to diversify geographically Mexico's tourism facilities, FONATUR undertook an anlysis of several areas and sites along the whole length of the peninsula. The areas were studied with respect to the Gov- ernment's regional policy to promote Baja California through the establish- ment of strategically located tourism development poles. Several sites were evaluated in conformity with economic criteria and with reference to such characteristics as physical conditions (nature of terrain, attractive- ness, and climate); market potential; availability of infrastructure, in- cluding water supply and accessibility of the sites; land tenure situation; and proximity to existing urban areas. Out of a total of six potential areas selected on the basis of FONATUR's exhaustive study, the Government decided to proceed initially with the provision of tourism and other facili- ties in Loreto and San Jose del Cabo, both areas located in the southern half of the peninsula. These sites would permit Mexico to promote a diver- sified product and limit enclave-type development. They would provide an expanded opportunity to utilize more efficiently the large infrastructure investments already made by the Government and help spread the economic benefits of tourism throughout the state. The project would particularly cater to middle-income tourists, in contrast to the current high income tourists visiting the peninsula. Loreto 3.04 Loreto is located on the Sea of Cortez, 360 km north of La Paz. The town, nestled between the sea and the mountains, is one of the earliest settlements in Baja California. Its population of 3,200 engages primarily in fishing and some agriculture. Visitors have been attracted by the scenic charm, but tourism development is still small and facilities inadequate. 3.05 The principal tourism zone would be located along the wide crescent beach at Nopolo, 7.5 km south of the town of Loreto. The site is one of great natural beauty. To the east lie the calm, blue waters of the Sea of Cortez, suitable for all types of water sports and fishing; to the west rise picturesque desert mountains. Average annual temperatures of 240C, combined with a desert atmosphere, ensure constant pleasant weather. South of Nopolo is Puerto Escondido, a protected natural habor surrounded by hills,and already popular with foreign visitors who arrive by sea or road. 3.06 A total area of 10,000 ha has been acquired by the Government at  Nopolo and Puerto Escondido for tourism purposes. The development, how- ever, would be staged. The first stage, to be implemented over a nine- year period, envisages the construction of 1,000 hotel rooms, 2,000 apartel (apartment hotel) rooms and 655 condominium units and tourist villas. 3.07 At present, access to Loreto is provided by the recently complet- ed 1,700 km paved transpeninsular highway. A jetty at Puerto Escondido, also recently completed, will connect the area with the mainland through ferry services. Air access to the area is poor. The airport near Loreto is small and capable of taking only light planes. 3.08 Project development will attract new residents to Loreto. The proposed project includes facilities for a population that is projected to grow from 3,000 to 25,000 in ten years. About 736 ha of land have been acquired by the Government and legal titles to property will be provided to present and future residents. Housing for new residents will be fi- nanced through programs already in operation in Mexico. To aid immigrant workers and the very poor who do not qualify for the federal programs, special arrangements will be made under the project to provide land, infra- structure, and temporary accommodation, as well as construction materials at cost and technical assistance for building houses. San Jose del Cabo 3.09 The San Jose del Cabo site is located about 200 km south of La Paz on the southern tip of Baja California, a region long known to visitors from the west coast of the US. San Jose del Cabo is reminiscent of Euro- pean towns with narrow, hilly streets. Beautiful beaches stretch for kilo- meters on both sides of the town, and an attractive sweet-water lagoon--a rarity in a desert region--offers special interest. The climate is like that of Loreto. The sea, however, is rougher than at Loreto and is more suitable for boating and fishing than swimming. 3.10 The region has benefited from both private and public investments in hotels and infrastructure. Several hotels have been built along the coast from San Jose del Cabo to Cabo San Lucas, 30 km to the southwest (425 hotel rooms); there are also small air strips, generally owned by the hotels. More recently, the Government initiated the construction of an international airport 20 km north of the town of San Jose del Cabo, but for budgetary reasons the project has not yet been completed. Road access is provided by the recently completed transpeninsular highway. The Government also recently completed the main works for water supply but has not yet provided the area with a distribution system. 3.11 The master plan for the development of this area will make use of investments already made in infrastructure facilities by integrating them and the town of San Jose del Cabo with the main tourism facilities to be built 2 km west of the town along a 10 km long beach of fine sand. A total area of 1,750 ha has been acquired by the Government, though not all land will be needed immediately. The first stage, to be implemented over nine years, envisages the construction of 1,100 hotel rooms, 2,050 apartel rooms and 305 condominium units and tourist villas.  - 8 - 3.12 Facilities in the towns of San Jose del Cabo will be upgraded and expanded to meet the needs of the local population which is projected, like Loreto, to grow from 3,500 to 25,000 in ten years. The town will benefit from project investments similar to those planned for Loreto, which would include investments to aid migrants and the poorer sections of the popula- tion. As part of the project, the international airport will be completed. Project Integration and Environmental Considerations 3.13 The land use plans for the tourism and urban zones in both the pro- ject areas attempt to balance the best possible protection of the physical environment with the most economic use of land. In the tourism areas, land use has been studied, first, in terms of the likely pattern of visitor ac- tivity; second, in terms of space requirements and the needed physical fa- cilities to accommodate those activities; and, third, in terms of the need to preserve the existing natural environment. For the towns of Loreto and San Jose del Cabo, special attention was paid to the expected structure and functioning of the towns' economy and to the spatial distribution of urban functions. Accompanying these land use plans are detailed zoning and build- ing regulations. An important feature of these regulations is that all structures will have building density and height limitations so that visual integrity can be maintained. 3.14 Because of the fragile nature of the ecological system of the pen- irnsula, special attention has been paid to the impact of the proposed pro- jects and the measures that will need to be taken to avoid deterioration of the environment (Annex XII). As presently designed, no significant external environmental problem will result from these developments; rather than im- poverishing the environment, the project will significantly induce changes to the contrary. Sewage pollution problems were analyzed and the solutions adopted will preserve the diversity of marine life of the sea. Large tracts of land have been reserved as "green areas"; buildings will be set back from the beach, and not allowed on dunes. Provision has been made for studies to initiate proper water management, as well as for preservation of the rare sea fauna and wildlife found in the area. The lagoon at San Jose del Cabo will be cleared, dredged, and conserved. Velocity check dams will eventually be built at San Jose del Cabo, both to preserve the lagoon and help recharge the existing aquifer. Provision has also been made for pro- grams and studies for conservation of the environment around Loreto and Puerto Escondido, including the outer islands. The area has an extraordi- nary collection of sea lions, seals, birds, and animals which are of inter- est to tourists but which must be protected, possibly by creation of a marine or national park. The results of the wildlife conservation and coastal zone water management studies, and the appropriate actions to be taken will be reviewed with the Bank. In addition, four stations for fauna conservation and protection would also be built under the project and lo- cated at strategic points along the Sierra. In Puerto Escondido, facilities for trailers and boats would be provided to reduce the pollution being created by visitors. Finally, the urban plan for Loreto and the path of air- craft over San Jose del Cabo have been drawn up so as to avoid noise pol- lution.  - 9 - 3.15 Private hotel investors are reluctant to be first in a new desti- nation and generally tend to wait until all tourism infrastructure is in place before investing, which may be a year or more later than desirable from a financial and economic point of view. These first investments in superstructure facilities are crucial in setting the architectural tone of the resort, and if left to private investors they may not match the pains- taking planning that will characterize the Government's infrastructure in- vestment. Accordingly, financing is included in the project for construc- tion of a first hotel of 250 rooms of medium category at both Loreto and San Jose del Cabo, which would set the market and architectural tone of the resorts, demonstrate proper environmental standards, and accelerate the generation of benefits from investments in infrastructure and other facili- ties. B. Project Description 3.16 In each of the Loreto and San Jose del Cabo sites, the project would include the following main elements, described further in Annex II. (a) infrastructure and other facilities for the tourist zones; (b) a medium category 250-room hotel for each development area; (c) infrastructure and other facilities for the towns; (d) airport facilities; and (e) investment promotion, community develop- ment activity, conservation studies and programs for both areas, and a tourism market and economic study. Loreto 3.17 The road network in the tourism zone at Loreto (Nopolo) includes the construction of a two km long boulevard parallel to the beach, set back 200 to 300 meters, and an internal two-lane loop road that would provide access to single family cluster houses and condominia. In addition, a cen- tral pedestrian spine with a series of squares and plazas would run parallel to the beach giving easy access to the community. At Loreto, a new entrance road would connect the transpeninsular highway with an improved street sys- tem and the center of the town. Landscaping, storm drainage facilities, and street lighting would be provided for the entire network. 3.18 To meet the electric power needs of both the tourism area and the town, a 115 kv transmission line will be constructed from the town of Villa Constitucion 150 km away, a less expensive undertaking than installing new generating capacity at Loreto. In addition, a new substation and trans- former will be installed and a distribution system built. 3.19 An integrated telecommunications system will be installed to serve both tourists and local inhabitants. The new exchange building will be lo- cated in the town, and the long distance circuits will be tied into the regional microwave network.  - 10 - 3.20 Water supply for the tourism zone will be tapped from an aquifer about 5 km to the north. It would involve the construction of a 10 km dis- tribution system and the use of an existing water storage tank. For the town, the presently used aquifer will continue to be the source of water supply, but the main distribution system will be expanded. 3.21 Storm water will be cleared from the tourism zone by allowing it to flow along street pavements to an artificial lake prior to being dis- charged into the sea. An open channel going through the middle of the existing town will intercept storm water from the upper portions of the town and discharge it into a nearby creek. 3.22 Sewage from the tourism zone will flow by gravity to two pumping stations and from there will be pumped to stabilization ponds for treatment. The effluent after treatment will be used for irrigation purposes. A simi- lar but separate and smaller sewerage system will serve the town. A sani- tary landfill site for disposal of solid waste has been located 5 km north of the town of Loreto. Garbage trucks and other equipment are included in the project. 3.23 The community and cultural center in the tourism zone, which will be the focal point of activities for the resort, will consist of a large central plaza surrounded by various facilities, including an auditorium, as well as rental space for a post office, shops, cafes, and restaurants. other buildings would include an emergency clinic, and a fire and police station. A main recreation and landscape feature of the tourism area is an 18-hole golf course, of which nine holes and a clubhouse would be construct- ed under the project. Beach facilities would include a snack bar and res- taurant. The town of Loreto would receive a variety of community facilities such as parks, playgrounds, a health clinic, schools, and a local market. The existing central plaza would be upgraded, paved, and landscaped. Some existing buildings around the plaza would be improved. Administrative of- fices would be located in the town. 3.24 Adjacent to the community and cultural center, a boat house and pier will be constructed for aquatic sports and fishing, as well as excur- sions to the neighboring islands. In addition, a year-round boat anchorage will be located at the southern end of the tourism zone at Nopolo, well pro- tected by a 60 m rocky promontory. Public beach facilities will be provided to be used by the local population. 3.25 The project includes a 250-room hotel of medium category to be com- pleted at about the same time as the infrastructure and other facilities. The exact location of the hotel in the tourism zone will be subject to Bank approval. 3.26 The small general aviation airport at Loreto will be upgraded and expanded to handle larger aircraft and larger volumes of traffic. Works would include the lengthening, widening, and strengthening of the existing runway, and the construction of a new taxiway, apron, and terminal building. Also included in the project will be the construction of a control tower, a three-bay crash, fire, and rescue building, a fuel farm, an access road, a parking area, and the installation of fencing, visual aids, communication and radio navigation equipment.  San Jose del Cabo 3.27 The road network at San Jose del Cabo will consist of a 1.6 km main boulevard extending from the transpeninsular highway to form a circuit around the community and cultural center and a two-lane road that connects the tour- ism zone with the town's main street. The town and the tourism zone will each have a focal point of activity, and a pedestrian way with small parks and plazas will connect the two. The entire network will have street light- ing and appropriate landscaping. 3.28 With the installation of a 115 km transmission line between La Paz and San Jose del Cabo now nearing completion, San Jose and the surrounding area will be served with electric power from generating plants in La Paz. The project makes provision for a substation, transformers, and local dis- tribution lines. 3.29 The existing telecommunications system will be expanded to serve tourism as well as the projected needs of the local population. A new ex- change building will be built in the town and equipment installed in stages. 3.30 Water will be supplied by four wells that have been drilled and by a major aqueduct already constructed to serve several small towns in the area. Provision has been made for water storage facilities, pumping sta- tions, and a distribution system. 3.31 The storm water drainage system consists of two interceptors that will collect storm water from the higher areas surrounding the town and the tourism zone. The interceptor in town will discharge the water into a near- by estuary, while another in the tourism zone will discharge the water into the sea. 3.32 The sewage from the tourism zone and the town will be pumped to sta- bilization ponds. The effluent after treatment will be used for irrigation. A landfill site will be located between the town and the airport for disposal of solid waste. Provision has been made for garbage trucks and other needed equipment. 3.33 Hotel and other accommodation in the tourism zone have been planned around a community and cultural center to be built under the project which will consist of a central plaza surrounded by various facilities, including an auditorium and rental space for shops, restaurants, and offices. Recre- ational facilities will include a fishing pier and boat dock, tennis courts, and some beach facilities. Because swimming is unsafe in front of the tour- ism zone during certain periods, a marine structure would be provided to allow a safe bathing area. Buildings included in the project consist of a police and fire station, an emergency clinic, schools, a health center, and some staff housing. In addition, some existing buildings in the town will be remodeled and repaired, and an old, interesting cemetery landscaped and preserved. 3.34 As in the case of Loreto, the project includes the construction of a 250-room hotel of medium category. The exact location of the hotel in the tourism zone will be subject to Bank approval.  - 12 - 3.35 The project makes provision for completion of the airport at San Jose del Cabo. This will include construction of a terminal building, a control tower, a three-bay crash, fire, and rescue building, a fuel farm, and an automobile parking lot. It will also include the installation of communication, navigation and visual aids as well as perimeter fencing. 3.36 Water management, conservation (para. 3.14), market and economic (para. 4.26) studies are also included in the project (Annexes II and X). C. Cost Estimates 3.37 The cost estimates and the foreign exchange component of the pro- ject elements are summarized in Table 1 on page 13. 3.38 Baseline costs reflect October 1976 price levels, converted into US dollars at an exchange rate of US$1 - Mex$19.90, the rate current at that time. An allowance of 10% to 15% of civil works and equipment costs has been made to cover physical contingencies, depending on the degree of design detail available for individual project components. On average, the allowance amounts to 13% and is reasonable since most of the cost es- timates are based on fairly detailed design work and equipment lists. Price contingencies have been calculated in dollar terms and take into ac- count the projected implementation schedule as well as any likely increases in price levels during the construction period. Mexico has lately been experiencing major price increases, especially since the recent devaluation of the peso, the first in 22 years. Total provision for contingencies amounts to US$24.5 million, which represents 41.3% of baseline costs, or 29.2% of total project costs (Annex I, Table 9). 3.39 Roads, water supply, and sewerage components of the project are in draft final design stage, requiring only minor revisions. The telecommuni- cations and electric power component cost estimates are in line with costs of similar works recently carried out in Baja California. The hotel as well as community facilities and buildings were designed from detailed spa- tial programs for each element, accompanied by floor plans, elevations, and sections at a scale of 1:200. The Ministry of Human Settlements and Public Works (SAHOP) is in the process of preparing final design drawings for the airport components. Cost estimates for equipment procured locally include taxes, and transportation to sites, port, warehouse, and handling charges; charges are equivalent to about 15% of the c.i.f. prices. Since Baja Cali- fornia is a free zone, no import duties are applicable. 3.40 For the project as a whole, consultants' services are estimated to total 1,075 man-months over a 3-1/2 year period and to cost about US$3.9 million. Some 64 man-months would be provided by foreign consultants. D. Execution and Operation 3.41 Basic responsibility for executing the proposed project would rest with FONATUR with the exception of electric power, telecommunications, and the airports, which would be carried out by other government agencies. The  13 - Tahle 1: Project Cost Estimates and Foreign Exchange Component Percent of Mex. $ (million) US$ (million) Foreign Project Items Local Foreign Total Local Foreign Total Exchange Tourism Area of Loreto 75 138 213 3.8 6.9 10.7 64 Civil Works 54 93 147 2.7 4.7 7.4 Equipment 8 42 50 0.4 2.1 2.5 Consulting Services 13 3 16 0.7 0.1 0.8 Town of Loreto 58 73 131 2.9 3.7 6.6 56 Civil Works 48 59 107 2.4 3.0 5.4 Equipment 2 12 14 0.1 0.6 0.7 Consulting Services 8 2 10 0.4 0.1 0.5 Tourism Area and Town of San Jose del Cabo 82 106 188 4.2 5.3 9.5 56 Civil Works 63 64 127 3.2 3.2 6.4 Equipment 7 38 45 0.4 1.9 2.3 Consulting Services 12 4 16 0.6 0.2 0.8 Pilot Hotels 91 109 200 4.6 5.4 10.0 54 Civil Works 71 65 136 3.6 3.2 6.8 Equipment 7 42 49 0.4 2.1 2.5 Consulting Services 13 2 15 0.6 0.1 0.7 Airports 85 105 190 4.2 5.3 9.5 56 Civil Works 64 67 131 3.2 3.4 6.6 Equipment 7 38 45 0.3 1.9 2.2 Consulting Services 14 14 0.7 0.7 Community Development 7 1 8 0.3 0.1 0.4 16 Pre-Opening Activities 27 27 1.4 1.4 - Investment Promotion 3 17 20 0.1 0.9 1.0 88 Project Administration 57 11 68 2.9 0.5 3.4 16 Market and Economic Study 8 8 0.4 0.4 100 Base-Line Cost 485 568 1,053 24.4 28.5 52.9 54 Contingencies: 221 268 489 11.1 13.5 24.6 55 Physical Increase 43 71 114 2.1 3.6 5.7 63 Price Increase 1/ 178 197 375 9.0 9.9 18.9 52 Land Acquisition 129 129 6.5 6.5 - Total Project Cost 835 836 1,671 42.0 42.0 84.0 50 1/ Assuming an average price increase of 12% per year for 1977-1979 and 10% for 1980 except for equipment, for whicb an 8% increase per year has been assumed for 1977-1979 and 7% for 1980. Price contingencies are "dollar contingencies" and have been converted to Mexican pesos at an exchange rate of US$ I = Mex$ 19.9 for illustrative purposes only.  - 14 - overall financial position of FONATUR is sound with adequate net working capital generated from its operations (Annex VI). FONATUR is managed by able and highly qualified individuals. 3.42 FONATUR has been concentrating its efforts in developing Cancun and Ixtapa-Zihuatanejo. These require diminishing attention, since the first phase of the Cancun project is completed while that of Ixtapa-Zihua- tanejo is nearing completion. With the invaluable experience it has gain- ed, FONATUR is now in a position to focus its attention on Baja California. 3.43 The land tenure system in Baja California has been an important consideration in designing the institutional arrangements to implement this project. In the tourism zone in Loreto (Nopolo-Puerto Escondido), an area totaling 10,000 ha along 20 km of coastline was expropriated from private individuals and transferred to FONATUR. The town of Loreto, however, is built on ejidal land and titles to the existing urban property in and around the town were neither clear nor legal. In order to legalize the situation, the Government expropriated the urban land, including 4 km of coastline. The Government, however, cannot legally transfer the land di- rectly to FONATUJR. Therefore, a new trust fund will be established, with several public agencies as members, including the Land Regularization Com- mittee (CORETT) and the state government. While this new trust fund will own the land, FONATUR will be solely responsible for the investment activ- ities in the town under the project and for the sale of urban property. In San Jose del Cabo, a similar land situation existed in the town as well as in the tourism zone. Accordingly, about 1,750 ha of land were expropriated and will be transferred to another new trust fund which will also be man- aged by FONATUR. The satisfactory establishment of the trust funds would be a condition of loan effectiveness. 3.44 FONATUR will contract with the Federal Electricity Commission (CFE) and the Telecommunications Corporation of Mexico (TELMEX) to design and construct the electric power and telecommunications networks. Responsibil- ity for operation and maintenance will also be assumed by CFE and by TELMEX. Technical designs and specifications of hydraulic works as well as water, sewerage, and storm water drainage systems would be subject to approval by the Ministry of Agriculture and Hydraulic Resources (SARH), although the actual implementation would be the responsibility of FONATUR. Operation and maintenance of these systems will be the responsibility of special lo- cal commissions (juntas) set up for the purpose, which in the initial years will receive support from FONATUR. Roads, streets, and solid waste dispos- al in the towns of Loreto and San Jose del Cabo will be maintained and operated by the local municipality. In addition, government agencies such as the Ministry for Health and the Ministry for Education will be responsi- ble for providing health and education services, and for adequately staffing and maintaining the relevant facilities. 3.45 Responsibility for design and construction of airport facilities will be that of SAHOP and SCT. Four agencies will be responsible for their operation and maintenance, including SAHOP, the Airports and Auxiliary Ser- vices Agency (ASA), the Aeronautical Radio Company of Mexico (RAMSA), and the National Company of Aviation Combustibles (NACOA).  - 15 - 3.46 All these agencies have the requisite experience and competence to execute the respective components of the project. FONATUR will not later than June 30, 1978 enter into contractual arrangements with CFE and TELMEX on the scope of the electric power and telecommunications program, the cost and construction timing. The project areas, however, will have to be as- sured of services and facilities not financed under the project. Accord- ingly, assurances have been obtained that the project areas will receive ade- quate aviation, water supply, power, and telecommunication services. Also, to protect the project investments the Government has agreed to adopt not later than June 30, 1978 land use and zoning codes that would regulate devel- opment on land immediately surrounding the project areas. 3.47 To ensure proper supervision of design and construction as well as to coordinate efforts of other agencies, a Project Unit to deal with invest- ments in Baja California would be set up within FONATUR (Annex VI). The Project Unit would have a Director, stationed in Mexico City, who would be responsible for the project and coordinate the activities in both sites through managers, who would spend half the time in Mexico City and the re- mainder in Baja California. In addition, each site would have a chief en- gineer stationed permanently in Baja California, and a staff of technicians, accountants, sociologists, community development workers, and procurement officers. 3.48 FONATUR would be responsible for the disposal of land to private in- vestors for the construction of hotels, restaurants, villas, and other facil- ities. It would also be responsible, through the new trust funds, for dis- posal of the urban property in the two towns. In addition, in the tourism zones of Loreto and San Jose del Cabo, FONATUR will be responsible for vari- ous facilities including parks and plazas, roads and streets, landscaping, beaches, beach facilities, the community and cultural center, and recreation facilities. In the case of the pilot hotels, FONATUR plans to hand over operation and management to Nacional Hotelera, a Government owned hotel oper- ating company in which FONATUR controls a majority share. Arrangements for financing, managing and operating the hotels would be subject to Bank approval. 3.49 No hotel training facilities will be constructed under the project. A large and modern hotel training center which includes a 109-room practice hotel has recently been constructed by the Secretariat of Tourism at La Paz, at a cost of Mex$60 million. These facilities are considered adequate for the needs of the proposed project. The Government has already set up a trust fund to operate and manage these facilities as a hotel school and assurances were obtained that the Government will take such actions as are necessary to adequately satisfy the staff requirements of the hotels in the project areas. 3.50 Final designs, plans, and specifications for the project will be submitted to the Bank for approval. This would include architectural de- signs for the hotel, and land use and zoning regulations for both areas. Because of complex problems in coordinating the execution of all parts of the project on schedule, a critical path chart now under preparation will be com- pleted. This chart would be reviewed by all parties concerned every three months and the results of such reviews would be communicated to the Bank.  - 16 - E. Financing Plan and Lending Arrangements 3.51 Total estimated cost of the project is US$84 million. It is pro- posed that the Bank loan of US$42 million cover the foreign exchange compo- nent, or 50% of total project costs. The balance would be provided through budgetary allocations of the Government, which would also meet any cost overruns. The consolidated financing plan for the project including contingencies can be summarized as follows: Table 2: Consolidated Financing Plan (US$ thousands) Source of Funds Estimated Government Component Cost Bank Loan Contribution Loreto 25,277 14,745 10,532 San Jose del Cabo 13,484 7,331 6,153 Pilot Hotels 15,410 8,236 7,174 Airports 14,293 7,948 6,345 Community Development 0,546 0,273 0,273 Proj. Admin. & Pre-Opening Expenses 6,548 2,262 4,286 Investment Promotion 1,402 0,701 0,701 Market & Economic Study 0,504 0,504 - Land Acquisition 6,482 - 6,482 Total 83,946 42,000 41,946 3.52 In line with Government policy, and as was agreed by the Bank in the case of the Ixtapa-Zihuatanejo project (and by IDB for the Cancun project), it is proposed that the proceeds of the Bank loan for the Baia California project be made available to FONATUR as equity contribution for timely execu- tion of project components. In order to maintain financial standards, how- ever, certain safeguards have been adopted to ensure that FONATUR would have no difficulty in recovering its investment and earning a reasonable return (para. 4.22). F. Procurement and Disbursement 3.53 Major civil works and equipment contracts would be awarded on the ba- sis of international competitive bidding. Mexico currently has legislative guidelines for procurement of goods and services under public sector financed projects which are basically in line with Bank guidelines../ Project items have been grouped into packages (Annex I, Tables 2 to 6) in order to encourage such competitive bidding, but bidders would also be able to bid on individual items. A high percentage of the building materials required for the project is produced in Mexico; however, because of lower transport costs and the duty free status of Baja California, a large portion of goods may come from the US or Canada. In evaluating international bids for equipment and furniture, lo- cal manufacturers would be allowed a preferential margin of 15% of the c.i.f. price of competing imports or the prevailing level of customs duties, which- 1/ Law on Public Works and Contracts (Dec. 21, 1965) and General Bases and Standards for Public Works Contracts (Jan. 26, 1970).  - 17 - ever is lower. Some civil works and equipment contracts for such items as earthworks, field offices and beach facilities would be too small to attract foreign bids. It is therefore proposed that these civil work contracts, each not to exceed US$500,000 in value, and equipment contracts, each not to exceed US$100,000 in value, would be awarded after local competitive bidding. The total value of such contracts would not exceed US$4 million equivalent. -iinoz civil tworks suci as landscaping, gardening and environmental sanita- tion, the total cost of which is estimated not to exceed US$1 million equiva- lent, would be carried out on force account by FONATUR. Since the navaid equipment for the airports should be compatible with equipment used in all airports in Mexico, procurement of this equipment, valued at US$700,000, would be negotiated directly with the supplier. 3.54 FONATUR would be responsible for advertising requests for tenders, issuing tender documents, evaluating bids, and awarding contracts for all project components, with the exception of the airports, electric power, and telecommunications. SAHOP and CFE have been past beneficiaries of Bank loans and would have no problem following established procedures. Because of the present setup of TELMEX and the manner in which that organization im- plements projects and procures equipment, the Bank loan will not finance the telecommunications component. 3.55 Disbursement of funds from the loan would be on the following basis: (a) 100% of foreign expenditures for directly imported equipment and furniture or 100% of the ex-factory cost of locally manufactured equipment and furniture; (b) 50% of total expenditures for civil works, con- sulting services, community development activities, investment promotion and project administration; and (c) 100% of total expenditures for wildlife, coastal water, conservation, market and economic studies. 3.56 A schedule showing the estimated rate of disbursement is given in Annex I, Table 8. Disbursements would be fully documented and any funds remaining in the loan on completion of the project would be cancelled. In order not to delay implementation of the project, it is proposed that a part of engineering expenditures incurred after December 1, 1976, and not exceed- ing US$300,000 equivalent, be financed retroactively. IV. JUSTIFICATION A. Market Demand Tourist Growth Rates and Projections 4.01 Foreign tourism to Mexico has been growing at an average rate of 10% a year over the last 15 years. In only two years since 1961 (1974 and 1975) has the growth rate been less than 8.7%. In 1974 the number of visi- tor arrivals increased by 3.7%; in 1975 it declined 4.3% (the first decline since 1953). This decrease was mainly attributable to the economic reces-  - 18 - sion in the US and to Mexico's uncompetitive position resulting from an overvalued peso. Visitor arrivals totaled 3.22 million in 1975. Table 3 shows recent trends in foreign visitor arrivals. Table 3: Foreign Visitor Arrivals (Thousands) Average Annual 1976 Growth Rate (%) Origin 1970 1974 1975 (est.) 1970/74 1970/76 United States 1,980 2,860 2,720 2,870 9.7 6.4 Canada 70 130 120 130 16.7 10.9 Other 200 370 380 330 16.6 8.7 Total 2,250 3,360 3,220 3,330 10.5 6.8 The factors that affected the total flow of visitors in the 70s had a smaller impact on visitors coming to Mexico by air. The average annual growth of visitors traveling by air was 16% in the 1970-74 period and 11% between 1970 and 1976. 4.02 In 1975, foreign visitors spent a total of 34 million nights in the country, which averaged to a stay of 10.6 nights per visitor. Hotel statis- tics indicate that they stayed approximately four nights in places such as Mexico City, Acapulco, and Puerto Vallarta, which indicates that tourists typically visit more than one destination while in the country. Foreign tour- ists, however, now seem to be following a single destination trend which in the long run may generate more tourism in the resorts along the coast. Mexi- cans also account for a significant share of overall tourism activities in Mexico (para. 2.05). 4.03 FONATUR, on the basis of its studies, projects both foreign and do- mestic tourism to grow at an average annual rate of 9% over the next ten years. These visitor and visitor night projections, as well as projections on a more conservative growth rate assumption of 6%, are summarized in Table 4. Table 4: Visitor and Visitor Night Projections to Mexico Item 1976 1980 1985 1990 1/ (est.) Number of Visitors (million)- Foreign (Growth Rate 9%) 3.3 4.7 7.2 11.1 Foreign (Growth Rate 6%) 3.3 4.2 5.6 7.5 Domestic (Growth Rate 9%) 16.5 23.3 35.8 55.1 Domestic (Growth Rate 6%) 16.5 20.8 27.9 37.3 Number of Visitor Nights (million) Foreign (Growth Rate 9%) 35.0 49.4 76.0 117.0 Foreign (Growth Rate 6%) 35.0 43.0 59.1 79.1 Domestic (Growth Rate 9%) 31.0 43.8 67.3 103.6 Domestic (Growth Rate 6%) 31.0 39.1 52.4 70.1 1/ Foreign visitors include Mexicans residing abroad.  - 19 - 4.04 Market projections for Baja California have been established on the basis of planned accommodation development and their likely utiliza- tion at Loreto and San Jose del Cabo (Table 5). Length of stay and occu- pancy rates are based on past experience in Mexico. Because of its vi- cinity to the US, roughly 70% of all visitors to these sites are expected to be foreigners (78% in Loreto and 61% in San Jose del Cabo), which is somewhat higher than in other Mexican resorts. The number of visitors has been calculated on the assumption that they will visit only one of the two project areas in the course of a trip to Baja California; the target num- ber of visitors could be lower if some tourists (possibly up to a fourth) visit both project areas. The target figures range between 0.3% and 3% of the overall market projections for the number of guest-nights spent in Mexico over the 1980-1990 period under the conservative 6% growth rate (0.5% to 4% in the case of foreign visitors and 0.2% to 2% in the case of Mexicans). These targets are reasonably attainable if adequate air access and promotion are provided. Table 5: Accommodation and Visitor Projections, 1980, 1985 and 1990 Item 1980/81 1985 1990 Hotels and Apartels Number of Rooms 800 4,950 6,150 Occupancies (%) 50 63 70 Double Occupancy Factor (guests/room) 1.8 1.8 1.8 Average Length of Stay (days) For Foreigners 4 4 4 For Mexicans 3 3 3 Condominia and Villas Number of Rooms - 1,115 2,330 Occupancies (%) - 50 50 Double Occupancy Factor (guests/room) - 2.5 2.5 Average Length of Stay (days) For Foreigners - 6 6 For Mexicans - 10 10 Market Targets Visitors 66,000 600,000 800,000 Visitor Nights 250,000 2,500,000 3,900,000 Potential Market Competition for Baja California 4.05 FONATUR has undertaken market studies for Baja California resorts which indicate that in the case of foreign tourists the project will be particularly appealing to the market from the southwestern US, in particu- lar from the state of California. It will also be in a position to compete with southern California resorts where some eight million Californian and non-Californian visitors spent some 35 million nights in 1975, and Hawaii where 2.8 million visitors spent 32 million nights in the same year. In addition, Baja California will have to compete with other northwestern  - 20 - Mexican resorts where some one million visitors from the US and Canada spent some four million nights in 1975. The studies further indicate that more than two-thirds of the tourists would come by air, that the majority would need first-class rather than luxury-type accommodation, and that not all of the visitors to Loreto and San Jose del Cabo will come to Mexico solely because of the project. In the case of Mexicans, FONATUR's studies indicate that the project resorts will attract visitors, mostly from Mexico City, Guadalajara, and Monterrey, some of whom would normally travel to northwestern Mexico (in particular to Mazatlan and Puerto Vallarta) and to the southwestern United States. 4.06 The main market segments for the projectl- (and their projected an- nual growth rates) are the following: (a) US visitors to southern California who travel by air (2.2%); (b) US visitors to Hawaii (8.3%); (c) Canadian visitors to the west coast of the US who travel by air (4.4%); (d) car trav- elers from California, Nevada, Utah, and Arizona who travel more than 2,000 miles roundtrip (1.2%), and (e) US and Mexican visitors to Mazatlan and Puerto Vallarta (9.9%). Projecting the growth of each segment with these rates, the target numbers of visitors to the project areas by 1980 would re- present only some 1% of the potential market attributed to the segments de- fined above, which clearly do not exhaust the market. Given that the pro- ject meets the major criteria that attract visitors to a given area (appeal- ing climate and natural environment; reasonable vacation cost, including the cost of transportation; proximity to major markets), the visitor target num- ber, both as a proportion of total projected volume of tourism to Mexico and as a proportion of the projected potential market, appears feasible. In order to compete with destinations in southern California and Hawaii, how- ever, comparable facilities need to be provided. Room tariffs in 1975 in southern California and Hawaii averaged some US$26 and US$30 per night re- spectively. The market strategy for Baja California therefore calls for construction of facilities of good quality to be provided to visitors at prices slightly lower than in southern California and Hawaii. The projected average hotel room tariff in the two project areas is US$25 per night. Travel Modes and Expenditures 4.07 Most visitors to the proposed project areas are expected to travel by air. Experience at other resorts has demonstrated that attracting large numbers of foreign visitors by air to Mexico requires provision of flights from major points in the US. The airport at San Jose del Cabo is already included in the bilateral air agreement with the US and can be served by both US and Mexican airlines from Los Angeles, Tucson and Phoenix. Loreto, however, is not. Accordingly, assurances have been obtained from the Govern- ment that it will have Mexican scheduled airlines serve San Jose del Cabo and Loreto on domestic segments of international routes to and from major tourism generating countries to coincide with the opening of the first two hotels at each site. In addition, assurances have been obtained that the Government will make its best efforts to retain San Jose del Cabo in future bilateral air agreements and include Loreto in these bilaterals, so that scheduled inter- 1/ These segments comprise visitor flows rather than population groups. Since some people travel to more than one place during a one-year period, the segments overlap in terms of population, but not in terms of overall visitor flows.  - 21 - national air service can be initiated to coincide with the opening of the first two hotels at each site. The flying time from Los Angeles to Loreto would be just over 1-1/2 hours and to San Jose del Cabo 2 hours, as compared to more than 5 hours to Hawaii. In addition to arrivals by air, it is ex- pected that some 30% of the visitors will use the highway that connects the US border with the tip of Baja California peninsula, providing access to both Loreto and San Jose del Cabo. The road distance between Los Angeles and Loreto is some 1,500 km and some 2,000 km in the case of San Jose del Cabo. 4.08 In mid-1976, foreign visitors to Mexico spent an average of US$24 per day, with visitors arriving by air spending more than US$38 per day. The per- centage of total guest-nights spent by Mexicans and foreigners and the aver- age daily expenditures in late 1976 prices in the two project areas is ex- pected to be as follows: Loreto San Jose del Cabo Mexicans Foreigners All Visitors Mexicans Foreigners All Visitors (25.7%) (74.3%) (100%) (39.1%) (60.9%) (100%) US$25.8 US$39.0 US$35.6 US$28.1 US$42.7 US$37.0 The average expenditure figures for foreign visitors to the project areas are a little more than the average for foreign air travelers to Mexico as a whole (many of whom do not use paid accommodation, therefore spending little, and who do not represent a typical resort visitor), but less than for foreign tourists to Mexico who stay ten days or less in the country and spend an aver- age of US$45 per day; for those who come on charter groups (US$60); and for those visiting destinations such as Cancun and Ixtapa (US$48). In projecting the levels of expenditures, it is assumed that foreign visitor expenditures will decline after the August 1976 devaluation. Also as a reflection of the devaluation, the projected expenditures of Mexican tourists are assumed would be lower than recent experience in Mexican resorts indicates (over US$45 per day in Cancun in mid-1976). Overall, the expenditure projections are there- fore reasonably conservative and consistent with the facilities offered. 4.09 Based on experience in other tourist resorts in Mexico, the breakdown of projected average expenditures of foreign visitors is calculated to be as follows: accommodation, food and beverages 58%; entertainment 14%; local trans- portation 11%; shopping 12%; and other 5%. The expenditure breakdown of Mexi- can visitors is only slightly different; they are expected to spend a higher proportion on accommodation and lower on shopping and local transportation. B. Development of Tourism Facilities 4.10 The project calls for a gradual build up of accommodation capacity in both zones over the 1980-1987 period (see Table 6). Of the total projec- ted accommodations, one-third would be of the pure hotel type and the remain- der would be apartels.i! There is no significant difference between hotels and apartels in terms of operation from the point of view of services received by the tourist (Annex VIII); ownership would be different in that apartel units would be sold to individual purchasers by the developer. 1/ Because of the small proportion of villa and condominium units, the expected development of these facilities are not shown in this table.  - 22 - Table 6: Development of Capacity 1980-1987 (Number of Rooms) San Jose del Cabo Loreto Total Year Annual Cumulative Annual Cumulative Annual Cumulative 1980 400 400 400 400 800 800 1981 300 700 500 900 800 1,600 1982 300 1,000 400 1,300 700 2,300 1983 400 1,400 400 1,700 800 3,100 1984 450 1,850 600 2,300 1,050 4,150 1985 500 2,350 300 2,600 800 4,950 1986 400 2,750 200 2,800 600 5,500 1987 400 3,150 200 3,000 600 6,150 When fully developed, most of the accommodations are expected to be of the A category in line with market expectations rather than the AA or B type, as follows: Category San Jose del Cabo Loreto Total AA 475 450 925 A 2,200 2,100 4,300 B 475 450 925 4.11 Private investors have long been interested in participating in tourism development in Baja California. Several projects have been submit- ted to the Government for approval but many have not gone forward for such reasons as land tenure problems and the absence of needed infrastructure. Recent discussions with potential hotel developers and investors have con- firmed a strong interest in building at Loreto and San Jose del Cabo and the prospects for hotel and apartel investments are considered favorable. No binding commitments have been made, however. Investors are reluctant to be the first in a new development. Therefore, as noted previously (para. 3.15), provision is made in the project for the construction of a pilot hotel of 250 rooms of the A category at each site. In addition, for successful launching of the resorts, the Government is prepared to take all necessary action, including the provision of adequate financing, to ensure the construction and operation of an additional hotel with a capacity of not less than 150 rooms at each site, to be opened at the same time as the hotels being financed under the project and another 600 rooms at each site three years thereafter. The Government will also make its best efforts to have an addi- tional 900 rooms in operation at each site seven years after the project is implemented to ensure the economic viability of the program of investments. 4.12 To test the financial viability of these facilities, operating pro- jections for a typical 250-room hotel and 250-room apartel (Annex VIII) dem- onstrate the profitability of such investments. The rate of return on equi- ty in hotel investments in the sixth year of operation is 12%, increasing to 14% in the tenth year. With respect to apartels, the rate of return on equity is 11% in the fourth year and 17% in the sixth year of operation. Investments in apartels are financially more attractive than in hotels be- cause of lower capital and operating costs. The apartel concept also makes it easier for promoters to raise capital among small investors.  - 23 - 4.13 Under the Mexican Constitution, foreigners cannot directly own land within 100 km of international borders and 50 km of the coast. How- ever, the Decree of April 29, 1971 permits accredited Mexican banks to act as trustees for foreigners. The banks can purchase land on behalf of for- eigners and hold the land for them in trust for a 10-year period, renewable to a maximum of 30 years. After 30 years, foreigners can seek a new trust with another bank or instruct the bank to sell the land. This decree has helped to solve one of the thorniest problems that existed for private for- eign investors. C. Financial Aspects 4.14 For financial evaluation purposes, the proposed investments have been divided into three groups: (a) items relating to the development of the urban and tourism zones in Loreto and San Jose del Cabo, including com- mercial, recreational and urban facilities and some infrastructure, but ex- cluding telecommunications and part of the investments in electric power, water supply and sewerage components; (b) the pilot hotels to be financed under the project; and (c) the airports at Loreto and San Jose del Cabo. Urban and Tourism Development 4.15 The capital costs of urban and tourism zone development are esti- mated at US$34.1 million including financial charges during construction but excluding price contingencies. Although these costs include the cost of electric power, water supply and sewerage distribution networks, they exclude: (a) investments in water supply and sewerage headworks and equip- ment which have been analyzed separately (para. 4.17) and (b) investments in electric power headworks and telecommunications for reasons explained in para. 4.18. The basic financial objectives which the urban and tourism zone investments are expected to meet is the recovery of investment costs and the earning of a reasonable rate of return. These would be achieved mainly by FONATUR through the sale of hotel, residential, and commercial sites in the tourism area, the sale of commercial and residential lots in the urban areas, and through charges for improvements made in the existing towns. FONATUR's operating policy calls for all developed land for sites of hotels and other superstructure to be sold, rather than leased, with the condition that no land may be acquired or held indefinitely for speculative purposes (Annex VI). The funds that will become available to FONATUR through the sale of land and various services are allocated by FONATUR's Technical and Resources Allocation Committee in accordance with the Govern- ment's priorities. This committee consists of representatives of various agencies including the Ministry of Finance, Presidencia and Patrimonio Na- cional, and is chaired by the Minister of Tourism. For the project areas specifically, FONATUR will not later than June 30, 1978 prepare in consul- tation with the Bank, a statement of its financial policy, including methodology for calculating selling prices and rental charges, as well as procedures for their implementation. Average sale prices in Baja Califor- nia are projected to range from US$20 to US$35 per m2 for hotel, residen- tial, and commercial sites, and from US$10 to US$12 per m2 for land used for urban purposes. These prices are reasonable and compare favorably with the price of developed land elsewhere in Mexico and the United States.  - 24 - 4.16 Based on these estimates, the financial rate of return on invest- ments in San Jose del Cabo in the fifth year of operation would be 24% (net cash flow on equity). The return would be of the same magnitude in the tourism zone in Loreto. However, when the financial projections for the tourism zone in Loreto and the town of Loreto are consolidated, the combined return is relatively low, 10% in the fifth year of operation. The lower consolidated returns in Loreto compared to San Jose del Cabo are largely due to the larger infrastructure investments needed in the town of Loreto. 4.17 Financial projections made separately for the water supply and sewerage components of the project are characterized by initial periods of losses and tight liquidity positions, followed by adequate profits and large cash surpluses (Annex IV). For Loreto, the annual financial rate of return on net fixed assets is 2.8% in the third full year of operations, increasing to 12.3% in the fifth year. For San Jose del Cabo, the annual financial rate of return is 8.3% in the fourth full year of operations, increasing to 14.6% in the fifth year. The losses in the initial years, followed by profits and cash surpluses in later years reflect the carrying costs of initial large investments required for a relatively complete sys- tem which operates for the first few years well below capacity. Assurances were obtained from the Government that all investment costs for water sup- ply and sewerage systems in the project areas would be recovered through land sales and user charges, and that water and sewerage charges would be sufficient to cover: (a) the costs of operation and maintenance of such facilities, including depreciation based on a reasonable valuation of all headworks and equipment costs; (b) increases in working capital; and (c) the financing of minor expansion of the facilities. 4.18 No attempt has been made to evaluate separately the investments in electric power headworks and the telecommunications system, which form a minor portion of CFE's and TELMEX' national network. The charges levied by these agencies are standard tariffs for different classes of service applied throughout Mexico. The Bank has for many years lent to CFE for ex- pansion of the electric power system in Mexico, and it has not been consid- ered appropriate to carry out a detailed financial analysis of these general policies for the present project. With regard to telecommunications, which will not be financed by the proposed loan, consumers pay monthly tariffs and are obligated to pay for capital costs through purchase of company shares which can be traded in the stock market, ensuring that there is at least full cost recovery. Pilot Hotels 4.19 The cost estimates for the pilot hotels to be built under the pro- ject are shown in Table 5 of Annex I. Capital costs per room average about US$27,000 in 1976 prices, including interest during construction, working capital, the cost of land, and physical contingencies. Detailed financial projections for the pilot hotels are given in Annex VIII. Revenues from hotel operations are based on a projected occupancy rate of 50% in the first year of operation, increasing to 70% in the fifth year, a double oc- cupancy factor of 1.8, and an average room rate of US$25. Revenues from sale of food and beverages and other services are assumed to equal revenues  - 25 - from room sales. Operating costs for the hotel operations have been esti- mated on the basis of current experience in existing facilities and stan- dard ratios for comparable hotels in Mexico. 4.20 On these assumptions, the financial projections indicate that the hotels would be financially viable and have satisfactory rates of return. In the sixth year of operation the rate of return on equity would be 12%, rising to 14% in the tenth year of operation. The projected sources and application of funds show that the hotels would be able to generate suffi- cient income to meet their financial obligations, including debt service, management fees, and reserves for replacements. The projected balance sheet also indicates that the hotels' financial position would be sound and that dividends could be paid from the sixth year of operations onwards. Airports 4.21 The revenues from the airports will be sufficient to pay for their operating expenses, but with little recovery of capital costs (Annex III), partly because departure taxes, a significant incremental revenue source of the airport, are traditionally not retained by the airport authorities. If departure taxes collected at the airports are included, the simple an- nual financial rate of return reaches 10.8% of average net fixed assets by 1986/87 in the case of Loreto and 17% in the case of San Jose del Cabo. Increased flights generated by the airport investments will significantly increase landings and, hence, landing fees at other Mexican airports, with little increase in operating costs or investments. The net return to the airport authority, therefore, is considerably higher. Financial Covenants 4.22 FONATUR has agreed to develop and use not later than January 31, 1978, specific financial reporting formats acceptable to the Bank, which would include program budgets, progress reports, and project management accounting statements for each project area. These reports, which would be submitted to FONATUR's management and the Bank, would include compari- sons of the actual operating results vs. budgeted financial and operating targets, with explanations for significant variations. FONATUR's finan- cial records would be maintained according to generally accepted accounting principles and audited annually by independent auditors acceptable to the Bank. Audited financial statements would be submitted to the Bank within five months after the end of each fiscal year. D. Economic Justification 4.23 For purposes of economic evaluation, the investment program has been defined more broadly than the project proper, and includes: (a) in- frastructure for the tourism zones and the towns of Loreto and San Jose del Cabo, including the development of the airports and social infrastruc- ture for the local population, such as health and civic centers, schools, and marketplaces; (b) superstructure facilities, including the first pilot hotels financed by the project, the commercial center, the golf club, and other common facilities; (c) community development expenditures, invest- ment promotion, technical assistance, and studies; and (d) hotels, apartels,  - 26 - condominia, villas, as well as restaurants and other tourism facilities not financed under the proposed project. 4.24 The basic assumption of the economic analysis is that the project would lead to the establishment of more tourism capacity in Mexico than if it were not undertaken. This incremental capacity will accommodate some tourists who would not otherwise come to the country. It will also divert some tourists, Mexicans as well as foreigners, from making expenditures elsewhere in Mexico. Deductions have therefore been made from the benefit and cost streams to reflect diversion of receipts (and variable operating costs) from other tourism facilities in Mexico. 4.25 The more rapid expansion of capacity due to the project would also have the effect of reducing, at least temporarily, the prices charged by other Mexican hotels, compared with the "without the project" case. These reductions have not been quantified, and are assumed to be compensated by similarly unquantified external benefits of the project. These consist of two main types. Firstly, some of the tourists who are induced to visit Mexico by the unique attractions of Baja California, will go on to visit other areas to the benefit of those areas and the Mexican domestic air- lines. Secondly, the project will permit higher rates of utilization of existing tourism capacity in Baja California which has been insufficient to justify the minimum critical transport and marketing efforts necessary to launch a large tourism area. 4.26 The failure to quantify some of the above issues is not meant to deny their importance. But existing data are insufficient to give rise to reasonable expectations that even quite elaborate quantitative analyses of them would materially improve the design of the project. The project makes provision for studies designed to improve the collection of information, and to provide a careful analysis of some of the more important investment policy issues affecting the whole tourism sector, including sectoral growth targets, policies on taxation and pricing of tourism services, and sectoral investment criteria. The results of these studies and the appropriate actions to be taken would be reviewed with the Bank. Gross Benefits 4.27 The gross benefits of the project would then be expenditures by visitors accommodated in Loreto and San Jose del Cabo (paras. 4.08 and 4.09), duly corrected for demand diversions, and the receipts from purchase of villas, condominium and apartel units by foreigners, plus the rental value to Mexican owners when they use these facilities. Demand diversion is estimated to be felt for only a two- to three-year period after accom- modation capacity expands and to affect 40% of the revenues from foreign visitors to Loreto, 60% to San Jose del Cabo, and 75% of the revenues from Mexican visitors to both Loreto and San Jose del Cabo. In the urban areas, gross benefits generated by the project would consist of revenues from sale of urbanized lots plus the rental value of housing units built by the poorest sections of the population accommodated in the semi-urbanized lots. In both the urban and tourism areas, revenues from the electricity, tele- phone, and water and sewerage components of the project would come from tariffs charged to the incremental users of these facilities. Gross bene-  - 27 - fits generated by the airports would consist of landing and parking fees, rent from commercial space leased, and the sale of other services. 4.28 Villas, condominia, and apartels in the project areas will typi- cally be used by the owner for a few weeks each year, and rented the re- maining part of the year. In addition to the gross benefits generated when rented to visitors, these units will generate gross benefits to the Mexican economy. The actual purchase price of these units by foreigners has been included as part of the gross benefits with the net financial returns to the owners treated as a cost. Selling prices are projected to range from US$30,000 for a two-bedroom condominium to US$45,000 for a three-bedroom villa, significantly lower than actual sale prices of such units in other parts of Mexico. The purchase of these units by Mexicans and the net financial returns they receive have been treated as transfers and are not incorporated in the economic analysis. However, the use of the facilities by the Mexican owners (about a month a year) is treated as a benefit at a price equal to the room tariff (or rental value). No rent- al values for foreigners are included. 4.29 All indirect taxes paid by Mexicans who would have traveled abroad without the project and those paid by foreign visitors to the project areas have been included in the gross benefits stream. No direct taxes, however, have been included. Costs 4.30 Total capital costs associated with the project (excluding replace- ment costs) amount to US$112.4 million in Loreto and US$100.5 million in San Jose del Cabo. The cost of a few components such as the studies, health clinics and marketplaces, amounting to 27. of total project costs have been excluded from the analysis, on the assumption that their benefits equal their costs. The capital costs of constructing the airports and the tele- communications system are included as project costs, but the benefits directly generated by these investments have been excluded. With regard to the airports, revenues (excluding departure taxes) would cover operating costs with little surplus generated. The telecommunications components will be a small part of an integrated network; no information is available on marginal operating and investment costs, although as a whole the returns on the telephone company's investment have been traditionally high. The exclusion of net benefits on telecommunications, therefore, lends a conser- vative bias to the rate of return calculations. 4.31 In addition to the capital costs of the proposed project, the eco- nomic analysis includes the cost of hotels, apartels, villas, and other superstructure facilities. Average economic investment costs for hotels have been estimated at US$24,000 per room, for apartels US$18,000, and for villas and condominia at US$11,000 per room, excluding the cost of land, and interest during construction. Additional investments that are likely to take place in local transportation, shops, and restaurants have also been taken into account. All relevant investment costs associated with the project are summarized separately for each area as follows:  - 28 - Table 7: Investment Costs for Project Areas Loreto S.J. del Cabo Total Item (US$ M. %) (US$ M. %) (US$ M. %) Hotels, Apartels, Villas and Condominia 75.45 67.1 73.45 73.1 148.90 69.9 Shops, Restaurants, and other Facilities 8.45 7.5 11.30 11.2 19.75 9.3 Infrastructure Facilities 28.50 25.4 15.79 15.7 44.29 20.8 Total 112.40 100.0 100.54 100.0 212.94 100.0 4.32 Infrastructure represents about a fourth of the total project costs in Loreto and less than a fifth in San Jose del Cabo. This is a lower pro- portion than in similar projects elsewhere and reflects the fact that large investments in infrastructure have already been made in the area. 4.33 The projected operating costs for the facilities have been taken from financial statements drawn up for each component and deducted from gross benefits to arrive at net benefits. Given Mexico's unemployment of unskilled labor, wages for unskilled workers have been shadowpriced at 75% of their market wages. Rates of Return 4.34 Separate rates of return are calculated for each project area. (Although it is arithmetically possible to calculate separate rates of re- turn for the tourism and urban elements of the project, the necessarily arbitrary allocation of costs to each element would yield arbitrary re- sults). On the basis of the above described assumptions and with an esti- mated economic life of 30 years, the internal economic rate of return on the investments in Loreto would be 19% and in San Jose del Cabo 21%. The discounted flow of costs and revenues (at a 10% discount rate) are US$340 million and US$420 million in Loreto, and US$290 million and US$370 million in San Jose del Cabo. The sensitivity rate of return to changes in key variables is shown in Table 8, on page 29, The rate of return would be par- ticularly sensitive to changes in operating costs and prices. However, the risk of operating costs increasing more than 10%, with no parallel increases in revenues is considered small. Similarly, a fall in prices (revenues) over the life of the project is considered unlikely. Because of the infra- structure facilities already available, the project is feasible even if only 75% of the revenue-earning superstructure facilities are implemented. The "best estimate" rate of return does not include the proportion of the project revenues which are considered non-incremental, as explained in para. 4.25. Such revenues are generated by visitors who would come to Mexico even without the project and thus represent demand diverted from else- where in Mexico. The rate of return calculations are not too sensitive to changes in the proportion of non-incremental total revenues.  - 29 - Table 8: Sensitivity Tests (in %) Loreto San Jose del Cabo Best Estimate 18.7 20.6 Changes Investment Costs +10% 17.3 19.0 +20% 15.9 17.6 Operating Costs +20% 13.1 15.1 +10% 16.1 17.9 -10% 21.3 23.1 Prices (revenues) +10% 21.9 25.1 -10% 14.2 16.0 One Year's Delay in Project Implementation 16.1 17.0 Only 75% of Superstructure Constructed 16.2 17.8 No Shadow Pricing of Unskilled Labor 17.2 18.9 4.35 The proposed project and related investments are expected to in- crease Mexico's gross foreign exchange revenues from tourism by US$34 mil- lion in 1982 and by US$110 million a year from 1990 onwards. Because the projects are located near the US and in a duty free area, imports would be higher than in the rest of Mexico. Nevertheless, net foreign exchange earnings in the year 1990 would amount to about US$84 million. This com- pares with the estimated foreign exchange component of the proposed pro- ject of US$42 million, of the total program of US$158 million and the gross foreign earnings of tourism as a whole in Mexico of US$800 million in 1975. 4.36 The direct employm9nt created by the proposed facilities is esti- mated to be around 12,000.1 In addition, an estimated 13,000 jobs would be generated by the investments in sectors such as handicraft production, food processing and transportation. Unskilled labor would fill more than 60% of the jobs created. Some 40% of the jobs could be filled by women. 4.37 The Government would benefit both directly and indirectly from the investments in the project area. In addition to the revenues earned by government agencies involved in the project, such as FONATUR and the utility companies, the Government would capture revenues through an air- 1/ The project's investment cost per man-year of direct employment gene- rated is US$1,800, with both investments and employment streams being discounted at 10%. This figure compares favorably with the urban poverty lending "benchmark" for Mexico on employment generation grounds.  - 30 - port tax and a 4% sales tax and direct taxes paid by commercial enter- prises. The estimated incremental accumulated cash flow (excluding the Bank loan, which is considered untied to the project, and FONATUR's hotel lending operations) accruing to the Government is estimated to be US$31 million in the tenth year of project operation and US$124 million in the fifteenth. The internal rate of return on the Government's cash flow is over 20%. 4.38 Around 36% of the project's net financial benefits generated in the two areas would be captured by the Government and 27% by unskilled labor, with the remainder accruing to owners of hotels, shops, restaurants and other facilities. E. Social Aspects 4.39 Mexico has welcomed foreign tourists for many decades. Because of its close ties with the US, whose influence has been strongly felt through mass media, education, consumer products, and large numbers of visitors, the project as such is not likely to affect the value systems of the local population in scope or direction other than those already occur- ring in the present day Mexican society. The influx of tourists who have come to enjoy Mexico's music, folkloric dances, handicrafts, archaeologi- cal sites, and remnants of a colonial past, have in fact brought about a stronger and deeper appreciation among Mexicans of their cultural heritage. However, to bypass the local population while developing facilities for foreign tourists could cause severe problems, as has been witnessed in both Mexico and the nearby Caribbean. 4.40 Drawing on FONATUR's experience in Cancun and Ixtapa-Zihuatanejo, the project in Baja California provides a major, rational means of inte- grating tourism and urban development. Socio-economic surveys of the ex- isting towns (already complete as part of the project preparation exercise) and special provisions for the existing and new population in the project areas, have resulted in a plan which shows the Government's concern for the effects of tourism and rapid urban growth on the local population. 4.41 Implementation of the project would mean the creation of employ- ment opportunities and a resulting increase in population in the project areas. The population in Loreto and San Jose del Cabo, which are basical- ly rural communities, is expected to grow from about 3,000 to about 25,000 in each town in less than ten years. Although the planned rate of growth of tourism facilities is based on market projections and financial-econom- ic criteria, and not on the social "carrying capacity" of the population, the project attempts to anticipate the stress resulting from the fast growth in population and makes provisions that would attempt to solve these problems. This is unusual for major investments in any sector and increases both the project preparation efforts and financial resources re- quired. Aside from increased employment and income, the population in the towns under the project would benefit from improved and expanded infra- structure facilities as well as facilities such as parks, plazas, and mar- ketplaces, all to be provided in the context of a well designed urban plan. Social services include day-care centers for working mothers, schools, and health clinics. Training centers to be provided would permit  - 31 - local residents to learn a new trade or improve their present skill levels. The ejido members would benefit from monetary compensation for land ex- propriated, and from revenues and employment in tourism ventures owned and managed by them. Those with steady jobs and incomes would have the oppor- tunity to purchase developed lots and qualify for assistance under current federal housing programs. For the newly arrived or the jobless, the pro- ject offers temporary accommodation as well as housing lots with some mini- mal infrastructure connections. For those who wish to build modest shelters, construction materials would be sold at cost, and technical assistance would be available. 4.42 In order to minimize any adverse impact, FONATUR, as part of pro- ject preparation, has assembled a community development team to handle day- to-day problems. This team will ease the transition from rural settle- ments to modern urbanized centers and will also provide avenues for local participation in the planning decisions. Assurances have been obtained that FONATUR will, through this team, assist migrant workers and the poorer sections of the population by, among other things, providing land, techni- cal assistance, and construction materials at cost for building houses. 4.43 Loreto (a more cohesive, more rural community), is probably bet- ter equipped to adapt to the new environment and take advantage of its opportunities than San Jose del Cabo, because Loreto's stronger social structure will provide its inhabitants with support and will enable the community as such to cope with changes. At present, both communities fa- vor tourism as a means for earning or increasing their incomes. It will be up to the community development team, however, to further this positive feeling and guide the population toward realistic expectations of, and pride in, being a host and support community for tourism. V. AGREEMENTS REACHED AND RECOMMENDATIONS 5.01 During loan negotiations, agreement was reached and assurances were obtained on the following major points: (i) With the Government: (a) that the project areas would receive adequate airline, water supply, power, telecommunica- tions, education, training and health services (paras. 3.44, 3.46, 3.49, 4.07); (b) that land use and zoning regulations would be adopted to control development on land imme- diately surrounding the project areas (para. 3.46); (c) that all necessary action would be taken to ensure the construction and operation of 750 hotel rooms in each of the project areas in addition to the pilot hotels being financed under the project (para. 4.11); and  - 32 - (d) that investments in the water supply and sewerage systems would be fully recovered and that charges would be sufficient to cover operation and maintenance costs and the financing of minor expansion (para. (para. 4.17). (ii) With FONATUR: (a) that the Bank would be consulted on the results of the wildlife conservation, coastal zone water management, and market and economic studies and the appropriate actions to be taken (paras. 3.14, 4.26); (b) that final designs, plans, specifications and regulations for the project, including the pilot hotels, would be submitted to the Bank for approval (paras. 3.25, 3.34, 3.48, 3.50); (c) that improved financial reporting formats would be adopted and the relevant reports sent to the Bank (para. 4.22); (d) that the Bank would be consulted on the financial and operating policies for the proposed project (para. 4.15); and (e) that assistance would be given to migrant workers and the poorer sections of the population (para. 4.42). 5.02 The satisfactory establishment of the trust funds for the develop- ments envisaged in Loreto and San Jose del Cabo (para. 3.43), will be a condition of loan effectiveness. 5.03 Subject to the condition of effectiveness described above, the proposed project would constitute a suitable basis for a Bank loan of US$42 million equivalent to Nacional Financiera, S.A., acting for and with the guarantee of the Government, for a period of 17 years, including a grace period of 3-1/2 years.  ANNEX I MEXICO APPRAISAL OF THE BAJA CALIFORNIA TOURISM PROJECT PROJECT COST ESTIMATES The attached tables contain project estimates and schedules of expenditures and disbursements. These tables and schedules are listed below: 1. Breakdown of Total Project Cost by Major Project Items and Areas 2. Project Cost Estimates - Loreto Tourism Area 3. Project Cost Estimates - Town of Loreto 4. Project Cost Estimates - Town of San Jose del Cabo and Tourism Area 5. Project Cost Estimates - 250-Room Pilot Hotels (2) 6. Project Cost Estimates - Loreto and San Jose del Cabo Airports 7. Schedule of Expenditures by Year and Quarter 8. Estimated Schedule of Disbursements 9. Contingency Allowances  MEXICO: BAJA CALIFORNIA TOURISM PROJECT Breakdown of Total Project Cost (in US$ 000) Land Civil Equip- Consultant Community Pre-Opening Project Total Acquisition Works ment Services Developm. Expenses Promotion Admin. Cost 1. Loreto Tourism Area 3,518 7,382 2,503 816 363 500 1,404 16,486 2. Town of Loreto 854 5,366 717 487 211 221 723 8,579 3. Loreto Pilot Hotel 3,423 1,239 373 241 5,276 4. Loreto Airport 100 4,636 1,116 460 6,312 (Sub-Total) (4,472) (20,807) (5,575) (2,136) (211) (825) (500) (2,127) (36,653) 5. Town of San Jose del Cabo and Tourism Area 2,010 6,393 2,274 783 211 316 500 1,275 13,762 6. San Jose Pilot Hotel 3,423 1,239 373 241 5,276 .7. San Jose Airport 1,962 1,116 246 3,324 (Sub-Total) (2,010) (11,778) (4,629) (1,402) (211) (557) (500) (1,275) (22,362) 8. Market and Economic Study 400 400 Baseline Cost 6,482 32,585 10,204 3,938 422 1,382 1,000 3,402 59,415 Contingencies: Physical Increase (10.7%) 4,138 1,529 5,667 Price Increase 1/ (35.6%) 12,625 2,718 1,231 124 641 402 1,123 18,864 (Total Contingencies) (16,763) (4,247) (1,231) (124) (641) (402) (1,123) (24,531) TOTAL COST 6,482 49,348 14,451 5,169 546 2,023 1,402 4,525 83,946 Foreign Exchange Component Percentage 53.7 85.0 23.2 16.5 87.8 15.8 50.0 Total 26,483 12,282 1,200 90 1.231 714 42,000 1/ Price Increase Civil Works Equipment 1976 14% 10% < 3 1977 12% 8% 1978 12% 8% 1979 12% 8% 1980 10% 7% December 1976  MEXICO: BAJA CALIFORNIA TOURISM PROJECT LORETO TOURISM AREA (in US$ 000) Civil Works Equipment Total Cost Expenditures Local Foreign Total Local Foreign Total Local Foreig" Total Year-I Year+I Year+II Year+III Year+IV BID PACKAGES 1. Earthworks & storm drainage 340 590 930 340 590 930 262 329 245 94 2. Electricity (headworks) 429 1,179 1,608 103 584 687 532 1,763 2,295 608 855 631 201 3. Electricity & street lighting (installation) 32 161 193 43 240 283 75 401 476 118 186 137 35 4. Telecommunications 1/ 214 820 1,034 102 578 680 316 1,398 1,714 446 649 478 141 5. Water supply (head works) 171 93 264 6 35 41 177 128 305 84 111 82 28 6. Other infrastructure 714 801 1,515 32 184 216 746 985 1,731 476 626 463, 166 7. Golf course 28 106 134 40 231 271 68 337 405 99 161 117 28 8. Environmental sanitation 14 17 31 6 25 31 20 42 62 16 24 17 5 9. Buildings 719 806 1,525 45 249 294 764 1,055 1,819 497 661 490 171 10. Wildlife conservation 70 78 148 70 78 148 42 52 39 15 (Sub-Total) (2,731) (4,651) (7,382) (377) (2,126) (2,503) (3,108) (6,777) (9,885) (2,648) (3,654) (2,699) (884) ACTIVITIES: 1. Promotion 61 439 500 200 200 100 2. Pre-Opening activities 363 363 272 91 3. Project administration (1,182) (222) (1,404) (140) (282) (421) (421) (140) (a) headquarters 591 222 813 90 155 244 244 80 (b) field office 591 591 50 127 177 177 60 4. Consulting Services: (672) (144) (816) (296) (322) (99) (99) (a) final design 420 74 494 296 198 (b) supervision 252 45 297 99 99 99 (c) special studies 25 25 25 (Sub-Total) (2,278) (805) (3,083) (436) (604) (720) (992) (331) Baseline Cost 5,386 7,582 12,968 436 3,252 4,374 3,691 1,215 Contingencies: (1,355) (2,355) (3,710) (147) (832) (979) (2,312) (3,481) (5,793) (35) (959) (1,920) (2,085) (794) Physical increase 365 657 1,022 56 319 375 421 976 1,397 373 518 383 123 Price increase 990 1,698 2,688 91 513 604 1,891 2,505 4,396 35 586 1,402 1,702 671 (4,086) (7,006)(11,092) (524) (2,958) (3,482) Land acquisition 3,518 _ 3,518 1.267 1.145 1.106 TOTAL COST 11,216 11.063 22,279 1,738 5,356 7,400 5,776 2,009 1/ not to be financed by the Loan December 1976  MEXICO: BAJA CALIFORNIA TOURISM PROJECT TOWN OF LORETO (in US$ 000) Civil Works Equipment Total Cost Expenditures Local Foreign Total Local Foreign Total Local Foreign Total Year-i Year+l Year+II Year+III Year+IV BID PACKAGES 1. FONATUR's administration buildings & housing 190 190 380 2 13 15 192 203 395 395 2. Earthworks & infrastructure works 1,658 1,660 3,318 21 119 140 1,679 1,779 3,458 968 1,232 915 343 3. Electricity (headworks) 35 198 233 35 198 233 53 97 71 12 4. Electricity & street lighting (installations) 107 605 712 107 605 712 201 252 187 72 5. Telecommunications 1/ 49 148 197 27 151 178 76 299 375 96 144 106 29 6. Environmental sanitation 16 15 31 4 27 31 20 42 62 16 24 17 5 7. Buildings 364 364 728 19 101 120 383 465 848 232 308 227 81 (Sub-Total) (2,384) (2,982) (5,366) (108) (609) (717) (2,492) (3,591) (6,083) (1,961) (2,057) (1,523) (542) ACTIVITIES: 1. Community development 176 35 211 18 53 64 76 2. Pre-Opening activities 221 221 166 55 3. Project administration: (609) (114) (723) (72) (145) (217) (217) (72) (a) headquarters 217 114 331 43 67 99 99 23 (b) field office 392 392 29 78 118 118 49 4. Consulting services (414) (73) (487) (182) (183) (61) (61) (a) final design 231 73 304 182 122 (b) supervision 183 183 61 61 61 (Sub-Total) (1,420) (222) (1,642) (272) (381) (342) (520) (127) Baseline Cost 3,912 3,813 7,725 272 2,342 2,399 2,043 669 Contingencies: (1,154) (1,457) (2,611) (43) (244) (287) (1,679) (1,770) (3,449) (71) (676) (1,059) (1,193) (450) Physical increase 332 41B 750 16 91 107 348 509 857 265 296 219 77 Price increase 822 1,039 1,861 27 153 180 1,331 1,261 2,592 71 411 763 974 373 (3,538) (4,439) (7,977) (151) (853) (1,004) Land acquisition 854 854 308 278 268 TOTAL COST 6.445 5.583 12,028 651 3,296 3,726 3,236 1,119 1/ not to be financed by the Loan December 1976 Fl  MEXICO: BAJA CALIFORNIA TOURISM PROJECT TOWN OF SAN JOSE DEL CABO AND TOURISM AREA (in US$ 000) Civil Works Equipment Total Cost Expenditures Local Foreign Total Local Foreign Total Local Foreign Total Year-1 Year+l Year+II Year+III Year+IV BID PACKAGES: 1. FONATUR's administration buildings & housing 119 118 237 4 24 28 123 142 265 265 2. Earthworks & storm drainage 308 307 615 308 307 615 173 218 162 62 3. Electricity (headworks) 14 41 55 75 422 497 89 463 552 128 226 165 33 4. Electricity & street lighting (installations) 83 331 414 42 234 276 125 565 690 179 262 193 56 5. Telecommunications 1/ 94 285 379 116 657 773 210 942 1,152 282 456 334 80 6. Water supply (headworks) 68 68 136 68 68 136 38 48 36 14 7. Other infrastructure 1,638 1,148 2,786 72 410 482 1,710 1,558 3,268 895 1,187 879 307 8. Environmental sanitation 34 34 68 10 58 68 44 92 136 34 52 39 11 9. Buildings 778 875 1,653 22 128 150 800 1,003 1,803 500 647 480 176 10. Wildlife conservation 25 25 50 25 25 50 14 18 13 5 (Sub-Total) (3,161) (3,232) (6,393) (341) (1,933) (2,274) (3,502) (5,165) (8,667) (2,508) (3,114) (2,301) (744) ACTIVITIES: 1. Community development 176 35 211 18 53 64 76 2. Promotion 61 439 500 200 200 100 3. Pre-Opening activities 316 316 237 79 4. Project administration: (1,074) (201) (1,275) (112) (269) (383) (383) (128) (a) headquarters 538 201 739 74 147 222 222 74 (b) field office 536 536 38 122 161 161 54 5. Consulting services: (589) (194) (783) (260) (349) (87) (87) (a) final design 329 104 433 260 173 (b) supervision 260 260 86 87 87 (c) special studies 90 90 90 (Sub-Total) (2,216) (869) (3,085) (390) (671) (734) (983) (307) Baseline Cost 5,718 6,034 11,752 390 3,179 3,848 3,284 1,051 Contingencies: (1,563) (1,566) (3,129) (133) (752) (885) (2,456) (2,632) (5,088) (99) (881) (1,606) (1,819) (683) Physical increase 442 425 867 52 289 341 494 714 1,208 321 449 331 107 Price increase 1,121 1,141 2,262 81 463 544 1,962 1,918 3,880 99 560 1,157 1,488 576 (4,724) (4,798) (9,522) (474) (2,685) (3,159) Land acquisition 2,010 _____ 1 718 646 646 __ TOTAL COST 10.184 8.666 18,850 1,207 4,706 6,100 5,103 1,734 1/ not to be financed by the Loan December 1976  MEXICO: BAJA CALIFORNIA TOURISM PROJECT 250-ROOM PILOT HOTELS (2) (in US$ 000) Civil Works Equipment Total Cost Expenditures Local Foreign Total Local Foreign Total Local Foreign Total Year-1 Year+l Year+II Year+III Year+IV BID PACKAGES: 1. Buildings & external works 3,365 3,054 6,419 3,365 3,054 6,419 2,696 2,978 745 2. Electrical, mechanical & hydraulic installations 144 118 262 157 891 1,048 301 1,009 1,310 189 1,091 30 3. Furniture, fixtures & special equipment 91 74 165 215 1,215 1,430 306 1,289 1,595 176 1,399 20 (Sub-Total) (3,600) (3,246) (6,846) (372) (2,106) (2,478) (3,972) (5,352) (9,324) (3,061) (5,468) (795) ACTIVITIES: 1. Pre-Opening activities 482 482 482 2. Consulting services: (634) (112) (746) (466) (140) (140) (a) design 354 112 466 466 (b) supervision 280 280 140 140 (Sub-Total) (1,116) (112) (1,228) (466) (140) (140) (482) Baseline Cost 5,088 5,464 10,552 466 3,201 5,608 1,277 Contingencies: (1,918) (L,728) (3,646) (176) (998) (1,174) (2,568) (2,772) (5,340) (190) (1,345) (3,269) (536) Physical increase 360 324 684 56 316 372 416 640 1,056 315 661 80 Price increase 1,558 1,404 2,962 120 682 802 2,152 2,132 4,284 190 1,030 2,608 456 (5,518) (4,975)(10,493) (547) (3,104) (3,651) _ _ TOTAL COST 7,656 8,236 15,892 656 4,546 8,877 1,813 December 1976 ebI.,  MEXICO: BAJA CALIFORNIA TOURISM PROJECT LORETO AND SAN JOSE DEL CABO AIRPORTS (in US$ 000) Civil Works Equipment Total Cost Expenditures Local Foreign Total Local Foreign Total Local Foreign Total Year-1 Year+I Year+II Year+III Year+IV BID PACKAGES: (a) Loreto Airport (2,405) (2,231) (4,636) (167) (949) (1,116) (2,572) (3,180) (5,752) (2,667) (3,085) 1. Maneuvering areas 1,337 1,337 2,674 1,337 1,337 2,674 1,136 1,538 2. Terminal buildings 962 788 1,750 25 142 167 987 930 1,917 848 1,069 3. Fuel storage & supply 106 106 212 16 91 107 122 197 319 157 162 4. Visual aids and electrical supply 76 432 508 76 432 508 317 191 5. Navigational aids & comunica- tions 50 284 334 50 284 334 209 125 (b) San Jose del Cabo Airport (806) (1,156) (1,962) (167) (949) (1,116) (973) (2,105) (3,078) (1,531) (1,547) 6. Terminal buildings 700 1,050 1,750 25 142 167 725 1,192 1,917 848 1,069 7. Fuel storage & supply 106 106 212 16 91 107 122 197 319 157 162 8. Visual aids & electrical supply 76 432 508 76 432 508 317 191 9. Navigational aids & communi- cations 50 284 334 50 284 334 209 125 (Sub-Total) (3,211) (3,387) (6,598) (334) (1,898) (2,232) (3,545) (5,285) (8,830) (4,198) (4,632) Consulting Services: (706) (706) (441) (132) (133) (a) final design 441 441 441 (b) supervision 265 265 132 133 Baseline Cost 4,251 5,285 9,536 441 4,330 4,765 Contingencies: (1,788) (1,879) (3,667) (138) (784) (922) (2,094) (2,663) (4,757) (69) (1,833) (2,855) Physical increase 399 416 815 50 284 334 449 700 1,149 554 595 Price increase 1,389 1,463 2,852 88 506 588 1,645 1,963 3,608 69 17,279 2,260 Land acquisition (4,999) (5,266)(10,265) (472) (2,682) (3,154) 100 100 40 30 30 (at Loreto) TOTAL COST 6,445 7,948 14,393 40 540 6,193 7,620 December 1976  MEXIC0: BAJA CALIFORNIA TOURISM PROJE8T Schedule of Expenditures bv Year and Ouarter (in US.S 000) Year I Year + I Year + I Year + IV Q. I 2 QS 0 2 Q. 6 2t7 4 = 5 O. 60 0.1D1 Q.12 .13 Q Total LOREIO CCgPi3ZX Lan4 Acquiesfion 808 807 364 363 363 363 351 351 351 351 4.472 Civil Works 1,263 1,264 1,264 1,264 2,849 2,850 2,850 2,850 3,072 3,o03 3,072 3,072 1,559 1,275 31,577 Equiprent 473 474 728 728 728 729 939 939 939 939 151 122 7,8S9 Consulting Services 274 275 324 325 325 324 112 112 112 112 124 125 125 125 2,794 Counity Deveaop,ant 5 14 15 15 15 16 21 21 21 21 27 28 27 27 273 Pro,aotion 64 65 65 65 72 73 73 72 84 68 701 Pre-Opening Activities 246 247 247 246 - 123 100 1,209 Project Admintatration 142 142 130 130 130 130 207 207 207 207 232 232 233 232 157 128 2,S46 (Sub-Total) (1,229) (1,238) (2,569) (2,571) (2.097) (2,097) (4,332) (4,334) (4,334) (4,335) (4,712) (4,717) (4,716) (4,713) (2,074) (1,693) (51,761) So Jos0 DEL CjO_a ELEX Land Acquisition 359 359 161 161 162 162 162 162 161 161 2,010 Civil Work4 644 644 644 645 1,611 1,611 1,611 1,612 1,752 1,753 1,753 1,752 956 783 17,771 2quipest 339 340 591 591 592 592 831 832 832 832 104 86 6,562 CDnoulting Services 173 173 242 243 243 242 68 68 68 68 70 71 71 71 1.871 Comnutty Development 5 14 15 15 15 16 21 21 21 21 27 28 27 27 273 Promotion 64 65 65 65 72 73 73 72 84 68 701 Pr.-Opming Activities 173 174 174 173 66 54 814 Prejact iskinlatration 69 70 74 74 74 75 123 124 124 124 138 139 139 139 106 87 1,679 (Sub-Totat) (606) (616) (1,475) (1,477) (1,138) (1,140) (2,640) (2,642) (2,642) (2,643) (3,063) (3,070) (3,069) (3,066) (1,316) (1,078) (31,6817 TOURISM MA,T STUDY 58 58 97 97 97 97 504 Total Expenditures p.Q. 1,835 1,854 4,044 4,048 3,293 3,295 7,069 7,073 7,073 7,075 7,775 7,787 7,785 7,779 3,390 2,771 3 Total Erpenditures p.Y. 3,689 14,680 28,290 31,126 6,161 Cuwzative p.Y. 3,689 18,369 46,659 77,785 83,946 Decaeber 1976  ANNEX I Table 8 MEXICO: BAJA CALIFORNIA TOURISM PROJECT Forecast of Disbursements (in US$ 000) Implementation Disbursements Undisbursed Balances Quarter Quarterly Percent Cumulative Percent Quarterly Percent First Year: Q. 1 42,000 100.0 Q. 2 1,266 3.0 1,266 3.0 40,734 97.0 Q. 3 1,905 4.5 3,171 7.5 38,829 92.5 Q. 4 1,937 4.6 5,108 12.1 36,892 87.9 Second Year: Q. 5 1,660 4.0 6,768 16.1 35,232 83.9 Q. 6 3,707 8.8 10,475 24.9 31,525 75.1 Q. 7 3,710 8.8 14,185 33.7 27,815 66.3 Q. 8 3,849 9.2 18,034 42.9 23,966 57.1 Third Year: Q. 9 3,912 9.3 21,946 52.2 20,054 47.8 Q.10 4,105 9.8 26,051 62.0 15,949 38.0 Q.l1 4,373 10.4 30,424 72.4 11,576 27.6 Q.12 4,339 10.3 34,763 82.7 7,237 17.3 Fourth Year: Q.13 4,108 9.8 38,871 92.5 3,129 7.5 Q.14 3,129 7.5 42,030 100.0 0 0.0 TOTAL 42,000 100.0 February 1977   ANNEX I Table 9 MEXICO: BAJA CALIFORNIA TOURISM PROJECT Contingency Allowances (in US$ 000) Land Civil Works Equipment Consulting Services Community Development Pre-Opening Promotion Project Administration Total Contingencies Acquisition Local Foreig Total Local Foreign Total Local Foreign Total Local Foreign Total Expenses Local Foreign Total Local Foreign Total Local Foreign Total TOTAL PROJECT COST EXCLUDING CONTINGENCIES 6,482 15,087 17,498f 32,585 1,532 8,672 10,204 3,015 923 3,938 352 70 422 1,382 122 878 1,000 2,865 537 3,402 30,837 28,578 59,415 Percentage of Total 100.0 46.3 53.7 100.0 15.0 85.0 100.0 76.6 23.4 100.0 83.4 16.6 100.0 100.0 12.2 87.8 100.0 84.2 15.8 100.0 51.9 48.1 100.0 CONTINGENCIES (a) Allowance for Probable Price Increases: (t) Percentage 39.0 38.5 38.7 26.6 26.6 26.6 31.6 30.0 31.3 29.5 28.6 29.4 46.4 40.2 40.2 40.2 33.0 33.0 33.0 29.1 34.6 31.8 (ii) Amount 5,880 6,745 12,625 407 2,311 2,718 954 277 1,231 104 20 124 641 49 353 402 946 177 1,123 8,981 9,883 18,864 (b) Allowances for Unforeseen Factors: (i) Percentage 12.6 12.8 12.7 15.0 15.0 15.0 6.9 12.4 9.5 (ii) Amount 1,898 2,240 4,138 230 1,299 1,529 2,128 3,539 5,667 (c) Total Contingency Allowances: (M) Percentage 51.6 51.3 51.4 41.6 41.6 41.6 31.6 30.0 31.3 29.5 28.6 29.4 46.4 40.2 40.2 40.2 33.0 33.0 33.0 :36.0 47.0 41.3 (ii) Amount 7,778 8,985 16,763 637 3,610 4,247 954 277 1,231 104 20 124 641 49 353 402 946 177 1,123 11,109 13,422 24,531 (iii) Percentage of Total 46.3 53.7 100.0 15.0 85.0 100.0 77,5 22.5 100.0 83.9 16.1 100.0 100.0 12.2 87.8 0OO.O 84.2 15.8 100.0 45.3 54.7 1o0.0 TOTAL PROJECT COST INCLllDING CONTINGENCIEs 6,482 22,865 26,483 49,348 2,169 12,282 14,451 3,969 1,200 5,169 456 90 546 2,023 171 1,231 1,402 3,811 714 4,525 41,946 42,000 83,946 Percentage of Total 100.0 46.3 53.7 100.0 15.0 85.0 100.0 75.8 23.2 100.0 83.5 16.5 100.0 100.0 12.2 87.8 100.0 84.2 15.8 loo.o 50.0 50.0 100.0 December 1976   ANNEX II Page 1 MEXICO APPRAISAL OF THE BAJA CALIFORNIA TOURISM PROJECT PROJECT DESCRIPTION A. General 1. The project would consist of the following main elements: For Loreto: (a) infrastructure and other facilities for the tourist zone at Nopolo, located 7.5 kms south of Loreto and some minimal trailer park and other facilities at nearby Puerto Escondido; (b) a medium category 250-room hotel to be located at Nopolo; (c) infrastructure and other facilities for the exist- ing town itself; and (d) airport facilities. For San Jose: (a) infrastructure and other facilities for the town as well as the adjacent tourism zone; (b) a medium category 250-room hotel; and (c) airport facilities. 2. The project also makes provision for promotion, community develop- ment activities and conservation programs for both areas. In addition, a tourism market and economic study is included that would provide Mexico with needed information on the sector as a whole. These components are discussed in greater detail below, except the water supply, sewerage and drainage systems, the airport facilities and the studies which are discussed more fully in Annexes III, IV and X.  ANNEX II Page 2 B. Loreto Tourism Zone and Puerto Escondido 3. In the tourism zone (Nopolo), infrastructure in the first stage will serve an accommodation program of 3,000 hotel and apartel rooms plus 655 condominium-type apartments and villas, along with recreation, community and cultural facilities. The hotel and apartel accommodations have been planned around a community and cultural "animation" center within the primary hotel zone that would provide day and night activities for the resort. Included in the project is the construction of a first 250-room medium category hotel. 4. A central pedestrian spine would run parallel to the beach giving easy access to all the community facilities from the hotels. A series of squares and plazas along the pedestrian way would form the entrances to the hotel clusters. Thus a pedestrian town would be created along the beach front in contrast to the traditional separate and individual lots with no visual linkage except the road. The pedestrian spine would serve as a visual link in which the tourist can move under cover of vegetation and arcades. 5. On the west side of the main boulevard, clusters of condominium apartments and villas have been planned along with three apartel sites. While there is flexibility in the plan in terms of size and shape of the lots, the type of accommodation designated for each site has been selected to permit optimum development of the land. 6. Roads. The hotel zone would be served by a main boulevard (2 km long, 30 m wide, 4-lane) parallel to the beach, but set back 200 to 350 meters. The main entrance to the zone is located at the north end of the site--nearest the airport--and provides direct access to the beach boulevard. The boulevard ends in a cul-de-sac to the north and continues as a two-lane road serving the southern end of the development. It connects to the main highway to provide a secondary entrance. 7. As part of the road infrastructure, an internal 2 km long, 18 m wide, 2-lane loop road provides access to single family cluster housing, condominium apartments and villas at the back of the site as well as a tennis center and other recreational facilities. The system has been so designed that the sites can be developed without tearing up the curbs and gutters of the main road system. Landscaping and street lighting have been included for the entire road network. The storm water drainage network would be open channels, except for discharge structures. 8. Power uppl and Distribution. The Federal Electricity Commission (CFE) builds anca operates`al1 the power supply and distribution for the country. The project would require a new overhead transmis- sion line to be constructed from Villa Constitucion to service the projected demand of 12,000 kv. From the substation in Villa Constitucion, 150 km away, a 115 kv transmission line with controls and  ANNEX II Page 3 protection circuit breakers would be constructed under the project, with conductors supported on concrete posts. A new substation would be constructed at the town of Loreto, and electricity delivered to the tourism zone via a 34.5 kv overhead transmission line. These headworks and transmission lines from Villa Constitucion would take about 36 months to construct. Work would be initiated in the first year and completed early in the third year to serve the complex by early 1980. 9. The local distribution for both Nopolo and Loreto would consist of 34.5 kv overhead lines reduced to 220/127 volts by transformers to service each lot. A total of 66 transformers would be provided along the major boulevard from which underground service to individual sites would be provided. 10. Telecommunications. Telecommunications in Mexico are built and operated by TELMEX, a government owned agency. In Loreto, an integrated system would be installed that would serve both the town and the tourism zone until 1988. Under the project, a new exchange building will be built and located in the town. The local exchange equipment would consist of AFRm/6B multiplex equipment. One thousand lines on 60 circuits would be provided to meet projected demand. 11. The long distance circuits will be tied into the regional micro- wave with 120 channels initially, 8 repeaters and 2 terminals. A booster station to be constructed would include rectifiers, amplifiers, battery cells and emergency equipment. 12. The local distribution lines would be placed in underground conduits. Initially 1,550 lines would be placed in service. In addition, each hotel will be required to purchase their own PABX private exchange which they will operate. The system will take about three years to install. It is programmed for completion by early 1980. 13. The entire system will be installed by one of the sister companies of TELMEX: Teleconstrucciones, Contelmex or Cycxsa. TELMEX, the operating agency will be charged for the costs of the installation and connection, and TELMEX in turn will charge FONATUR. 14. Recreational Facilities. A community and cultural center would be built under the project and would consist of an auditorium with a capacity of 500 seats and a central plaza with space for shops, offices, cafes, travel agencies, restaurants, banks, pharmacies, a post office and an emergency health clinic. Adjacent to the center, a boat house and pier would be constructed for safe and easy boarding of boats (motor and sail), for all forms of aquatic sports as well as excursions. The pier would be constructed of precast, reinforced concrete piling and cross ties with a treated wooden deck, handrails and bumpers. Water and fuel service would be available at the end of the pier from underground tanks. A concessionaire would manage the rental of all boats.  ANNEX II Page 4 15. Based on the oceanographic data and bathymetric surveys along with configuration and orientation of the beach, a site has been earmarked to provide year-round anchorage and protection for boats. Located at the southern end of the complex the protection would come from a 60 m rocky promontory. Anchorage would be provided for 25 boats attached to mooring buoys (fore and aft) and secured to a system of anchors below. A small recreation center will be constructed for the beach area and would include a restaurant, restrooms, changing rooms and parking facilities. 16. A main recreation and landscape feature of the project is an 18-hole golf course, of which the first nine holes and clubhouse would be constructed under the project. The clubhouse (with pro-shop, snack bar, changing rooms and office) is a single structure and has been located at the junction of the beach and main entrance boulevard. Equipment such as golf carts and an irrigation system have also been included in this component. The fairways have been designed to open up residential proper- ties for condominium and villa development on both sides for maximum exposure. The alignments of the fairways take advantage of the natural vegetation and would need minimum grading. The course would be irrigated by the treated effluent of the sewage lagoons located 2.5 km west from the site. In this manner, the hydrological cycle would be complete. Only natural storm drainage run-off would enter the sea. An ample site at the southern end of the inner loop has been provided so that private interests could develop a 16-lawn tennis club in a "park-like" setting along one of the golf course fairways. On the other side of the transpeninsular highway, land has been reserved for riding stables and a practice ring. Visitors would be able to ride up into the spectacular gorges and escarpments of the Sierra Range to enjoy the panoramic views of the surrounding region. 17. Buildings. A service building for fire and police would be built under the project with adequate space for parking, storage, and maintenance of equipment. This component also includes fire fighting and police vehicles and equipment. 18. Environmental Sanitation. For the first three years of project implementation, an environmental sanitation program would be undertaken consisting largely of pest control. Areas infested with flies and mosquitoes would be treated and measures will be taken to eliminate any source of contamination. In a nearby small lagoon, top feeding minnows will be introduced to control larvae population. Special controls will be maintained around the area of the oxidation ponds and the sanitary landfill. 19. Flood Protection. Along the Primer Agua Creek, a protection wall would be built under the project to avoid any flooding of the tourism zone.  ANNEX II Page 5 C. The Town of Loreto 20. Infrastructure and other facilities for the town of Loreto are aimed at upgrading present living conditions of inhabitants and providing for the expansion in population, which is projected to grow from 3,000 to 25,000 in about 10 years. For this purpose, 736 ha of land were expro- priated, and an urban plan prepared. 21. The urban plan calls for the redensification of the old town to accommodate some of the increase in population. A large proportion of the expanded population, however, would be accommodated in a new residen- tial area. Because of aircraft flight lines and aircraft noise the new district will be built 600 m west of the old town, with green areas and parks separating the two. Under the project, parks, playgrounds, health clinics, schools and shops would be built so as to ensure that newcomers do not overload the present facilities. Offices for FONATUR personnel and some staff housing will be built in the new residential area. FONATUR's offices include offices for accounting, engineering, community development and promotion activities. The offices will be furnished and personnel provided with vehicles. Single family or cluster housing and apartments in the new residential area would be financed through existing federal housing programs. 22. Roads. A new 4-lane (1 ka long and 28 m wide) entrance road, adequately lit and landscaped, would connect the transpeninsular highway with the center of the town. Roadworks will also include construction of a 16 km long street network to serve the new district and the upgrading of existing streets in the old town. 23. Electric Power. The transmission line from Villa Constitucion will also deliver electric power to the town of Loreto. The existing dis- tribution system will be expanded with 34.5 kv overhead lines and will include transformers and street lighting. 24. Solid Waste Disposal. A large solid waste disposal site has been selected 5 km from town and would serve the needs of both the town and the tourism zone. Equipment would include three covered garbage trucks and one tractor to help the sanitary landfill process. 25. Urban Renewal. The central plaza in the old town would be improved, paved and landscaped. A recreation beach facility would be provided with snack bar and changing rooms to serve the town. Portions of the old buildings around the plaza would be renovated. 26. Other Facilities. The area of the aircraft flight cone between the old town and the new residential area has been reserved for recreation facilities, cemeteries and other non-residential uses. Rigid height and use restrictions would be applied to ensure the safety and welfare of  ANNEX II Page 6 existing and future residents. A new wholesale market will be built mid- point between the new residential area and the existing town. A nursery- kindergarten for about 100 children would be built in the new district for infants as well as pre-school children of working mothers. A new health center would be built for the new residential area. Vocational training in basic skills such as carpentry, electricity, plumbing, and masonry, would be provided in a building located in the industrial zone. The Mexican Institute for Social Security (IMSS) would equip and operate the facility. At the far end of the industrial area, a slaughter house would be built and equipped under the project. All the above facilities would be provided in the first year and a half of the development program. A boat ramp will be built at the edge of the "ejido" settlement on the outskirts of the town of Loreto where boat repairs and maintenance would be undertaken. Adequate space has been provided for the storage and repairs of 25 boats. This activity if properly managed has the potential of evolving into an important industry in the future. 27. Sites and Services. To accommodate the poorer sections of the population and the migrant worker seeking employment, 500 lots in three to four locations distributed throughout the new residential area have been 2 planned. A road would be constructed for access to each cluster of 150 m lots. Common water taps would be available along the road for every 15 to 20 houses. Each lot would be provided with a graded site, and a simple toilet in a utility structure. The houses would be built on a do-it-yourself basis and in the future could be integrated into the town. Power would be available along the streets, along with street lighting. To facilitate the construction of houses, the building materials for a two-room structure would be provided by FONATUR at cost along with technical assistance and supervision. 28. Facilities for Puerto Escondido. Puerto Escondido is a natural sheltered harbor with a small hidden entrance. It is already popular with tourists who come here with their boats and trailers. However, pollution is increasing and threatens the beauty of the area. The water quality is excellent, but the beach quality is inferior to Nopolo, although acceptable for limited tourism activities. Most of the land is steep rocky slopes and undevelopable in any major way. The harbor today serves as a yacht anchor- age and can accommodate over 200 boats. At the entrance, a ferry boat terminal was recently constructed. Ferry service to Guaymas on the mainland will begin in the near future. The project provides for minor improvements to a general commercial pier adjacent to the terminal to serve small cargo vessels. A modest administrative building would be provided to control the area. Along the inner harbor, a trailer park for 50 trailers and campers would serve tourists coming by road. Minimum site work is required to develop clustered campsites. Office, restaurant, shops, changing rooms and bathing facilities have been included in the project. Water supply would be provided from a nearby existing well. Sewage from the area would be processed in a package treatment plant. It would be located inland from  ANNEX II Page 7 the harbor and disposal of the effluent would be through leaching drain fields. Power supply would come from a small diesel plant located at the entrance to the area. D. San Jose del Cabo 29. The San Jose master plan calls for the integrated development of the town and the tourism zone. Presently two kilometers apart, they will be merged, with only a large hill that will visually separate the two. Tourist facilities would be located at the west of a long beach that extends for 10 kilometers. About 1,800 hectares have been expropriated for the purpose. 30. Infrastructure facilities will serve 3,150 hotel and apartel rooms and 305 condominium-type apartments and villas along with community, cultural and recreation facilities. Like Loreto, the hotels and apartels have been planned around a community and cultural center. The center is linked to the beach by several plazas to facilitate pedestrian circulation. In back of the primary hotel zone, apartments and villas are clustered around common courts which form part of the pedestrian network. While there is flexibility in the plan in terms of size and shape of the lots, the type of accommodation designated for each lot has been selected to permit optimum development of the land. Included in the project is the construction of a first 250-room medium category hotel. 31. Power Supply and Distribution. At present, the area, including the town of San Jose del Cabo, is served by a small diesel generating plant located at Cabo San Lucas. To meet the increased demand for power, a 115 kv transmission line is under construction that would bring electric power from large generating plants in La Paz. These works were scheduled to be finished by March 1977. Under the project, the present substation at San Jose will be expanded to meet projected urban and tourism needs. Local distribution would be by 13.3 kv overhead lines. From the main streets, service would be underground to each individual lot. 32. Road Network. The road network includes a main entrance boulevard (4-lane, 1.6 km, 30 m wide) from the transpeninsular highway which borders the western edge of the tourism area. This main boulevard is curvalinear and forms a circuit around the "cultural center. A two-lane road extends to the east to connect with the town's main street, along which the main utility lines would run. The secondary roads would have cul-de-sacs that could be extended in the future to connect with the town's street system. Turnoffs and junctions have been provided for the residential clusters and recreation facilities so that the sites can be developed without tearing up the curbs and gutters of the main road system. Landscaping and street lighting have been included for the entire network.  ANNEX II Page 8 33. Telecommunications. The telephone system in San Jose del Cabo has 125 lines which will be expanded under the project to 1,260. A new exchange building would be built in the town. Local exchange equipment would be installed in stages and consist of AFRm/6B type multiplex equip- ment. 34. The long distance circuits will be tied into the regional micro- wave system and would have 120 channels with 6 repeaters. The booster station facilities include rectifiers, amplifier battery cells, emergency equipment of 50 kw and 15 tons of refrigeration. To meet projected demands, 1,040 local distribution lines would be constructed in underground conduits. Each hotel would be required to purchase PABX exchange equipment. It would take about two years to construct and install these facilities. As in the case of Loreto, the system will be installed by one of TELMEX's sister companies: Teleconstrucciones, Contelmex or Cycxsa. TELMEX, the operating agency, will be charged for the costs of installation connection, and in turn will charge FONATUR. 35. Recreational and Other Facilities. A community and cultural center would be constructed in the first stage and would consist of an auditorium (capacity 500) and a central plaza with space for shops, cafes, bars, restaurants, banks, pharmacies, and a post office to provide the tourist with essential as well as recreational services . 36. Two small recreation centers have been planned for the beach area and would contain a swimming pool, snack bar, a restaurant, toilets, chang- ing rooms and parking. One located on the east side would serve primarily the town population, while the second--in front of the cultural center-- would serve visitors to the tourism zone. Although not financed under the project, space has been reserved for sport activities such as tennis and handball, which will be developed by the private sector- Land has been reserved at the base of the mountains for riding stables and a practice ring. Visitors would be able to ride into the foothills for panoramic views of San Jose del Cabo and the sea bevond. South of the site, at Punta Palmilla, a fishing pier and boat dock would be provided for deep- sea sports fishing. Water and fuel service would be available and a small boat house for storage of equipment. Adjacent to the pier a marine structure would be provided to create a safe bathing area for visitors because during certain periods the beach in front of the resort is unsafe. 37. On the south side of the town between the fishing pier and the tourism area a trailer park has been constructed, owned and operated by "tejidatarios." Under the project, the park will be improved and FONATUR plans to assist the "ejidatarios" to run the park. 38. Urban Facilities. The town of San Jose del Cabo is projected to grow from about 4,000 to 25,000 by 1988. A new residential area will be constructed near the existing town on the west side of the transpeninsular  ANNEX II Page 9 highway. This area would accommodate 200 "ejidatario" families whose land was expropriated and population of the lowest income category, including migrant workers (500 lots). The level of urbanization would be minimal with stabilized roads serving each lot of 150 m2. A common water tap, lo- cated in the center of the hlock, would serve 10-heuses-. Each lot would be graded and provided with a simple toilet. Power would be available along the streets. To implement the aided self-help housing program, building materials would be provided for each eligible person along with technical assistance and supervision. In both neighborhoods, space has been provided for community facilities, including -schools, parks and playgrounds. 39. A kindergarten for about 100 children would be provided to serve both infants as well as pre-school children while mothers work. It would be located midway between the tourism zone and the old town. Also located midway would be a health center. Vocational training in basic skills (carpentry, electricity, plumbing and masonry) would be provided at a build- ing north of the town. It would be equipped and operated by the IMSS who are presently operating similar facilities in Zihuatanejo and the town of Cancun. Small scale industries will be promoted adjacent to the training school to increase the town's economic base. 40. While the character of the "colonial" town with the extended pedestrian plaza is attractive, many of the old buildings and facades are in need of extensive repairs. Six important buildings of fine colonial style in the town would be repaired under the project, and 25 blocks of building facades would be given a "face-lift." Parks and plazas will be built along the main pedestrian way connecting the center of the old town with the tourism zone. Adjacent to the existing slaughter house 2 km north of the town in the industrial service area, land has been reserved for a wholesale market. A solid waste disposal site has been selected in the flight line of the new airport. Covered garbage trucks and a tractor would be provided for the sanitary landfill process. 41. Environmental Sanitation. For the first three years of project implementation, sanitation programs consisting mainly of pest control would be undertaken. Areas such as the lagoon would be studied for mosquito control. Areas infested with flies would be treated and measures taken to eliminate the source of contamination. Special controls will be maintained around oxidation ponds, the sanitary landfill area and the stables. 42. Buildings. A fire station would be provided with space for dormitories, administration offices, storage and garaging of fire trucks. It will be located between the town and the tourism zone. FONATUR's field offices and some staff housing would be located in the tourism zone. Furniture, office equipment and vehicles would be provided under the project.  ANNEX II Page 10 E. Conservation Programs and Studies for Both Project Areas 43. In Loreto along the coastline there are a number of areas that would be protected under the project by means of planting new material and limited reforestation. In Puerto Escondido, which is barren, a variety of palms and plant material would be developed along the beach of the inner harbor. Dune grass along the outer edge of the beach would protect it. Cactus and ground cover planted in clusters would stabilize the soil and give cover for wildlife. In addition, the north and south end of Nopolo Beach would be planted with palms and ground cover. There are also a few lagoons that are potential bird sanctuaries where wild rice and other natural foods would be planted to support a sizeable bird population. Tree planting would also be extended along the coastline north to the airpolt. 44. Outside the immediate project area in Loreto a wide conservation zone has been planned that extends up into the foothills to the top of the watershed. Behind the tourism zone, a natural spring feeds an oasis of lush tropical vegetation and desert palms which have been cultivated for the last century. It is surrounded by barren high rocky crags and cliffs, providing a dramatic contrast. Under the project this "oasis" will be used as a plant nursery, and serve as a center of tourist attraction. 45. Out in the sea itself, is an extraordinary treasure of natural life. Sea lions and seals inhabit the eastern tip of an island called Isla Coronados. Birds have nests on the rocks on top of the island while a complete rookery of bird life exists at the western end. In order to preserve the natural life on this island, studies are reouired. It is estimated that four man-months of naturalists will suffice to analyze the present conditions and develop a program of conservation and wildlife manage- ment. The potential for a "marine" park, that would include creating under- water trails on the reefs at the western end of the island, would also be studied. 46. A second study to be undertaken would evaluate the vegetation and wildlife surrounding Puerto Escondido and determine what portion of the bay should be a wildlife sanctuary. The study would also include a general reconnaissance of the large Isla del Carmen, 5 km east of Puerto Escondido, which is presently used for salt extraction. These studies would provide the necessary inputs for a conservation program and a coastal land management plan for the entire area. 47. In San Jose del Cabo the main conservation objectives are to protect an attractive sweet-water lagoon adjacent to the town and tourism zone, to develop a water management plan to conserve precious water in the area, and to maximize the lagoon's long-term beneficial contribution to the local population and the visiting tourists.  ANNEX II Page 11 48. Under the project, the lagoon will be dredged to provide for sufficient depth so that plant and fish population could increase. Access to the lagoon will be controlled and new plant material introduced around the edge and on the island in the lagoon. Palm varieties will be added to the existing royal palm clusters on the south side of the lagoon. The lagoon contains a substantial quantity of fresh water,and a significant feeding station would be established for the migratory bird population. Wild rice would be planted for this purpose. Dune grass and ground cover will be planted on the fragile primary beach to protect the land bridge in front of the lagoon. In addition, similar planting would be extended along the 2.5 kilometers in front of the resort for greater soil stability. Wooden catwalks would be constructed across the primary and secondary dunes at 4 or 5 locations, and regulations prohibiting the crossing of the dune anywhere else would conserve the dune from the erosion of daily use. 49. Under the project, SARH would undertake a study of the watershed for San Jose del Cabo to prepare a water management plan that would assure the area of permanent and safe groundwater supply. The study would include the identification of strategic points for the construction of velocity check dams. A limited program of reforestation would be implemented to control erosion. These dams and programs will help recharge the aquifer. It would also preserve the lagoon as a natural attraction for visitors.  ANNEX III Page 1 MEXICO APPRAISAL OF THE BAJA CALIFORNIA TOURISM PROJECT AERONAUTICAL ASPECTS 1. Direct air access to the two tourism sites is critical to the success of the project. San Jose del Cabo at present has a recently completed 2,200 x 45 m runway of suitable strength, but there are no build- ings, visual, navigational, or communication aids. At Loreto there is a small general aviation airport that can handle only light aircraft. Ex- panding and improving these airports and providing the necessary facilities is estimated to cost US$14.4 million, which is expected to be disbursed over the first three years of project implementation. The airport facilities are discussed below, separately for each area. A. San Jose del Cabo 2. The terminal building at San Jose del Cabo will have about 2,500 m of operational space on the ground floor with a modest restaurant, kitchen and offices on an upper level. Since Baja California is a free zone, there will be no incoming customs clearance but there will be an outgoing customs clearance for flights proceeding to domestic points within Mexico. Health, emigration and immigration check points will be required for all international flights. The processing areas have been designed for about 200 peak-hour passengers in each direction. 3. A standard control tower, with adjacent technical block, will be constructed to one side of the terminal building. The tower cab floor will be about 25 meters above the ground. The technical block will contain offices, equipment rooms, generator and pumping equipment. 4. A three-bay crash, fire and rescue (CFR) building will be constructed on the other side of the terminal. The ground floor will contain offices, a dining room, kitchen and a training room as well as the CFR vehicles. The upper level will house the dormitories and baths. 5. A fuel farm will be constructed to one side and at the rear of the terminal area. Turbine fuel will be supplied from there to the apron by an underground hydrant system, while gasoline will be dispensed by fuel tank trucks. 6. An automobile parking area will be constructed in the forecourt of the terminal building and internal access roads will be constructed as necessary.  ANNEX III Page 2 7. A VOR/DME and NDB (radio navigational equipment) will be installed on airport property. Each will be provided with standby electrical power. The VOR will be located in such a position that the southern approach radial will pass over agricultural land between the tourism facilities to be provided under the project and the development planned for a second stage (see Map ). 8. Both VHF and HF radio equipment will be provided for air/ground and point-to-point communications by the tower (air traffic control). 9. Visual aids in the form of VASIS (visual landing aid) runway and taxiway edge lights, apron lights and runway marking will be provided. Perimeter fencing will also be installed. B. Loreto 10. At Loreto, buildings and equipment identical to those described above for San Jose del Cabo would be provided except that there is no need for a special location for the VOR. In addition, the following will be provided: (a) refurnishing of the existing terminal for use as a general aviation terminal and repair of the existing apron and taxiway for use of light aircraft; (b) widening of the existing 1,410 x 30 m runway (16-34) to 45 m and lengthening to 2,200 m; (c) strengthening of the existing runway; (d) construction of a new taxiway and apron for large aircraft and rectification of any existing drainage problems; and (e) construction of an access road to the new terminal from the main highway. C. Airport Zoning Ordinances 11. Zones along the sides of both airports would be established and land use restricted to types insensitive to aircraft flight requirements and noise. 12. Zones at the ends of each runway under the approach and departure paths of aircraft would be established with height restrictions for build- ings in addition to land use restrictions.  ANNEX III Page 3 D. Utilities 13. Electrical services will be brought from the main distribution substations at San Jose del Cabo and Loreto to the airports. Distribu- tion within the airports will be under various contracts depending upon the ultimate use. 14. Potable water will be provided through the use of bore holes and underground storage tanks. Pressure for the domestic system will be pro- vided by pneumatic tanks. High pressure pumps will be provided for the fire hydrant ring system. 15. Sewage disposal will be accomplished by means of septic tanks and leaching fields. Aircraft sewage wastes will be passed through a treatment plant to neutralize the antiseptic solutions prior to introduction into the airport sanitary system. 16. Solid wastes from the aircraft and airport will be incinerated. E. Aeronautical Considerations 17. Procedures have been developed based on the VOR/DME for both approach and departure from the airways and the airports. The provision of an NDB will provide a means for aircraft not equipped with VOR/DME to navigate and land at the airports. 18. In the future, either end of the runways could be fitted with instrument landing systems (ILS). Such installations should be seriously considered as soon as heavy aircraft traffic develops, since vertical and lateral guidance during landing approaches is highly desirable for large jet aircraft. 19. Although San Jose del Cabo is listed in the existing US/Mexico bilateral agreement on three US routes and two Mexican routes serving a total of four US cities, assurances have been obtained during negotiations that the Government would make its best efforts to retain as a minimum these points in future bilateral agreements and that scheduled interna- tional air service be initiated to coincide with the opening of the first hotels. 20. Loreto is not listed in any bilateral agreement. Accordingly, assurances were obtained during negotiations that the Government will make its best efforts to include Loreto in future bilaterals and that sched- uled international air service be initiated on these routes as soon as the first hotels are opened. In the event that the signing of bilateral air agreements are delayed beyond the opening date of the first hotels, the Government has agreed to begin unilaterally scheduled international air service to the United States from Loreto by adding Loreto to the end, in each direction, of existing international routes.  ANNEX III Page 4 This might necessitate changing the flight number of a through aircraft at the previous terminal point of the flight. An example of such a flight could be illustrated by adding Loreto at each end of the existing flights-- Puerto Vallarta, Monterrey, Houston, Monterrey, Puerto Vallarta or Mazatlan, Puerto Vallarta, Guadalajara, Dallas, Guadalaiara, Puerto Vallarta, Mazatlan. Actual fliehts to accomplish this purpose would in all likelihood be different. F. Engineering Services 21. All engineering work associated with the airports will be done by the Secretariat of Human Settlements and Public Works (SAHOP) with technical assistance provided by the Secretariat of Communications and Transport (SCT) Airports and Auxiliary Services (ASA), Aeronautical Radio of Mexico (RAMSA), and National Company of Aviation Combustibles (NACOA). SAHOP has designed and supervised the construction of many airports in the past and is fully competent to execute this component of the tourism project. G. Environmental Considerations 22. At San Jose del Cabo, because of prevailing winds, 90% of the landings and take-offs will be from the south. The problems of noise at San Jose del Cabo will be minimized through the adoption of flight procedures which place aircraft over agricultural land (12 km away). 23. At Loreto the approach will be over the water about 90% of the time. The departure zone will cross the existing town (6 km away). The urban plan has been so designed however, that no residences will be constructed in the path of aircraft flights. 24. The leaching fields associated with the sewage disposal systems will introduce a pure effluent directly into the ground water with no harmful effects. Aircraft and industrial wastes will be treated prior to their introduction into the sanitary system to remove all harmful elements. 25. Solid wastes will be incinerated in furnaces designed to release no unburned material into the air. Ashes will be buried in landfill areas on the airports. H. Cost Estimates 26. Detailed cost estimates for the airport component are shown in Annex I, Table 6. The cost estimates were developed by SAHOP and are based on quantities obtained from field survey data and preliminary architectural drawings. The unit costs used are comparable to costs of similar work designed and constructed under the supervision of SAHOP, and are considered reasonable. Construction is expected to take two years.  ANNEX III Page 5 I. Procurement 27. A high percentage of the material required for the project is produced in Mexico. However, because of lower transportation costs and of the duty free aspect of Baja California, a large portion of the material may come from the United States. Contractors for airport construction are fairly numerous in Mexico and are generally the only tenderers on airport work. However, the location of the airports may encourage US contractors to bid. The manufacture and installation of the communications equipment will be done by foreign contractors. 28. A portion of the navaid equipment will be obtained from Wilcox Electric Company, Division of American Standard, Kansas City, Missouri. The cost of this procurement will be about US$700,000 and will consist of the manufacture and installation of two Wilcox VOR/DME's. There is ample justification for purchasing this equipment from this manufacturer. All VOR's in Mexico (47) are Wilcox; supply support is based on this one type of equipment; the electronic maintenance technicians are trained for this equipment; test equipment for this specific VOR is available in quantity in the country. The only DME's in Mexico (20) are Wilcox and the Wilcox DME is specifically designed to mate with Wilcox VOR. J. Aviation Administration 29. The responsibility for the administration and operation of aviation in Mexico devolves upon four organizations. The design and supervision of construction of airports and their buildings is the responsibility of two divisions within SAHOP. After construction, the maintenance of the field lighting and collection of landing and rental charges is that of ASA. RAMSA is responsible for the operation and maintenance of the navaids, communica- tion gear and their operational areas (control tower, etc.) and is in complete control of enroute and terminal air traffic. The Directorate General of Civic Aeronautics is in charge of establishing air routes and procedures, licensing, negotiating bilateral air agreements and other policy type matters. DGCA is a governmental agency and reports to SCT. RAMSA, which is a corporation partially owned by the Government and partially by airlines serving Mexico, also reports to SCT. ASA, the airport operator, is a governmental agency but reports to neither SAHOP nor SCT. It reports directly to the Secretariat of the Presidencia. 30. A fifth organization operates the fuel services. NACOA is a partially government owned corporation which operates under very exacting standards. The fuel being processed is continually under test to assure the airlines that the fuel meets their specifications. Since the fuel being processed actually belongs to the airlines involved, the only income NACOA realizes is derived from a through-put charge. This charge is established by SCT, not by NACOA.  ANNEX III Page 6 31. The various other charges are also established by SCT, although some are upon the recommendation of the operating services. For example, enroute communication charges and navigational aid user charges are established by SCT upon the recommendations of DGCA and RAMSA; landing charges for each category of airport and terminal building rental charges are established by SCT upon recommendations of ASA. The responsibility for collecting these charges rests with RAMSA and ASA respectively. K. Financial Aspects 32. Projected Statements of Income and Expense in 1976 prices for Loreto and the San Jose del Cabo airport for the seven years 1980/81 to 1986/87 are shown in Tables 1 and 2 of this annex. It is assumed that both airports will be operated as independent units. While the responsibi- lity for the administration and operation of aviation in Mexico falls on five organizations, the financial projections assume a consolidation of activities as though it were one organization. It is also assumed that all new airport investment costs will become assets of the airports and that existing assets are not an incremental project cost and can be transferred on a zero book value basis. 33. Assumptions used in projecting revenue include: (a) Commercial landing fees are the primary revenue source. These fees, set nationally, vary with weight and presently average 2000 pesos for a DC-9 (flown by AeroMexico) and 3000 pesos for a 727. It is assumed that these charges will be raised 20% from present levels in accordance with Bank recommendations (Loan 1022) prior to initiation of significant activity in 1980. (b) General aircraft landing fees are assumed to average 10% and other income, including rentals, fuel through- put and concessions will average 9% of commercial landing fee income. (c) 70% of all tourists will arrive by air. 60% of these air passengers will embark from Mexican origin points and 40% will embark elsewhere. The number of tourists is derived from occupant days as projected in Annex VII and assumes an average duration of stay of four days in hotel/apartels and ten days in condominiums and villas. (t) Half of the tourists arriving from points within Mexico will travel by 727 and half by DC-9. Planes will operate at 60% of occupancy. Two-thirds of the passengers arriving from international destinations  ANNEX III Page 7 will arrive by chartered 727 averaging 90% of capacity and the remainder will arrive by commercial 727 averag- ing 50% of capacity. It is assumed there is no season- ality in the traffic. (e) Air cargo and non-tourist air traffic will not be significant. (f) 40% of departing air passengers will pay a Mex$50 international departure tax and 60% will pay a Mex$10 domestic departure tax. These taxes are assumed to represent project revenues although in practice they will not be retained by the airport authority but will go directly to the national treasury. 34. Assumptions used in projecting expenses are: (a) All operating expenses, i.e., labor, materials, services, and SAHOP maintenance costs will be the same US dollar equivalent as projected for the Bank's 1974 financial analysis for a similar operation at Villahermosa Airport. These projections assumed a conversion rate of Mex$12.50 to US$1 and a 2% increase in costs per year in real terms. (b) An ASA overhead allocation of about 16% of operating costs will be levied on the two airports. (c) Depreciation on a 20-year straight line basis will be charged only on the incremental project investment excluding price contingencies to express the expense in 1976 dollars. (d) No interest expense or loan amortization requirements will be imposed. 35. The projected financial results on the basis of these assumptions, including departure taxes as revenues, are: (a) For Loreto, the project achieves an operating cash sur- plus in 1981/82, the second full year of operation and achieves a positive net operating revenue position in 1983/84 following deficits during the construction years and three years of full operation. Thereafter, the simple annual financial rate of return improves steadily reaching 10.8% of average net fixed assets by 1986/87.  ANNEX III Page 8 (b) For San Jose del Cabo, the airport project achieves an operating cash surplus in 1982/83, the third full year of operation, and achieves a positive net operating revenue position in 1984/85, the fifth full year of operation. Thereafter, the simple an- nual financial rate of return improves steadily reaching 17% of initial average net fixed assets by 1986/87. (c) Increased flights generated by the airport invest- ments will significantly increase landings and, hence, landing fees at other Mexican airports, with little increase in operating costs or investments. The net return to ASA, therefore, is considerably higher than the projections suggest.  MEXICO: BAJA CALIFORNIA TOURISM PROJECT LORETO INTERNATIONAL AIRPORT PROJECTED OPERATING INCOME AND EXPENSES Fiscal Year Ending June 30 1981 1982 1983 198) 1985 1986 1987 US$ '000 (1976 prices7T Total Revenues Commercial Landing Fees 49.7 148.9 244.0 349.3 458.9 533.5 574.8 Miscellaneou/ Landing Fees 5.0 14.9 24.4 34.9 45.9 53.4 57.5 Other Incomela 4.5 13.4 22.0 31.4 41.3 48.0 51.7 Sub-Total 59.2 177.2 290.4 546.1 634.9 6 Departure Taxes 31.2 93.6 153.4 219.7 288.6 335.4 361.4 Total Revenue 90.4 2-7 635.3 2 77 970.3 1045.7 Operating Expenses Labor 92.2 94.1 96.0 97.9 99.8 101.8 103.8 Materiala 11.9 12.1 12.4 i2.6 12.9 13.2 13.4 ServicesL 32.9 33.5 34.2 34.9 35.6 36.3 37.0 SOP Maintenance Costs 28.8 29.4 29.9 30.5 31.1 31.7 32.4 Total Working Costs 169.1 172. 175.9 17.9E 183.0 186.6 Operating Revenue Before Allocations and Depreciation (75.4) 101.7 271.3 459.4 655.3 787.3 858.8 Less ASA Overhead Calculation 27.0 27.5 28.0 28.6 29.1 29.7 30.3 Less Depreciation 348.o 348.0 348.0 348.0 348.0 348.0 348.0 Net Operating Revenue Including Departure Taxes (loss) (450.4) (273.8) (10L.7) 82.8 278.2 409.6 480.5 Net Operating Revenue Excluding Departure Taxes (loss) (481.6) (367.4) (258.1) (136.9) (10.4) 74.2 119.1 Annual % Return on Net Fixed Assets Including Departure Taxes (6.9) (4.4) (1.8) 1.5 5.4 8.5 10.8 Annual % Return on Net Fixed Assets Excluding Departure Taxes (7.4) (5.9) (4.4) (2.5) (.2) 1.5 2.7 /a Includes rentals, fuel through put, concession, etc. T Includes cleaning electricity, water, telephone, etc. H-~  MEXICO: BAJA CALIFORNIA TOURISM PROJECT SAN JOSE DEL CABO INTERNATIONAL AIRPORT PROJECTED OPERATING INCOME AND EXPENSES Fiscal Year Ending June 1981 1982 1983 1984 e 1986 1987 US$ '000 (19-76 pricesYL Total Revenues Commercial Landing Fees 20.8 91.1 140.6 206.8 283.3 363.8 438.3 Miscellaneou/ Landing Fees 2.1 9.1 14.1 20.7 28.3 36.4 43.8 Other Income-a 1.9 8.2 12.7 18.6 25.5 32.7 39.4 Sub-Total 2 167.4 246.1 337.1 432.9 Departure Taxes 13.0 57.2 88.4 130.0 178.1 228.8 275.6 Total Revenue 165.6 257. 376.1 515.2 661.7 797.1 Operating Expenses Labor 92.2 94.1 96.0 97.9 99.8 101.8 103.8 Materials 11.9 12.1 12.4 12.6 12.9 13.2 13.4 Services 32.9 33.5 34.2 34.9 35.6 36.3 37.0 SOP Maintenance Costs 28.8 29.4 29.9 30.5 31.1 31.7 32.4 Total Working Costs 165.8 169.1 1-72.5 17.9 179.4 183.0 1. Operating Revenue Before Allocations and Depreciation (128.0) (3.5) 83.3 200.2 335.8 478.7 610.5 Less ASA Overhead Calculation 27.0 27.5 28.0 28.6 29.1 29.7 30.3 Less Depreciation 186.3 186.3 186.3 186.3 186.3 186.3 186.3 Net Operating Revenue Including Departure Taxes (loss) (341-3) (217-3) (131.0) (14-7) 120.4 262.7 393.9 Net Operating Revenue Excluding Departure Taxes (loss) (354.3) (274-5) (219.4) (144.7) (57.7) 33.9 118.3 Annual % Return on Net Fixed Assets Including Departure Taxes (9.9) (6.7) (4.3) (.5) 4.5 10.5 17.0 Annual % Return on Net Fixed Assets Excluding Departure Taxes (10.3) (8.4) (7.2) (5.0) (2.1) 1.4 5.1 | /a Includes rentals, fuel through put, concession, etc. 7T Includes cleaning, electricity, water, telephone, etc.  ANNEX IV Page 1 MEXICO APPRAISAL OF THE BAJA CALIFORNIA TOURISM PROJECT Part I. Water Supply, Sewerage and Storm Drainage for Loreto I. Project Description A. Water Supply (a) Loreto-Tourism Zone 1. The project foresees the provision of water for the tourism zone of Nopolo from the aquifer of Primera Agua drainage basin, about 5 km north of the tourism zone and, if necessary, complemented by water extracted from the aquifer of the Loreto Creek Valley. The facilities include: ( i) a transmission main of asbestos cement pipe, 8" and 10" in diameter and 10.5 km in length, with an intermediate booster pumping station; ( ii) use of an already constructed water storage tank to provide for peak demands of the tourism zone (Nopolo) and for reserve storage; (iii) distribution system inside the tourism zone which will include 9.6 km of asbestos cement pipe, ranging from 3" to 16". (b) Town of Loreto 2. Water from Loreto Creek Valley aquifer is presently used for supply- ing the local population of Loreto and will continue to be the source for the expanded system. The distribution system is composed of 8 circuits, representing 12.7 km of asbestos cement pipe ranging from 4" to 12". In addition, there will be 41.4 km of secondary service mains of 3" pipe. B. Sewerage (a) Loreto-Tourism Zone 3. Sewage collected in the tourism zone will flow toward two pumping stations. The sewage arriving at the pumping station in the southern part of the tourism zone will be elevated to a point from which it can reach by gravity the north pumping station. This second station will pump the total  ANNEX IV Page 2 sewage flow to stabilization ponds through a 10" asbestos cement pipe of about 2 km in length. The effluent, after treatment, will be used for irrigation purposes. The length of the sewer to be installed is about 10.6 km. Sewer lines will be made of concrete pipe in diameters up to 18" and of reinforced concrete for laTger pipes. (k) Town of Loreto 4. The sewage from the entire town will flow to a pumping station located near the seashore, and from there pumped back through a 10" asbestos cement pipe of about 5 km in length to the stabilization ponds. The effluent will be used for irrigation purposes. The sewerage system of Loreto includes about 5 km of collectors ranging in diameter from 10" to 24", lateral sewers of 8" and house connections of 6". C. Storm Drainage (a) Loreto-Tourism Zone 5. Storm water will be allowed to flow on the street pavement to a low point, where an outfall - 150 m long - has been provided to discharge the water into a nearby estuary. To assure the surface flow, some cuts and fill- ings will be made in a number of streets to obtain continuous descending slopes. (b) Town of Loreto 6. An open channel crossing the middle of the town will intercept the storm water from the upper portions of town and discharge it into a nearby creek. For the lower portions of the town, 4 outfalls have been provided which will discharge the storm water into the sea. II. Cost Estimates 7. The estimated cost of the water supply, sewerage and storm drain- age is summarized in Annex I. Cost estimates were prepared by consultants to FONATUR and based on the Unit Price Catalogue issued by SARH, and adjusted to take into account the effects of devaluation. Unit costs represent the Mexican cost of goods and civil works and appear reasonable. III. Administration of the Project 8. FONATUR will employ consultants for the final design of the project, which will be prepared in accordance with SARH standards. Supervision of construction will be done by FONATUR, with the assistance of SARH. The system will be operated and maintained by a Junta Local de Agua Potable, with representatives of the state government, local authority, SARH and FONATUR.  ANNEX IV Page 3 Part II. Water Supply, Sewerage and Storm Water Drainage for San Jose del Cabo I. Project Description A. Water Supply (Tourism and Urban Areas) 9. A major aqueduct has been constructed by SARH to serve the towns in the southern tip of Baja California peninsula. The water is extracted from four wells located between San Jose Viejo and Santa Anita in the valley of San Jose Creek. The transmission line is an 18" asbestos cement pipe which runs down the valley to San Jose del Cabo and then along the coast to Cabo San Lucas, The capacity of the aqueduct is 200 l/sec, of which about half would be designated for the project. 10. As the selected tourism zone is close to the town of San Jose del Cabo, the water storage facilities will be common for both areas. There will be two systems, one for the main sections of the town and the tourism zone (areas located from sea level to 40 m above sea level),and the second for the areas between 40 m to 60 m above sea level. 11. The low lying areas will be supplied by gravity from the aque- duct to storage tanks at an elevation of 55 m, and from there by gravity to the distribution systems. The required storage capacity is 1,200 m3. The higher sections will be supplied from the aqueduct through a pumping station to the storage tanks and from there by gravity to the distribution systems. The distribution system for the town and tourism zone will include 23.6 km of asbestos cement mains ranging from 2