Bolivia - Aviation Development Project

Document of The World Bank FILE CO FOR OFFICIAL USE ONLY Report No. p'-2Q64-BO REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE AIRPORTS AND AIR NAVIGATION SERVICES ADMINISTRATION WITH THE GUARANTEE OF THE REPUBLIC OF BOLIVIA FOR AN AVIATION DEVELOPMENT PROJECT ADril 29, 1977 This document has a restrieted 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 AND EQUIVALENTS Bolivian Peso ($b) = US$0.05 US$1.00 = 20.0 ($b) 1 million ($b) = US$50,000 MEASURES AND EQUIVALENTS 1 kilometer (km) = 0.62 mile (mi) 1 meter (m) = 3.28 feet (ft) 1 kilogram (kg) = 2.20 pounds (lb) 1 ton = 2,205 pounds FISCAL YEAR January 1 to December 31 ABBREVIAITIONS AND ACRONYMS AASANA Airports and Air Navigation Services Administration ICAO International Civil Aviation Organization LAB Lloyd Aereo Boliviano MTCCA Ministry of Transport, Communication, and Civil Aviation UNDP United Nations Development Program  FOR OFFICIAL USE ONLY REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE AIRPORTS AND AIR NAVIGATION SERVICES ADMINISTRATION WITH THE GUARANTEE OF THE REPUBLIC OF BOLIVIA FOR AN AVIATION DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed loan to the Airports and Air Navigation Services Administration (AASANA) with the guarantee of the Republic of Bolivia for the equivalent of US$25 million to help finance an Aviation Development Project. The loan would have a term of 20 years, including four and one-half years of grace, with interest at 8.2% per annum. PART I - THE ECONOMfY 1/ Introduction 2. A report entitled "Economic Memorandum on Bolivia" (1546-BO) dated March 23, 1977, was distributed to the Executive Directors. Country data sheets are attached as Annex I. Background 3. Despite the increasing importance of petroleum and natural gas exports, as well as significant mineral deposits, Bolivia remains one of the poorest countries in South America. The majority of its population is engaged in traditional agriculture. Only a small part of the labor force is employed in the modern sectors. The infrastructure is primitive and the road and rail networks cover only a fraction of the country. The combination of strong tra- ditional ties within the indigenous communities and geographic, health and educational obstacles to population mobility has perpetuated the demographic concentration on the inhospitable 3-4 thousand meter plateau, the Altiplano. About half of Bolivia's population lives a physically, culturally and econo- mically isolated subsistence existence in this region, which is rich in mineral deposits but limited in agricultural potential. 4. The 1952 revolution sought to put an end to the dual structure which had characterized Bolivia's economy since colonial times and to deprive the landowning and mining oligarchy of its economic base. This objective was only partially achieved. Progress was made in eradicating feudal relations, distributing the land and eliminating obstacles to social mobility. The agrarian reform and the nationalization of large mines, however, were followed by falling production. GDP declined in the 1950s and did not recover to its pre-1952 level until 1961. During the subsequent decade, output increased steadily at an average annual zate of around 5%, providing for per capita income increases averaging 2.5% p.a. As a result, GNP per capita, which had 1/ This section is reprinted from the President's Report on the First Education and Vocational Training Project for Bolivia (No. P-202P-RO), dated March 31, 1977. 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 Dank authorization.  -2- fallen by 24% in the 1952-60 period, recovered to its 1952 level by 1970 and was more equally distributed. However, the momentum of economic growth was again lost in 1969/71, when political instability led to declining private investment and deteriorating public finances. The deterioration of public finances reflected a structural problem in the economy. Bolivia's public sector is proportionately one of the largest in South America and a source of livelihood for a sizeable segment of the population. With scarce employment opportunities in the private sector, pressures to expand public employment proved difficult to resist. Large expenditures on wages and salaries, combined with a weak tax system, have limited the resources available for public invest- ment. Moreover, the inability of the public sector to generate adequate savings limited its capacity to utilize available external capital assistance. 5. On coming to power in 1971, President Banzer faced the need to provide jobs for the unemployed and to revitalize investment and growth. Initially, this task was complicated by a sharp deterioration in Bolivia's terms of trade, which produced a weakening in the balance of payments and a further deterioration in public finances, eventually resulting in a substantial devaluation in 1972. However, more rational economic policies were put into effect and a more favorable climate for private investment was established. New laws offering guarantees and incentives to private investors, especially in the hydrocarbon field, were promulgated and claims pending from earlier nationalizations were settled. The Government also improved public adminis- tration and the pricing policies of some public undertakings. These policies were successful in increasing private investment and in bolstering the rate of growth. Recent Economic Developments and Prospects 6. Bolivia's economic performance has continued to be strongly in- fluenced by movements in its terms of trade, which have been particularly volatile in recent years. The sharp increases in petroleum and mineral prices in 1974 resulted in a major terms of trade gain, which led to a dra- matic reversal in the balance of payments and increase in foreign exchange reserves. While GDP increased by about 5%, improvements in the terms of trade helped raise gross domestic income by more than 20%, permitting a substantial increase in both consumption and investment. Moreover, this was accomplished within the context of an unprecedented improvement in public finances. After current deficits in 1970-73, the Central Government achieved savings equivalent to one-third of its capital expenditure. For the public sector as a whole, savings in 1974 exceeded 10% of GDP and covered nearly 90% of capital expendi- ture. On the balance-of-payments side, a near doubling of exports permitted a trade surplus which exceeded US$160 million despite a rapid increase in imports. The current account showed a surplus for the first time in decades and net capital inflows approached US$90 million, nearly four times their 1973 level, as a result of substantially higher loan disbursements to the public sector and increased foreign investment associated with hydrocarbon exploration. As a result, foreign exchange reserves rose by a record US$124 million. 7. The extreme dependence of the Bolivian economy on its foreign sector was once more brought into focus in 1975 and early 1976 as, with world eco- nomic recession, the country's terms of trade deteriorated and export volumes  - 3 - declined. Mineral exports fell by well over 20% as the weighted average of mineral prices declined by approximately 13%, and shipments of most minerals fell as a direct result of the recession and the unloading of speculative stock on international markets. The situation was exacerbated by the fact that exportable surpluses of crude petroleum were significantly reduced for the second year in a row due to falling production and rapidly rising domestic consumption of hydrocarbon derivatives. While the export picture was helped by a significant price increase for natural gas exports to Argentina, this could not compensate for the overall decline in export earnings. On the whole, merchandise exports in 1975 declined by 16%. On the other hand, growth of GDP and investment continued unabated as imports rose by about 36% in the wake of the start-up of new public investment projects and the liberalization of imports for consumer durables and motor cars earlier in the year. As a result, the balance-of-payments current account shifted from a surplus of US$150 million in 1974 to a deficit of US$190 million in 1975. Despite further substantial increases in disbursements of medium-term loans to the public sector, net foreign exchange reserves fell by US$54 million to US$134 million, or about 2.5 months of imports. The weakening of the balance of payments was accompanied by a deterioration of the fiscal situation. The Central Government's current surplus decreased to just about 1.'7% of GDP, after reaching 2.6% in 1974, and increased borrowing from external resources and the domestic banking system was necessary to finance growing public invest- ment. However, some public utilities strengthened their financial situation due to increased rates. 8. The authorities, reacting to the weakening of the external accounts, took action late in 1975 to tighten trade restrictions. This resulted in a significant reduction of import growth to only 2.0% during 1976. This, toge- ther with a recovery in mineral prices and overall merchandise exports, helped reduce the current account deficit by about US$50 million. At the same time, Bolivia continued to attract substantial external capital inflows which enabled it to finance the current account deficit and recoup the foreign exchange reserves lost the preceding year. Conservative incomes policies applied since 1974 have resulted in a reduction of inflation to an annual rate of about 14%. 9. Economic growth prospects over the medium- to longer-term depend on the Government's ability to increase savings and stimulate investments particularly those for developing hydrocarbon, mineral and agricultural resources. Investment in mining and hydrocarbons is accelerating. Inten- sified exploration for hydrocarbons by the state-owned petroleum company and private foreign companies is underway and may lead to significantly increased production and exports of crude petroleum and natural gas, which could permit an acceleration of economic growth towards the end of the decade. Recent exploration results have been fairly positive, i.e. a new oil field with immediate commercial potential was discovered at Montecristo near Santa Cruz and a private foreign concern made a gas strike in the Abapo-Izozog region in the southeast of the country. Fiscal performance has remained weak during the last two years, with the Central Government performance being adversely  -4- affected by the deficits of decentralized agencies and state-owned enterprises. However, the authorities are beginning to implement mining and income tax reforms so as to improve the yields, efficiency and equity of the tax system. Debt Service and Creditworthiness 10. Bolivia's external debt outstanding and disbursed at the end of 1976 amounted to US$1.0 billion. Service on external debt amounted to 18.8% of exports of goods and non-factor services net of investment income abroad. Average terms of external debt have worsened as 46% of the newly contracted public debt over the last two years has been from commercial banks. Between 1971 and 1976, average maturity has declined from 24 years to 14 years while the average interest rate has increased from about 4.4% to 7% and the grant element has fallen from 36% to 17%. Because of the heavy investment require- ments associated with development of the mining and hydrocarbon sectors and the large import content of these investments, Bolivia's trade gap and current account deficit can be expected to rise for the remainder of this decade. As a consequence, the debt service ratio is expected to increase to about 24% by 1980. However, as investments in these sectors come to fruition, exports will accelerate and import requirements of investment will decline. A gradual fall in the debt service ratio is therefore likely in the 1980s. In view of the nature and growing size of Bolivia's debt, prudence in selecting and utilizing external capital will have to be an essential element of debt management. 11. Bolivia enjoys a substantial resource base in agriculture, minerals and hydrocarbons, which has to be developed to sustain rapid economic growth and, in particular, to achieve a rapid expansion of export earnings in the foreseeable future. If production in the export sectors, particularly mining and hydrocarbons, can be increased and prices for major export products remain adequate, Bolivia can be considered creditworthy for moderate amounts of external lending on conventional terms. Nevertheless, some additional lending on soft terms (available from the Inter-American Development Bank's Fund for Special Operations and the USAID) is justified by Bolivia's poverty and its large and continuing external capital requirements. The country will require substantial external financing of investment to supplement the domestic savings effort at least until the early 1980s. The Government, in pursuing its progressive development policies, is making a serious effort to mobilize domestic resources and has prepared its first five-year economic plan. Imple- mentation of the underlying investment program will require external assis- tance for high priority projects in excess of the foreign exchange component. Although substantially increased suppliers' and financial credits will prob- ably become available, prudent debt management requires that they should cover not more than about a third of the public capital inflows needed during 1977-80 for meeting a GDP growth target of 6% annually. The remainder should be obtained on softer terms from bilateral and international develop- ment financing agencies, including the Bank.  - 5 - PART II - BANK GROUP OPERATIONS IN BOLIVIA 12. Although Bolivia is an original member of the Bank, it did not obtain any Bank Group funds until 1964. Bolivia's tight budget constraints and restricted capacity to service external debt had limited Bank Group assistance until recently. Apart from a US$23.3 million Bank loan for a gas pipeline, Bank Group operations until FY75 were exclusively through IDA. Following Bolivia's emergence as a natural gas and petroleum exporter, albeit on a limited scale, IDA's lending was phased out with the Agricultural Credit I Project in June, 1975. By February 28, 1977, the Bank Group had approved 18 operations for Bolivia amounting to US$184.9 million, of which eight have been fully disbursed. Net of undisbursed balances, Bolivia's debt to the Bank and IDA in 1975/76 represented 7.9% of its public debt. The Bank's share of the service on this debt is about 4%. Both figures are expected to increase marginally by 1980. 13. Bank Group lending to Bolivia has assisted in the development of various sectors. US$27.2 million have been for agriculture where our lending has helped the Government to initiate long term progress for the development of a viable livestock industry, to increase agricultural production and to improve living conditions on the Altiplano, as well as to strengthen the Banco Agricola as a development institution. The five loans for power projects, totalling US$53.4 million, have been instrumental in modernizing the sector, expanding electricity services, stabilizing the electricity supply and setting up a regulatory agency. Also, a public power company was set up which has been operated in an efficient and financially sound manner. Two railway loans totalling US$40.0 million, of which US$3.3 million were cancelled when ENFE obtained funds from bilateral sources to purchase locomotives, have helped to improve the quality of management, efficiency of operations and financial condition of the national railways. Three operations, for a total of US$28.2 million, for medium- and small-size mining aim at increased production and improved sectoral coordination. A loan for a water supply and sewerage project of US$11.5 million is expected to improve services in the main mining cities and 70 rural communities. A recently approved loan of US$15 million for an education and vocational training project would assist Bolivia to develop its human resources in a more effective and rational way. Finally, the proposed project and a third railway project, also being considered by the Executive Directors, will assist Bolivia's efforts to develop agri- culture in hitherto isolated areas and to provide efficient freight and passenger transportation. 14. Because of the narrow scope for private investment, IFC became active in Bolivia only in 1973 through an investment of US$400,000 in a firm producing cables' and plastic products. With expanding opportunities for private investment, however, IFC has most recently agreed to take an equity participation of up to US$550,000 in Banco Industrial S.A. (BISA) in conjunction with a Bank loan of US$10.0 million for the same institution to assist in financing medium-sized industrial and mining enterprises, and US$337,500 in Banco Hipotecario Nlacional to assist in the development of  -6- mortgage banking. The two IFC investments aim at cohnributing to the esta- blishmeht of a local market for long-term secUrities. Annex II contains a summary statement of the status of Bank Group operations in Bolivia as of March 31, 1977, and notes on the status of ongoing projects. 15. Remarkable progress has been made in achieving the goals set for Bank lending to Bolivia. On the macro-economic level, the Government has made important strides towards formulating a coherent and consistent set of overall economic policies. On the sector and project level, public services have been improved and the institutions strengthened. The financial positions of the railroads and power sectors compare favorably with that of similar entities in other developing countries. Also, during the last two years, the Govern- ment has established an excellent record in providing the required counterpart funds for Bank financed projects. Future Bank lending will continue to support Government efforts to establish infrastructure necessary for sustained economic development while simultaneously improving the distribution of the benefits of economic growth. In this context, Bank activities will focus on the less developed regions and the lower income strata of the population. At present two projects are at an advanced stage of processing: an urban project to finance urban upgrading, sites and services, employment generation schemes and supporting social infrastructure; and an agricultural project for the develop- ment of alpaca/llama husbandry to assist subsistence farmers in the Altiplano and improve their living standards. For the more distant future, further Bank projects in irrigation, agroindustries, highway maintenance, railways, electric energy, forestry, industry and mining are under consideration. PART III - THE TRANSPORT SECTOR General 16. Bolivia has an area of 1.1 million km2, which can be roughly divided into the barren highlands "Altiplano" in the western part of the country, where most of the country's population lives, the central valleys in the mid- west, and the sparsely populated lowlands to the east and north. High trans- port infrastructure costs, caused by difficult topography, and sparse popu- lation distribution, make it necessary to use special care in determining the most appropriate modes of transportation and in selecting investment projects. Transport Modes 17. Bolivia's transportation infrastructure is relatively underdeveloped, the major transport modes by and large have played complementary roles to meet particular requirements: railroads, to haul most of Bolivia's export trade consisting of bulky mineral products; domestic aviation, to transport passen- gers and perishable goods, in particular, beef; highways, to carry mostly domestic freight and passengers; and waterways, to provide access to otherwise  - 7 - isolated towns and villages. Because of the difficult topography of Bolivia, the dispersal of the population in widely scattered small towns and the high cost of developing ground transportation, aviation plays a much more important role in meeting the transport needs of the country than in many other countries at a similar stage of development. For example, the domestic air passenger traffic was 463,200 passengers in 1975, compared with the railway traffic of 832,000 passengers for the Western System and 317,000 for the Eastern System. The main features of the transport modes are as follows. 18. Railways. The railways are owned by the Government and consist of 3,400 km of meter-gauge single track lines. The most important route in terms of external trade is the line connecting the mining areas and the city of La Paz with the Chilean ports of Arica and Antofagasta. This western network is not directly connected to the eastern network which links Santa Cruz with the Argentine and Brazilian railway networks, the only connection being through Argentina. Although less important than the Western network in terms of traffic, the lines between Santa Cruz and Brazil and Santa Cruz and Argentina are vital because these are the only surface mode of transport and the natural trade routes for this rapidly growing part of the country. 19. Highways. The present road system consists of about 37,600 km of highways of which 1,170 km (3%) are paved; 6,560 km (17%) are gravel and the remainder, 29,830 km (80%), are unimproved earth roads. The most important part of the network is located in the western and southern highlands and valleys, which occupy one-third of the country and are inhabited by 84% of the population. In contrast, the lowlands of the northern and eastern regions are serviced only by a few low standard roads. 20. Waterways. The river transport system is made up of an extensive network of inland waterways located in the eastern and northern parts of Bolivia, measuring about 1,600 km. Minimum channel depths vary from 1.0 to 3.5 m, with seasonal variations of up to 9.0 m. The system consists of five main waterways and represents the only available transport mode in vast areas of the sparsely populated northeastern part of the country. Lake transport is limited to Lake Titicaca, the highest navigable lake in the world, which provides an alternative transport corridor to the Pacific Ocean through the Peruvian lake port of Puno, and from there by rail and road to the seaports of Matarani and Mollendo. In terms of ton-km of freight traffic, lake traffic is more important than river traffic. 21. Pipelines. The state oil company operates 2,462 km of oil pipelines and 754 km of gas pipelines. The oil pipelines allow access from the major production fields near Santa Cruz to the Pacific seaport of Arica and to the Argentine border. The Bank-financed natural gas pipeline (Loan 635-BO) conveys gas to Argentina. Depending on the success of intensive exploration efforts now under way and the confirmation of identified reserves, significant new pipeline construction, especially to Brazil, may be undertaken.  - 8- Transport Planning and Coordination 22. Transport planning and coordination in Bolivia have historically been weak. In recognition of this deficiency and the substantial invest- ments required to upgrade the transport system in line with Bolivia's economic development, a National Transport Survey for Bolivia, financed by UNDP with the Bank acting as Executing Agency, was completed in 1969. It proposed a program for integrated transport development over the following ten years and among other things recommended the creation of a Directorate of Planning and Coordination which is now in the Ministry of Transportation, Communication and Civil Aviation (MTCCA). In 1972, the Bank assisted in the preparation of terms of reference for a UNDP-financed technical assistance program to streng- then the Directorate. The program was cancelled in 1976, after partial imple- mentation, due to lack of UNDP funds. In order to obtain better information on transport facilities and equipment, the Government decided to update the National Transport Survey and has requested financial and technical support from the Bank. The financing for the foreign exchange cost of consultant services for this purpose is included in the proposed loan for the Third Railway Project. 23. The Government's main transport strategy underlying its five-year (1976-1980) development plan are as follows: continued rehabilitation and modernization of the railway system; improvement and expansion of the road network to serve high priority sectors in the economy; modernization of air transport through improvement and re-equipment of infrastructure, parti- cularly in the north and northeast; and, expansion of the river and lake fleet, and the improvement of river navigation and port facilities on Lake Titicaca. The five-year development plan calls for investments totalling US$475 million in projects already started and consists of US$266 million for highways, US$107 million for railways and US$102 million for aviation. The foreign exchange component is estimated to be about 62% of the total cost. Additional projects with a total cost of US$439 million are under study. A separate plan is being prepared by the Ministry of Mines and Metallurgy for the development of pipelines for the transport of natural gas and petroleum. The Government is currently reviewing these and other plans to ensure that they are within its financial capabilities and implementing capacity. Aviation Subsector 24. The critical importance of air transport for Bolivia's development derives mainly from the difficult topography of the country. Most of the population lives on the barren Altiplano at altitudes above 3,000 meters and is separated by high mountain ranges from the sparsely populated lowlands which cover about two-thirds of the country. The Government is determined to develop the lowlands in order to realize their rich agricultural potential and to relieve the population pressure in the Altiplano. Construction of a highway from La Paz to the northeastern plains in the Department of Beni has  -9- started but it will be many years before this road will be fully developed. In the meantime, the primary transport modes for linking the lowlands con- tinue to be river transport for bulk goods and aviation for people and high value goods. The difficulties in opening up the potentially rich areas of the country and the increase in the demand for air transport in general because of the recent acceleration of economic development, have brought into sharp focus the deficiencies in the existing aviation infrastructure. 25. Except for a few modern jet aircraft operated by Lloyd Aereo Boliviano (LAB), an almost totally government-owned airline, and the instal- lations of three international airports, the communications equipment, navi- gational aids, airfields and aircraft for civil aviation in Bolivia date from the 1940's. Consequently, the subsector is afflicted with numerous problems which accompany nearly obsolete equipment and facilities. The electronic equipment has become unreliable, difficult to operate and costly to maintain. Operating costs of the older aircraft have gone up, while spare parts are becoming difficult, if not impossible, to obtain. Ground facilities in general have become dilapidated but have received very limited maintenance or improvement. Consequently, the system has been plagued with many accidents, both reported and unreported. 26. There are approximately 300 airports in the country, but only 30 airports, managed by AASANA, serve the scheduled domestic cargo and passenger flights provided by LAB. Airports at the four major cities--La Paz, Cochabamba, Santa Cruz and Trinidad--account for more than 80% of regular passengers and 70% of cargo traffic. These four airports, with some weight restrictions, are used by jet aircraft such as the Boeing 727. Virtually all other airports are in poor condition and can accept only small propeller-driven aircraft. During the wet season, several of these airports are closed for considerable periods due to flooding and other hazardous conditions. 27. Unscheduled cargo service is provided by several private operators, who are normally engaged in the transport of meat from the Department of Beni to La Paz and other cities in the Altiplano. They are owned by meat whole- salers, cattle owners' associations, and slaughterhouses and operate under difficult circumstances. Due to low capital investment by the owners, almost all of about 50 aircraft in use are more than 20 years old. The most typical type is the C-46, which can carry 5 to 6 tons of cargo on short flights but which is dangerous to fly over high mountains en route to La Paz. About 250 small aircraft are operated by air taxi companies and individuals and, although the number of passengers and cargo transported is small, these aircraft provide vital services to large areas of the country which lack all-weather roads. A comparison of traffic of the various types of carriers is as follows:  - io - Traffic by Carrier Type in .197.5 PAssengers Cargo (tons.) tAB 396,00 4,300 Ait Taxi Opetatbrs 30i000 1,600 Trans~portes Atereos 9ilit&k&9 16i5bO 200 d6Vernmeht Oil Cbi*ahy 11700 - Non-Scheduied dargb Airlines 9,000 32i000 463,200 38,lOO 28. Demand for air transpott has increased rapidly in the recent past. The number of passengers using LAB's scheduled domestic flights increased at a rate of 14.5% per year during the past five years, and this was made possible by the introduction by LAB of mioderin jet airctaft with higher passenger capac- ities. The volume of unscheduled domestic air cargo, on the other hand, did not increast appreciabiy during the same period due to severe aircraft limita- tions and the continued vulnerability of many airports to poor weather condi- tions as discussed above. 29. Because of a recent serious aircraft accident at Santa Cruz, public pressure has been mounting to construct a new airport at a site some 15 km north of the city. However, there are doubts about its economic justification because of the recent completion of a new terminal building at the existing airpott, and also because of the high estimated cost of the new airport. Since no decision has been taken yet, the cost of the new airport has not been included in the financial projections for AASANA. The Government has agreed that if the airport were constructed, AASANA would be the operator only, and not the owner, until it can be assured that the transfer of the assets of the new airport to AASANA will not prevent the latter from achieving its financial goals (Section 3.02 of the draft Guarantee Agreement). Aviation Organization 30. Overall control of civil aviation is exercised by MTCCA, in consul- tation with the National Aviation Council which consists of the Commander of the Bolivian Air Force, the Minister of Foreign Relations and the Minister of Transport, Communications and Civil Aviation. The Council, with the support of the staff of MTCCA, has the power to approve the establishment of new national airlines and operations, establish the level and structure of national passenger and freight tariffs, enter into agreements with interna- tional carriers and set conditions under which airlines operate in Bolivia. AASANA, which is under the authority of MTCCA, plans, constructs and operates airports and air navigation facilities. LAB and various non-scheduled air- lines are the principal users of these facilities. A total of about 2,000 people are employed in the aviation subsector, not counting those in associated activities such as customs, air cargo handling, and catering. AASANA has about 550 employees, compared with 750 for LAB. The remaining personnel are  in MTCCA and several small charter airlines. The Bolivian Air Force, through Transportes Aereos Militares, has long been engaged in civil air transport and, although its civil activities have been curtailed, it continues to provide air service on some of the unprofitable, low-density routes. PART IV - THE PROJECT 31. The project was appraised by a Bank mission which visited Bolivia in November 1976. A report entitled "Appraisal of an Aviation Development Project," No. 1458b-BO dated April 28, 1977 is being circulated separately to the Executive Directors. A loan and project summary is presented in Annex III. Negotiations were held in Washington on March 30 and 31, 1977. The Government was represented by Mr. Fernando Anker, Ministry of Finance, and the AASANA delegation was headed by My. DIM. Aroldo Cortez, Executive Director, AASANA. Project Description 32. The project would consist of: (a) the construction of two new domestic airports (Riberalta and San Borja) and major improvements at two others (Santa Ana and Tarija); (b) the design and supervision of construction in (a); (c) the provision of navigation aids and communications equipment at the project airports and various other airports; (d) the provision of maintenance equipment for AASANA, including runway maintenance equipment for Santa Ana airport; (e) the provision of technical assistance and staff training for AASANA; and (f) the provision of final design for the construction of a new runway, apron and taxiways for Cochabamba airport. 33. At the completion of the project, medium-size jet aircraft will be able to use Riberalta and Tarija airports. San Borja and Santa Ana airports will be able to serve turbo-prop passenger and cargo aircraft. All four air- ports will have all-weather capabilities. The navigational aids, communica- tions equipment and the general maintenance equipment will greatly increase safety and reliability of not only the four project airports, but a number of key airports throughout the country. The communications equipment, in parti- cular, will enable safe and efficient use of aircraft through quick trans- mittal of weather and airport conditions at each airport. The design work for Cochabamba airport, the home airport for LAB with relatively high flight  - 12 - densities, will facilitate the timely relocation of the main runway. The existing runway has hills in the flight path which are not only hazardous but also impose weight restrictions on the jet aircraft flown by LAB. The reloca- tion of the runway will also make it possible to reroute the flight paths, from urban to agricultural areas, and thereby reduce hazards and noise to the population of the city. Cost Estimates and Financing Plan 34. The total project cost, including contingencies, in prices expected at the end of June 1977, is estimated to be US$39.5 million. The foreign exchange component is US$23.7 million, or 60% of total project cost. Physical contingencies of 10% and price contingencies of an average of 7.7% per annum have been included in the cost estimate. The project would be financed by the proposed Bank loan of US$25 million and a Government equity contribution of US$14.5 million. The Bank loan would finance the foreign exchange cost of the project; in addition, as a consequence of giving equal treatment to foreign and local consultants, it would cover US$1.3 million of the local cost of engineering and supervision provided by local consultants. The Borrower 35. AASANA was established in 1968 as an autonomous Government entity to administer, plan, maintain, operate and improve the national network of airports and to provide air navigation services. AASANA has operational autonomy for its administrative functions, and obtains technical guidance from the National Aviation Council. The major portion of AASANA's assets consist of relatively old equipment. A high percentage of AASANA's assets at small airports have been in service beyond what is normally considered to be the economic life for such items and they need to be replaced in the immediate future. 36. As a result of extensive reorganization in 1975, AASANA has a good management structure headed by a competent Executive Director and a team of qualified top level technical staff. However, in spite of significant recent salary increases and improved administrative procedures established since 1975, AASANA suffers from limitations in staff capabilities. Some essential technical training has been provided by the International Civil Aviation Organization (ICAO), and further assistance to bolster management experience would be provided by foreign specialists under the proposed project. In addition, salaries for technical specialists would be adjusted as necessary to enable AASANA to recruit and retain needed personnel (Section 4.05 of the draft Loan Agreement). 37. AASAIA's accounting system currently provides information on revenues and expenses on a system-wide basis. It needs to be redesigned to supply infor- mation in such detail as necessary to enable a proper review of the structure and level of user charges and to provide for the proper valuation and disposal of assets. AASANA is aware of these deficiencies and intends to engage one of the foreign experts (para 41) as the Accounts Division Chief.  - 13 - 38. The accounts of AASANA are currently subject to review by the Government at irregular intervals. AASANA agreed that, beginning with 1978, certified copies of the audited annual accounts would be furnished to the Bank, not later than four months after the end of each calendar year. Audit- ing would be carried out by an independent auditor satisfactory to the Bank (Section 5.02 of the draft Loan Agreement). 39. Government policy had been-to maintain AASANA's user charges at a low level in order to assist aviation development. In 1975, landing fees were increased by 60% for LAB and for the foreign carriers, mainly to enable a salary increase of 60% for AASANA personnel to compensate for the cumulative effect of inflation and, in accordance with reorganization efforts, to maintain qualified personnel. AASANA still operates on a breakeven basis and its current user charges will not be sufficient to cover the operating expenses for the project period (1977-1981). AASANA would consult from time to time with the Bank on the structure and level of user charges (Section 5.04(a) of the draft Loan Agreement). It would take all necessary actions to attain an overall working ratio of not more than 75% in 1978 and 60% in 1979-82; a return on net fixed assets of not less than 2% in 1983-84 and not less than 4% by 1985. Because of the heavy investments planned and the time needed for traffic to build up, the project airports would not be able to attain the financial targets set for AASANA's overall operations. However, it has been agreed that the combined working ratio for the project airports would not be more than 85% by 1985 (Section 5.04(b) of the draft Loan Agreement). 40. The projected cash flow for AASANA provides only for the replacement of assets and for other investments required for efficient operation. AASANA would consult with the Bank before undertaking any expansion or improvement, other than the Project, of over US$1.0 million at any one site in any one year (Section 5.05 of the draft Loan Agreement). The current receivables and payables of AASANA are high. AASANA would ensure that, in the future, receiv- ables from operating revenues will be collected and payables for working expenses will be paid, within 90 days (Section 5.06 of the draft Loan Agree- ment). Project Execution 41. The project would be executed by AASANA who will engage both local and foreign contractors. The contract for the drainage of the runway at Tarija has been awarded, while the contract for the paving of this runway will be awarded shortly. The civil works contracts for Riberalta and San Borja are expected to be awarded by December 1977, with Santa Ana to follow in June 1978. Construction is expected to take about one year at Tarija and up to two-and-a-half years at the other three airports. Work at Tarija is expected to be completed by April 1978, followed by Riberalta and San Borja by July 1980 and Santa Ana by January 1981. Part of the communication equipment and navigational aids would be installed by AASANA and the remainder, by the equip- ment manufacturers. In order to strengthen AASANA's capacity to implement the project, technical assistance will be provided as part of the proposed project and agreement has been reached on job descriptions for a five-man team of  - 14 - specialists. A training program for its technical staff would be prepared by AASANA to begin not later than October 1978 and to last for a period of three years (Section 4.06 of the draft Loan Agreement). Procurement and Disbursement 42. The contract for the drainage of the runway at Tarija is an addition to the contract for ongoing civil works which was awarded in accordance with Bank Guidelines. The contract for the paving of this runway would be awarded shortly, also in accordance with Bank Guidelines. An engineering contract (about 40 man-years at US$50,000 per man-year) for the final design and supervision of the construction of the four project airports has been awarded to local engineers. Retroactive financing, for expenditures incurred after January 1, 1977, of up to US$1.0 million for civil works at Tarija and up to US$0.7 million for engineering services for the four project airports are included in the proposed loan (Schedule 1, paragraph 4 of the draft Loan Agreement). 43. Contracts for civil works at the other airports, and visual aids, navigational aids and communication equipment and installation would be awarded under international competitive bidding after a prequalification screening of interested contractors both local and foreign. No local firms are expected to tender for equipment. A negotiated contract for 25 man-years, at an estimated cost of US$50,000 per man-year, would be arranged by AASANA for the five-man technical assistance team. Training would be arranged individually through UNDP/ICAO or technical training schools at a cost not exceeding approximately US$6,000 per man-year. 44. Disbursements would be made against appropriate documentation for 100% of foreign expenditures for equipment and its installation; 100% of foreign expenditures for technical assistance and training; 56% of total expenditures, which is the estimated foreign exchange component, for civil works; and 70% of total expenditures for engineering services. Project Benefits and Risks 45. The proposed project would serve about 50,000 people in the Depart- ment of Beni and about the same number in the Department of Tarija in the south, who have not been able to develop the rich agricultural potential of these areas because of their isolation from the rest of Bolivia. The country as a whole would gain from a more rapid and reliable transport of beef from the livestock centers of Santa Ana and San Borja, rubber and nuts from Riberalta and grains, vegetables and grapes from the area around Tarija. Of the four towns, only Tarija is connected by road to other parts of Bolivia. A road is now under construction from La Paz to San Borja but it will not be usable during the wet season. The road is not expected to be upgraded to all-weather standards in the near future due to the high cost.  - 15 - 46. The passenger traffic forecasts for the project airports take into consideration the general traffic trend, based on such factors as future popu- lation and income growth and the additional traffic due to service improve- ments at each project airport. While the actual average growth rate has been about 15% per year, the forecast tapers this rate to about 6% between 1985 and 1990. Cargo traffic is of comparatively minor importance on a system-wide basis. However, it constitutes a significant portion of traffic at three of the project airports (Riberalta, Santa Ana, and San Borja). The forecast cargo growth for the three project airports is 14% through 1980, with the rate gradually declining to 8% between 1985 and 1990. 47. The main economic benefits for the project derive from increased capacity and improved efficiency compared to the existing air services, i.e., introduction of better aircraft, already available in Bolivia, at lower oper- ating costs, for service to the project airports, and to a lesser extent on savings accruing to aircraft operators from reduced aircraft delays. Neither passenger time savings nor reduction in cargo spoilage have been included in the benefit analysis. Also excluded were important but nonquantified benefits such as reduction in accidents and the effects of better regional linkage. 48. Transport cost savings were calculated per passenger or per ton of cargo based on the unit cost differential between the use of better aircraft and aircraft currently used. It is expected that the existing piston engine aircraft will be replaced by small jet or turbo-prop aircraft for passengers and turbo-prop aircraft for cargo. Improvements in the aeronautical communi- cations network and air navigational aids and runway maintenance would signif- icantly reduce the current delays and cancellations of flights due to bad weather. This type of savings has been quantified only for LAB scheduled flights and thus underestimates similar benefits for non-scheduled flights in Beni. 49. The economic return of the project as a whole is calculated to be 19%. The economic rate of return for the project airports varies from 24% for the investments at San Borja and Riberalta, which represent 46% of the total project cost, to 12% for the investments at Santa Ana, which represent 17% of the total project cost. Higher than anticipated cost increases are considered the most significant risk but even if costs increased by 15%, the overall rate of return would still be 17%. The effect of road improvements to San Borja has been tested under various assumptions. The most extreme assumption of no air cargo at all after 1985 still gives an economic rate of return of 14% at this airport. Another risk is a possible delay in the implementation of the project. Although present technical capabilities of AASANA are weak, we are confident that with the technical assistance to be provided (para 41), AASANA would be able to execute the project satisfactorily. The project is not expected to have any adverse environmental effects.  - 16 - PART V - LEGAL INSTRUMENTS AND AUTHORITY 50. The draft Loan Agreement between the Bank and AASANA, the draft Guarantee Agreement between the Republic of Bolivia and the Bank and the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement and the text of a draft resolution approving the proposed loan are being distributed to the Executive Directors separately. Features of the draft Loan and Guarantee Agreements of special interest are referred to in paragraphs 29, 36, 38, 39, 40, 41, and 42 of this report. 51. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 52. I recommend that the Executive Directors approve the proposed loan. Robert S. 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