Papua New Guinea - Second Port Project

FILE COPY Document of The World Bank FOR OFFICIAL USE ONLY REPORT AND RECOMMENDATION Report No. P-2283-PNG OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO PAPUA NEW GUINEA FOR A SECOND PORT PROJECT April 3, 1978 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may nof otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit - Kina (K) /1 US$1 = K 0.72 K 1 = US$1.38 K 1 million = US$1,380,000 ABBREVIATIONS AND ACRONYMS ADB - Asian Development Bank DTS - Department of Works and Supply LWOST - Low Water Ordinary Spring Tides PNG - Papua New Guinea PNGHB - Papua New Guinea Harbours Board PAPUA NEW GUINEA FISCAL YEAR July 1 - June 30 (until December 31, 1977) January 1 - December 31 (from January 1, 1978) /1 The exchange rate is floating; the rate used in this report is the short-term average at the time of appraisal.  4I C.;.XIAL US ONLY PAPUA NEW GUINEA SECOND PORT PROJECT Loan and Project Summary Borrower: Papua New Guinea Beneficiary: Papua New Guinea Harbours Board Amount: US$3.5 mi'Llion Term: 20 years :Lncluding a grace period of 5 years, with interest at 7.50% p.a. Relending Terms: Loan proceeds would be onlent to Papua New Guinea Harbours Board for 20 years including four years grace, with interest at 7.50% p.a. Project Description: The proposed project would provide container handling facilities at Port Moresby, with the objective of avoid- ing ship waiting time, reducing ship turnaround time and significanitly reducing cargo handling costs, thereby enabling ]?ort Moresby to realize fully the greater effic- iency of container shipping. Major components include land reclamation of 1.6 ha, a 125 m berth, an extension of the present container freight station, and improvements to the port access road. Also included in the project are a 30 in coastal berth at Samarai, located on a small island off the coast of Southern Papua, and consulting services fEor project design and implementation, and for training ]?apua New Guinea Harbours Board staff. There are no special risks associated with the project. A 25% increase in capital costs would reduce the rate of return from 14% to 10%. This documnt has a restricted distribution and may be used by recipients only in the performance of their o(fcial duties. Its contents may not otherwise be disclosed without World bank authorization.  Estimated Cost: US$ Million Local Foreign Total 1. Civil works 2.7 4.7 7.4 2. Floating equipment - 0.3 0.3 3. Consultants and technical assistance 0.1 0.7 0.8 Subtotals Base cost 2.8 5.7 8.5 Contingencies 0.7 1.3 2.0 Total 3.5 7.0 10.5 Financing: US$ Million Equivalent Financing Parties Local Foreign Total IBRD - 3.5 3.5 Kuwait Fund 3.5 3.5 PNGHB 3.5 - 3.5 3.5 7.0 10.5 IBRD and Kuwait Fund would jointly finance foreign exchange costs of the project. Estimated Disbursements: ----- US$ Million Equivalent---- Bank FY 1978 1979 1980 1981 Annual: 100 2,720 2,800 1,380 Cumulative: 100 2,820 5,620 7,000 The above figures represent the combined disbursements of IBRD and Kuwait Fund loans. IBRD disbursements alone would represent about 50% of the above. Rate of Return: 14% Appraisal Report: Report No. 1710a-PNG, dated April 3, 1978.  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAkL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO PAPUA NEW GUINEA FOR A SECOND PORT PROJECT 1. I submit the following report and recommendation on a proposed loan to Papua New Guinea for the equivalent of US$3.5 million to help finance a second port project. The loan would have a term of 20 years, including 5 years grace with interest at 7.50% per annum. The Kuwait Fund would provide US$3.5 million equivalent in joint financing. Both loans would be onlent to the Papua New Guinea Harbours Board at 7.50% interest for 20 years with four years grace. PART I - THE ECONOMY 2. An economic mission visited Papua New Guinea (PNG) in early 1976, and its report, "Papua New Guinea: Economic Situation and Development Prospects," (Report No. 1150-PNG) was distributed to the Executive Directors in July 1976. A smaller mission in late 1976 led to a Country Economic Memorandum (Report No. 1428-PNG) which was distributed to the Executive Directors in October 1977. The following discussion of the economy of PNG is based on these two reports. Details of recent economic data can be found in Annex I. 3. Papua New Guinea achieved internal self-government on December 1, 1973, and independence from Australia on September 16, 1975. It is a land of mountainous terrain, endowed with good soils, abundant rainfall, considerable mineral resources, and forestry and fishery resources of good commercial potential. The capital city, Port Moresby, is the largest urban settlement in what remains an overwhelmingly rural society. Only seven towns have more than 10,000 inhabitants. Of the arable land, 90% is still under subsistence agriculture, and 60% to 70% of the population are subsistence farmers, many of whom have only recently emerged from a neolithic culture. 4. The most striking feature of the economy is the contrast between the relatively suall modern monetary sector and the subsistence sector. Papua New Guinea is a clear example of a dual economy. This dualism is well recognized by the Government, and the economic policies which have been developed since independence are directed towards reducing the contrasts between the modern and the subsistence sectors and directing development efforts towards the latter. The modern sector consists of a large copper mine, contributing about 207. to 25% of the GDP, the government sector, and a variety of small manufacturing, wholesale and retail trade, tourism, banking and insurance, contributing another 50% of the GDP. Agriculture, forestry and fisheries provide the remaining 25% - 30% of the GDP mainly within a subsistence form of production. Within this structure, the relatively abundant subsistence agriculture is slowly being converted into a subsistence- plus-cash-crop agriculture; cash-crop farming is predominantly export oriented, and the 500 to 600 plantations are completely export oriented. The main agricultural exports are coffee, cocoa, and copra.  - 2 - 5. The modern sector of the economy is dominated by the Bougainville copper mine which came into production in 1972. However, the dualistic nature of the economy existed before the mine was constructed because of the role of the Government, staffed, before independence, entirely by expatriates and serviced by an expatriate commercial sector oriented to their needs and those of the owners and managers of expatriate-owned plan- tations. The level of public services provided could not be financed by local revenues and was supported by subventions from Australia. The modern sector was heavily dependent upon imports which were also financed by the support from Australia. This situation continued after independence, with the Australian grant now formalized under an agreement which covers a five- year period. 6. Real GDP in Papua New Guinea grew at at an average of more than 8% per annum during the period 1967/68 to 1973/74. This growth was led by the monetary sector, growing at over 10% per annum, while the subsistence sector grew at less than 1% per annum. As a result, the share in GDP of the subsis- tence sector fell from about two thirds to its present one third. Real GDP fell in both 1974/75 and 1975/76, but improvements in the world economy, particularly rising prices for PNG's major exports, contributed to a more favorable economic performance in 1976/77. The growth rate of the indigenous population is at present about 2.8% per annum, an increase over the 2.5% per annum rate of ten years ago, due mainly to a halving of the infant/child mortality rate. Per capita GNP in 1976 was US$490, but this average includes the high-income expatriate sector. The per capita GNP of the local population in the subsistence sector is probably no more than US$200 per capita. 7. The dependence of the economy upon the outside world is reflected in a structural balance of payments deficit. The need to import most of the capital and consumer goods required, including food, has meant that there is normally a current account deficit. Exports consisted, until 1972, of a few agricultural commodities whose total value covered about half the total import bill. The other half was covered by the Australian budget grant. After the Bougainville copper mine came into production in April 1972, the 1972/73 level of agricultural exports of about US$90 million was suddenly dwarfed by copper exports of more than US$200 million, and PNG's traditionally negative trade balance became positive. However, in 1974, copper prices fell sharply, and copper's contribution to the country's exports dropped from 70% to about 50%. 8. The Bougainville copper mine has played an important role in the country's economy through its impact upon exports and the public finances. As an enclave operation its contribution to employment has been small. Mining's share in GDP rose from 2% in 1968/69 to 32% in 1973/74. The impact of Bougainville on national investment was also large; during the construction phase, it accounted for nearly 60% of all fixed capital formation in the country. As indicated above, the impact on exports has been enormous; between 1972 and 1975, the copper mine doubled PNG's export earnings. Furthermore, the growth of exports from the mine has accounted for the bulk of incremental GDP in the last few years. Papua New Guinea receives a fair share of the  earnings from the Bougainville mine as a result of the renegotiation of Lhe agreement with the operating company in 1974. Furthermore, the impact of fluctuating copper earnings on the Government's budget has been stabilized through the operation of the Mineral Resources Stabilization Flnd established in 1974. Payments into the fund include the revenues from company income and excess profits taxes, government dividends, and the proceeds of the withhold- ing tax on dividends paid overseas. These funds are then transferred in predetermined amounts into ithe budget, where they are used according to Government priorities. Another large copper mine is expected to be con- structed within the next few years, and its operation will be governed by an agreement similar to that reached in Bougainville. 9. Government activities are the second most important influence in the economy. Real expenditures by the Government increased at a rate of close to 5% per annum during the past five years. This rise was mainly the result of a substantial increase in current outlays, dominated by wages and salaries (45-50% of total current expenditures), and the purchase of goods and services (35-40%). Government employment of staff grew at close to 6% per annum from 1971 to 1975 and, simultaneously, there were substantial increases in wage and salary levels, influenced by strong trade union tradi- tions which had been introduced before independence. However, internal reve- nues have grown at a faster rate than have expenditures, but not sufficiently to eliminate the current account deficit, which is met by grants from Australia. 10. PNG benefits greatly from Australian assistance, both financial and technical, although the relative importance of such assistance is declining. Australian grants provided 42% of the 1976/77 budget, down from the 70% provided in 1963. The commencement of copper production in 1972 contributed to the decreased dependence on Australia by expanding domestic revenues by about one third. Under the terms of a recent agreement, Australia's aid program for PNG for the period 1976-81 will amount to approximately A$1 bil- lion (US$1.1 billion). Subsequent to the agreement, a series of revaluations of the kina relative to the Australian dollar have reduced the kina value of Australian aid, but this loss should be partially compensated by lower prices on goods imported from Australia, PNG's major trading partner. 11. Papua New Guinea"s dependence on outsiders for its technical expertise is gradually decLining. Expatriates, largely Australians, accounted for 11% of the Government staff as of April 1977, compared to 20% in 1971. In the private sector, many senior administrative, professional, and higher technical posts are also now filled by expatriates. The Government attaches great importance to restraining both employment and salary increases, and has recently taken steps to ensure such restraint. It has also placed a high priority on technical education to train Papua New Guineans to replace the higher paid expatriates. 12. A recent government policy statement calls for the concentration of a higher proportion of the nation's resources in rural areas. The Government proposes to improve the coordination of extension services, diversify and raise agricultural production, introduce appropriate technology, promote  - 4 - small-scale industry, develop means to mobilize local savings, redistribute health services towards rural areas, introduce and improve marketing and storage facilities, and extend rural electrification. In addition, recog- nizing that in many areas the high cost and slow speed of transport are major obstacles to rural improvement, the Government will accord high priority to improving and extending the existing transport system in order to increase accessibility to markets, both through development of feeder road systems and improvement of coastal shipping. A few large-scale natural resource based projects, such as the expected new copper mine and a possible power scheme, will be encouraged as the main sources of revenue to reduce reliance on foreign aid. These policies reflect a substantial shift of emphasis in comparison with the First Five-Year Development Plan (1969-73), which concen- trated on the build-up of infrastructure and the development of the modern sector of the economy. 13. Papua New Guinea faces special problems of nationhood arising from its geographical situation, an archipelago of islands without developed transport links. Its people also come from diverse cultural and ethnic backgrounds. In order to respond to these characteristics and to tap local initiatives, Papua New Guinea is introducing a system of provincial govern- ments. The aim is to devise a workable system which does not give rise to a costly government structure, but which gives the responsibility for imple- menting development projects to local people. These developments should reinforce the central government policies to give priority to development outside the modern sector. 14. Total external public debt outstanding as of December 31, 1976, amounted to US$336 million, of which US$96.6 million was owed to the Bank Group. Public debt service payments in 1975/76 were about 5.8% of the gross value of exports of goods and nonfactor services. Debt payments to the Bank Group were only about 16% of total debt service payments. Debt service is expected to fall to about 4% of exports by the early 1980s. About one-fifth of total debt service obligations would be due to the Bank Group. In addition, there are considerable interest and dividend payments abroad, mainly as a result of the Bougainville copper project. PNG is considered creditworthy for a limited amount of Bank lending. In addition to Australia, other bilateral sources (e.g. Japan and New Zealand) are also expected to make aid funds available. The Asian Development Bank has lent to PNG from its Special Fund and is expected to continue lending to PNG in the future, and several commercial loans have recently been arranged. PART II - BANK GROUP OPERATIONS 15. Bank Group assistance to Papua New Guinea has consisted of six loans (US$67.5 million) and seven development credits (US$48.2 million), which together have helped to finance twelve projects. This assistance has focused largely on infrastructure development - 80% of total Bank Group assistance has been for power, telecommunications, highways, and ports. Agricultural projects - mainly oil palm and livestock - and one education project have absorbed the remaining 20% of Bank Group assistance. IFC is considering investment in a tuna fishing/canning project; this would be IFC's first operation in PNG.  - 5 - 16. Project implementation has been satisfactory although, in some cases, it was slowed down -by transition to self-government and independence. Disbursements have sometimes been slow because of administrative procedures requiring multiple clearances for preparing withdrawal applications. Annex II contains a summary statement of Bank loans and IDA credits as of February 28, 1978, and notes on the execution of ongoing projects. 17. In view of PNG's very scant infrastructure base, the past emphasis of Bank Group assistance was appropriate in helping to open up remote areas and establish a basic foundation for future economic development. However, in the coming years, a somewhat different strategy appears more appropriate with greater emphasis on agriculture and rural development projects, which would have a direct impact on the subsistence sector. About two thirds of PNG's population rely on subsistence production for the bulk of its livelihood, and living conditions for these people are among the most primitive found any- where in the world. For these people, the most appropriate form of assistance would be an integrated package of components, aimed at increasing and diversi- fying agricultural production and incomes through improved indigenous cash and food cropping methods, and at raising rural living standards through the provision of social and economic infrastructure. However, because of the primitive condition of these areas and the Government's very limited prepara- tion capability, designing such projects requires considerable lead-in time. Consequently, the number of such projects which the Bank can realistically expect to assist in the coming years and the level of such lending the Bank can hope to achieve will be constrained. 18. Infrastructure development still has a vital role to play in PNG's economic development and it is proposed that the Bank Group continue assisting such projects, but on an increasingly selective basis. The further development of the transport sector will be of critical importance in realizing the potential of many presently backward areas. However, reflecting a constraint prevalent throughout the public service, manpower, capable of planning sectoral investment strategy and of identifying and preparing projects, is extremely scarce. A transport sector mission is scheduled for mid-1978 which will review the Government's investment strategy, focusing particularly on the needs of primitive rural areas, and an appropriate balance and coordination between various transport modes. Based on the findings of the transport sector mission, Bank staff would expect to identify further transport projects such as rural access roads and coastal shipping, which could directly assist PNG's subsistence popu- lation. Finally, Bank staff are working with the Government to determine rural water supply and electrification requirements, and would expect that these should materialize in FY80 and FY81 projects. 19. While the manpower constraint which confronts PNG has been relieved to some extent by aggressive recruitment of expatriates, skilled technical and administrative personnel remain very scarce relative to the need. The Government's ability to identify and prepare projects is ex- tremely weak. With the Government's concurrence, Bank staff have made very preliminary overtures to LINDP for assistance in setting up a project  - 6 - preparation facility which could help to ameliorate the situation. However, even if this proposal is ultimately accepted, it would be some time before its benefits would begin to be realized. In the meantime, the Bank's technical advice and support in project preparation and implementation will be especially important. Moreover, a particular effort will be made to identify and include technical assistance components as appropriate in forthcoming projects. 20. A major developmental decision confronting Papua New Guinea is how to balance the allocation of national resources between revenue generating projects, geared toward exploitation of its very considerable mineral wealth, and projects which aim directly at increased incomes and improved welfare for the subsistence population. On occasion, PNG has, in the past, sought the Bank's advice on such strategy questions. Moreover, in response to the Government's request, the Bank has offered advice to the Government on particular resource-based projects (such as a possible scheme to harness the hydropower potential of the Purai River in Central Papua) in their early stages of conceptualization. PART III - THE TRANSPORT SECTOR Background 21. For many years, the geography of Papua New Guinea confined economic activity to a few urban centers: Port Moresby in Papua; Lae and Madang in New Guinea; and Rabaul in New Britain. Initially, these centers were supplied by sea and, later, by air. For decades, they remained economic enclaves, as the country's rugged topography inhibited economic development of the interior. In recent years and particularly since independence, the interest in pro- viding access to the interior regions in order to realize the country's considerable economic potential has focused attention on the transport sector. The large number of islands and the abundance of good natural harbors make sea transport important both for inter-island, and overseas communication and shipping. Interior land transportation is not well- developed - the coastal plain is either narrow, terminating abruptly in formidable mountain ranges; or low-lying, swampy, and intersected by major rivers. Consequently, for interior travel, airplanes have frequently been the most important and, sometimes, the only form of transport. Civil Aviation 22. Air, the major mode of long distance domestic passenger travel, increased by about 10% each year between 1964 and 1974. In addition, some freight is still moved by air, particularly to and from the more isolated areas, but this has declined substantially in recent years, with the expansion of the road network. Scheduled internal services are mainly provided by Air Niugini (84% Government-owned), which has a low aircraft utilization rate due to the restriction of most flights to daylight hours. Four other companies operate scheduled and charter services, and a further  - 7 - 12 operators are licensed for charter operations only. PNG is adequately served by international flights from Australia, Hong Kong, the Philippines, and Japan. Port Moresby has the only international airport. However, a new airport was opened in 1977 near Lae, constructed with Aus'ralian assistance, which may become a second international airport. Ports and Shipping 23. Most of PNG's overseas trade is handled by nine main ports: Port Moresby, Lae, Madang, and hWewak on the mainland; and Rabaul, Samarai, Kavieng, Kieta, and Kimbe on other islands. In addition, Oro Bay, on the mainland, handles a significant volume of coastal traffic. These ten ports, together with six smaller piorts, are administered by the Papua New Guinea Harbours Board (PNGHB) and handled a total of 1.3 million tons in 1975-76. Development of the ports of Port Moresby, Lae, Kieta, and Alotau (one of the six smaller ports), has been under way since 1972, partly financed by Credit 326-PNG. Most of this was completed in 1976. Additional works at Kieta and Port Moresby were completed in July 1977, and a barge ramp at Alotau is still under construction. 24. Overseas shipping; services are provided by ten foreign shipping lines. Coastal and inter-island services are provided by about 240 Govern- ment-licensed and locally-owned small vessels greater than 10 m in length. The Government is studying, with Norwegian assistance, the feasibility of regularly scheduled services between the main ports, and is contemplating a substantial investment, through the newly established PNG Shipping Corpora- tion, in specially designed coastal ships for main port services. At present, a Government-owned fleet of 87 small vessels provides passenger services to remote communities and carries a small amount of cargo. A five-year program for replacement of old vessels in this fleet is expected to commence in FY78. The Bank is discussing with the Government a possible project for improving coastal shipping operations. 25. The volume of containers through PNG ports has been growing rapidly and all shipments from Australia, which account for about 50% of overseas traffic, have now been containerized. Most of the containers will be handled through Lae, which has adequate facilities (provided under Credit 326), or through Port Moresby, whose present inadequate facilities are preventing the full realization of increased efficiencies of container shipping. In addition, ocean freight rates to and from Port Moresby will ultimately rise without better container facilities in the port. 26. The main port facilities in Port Moresby are located in a well- protected deep-water bay, adjacent to the city center. The existing wharf's design load is too low for efficient handling of containers and the facility's present heavy maintenance requirements will increase even further as container traffic increases. Coasta:L shipping is presently handled at a berth located about 250 m east of the main wharf which is in a seriously dilapidated state. Upon completion of the proposed project, coastal shipping would be diverted to the present main wharf, and overseas cargo would be largely handled at the newly constructed facilities.  - 8 - The Papua New Guinea Harbours Board (PNGHB) 27. PNGHB, established in 1963, is a corporate entity with comprehen- sive supervisory functions including control, regulation, and management of 16 ports. The Bank's experience with PNGHB under the First Port Project has been generally satisfactory. There has been a considerable improvement in PNGHB's system of accounting over the past two years. However, under the First Port Project, it was agreed that individual port services would be costed to enable dues and rates to be cost-based. This has not yet been accomplished. As a necessary first step towards compliance with this requirement, PNGHB has agreed to undertake a study to determine the cost of individual services at each major port and to review these costs annually in relation to the revenues derived from each of the services. PNGHB has also agreed to employ consulting engineers to revalue its assets no later than December 31, 1978, and every three years thereafter (see draft Project Agreement, Sections 3.08 and 4.06). 28. In line with Government policy, PNGHB is endeavoring to increase the number of its indigenous officers, and some of the more senior positions will, for the first time, be filled by indigenous staff within the next few years. Since the experience of these new staff will inevitably be limited, funds are included in the project for the training of indigenous staff in the fields of engineering and accounting, and for consultants' services. While newly recruited staff are gaining experience, it may be necessary to maintain an appropriate expatriate presence at senior management levels. The positions of chief financial officer and chief engineer are especially important, and the Bank would review the qualifications and experience of any candidates proposed to succeed the present incumbents (see draft Project Agreement, Sections 3.02 and 3.06). 29. PNGHB does not yet hold all necessary leases for the present port area or for improvements at other ports, as required under the First Port Project. The absence of land records and the high staff turnover in the responsible department are the chief causes of delay. While the absence of the necessary leases has not delayed construction of the First Project, it, quite obviously, is a situation which must be corrected. Recently enacted legislation should facilitate the granting of the necessary leases to PNGHB covering the area of the proposed project by January 1, 1979 (draft Loan Agreement, Section 3.02(a)). In order to ensure the continued efficient use of port facilities, the next stage of port development, planned to begin in about 1987, should be contiguous to the present facilities. After consider- able investigation, the Government and the Bank agree that the expansion should be located to the north of the proposed project (see draft Loan Agreement, Section 4.02(ii)). 30. Cargo handling at Port Moresby is now performed by four private stevedoring companies, licensed by PNGHB, and selected by the shipping companies. While this arrangement is satisfactory for general cargo handled at the existing facilities, in order to ensure that containers can be located and retrieved in a timely and efficient manner, it will be necessary to estab- lish a single stevedoring organization to be responsible for all container  - 9 - operations. PNGHB has agreed to make appropriate arrangements for one stevedoring firm or consortium to be responsible for container handling at Port Moresby by January 1, 1979, and to appoint a PNGHB officer to supervise the container terminal operations (see draft Loan Agreement, Section 4.02(i) and draft Project Agreement, Section 3.04 (ii)). 31. PNGHB's capital investment program for 1978 through 1982 totals US$18.4 million, including the proposed project. Besides expenditures to complete the First Port Project and the proposed Second Project, the program includes: coastal shipping facilities at Rabaul; a cargo shed at Kavieng; a new wharf at Madang; construction of breasting dolphins, an extension of the coastal facilities and the first stage of a tidal basin at Lae; and minor works at other ports. Based on conservative traffic forecasts, PNGHB would be able to finance about half of its capital investment program, in addition to its current operations, from internal cash resources. PART IV - THE PROJECT Description 32. The project would provide, at Port Moresby, adequate and efficient facilities for handling containers, including an extension of the available land area and the existing container freight station and facilities for refrigerated container cargoes. It would provide an adequate capacity to handle the forecast traffiLc until the next port development is required in about 1987. In addition, the proposed project would provide a new coastal facility at Samarai, located on a small island off the coast of Southern Papua, to replace the existing wharf which is in an extremely dilapidated and unsafe condition. The project, which was prepared by PNGHB with the help of consultants, was appraised in February 1977. At that time, it included a substantial road component which, after a lengthy deliberation, the Government eventually wished to delete from the project. In addition, the Government wished to have additional time to review the location of the next stage of port development. Since, by the time these decisions were taken, considerable time had elapsed, a follow-up appraisal was required in January 1978. Negotiations took place in Washington in March 1978, with Ms. Patricia Curley leading the PNG delegation. Representatives of the Kuwait Fund, which would provide joint financing for the project, attended negotia- tions as observers. A Supplementary Project Data Sheet is included as Annex III. The project would consist of the following components: (a) additional reclaimed land of about 1.6 ha adjacent to the 2.6 ha provided under the First Port Project; (b) a new 125 m berth to handle containers; (c) an extension to the existing container freight station; (d) improvements to about 400 m of the road adjacent to the port;  - 10 - (e) a 30 m long coastal berth at Samarai; (f) pilotage launches for other ports; and (g) consulting services for design and construction supervision, and technical assistance and training. The road improvements to be done under the project would be sufficient to meet the port's immediate access requirements. However, improvements to the road between the industrial area and the port (about 15 km), which had originally been included in the proposed project, will soon be required. The Government concurs with this assessment and has undertaken to complete the appropriate improvements by January 1982 (see draft Loan Agreement, Section 3.03). Project Cost and Financing 33. The total cost of the proposed project is estimated at US$10.5 million, with a foreign exchange component of US$7.0 million. The estimate is based upon final design and unit costs for similar ongoing or recently completed works in PNG and is considered adequate. It includes 10% for physical contingencies, and an allowance for price increases of 9% in 1978-79 and 8% in 1980. The proposed Bank loan of US$3.5 million would cover 50% of the estimated foreign exchange costs of US$7.0 million; joint-financing of the balance would be provided by the Kuwait Fund for Arab Economic Development (the Kuwait Fund). The full amount of US$7.0 million would be relent to PNGHB at 7.50% interest for 20 years including four years grace, with PNGHB assuming the foreign exchange risk. At the request of the Kuwait Fund, the Bank has incorporated a cross-default and cross-effectiveness clause into its Loan Agreement (see draft Loan Agreement, Sections 5.01 (f) and 6.01 (a)). Local currency costs would be financed by PNGHB. PNGHB's Financial Position 34. PNGHB's revenues in recent years have not kept pace with operating costs. The traffic volume and, consequently, the financial performance in 1975-1977, were substantially below that forecasted when the First Port Project was appraised, with the result that the 8% return on net fixed assets required under the First Project was not realized. The principal reason for this poor performance is the failure to increase tariffs sufficiently to compensate for static traffic and the unexpected increase in operating expenses (mainly a trebling of depreciation and a doubling of working expenses). An operating deficit was incurred in 1976. Later that year, a long overdue increase in tariffs and rates was instituted. However, further increases are required if PNGHB is to meet its obligations and preserve a sound financial position, particularly during the construction period of the project. The appraisal mission has estimated what would be adequate tariffs to ensure a reasonable return on fixed assets and a healthy cash position. These rates are as follows: for container traffic, US$134 per container, replacing the present berthage and wharfage charges  - 11 - on containerized cargo; for non-container overseas traffic, a 70% increase in berthage and a 30% increase in wharfage rates; and for coastal traffic, a 10% increase each in wharfage and berthage rates. In addition, a steve- doring charge should be imposed at Port Moresby. 35. Based on the projected traffic (which in the case of containers assumes zero growth), these cr similar tariffs would result in a 4% rate of return in 1979 and a 7% return thereafter which would be adequate. To continue to require an 8% return would necessitate tariff increases so large as to be unacceptable to both the Government and the shipping industry. Therefore, we have agreed to modify the rate of return requirement under the First Ports Project; the Government and PNGHB have agreed to adjust tariffs by January 1, 1979 and, subsequently as necessary, to ensure that the revised rates of return (4% in 1979, and 7% thereafter) are met (see draft Loan Agreement, Section 4.03 and diraft Project Agreement, Section 4.03). The projections of PNGHB's cash J-low was done in the context of its currently planned investment program which was reviewed during negotiations. A signi- ficant increase in investmentL over this plan could render PNGHB's cash position inadequate. Therefore, it was agreed that PNGHB would seek the Bank's concurrence before undertaking any investments (except the proposed project) which would require annual expenditures exceeding US$830,000 in 1978 and 1979 and US$1.4 million in 1980-82 (see draft Loan Agreement Section 4.04 and draft Project Agreement, Section 4.04). (These levels reflect PNGHB's planned program of investment plus some margin of flexibility). Procurement and Disbursement 36. Contracts for construction and supply for all items in the proposed project would be awarded on the basis of international competitive bidding, in accordance with Bank guidelines, which is acceptable to the Kuwait Fund. The contract for pilotage launches has already been let to a local firm following international competitive bidding in accordance with Bank guidelines, and retroactive financing of US$100,000 for this component is recommended. Because of the urgency to provide the container facilities, PNGHB proposes to prepare all documentation and to call for tenders in accordance with Bank guidelines prior to loan signature. However, the tender would be let only after loan signature. 37. Disbursement for civil works would be at the rate of 32% of the total cost. For technical assistance, training, and consulting services, disbursement would be on the basis of 50% of total costs. Disbursement for the pilotage launches would be at 45% of total costs. Joint financing to be provided under the Kuwait Ftnd loan would be disbursed in equivalent percent- ages for the respective categories. Implementation 38. Construction: PNGHB, with the assistance of consultants, would be responsible for the execution of the project. It is expected that construc- tion would commence in June 1978 and would be completed in June 1980.  - 12 - 39. Engineering Services and Technical Assistance: Final engineering has been completed by the firm of Maunsell and Partners (Australia), who has also been appointed for construction supervision and is acceptable to the Bank. 40. While PNGHB has a vigorous training program for new recruits and existing staff, aimed at localizing technical and managerial staff, sub- stantial losses of trained local staff to other organizations have occurred over the past few years due to the general shortage of trained PNG staff. The proposed project would provide consultancy services to review the existing program and establish additional training requirements, and would provide on-the-job training for new recruits in the fields of management, accounting, and data collection, together with financing of overseas training. This technical assistance would also include the costing study referred to above (para. 27), and would set up a data collection system to provide a commodity breakdown of traffic statistics, with the objective of improving port planning capabilities. A total of 36 man-months of consultancy services has been included at an average cost of $6,000 per man-month, excluding air travel and local subsistence costs, plus $24,000 for overseas training. Ecology and Impact 41. The proposed reclamation of land for the port works at Port Moresby is similar in all respects to that undertaken for Credit 326-PNG, which had no adverse effects on the harbor ecology. The proposed dredging would not be excessive and the spoil would be dumped beyond the existing coral reef. No other environmental effects are expected from the proposed project. Benefits and Justification 42. Port Moresby handles almost all external trade for the southern mainland together with a substantial volume of coastal traffic. About half of Port Moresby's external trade is with Australia. The proposed project has two objectives: (i) to provide Port Moresby with facilities to cope with the container traffic, brought about by Australian shippers' decision to contain- erize all its PNG shipments; and (ii) to permit coastal shipping to use the existing main wharf instead of the present coastal facility, which is in a seriously dilapidated condition. 43. A major benefit of the proposed project would be to avoid ship waiting time and to reduce ship turnaround time for both coastal and overseas ships; this saving has been valued at some US$1.1 million annually. Port tariffs would be increased to ensure that those benefits which would otherwise accrue to foreign shipping firms (about US$480,000 annually) would be retained in PNG. Another benefit of the proposed project would be to avoid the present transport of containers between the existing wharf and the existing shed. Expanded shed space and reduced congestion at the new berth would reduce cargo handling costs by some US$474,000 annually. To ensure the full realization of the benefits to coastal shipping, the existing coastal wharf should be closed to all cargo ships more than 10 m long. The wharf itself need not be  - 13 - demolished as it is still useful for small Government passenger launches (see draft Project Agreement, Section 3.03). Taken together, these benefits would yield an economic rate of return of 14%. 44. There are no special risks associated with the project. A 25% increase in capital costs would reduce the rate of return to 10%. No increase in the volume of container traffic has been assumed in the calculation of project benefits, and reduction in the projections of other traffic to a zero growth rate would have a negligible impact on the project's rate of return. PART V - LEGAL INSTRUMENTS AND AUTHORITY 45. The draft Loan Agreement between Papua New Guinea and the Bank; the draft Project Agreement between the Papua New Guinea Harbours Board and the Bank; and the Report of the Committee provided for in Article III, Section 4(iii), of the Articles of Agreement are being distributed to the Executive Directors separately. 46. Features of special interest in the draft Loan and Project agree- ments are referred to in Annex III, Section III, of this Report. 47. There are three additional conditions of effectiveness: that the Kuwait Fund Loan Agreement, the Project Agreement and the subsidiary Loan Agreement have been executed on behalf of the relevant parties thereto. 48. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 49. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments April 3, 1978 Washington, D.C.   ANNEX I TABLE 3A Page 1 of 4 pages PAPUA NEW GUINEA - SOCIAL INDICATORS DATA SHEET LAND AREA (THOU KM2)