Uruguay - Montevideo Port Project

Document of The World Bank FILE COPY FOR OFFICIAL USE ONLY Report No. P-2678-UR REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO ADMINISTRACION NACIONAL DE PUERTOS TO BE GUARANTEED BY THE REPUBLICA ORIENTAL DEL URUGUAY FOR A MONTEVIDEO PORT PROJECT December 28, 1979 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 (As of May 1979) Currency Unit = New Uruguayan Peso (NUr$) NUr$1 = 100 Centavos (ctv) NUr$7.7 = US$1 NUr$1,000 = US$129.80 NUr$1,000,000 = US$129.800.00 WEIGHTS AND MEASURES Metric System GLOSSARY OF ACRONYMS ANP = Administracion Nacional de Puertos 1DB = Inter-American Development Bank MTOP = Ministerio de Transportes y Obras Publicas UNDP = United Nations Development Program FISCAL YEAR January 1 - December 31  FOR OFFICAL USE ONLY URUGUAY MONTEVIDEO PORT LoaLn and Project Summary Borrower: kiLministracion Nacional de Puertos (ANP) Guarantor: Republica Oriental del Uruguay Amount: US$50 million equivalent Terms: Repayable in 15 years, including 3 years of grace, at: 7.95 per annum Project Description: The proposed project, which covers 66% of ANP's 1978-1982 development program for the Port of Montevideo, consists of: (i) acquisition of equipment and modification of an existing wharf for use as a container and bulk cargo terminal; (ii) procurement of- equipment and improvement of pavement and sheds for general cargo operations; (iii) purchase of two harbor tugs; (iv) acquisition of a bucket dredge with auxiliary equipment and of a suction-hopper dredge; (v) technical assistance to ANP for the excecution of the investments included in the development program, institutional strengthening and planning studies. Benefits and Risks: Expected economic benefits from the proposed project would consist of reduced port operating and mainte- nance costs for ANP and ship servicing and waiting times for ocean carriers. The net effect of these improvements would be reductions in transport ciDsts to users: primarily to consumers of imports and the producers of exports in Uruguay. The project would improve Uruguay's positLoa in foreign trade and potentially contribute to the country's economic recovery. There are risks inherent in ANP's inexperience with the imple- mentation of a large-size port development program, which may result in delays and cost overruns; flarthermore, the expected benefits may not be dierived from the project if operational changes do not occur as new equipment is introduced. Proposed technical assistance to ANP would minimize these risks, which are not unusual for projects of this kind. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Estimated Cost: Investment Category: 1/ Local Foreign Total ------- US$ million ------- 1. Container and Bulk Cargo Terminal 2.6 8.6 11.2 2. General Cargo Handling Equipment 0.7 3.6 4.3 3. Harbor Tugs 0.3 6.2 6.5 4. Dredging Equipment 1.4 24.4 25.8 5. Technical Assistance to ANP 0.6 2.4 3.0 Base Cost 5.6 45.2 50.8 Contingencies: (a) Physical 0.4 0.3 0.7 (b) Price 0.9 6.0 6.9 Subtotal 1.3 6.3 7.6 Total 6.9 51.5 58.4 Financing Plan: Local Foreign Total ------ US$ million ------- ANP 6.9 1.5 8.4 Bank - 50.0 50.0 Total 6.9 51.5 58.4 Estimated Disbursements: FY 1980 1981 1983 1983 Annual 1.5 24.0 20.0 4.5 Cumulative 1.5 25.5 45.5 50.0 Economic Rate of Return: 24% Appraisal Report: Report No. 2642a-UR, dated December 28, 1979 1/ The proposed project represents 66% of the Development Program (1978-1982) for the Port of Montevideo.  REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN FOR MONTEVIDEO PORT PROJECT TO ADMINISTRACION NACIONAL DE PUERTOS (ANP) 1. I submit the following report and recommendation on a proposed loan to Administracion Nacional de Puertos (ANP) with the guarantee of the Republica Oriental del Uruguay for the equivalent of US$50.0 million to help finance the proposed Montevideo Port Project. The loan would have a term of 15 years, including 3 years of grace, at an interest rate of 7.95 per annum. PART I - THE ECONOMY 1/ 2. An economic mission visited Uruguay in May 1979. The section below reflects the findings of this mission and its report is expected to be distri- buted in December 1979. The previous Economic Memorandum (2241-UR) was distributed to the Executive Directors in December 1978. A summary of Country Basic Data is attached as Annex 1. Economic Performance 3. After having become one of the most prosperous countries in Latin America in the first half of the twentieth century, Uruguay's economy deteri- orated steadily in the next two decades. This was the result of policies that favored urban consumption andL high-cost industrial import substitution at the expense of investment, exports and growth. A well-educated and predominantly urban population generated increasing demands for high employment,-better public services and social benefits. The attempts to meet these demands took the form of fiscal, exchange rate and price policies that resulted in a sustained transfer of income out of the resource-rich agricultural and live- stock sector mainly into consumption by the urban population. Industrial sector development, initially stimulated by shortages of consumer goods during World War II, was fostered through a deliberate import substitution and protection policy during the immediate post-war era. However economic growth faltered as agricultural production, productivity and exports declined after the Korean War. Moreover, industrial import substitution possibilities in the small domestic market were largely exhaustedl. Unemployment and underemployment rose sharply. Government policies aimed at maintaining urban income and consumption levels resulted in strong inflationary pressures, capital flight and serious misalloca- tion of resources. During the early 1970s, political and social unrest marked by urban terrorism and labor strife further discouraged savings, investment and any initiative to expand output and exports. 4. Uruguay had instituted comprehensive welfare legislation in the 1920s when the potential from livestock seemed inexhaustible. Progressive legislation covering such areas as social security retirement and survivors' pensions, job security, unemployment compensation, free health and education services provided mechanisms for redistributing income. Uruguay was thus able to achieve a relatively high level of social progress as evidenced by an in- come distribution pattern which compares favorably with that of many developed countries. Although Uruguay experienced a drop in per capita income during 1/ This section is similar to the section on the economy contained in the President's Report for the Fifth Power Project (Report No. P-2657-UR of November 26, 1979).  - 2 - the 1960s and early 1970s, the country has attained levels that are comparable to those of some developed countries and above those of most developing countries in health (life expectancy at birth of 70 years), education (94% literacy rate), and nutrition (per capita intake of protein of 100 grams per day). 5. The redistribution mechanisms were not, however, immune to economic instability--and, in effect, contributed to it. The uncoordinated growth of the social security system and its liberal benefits, coupled with a stagnant economy and rapid inflation, caused increasing stress on the country's resources. Larger transfers from the Central Government were increasingly needed to provide decreasing real benefits to a larger number of people. In addition to the financial burden on the Government, the high level of contributions required by the system from employers increased the real cost of labor. This high cost, coupled with the incentives to the use of capital inherent in the import substitution strategy, acted as a brake on the creation of employ- ment. Moreover, the inadequate level of real benefits, together with the old age structure of the population, resulted in a large number of people working past retirement age (though as retirement was at 55 years, this was not neces- sarily a great burden) and this further limited employment opportunities for the groups entering the labor force. 6. The structural changes in the world economy that emerged in late 1973 had a strong impact on the Uruguayan economy. The threefold increase in the price of imported oil (upon which the country is entirely dependent), substantial increases in other import prices, and the closing of the European Economic Community to meat imports contributed to a sharp reversal in the balance of payments, a precipitous deterioration of fiscal performance and to an acceleration of domestic inflation. The economic team appointed in mid-1974 recognized that long-term solutions to the country's economic problems went beyond stabilization and required a fundamental reorientation of economic management away from an inward-looking towards an export-oriented development strategy. The basic objectives of the new program were the improvement of resource allocation and productive efficiency through greater reliance on the price mechanism, and the promotion and diversification of nontraditional exports, i.e., those other than beef and wool. The achievement of these objectives required the freeing of domestic prices and the liberalization of the foreign trade and payment system from the burdensome controls instituted in the past. 7. The rapid implementation of export-oriented development measures yielded unexpectedly rapid and positive results in 1975-78, enabling Uruguay to surpass most of the performance targets embodied in three successive standby agreements with the IMF. Government economic policy during this period con- centrated on fostering growth in the commodity-producing sectors by eliminating various types of controls that distorted resource allocation, and by achieving a more realistic exchange rate in order to promote exports. Quantitative and financial controls on imports of raw materials and capital goods were elimi- nated; price ceilings on many domestic products were lifted; interest rates on deposits and loans were freed; and nontraditional exports were successfully stimulated through a policy of minidevaluations and the establishment of a system of tax rebates. Reversing policies that prevailed for thirty years, the government eliminated controls on pricing and marketing of agricultural goods in the third quarter of 1978. While the immediate effect of the removal of  -3- the ceiling was to increase beef prices by about 20%, the difference between international and domestic prices, the measure should help in the medium term to improve efficiency in the sector and lead to higher supplies, without undermining the Government's anti-inflation program. In continuation of its liberalization policies, the Government reduced maximum levels of import duties and surcharges in January 1979. 8. The economy responded to these changed policies by achieving an annual average GDP growth of about 3.2% during 1974-78, compared with an annual decline of 0.2% during the previous four years. Gross domestic invest- ment also increased from an average of 13.5% of GDP in the period 1970-74 to 18.3% in 1977/78. Production of nontraditional exports, particularly leather and textile manufactures, led the recovery of the economy and was instrumental in initiating a remarkable turnaround in the external sector which has continued since 1976. As a result the current account balance continued to improve as the deficit declined from US$190 million in 1975 to an average of US$85 million during 1976-78, which together with strong private capital inflows, resulted in increasing gains in net foreign exchange reserves of US$112 million, US$154 milliLon and US$181 million in 1976, 1977 and 1978, respectively, compared with a loss of US$65 million in 1975. Moreover, the inflation rate had been reduced to an average of about 50% in 1976-78, from a level of 67% in 1975 and 107% in 1974, owing to a combination of more res- trictive monetary management and incomes policy, and--above all--improving fiscal performance. The Central Government fiscal deficit was reduced from 4.5% of GDP in 1974-75, to 2.5% in 1976, notably surpassing the target of 3.4% stipulated in a standby agreement with the IMF. The marked fiscal improvement was brought about by a combination of increased collection of revenues from the value-added tax and IMPROME (a tax on imputed income on agricultural land), and restraint of current expenditures. As a result of the reactivation of the economy, and the diversity of redistribution mechanisms, the economic liberalization and stabilization program does not appear to have significantly affected income distribution.l/ 9. The Central Government's fiscal situation continued to improve in 1977-78 (an average overall deficit of 1.2% of GDP). The policy of wage restraint enabled the Government to restrict current expenditures and finance a larger investment program. The Government's wage policy has also been instrumental in maintaining a relatively low level of inflation during 1976-78 as compared to 1974-75. The increased inflationary pressures in 1977, caused by a poor harvest and the monetary expansion resulting from accumulation of foreign exchange reserves, were controlled through monetary measures introduced in late 1977. As a result, the rate of inflation declined from 57% in 1977 to 46% in 1978. 10. During the latter part of 1978 and in early 1979, the Government freed the livestock industry from price and marketing controls and initiated a process of tariff reduction. Private sector investment responded strongly 1/ Major changes have been. for the middle 60% of population, whose share of total income declined from 50.5% in 1968 to 47.8% in 1976, as the top 20% increased from 43.4% to 46.7%. The share of the bottom 20% showed a slight decline during the stabilization program, from 6.1% in 1968 to 5.5% in 1976. In all, this income distribution compares favorably with most developing countries, and is similar to many of the developed countries.  - 4 - to these moves and together with increased demand arising from capital inflows and tourists has resulted in a strong surge in economic activity. While the balance of payments position and the fiscal situation remain favorable, in- creased economic activity has been accompanied by the rate of inflation increasing to about 80% in 1979. The Government has opted for a high growth strategy and believes that the rate of inflation will decline only gradually as the restructuring of the economy and its program of import liberalization are completed. Economic Prospects 11. The Government is attempting to shift the economic structure towards a more open, export-oriented model. This shift is by no means easy in view of the deep-seated rigidities which Uruguay's economy has acquired over the last thirty years. High tariff protection and highly segmented public sector management continue to hamper growth. Nevertheless, the success in stimulating economic activity and turning around the balance of payments during the last four years attests to the economy's responsiveness to a consistent set of signals as the price mechanism is allowed to operate more freely. The key to sustained growth for the future will depend on the Government's ability to consolidate the recent gains through longer-term policies. Uruguay's long and difficult experience in pursuing income distribution policies in the face of a stagnant economy has led the authorities to give utmost priority over the coming years to sustained growth. 12. In broad terms, government policies aim to provide a propitious economic environment for the fuller use of such advantages as the country's highly literate labor force, its strategic location between Argentina and Brazil, and a natural resource endowment suited to export-oriented agricultural production, including the traditional livestock industry as well as the largely untapped potential in crop production, food processing and fisheries. 13. Provided that the sound orientation of fiscal, monetary and trade policies already instituted is consolidated, the Uruguayan economy has the capacity to grow at faster rates than in recent years (possibly some 5% p.a. compared to about 1.0% during 1971-78). The expansion of both traditional and nontraditional exports should provide the main impetus for growth. Beef and wool exports will benefit from the recently enacted price and marketing liberalization measures, the reasonably favorable price outlook, and the successful penetration of new markets in recent years. Sustained growth of manufacturing output and nontraditional exports should be possible with the further development of such subsectors as leather products, textiles, processed foods, fish and other manufacturing goods. Private sector investment should provide the principal impulse for growth in the coming years in the form of the rehabilitation, modernization and expansion of existing production units rather than the establishment of new, large-scale ventures. The public sector is expected to play a key supporting role by mobilizing financial resources, rehabilitation of infrastructure and complementary services to the productive sectors. 14. Export expansion and diversification will require the modernization of the country's capital stock. This implies heavy import requirements for key infrastructure, new plant and equipment, rehabilitation of the existing stock, and related intermediate inputs. Imports are also expected to increase as a result of the Government's import liberalization policy. A rapid growth in  imports is to be expected under these policies possibly resulting in a trade deficit averaging about US$140 million during 1980-82. With the development of hydroelectric energy sources the volume of petroleum imports can be expected to slow down and together with the expansion of beef exports, result in a smaller trade deficits after 1983. The above trade projections combined with steadily increasing net factor payments on public and private borrowing would result in a widening of the current account deficit from an average of US$70 million during 1976-78 to an annual average of US$235 million in 1980-82. Expansion of beef exports in 1982-83 in conjunction with reduced petroleum imports may be expected to reduce the projected current account deficit to about US$200 million by 1983. The current account deficits projected are moderate and should lead to a further enhancement of Uruguay's creditworthiness and to more favorable terms on external credits than in the recent past. The relatively moderate gross external capital requirements for 1979-83 (estimated at an annual average of US$225 million) can be expected to come partly from existing and new commitments of multilateral and bilateral agencies. Private financial institutions, suppliers' credits and Government bonds would provide the major portion of the remainder. 15. The remarkable turnaround in Uruguay's balance of payments since 1976 has enabled the authorities to amortize or refinance various commit- ments contracted on unfavorable terms during the previous years. The volume of commitments contracted during 1974-75, their relatively unfavorable terms and prepayments of hard term loans resulted in a debt service ratio of about 28% in 1977 and abiout 46% in 1978. However, such prepayments have improved Uruguay's debt profile and the debt service ratio for the period 1979-83 is projected to be 12-13%. Under these circumstances, Uruguay would remain creditworthy for the amounts of external capital required to rehabilitate the country's capital stock and to achieve sustained economic and social progress. PART II - BANK GROUP OPERATIONS IN URUGUAY 15. To date, Uruguay has received US$253.1 million (net of cancellations) in Bank loans. As of September 30, 1979, the Bank held US$119.1 million, including US$45.1 million tmdisbursed. On a sectoral basis, Bank assistance to Uruguay (16 loans in total) has been for power (42%) and livestock (28%), with some lending for industry (8%), transport (18%) as well as vocational training and technological development (4%). IFC has made three investments in Uruguay: in Fabrica Uruguaya de Neumaticos S.A. (US$3.8 million) to introduce radial tire production, increase tire manufacturing capacity and improve operating efficiency and product quality; in Acodyke Supergas S.A. (US$950,000) to help finance a new liquid petroleum gas bottling plant; and in Astra Pesquerias Uruguayas, S.A. (US$4.5 million and up to US$0.9 million in equity) to help finance an integrated fishing and processing project. Execution of these projects has, on the whole, been satisfactory. Annex II contains a summary of Bank loans as of September 30, 1979 and IFC investments as of October 31, 1979, and notes on the execution of ongoing projects.  - 6 - 16. Bank lending in Uruguay in FY78 consisted of a loan of US$9.7 million equivalent for a Vocational Training and Technological Development Project. In FY79, a loan of US$26.5 million was approved in April for a Second Highway Project. In FY80, a loan of US$24.0 million was approved in December for a Fifth Power Project. In addition to the proposed project, work is underway on agriculture and industrial credit projects for possible consideration by the Executive Directors during the next two years. 17. The Bank, in its program in Uruguay, is trying to assist the Govern- ment in implementing an economic strategy designed to put the economy on a path of sustained growth. Towards this end, all operations are aimed at policies and programs that will support the continued recovery of the economy within a framework of financial stability. More specifically, the objectives of the Bank's program are to: (i) foster productive activities by promoting the expansion and diversification of export earnings; (ii) help strengthen the country's sectoral policies and public sector institutions; (iii) improve and promote the integration of the economy with the large markets of neighbor- ing Argentina and Brazil, as well as with overseas markets; and (iv) assist the country to develop policies and programs to diversify its sources of energy. 18. The proposed project is designed to support the Government's effort to rehabilitate and modernize the country's key infrastructure to foster sustained economic growth, rising income, exports, and employment. As in the case of other transport investments supported by the Bank, the proposed project will also assist Uruguay's efforts to integrate with its neighbors (Brazil and Argentina), which are its major trading partners. Bank lending for agriculture is directed at increasing crop production to assist Uruguay in achieving self-sufficiency in grains and increasing and diversifying its export earnings. Bank assistance for industry, including vocational training and technological development, is designed to help expand non-traditional exports, the principal motor of economic growth; at the same time, Bank lending will continue to support simplifying the cumbersome tariff and import regulation structure and lowering the rate of protection, which is necessary to increase the efficiency of the industrial sector. PART III - THE TRANSPORT SECTOR IN URUGUAY 19. With its economy largely based on primary and processed agricultural/ livestock products, Uruguay is heavily dependent for its continued economic growth on the development of its transport sector. Bordered by the two largest countries in South America, Argentina on the west and Brazil on the north, and with more than half of its national boundary navigable coastline on the south and east, the country is geographically unusually well endowed for the export-oriented development strategy being pursued. The country's economic difficulties referred to above have, however, led to a general neglect of an adequate pace of maintenance and rehabilitation of infra- structure facilities with the result that much of the existing transport system in Uruguay is antiquated and inadequate for future needs. To define key development issues in the sector, a comprehensive survey of the national  -7 transport system was undertaken with UNDP assistance in 1976-1978, with the Bank as executing agency. This survey established a general framework for transport investment and identified four areas of highest priority need: strengthening of national transport planning; improvements in road rehabilita- tion and reconstruction; reductions in railroad operations and deficit; and port modernization. 20. The concentration of Uruguay's commercial activity and population in the capital of Montevideo is reflected in the country's transport system. The interior, with relatively flat terrain, main rivers at boundaries, and low density agricultural activity, offered no obstacles to development of radial roads and rail networks extending north, east and west from the metropolitan region around the seaport of Montevideo. This port, with its favorable location at the mouth of the La Plata River, is the country's focal point for foreign trade and also serves inland and coastal navigation. The Transport System (i) Maritime Transport and the Port of Montevideo 21. Over 90% of Uruguay's foreign trade depends on maritime transport, most of which is served through the port of Montevideo. Uruguay's exports consist largely of agriculitural products, with meat, rice and wool predomi- nating; however, "non-traditional" exports, such as shoes, garments and leather accessories are becoming increasingly important. Imports in mixed general cargo are largely machinery and other manufactured goods, and, in dry bulk commodities, comprise fertilizers and chemicals. Public terminal facilities at the port of Montevideo handled between 1.0 and 1.5 million tons in recent years and traffic through Montevideo is expected to grow moderately, from 1.5 million tons in 1978 to 1.9 million tons in 1983 and 2.7 million tons in 1990. This includes only Uruguayan imports and exports now handled at general cargo berths (break-bulk, containers and in bulk); it excludes petroleum products, handled at a separate facility, and transit traffic (not significant at present). 22. Uruguay's foreign trade is handled predominantly by liner services which call at Montevideo on their way to and from Buenos Aires. This pattern of operation, dictated by the location of Buenos Aires upstream of Montevideo takes advantage of the deeper draft available in the access channel and port of Montevideo (with 10.0 m nominal depth), allowing vessels to lighten before entering the La Plata River channel (with 9.0 m nominal depth) and, on return from Buenos Aires, to take on additional cargo, fuel, water and provisions before starting an oceanic voyage. The same pattern of operation is also used, to a limited extent, by charter vessels in the grain trade "topping off" in Montevide!o with Uruguayan exports, after loading first at Rosario, Buenos Aires or other Argentine ports on the Parana River. There are four secondary ports in Uruguay, located along the La Plata and Uruguay Rivers where draft: limitations range from 9.0 m to 4.5 m: Colonia, Nueva Palmira, Fray Bentos and Paysandu. Traffic through these ports consists mainly of cereals and construction materials, exported to Argentina and Brazil.  - 8 - 23. The geographic location of Montevideo is such that it is possible that inland traffic, beyond Uruguay's borders, can be developed to a signifi- cant level in coming years; factors that would favor such a development in the future are the construction of a rail link to Argentina, over the dam at Salto Grande, and international agreements among the Southern Cone countries that would permit the transfer of freight across borders in bond, simplifying customs procedures. Such developments, however, are potentials only for the medium and longer term; they do not enter into the determina- tion of the immediate needs for physical improvement. 24. The existing port facilities at Montevideo were constructed between 1905 and 1931; there has been little change in the structures since that time. Massive masonry wharves and cobble-stone pavement provide the setting for present port operations. Originally designed to accommodate 14 ocean vessels, the port has an effective capacity of 11 berths for the larger ships currently in use. Most port equipment is over forty years old and, though less than efficient by today's standards, represents a considerable achievement in maintenance. The cost of this undertaking, however, has also been high and continues to affect the cost of vessel and cargo operations within the port. Maintenance dredging of the harbor and its access channel, tug services for vessels entering and leaving the port, and cargo transfer between vessels and inland transport modes are areas in which the age and obsolescence of equipment now in use are particularly significant at Montevideo. The lack of specialized installations for handling of dry-bulk and container traffic are also important factors in present and prospective port costs. 25. Administracion Nacional de Puertos (ANP) is the national organiza- tion entrusted with the administration of ports. Created in 1916 as an autonomous agency, ANP is responsible to the Ministry of Transport and Public Works (MTOP) and functions under the direction of a three-member Board of Directors nominated by the Government. The responsibilities of ANP include, in the case of all ports, the carrying out of loading and discharging operations, lighterage, towage, and salvage and, in the case of Montevideo only, investments in equipment for providing maritime and land services, granting concessions for such services and, with prior approval of the Government, fixing tariffs for port services. 26. In the last few years ANP has made considerable progress in certain areas, such as: (1) Better port operations and improved vessel dispatch since 1974 which has resulted in the removal of the penalty surcharge on international traffic that had been levied by major shipping conferences; (2) reduction in the total number of port employees, from about 8,000 in 1972 to some 5,600 in mid-1978; and (3) consistent reductions in total port operating costs in real terms between 1974 and 1978, despite increases in port traffic.  - 9 - Despite these improvements, ANP's costs are still high and efficiency is low. The total number of staff is still excessive for the traffic handled, especially in the administrative and maintenance departments. The ANP organization is badly fragmented and systems are outmoded and slow. Salaries are low and there is a shortage of qualified staff in technical and management areas. 27. ANP docs not prepare any real financial plan for the port and budgets do not get issued until late in the year for which they are supposed to apply. A major factor wrhich impairs ANP's ability to make financial plans is the current Government practice of granting exemptions from port fees on the imports of a number of port users. In recent years these exemptions have increased substantially in importance (in 1978, 25% of ANP's charges were waived), but ANP continues to be profitable (see para. 48). (ii) Highways 28. Roads currently account for about 73% of the total freight traffic carried within the country. The road network consists of some 50,000 km, of which 9,800 km are national roads maintained by MTOP. One-third of the national network is paved, and about 90% of this third lies in the radial system originating in Montevideo. The remainder of the network, 40,000 km, consists of secondary and feeder roads largely maintained by the departments and municipalities. The coverage of the national road network is adequate; the principal problem is its age and seriously deteriorated condition, notably on some of the international connections, which have considerable importance given the country's trade with its neighbors, and low standard feeder roads in some areas of the country which offer restricted service availability. 29. Traffic growth in Uruguay has been low over the last decade. High average vehicle age, deteriorating road conditions, rising fuel prices and the overall state of the economy have inhibited the growth of traffic. In the road transport industry, trucking companies with principally international operations are few, and they operate truck fleets which are reasonably modern but smaller than the average for Latin America. International freight rates offered by Uruguayan firms are competitive with those of Argentine and Brazilian operators. The level of service offered and the capacity of the truck and bus fleet are broadly adequate for the demand. (ii) Railways 30. The railway network of 3,000 km radiates in five lines from Montevideo. Passenger traffic has halved since the early 1950s to its lowest level in 1972 at 343 million pass-km. No substantial long distance passenger traffic exists today, with the major part of traffic consisting of suburban commuters, concentrated within 100 km of Montevideo. Freight traffic had, by 1975, fallen to 290 million ton-km compared with 445 million ton-km in 1965. Principal items of freight are limestone, rice, and, of lesser importance, other grains, sugar and fertilizers. Despite its deterioration, the railway network still carries 20% of Uruguay's freight and passenger traffic. The managerial and operating procedures of the government railway company are antiquated and inefficient. This, combined with the poor physical and largely  - 10 - obsolete condition of the system results in financial losses (these amounted to over US$7 million in 1976). The transport survey referred to in paragraph 19 concluded that all rail traffic could be carried more efficiently on roads. However, recognizing that complete closure of the rail system is a remote possibility, the study recommended a further survey of limitation of the passenger service to commuter lines near Montevideo and of freight service to specialized bulk cargoes such as minerals, fuels and grain. (iii) Aviation 31. Air transport has developed slowly in Uruguay, principally because of the concentration of population in the Montevideo area, the country's easy topography, resulting in an abundance of surface transportation, and the short distances involved. Domestic air traffic has increased considerably in recent years, but the total number of domestic passengers (88,000 in 1978) remains low. International traffic, mostly related to travel in the River Plate area, totaled about 495,000 passengers in 1978. Uruguay's main functioning interna- tional airport is located in Carrasco (Montevideo). A military airport to the north (Durazno) has been upgraded to emergency alternative status. Maldonado, near the tourist resort of Punta del Este, has only daylight operations. Commercial airline operations are dominated by PLUNA, a state-owned company. Services to several domestic airports are provided by TAMU (Transportes Aereos Militares Uruguayos). Transport Planning and Coordination 32. MTOP was created in 1967 and is responsible for the development of national transport policy, transport coordination and establishment of tariffs for transport services. The Ministry has nominal jurisdiction over the investment plans and operational policies and practices of the modal agencies. In practice, however, their plans and policies are formulated independently of MTOP. Sector management and intermodal coordination have been badly neglected in the past. Lack of sectoral coordination has a long history, starting early this century with the parallel and often competitive development of the then foreign-owned railway and the national highway network. The almost complete absence, until the 1978 transport study, of data on trans- port costs and demand has frustrated any efforts in this regard. To overcome the problem and help the planning of future maintenance, rehabilitation and reconstruction works, the Bank-supported Second Highway Project (paragraph 35) included a technical assistance component to provide for permanent traffic counting and an implementation program. 33. As a first step toward improving transport planning and coordina- tion, in December 1977, the government established a Transport Advisory Council. This Council is led by the National Directorate of Transportation and includes the Railways Administration, the state airline (PLUNA), the Airports Administration, the ANP and the Government Planning Secretariat. This Council is preparing a national transport plan, which is to be based largely on the 1978-1982 investment plan recommendations of the transport  - 11 - study. A transport planniLng unit within MTOP, staffed with counterparts from the sector survey, is currently assisting the Transport Advisory Council in preparing the national transport plan. The Second Highway Project in conjunc- tion with a UNDP grant provides technical assistance by specialized consultants to strengthen this unit. Included in their program of work is the completion by June 30, 1981 of a study comparing costs as between transport modes, initiated by the transport sector survey, which would serve as the basis for coordination of transport policies and investments. Bank Participation in the Transport Sector 34. The proposed project would be the third Bank operation in the transport sector and the first in the port subsector. The Bank's first operation in the sector was a highway loan made in 1963 (Loan 324-UR, US$18.5 million equivalent) to help finance the improvement of Route 5 from Montevideo north to Rivera on the Brazilian border (about 500 km), strengthening of highway maintenance, including the purchase of equipment, and a highway planning study. The improvement of Route 5 consisted mainly of paving and bridge replacement or improvement. The works were completed satisfactorily with a 14% cost overrun but not until 1971, five years behind schedule. The delay was mainly due to poor contractor performance. Traffic in 1971 showed an average increase of about 50% over appraisal estimates. As a result of equipment purchases under the project, maintenance of the national network improved considerably and with the help of consultants employed under the project the quality of maintenance work performed in the Highway Directorate's workshop was raised to a satisfactory level, and overall organization was improved. 35. The second Bank operation in the sector was also a loan for highways (Loan 1689-UR, UJS$26.5 million equivalent); approved by the Board on April 17, 1979, it wi'Ll assist in the reconstruction of the most heavily traveled portion of Route 8 (another important link with Brazil) and improve road rehabilitation and transport planning capabilities. This loan is not yet effective. Montevideo Port Development (i) Background 36. In 1968, the Inter-American Development Bank (IDB) made two loans to ANP, in the total amount of US$11.95 million equivalent, for the acquisition of port equipment; included in this loan were funds for a study by consultants to determine, inter alia, the type and amount of equipment to be acquired under the loan. This study was completed in 1973; however, ANP did not accept a number of its recommendations, in particular those concerning the technical recommendations for dredging and the proposed type and amounts of technical assistance, which ANP considered excessive for its requirements. Most equipment purchases were delayed. In 1975, IDB canceled the undisbursed balance of its loan (US$9.55 million).  - 12 - (ii) The 1978-1982 Development Program 37. In mid-1977, ANP submitted to the Government a five-year port devel- opment program which included a general description of proposed investments, which at present total close to US$89 million equivalent. This program is focused on improvement of existing terminal facilities, with primary emphasis on equipment renewal, upgrading of maintenance, and modernization and does not include major expansion, such as new berth construction. 38. There are three principal groups of investments: (i) cargo handling equipment and related ancillary investments to reduce port handling costs and add capacity to existing berths (total cost: US$37.2 million); (ii) dredging equipment, including a grab-bucket dredge and auxiliary equipment and a suction-hopper dredge (to maintain existing port channels; total cost: 30.9 million); (iii) tug boats (to eliminate obsolete equipment; total cost: US$7.3 million); and (iv) miscellaneous items, including a silo and a fishing pier (total cost: US$13.5 million). The program, which received official Gov- ernment approval in 1978, has been reviewed by the Bank and a number of modifications have been agreed upon (bringing the development program to US$88.9 million). ANP has undertaken not to modify the agreed development program without prior Bank approval (Section 6.01(b) of the draft Loan Agreement). In its revised form, the Montevideo port development program is considered appropriate in scope and content to meet the priority needs of international commerce. PART IV - THE PROJECT 39. A report entitled Staff Appraisal Report: Montevideo Port Project (No. 2642a-UR) dated December 28, 1979 is being distributed separately. A Loan and Project Summary is placed at the front of this report. A supplemen- tary Project Data Sheet is appended as Annex III. The project was identified in August 1977, subsequently prepared with the assistance of UNDP-financed advisors to ANP, and appraised by a Bank mission that visited Uruguay in May 1979. Negotiations were held in Washington from November 5 to 14, 1979. The Uruguayan delegation was led by Ing. Juan Jose Anichini, Alternate Governor for the Bank, representing the Government and by Col. Hector Calafi, Vice President of ANP, representing ANP. Project Objectives 40. The proposed project is an integral part of ANP's ongoing (1978-1982) Development Program for the Port of Montevideo (paragraphs 37-38); it consists of selected equipment and civil works components of the program for which ANP requested Bank financing and technical assistance to ANP required for program implementation and institutional improvements. 41. The project has the dual purpose of: (i) increasing the operating efficiency and throughput capacity of existing terminal facilities in the Port of Montevideo through the introduction of modern handling methods and  - 13 - equipment, thereby improving the integration of the country with its trading partners; and (ii) setting in motion an institutional effort to improve the programming and executing capacity for the port investments required in the 1980's. Given the central role of the port in Uruguay's export-led development policy, the proposed project should provide more reliable trans- port services to the country's trading partners and enhance the competitiveness of the country's production. The project would: (a) convert an existing, open wharf into a modern terminal for the handling of large shipments of dry-bulk imports such as fertilizers and for the transfer of cargo in containers; (b) reduce congestion and operating costs at existing general cargo berths by introducing palletized handling methods and replacing the present system of "direct transfer" between ship and truck (or rail) with an "indirect transfer" system by which most of the cargo will be moved through the existing transit sheds; (c) improve marine operations within the port and permit retire- ment of large portions of ANP's obsolete fleet of harbor -craft through the acquisition of modern tugs and dredging equipment; and (d) introduce modern administrative, financial and planning procedures for port management and future development, including the removal of the existing ad valorem port charges system and the establishment of a cost-based tariff system that wil:L provide more rational use of the ports facilities. Project Description 42. Specifically, tlhe project would consist of: (a) Acquisition of equipment and modification of an existing wharf for a container and bulk cargo terminal. This component would include purchase of two rail mounted cranes of 35-ton lifting capacity, equipped for operation with grab-buckets, container spreaders or cargo hooks; widening and strengthening of approximately 90 m of an existing (288-m long) wharf structure; construction of crane rail supports for the full length of the wharf; concrete paving over the wharf surface and adjacent existing land areas; and acquisition of yard handling equip- ment for dry bulk cargo and container operations. (b) Procurement of equipment and improvement of pavement and sheds for general cargo operations This component would include acquisition of about 60 forklift trucks, 8 mobile cranes and 5,000 pallets; structural alterations to six existing, multi-story transit sheds to facilitate indirect transfer operations based on utilizing the  - 14 - sheds for interim storage to replace the existing system of transfer immediately between ships and truck or freight car; and yard paving around three existing, single-story transit sheds. (c) Purchase of two harbor tugs. The tugs would be diesel-powered and of standard design for assistance to ocean vessels in berthing and unberthing operations. One tug would be designed for operations in relatively sheltered harbor and channel areas only. The other would be designed for seagoing operations to (i) provide capability for assisting vessels in distress outside the port of Montevideo and (ii) serve as standby at the offshore tanker mooring buoy near Punta Jose Ignacio (about 145 km east of Montevideo). It would have equipment to combat oil spills. (d) Acquisition of a bucket dredge with auxiliary equipment, and a suction hopper dredge. The dredging equipment would comprise grab-bucket and a suction-hopper dredge, three split-hull scows, and a tug for towing the scows. ANP has agreed to prepare by July 1, 1980 a program containing the timing for the retirement of dredges (Section 4.04(b) of the draft Loan Agreement). (e) Technical assistance to ANP. This assistance would consist of approximately 18 man-years of professional services for individual advisors and engineering services to ANP, subsurface explorations and planning studies (aimed at preparing a long-range development plan). Cost Estimates and Financing 43. Out of ANP's 1978-1982 development program for the port of Montevideo of US$88.9 million, the proposed project's cost is estimated at US$58.4 million (65% of the total program). The project cost includes a foreign exchange component of US$51.5 million. Pursuant to government regulations, the authori- ties have expressed their intention to exempt the bulk of project-related expenditures from taxes and duties. Equipment acquisitions represent 84% of the estimated project total, civil works 11% and technical assistance, the remaining 5% (at US$6,000 per man-month). A physical contingency allowance of 15% was used for all civil works. As customary, no physical contingency is applied to equipment items and technical assistance. Contingencies for price escalation are 7% annually for civil works and 6% annually for equipment, on both local and external costs. Based on the project implementation schedule, the average estimated price escalation throughout the implementation period amounts to about 12% of project costs. 44. The proposed Bank loan of US$50.0 million, covers about 56% of the total cost of the development program, and 86% of the project cost (97% of the foreign exchange component). The balance of project costs would be provided by ANP from its own resources. For parts of the 1978-82 development program for Montevideo not covered under the proposed project, ANP has already obtained about US$16 million in financing from local banks and foreign suppliers' credit to supplement its own resources.  - 15 - Execution 45. ANP would be responsible for execution of the project through a project implementation unit:, which would be assisted by advisors forming part of the technical assistance component of the project. The advisors referred to in paragraph 42(e) would work within ANP's organization in support of existing permanent staff or in temporary assignments to positions for which permanent staff have not yet been recruited. In both cases, the tasks of the advisors would be to provide professional services in their respective fields of expertise in support of the 1978-1982 development program for the port of Montevideo and to train ANP staff in the performance of these services. In total 12 advisors are expected to work with ANP's Planning, Project Implemen- tation, Finance and Operations Units. Services of advisors would be retained on the basis of qualification, experience and conditions of employment satis- factory to the Bank (Section 3.02 of the draft Loan Agreement). 46. A number of measures are being undertaken by ANP to help improve the administrative and technical efficiency of the Port of Montevideo: first, ANP has replaced the Planning and Technical Advisor by two Units - one with responsibility for overall institutional and physical planning and the other in charge of preparation aLnd implementation of projects in the development program. These Units would be fully staffed by May 1, 1980 (Section 3.01(c) of the draft Loan Agreement). Second, ANP has appointed a General Manager for the Port and a Budget Officer, both with acceptable functions and responsi- bilities. The General Manager has responsibility for coordinating all aspects of the day-to-day operations and management of the port. The Budget Officer has been assigned to the ]?lanning Unit with the specific responsibility of preparing annual budgets. Third, ANP would prepare the following plans, to be satisfactory to the Bank: (i) by January 1, 1981, a plan of selective salary increases aimed at attracting and retaining suitably qualified personnel; and (ii) by January 1, 1981, a plan for an overall staff reduction aimed at diminishing ANP's personniel to about 4,500 employees by December 31, 1983 (Sections 3.01(d)(i) and (ii) of the draft Loan Agreement). 47. An important element in the execution of the project would be the preparation of detailed engineering designs for all civil works, performance specifications for major items of equipment and the institution of procurement procedures acceptable to the Bank, based on appropriate documentation for both civil works and equipment components of the project. Full-time engineering supervision of construction and professional inspection of major equipment items (during fabrication and at times of delivery) would be required. As civil works constitute only about 11% of project costs, and in order not to delay execution of the! rest of the project, detailed engineering would be carried out concurrently with the initial phases of procurement of equipment. The physical contingencies under the project are adequate to make allowance for any possible cost increases that may result from unexpected design changes. Financial Position of AN?I 48. ANP has been a profitable institution over the last five years. Total revenues daring the period have averaged US$30 million and total expenses have averaged US$24 million, and therefore the working ratio (working  - 16 - expenses--i.e., expenses before depreciation and interest--divided by operating revenues) averaged 80. Because of limited depreciation charges (since most of the installations have been written off), operating ratios (which include depreciation) have also averaged slightly over 80. These ratios have been sufficient in the past to maintain a healthy financial position for ANP because of the very small debt. As a result of substantial borrowing needed to carry out the development program, it is projected that an improvement in ratios will be required. 49. ANP's ability to make financial plans has been impaired by the existing Government practice of exempting certain users from port fees, a fact which reflects inadequacies in the structure of its present port tariffs. Adoption of an acceptable port tariff system, which would eliminate all tariff exemptions, would be a condition of effectiveness of the proposed loan (Section 7.01 of the draft Loan Agreement and Section 3.02 of the draft Guarantee Agreement). Other changes to improve ANP's management, staffing and financial administration and position would also be implemented. These changes include the selective salary increases and continued reduction in staffing levels mentioned above, and adjustments of tariffs as required to (i) achieve improved working ratios (gradually declining from not more than 81% in 1980 to 68% in 1985 and thereafter); and (ii) ensure that the tariffs for each service cover at least the marginal costs for providing such service (Sections 5.04(a)(i) and (ii) of the draft Loan Agreement). 50. The ANP budget would be prepared and furnished to the Bank for comment at least three months prior to the start of the budget year (Section 3.04(b) of the draft Loan Agreement). Lastly, ANP has agreed on a series of measures aimed at improving the financial information system available for ANP and on covenants to ensure the entity's financial soundness. These include retention of auditors, keeping financial data on a current basis (reflecting current asset values), and limiting investments (to not more than US$1 million per year) not included in the 1978-1982 development program (Sections 5.02 and 5.05 of the draft Loan Agreement). Concerning indebtedness, it has been agreed that ANP will not incur any additional debt, beyond that already arranged, unless net cash generation for the preceeding 12 months is at least 1.75 times the maximum total debt service requirements for any succeeding fiscal year (Section 5.06 of the draft Loan Agreement). Monitoring 51. Operational improvements to be achieved as a result of the project and related administrative changes in the port organization have been defined on the basis of performance targets agreed with ANP. These targets cover the following major issues: staff reductions over the period 1980-1984; and working ratio over the period 1980-1984 (Section 3.01(d)(ii) and Section 5.04(a)(i) of the draft Loan Agreement). In addition, key operating indicators to be monitored during supervision would include tons of cargo handled per ship-day in port; and dredging operations, to remove the backlog of deferred maintenance work. Starting on April 1, 1980, ANP would prepare quarterly reports, satis- factory to the Bank, on its financial condition (Section 4.06 of the draft Loan Agreement). Procurement and Disbursements 52. With the exception of minor civil works (for alterations to existing transit sheds) which would be advertized locally, all items of equipment and  - 17 - civil works to be financed under the proposed project would be procured through international competitive bidding in accordance with the Bank's Procurement Guidelines. 53. Disbursements of funds from the loan would be on the following basis: (a) 40% of total expenditures for civil works (the estimated foreign exchange component); (b) 100% of foreign and 92% of local expenditures for equipment; and (c) 80% of total expenditures for technical assistance. Environmental Impact 54. No significant environmental impact is expected in the city of Montevideo and adjacent water areas as a result of ANP's 1978-1982 develop- ment program since all proposed improvements are confined to relatively minor physical changes in existing facilities that have operated in the same ioca- tions since construction of the port in 1905-1931. However, environmental considerations are a significant factor in the justification of the sea-going tug to be included in this project, which would provise standby service at the off-shore tanker terminal at Punta Jose Ignacio. While the terminal has standard provisions against accidental oil spills, the possibility of a tanker breaking loose from the buoy during a storm and being beached is a considerable potential hazard to the natural environment and the tourism investments in the area; the availability of the tug is expected to mitigate these dangers. The tug would have equipment designed to combat oil spills. Benefits and Risks 55. Expected economic benefits from the proposed project would be reduced port operating and maintenance costs for ANP and reduced ship servicing and waiting times for ocean carriers. The net effect of these improvements would be reductions in transport costs to users: primarily to consumers of imports and the producers of exports in Uruguay. As a result, the project would improve Uruguay's position in foreign trade and potentially contribute to the country's economic recoveary. 56. Based on the benefits Uruguay would receive from the reduction in economic transport costs arising from each specific item, the economic rate of return for general cargo handling equipment and the container/bulk cargo terminal is estimated to be about 27%, about 36% for the new D-8 and about 18% for the new D-9 dredge, and for the smaller of the harbor tugs about 14% and for the larger about 7%. In addition to the quantifiable benefits limited to its port functions, the ocean-going 4,000 HP tug would help to reduce the chance for or minimize accidental oil spills from tankers unloading at the off-shore mooring buoy operated by ANCAP and would be useful in carrying out rescue and salvage operations in Uruguay's territorial waters which is ANP's responsibility by law. The overall rate of return for the project is estimated at 24% (Some further benefits attributable to other countries have not been included in the analysis).  - 18 - 57. The proposed improvements at the port of Montevideo would not involve unusual risks. However, project risks are inherent in ANP's inexperience with the implementation of a port development program of the proposed scope, which may result in delays and/or cost overruns; furthermore, the expected benefits may not be derived from the project if operational changes do not occur as new equipment is introduced. Proposed technical assistance to ANP would minimize these risks. A sensitivity analysis of all project components except one for major changes in costs and benefits showed economic rates of return from 10 to 33%. The rate of return of the 4,000 HP tug, will in no case be lower than 4%. Even this would be considered adequate because of the importance of the unquantifiable environmental and safety benefits (see paragraph 56) which are not included in the analysis. A special sensitivity test was made for the bulk container terminal, assuming not only reductions in benefits and cost increases but also implementation delays. This showed that this component would still have a rate of return of at least 15%. PART V - LEGAL INSTRUMENTS AND AUTHORITY 58. The draft Guarantee Agreement between the Republic of Uruguay and the Bank, the draft Loan Agreement between the Administracion Nacional de Puertos and the Bank, and the recommendations of the Committee provided for in Article III, Section IV (iii) of the Bank's Articles of Agreement are being distributed to the Executive Directors separately. 59. Special conditions of the loan are listed in Section III of Annex III. A special condition of loan effectiveness would be the implementation of a new port tariff system, which would include the discontinuance of exemptions from port fees. It would also be a condition of effectiveness that a decree has been enacted granting ANP the necessary authorization from government agencies to carry out all procurement for the Project. This is expected to accelerate procurement. 60. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 61. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President By I.P.M. Cargill Attachments December 28, 1979  19- ATTACHMENT I TAtLC 3A URtCUAI - SOCIAL INDICATORS DATA SHEET URUGUAT U!EfIENCE ROUP5 (ADJUStD &